** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 
|   | **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|--------|------------|----------------------------------------------------------------------------------------|

**For the quarterly period ended September 30, 2001**
|   | **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES ACT OF 1934** |
|--------|-------|--------------------------------------------------------------------------------------|

 

 

**Forthe transition period from ____ to ____**

**Commissionfile number 0-011275**

 

**TELTONE CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **WASHINGTON**                                                  |   | **91-0839067**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **22116  – 23rd Drive SE, Bothell, Washington**            |   | **98021**                             |
| (Address of  principal executive offices)                       |   | (Zip Code)                            |

 

**(425)487-1515**

(Registrant'stelephone number, including area code)

 

 

**N/A**

(Former name,former address and former fiscal year)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.      Yesý No o

 

**APPLICABLEONLY TO ISSUERS INVOLVED IN BANKRUPTCY**

**PROCEEDINGSDURING THE PRECEDING FIVE YEARS**

 

                Check whether the registrant filed all documents andreports required to be filed by Section 12, 13 or 15(d) of the Exchange Actafter the distribution of securities under a plan confirmed by a court.  Yes o  No o

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

State the number ofshares outstanding of each of the issuer's classes of common equity, as of thelatest practicable date.

 

6,865,503 sharesof common stock outstanding as of September 30, 2001.

Transitional SmallBusiness Disclosure Format (Check One):                      Yeso No ý

 

| Index        |                                                                                                |   |
|--------------|-----------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                |   |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                           |   |
|         |                                                                                                |   |
| Item 1.      | Financial Statements                                                                                |   |
|         |                                                                                                |   |
|         | Balance  Sheets at September 30, 2001 (unaudited) and June 30, 2001                                 |   |
|         |                                                                                                |   |
|         | Statements  of Operations for the three months ended  September 30, 2001  and 2000 (unaudited) |   |
|         |                                                                                                |   |
|         | Statements  of Cash Flows for the three months ended  September 30, 2001 and  2000 (unaudited) |   |
|         |                                                                                                |   |
|         | Notes to  Unaudited Financial Statements                                                            |   |
|         |                                                                                                |   |
| Item  2.     | Management’s  Discussions and Analysis of Financial Conditions and  Results of Operations |   |
|         |                                                                                                |   |
| **PART II.** | **OTHER INFORMATION**                                                                               |   |
|         |                                                                                                |   |
| Item 1.      | Legal Proceedings                                                                                   |   |
|         |                                                                                                |   |
| Item 2.      | Changes in Securities                                                                               |   |
|         |                                                                                                |   |
| Item 3.      | Defaults Upon  Senior Securities                                                                    |   |
|         |                                                                                                |   |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                |   |
|         |                                                                                                |   |
| Item 5.      | Other Information                                                                                   |   |
|         |                                                                                                |   |
| Item 6.      | Exhibits and  Reports on Form 8-K                                                                   |   |
|         |                                                                                                |   |
| Signature    |                                                                                                |   |

 

 

**PART 1 – FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

 

Balance Sheets at September 30, 2001 (unaudited) and June 30, 2001

 

Statements of Operations for the three months ended September 30, 2001and 2000 (unaudited)

 

Statements of Cash Flows for the three months ended September 30, 2001and 2000 (unaudited)

 

Notes to Unaudited Financial Statements

 

**TELTONE CORPORATION****BALANCESHEETS**

 
|                                                                                                                                                                  |   | **September 30** |                 | **June 30** |                 |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|----------------------|-------------|----------------------|
|                                                                                                                                                                  |   | **2001**         |                 | **2001**    |                 |
| **ASSETS**                                                                                                                                                            |   | **(Unaudited)**  |                 |        |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| Current assets                                                                                                                                                        |   |             |                 |        |                 |
| Cash                                                                                                                                                                  |   | $                | 190,006              |        | $                    | 333,243 |   |
| Trade accounts  receivable (net of allowance for doubtful accounts of $29,798)                                                                                        |   | 1,324,111        |            | 1,013,325   |            |
| Inventories                                                                                                                                                           |   |             |                 |        |                 |
| Raw materials                                                                                                                                                         |   | 537,120          |                 | 726,072     |                 |
| Work in process                                                                                                                                                       |   | 95,633           |                 | 174,595     |                 |
| Finished goods                                                                                                                                                        |   | 522,660          |                 | 426,210     |                 |
| Total inventories                                                                                                                                                     |   | 1,155,413        |                 | 1,326,877   |                 |
| Other current assets                                                                                                                                                  |   | 179,545          |                 | 111,020     |                 |
| Total current assets                                                                                                                                                  |   | 2,849,075        |                 | 2,784,465   |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| Property, plant and equipment - net                                                                                                                                   |   | 635,235          |                 | 638,429     |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| TOTAL                                                                                                                                                                 |   | $                | 3,484,310            |        | $                    | 3,422,894 |   |
|                                                                                                                                                                  |   |             |                 |        |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                              |   |             |                 |        |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| Current liabilities                                                                                                                                                   |   |             |                 |        |                 |
| Accounts payable - trade                                                                                                                                              |   | $                | 515,936              |        | $                    | 398,816 |   |
| Accrued compensation and benefits                                                                                                                                     |   | 394,106          |                 | 437,627     |                 |
| Deferred revenue                                                                                                                                                      |   | 187,144          |                 | 197,906     |                 |
| Accrued expenses                                                                                                                                                      |   | 109,629          |                 | 107,258     |                 |
| Note payable – current portion                                                                                                                                   |   | 92,146           |                 | 5,529       |                 |
| Total current liabilities                                                                                                                                             |   | 1,298,961        |                 | 1,147,136   |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| Note payable – long-term portion                                                                                                                                 |   | 100,615          |                 | -           |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| Stockholders' equity                                                                                                                                                  |   |             |                 |        |                 |
| Convertible  preferred stock - no par value; authorized 6,000,000 shares; 876,684 shares  issued and outstanding ($1,753,368 liquidation preference; or $2 per share) |   | 1,665,236        |       | 1,665,236   |       |
| Common stock -  no par value; authorized 20,000,000 shares; 6,865,503 shares issued and  outstanding                                                                  |   | 3,811,195        |            | 3,811,195   |            |
| Deferred stock compensation                                                                                                                                           |   | (60,637          | )                    | (67,054     | )                    |
| Accumulated deficit                                                                                                                                                   |   | (3,331,060       | )                    | (3,133,619  | )                    |
| Stockholders' equity                                                                                                                                                  |   | 2,084,734        |                 | 2,275,758   |                 |
|                                                                                                                                                                  |   |             |                 |        |                 |
| TOTAL                                                                                                                                                                 |   | $                | 3,484,310            |        | $                    | 3,422,894 |   |

----

The accompanying notes are an integral part of these financialstatements

 

**TELTONE CORPORATIONSTATEMENTS OF OPERATIONS(Unaudited)**

 
|                                                             |   | **Three Months Ended** |          |
|------------------------------------------------------------------|--------|------------------------|---------------|
|                                                             |   | **September 30**       |          |
|                                                             |   | **2001**               |          | **2000** |   |
|                                                             |   |                   |          |   |   |
| Net sales                                                        |   | $                      | 1,958,344     |   | $ | 2,703,644 |   |
| Cost of goods sold                                               |   | 929,968                |          | 1,118,306 |   |
|                                                             |   |                   |          |   |   |
| Gross margin on sales                                            |   | 1,028,376              |          | 1,585,338 |   |
|                                                             |   |                   |          |   |   |
| Operating expenses                                               |   |                   |          |   |   |
| Selling, general and administrative                              |   | 840,291                |          | 1,540,604 |   |
| Engineering and development                                      |   | 381,979                |          | 411,836 |   |
| Total operating expenses                                         |   | 1,222,270              |          | 1,952,440 |   |
|                                                             |   |                   |          |   |   |
| Loss from operations                                             |   | (193,894               | )             | (367,102 | ) |
|                                                             |   |                   |          |   |   |
| Other income (expense) - net                                     |   | (3,547                 | )             | 6,490 |   |
|                                                             |   |                   |          |   |   |
| Gain on sale of product line                                     |   |                   |          | 1,620,000 |   |
|                                                             |   |                   |          |   |   |
| (Loss) income before tax                                         |   | (197,441               | )             | 1,259,388 |   |
|                                                             |   |                   |          |   |   |
| Income tax provision                                             |   | -                      |          | - |   |
|                                                             |   |                   |          |   |   |
| Net (loss) income                                                |   | $                      | (197,441      | ) | $ | 1,259,388 |   |
|                                                             |   |                   |          |   |   |
| Basic net (loss) income per common share                         |   | $                      | (.03          | ) | $ | .20 |   |
|                                                             |   |                   |          |   |   |
| Weighted average common shares outstanding                       |   | 6,865,503              |          | 6,349,119 |   |
|                                                             |   |                   |          |   |   |
| Diluted net (loss) income per common and potential common share  |   | $                      | (.03          | )  | $ | .16 |   |
|                                                             |   |                   |          |   |   |
| Weighted average  common and potential common shares outstanding |   | 6,865,503              |     | 7,909,200 |     |

----

The accompanying notes are an integral part of these financialstatements.

 

 

**TELTONE CORPORATIONSTATEMENTS OF CASH FLOWS(Unaudited)**

 

 
|                                                                                   |   | **Three Months Ended** |          |
|----------------------------------------------------------------------------------------|--------|------------------------|---------------|
|                                                                                   |   | **September 3**        |          |
|                                                                                   |   | **2001**               |          | **2000** |   |
|                                                                                   |   |                   |          |   |   |
| Cash flows from operating activities:                                                  |   |                   |          |   |   |
| Net (loss) income                                                                      |   | $                      | (197,441      | ) | $ | 1,259,388 |   |
| Adjustments to  reconcile net (loss) income to net cash used for operating activities: |   |                   |     |   |     |
| Amortization of deferred stock compensation                                            |   | 6,417                  |          | - |   |
| Depreciation                                                                           |   | 53,979                 |          | 45,938 |   |
| Gain on sale of product line                                                           |   | -                      |          | (1,620,000 | ) |
| Changes in:                                                                            |   |                   |          |   |   |
| Accounts receivable                                                                    |   | (310,786               | )             | 436,853 |   |
| Inventories                                                                            |   | 171,464                |          | (288,106 | ) |
| Accounts payable and accrued items                                                     |   | 65,208                 |          | 141,559 |   |
| Other current assets                                                                   |   | (68,525                | )             | (33,788 | ) |
|                                                                                   |   |                   |          |   |   |
| Cash used for operating activities                                                     |   | (279,684               | )             | (58,156 | ) |
|                                                                                   |   |                   |          |   |   |
| Cash flows from investing activities:                                                  |   |                   |          |   |   |
| Net proceeds from sale of product line                                                 |   | -                      |          | 1,895,184 |   |
| Purchase of property, plant and equipment                                              |   | (50,785                | )             | (62,737 | ) |
| Cash provided by (used for) investing activities                                       |   | (50,785                | )             | 1,832,447 |   |
|                                                                                   |   |                   |          |   |   |
| Cash flows from financing activities:                                                  |   |                   |          |   |   |
| Net proceeds from (borrowings on) notes payable                                        |   | 187,232                |          | (7,713 | ) |
| Employee stock sales                                                                   |   | -                      |          | 91,950 |   |
|                                                                                   |   |                   |          |   |   |
| Cash provided by financing activities                                                  |   | 187,232                |          | 84,237 |   |
|                                                                                   |   |                   |          |   |   |
| Increase (decrease)  in cash                                                      |   | (143,237               | )             | 1,858,527 |   |
| Beginning of period                                                                    |   | 333,243                |          | 503,592 |   |
| End of period                                                                          |   | $                      | 190,006       |   | $ | 2,362,119 |   |

----

The accompanyingnotes are an integral part of these financial statements.

**TELTONE CORPORATION****NOTES TO UNAUDITED FINANCIAL STATEMENTS**

 

**1.     BASIS OF PRESENTATION**

 

The unaudited InterimFinancial Statements reflect all adjustments, which are, in the opinion ofmanagement, necessary to present fairly the financial condition and the resultsfor the interim periods.  The results ofoperations for the period ended September 30, 2001, are not necessarilyindicative of operating results to be expected for the full year.  Portions of the accompanying financialstatements are derived from the June 30, 2001, audited financial statements ofthe Company.  These interim condensedfinancial statements should be read in conjunction with the June 30, 2001audited financial statements filed on Form 10-KSB.

 

**2.    STOCKHOLDERS' EQUITY**

 

The Company hastwo active stock option plans.  The 1992Employees Stock Option Plan provides for the grant of options to purchase up to1,900,000 common shares to key employees of the Company.  Of this total, options to purchase 1,114,500shares of common stock are outstanding and 368,500 shares remain available forgrant at September 30, 2001.   TheNonemployee Directors Stock Option Plan provides for the grant of options to purchaseup to 320,000 common shares to outside directors of the Company.  Of this total, options to purchase 200,000shares of common stock are outstanding and 120,000 shares remain available forgrant at September 30, 2001.  Alloptions are granted at the fair market value of the stock on the date of grantand vest over a four-year period.  Themaximum term of an option may not exceed six years.

 

**3.    FEDERAL INCOME TAX**

 

At September 30, 2001, approximately $12,709,000 innet operating loss carry-forwards were available to offset future taxable incomeand expire from 2002 through 2021.  Ifsubstantial changes in the Company’s ownership should occur, there may beannual limitations on the utilization of such carry-forwards.   Although the Company has adopted theStatement of Financial Accounting Standards No. 109, “Accounting for IncomeTaxes,” there is no tax asset recognized for the net operating losscarry-forwards and tax credits due to the Company’s loss history, andtherefore, uncertainty regarding future taxable income.

 

**4.    NET INCOME (LOSS) PER SHARE**

 

Basic net income (loss) per common share is based on the weightedaverage number of common shares outstanding during the period.  Diluted earnings per share is computed usingthe weighted average number of common shares outstanding and potential commonshares outstanding.  Potential sharesresult from the assumed exercise of outstanding stock options and convertiblepreferred stock.  Because of the netloss for the three months ended September 30, 2001, potentially dilutive commonstock issuances were not included in the calculation of diluted earnings pershare as their inclusion would be antidilutive.  Diluted earnings per share excludes the effect of antidilutivestock options, aggregating 1,640,675 for the quarter ended September 30, 2001,and 3,450 for the quarter ended September 30, 2000.

 

A reconciliation of thenumber of average common shares outstanding to the number of average common andpotential common shares outstanding is as follows as of September 30:
|                                                             |   | **2001**  |          | **2000**  |          |
|------------------------------------------------------------------|--------|-----------|---------------|-----------|---------------|
| Weighted average  common shares outstanding                      |   | 6,865,503 |          | 6,349,119 |          |
| Dilutive effect  of potential common shares                      |   | -         |          | 1,560,081 |          |
|                                                             |   |      |          |      |          |
| Weighted average  common and potential common shares outstanding |   | 6,865,503 |     | 7,909,200 |     |

 

**Item 2.                                     MANAGEMENT'S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND**

**RESULTS OF OPERATIONS**

 

**Statement of Forward-LookingInformation**

 

Statementscontained herein that are not based on historical fact, including withoutlimitation statements containing the words “believes,” “may,” “will,” “estimate,”“continue,” “anticipates,” “intends,” “expects” and words of similar import,constitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause the actual results, events ordevelopments to be materially different from any future results, events ordevelopments expressed or implied by such forward-looking statements.  Such factors include, among others, thefollowing: general economic and business conditions, both nationally and in theregions in which the Company operates; technology changes; competition; changesin business strategy or development plans; the ability to attract and retainqualified personnel; liability and other claims asserted against the Company;and other factors referenced in the Company's filings with the Securities andExchange Commission.  Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  The Companydisclaims any obligation to update any such factors or to publicly announce theresult of any revisions to any of the forward-looking statements containedherein to reflect future results, events or developments.

 

**Overview**

 

*TeltoneCorporation designs, develops and markets industry award-winning telephonysolutions that extend the enterprise communications infrastructure to branchoffices and other remote locations. With the OfficeLink line of products, companiesare afforded seamless remote access to the PBX/ACD as well as CTI andintelligent routing applications. Teltone also provides a line of award-winningtelecom test tools that can meet the needs of sales and tradeshowdemonstration, engineering test and production test applications. Customers forthese products include any manufacturer or developer of telecom equipment,which provides connectivity to the global public telephone network.  Teltone’s line sharing products are built torigorous customer requirements and enable multiple devices to share a singletelephone line for remote data collection and other applications. Establishedin 1968, Teltone is a public corporation, listed on the NASD electronic OTCBulletin Board (TTNC).*

 

**Results of Operations**

 

In the firstfiscal quarter of 2002 net sales decreased 15% over the first quarter of theprior year after adjustment for the sale of the ASIC (Application SpecificIntegrated Circuits) segment in August 2000, and gross margin decreased from57% to 53% due to changes in product mix.

 

The Company hasthree product families and each has responded differently to the currenteconomic climate. Line sharing products increased 34% due to strength in salesto the public utility companies as a result of their need to expand theirremote data collection efforts.  Inaddition, sales increased in the custom line sharing products as a result of anexpansion of an OEM customer’s needs.

 

The simulator andOfficeLink sales were down 38% and 22%, respectively, as a result of budgetaryconstraints on capital equipment spending of our customers, partially offset byincreasing demand for disaster preparedness systems, which is a growing marketfor the OfficeLink remote voice products.

 

Operating expensesdecreased 37% or $730,000 over the same quarter of the prior fiscal year due toa Company-wide reorganization that affected all areas of the Company; however,the most significant reductions in personnel were in sales, general andadministrative.  In addition, costs werereduced as a result of the decision to outsource printed circuit board assemblyand to move to a smaller, lower cost facility.

 

In the first quarter of fiscal 2001 the ASIC segmentwas sold to CP Clare Corporation, which resulted in a gain of $1,620,000.

 

The Company hasapproximately $12,709,000 in net operating loss carry-forwards available tooffset future taxable income, which expire from 2002 through 2022.  If substantial changes in the Company’sownership occur, there may be annual limitations on the utilization of suchcarry-forwards.  The Company has notrecognized a tax asset for the operating loss carry-forwards due to theuncertainty regarding the amount of future taxable income.

 

**Liquidity and Capital Resources**

 

The Company hadcash on hand at September 30, 2001, of $190,000 in addition to a line of creditagreement for up to $1,500,000, subject to certain limitations, renewable inJuly 2002.  As of September 30, 2001,there were no borrowings outstanding under this line.

 

The Company hasborrowed $200,000 pursuant to a capital equipment term loan to financelong-term purchases. The agreement is collateralized by eligible accountsreceivable, inventory, and other tangible and intangible assets and containsfinancial covenants including working capital and debt ratios, as well asmaximum loss provisions.

 

During the firstfiscal quarter of 2001 the ASIC (Application Specific Integrated Circuits)segment was sold to CP Clare Corporation. Gross proceeds were $1,975,000 and are being used for working capital.

 

Accountsreceivable increased due to higher sales levels at the end of the first fiscalquarter of 2002 compared to the same period in fiscal 2001.  Inventories decreased as sales in thequarter reduced overstocked quantities on hand in certain products.

 

Cash on hand andcash generated from operations as well as the line of credit are expected toenable the Company to meet its operating and working capital needs during atleast the next twelve months.

 

 

**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’sAnnual Meeting of Shareholders was held on November 6, 2001.  Out of 6,321,620 shares of common stockentitled to vote at the meeting, there were present in person or by proxy5,560,943 shares.   Out of 876,684shares of preferred stock entitled to vote at the meeting, there were presentin person or by proxy 375,285shares.

 
| a)        |   | To elect directors: |   |    |   |    |   |      |   |
|-----------|--------|---------------------|--------|---------|--------|---------|--------|-----------|--------|
|      |   | For                 |   | Against |   | Abstain |   | Not Voted |   |
| Common    |   | 5,525,238           |   | 35,705  |   | 0       |   | 761,177   |   |
| Preferred |   | 375,285             |   | 0       |   | 0       |   | 501,399   |   |
|      |   |                |   |    |   |    |   |      |   |

 

**Item 5.     Other Information**

 

**None**

 

**Item 6.     Exhibits and Reports on Form 8-K**

 

**                 **(a)           Exhibits

 

                  None

 

                  (b)           Reports on Form 8-K

 

**               **On September 20, 2001, the Company filed a Form 8-Kunder Item 4 and Item 7 for reporting changes in registrant’s certifyingaccountant. (1)

 

                                                OnSeptember 26, 2001, the Company filed a Form 8-K/A under Item 4 and Item 7 forreporting changes in registrant’s certifying accountant. (2)

----

(1)  Incorporated herein by reference to theCorporation’s 8-K filed on September 20, 2001, Commission file 

No. 0-11275

(2)  Incorporated herein by reference to theCorporation’s 8-K filed on September 26, 2001, Commission file 

No. 0-11275

 

 

**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |             |   |   | TELTONE CORPORATION                      |
|--------|------------------|--------|--------|------------------------------------------|
|   |             |   |   | (Registrant)                             |
|   |             |   |   |                                     |
|   |             |   |   |                                     |
| Date   | November 9, 2001 |   | By     | /s/ DEBRA L GRIFFITH                     |
|   |             |   |   | Debra L. Griffith                        |
|   |             |   |   | President & Chief  Executive Officer |
|   |             |   |   |                                     |
|   |             |   |   |                                     |
| Date   | November 9, 2001 |   | By     | /s/ DEBRA L. GRIFFITH                    |
|   |             |   |   | Debra L. Griffith                        |
|   |             |   |   | Acting Chief Financial  Officer          |
|   |             |   |   |                                     |