-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtmRr5QXDpJsw04x4+xT/tcJXU9/fzKrDNUwszrKk1VksACr2u+74gFSwNDNS7KH rdkeA6ZW8/7PDTPxq4EqLA== 0000950135-97-002933.txt : 19970710 0000950135-97-002933.hdr.sgml : 19970710 ACCESSION NUMBER: 0000950135-97-002933 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970525 FILED AS OF DATE: 19970709 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELCO SYSTEMS INC /DE/ CENTRAL INDEX KEY: 0000736893 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942178777 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12622 FILM NUMBER: 97638074 BUSINESS ADDRESS: STREET 1: 63 NAHATAN ST CITY: NORWOOD STATE: MA ZIP: 02062 BUSINESS PHONE: 6175510300 MAIL ADDRESS: STREET 1: 63 NAHATAN ST CITY: NORWOOD STATE: MA ZIP: 02062 FORMER COMPANY: FORMER CONFORMED NAME: TELCO SYSTEMS INC DATE OF NAME CHANGE: 19880208 10-Q 1 TELCO SYSTEMS, INC. 1 QUARTER 3 - FY 1997 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MAY 25, 1997 ------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________TO___________ Commission file number 0-12622 ------- TELCO SYSTEMS, INC ------------------ (Exact name of registrant as specified in its charter) Delaware 94-2178777 ------------------------------ ------------------- (State or other jurisdiction (I.R.S. employer incorporation or organization) identification no.) 63 NAHATAN STREET, NORWOOD, MASSACHUSETTS 02062 ----------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (617) 551-0300 ------------- NO CHANGE --------------------------------------------------------------------- (Former name, former address and former fiscal year, if change since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. Classes Outstanding at July 1, 1997 - ---------------------------- --------------------------- Common Stock, $.01 par value 10,805,944 1 2 TELCO SYSTEMS, INC. INDEX REPORT ON FORM 10-Q FOR QUARTER ENDED MAY 25, 1997 Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements ------ -------------------- Consolidated Balance Sheets May 25, 1997 and August 25, 1996 3 Consolidated Statements of Operations Three and nine months ended May 25, 1997 and May 26, 1996 4 Consolidated Statements of Cash Flows Three and nine months ended May 25, 1997 and May 26, 1996 5 Notes to Consolidated Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of ------ --------------------------------------- Financial Condition and Results of Operations 8 - 11 --------------------------------------------- Item 3. Quantitative and Qualitative Disclosures about ------ ---------------------------------------------- Market Risk 12 ----------- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 ------ -------------------------------- SIGNATURE(S) 13 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- TELCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS)
May 25, 1997 August 25, 1996 ------------ --------------- Assets - ------ Current assets: Cash and equivalents.................................. $11,791 $ 8,461 Short-term investments................................ 978 6,581 Accounts receivable, net.............................. 17,525 18,025 Refundable income taxes............................... 702 702 Inventories, net...................................... 26,146 23,495 Other current assets.................................. 962 810 ------- ------- Total current assets............................... 58,104 58,074 ------- ------- Fixed assets............................................. 47,940 45,941 Less accumulated depreciation......................... 36,201 33,411 ------- ------- Net fixed assets................................... 11,739 12,530 ------- ------- Intangible and other assets, net ........................ 7,366 8,900 ------- ------- Total assets....................................... $77,209 $79,504 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Accounts payable...................................... $ 6,701 $11,243 Payroll and related liabilities....................... 2,250 1,917 Other accrued liabilities............................. 12,010 8,997 ------- ------- Total current liabilities.......................... 20,961 22,157 ------- ------- Restructuring and other long-term liabilities............ 1,198 3,350 Shareholders' Equity: Preferred stock, $.01 par value, 5,000,000 shares authorized; no shares outstanding........... -- -- Common stock, $.01 par value, 24,000,000 shares authorized; shares outstanding: 10,786,287 at May 25, 1997; 10,519,529 at August 25, 1996...................... 108 105 Capital in excess of par value........................ 76,508 74,267 Deferred compensation............................. (271) (567) Accumulated deficit .............................. (21,295) (19,808) ------- ------- Total shareholders' equity...................... 55,050 53,997 ------- ------- Total liabilities and shareholders' equity $77.209 $79,504 ======= =======
See accompanying notes to consolidated financial statements. 3 4 TELCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended ------------------ ----------------- May 25, May 26, May 25, May 26, 1997 1996 1997 1996 ---- ---- ---- ---- Net sales .............................. $27,411 $ 23,223 $86,541 $ 64,333 Costs and expenses: Cost of products sold .................. 19,118 15,174 54,255 39,298 Research and development ............... 3,598 5,124 11,336 14,203 Sales, marketing and administration .... 8,705 9,779 23,510 23,284 Restructuring costs .................... -- 4,659 -- 4,659 (Gain) on sale of investment ........... -- -- (1,070) -- Amortization of intangible assets ...... 168 196 501 586 Interest (income) ...................... (161) (255) (504) (944) ------- -------- ------- -------- 31,428 34,677 88,028 81,086 ------- -------- ------- -------- (Loss) before income taxes ............. (4,017) (11,454) (1,487) (16,753) Provision for income taxes ............. -- -- -- -- ------- -------- ------- -------- Net (loss) ............................. $(4,017) $(11,454) $(1,487) $(16,753) ======= ======== ======= ======== Average shares and equivalents ......... 10,764 10,408 10,690 10,316 Net (loss) per share ................... $ (0.37) $ (1.10) $ (0.14) $ (1.62)
See accompanying notes to consolidated financial statements. 4 5 TELCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Nine months ended ----------------- May 25, 1997 May 26, 1996 ------------ ------------ INCREASE (DECREASE) IN CASH AND EQUIVALENTS Cash flows from operating activities: Net (loss) ............................................. $ (1,487) $(16,753) Depreciation and amortization .......................... 4,043 4,360 Restructuring costs .................................... -- 4,659 Amortization of unearned compensation .................. 40 177 Change in assets and liabilities: Accounts receivable ................................ 500 (4,122) Refundable income taxes ............................ -- 403 Inventories ........................................ (2,651) (1,700) Other current assets ............................... (152) 714 Intangible and other assets ........................ 1,000 24 Accounts payable and other current liabilities ..... (1,994) 7,234 Restructuring liabilities .......................... (1,712) (301) Long-term liabilities .............................. 358 (599) -------- -------- Net cash (used in) operating activities ............ (2,055) (5,904) -------- -------- Cash flows from investing activities: Additions to plant and equipment, net .................. (2,718) (5,627) Purchase of short-term investments ..................... (5,110) (19,225) Maturities of short-term investments ................... 10,713 22,616 -------- -------- Net cash (used in) provided by investing activities .... 2,885 (2,236) -------- -------- Cash flows from financing activities: Proceeds from sale of common shares under employee stock plans ........................... 2,500 1,355 -------- -------- Net cash provided by financing activities ............. 2,500 1,355 -------- -------- Increase (decrease) in cash and equivalents ............... 3,330 (6,785) Cash and equivalents at beginning of year ................. 8,461 18,208 -------- -------- Cash and equivalents at end of period ..................... $ 11,791 $ 11,423 ======== ========
See accompanying notes to consolidated financial statements. 5 6 TELCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED MAY 25, 1997 (UNAUDITED) Note 1 - The consolidated financial statements of Telco Systems, Inc. (the Company) included in this report reflect all adjustments (consisting of only normally recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position at May 25, 1997 and the consolidated statements of operations and cash flows for the nine months ended May 25, 1997 and May 26,1996. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the year. Certain notes and other information has been condensed or omitted from these interim financial statements. The statements, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Telco Systems, Inc. Annual Report on Form 10-K for the year ended August 25, 1996.
Note 2 - Inventories (dollars in thousands) May 25, August 25, 1997 1996 ------ --------- Raw materials.................................. $12,590 $12,112 Work-in-process................................ 6,564 5,560 Finished goods................................. 6,992 5,823 ------- ------- $26,146 $23,495 ======= ======= Note 3 - Shares Outstanding Changes in shares outstanding: Nine months ended ------------------ May 25, May 26, 1997 1996 ------ ------ Outstanding at beginning of period............. 10,519,529 10,230,624 Options exercised............................ 246,647 113,444 Restricted stock grants (retirements)........ (23,000) 82,000 Employee stock purchase plan................. 43,111 56,010 ---------- ---------- Outstanding at end of period................... 10,786,287 10,482,078 ========== ==========
6 7 Note 4 - Stockholder Rights Plan On February 19, 1997, the Board of Directors of Telco Systems, Inc. adopted a Stockholder Rights Plan (the "Plan") and distributed one Right for each outstanding share of the Company's Common Stock, par value $.01 per share. The Rights were issued to holders of record of Common Stock outstanding on February 19, 1997. Each share of Common Stock issued after February 19, 1997 will also include one Right subject to certain limitations. Each Right when it becomes exercisable will initially entitle the registered holder to purchase from the Company one one-hundredth (1/100th) of a share of Series A Participating Cumulative Preferred Stock, par value $.01 per share ("Series A Preferred Stock), of the Company at a price of $50.00 (the "Exercise Price"). Currently, the Rights are attached to the Company's common stock. These Rights are not now exercisable and cannot be transferred separately. The Rights become exercisable and separately transferable when the Board learns that any person or group (other than Kopp Investment Advisors, Inc. and its affiliates or associates (collectively "KIA")), has acquired 15% or more of the Company's outstanding common stock or on such date as may be designated by the Board following the announcement of a tender or exchange offer for outstanding shares of common stock which could result in the offeror becoming the beneficial owner of 15% or more of the Company's outstanding common stock. Under such circumstances, holders of the Rights will be entitled to purchase, for the Exercise Price, that number of hundredths of a share of Series A Preferred Stock equivalent to the number of shares of the Company's common stock (or under certain circumstances other equity securities) having a market value of two times the Exercise Price. 15% holders (other than KIA), however, are not entitled to exercise their Rights under such circumstances. As a result, their voting and equity interests in the Company would be substantially diluted should the rights ever be exercised. The Rights expire in February 2007, but may be redeemed earlier by the Company in accordance with the provisions of the Rights Plan at a price of $.01 per Right. 7 8 PART I. FINANCIAL INFORMATION (CONTINUED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the period indicated (i) percentages which certain items reflected in the financial data bear to sales of the Company and (ii) the percent change of such items as compared to the indicated prior period. See Consolidated Statements of Operations.
PERCENT CHANGE -------------- PERCENT OF SALES THIRD NINE ---------------- ----- ---- THIRD QUARTER NINE MONTHS QTR MONTHS ------------- ----------- --- ------ 1997 1996 1997 1996 97 vs 96 97 VS 96 ---- ---- ---- ---- -------- -------- Sales ...................................... 100.0% 100.0% 100.0% 100.0% 18.0% 34.5% Cost of sales .............................. 69.8% 65.3% 62.7% 61.1% 26.0% 38.1% Expenses: Research and development ................ 13.1% 22.1% 13.1% 22.1% (29.8%) (20.2%) Sales, marketing and administration ..... 31.8% 42.1% 27.1% 36.2% (11.0%) 1.0% Restructuring costs ..................... -- 20.0% -- 7.2% N/A N/A (Gain) on sale of investment ............ -- -- (1.2%) -- N/A N/A Amortization of intangible assets ....... 0.6% 0.8% 0.6% 0.9% (14.3%) (14.5%) Interest (income) ....................... (0.6%) (1.0%) (0.6%) (1.5%) (36.9%) (46.6%) Total ................................... 114.7% 149.3% 101.7% l26.0% (9.4%) 8.6% Pretax (loss) .............................. (14.7%) (49.3%) (1.7%) (26.0%) (64.9%) (91.1%) Provision for income taxes ................. -- -- -- -- N/A N/A Net (loss) ................................. (14.7%) (49.3%) (1.7%) (26.0%) (64.9%) (91.1%)
8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SALES AND NET LOSS - Sales for the third quarter of fiscal 1997 increased 18% to $27.4 million compared with sales of $23.2 million in the third quarter of last year. For the nine month period, sales were $86.5 million, reflecting an increase of 35% compared with sales of $64.3 million in the same period of last year. Increased sales were recorded across all product areas with the most significant gains in the broadband products area. Increased demand for broadband products for use in local loop applications resulted in increased shipments in both the third quarter and first nine months of fiscal 1997 of 22% and 39%, respectively. As a percent of net sales in fiscal 1997, broadband products represented 51% in the third quarter and 54% in the first nine months. For the third quarter and first nine months of fiscal 1996, broadband products represented 50% and 52% of sales, respectively. Sales to NYNEX represented 30% of net sales for the third quarter and 31% of net sales for the first nine months of fiscal 1997. For the comparable periods of last year, sales to NYNEX accounted for approximately 31% of net sales in both periods. Although the Company has recently been selected as NYNEX's supplier of choice for certain asynchronous products, there can be no assurance that orders will continue at the level experienced in the recent past. Accordingly, the loss of this customer would have a materially adverse affect on the Company' s financial results. Access product sales represented 42% and 41% of net sales in the third quarter and first nine months of fiscal 1997, respectively, and increased 12% in the third quarter and 32% in the year to date period compared with last year. These increases resulted as the Company's Access60 network access server continues to be deployed at an increasing rate for use in voice, data and wireless applications. Net loss for the third quarter and first nine months of fiscal 1997 was $4.0 million and $1.5 million, respectively, compared with $11.5 million and $16.8 million in the same periods of last year. The fiscal 1997 net loss resulted as gross margins were adversely affected by strong competitive pressure and increased period costs including charges associated with selling and marketing expense reductions. Fiscal 1996 operating results included a restructuring charge of $4.7 million and other charges associated with the transfer of manufacturing operations from the Company's Fremont, California facility to its facility located in Norwood, Massachusetts. The physical move of operations was completed during the second quarter of fiscal 1997. COST OF PRODUCTS SOLD - Cost of sales represented 70% and 63% of net sales for the third quarter and first nine months of fiscal 1997, respectively. For the same periods of last year, cost of sales was 65% and 61% of net sales, respectively. During the third quarter of fiscal 1997, gross margins were adversely affected by shipments of a proportionally higher level of lower margin products and increased period costs associated with reserves for certain inventory items. The Company is presently implementing initiatives to reduce product cost through manufacturing process improvements and material procurement cost savings. RESEARCH AND DEVELOPMENT - Spending on research and development decreased 30% in the third quarter of fiscal 1997 compared with the third quarter of last year and decreased 20% in the nine month period compared with last year. Lower spending continued into fiscal 1997 after certain broadband product development programs were curtailed in conjunction with the Company's restructuring activities which began in the third quarter of fiscal 1996. Research and development expense was 13% of sales in both the third quarter and first nine months of fiscal 1997 compared with 22% in both comparable periods of fiscal 1996. 9 10 SALES, MARKETING AND ADMINISTRATION - Sales, marketing and administration expense decreased 11% in the third quarter of fiscal 1997 compared with the third quarter of last year. For the nine month period of this year, spending for sales, marketing and administration was even with last year. Lower spending in the third quarter of fiscal 1997 was partially offset by one-time costs associated with the realignment of certain selling and marketing activities. The third quarter of fiscal 1996 included costs associated with the relocation of information systems and customer administration activities from the Company's Fremont, California facility to its facility located in Norwood, Massachusetts. RESTRUCTURING COSTS - During the third quarter of fiscal 1996, the Company's management approved a plan to restructure its operations and recognized a charge of $4.7 million. This charge included provisions for excess facilities, asset write-downs and employee severance costs. GAIN ON SALE OF INVESTMENT - During the first quarter of fiscal 1997, the Company liquidated its equity position in an international distributor of the Company's products due to certain changes in strategic objectives. This investment, which occurred in fiscal 1995, yielded a one-time gain of $1.1 million. AMORTIZATION OF INTANGIBLE ASSETS - Amortization expense relates to the acquisition of the broadband family of products in 1983, certain channel bank products in 1984 and the acquisition of Magnalink Communications Corporation in 1992. In fiscal 1997, amortization expense was $.2 million for the third quarter and $.5 million for the year to date period. INTEREST INCOME - Interest income decreased 37% and 47% in the third quarter and first nine months of fiscal 1997, respectively. This decrease resulted from a lower level of average cash and short-term investments available for investment. INCOME TAX PROVISION(BENEFIT) - No provision for income tax was recorded during the first nine months of fiscal 1997 due primarily to the net loss incurred during the period. In addition, no income tax benefits were available from the either the fiscal 1997 or the fiscal 1996 net losses. LIQUIDITY AND CAPITAL RESOURCES - For the nine month period ended May 25, 1997, cash and equivalents increased $3.3 million and short-term investments decreased $5.6 million resulting in a net decrease to cash and short-term investments of $2.3 million. Operating activities to support revenue growth required net cash of $2.1 million. Cash requirements for increased inventory of $2.7 million, net payments against liabilities of $3.3 million and a net loss of $1.5 million were partially offset by depreciation and amortization of $4.0 million and the proceeds from the sale of an investment of $1.0 million. Cash flows from investing activities provided cash of $2.9 million. In short-term investing activities, maturing investments exceeded purchases by $5.6 million. These proceeds were partially consumed by additions to plant and equipment of $2.7 million. Financing activities consisted of sales of common shares under various employee stock plans and provided cash of $2.5 million. The Company maintains a $20.0 million line of credit with Fleet Bank which is available until June 1, 1998. Additionally, the Company maintains a $3.5 million line of credit with Fleet Bank which is specifically designated for the acquisition of capital equipment. This line of credit is available until December 31, 1997. Subsequent to the end of the third quarter of fiscal 1997, the Company entered into a sale-leaseback arrangement with GE Capital Corp. for certain computer and other electronic equipment which provided cash of approximately $2.6 million. The operating leases contained in the arrangement, which commenced on June 17, 1997, cover periods from two to four years. This arrangement also provides an additional lease credit line of $4.0 million which is available until December 31, 1997. 10 11 Management believes that cash, short-term investments and the availability of its lines of credit will be adequate to support operating cash requirements for the foreseeable future. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 ("the Act") provides a "safe harbor" for forward-looking statements so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. The Company desires to take advantage of the "safe harbor" provisions of the Act. Certain information contained herein, particularly certain information appearing in this section is forward-looking. Information regarding certain important factors that could cause actual results of operations or outcomes of other events to differ materially from any such forward-looking statement appear together with such statement, and/or elsewhere herein. This information should be read in conjunction with the Company's annual report on Form 10-K for the year ended August 25, 1996, particularly the information appearing under the heading "Factors That May Affect Future Financial Results" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the report. 11 12 TELCO SYSTEMS, INC. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------ ---------------------------------------------------------- Not Applicable PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports filed on Form 8-K - ------ -------------------------------------- (b) The Company filed no reports on Form 8-K during the fiscal quarter for which this report is filed. 12 13 TELCO SYSTEMS, INC. SIGNATURE(S) Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELCO SYSTEMS, INC. By: /s/ William J. Stuart ---------------------------------- William J. Stuart Vice President and Chief Financial Officer Principal Accounting Officer 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS AUG-31-1997 MAY-25-1997 1 11,791 978 17,525 642 26,146 58,104 47,940 36,201 77,209 20,961 0 0 0 108 54,942 77,209 27,411 27,411 19,118 31,428 0 0 0 (4,017) 0 (4,017) 0 0 0 (4,017) (0.37) (0.37)
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