-----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, OTf3+GfLcU+eYmmyyat7IGVYfVfU4UekRLHdja79xr9B+KY00whobuka9ThYlp6f 1gnTHAkiCF3YFc2MYSdYjQ== 0000950135-96-001692.txt : 19960410 0000950135-96-001692.hdr.sgml : 19960410 ACCESSION NUMBER: 0000950135-96-001692 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960225 FILED AS OF DATE: 19960409 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: 96545525 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 2 - FY 1996 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 February 25, 1996 ----------------- 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 April 2, 1996 - ---------------------------- ---------------------------- Common Stock, $.01 par value 10,401,980 1 2 TELCO SYSTEMS, INC. INDEX REPORT ON FORM 10-Q FOR QUARTER ENDED FEBRUARY 25, 1996
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements ---------------------------- Consolidated Balance Sheets February 25, 1996 and August 27, 1995 3 Consolidated Statements of Operations Three months and six months ended February 25, 1996 and February 26, 1995 4 Consolidated Statements of Cash Flows Six months ended February 25, 1996 and February 26, 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of ------- Financial Condition and Results of Operations 7 - 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 10 ------- Item 6. Exhibits and Reports on Form 8-K 10 ------- SIGNATURE(S) 11
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------------------------------ TELCO SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
February 25, 1996 August 27, 1995 ----------------- --------------- Assets - ------ Current assets: Cash and equivalents...................... $11,478 $18,208 Short-term investments.................... 11,456 10,895 Accounts receivable, net.................. 12,595 10,047 Refundable income taxes................... 848 1,251 Inventories, net.......................... 18,553 18,473 Other current assets...................... 2,172 2,585 ------- ------- Total current assets................ 57,102 61,459 ------- ------- Plant and equipment, at cost................. 45,024 41,720 Less accumulated depreciation............. 32,945 31,114 ------- ------- Net plant and equipment................ 12,079 10,606 ------- ------- Intangible and other assets, net............. 9,712 10,374 ------- ------- Total assets........................... $78,893 $82,439 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Accounts payable.......................... $ 4,806 $ 3,952 Payroll and related liabilities........... 2,428 2,628 Other accrued liabilities................. 6,319 4,964 ------- ------- Total current liabilities.............. 13,553 11,544 ------- ------- Restructuring and other long-term liabilities............................... 2,773 3,490 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: 10,372,281 at February 25, 1996; 10,230,624 at August 27, 1995.......... 104 102 Capital in excess of par value............ 73,038 71,566 Accumulated deficit....................... (9,562) (4,263) Unearned compensation - restricted stock.. (1,013) -- ------- ------- Total shareholders' equity............. 62,567 67,405 ------- ------- Total liabilities and shareholders' equity ............... $78,893 $82,439 ======= =======
See accompanying notes to consolidated financial statements. 3 4 TELCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended ------------------ ----------------- Feb. 25, Feb. 26, Feb. 25, Feb. 26, 1996 1995 1996 1995 ---- ---- ---- ---- Sales: Broadband transmission products ............ $10,918 $ 9,015 $21,844 $19,034 Network access products .................... 8,006 12,279 16,623 26,893 Bandwidth optimization products ............ 1,653 1,583 2,643 3,167 ------- ------- ------- ------- 20,577 22,877 41,110 49,094 ======= ======= ======= ======= Costs and expenses: Cost of products sold ...................... 12,012 12,065 24,124 26,447 Research and development ................... 4,546 4,214 9,079 8,323 Sales, marketing and administration ........ 6,821 5,500 13,505 11,509 Amortization of intangible assets .......... 195 186 390 386 Interest (income) .......................... (318) (443) (689) (745) ------- ------- ------- ------- 23,256 21,522 46,409 45,920 ------- ------- ------- ------- (Loss) income before income taxes. ........... (2,679) 1,355 (5,299) 3,174 Provision for income taxes ................... --- 100 --- 375 ------- ------- ------- ------- Net (loss) income ............................ $(2,679) $ 1,255 $(5,299) $ 2,799 ======= ======= ======= ======= Average shares and equivalents (thousands) ... 10,283 10,392 10,271 10,334 (Loss) earnings per share .................... $ (.26) $ .12 $ (.52) $ .27
See accompanying notes to consolidated financial statements. 4 5 TELCO SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Six months ended ---------------- Feb. 25, 1996 Feb. 26, 1995 ------------- ------------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS Cash flows from operating activities: Net (loss) income ........................................ $ (5,299) $ 2,799 Depreciation and amortization ............................ 2,923 2,949 Other non-operating items ................................ 10 --- Change in assets and liabilities: Accounts receivable ................................... (2,548) 2,068 Refundable income taxes ............................... 403 --- Inventories ........................................... (80) (3,093) Other current assets .................................. 413 (168) Intangible and other assets ........................... 24 103 Accounts payable and other current liabilities ........ 2,009 (3,028) Long-term liabilities ................................. (717) (505) -------- -------- Net cash (used in) provided by operating activities ...... (2,862) 1,125 -------- -------- Cash flows from investing activities: Additions to plant and equipment, net ................... (3,758) (1,315) Purchase of short-term investments ...................... (15,337) (13,550) Maturities of short-term investments .................... 14,776 15,497 -------- -------- Net cash (used in) provided by investing activities ..... (4,319) 632 -------- -------- Cash flows from financing activities: Proceeds from sale of common shares under employee stock plans ............................... 451 3,696 -------- -------- Net cash (used in) provided by financing activities ..... 451 3,696 -------- -------- (Decrease) increase in cash and equivalents ................ (6,730) 5,453 Cash and equivalents at beginning of year .................. 18,208 15,262 -------- -------- Cash and equivalents at end of period ...................... $ 11,478 $ 20,715 ======== ========
5 6 TELCO SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR PERIOD ENDED FEBRUARY 25, 1996 (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 February 25, 1996 and the consolidated statements of operations and cash flows for the six months ended February 25, 1996 and February 26, 1995. 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 27, 1995.
Note 2 - Inventories, net (dollars in thousands) February 25, 1995 August 27, 1995 ----------------- --------------- Raw materials............................ $ 9,791 $ 9,101 Work-in-process.......................... 3,066 3,060 Finished goods........................... 5,696 6,312 ------- ------- $18,553 $18,473 ======= =======
Note 3 - Shares Outstanding
Changes in shares outstanding: Six months ended ---------------- Feb. 25, 1996 Feb. 26, 1995 ------------- ------------- Outstanding at beginning of period....... 10,230,624 9,649,051 Options exercised..................... 23,748 377,818 Restricted stock grants............... 92,000 --- Employee stock purchase plan.......... 25,909 27,167 ---------- ---------- Outstanding at end of period............. 10,372,281 10,054,036 ========== ==========
Note 4 - Restricted Stock Grants On February 15, 1996, 92,000 restricted shares of the Company's common stock were granted and issued to certain key employees. Shares were awarded in the name of each of the participants who have all the rights of other stockholders, subject to certain restrictions and forfeiture provisions. Restrictions on the shares expire equally on the anniversary date of the award over the next four years. The market value of the shares awarded, $1,023,500, has been recorded as unearned compensation - restricted stock and is shown as a separate component of stockholder's equity. Unearned compensation is being amortized to expense over the four year vesting period. 6 7 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 Income.
Percentage of Sales Percentage Increase (Decrease) ------------------- ------------------------------ Second Quarter Six Months Second Quarter Six Months 1996 1995 1996 1995 1996 vs. 1995 1996 vs. 1995 ---- ---- ---- ---- ------------- ------------- Sales ................................. 100.0% 100.0% 100.0% 100.0% (10.1%) (16.3%) Costs and expenses: Costs of products sold .............. 58.4% 52.8% 58.7% 53.8% (0.4%) (8.8%) Research and development ............ 22.1% 18.4% 22.1% 17.0% 7.9% 9.1% Sales, marketing and administration .................... 33.1% 24.0% 32.8% 23.4% 24.0% 17.3% Amortization of intangible assets ... .9% .8% .9% .8% 4.8% 1.0% Interest expense .................... -- -- -- -- -- -- Interest income ..................... (1.5%) (1.9%) (1.7%) (1.5%) (28.2%) (7.5%) ----- ----- ------ ----- ----- ----- Total costs and expenses .............. 113.0% 94.1% 112.8% 93.5% 8.1% 1.1% ----- ----- ------ ----- ----- ----- (Loss) income before income taxes ..... (13.0%) 5.9% (12.8%) 6.5% -- -- Provision for income taxes ............ -- .4% -- .8% -- -- ----- ----- ------ ----- ----- ----- Net (loss) income ..................... (13.0%) 5.5% (12.8%) 5.7% -- -- ===== ===== ====== ===== ===== =====
7 8 TELCO SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDED FEBRUARY 25, 1996 SALES AND NET LOSS - Sales for the second quarter of fiscal 1996 decreased 10% to $20.6 million compared with $22.9 million in the second quarter of last year. For the first six months of fiscal 1996, sales amounted to $41.1 million, a decrease of 16% compared with the same period last year. These decreases resulted primarily from lower shipments of network access products due to continued competitive pressure on sales of certain older products. Sales to NYNEX, a significant customer of the Broadband Business Unit, accounted for 34% of total sales in the second quarter of fiscal 1996 compared to 19% for the same period in fiscal 1995. For the first six months of fiscal 1996, NYNEX sales accounted for 31% of total sales compared to 14% for the same period last year. Net loss for the quarter was ($2.7) million or ($.26) per share compared with net income of $1.3 million or $.12 per share in the second quarter of last year. For the six month period of fiscal 1996, the net loss was ($5.3) million or ($.52) per share, compared with net income of $2.8 million or $.27 per share for the comparable six month period of last year. The net loss for the second quarter and first half of the year resulted primarily from lower sales volume of older network access products, increased spending on research and development projects, and selling and marketing activities. Management is evaluating a number of alternatives to both reduce costs and increase revenues in order to achieve a return to profitability in the future. COST OF PRODUCTS SOLD - Cost of products sold represented 58% of sales in the second quarter of fiscal 1996. In the second quarter of fiscal 1995, cost of products sold represented 53% of sales. For the six month period, costs of products sold represented 59% and 54% in 1996 and 1995, respectively. The increases in cost of products sold are principally related to lower absorption of fixed costs resulting from the lower operating level, and increased competitive pricing pressures on older network access products. RESEARCH AND DEVELOPMENT - Spending on research and development for both broadband and network access products continued at a high level in the second quarter of fiscal 1996, increasing 8% to $4.5 million compared with the second quarter of fiscal 1995. For the first six months of fiscal 1996, research and development expense was $9.0 million, an increase of 9% over the comparable period of fiscal 1995. These increases are due to higher spending for new product development, feature additions to existing products and product modifications for international applications. SALES, MARKETING AND ADMINISTRATION - Sales, marketing and administration expense was $6.8 million and $13.5 million for the second quarter and first six months of fiscal 1996, respectively. This represented an increase of 24% for the second quarter compared with last year and a 17% increase compared with the six month period last year. These increases are primarily related to expanded selling and marketing activities in the international marketplace. INTEREST INCOME - Interest income decreased 28% compared with the second quarter of fiscal 1995. For the first six months of fiscal 1996, interest income declined 8% over the comparable period in fiscal 1995. This decrease resulted primarily during the second quarter, due to lower interest rates earned on a lower level of average cash and short-term investments. PROVISION FOR INCOME TAXES - The Company provided for no taxes during the second quarter and for the first six months of fiscal 1996. Due to net losses through six months and the availability of $2.7 million of deferred tax credits to offset future tax liabilities, no income tax provision or benefit is anticipated for fiscal 1996. 8 9 LIQUIDITY AND CAPITAL RESOURCES - For the six month period ended February 25, 1996, cash and short-term investments decreased $6.2 million to $22.9 million. The decrease reflects the net operating loss for the period as well as $2.5 million from higher accounts receivable due to quarter end shipments and $3.8 million in capital expenditures, partially offset by higher current liabilities. The Company maintains a $10.0 million line of credit with the Bank of Boston which is available until September 30, 1996. Under the facility, borrowings may be made at the bank's prime rate plus one half percent. Although the Company had no borrowings against the line in fiscal 1996, approximately $1.1 million has been reserved to support various guarantees in effect at February 25, 1996. Management believes that existing cash and short-term investments of $22.9 million will be adequate to satisfy operating cash requirements for the foreseeable future. 9 10 TELCO SYSTEMS, INC. PART II. OTHER INFORMATION -------------------------- Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- The Company held its most recent Annual meeting of Shareholders on January 24, 1996. At the meeting, the stockholders elected Dean C. Campbell, Steward S. Flaschen, John A. Ruggiero, 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, 9,781,798 shares of common stock representing 95% of the total outstanding shares were voted in the following manner:
Total Vote For Total Vote Withheld Each Director From Each Director ------------- ------------------ Dean Campbell 9,656,417 125,381 Steward Flaschen 9,658,428 123,370 John Ruggiero 9,663,867 117,931 William Smith 9,663,478 118,320 Sheldon Horing 9,658,982 122,816
Additionally, the stockholders approved the 1990 Stock Option Plan as amended by a vote of 8,580,131 in favor, 1,060,338 opposed, and 141,329 abstentions and ratified the selection of Ernst and Young LLP as independent certified public accountants for the Company by a vote of 9,695,453 in favor, 53,141 opposed, and 33,204 abstentions. 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. 10 11 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/ Daniel A. DiPietro ---------------------------- Daniel A. DiPietro Vice President and Corporate Controller Principal Accounting Officer 11 12 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: ---------------------------- Daniel A. DiPietro Vice President and Corporate Controller Principal Accounting Officer 11 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS AUG-25-1996 NOV-25-1996 FEB-25-1996 1 11,478 11,456 12,595 0 18,553 57,102 45,024 32,945 78,893 13,553 0 104 0 0 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)
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