<PAGE> 1
3rd Quarter FY'95
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 28, 1995
------------
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
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TELCO SYSTEMS, INC
------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2178777
------------------------------ -------------------
(State or other jurisdiction (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
63 NAHATAN STREET, NORWOOD, MASSACHUSETTS 02062
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(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 551-0300
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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
--- ----
<TABLE>
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<S> <C>
Classes Outstanding at July 3, 1995
---------------------------- ---------------------------
Common Stock, $.01 par value 10,149,610
</TABLE>
1
<PAGE> 2
TELCO SYSTEMS, INC.
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED May 28, 1995
<TABLE>
<CAPTION>
Page Number
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets
May 28, 1995 and August 28, 1994 3
Consolidated Statements of Operations
Three and nine months ended May 28, 1995
and May 29, 1994 4
Consolidated Statements of Cash Flows
Nine months ended May 28, 1995
May 29, 1994 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 6. Exhibits and Reports on Form 8-K 10
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SIGNATURE(S) 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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<TABLE>
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
May 28, 1995 August 28, 1994
-------------- ---------------
<S> <C> <C>
Assets
------
Current assets:
Cash and equivalents....................... $17,120 $15,262
Short-term investments..................... 10,524 10,946
Accounts receivable, net................... 11,683 15,064
Inventories, net........................... 19,356 15,244
Other current assets....................... 3,475 2,905
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Total current assets.................... 62,158 59,421
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Plant and equipment, at cost.................... 41,542 39,861
Less accumulated depreciation.............. 30,794 27,745
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Net plant and equipment................. 10,748 12,116
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Intangible and other assets, net................ 10,689 10,665
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Total assets............................ $83,595 $82,202
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable........................... $3,909 $5,519
Payroll and payroll related
liabilities.............................. 2,781 3,436
Other accrued liabilities.................. 5,386 7,256
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Total current liabilities............... 12,076 16,211
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Restructuring and other long-term
liabilities................................... 3,598 4,443
Shareholders' Equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding
at May 28, 1995 and August 28, 1994..... -- --
Common stock, $.01 par value, 24,000,000
shares authorized; shares outstanding:
10,149,610 at May 28, 1995;
9,649,051 at August 28, 1994............. 101 96
Capital in excess of par value.............. 70,852 66,343
Accumulated deficit......................... (3,032) (4,891)
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Total shareholders' equity............... 67,921 61,548
------- -------
Total liabilities and
shareholders' equity.................. $83,595 $82,202
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -----------------------
May 28, May 29, May 28, May 29,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales:
Fiber optic transmission products............ $ 8,631 $11,904 $27,665 $34,537
Customer premise network access equipment.... 10,811 13,017 37,704 35,407
Internetworking products..................... 1,214 1,119 4,381 2,560
-------- ------- ------- -------
20,656 26,040 69,750 72,504
Cost and expenses:
Cost of products sold........................ 11,060 14,200 37,507 40,700
Research and development..................... 4,992 4,334 13,315 11,619
Sales, marketing and administration.......... 5,930 5,749 17,439 16,949
Amortization of intangible assets............ 196 207 582 621
Interest expense............................. -- 53 -- 216
Interest income.............................. (457) (281) (1,202) (585)
-------- ------- ------- -------
21,721 24,262 67,641 69,520
-------- ------- ------- -------
(Loss) income before income taxes............ (1,065) 1,778 2,109 2,984
Income tax (benefit) provision ............. (125) 178 250 298
-------- ------- ------- -------
Net (loss) income ........................... $ (940) $ 1,600 $ 1,859 $ 2,686
======== ======= ======= =======
Average number of shares and equivalents..... 10,098,015 10,028,349 10,329,089 9,797,452
(Loss) earnings per share.................... $ (.09) $ .16 $ .18 $ .27
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Nine months ended
-----------------------------------------
May 28, 1995 May 29, 1994
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net income ............................................. $ 1,859 $ 2,686
Depreciation and amortization........................... 4,278 4,166
Change in assets and liabilities:
Accounts receivable................................... 3,381 1,825
Refundable income tax................................. -- 2,060
Inventories........................................... (4,112) 1,338
Other current assets.................................. (570) 52
Intangible and other assets........................... (923) (224)
Accounts payable and other current liabilities........ (4,135) (706)
Long-term liabilities................................. (845) (1,398)
------ ------
Net cash (used in) provided by operating activities... (1,067) 9,799
------ ------
Cash flows from investing activities:
Additions to plant and equipment, net................. (2,011) (1,868)
Purchase of short-term investments.................... (12,567) --
Maturities of short-term investments.................. 12,989 --
------ ------
Net cash (used in) investing activities............... (1,589) (1,868)
------ ------
Cash flows from financing activities:
Proceeds from sale of common shares
under employee stock plans.......................... 4,514 1,722
Payments on long-term liabilities..................... -- (4,000)
------ ------
Net cash provided by (used in) financing activities... 4,514 (2,278)
------ ------
Increase in cash and equivalents.......................... 1,858 5,653
Cash and equivalents at beginning of year................. 15,262 21,788
------ ------
Cash and equivalents at end of period..................... $17,120 $27,441
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 28, 1995 and the
consolidated statements of income and cash flows for the nine
month periods ended May 28, 1995 and May 29, 1994. 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 28, 1994.
<TABLE>
Note 2 - Inventories, net (dollars in thousands)
<CAPTION>
May 28, 1995 August 28, 1994
------------ ---------------
<S> <C> <C>
Raw materials.................... $ 9,415 $ 6,656
Work-in-process.................. 3,500 2,305
Finished goods................... 6,441 6,283
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$19,356 $15,244
======= =======
</TABLE>
<TABLE>
Note 3 - Shares Outstanding
Changes in shares outstanding:
<CAPTION>
Nine Months Ended
-----------------
May 28, 1995 May 29, 1994
------------ ------------
<S> <C> <C>
Outstanding at beginning of period... 9,649,051 9,345,660
Options exercised.................. 444,554 242,736
Employee stock purchase plan....... 56,005 53,079
---------- ---------
Outstanding at end of period......... 10,149,610 9,641,475
========== =========
</TABLE>
6
<PAGE> 7
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
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.
<CAPTION>
Percentage of Sales Percentage Increase (Decrease)
------------------- ------------------------------
Third Quarter Nine Months Third Quarter Nine Months
1995 1994 1995 1994 1995 VS. 1994 1995 VS. 1994
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... 100.0% 100.0% 100.0% 100.0% (20.7%) (3.8%)
Costs and expenses:
Costs of products sold....... 53.6% 54.5% 53.8% 56.1% (22.1%) (7.8%)
Research and development..... 24.2% 16.6% 19.1% 16.0% 15.2% 14.6%
Sales, marketing and
administration............. 28.7% 22.1% 25.0% 23.4% 3.1% 2.9%
Amortization of intangible
assets..................... .9% .8% .8% .9% (5.3%) (6.3%)
Interest expense............. -- .2% -- .3% -- --
Interest income.............. (2.2%) (1.1%) (1.7%) (.8%) 62.6% 105.5%
------- ------ ------ ----- ----- ------
Total costs and expenses....... 105.2% 93.2% 97.0% 95.9% (10.5%) 2.7%
------ ----- ----- ----- ------- ----
(Loss) income before
income taxes................. (5.2%) 6.8% 3.0% 4.1% -- (29.3%)
Income tax (benefit)
provision.................... (.6%) .7% .4% .4% -- (16.1%)
----- --- --- ---
Net (loss) income ............. (4.6%) 6.1% 2.6% 3.7% -- (30.8%)
====== ==== ==== ====
</TABLE>
7
<PAGE> 8
TELCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SALES AND NET INCOME - Sales for the third quarter of fiscal 1995 were
$20.7 million, a decrease of 21% compared with the third quarter of fiscal
1994. For the first nine months of fiscal 1995, sales were $69.8 million,
down 4% compared with the first nine months of last year. These decreases
resulted as the Company experienced order delays for both fiber optic
tranmission products and network access equipment. Internetworking
product sales which represented 6% of total sales in both the third
quarter and nine month period increased 8% and 71%, respectively, due to
increased demand for the Company's LAN/WAN optimized product.
The Company recorded a net loss of ($.9) million or ($.09)per share for
the third quarter of fiscal 1995 which compares to net income of $1.6
million or $.16 per share in the third quarter of last year. For the first
nine months of fiscal 1995, net income was $1.9 million or $0.18 per share
compared with $2.7 million or $0.27 per share in the year ago period. The
reduced net income results for the third quarter and nine month period was
principally related to lower sales volume of both transmission products
and network access equipment and record spending on research and
development programs for new products.
COSTS OF PRODUCTS SOLD - For the third quarter of fiscal 1995, costs of
products sold represented 54% of sales compared with 55% of sales in the
third quarter of last year. For the year to date period, costs of
products sold represented 54% of sales in fiscal 1995 and 56% of sales in
fiscal 1994. The improved gross margins in both the quarter and year to
date periods were principally related to a favorable mix of product sales.
RESEARCH AND DEVELOPMENT - Research and development expense was $5.0
million and $13.3 million in the third quarter and first nine months of
fiscal 1995, respectively. This represented an increase of 15% over the
comparable periods of last year due to increased spending for ATM/SONET
multiplexers and intelligent network access products. As a percent of
sales, research and development represented 24% in the third quarter and
19% in the nine month periods of fiscal 1995, up from 17% and 16% in the
comparable periods of fiscal 1994, respectively.
SALES, MARKETING AND ADMINISTRATION - Sales, marketing and administration
expense was $5.9 million and $17.4 million in the third quarter and first
nine months of fiscal 1995, respectively, and represented a 3% increase
for both the third quarter and nine month periods.
INTEREST INCOME - Interest income was $.5 million and $1.2 million for
the third quarter and nine month periods of fiscal 1995. This reflects an
increase of 63% compared to the third quarter of last year and 105%
increase for the nine month period. These increases resulted from higher
interest earned on a higher level of cash and short term investments
during the current year.
INCOME TAX (BENEFIT) PROVISION - The Company is providing for income tax
at an effective tax rate of 12% for fiscal 1995. The estimated effective
tax rate used in fiscal 1995 approximates the 10% effective tax rate used
in the prior year period and reflects utilization of net operating loss
carryforwards and tax credits earned in prior years.
LIQUIDITY AND CAPITAL RESOURCES - During the first nine months of fiscal
1994, cash and equivalents increased $1.8 million and short-term
investments decreased ($0.4) million, for a net increase of $1.4 million,
resulting in a quarter-end total for cash and short-term investments of
$27.6 million.
8
<PAGE> 9
The increase of $1.8 million in cash and equivelants during the first nine
months of fiscal 1995 reflected use by operating activities and investing
activities of ($1.1) million and ($1.6) million of cash, respectively,
offset by $4.5 million of cash provided by financing activities, primarily
the proceeds of employee stock option exercises. For the nine month
period of last year, cash and equivalents increased $5.7 million to $22.4
million. This increase in fiscal 1994 resulted from cash provided by
operating activities of $9.8 million, and was partially offset by cash
used in investing activities and financing activities of ($1.9) million
and ($2.3) million, respectively.
For the first nine months of fiscal 1995, cash used in operating
activities of ($1.1) million decreased ($10.9) million from the comparable
period of last year. This decrease resulted primarily from increased
inventory levels and reduced accounts payable and other current
liabilities. Cash used in investing activities was ($1.6) million for the
first nine months of fiscal 1995, reflecting an increase in expenditures
for plant and equipment and a decrease in short-term investments. Cash
provided by financing activities was $4.5 million from employee stock
plan proceeds.
The Company maintains a $10 million line of credit with the Bank of Boston
which expires on July 31, 1995. The Company is currently negotiating an
extension beyond the current expiration date. At May 29, 1995 the Company
had no borrowings under this line of credit and currently has no other
debt outstanding. Management believes that existing cash and future
funds provided by operating activities will be adequate to satisfy
operating cash requirements.
9
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TELCO SYSTEMS, INC.
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.
10
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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
Date: July 6, 1995
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-27-1995
<PERIOD-END> MAY-28-1995
<EXCHANGE-RATE> 1
<CASH> 17,120
<SECURITIES> 10,524
<RECEIVABLES> 11,683
<ALLOWANCES> 0
<INVENTORY> 19,356
<CURRENT-ASSETS> 62,158
<PP&E> 41,542
<DEPRECIATION> 30,794
<TOTAL-ASSETS> 83,595
<CURRENT-LIABILITIES> 12,076
<BONDS> 0
<COMMON> 101
0
0
<OTHER-SE> 67,820
<TOTAL-LIABILITY-AND-EQUITY> 83,595
<SALES> 20,656
<TOTAL-REVENUES> 20,656
<CGS> 11,060
<TOTAL-COSTS> 21,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,065)
<INCOME-TAX> (125)
<INCOME-CONTINUING> (940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (940)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
