<PAGE> 1
QUARTER 1 - FY 1997
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 NOVEMBER 24, 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
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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
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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
----- -----
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 January 3, 1997
- ---------------------------- ------------------------------
Common Stock, $.01 par value 10,724,150
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TELCO SYSTEMS, INC.
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED NOVEMBER 24, 1996
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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Consolidated Balance Sheets
November 24, 1996 and August 25, 1996 3
Consolidated Statements of Operations
Three months ended November 24, 1996
and November 26, 1995 4
Consolidated Statements of Cash Flows
Three months ended November 24, 1996
and November 26, 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of
------- Financial Condition and Results of Operations 8 - 9
PART III. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
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SIGNATURE(S) 11
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
TELCO SYSTEMS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
November 24, 1996 August 25, 1996
----------------- ---------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and equivalents ............................. $ 13,891 $ 8,461
Short-term investments ........................... 3,166 6,581
Accounts receivable, net ......................... 17,928 18,025
Refundable income taxes .......................... 702 702
Inventories, net ................................. 26,444 23,495
Other current assets ............................. 1,223 810
-------- --------
Total current assets .......................... 63,354 58,074
-------- --------
Fixed Assets ........................................ 46,493 45,941
Less accumulated depreciation .................... 34,666 33,411
-------- --------
Net fixed assets .............................. 11,827 12,530
-------- --------
Intangible and other assets, net .................... 7,722 8,900
-------- --------
Total assets .................................. $ 82,903 $ 79,504
======== ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable ................................. $ 9,631 $ 11,243
Payroll and related liabilities .................. 1,995 1,917
Other accrued liabilities ........................ 10,363 8,997
-------- --------
Total current liabilities ..................... 21,989 22,157
-------- --------
Restructuring and other long-term liabilities ....... 3,136 3,350
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:
10,692,296 at November 24, 1996;
10,519,529 at August 25, 1996 ................. 107 105
Capital in excess of par value ................... 75,598 74,267
Deferred Compensation ............................ (393) (567)
Accumulated deficit .............................. (17,534) (19,808)
-------- --------
Total shareholders' equity ................. 57,778 53,997
-------- --------
Total liabilities and shareholders' equity .. $ 82,903 $ 79,504
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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TELCO SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended
------------------
Nov. 24, 1996 Nov. 26, 1995
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<S> <C> <C>
Net sales ................................. $31,835 $20,533
Costs and expenses:
Cost of products sold ..................... 19,362 12,112
Research and development .................. 3,881 4,533
Sales, marketing and administration ....... 7,381 6,684
(Gain) on sale of investment .............. (1,070) --
Amortization of intangible assets ......... 167 195
Interest (income) ......................... (160) (371)
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29,561 23,153
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Income (loss) before income taxes ......... 2,274 (2,620)
Provision for income taxes ................ -- --
------- -------
Net income (loss) ...................... $ 2,274 $(2,620)
------- -------
Average number of shares and equivalents .. 11,051 10,266
Earnings (loss) per share.................. $ .21 $ (.26)
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TELCO SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
Three months ended
------------------
Nov. 24, 1996 Nov. 26, 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net (loss) income ................................ $ 2,274 $(2,620)
Depreciation and amortization .................... 1,433 1,348
Amortization of unearned compensation ............ 174 --
Change in assets and liabilities:
Accounts receivable ............................ 97 (985)
Inventories, net ............................... (2,949) 864
Other current assets ........................... (413) 320
Intangible and other assets .................... 1,000 --
Accounts payable and other current liabilities.. (302) 494
Restructuring liabilities ...................... (421) --
Long-term liabilities .......................... 341 (338)
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Net cash from operations ......................... 1,234 (917)
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Cash flows from investing activities:
Additions to plant and equipment, net ............ (552) (999)
Purchase of short-term investments ............... (1,184) (7,039)
Maturities of short-term investments ............. 4,599 7,760
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Net cash from investing .......................... 2,863 (278)
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Cash flows from financing activities:
Proceeds from sale of common shares
under employee stock plans ..................... 1,333 334
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Net cash provided by financing activities ........ 1,333 334
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(Decrease) increase in cash and equivalents ......... 5,430 (861)
Cash and equivalents at beginning of quarter ........ 8,461 18,208
------- -------
Cash and equivalents at end of quarter .............. $13,891 $17,347
======= =======
</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 24, 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 November 24, 1996 and the consolidated
statements of operations and cash flows for the three months ended
November 24 , 1996 and November 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 25, 1996.
<TABLE>
<CAPTION>
Note 2 - Inventories (dollars in thousands) November 24, August 25,
1996 1996
------------ ----------
<S> <C> <C>
Raw materials......................... $14,123 $12,112
Work-in-process....................... 4,582 5,560
Finished goods........................ 7,739 5,823
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$26,444 $23,495
======= =======
<CAPTION>
Note 3 - Shares Outstanding
Changes in shares outstanding: Three months ended
-------------------
November 24, November 26,
1996 1995
------------ ------------
<S> <C> <C>
Outstanding at beginning of period.... 10,519,529 10,230,624
Options exercised.................. 146,491 9,515
Employee stock purchase plan....... 26,276 25,909
---------- ----------
Outstanding at end of period.......... 10,692,296 10,266,048
========== ==========
</TABLE>
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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>
PERCENT OF SALES PERCENT
FIRST QUARTER INCREASE (DECREASE)
------------------ -------------------
1997 1996 1997 VS. 1996
---- ---- ---- --- ----
<S> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 55.0%
Costs and expenses:
Cost of products sold ................ 60.8 59.0 59.9
Research and development ............. 12.2 22.1 (14.4)
Sales, marketing and administration .. 23.3 32.6 10.4
(Gain) on sale of investment ......... (3.4) -- N/A
Amortization of intangible assets .... 0.5 0.9 (14.4)
Interest income ...................... (0.5) (1.8) (56.9)
---- -----
Total costs and expenses ................ 92.9 112.8 27.7
---- ----- ----
Income (loss) before income taxes ....... 7.1 (12.8) N/A
Provision for income taxes .............. -- -- N/A
---- -----
Net income (loss) ....................... 7.1% (12.8)% N/A
</TABLE>
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TELCO SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR QUARTER ENDED NOVEMBER 24, 1996
SALES AND NET INCOME Sales for the first quarter of fiscal 1997 increased 55% to
$31.8 million compared with $20.5 million in the first quarter of last year.
Shipments increased across all product areas, most significantly for broadband
products and network access products. Broadband products represented 54% of
total sales in fiscal 1997, an increase of 57% compared with the first quarter
of fiscal 1996. This increase resulted as telephone company customers increased
deployment of broadband products for T1 services in local loop applications.
Access products represented 42% of total sales and increased 57% compared with
the first quarter of last year. Increased usage of the Company's access products
for voice and data network expansion resulted in this growth. The backlog of
unfilled orders at quarter-end was $14.4 million, a decrease of $9.6 million
compared with the recent year-end backlog of $24.0 million. This decrease
resulted since new orders booked during the first quarter of $22.1 million were
below first quarter shipments due to early receipt of some customer stocking
orders in the fourth quarter of last year. Going forward, the Company expects
the quarterly order rate to be more in line with the first quarter shipment
level.
Net income for the quarter was $2.3 million or $.21 per share which included a
one-time gain of $1.1 million or $.10 per share. Net income from operations of
$1.2 million or $.11 per share compares favorably with a net loss of $2.6
million or $.26 per share reported in the first quarter of fiscal 1996. This
increase was primarily related to increased sales volume across all product
areas.
COST OF PRODUCTS SOLD Cost of products sold represented 61% of sales in the
first quarter of fiscal 1997 compared with 59% in the first quarter of fiscal
1996. Lower product margins on initial production of new network access products
and increased period costs accounted for this decrease in gross profit percent.
RESEARCH AND DEVELOPMENT Spending on research and development represented 12% of
sales in the first quarter of fiscal 1997, a decrease of 14% compared with the
first quarter of last year. Lower spending resulted as development efforts for
certain broadband products were curtailed in conjunction with the Company's 1996
restructuring program.
SALES, MARKETING AND ADMINISTRATION Sales, marketing and administration expense
increased 10% in the first quarter of fiscal 1997 compared with the same period
of last year. This increase was primarily related to increased selling and
marketing activities in both the domestic and international marketplace.
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
occurred 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 Maganalink Communications Corporation in
1992. Amortization expense was $0.2 million in the first quarters of both fiscal
1997 and 1996.
INTEREST INCOME Interest income related to the Company's cash equivalents and
short-term investments decreased 57% compared with the first quarter of fiscal
1996. This decrease was
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primarily related to a lower level of average cash equivalents and short-term
investments in the first quarter of fiscal 1997 compared with last year.
INCOME TAX PROVISION No provision for income tax was recorded on the fiscal 1997
first quarter net income and no tax benefit was available on fiscal 1996 first
quarter net loss. Tax benefits relating to prior periods are sufficient to
offset net income generated in the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES For the three months ended November 24, 1996,
cash and short-term investments increased $2.0 million to $17.0 million. During
the first quarter of fiscal 1997, operating activities, investing activities and
financing activities each provided cash in the amount of $1.2 million, $2.9
million and $1.3 million, respectively. Operating activities provided cash of
$1.2 million after funding increases in inventory of $2.9 million which was
required to support increased operations. Additionally, sales of common stock
under various employee stock purchase plans generated $1.3 million.
The Company maintains a $10.0 million line of credit with the Bank of Boston
which is available until September 30, 1997. Although the Company has made no
borrowings against the line in fiscal 1997, approximately $1.1 million has been
reserved to support various guarantees in effect at November 24, 1996.
Management believes that cash, short-term investments 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 new "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 new "safe harbor" provisions of the
Act. Certain information contained herein, particularly the information
appearing under the headings "Results of Operations" and "Financial Condition"
are 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 25, 1996, 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.
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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.
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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/ Stephen J. Maffeo
---------------------------------
Stephen J. Maffeo
Vice President and
Corporate Controller
Principal Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-24-1996
<CASH> 13,891
<SECURITIES> 3,166
<RECEIVABLES> 17,928
<ALLOWANCES> 675
<INVENTORY> 26,444
<CURRENT-ASSETS> 63,354
<PP&E> 46,493
<DEPRECIATION> 34,666
<TOTAL-ASSETS> 82,903
<CURRENT-LIABILITIES> 21,989
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 57,671
<TOTAL-LIABILITY-AND-EQUITY> 82,903
<SALES> 31,835
<TOTAL-REVENUES> 31,835
<CGS> 19,362
<TOTAL-COSTS> 29,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,274
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,274
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
