<PAGE> 1
QUARTER 1 - FY 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
{X} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 26, 1995
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OR
--
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO
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Commission file number 0-12622
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TELCO SYSTEMS, INC
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2178777
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(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
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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>
<CAPTION>
Classes Outstanding at January 3, 1996
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<S> <C>
Common Stock, $.01 par value 10,269,866
</TABLE>
1
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<TABLE>
TELCO SYSTEMS, INC.
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED NOVEMBER 26, 1995
<CAPTION>
Page Number
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets
November 26, 1995 and August 27, 1995 3
Consolidated Statements of Income
Three months ended November 26, 1995
and November 27, 1994 4
Consolidated Statements of Cash Flows
Three months ended November 26, 1995
and November 27, 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
------ Financial Condition and Results of Operations 7-8
PART III. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
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SIGNATURE(S) 10
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2
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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>
November 26, 1995 August 27, 1995
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<S> <C> <C>
Assets
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Current assets:
Cash and equivalents . . . . . . . . . . . . . . . $17,347 $18,208
Short-term investments . . . . . . . . . . . . . . 10,174 10,895
Accounts receivable, net . . . . . . . . . . . . . 11,032 10,047
Refundable income taxes . . . . . . . . . . . . . 1,251 1,251
Inventories, net . . . . . . . . . . . . . . . . . 17,609 18,473
Other current assets . . . . . . . . . . . . . . . 2,265 2,585
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Total current assets . . . . . . . . . . . . . 59,678 61,459
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Plant and equipment, at cost . . . . . . . . . . . . 42,713 41,720
Less accumulated depreciation . . . . . . . . . . 32,140 31,114
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Net plant and equipment . . . . . . . . . . . . 10,573 10,606
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Intangible and other assets, net . . . . . . . . . . 10,058 10,374
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Total assets . . . . . . . . . . . . . . . . . $80,309 $82,439
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Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 3,677 $ 3,952
Payroll and related liabilities . . . . . . . . . 1,843 2,628
Other accrued liabilities . . . . . . . . . . . . 6,518 4,964
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Total current liabilities . . . . . . . . . . . 12,038 11,544
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Restructuring and other long-term liabilities . . . . 3,152 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:
10,266,048 at November 26, 1995;
10,230,624 at August 27, 1995 . . . . . . . . . 103 102
Capital in excess of par value . . . . . . . . . . 71,899 71,566
Accumulated deficit . . . . . . . . . . . . . . . (6,883) (4,263)
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Total shareholders' equity . . . . . . . . . 65,119 67,405
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Total liabilities and shareholders' equity . $80,309 $82,439
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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<TABLE>
TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended
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Nov. 26, 1995 Nov. 27, 1994
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<S> <C> <C>
Sales:
Broadband transmission products . . . . . . . . . $10,926 $10,019
Network access products . . . . . . . . . . . . . 8,617 14,614
Bandwidth optimization products . . . . . . . . . 990 1,584
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20,533 26,217
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Costs and expenses:
Cost of products sold . . . . . . . . . . . . . . 12,112 14,382
Research and development . . . . . . . . . . . . . 4,533 4,109
Sales, marketing and administration . . . . . . . 6,684 6,009
Amortization of intangible assets . . . . . . . . 195 200
Interest (income) . . . . . . . . . . . . . . . . (371) (302)
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23,153 24,398
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(Loss) income before income taxes . . . . . . . . . . (2,620) 1,819
Provision for income taxes . . . . . . . . . . . . . - 275
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Net (loss) income . . . . . . . . . . . . . . . . . . $(2,620) $ 1,544
======= =======
Average number of shares and equivalents (thousands) 10,266 10,273
(Loss) earnings per share . . . . . . . . . . . . . . $ (.26) $ 0.15
</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)
<CAPTION>
Three months ended
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Nov. 26, 1995 Nov. 27, 1994
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net (loss) income . . . . . . . . . . . . . . . . . . . . . $(2,620) $ 1,544
Depreciation and amortization . . . . . . . . . . . . . . . 1,348 1,469
Change in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (985) 1,032
Inventories . . . . . . . . . . . . . . . . . . . . . . 864 (1,770)
Other current assets . . . . . . . . . . . . . . . . . . 320 495
Intangible and other assets . . . . . . . . . . . . . . . -- 103
Accounts payable and other current liabilities . . . . . 494 (1,577)
Long-term liabilities . . . . . . . . . . . . . . . . . . (338) (361)
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Net cash (used in) provided by operating activities . . . . (917) 935
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Cash flows from investing activities:
Additions to plant and equipment, net . . . . . . . . . . . (999) (624)
Purchase of short-term investments . . . . . . . . . . . . (7,039) (5,758)
Maturities of short-term investments . . . . . . . . . . . 7,760 4,631
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Net cash (used in) investing activities . . . . . . . . . . (278) (1,751)
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Cash flows from financing activities:
Proceeds from sale of common shares
under employee stock plans . . . . . . . . . . . . . . . 334 2,390
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Net cash provided by financing activities . . . . . . . . . 334 2,390
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(Decrease) increase in cash and equivalents . . . . . . . . . (861) 1,574
Cash and equivalents at beginning of quarter . . . . . . . . . 18,208 15,262
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Cash and equivalents at end of quarter . . . . . . . . . . . $17,347 $16,836
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</TABLE>
See accompanying notes to consolidated financial statements.
5
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TELCO SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Quarter Ended November 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 November 26, 1995 and the
consolidated statements of operations and cash flows for the three
months ended November 26, 1995 and November 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
27, 1995.
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<CAPTION>
Note 2 - Inventories, net (dollars in thousands) November 26, August 27,
1995 1995
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<S> <C> <C>
Raw materials . . . . . . . . . . . . $ 9,703 $ 9,101
Work-in-process . . . . . . . . . . . 2,688 3,060
Finished goods . . . . . . . . . . . . 5,218 6,312
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$17,609 $18,473
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</TABLE>
<TABLE>
Note 3 - Shares Outstanding
<CAPTION>
Changes in shares outstanding: Three months ended
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November 26, November 27,
1995 1994
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<S> <C> <C>
Outstanding at beginning of period . . 10,230,624 9,649,051
Options exercised . . . . . . . . . 9,515 277,219
Employee stock purchase plan . . . 25,909 27,167
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Outstanding at end of period . . . . . 10,266,048 9,953,437
========== =========
</TABLE>
6
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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.
<TABLE>
<CAPTION>
PERCENT OF SALES PERCENT
FIRST QUARTER INCREASE (DECREASE)
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1995 1994 1995 VS. 1994
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<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . 100.0% 100.0% (21.7)%
Costs and expenses:
Cost of products sold . . . . . . . . 59.0 54.9 (15.8)
Research and development . . . . . . . 22.1 15.7 10.3
Sales, marketing and administration . . 32.6 22.9 11.2
Amortization of intangible assets . . . 0.9 0.8 (2.5)
Interest income . . . . . . . . . . . (1.8) (1.2) 22.8
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Total costs and expenses . . . . . . . . 112.8 93.1 (5.1)
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(Loss) income before income taxes . . . . (12.8) 6.9 --
Provision for income taxes . . . . . . . -- 1.0 (100.0)
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Net (loss) income . . . . . . . . . . . . (12.8)% 5.9% --
</TABLE>
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TELCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR QUARTER ENDED NOVEMBER 26, 1995
SALES AND NET LOSS - Sales for the first quarter of fiscal 1996 decreased 22%
to $20.5 million compared with $26.2 million in the first quarter of last
year. This decrease resulted primarily from lower shipments of network access
products due to continued competitive pressure on sales of certain older
products.
Net loss for the quarter was ($2.6) million or ($.26) per share compared with
net income of $1.5 million or $.15 per share in the first quarter of last
year. The net loss resulted from the lower sales volume and increased
spending on both research and development projects and increased selling and
marketing activities.
COST OF PRODUCTS SOLD - Cost of products sold represented 59% of sales in the
first quarter of fiscal 1996. In the first quarter of fiscal 1995, cost of
products sold represented 55% of sales. This decrease in gross margin percent
was principally related to lower absorption of fixed costs resulting from the
lower operating level.
RESEARCH AND DEVELOPMENT - Spending on research and development continued at a
high level in the first quarter of fiscal 1996, increasing 10% to $4.5 million
compared with the first quarter of fiscal 1995. The increase was due to higher
spending for ATM/SONET products, feature additions to existing products and
product modifications for international applications.
SALES, MARKETING AND ADMINISTRATION - Sales, marketing and administration
expense increased 11% to $6.7 million compared with $6.0 million in the first
quarter of fiscal 1995. This increase was primarily related to expanded
selling and marketing activities in the international marketplace.
INTEREST INCOME - Interest income increased 23% compared with the first
quarter of fiscal 1995. This increase resulted from higher interest rates
earned on a higher level of average cash and short-term investments.
PROVISION FOR INCOME TAXES - The Company provided for no taxes during the
first quarter of fiscal 1996. Based on anticipated income for the year and
factoring in available net operating loss carryforwards, the Company
anticipates that it will not need to provide for income taxes this year.
LIQUIDITY AND CAPITAL RESOURCES - For the three month period ended November
26, 1995, cash and short-term investments decreased $1.6 million to $27.5
million. The decrease reflects the net operating loss for the period as well
as $1.0 million from higher accounts receivable due to quarter end shipments
and $1.0 million in capital expenditures, partially offset by lower
inventories and 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 1995, approximately $1.1
million has been reserved to support various guarantees in effect at November
26, 1995.
Management believes that cash and short-term investments of $27.5 million and
funds provided by continuing operations will be adequate to satisfy operating
cash requirements for the foreseeable future.
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TELCO SYSTEMS, INC.
PART II. OTHER INFORMATION
----------------------------
Item 6. Exhibits and Reports filed on Form 8-K
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(b) The Company filed no reports on Form 8-K during the fiscal
quarter for which this report is filed.
9
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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
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-25-1996
<PERIOD-END> NOV-26-1995
<CASH> 17,347
<SECURITIES> 10,174
<RECEIVABLES> 11,032
<ALLOWANCES> 0
<INVENTORY> 17,609
<CURRENT-ASSETS> 59,678
<PP&E> 42,713
<DEPRECIATION> 32,140
<TOTAL-ASSETS> 80,309
<CURRENT-LIABILITIES> 12,038
<BONDS> 0
<COMMON> 103
0
0
<OTHER-SE> 65,016
<TOTAL-LIABILITY-AND-EQUITY> 80,309
<SALES> 20,533
<TOTAL-REVENUES> 20,533
<CGS> 12,112
<TOTAL-COSTS> 23,153
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,620)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,620)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
