-----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, UTGpC6P7PZW7nywYy5TfyVUNPhMjYCNCeOnIVQc8oUAvbjT6gft3xjxtyBhFiJyL p9tSgXY88743fqJvapanaQ== 0000950135-98-002429.txt : 19980416 0000950135-98-002429.hdr.sgml : 19980416 ACCESSION NUMBER: 0000950135-98-002429 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980301 FILED AS OF DATE: 19980415 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: SEC FILE NUMBER: 000-12622 FILM NUMBER: 98594583 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 1 QUARTER 2-FY 1998 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 MARCH 1, 1998 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: (781) 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 April 9, 1998 - --------------------------- ---------------------------- Common Stock, $.01 par value 11,022,699 1 2 TELCO SYSTEMS, INC. INDEX REPORT ON FORM 10-Q FOR QUARTER ENDED MARCH 1, 1998

3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TELCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (THOUSANDS)

See accompanying notes to consolidated financial statements. 3 4

See accompanying notes to consolidated financial statements. 4 5

See accompanying notes to consolidated financial statements. 5 6 TELCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR QUARTER ENDED MARCH 1, 1998 (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 March 1, 1998 and the consolidated statements of operations and cash flows for the six months ended March 1, 1998 and February 23, 1997. 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 have 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 31, 1997.

Note 3 - Shares Outstanding

Note 4 - On January 26, 1998, the Company acquired substantially all of the assets of Jupiter Technology, Inc., a privately held company engaged in the development of ATM and frame relay access equipment. The transaction was accounted for using the purchase method at a cost of $6.2 million, including issuance of 101,636 shares of common stock. The purchase price included $5.1 million which represented the value of in-process technology that had not yet reached technological feasibility and had no alternative use. This amount was expensed during the second quarter of fiscal 1998. In addition, the purchase price included $1.1 million of goodwill, which will be amortized over five years. 6 7 Note 5 - (LOSS) EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which the Company adopted in the second quarter of fiscal 1998. The Company has restated all prior period per share amounts to comply with the requirements of FAS 128. Under the new requirements, primary and fully diluted earnings per share were replaced by basic and diluted earnings per share. Basic earnings per common share is calculated by dividing net income or loss by the weighted average number of common shares outstanding during the periods. Diluted earnings per share is calculated by dividing net income or loss by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. Potentially dilutive common shares were excluded from the diluted calculation for those periods in which the Company reported a net loss. The following table reconciles the number of shares utilized in the earnings per share calculations for the periods ended March 1, 1998 and February 23, 1997. SHARES USED IN COMPUTING EARNINGS PER SHARE (IN THOUSANDS)

7 8 PART I. FINANCIAL INFORMATION (Continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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.

8 9 NET SALES AND NET INCOME Sales decreased 5% to $26.0 million in the second quarter of fiscal 1998 compared with $27.3 million the second quarter of last year. For the first six months of fiscal 1998, sales decreased 10% to $53.0 million compared with $59.1 million in the same period of last year. Sales of broadband products declined 15% and 12% in the second quarter and first six months of fiscal 1998, respectively, compared with last year as a result of a lower level of shipments. These decreases were partially offset by increased shipments to Bell Atlantic, the Company's largest customer for broadband products which increased 10% in both the second quarter and year-to-date periods compared with last year. The Company expects that future sales of the recently introduced EdgeLink100 product will offset the decline in sales of older broadband products. Broadband product sales represented 50% and 54% of total sales for the second quarter and first six months of fiscal 1998, respectively, compared with 56% and 55% in the comparable periods of last year. Sales of access products increased 9% for the second quarter of fiscal 1998 compared with last year and decreased 9% for the six month period compared with last year. The increased sales in the second quarter of fiscal 1998 resulted from a higher level of shipments of Access60 multiplexers to both domestic and international customers and was partially offset by lower shipments of older network access products. The decrease in sales for the six month period of fiscal 1998 compared with last year resulted from lower shipments of older access products partially offset by higher shipments of the new Access60 and Access45 products. Although the Company anticipated the decline in legacy product sales, customer migration to the new products has been slower than expected. Access products represented 45% of total sales for the second quarter of fiscal 1998 compared with 39% in the second quarter of last year. For the six month periods, access product sales were 41% of total sales in both years. Bandwidth optimization product sales continue to represent approximately 5% of sales in all periods presented. Net loss for the second quarter and first six months of fiscal 1998 was $4.7 million and $4.0 million, respectively, compared with net income of $.3 million and $2.5 million for the comparable periods of last year. The fiscal 1998 periods include a charge of $5.1 million for purchased research and development in association with the acquisition of Jupiter Technology. For a more complete discussion of this acquisition, please refer to Note 4 to the financial statements. Net income for the year-to-date period of 1997 includes a $1.1 million gain on the sale of an investment. Excluding the write-off of purchased R&D, the Company recorded net income from operations of $.5 million for the second quarter of fiscal 1998 and $1.1 million for the first six months of fiscal 1998. COST OF PRODUCTS SOLD Cost of products sold was $15.5 million and represented 60% of sales in the second quarter of fiscal 1998 compared with $15.8 million or 58% of sales for the second quarter of last year. For the six month period, cost of products sold was $32.6 million representing 61% of sales compared with $35.1 million or 59% for the first six months of last year. In comparison to fiscal 1997, the mix of product sales in fiscal 1998 shifted to include a higher proportion of access products which carry a lower gross margin. In addition, gross margin for the second quarter of fiscal 1998 included non-recurring benefits from product sales relating to the Jupiter acquisition and a higher level of royalty income. During the second quarter fiscal 1998, the Company announced a plan to out-source it's manufacturing operations to third party subcontractors. This move is expected to provide greater flexibility for manufacturing capacity, improve product margins and reduce the Company's investment in inventory. The Company believes that this strategy is necessary to offset the potential negative impact from competitive pressure and unfavorable product mix. RESEARCH AND DEVELOPMENT Research and development was $3.8 million and $7.3 million for the second quarter and first six months of fiscal 1998 respectively. Spending on research and development for the second quarter of fiscal 1998 was even with the second quarter of fiscal 1997 and 6% less than fiscal 1997 on a year-to-date basis. This reflects the Company's plan for reduced spending and productivity improvements. In fiscal 1998, 9 10 research and development represented 15% of sales in the second quarter and 14% of sales in the six month period compared with 14% and 13% in fiscal 1997, respectively. SALES, MARKETING AND ADMINISTRATION Sales, marketing and administration (SG&A) was $6.1 million or 24% of sales in the second quarter of fiscal 1998. For the first six months of fiscal 1998, SG&A was $12.0 million or 23% of sales. For the second quarter and first six months of last year, SG&A was $7.4 million or 27% of sales and $14.8 million or 25% of sales, respectively. These reductions in spending reflect the Company's plan to reduce overall spending and improve productivity. PURCHASED RESEARCH AND DEVELOPMENT During the second quarter of fiscal 1998, the Company purchased substantially all of the assets of Jupiter Technology, Inc., a developer of ATM and frame relay technology. Please refer to Note 4 for a more complete discussion of this transaction. The purchase price included $5.1 million which represented in-process technology that had not yet reached technological feasibility. Accordingly, this amount was charged to expense in the second quarter of fiscal 1998. The Company intends to continue the development of a product line that will incorporate ATM and Frame Relay technology. The Company does not anticipate a material increase in spending to support this product development and expects to ship product for revenue within the next twelve to eighteen months. 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 was originally made 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. Included in the acquisition of Jupiter Technology discussed in Note 4, was $1.1 million of goodwill which will be amortized to expense over five years. Amortization expense was $.2 million in the second quarters of both fiscal 1998 and fiscal 1997. For the six month periods, amortization expense was $.4 million and $.3 million in fiscal 1998 and fiscal 1997, respectively. INTEREST INCOME Interest income was $.2 million in the second quarters of both fiscal 1998 and fiscal 1997. For the six month periods, interest income was $.4 million and $.3 million in 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES During the first six months of fiscal 1998, an increase in cash of $5.3 million was offset by a decrease in marketable securities of $5.5 million resulting in a decrease to cash and marketable securities of $.2 million. Cash provided by operating activities of $4.7 million and financing activities of $.9 million was used in investing activities for the purchase of Jupiter Technology, Inc. for $4.3 million and the purchase of capital equipment of $1.5 million. Operating activities consisted of reductions to accounts receivable and inventory which together provided cash of $3.6 million. Net income before non-cash expenses and the write-off of purchased R&D provided an additional $3.6 million. These increases in cash were partially offset by changes in other assets and liabilities of $2.5 million. Financing activities consisted of sales of the Company's common stock under employee stock plans and provided cash of $.9 million. Non-cash investing activities and financing activities included the issuance of 101,636 shares of common stock for $1,000 and the assumption of $898 of liabilities, respectively, in connection with the acquisition of Jupiter Technology, Inc. (See Note 4) 10 11 The Company maintains a $20.0 million line of credit with Fleet Bank which is available until June 1, 1998. The Company has begun discussions with the bank to renew the line of credit upon expiration. Management believes that cash, marketable securities and the availability of its line 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 31, 1997, 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. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER The company held its most recent Annual Meeting of Shareholders on February 11, 1998. At the meeting, the stockholders elected Dean C. Campbell, Steward S. Flaschen, Edward J. Fontenot, William B. Smith and Sheldon Horing as directors of the corporation, to hold office until the next annual shareholders' meeting, or until such time as their successors are elected. At the meeting, 9,784,535 shares of common stock representing 90% of the total outstanding shares were voted in the following manner:

Additionally, the stockholders approved the 1990 Stock Option Plan as amended by a vote of 7,316,119 in favor, 2,368,880 opposed, and 99,536 abstentions. The Amendment to the 1983 Employee Stock Purchase Plan was also approved by a vote of 9,316,916 in favor, 381,074 opposed and 86,545 abstentions. The selection of Ernst and Young LLP as independent certified accountants for the Company was ratified by a vote of 9,709,335 in favor, 35,482 opposed, and 39,718 abstentions. ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K None. 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: William J. Stuart ------------------------------------ William J. Stuart Vice President and Chief Financial Officer Principal Accounting Officer Dated: April 15, 1998 -------------------------------- 13 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-30-1998 MAR-01-1998 10,724 1,812 18,085 844 26,349 58,351 47,854 38,751 75,363 20,448 0 0 0 110 53,547 75,363 26,007 26,007 15,543 15,543 15,097 0 0 (4,633) 50 (4,683) 0 0 0 (4,683) (0.43) (0.43)

EX-27.2 3 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-30-1998 NOV-30-1997 14,727 658 16,455 849 28,044 61,085 46,880 37,801 77,170 18,907 0 0 0 109 57,113 77,170 27,005 27,005 17,015 17,015 9,348 0 0 642 0 642 0 0 0 642 0.06 0.06

EX-27.3 4 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS AUG-31-1997 AUG-31-1997 5,406 7,302 19,663 895 28,370 61,726 46,401 36,712 78,599 21,312 0 0 0 108 55,648 78,599 117,843 117,843 74,985 118,921 0 0 0 (1,078) 0 (1,078) 0 0 0 (1,078) (0.10) (0.10)

EX-27.4 5 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-31-1997 MAY-25-1997 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)

EX-27.5 6 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-31-1997 FEB-23-1997 8,437 3,926 19,870 665 27,631 61,564 47,240 35,811 80,537 20,486 0 0 0 107 58,462 80,537 27,295 27,295 15,775 27,039 0 0 0 256 0 256 0 0 0 256 0.02 0.02

EX-27.6 7 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-31-1997 NOV-24-1996 13,891 3,166 17,928 675 26,444 63,354 46,493 34,666 82,903 21,989 0 0 0 107 57,671 82,903 31,835 31,835 19,362 29,561 0 0 0 2,274 0 2,274 0 0 0 2,274 0.21 0.21

EX-27.7 8 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS AUG-25-1996 AUG-25-1996 8,461 6,581 18,025 676 23,495 58,074 45,941 33,411 79,504 22,157 0 0 0 105 53,892 79,504 93,954 93,954 57,285 109,499 0 0 0 (15,545) 0 (15,545) 0 0 0 (15,545) (1.50) (1.50)

EX-27.8 9 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-25-1996 MAY-26-1996 11,423 7,504 14,169 0 18,671 54,486 46,253 33,641 76,172 20,048 0 0 0 105 52,080 76,172 23,223 23,223 15,174 15,174 19,503 0 0 (11,454) 0 (11,454) 0 0 0 (11,454) (1.10) (1.10)

EX-27.9 10 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-25-1996 FEB-25-1996 11,478 11,456 12,595 0 18,553 57,102 45,024 32,945 78,893 13,553 0 0 0 104 62,463 78,893 20,577 20,577 12,012 23,256 0 0 0 (2,679) 0 (2,679) 0 0 0 (2,679) (.26) (.26)

EX-27.10 11 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS AUG-25-1996 NOV-26-1995 17,347 10,174 11,032 0 17,609 59,678 42,713 32,140 80,309 12,038 0 0 0 103 65,016 80,309 20,533 20,533 12,112 12,112 11,041 0 0 (2,620) 0 (2,620) 0 0 0 (2,620) (0.26) (0.26)

EX-27.11 12 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS AUG-27-1995 AUG-27-1995 18,208 10,895 10,047 649 18,473 61,459 41,720 31,114 82,439 11,544 0 0 0 102 67,303 85,164 89,070 89,070 48,559 88,442 0 0 0 628 0 628 0 0 0 628 .06 .06

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