<PAGE> 1
QUARTER 1-FY 1998
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 30, 1997
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.
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(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: (781) 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 JANUARY 5, 1998
- ---------------------------- -------------------------------
Common Stock, $.01 par value 10,887,980
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TELCO SYSTEMS, INC.
INDEX
REPORT ON FORM 10-Q
FOR QUARTER ENDED NOVEMBER 30, 1997
<TABLE>
<CAPTION>
Page Number
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets
November 30, 1997 and August 31, 1997 3
Consolidated Statements of Operations
Three months ended November 30, 1997 and November 24, 1996 4
Consolidated Statements of Cash Flows
Three months ended November 30, 1997 and November 24, 1996 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 FILED 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
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30, 1997 AUGUST 31, 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ............................. $ 14,727 $ 5,406
Marketable securities ............................ 658 7,302
Accounts receivable, net ......................... 16,455 19,633
Inventories, net ................................. 28,044 28,370
Other current assets ............................. 1,201 985
-------- --------
Total current assets ....................... 61,085 61,726
Plant and equipment, at cost ............................. 46,880 46,401
Less accumulated depreciation .................... 37,801 36,712
-------- --------
Net plant and equipment .................... 9,079 9,689
Intangible and other assets, net ......................... 7,006 7,184
-------- --------
Total assets ............................... $ 77,170 $ 78,599
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 5,728 $ 7,292
Payroll and related liabilities .................. 2,613 3,492
Other accrued liabilities ........................ 10,566 10,528
-------- --------
Total current liabilities .................. 18,907 21,312
Restructuring and other long-term liabilities ............ 1,041 1,531
Shareholders' equity:
Series A participating cumulative preferred stock,
200 shares authorized; no shares outstanding -- --
Preferred stock, $.01 par value, 5,000 shares
authorized; no shares outstanding .......... -- --
Common stock, $.01 par value, 24,000 shares
authorized; shares outstanding:
10,888 at November 30, 1997
10,805 at August 31, 1997 .................. 109 108
Capital in excess of par value ................... 77,388 76,602
Unearned compensation - restricted stock ......... (31) (68)
Accumulated deficit .............................. (20,244) (20,886)
-------- --------
Total shareholders' equity ................. 57,222 55,756
-------- --------
Total liabilities and shareholders' equity . $ 77,170 $ 78,599
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
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November 30, 1997 November 24, 1996
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<S> <C> <C>
Net sales ..................................... $ 27,005 $ 31,835
Costs and expenses:
Cost of products sold ......................... 17,015 19,362
Research and development ...................... 3,453 3,881
Sales, marketing and administration ........... 5,910 7,381
(Gain) on sale of investment .................. -- (1,070)
Amortization of intangible assets ............. 167 167
Interest (income) ............................. (182) (160)
-------- --------
Total costs and expenses ...................... 26,363 29,561
-------- --------
Income before income taxes .................... 642 2,274
Provision for income taxes .................... -- --
Net income ............................... $ 642 $ 2,274
======== ========
Average number of shares and equivalents ...... 11,206 11,051
Earnings per share ............................ $ .06 $ .21
</TABLE>
See accompanying notes to consolidated financial statements.
4
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TELCO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
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November 30, 1997 November 24, 1996
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<S> <C> <C>
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash flows from operating activities:
Net income ......................................... $ 642 $ 2,274
Depreciation and amortization ...................... 1,271 1,433
Amortization of unearned compensation .............. 37 174
Change in assets and liabilities:
Accounts receivable .............................. 3,208 97
Inventories, net ................................. 326 (2,949)
Other current assets ............................. (216) (413)
Intangible and other assets ...................... -- 1,000
Accounts payable and other current liabilities ... (2,211) (302)
Restructuring liabilities ........................ (288) (421)
Long-term liabilities ............................ (396) 341
-------- --------
Net cash from operations ........................... 2,373 1,234
-------- --------
Cash flows from investing activities:
Additions to plant and equipment, net .............. (483) (552)
Purchase of short-term investments ................. (445) (1,184)
Maturities of short-term investments ............... 7,089 4,599
-------- --------
Net cash from investing ............................ 6,161 2,863
-------- --------
Cash flows from financing activities:
Proceeds from sale of common shares
under employee stock plans ....................... 787 1,333
-------- --------
Net cash provided by financing activities .......... 787 1,333
-------- --------
Increase in cash and equivalents ...................... 9,321 5,430
Cash and equivalents at beginning of quarter .......... 5,406 8,461
-------- --------
Cash and equivalents at end of quarter ................ $ 14,727 $ 13,891
======== ========
</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 30, 1997
(UNAUDITED)
Notes 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 30, 1997 and the
consolidated statements of operations and cash flows for the three
months ended November 30, 1997 and November 24, 1996. 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 31, 1997.
<TABLE>
<CAPTION>
Note 2 - Inventories (thousands) November 30, 1997 August 31, 1997
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<S> <C> <C>
Raw materials........................... $13,185 $12,803
Work-in-process......................... 5,371 5,605
Finished goods.......................... 9,488 9,962
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$28,044 $28,370
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</TABLE>
<TABLE>
<CAPTION>
Note 3 - Shares Outstanding
Changes in shares outstanding: Three Months Ended
(thousands) ------------------
November 30, 1997 November 24, 1996
----------------- -----------------
<S> <C> <C>
Outstanding at beginning of period...... 10,805 10,520
Options exercised.................. 61 146
Employee stock purchase plan....... 22 26
------ ------
Outstanding at end of period............ 10,888 10,692
====== ======
</TABLE>
6
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PART I. FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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)
----------------- -------------------
1998 1997 1998 Vs. 1997
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<S> <C> <C> <C>
Net sales .............................. 100.0% 100.0% (15.1)%
Costs and expenses:
Cost of products sold ............. 63.0 60.8 (12.1)
Research and development .......... 12.8 12.2 (11.0)
Sales, marketing and administration 21.9 23.3 (19.9)
(Gain) on sale of investment ...... -- (3.4) N/A
Amortization of intangible assets . 0.6 0.5 --
Interest income ................... (0.7) (0.5) 13.8
----- -----
Total costs and expenses ............... 97.6 92.9 (10.8)
Income before income taxes ............. 2.4 7.1 (71.8)
Provision for income taxes ............. -- -- --
----- ----- -----
Net income ............................. 2.4% 7.1% (71.8)%
</TABLE>
7
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NET SALES AND NET INCOME
For the first quarter of fiscal 1998, net sales decreased 15% to
$27.0 million compared with $31.8 million in the first quarter of fiscal 1997.
Lower shipments in all product areas accounted for this decrease. Most notably,
sales of access products which were 38% of net sales in the first quarter of
fiscal 1998 declined 24% compared with the first quarter of last year. This
decrease was principally related to the cancellation of a large customer order
during the first quarter of fiscal 1998.
Sales of broadband products were 58% of net sales in the first quarter of
fiscal 1998 and decreased by 9% compared with broadband product sales in the
first quarter of fiscal 1997. Although shipments to the Company's largest
customer, Bell Atlantic (formerly NYNEX), increased 6% in the first quarter of
fiscal 1998 compared with last year, sales to other customers were below the
fiscal 1997 level as a result of lower demand for asynchronous products. Sales
of bandwidth optimization products represented 4% of net sales in the first
quarter of fiscal 1998 and experienced a 12% decrease compared with the first
quarter of last year.
Net income for the first quarter of fiscal 1998 was $.6 million or $.06
per share compared with $2.3 million or $.21 per share in the first quarter of
last year. Decreased net sales generated $2.5 million less gross profit which
was substantially offset by $1.9 million lower spending on R&D, selling and
administrative expenses. Additionally, results for the first quarter of fiscal
1997 were favorably impacted by a one-time gain on the sale of an investment of
$1.1 million.
COST OF PRODUCTS SOLD
Cost of products sold was $17.0 million or 63% of net sales in the first
quarter of fiscal 1998. This represented a 12% decrease compared with $19.4
million or 61% of net sales in the first quarter of last year. Gross profit
decreased to 37% of net sales in the first quarter of fiscal 1998 compared with
39% in the first quarter of last year. The decreases in both cost of products
sold and gross profit were principally related to the lower sales volume in the
first quarter of fiscal 1998 compared with last year.
RESEARCH AND DEVELOPMENT
Spending on research and development was $3.5 million in the first quarter
of fiscal 1998 and represented 13% of net sales. In the first quarter of last
year, research and development was $3.9 million or 12% of net sales. This
decrease in spending resulted as certain development programs were curtailed
during the latter part of fiscal 1997. In addition, the Company has reduced its
overall spending targets with the goal of reducing expense ratios and increasing
productivity.
SALES, MARKETING AND ADMINISTRATION
Sales, marketing and administration expense was $5.9 million in the first
quarter of fiscal 1998 compared with $7.4 million in the same period of last
year reflecting a 20% decrease in spending. This decrease is principally related
to the benefits of spending reduction programs instituted in the third quarter
of fiscal 1997. In fiscal 1998, the Company has reduced spending on selling,
marketing and administration expenses to be consistent with the Company's goal
of improving productivity and reducing expense ratios.
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 was originally
made in fiscal 1995, yielded a one-time gain of $1.1 million.
8
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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
Magnalink Communications Corporation in 1992. Amortization expense was
$.2 million in the first quarters of both fiscal 1998 and fiscal 1997.
INTEREST INCOME
Interest income was $.2 million in the first quarter of fiscal 1998
reflecting a 14% increase compared with the same period of last year. Higher
average interest rates earned were partially offset by lower average cash and
marketable securities.
INCOME TAX PROVISION(BENEFIT)
No provision for income tax was recorded during the first quarters of
fiscal 1998 and fiscal 1997 due primarily to the net operating losses incurred
during prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities increased $2.7 million in the first quarter
of fiscal 1998. Principal sources of cash were from net income before non-cash
expenses of $2.0 million, a decrease in accounts receivable of $3.2 million and
proceeds from employee stock purchase plans of $.8 million. These sources of
cash were partially offset by decreases in accounts payable and other
liabilities of $2.9 million and additions to plant and equipment of $.5 million.
The Company maintains a $20.0 million line of credit with Fleet Bank which
is available until June 1, 1998. The Company intends to renew the line of credit
upon expiration.
Management believes that cash, marketable securities 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 "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 "safe harbor" provisions of the Act. Certain information
contained herein, particularly certain information appearing in this section is
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 31, 1997, 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.
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: William J. Stuart
---------------------------------------------
William J. Stuart
Vice President and Chief Financial Officer
Principal Accounting Officer
Dated: January 12, 1998
------------------------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-30-1998
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 14,727
<SECURITIES> 658
<RECEIVABLES> 16,455
<ALLOWANCES> 849
<INVENTORY> 28,044
<CURRENT-ASSETS> 61,085
<PP&E> 46,880
<DEPRECIATION> 37,801
<TOTAL-ASSETS> 77,170
<CURRENT-LIABILITIES> 18,907
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 57,113
<TOTAL-LIABILITY-AND-EQUITY> 77,170
<SALES> 27,005
<TOTAL-REVENUES> 27,005
<CGS> 17,015
<TOTAL-COSTS> 17,015
<OTHER-EXPENSES> 9,348
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 642
<INCOME-TAX> 0
<INCOME-CONTINUING> 642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 642
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
