<PAGE> 1
Quarter 2 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 FEBRUARY 26, 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
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
NO CHANGE
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(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.
<TABLE>
<S> <C> <C>
Classes Outstanding at April 3, 1995
---------------------------- ----------------------------
Common Stock, $.01 par value 10,089,968
</TABLE>
1
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TELCO SYSTEMS, INC.
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED FEBRUARY 26, 1995
<TABLE>
<CAPTION>
Page Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets
February 26, 1995 and August 28, 1994 3
Consolidated Statements of Income
Three and six months ended February 26, 1995
and February 27, 1994 4
Consolidated Statements of Cash Flows
Six months ended February 26, 1995
and February 27, 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
------- Results of Operations and Financial Condition 7-9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
------- --------------------------------
SIGNATURE(S) 11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
------------------------------
TELCO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
February 26, 1995 August 28, 1994
Unaudited Audited
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<S> <C> <C>
Assets
------
Current assets:
Cash and equivalents............................ $20,715 $15,262
Short term investments.......................... 8,999 10,946
Accounts receivable, net........................ 12,996 15,064
Inventories, net................................ 18,337 15,244
Other current assets............................ 3,073 2,905
------- -------
Total current assets.......................... 64,120 59,421
------- -------
Plant and equipment, at cost....................... 40,756 39,861
Less accumulated depreciation................... 29,682 27,745
------- -------
Net plant and equipment....................... 11,074 12,116
------- -------
Intangible and other assets, net................... 9,970 10,665
------- -------
Total assets.................................. $85,164 $82,202
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable................................ $ 4,691 $ 5,519
Payroll and payroll related liabilities......... 2,926 3,436
Other accrued liabilities....................... 5,566 7,256
------- -------
Total current liabilities..................... 13,183 16,211
------- -------
Restructuring and other long-term ................. 3,938 4,443
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:
10,054,036 at February 26, 1995;
9,649,051 at August 28, 1994.................. 101 96
Capital in excess of par value.................. 70,034 66,343
Accumulated Deficit............................. (2,092) (4,891)
------- -------
Total shareholders' equity.................... 68,043 61,548
------- -------
Total liabilities and shareholders' equity.... $85,164 $82,202
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
Feb. 26, Feb. 27, Feb. 26, Feb. 27,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales:
Fiber optic transmission products......... $ 9,015 $11,801 $19,034 $22,633
Customer premise network access equipment. 12,279 11,731 26,893 22,390
Internetworking products.................. 1,583 713 3,167 1,441
------- ------- ------- -------
22,877 24,245 49,094 46,464
------- ------- ------- -------
Costs and expenses:
Cost of products sold..................... 12,065 13,548 26,447 26,500
Research and development.................. 4,214 3,895 8,323 7,285
Sales, marketing and administration....... 5,500 5,812 11,509 11,200
Amortization of intangible assets......... 186 207 386 414
Interest expense.......................... - 46 - 163
Interest income........................... (443) (173) (745) (304)
------- ------- ------- -------
21,522 23,335 45,920 45,258
------- ------- ------- -------
Income before income taxes................ 1,355 910 3,174 1,206
Provision for income taxes................ 100 90 375 120
------- ------- ------- -------
Net income................................ $ 1,255 $ 820 $ 2,799 $ 1,086
======= ======= ======= =======
Average shares and equivalents (thousands) 10,392 9,709 10,334 9,679
Earnings per share........................ $ .12 $ .08 $ .27 $ .11
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
---------------------------------------
Feb. 26, 1995 Feb. 27, 1994
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net income.................................. $ 2,799 $ 1,086
Depreciation and amortization............... 2,949 2,797
Change in assets and liabilities:
Accounts receivable....................... 2,068 434
Refundable income taxes................... - 312
Inventories............................... (3,093) 866
Other current assets...................... (168) (98)
Intangible and other assets............... 103 (265)
Accounts payable and other current
liabilities............................. (3,028) (1,008)
Long-term liabilities..................... (505) (848)
-------- -------
Net cash provided by operating activities... 1,125 3,276
-------- -------
Cash flows from investing activities:
Additions to plant and equipment, net..... (1,315) (1,041)
Purchase of short-term investments........ (13,550) -
Maturities of short-term investments...... 15,497 -
-------- -------
Net cash provided by (used in) investing
activities............................. 632 (1,041)
-------- -------
Cash flows from financing activities:
Proceeds from sale of common shares
under employee stock plans.............. 3,696 986
Payments on long-term liabilities......... - (2,000)
-------- -------
Net cash provided by (used in) financing
activities.............................. 3,696 (1,014)
-------- -------
Increase in cash and equivalents.............. 5,453 1,221
Cash and equivalents at beginning of year..... 15,262 21,788
-------- -------
Cash and equivalents at end of period......... $ 20,715 $23,009
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED FEBRUARY 26, 1995
(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 26, 1995 and the consolidated
statements of income and cash flows for the six month periods ended
February 26, 1995 and February 27, 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.
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<CAPTION>
Note 2 - Inventories (dollars in thousands) February 26, August 28,
1995 1994
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<S> <C> <C>
Raw materials..................................... $ 8,820 $ 6,656
Work-in-process................................... 3,300 2,305
Finished goods.................................... 6,217 6,283
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$18,337 $15,244
======= =======
</TABLE>
Note 3 - Shares Outstanding
Changes in shares outstanding:
<TABLE>
<CAPTION>
Six Months Ended
----------------
Feb. 26, 1995 Feb. 27, 1994
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<S> <C> <C>
Outstanding at beginning of period................. 9,649,051 9,345,660
Options exercised................................ 377,818 174,057
Employee stock purchase plan..................... 27,167 25,256
---------- ---------
Outstanding at end of period....................... 10,054,036 9,544,973
========== =========
</TABLE>
6
<PAGE> 7
PART I. FINANCIAL INFORMATION (Continued)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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.
<TABLE>
<CAPTION>
Percentage of Sales Percentage Increase (Decrease)
------------------- ------------------------------
Second Quarter Six Months Second Quarter Six Months
1995 1994 1995 1994 1995 vs. 1994 1995 vs. 1994
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% (5.7%) 5.7%
Costs and expenses:
Costs of products sold................ 52.8% 55.8% 53.8% 57.0% (10.9%) (.2%)
Research and development.............. 18.4% 16.0% 17.0% 15.7% 8.2% 14.2%
Sales, marketing and administration... 24.0% 24.0% 23.4% 24.1% (5.4%) 2.8%
Amortization of intangible assets..... .8% .9% .8% .9% (10.1%) (6.8%)
Interest expense...................... - .2% - .4% - -
Interest income....................... (1.9%) (.7%) (1.5%) (.7%) 156.1% 145.1%
------ ------ ------ ------ ------ ------
Total costs and expenses................ 94.1% 96.2% 93.5% 97.4% (7.8%) 1.5%
------ ------ ------ ------ ------ ------
Income before income taxes.............. 5.9% 3.8% 6.5% 2.6% 48.9% 163.2%
Provision for income taxes.............. .4% .4% .8% .3% 11.1% 212.5%
------ ------ ------ ------ ------ ------
Net income.............................. 5.5% 3.4% 5.7% 2.3% 53.0% 157.7%
====== ====== ====== ====== ====== ======
</TABLE>
7
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TELCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE PERIOD ENDED FEBRUARY 26, 1995
SALES AND NET INCOME - Sales for the second quarter of fiscal 1995 amounted
to $22.9 million, a decrease of 6% compared with the second quarter of
fiscal 1994. For the first six months of fiscal 1995, sales amounted to
$49.1 million, an increase of 6% compared with the same period last year.
For the second quarter and first six months of fiscal 1995, sales volume of
transmission products decreased 24% and 16% compared with the same periods
of fiscal 1994, respectively, due to continuing competitive pressures and
order delays. Sales volume of network access equipment increased 5% and 20%
for the second quarter and first six months of fiscal 1995 compared with
last year, reflecting continued strong demand for DCB-24 and Route-24
products for use in voice and data networks. Sales of internetworking
products doubled in the second quarter and first six months of fiscal 1995
over the year-ago periods, as customer demand increased for the Company's
LAN/WAN optimizer product.
Net income for the second quarter of fiscal 1995 was $1,255,000 or $.12 per
share, compared with $820,000 or $.08 per share for the same period of last
year. For the six month period of fiscal 1995, net income was $2,799,000 or
$.27 per share compared with $1,086,000 or $.11 per share for the six month
period of last year. The increase in net income in the second quarter
resulted from higher gross profit due to an improved gross margin percentage
and an increase in interest income. For the first half of the year, the net
income increase was principally related to higher gross profit from higher
sales and higher gross margin percent, as well as increased net interest
income which more than offset higher spending in research and development.
Over the balance of the year fiber optic transmission product revenue is
expected to remain at a steady level with a number of actions underway to
position this business for long-term growth. The outlook for network access
equipment remains positive and the internetworking product area is expected
to achieve better than planned results.
COSTS OF PRODUCTS SOLD - For the second quarter of fiscal 1995, costs of
products sold represented 53% of net sales versus 56% in last year's period.
For the six month period, costs of products sold represented 54% and 57% in
1995 and 1994, respectively. Margins improved over both the year-ago
quarter and for the six-month periods due to higher sales of network access
products and improved product mix.
RESEARCH AND DEVELOPMENT - Research and development expense was $4,214,000
for the second quarter of fiscal 1995 and $8,323,000 for the first six
months of fiscal 1995, and represented 18% and 17% of sales in these
periods, respectively. These amounts are an increase of 8% and 14% over the
comparable periods of fiscal 1994, resulting primarily from higher spending
for development of ATM/SONET and intelligent network access products.
SALES, MARKETING AND ADMINISTRATION - Sales, marketing and administration
expense was $5,500,000 and $11,509,000 for the second quarter and first six
months of fiscal 1995, respectively. This represented a decrease of 5% for
the second quarter period compared with last year, reflecting primarily
timing of spending for sales and marketing activities in both the domestic
and international marketplace. As a percentage of sales, these expenses
remained relatively constant at approximately 24% for the quarter and six
month periods in each year.
INTEREST INCOME - Interest income amounted to $443,000 and $745,000 in the
second quarter and first six months of fiscal 1995, respectively, versus
$173,000 and $304,000 in the comparable periods of last year. The increase
in interest income reflected higher interest earned on a higher level of
cash and short-term investments.
8
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PROVISION FOR INCOME TAXES - The provision for income tax was $100,000 and
$375,000 for the second quarter and first six months of fiscal 1995,
respectively, compared with $90,000 and $120,000 for the same periods of
last year. The estimated effective tax rate of 12% in fiscal 1995
approximates the 10% effective rate for the prior year period and reflects
utilization of net operating loss carryforwards and tax credits earned in
prior years.
LIQUIDITY AND CAPITAL RESOURCES - For the first six months of fiscal 1995,
cash and equivalents increased $5,453,000 and short-term investments
decreased $1,947,000 for a net increase of $3,506,000, resulting in a
quarter-end total for cash and short-term investments of $29,714,000. The
cash increase of $5,453,000 included cash provided by operating activities
of $1,125,000, cash provided by investing activities of $632,000 and cash
provided by financing activities of $3,696,000. For the comparable period
last year, cash increased $1,221,000 resulting from cash provided by
operating activities of $3,276,000 offset by cash used in investing
activities of ($1,041,000) and cash used in financing activities of
($1,014,000).
Net cash provided by operating activities of $1,125,000 for the first six
months of fiscal 1995 decreased ($2,151,000) from the comparable period last
year, reflecting increased inventory levels and a reduction in accounts
payable and other current liabilities, partially offset by higher net income
and a reduction in accounts receivable. Cash provided by investing
activities was $632,000, an increase of $1,673,000 from the first six months
of fiscal 1994, reflecting net short-term investment maturities of
$1,947,000 offset by increased expenditures for plant and equipment
($274,000). Financing activities during the first six months of fiscal 1995
provided cash of $3,696,000 from employee stock plan proceeds. In fiscal
1995, financing activities used ($1,014,000) of cash, which was primarily
related to an annual $2,000,000 sinking fund payment partially offset by
proceeds from employee stock plans.
The Company maintains a $10 million line of credit with the Bank of Boston
which expires July 31, 1995. Borrowings may be made at the bank's prime
rate. The Company expects to extend this line of credit at comparable
terms. At February 26, 1995 and August 28, 1994, the Company had no
borrowings on this line of credit and had no other debt outstanding.
Management believes that existing cash and short-term investments and funds
provided by operating activities will be adequate to satisfy cash
requirements for the foreseeable future.
9
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TELCO SYSTEMS, INC.
PART II. OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports filed on Form 8-K
---------------------------------------------
(a) Exhibit 27. Financial Data Schedule
(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: April 10, 1995
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-27-1995
<PERIOD-END> FEB-26-1995
<CASH> 20,715
<SECURITIES> 8,999
<RECEIVABLES> 12,996
<ALLOWANCES> 0
<INVENTORY> 18,337
<CURRENT-ASSETS> 64,120
<PP&E> 40,756
<DEPRECIATION> 29,682
<TOTAL-ASSETS> 85,164
<CURRENT-LIABILITIES> 13,183
<BONDS> 0
<COMMON> 101
0
0
<OTHER-SE> 67,942
<TOTAL-LIABILITY-AND-EQUITY> 85,164
<SALES> 22,877
<TOTAL-REVENUES> 22,877
<CGS> 12,065
<TOTAL-COSTS> 21,522
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,355
<INCOME-TAX> 100
<INCOME-CONTINUING> 1,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,255
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
