UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the quarterly period ended: June 29, 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 0-18374
Telebit Corporation
(Exact name of registrant as specified in its charter)
California 77-0007049
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Executive Drive, Chelmsford, Massachusetts 01824
(Address of principal executive offices)
(Zip Code)
(508) 441-2181
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed 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.
Common stock, no par value 13,831,466 shares
(Class) (Outstanding at August 5, 1996)
Page 1 of 18
<PAGE>
TELEBIT CORPORATION
FORM 10-Q
For the Quarter Ended June 29, 1996
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of
June 29, 1996 and December 31, 1995............ 3
Consolidated Statements of Operations
for the Three and Six Months Ended
June 29, 1996 and July 1, 1995.................. 4
Consolidated Statements of Cash Flows
for the Six Months Ended
June 29, 1996 and July 1, 1995.................. 5
Notes to Consolidated Financial
Statements...................................... 6
ITEM 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................................... 9
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings.................................15
ITEMS 2-3 (Not applicable)..................................15
ITEM 4 Submission of Matters to a Vote of
Security Holders..................................15
ITEM 5 Other Information.................................16
ITEM 6 Exhibits and Reports on Form 8-K..................17
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TELEBIT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
June 29, Dec. 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,735 $ 2,371
Short-term investments 7,007 10,055
Accounts receivable, less allowance for
doubtful accounts and sales returns of
$2,895 in 1996 and $2,972 in 1995 7,035 5,343
Inventories 8,023 8,161
Prepaid expenses and other
current assets 536 1,048
----------- -----------
Total current assets 24,336 26,978
Property and equipment, net 3,052 3,295
Other assets 209 309
----------- -----------
$27,597 $30,582
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $29 $29
Accounts payable 5,233 4,443
Accrued liabilities 6,044 9,172
----------- -----------
Total current liabilities 11,306 13,644
Long-term obligations, net of current portion 16 134
----------- -----------
Total liabilities 11,322 13,778
----------- -----------
Shareholders' equity:
Preferred stock, no par value: 5,000,000
shares authorized; none outstanding -- --
Common stock, no par value: 40,000,000 shares
authorized; 13,802,594 and 13,549,159 issued
and outstanding in 1996 and 1995, respectively 58,438 57,576
Net unrealized gain on securities available
for sale -- 43
Cumulative translation adjustment (29) (14)
Accumulated deficit (42,134) (40,801)
----------- -----------
Total shareholders equity 16,275 16,804
----------- -----------
$27,597 $30,582
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
TELEBIT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $12,540 $12,452 $25,288 $30,547
Cost of revenue 7,905 8,779 15,445 18,847
----------- ----------- ---------- ----------
Gross margin 4,635 3,673 9,843 11,700
----------- ----------- ---------- ----------
Operating expenses:
Product development, net 1,994 2,307 3,852 4,638
Sales and marketing 2,849 4,826 5,740 9,205
General and administrative 1,038 1,124 1,829 2,167
Restructuring -- 3,276 -- 3,276
---------- ----------- ---------- ----------
Total operating expenses 5,881 11,533 11,421 19,286
----------- ----------- ---------- ----------
Loss from operations (1,246) (7,860) (1,578) (7,586)
Interest income 121 235 239 432
Interest expense (1) (3) (2) (8)
Other income (expense), net (1) 1 62 15
----------- ----------- ---------- ----------
Loss before income taxes (1,127) (7,627) (1,279) (7,147)
Income tax expense 17 47 54 115
----------- ----------- ---------- ----------
Net loss $(1,144) $(7,674) $(1,333) $(7,262)
=========== =========== ========== ==========
Net loss per common share $(0.08) $(0.58) $(0.10) $(0.54)
=========== =========== ========== ==========
Weighted average common and common
equivalent shares outstanding 13,717 13,316 13,644 13,571
=========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
<TABLE>
TELEBIT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 29, July 1,
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,333) $(7,262)
Adjustments to reconcile net loss to net cash
used for operating activities -
Depreciation and amortization 706 1,104
Provision for doubtful accounts and sales returns -- 505
Provision for restructuring expenses -- 3,276
Changes in assets and liabilities -
Accounts receivable (1,691) 799
Inventories 138 2,544
Prepaid expenses and other assets 526 (771)
Accounts payable 791 313
Accrued liabilities (3,129) (1,242)
Long term obligations (103) (41)
---------- ----------
Net cash used for operating activities (4,095) (775)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in short-term investments 3,005 (2,050)
Acquisition of property and equipment (391) (484)
---------- ----------
Net cash provided by (used for) investing activities 2,614 (2,534)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations (15) (100)
Proceeds from issuance of common stock 862 1,273
---------- ----------
Net cash provided by financing activities 847 1,173
---------- ----------
Effect of exchange rate changes on cash (2) --
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (636) (2,136)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,371 6,471
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,735 $4,335
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $1 $8
Cash paid for income taxes 6 3
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
TELEBIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Telebit Corporation (the "Company" or "Telebit") and the Company's
wholly-owned subsidiaries, after elimination of intercompany accounts and
transactions.
The accompanying consolidated financial statements are unaudited; however,
in the opinion of management, such financial statements contain all
necessary adjustments to fairly present the financial position, results of
operations and cash flows of the Company for the interim periods
presented. These statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements, although the Company believes that the
disclosures made are adequate to make the information presented not
misleading. Accordingly, these financial statements should be read in
conjunction with the consolidated financial statements and related notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (the "Form 10-K").
Certain matters discussed in, or incorporated by reference into, this Form
10-Q are forward looking statements which involve risks and uncertainties.
The forward looking statements in, or incorporated by reference into, this
Form 10-Q are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Actual results may differ
materially due to a variety of factors, including, without limitation, the
risks, uncertainties and other information discussed under the heading
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Certain Factors that May Affect Future Results" in this
Form 10-Q and elsewhere in this Form 10-Q, as well as in the Company's
other filings with the Securities and Exchange Commission, including the
Form 10-K.
The operating results for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
2. NET LOSS PER COMMON SHARE
Net loss per common share has been computed based on the weighted average
number of common and common equivalent shares outstanding during the
period. Common equivalent shares are excluded from quarterly earnings per
share calculations when their effect would be anti-dilutive. Fully-diluted
per share amounts are the same as the reported per share amounts.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes material, labor and manufacturing overhead.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 29, Dec. 31,
1996 1995
----------- -----------
<S> <C> <C>
Raw materials $5,202 $5,986
Work-in-process 1,974 791
Finished goods 847 1,384
----------- -----------
$8,023 $8,161
=========== ===========
</TABLE>
<PAGE>
4. RESTRUCTURING RESERVES
Amounts charged against the restructuring reserve during the three months
ended June 29, 1996 and the composition of the remaining reserve balance
at June 29, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Second Second
Balance Quarter Quarter Balance
March 30, Accruals Charges June 29,
1996 1996 1996 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Provisions for severance
payments to terminated
employees $275 $ - $(154) $121
----------- ----------- ----------- -----------
$275 $ - $(154) $121
=========== =========== =========== ===========
</TABLE>
The balance at June 29, 1996 relates to the Company's 1995 Restructuring,
as discussed below.
1995 Restructuring
In June 1995, the Company commenced a plan to consolidate its operations
and reduce operating expenses (the "1995 Restructuring"). Under this plan,
the Company recorded expenses totaling approximately $3.2 million during
1995. These charges were comprised primarily of (i) provisions for
severance and retention bonus-related payments for terminated employees;
(ii) provisions relating to the closure of its Sunnyvale, California
facility; and (iii) provisions associated with the disposal of certain
property and equipment.
Amounts paid in the second quarter of 1996 and first six months of 1996
under the 1995 Restructuring totaled approximately $154,000 and $1.8
million, respectively, which consisted primarily of severance and
retention bonus-related payments for terminated employees.
5. LEGAL PROCEEDINGS
In August 1995, two class action lawsuits were filed in the United States
District Court for the District of Massachusetts in which the Company was
named as a defendant, along with certain of its officers and directors.
The plaintiffs in the two suits filed a consolidated amended complaint on
November 9, 1995. The suits relate to disclosures made by the Company,
including in its public filings and press releases, and asserts violations
of federal securities laws. The defendants moved to dismiss the complaint
on December 8, 1995. On February 1, 1996, the Court denied defendants'
motion to dismiss. No class has yet been certified in the litigation.
Although the Company denies all material allegations of the complaint and
intends to vigorously defend against all claims brought against it, the
ultimate outcome, including amount of possible loss, if any, of the
litigation cannot be determined at this time. No provision for any
liability that may result from this litigation has been made in the
accompanying Consolidated Financial Statements. There can be no assurance
that the ultimate outcome of this matter will not have a material adverse
affect on the Company's business and results of operations.
The Company may be contingently liable with respect to certain unasserted
claims that may arise during the normal course of business. There can be
no assurance that the outcome of these matters will not have a material
adverse effect on the Company's consolidated financial statements.
<PAGE>
6. SUBSEQUENT EVENTS
Proposed Merger and Asset Sale
On July 21, 1996, the Company, Cisco Systems, Inc. ("Cisco") , and Cobra
Acquisition Corporation, a California corporation and a wholly-owned
subsidiary of Cisco ("Merger Sub"), entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") pursuant to which (a) Merger Sub
will merge with and into the Company and the Company will be the surviving
corporation and become a wholly-owned subsidiary of Cisco and (b) each
share of common stock, no par value per share (the "Common Stock"), of the
Company (including shares represented by vested options) will be converted
into the right to receive $13.35 per share in cash, without interest (the
"Merger"). The obligations of Cisco and Merger Sub to consummate the
Merger are subject to shareholder and regulatory approval and certain
other conditions, including consummation of the Asset Sale described
below.
In connection with the Merger, the Company granted Cisco an option to
purchase 2,071,000 (or approximately fifteen percent (15%) prior to
issuance) of the authorized but unissued shares of the Company's Common
Stock at a price of $13.35 per share, payable in cash, subject to
adjustment. The option is exercisable by Cisco, in whole or in part, after
any event occurs which would permit Cisco to terminate the Merger
Agreement and recover a termination fee and certain out-of-pocket costs
and expenses pursuant to the Merger Agreement. The Cisco option will
terminate upon the consummation of the Merger, or upon the occurrence of
certain other events.
Concurrently with the Merger Agreement, the Company and Telebit (Newco)
Inc. ("Newco"), a Delaware corporation formed by James D. Norrod,
President and Chief Executive Officer of the Company for the sole purpose
of effecting the Asset Sale, entered into an Asset Purchase Agreement (the
"Asset Agreement"). Under the Asset Agreement, Newco will acquire
substantially all of the assets of the Company, excluding, among other
things, the Company's MICA technology, the trademark MICA, all other
patents and patent applications of the Company and $3.5 million in cash,
and will assume substantially all of the liabilities of the Company in
consideration for $31.5 million aggregate principal amount of Secured
Subordinated Promissory Notes due 2001 (the "Notes") of Newco (the "Asset
Sale"). The rights of the Company as holder of the Notes are set forth in
a Preferred Stock and Noteholder Rights Agreement. The Preferred Stock and
Noteholder Rights Agreement further provides for the sale and issuance by
Newco of 3,500 shares of Class A Redeemable Preferred Stock, $.01 par
value per share (the "Preferred Stock"), for an aggregate purchase price
of $3.5 million. Consummation of the Asset Sale is subject to approval by
the Company's shareholders and certain other closing conditions, including
the certification by the parties to the Merger Agreement that all
conditions precedent closing the Merger, other than consummation of the
Asset Sale, have been satisfied.
Certain Legal Proceedings
On August 2, 1996, a complaint was filed in the Middlesex County,
Massachusetts, Superior Court, entitled Dr. Herb Golden v. James P.
(sic) Norrod, Michael K. Ballard, C. Richard Kramblich (sic), Scott
J. Loftesness, Cisco Systems, Inc. and Telebit Corporation (Civil
Action No. 96-4537). The lawsuit relates to the Merger and the
Asset Sale.
The suit alleges, among other things, that the Merger and Asset Sale will
not be in the best interest of Telebit's shareholders. The suit also
alleges that the consideration being paid in connection with the Asset
Sale and the proposed merger consideration of $13.35 per share are below
market value. The suit asks the court to enjoin the closing of the
transactions, or, alternatively, to award unspecified damages from the
defendants in the event the transactions are consummated.
Cisco and Telebit believe that the suit is without merit and intend to
defend it vigorously.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto, included elsewhere herein.
The success of the Company is subject to a number of risks and uncertainties,
including, without limitation, the Company's ability to develop, manufacture and
market products that incorporate new technology, including the Company's Modem
ISDN Channel Aggregation ("MICA") technology on a timely basis, that are priced
competitively and achieve significant market acceptance; changes in product mix;
risks of dependence on third-party component suppliers; inventory risks due to
shifts in market demand; the presence of competitors with broader product lines
and greater financial resources; intellectual property rights and litigation;
needs for liquidity, including completion of a bank line of credit currently
under negotiation; and the other risks detailed from time to time in the
Company's filings with the Securities and Exchange Commission, including this
Form 10-Q.
Certain matters discussed in, or incorporated by reference into, this Form 10-Q
are forward looking statements which involve risks and uncertainties. The
forward looking statements in, or incorporated by reference into, this Form 10-Q
are made pursuant of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially due to a
variety of factors, including, without limitation, the risks, uncertainties or
other information discussed under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Certain Factors that
May Affect Future Results" and elsewhere in this Form 10-Q, as well as in the
Company's other filings with the Commission, including the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (the "Form 10-K").
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following table
sets forth certain items from the Company's Consolidated Statements of
Operations as a percentage of revenue for the fiscal periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue 100% 100% 100% 100%
Cost of revenue 63% 71% 61% 62%
------------ ------------ ------------ ------------
Gross margin 37% 29% 39% 38%
------------ ------------ ------------ ------------
Operating expenses:
Product development, net 16% 19% 15% 15%
Sales and marketing 23% 39% 23% 30%
General and administrative 8% 9% 7% 7%
Restructuring expenses -- 26% -- 11%
------------ ------------ ------------ ------------
Total operating expenses 47% 93% 45% 63%
------------ ------------ ------------ ------------
Loss from operations (10%) (64%) (6%) (25%)
----------- ------------ ------------ ------------
Interest income, net 1% 2% 1% 1%
------------ ------------ ------------ ------------
Net loss (9%) (62%) (5%) (24%)
============ ============ ============ ============
</TABLE>
<PAGE>
Revenue
The Company derives its revenue from the sale of remote network access products,
consisting of dial-up access routers and modem products. Total revenue for the
second quarter of 1996 was approximately $12.5 million, approximately equal to
the same period last year. Total revenue for the first six months of 1996 was
$25.3 million, a decline of 17% from revenue of $30.5 million for the same
period last year. The decrease in revenue was due primarily to lower product
unit sales, particularly of the Company's modem products, and, to a lesser
extent, the Company's dial up access router products.
Sales of the Company's products outside North America ("Export Sales") totaled
$7.3 million, or 58% of revenue for the second quarter of 1996, as compared with
$6.2 million, or 49% of revenue for the same period last year. Export Sales
totaled $13.4 million, or 53% of revenue for the first six months of 1996, as
compared with $14.2 million, or 47% of revenue for the same period last year.
Gross Margin
Gross margin for the second quarter of 1996 was 37%, as compared with 29% for
the same period last year. The higher gross margin for the second quarter of
1996 as compared with the same period last year was due primarily to (i) the
write-down of certain inventory to net realizable value during the second
quarter of 1995 and (ii) price protection reserves recorded in the second
quarter of 1995 due to list price reductions for certain products. This was
partially offset by the adverse impact of continued price erosion in the second
quarter of 1996, for modem products and, to a lesser extent, dial up access
router products.
Gross margin for the first six months of 1996 was 39%, as compared with 38% for
the same period last year. Although gross margins for both periods were similar,
gross margin for the first six months of 1995 was adversely affected by (i) the
write-down of certain inventory to net realizable value during the second
quarter of 1995 and (ii) price protection reserves recorded in the second
quarter of 1995 due to list price reductions for certain products. This was
largely offset during the first six months of 1996 by the continued adverse
impact of price competition for modem products and dial up access router
products.
Due to continued competitive pricing pressure, the Company experienced erosion
of both modem and dial up access router sell prices during the second quarter
and first six months of 1996, and anticipates such erosion in the future. In
order to mitigate the effect of this erosion on gross margin, the Company is
attempting to (i) reduce material costs and maximize manufacturing efficiencies;
(ii) increase the sales of other products which generally offer higher margins;
and (iii) introduce new products and technologies. There can be no assurance
that these measures will successfully mitigate the effects of such competitive
pricing pressure on the Company's gross margin and the failure to mitigate such
competitive pricing pressures would have a material adverse effect on the
Company's business and results of operations.
Product Development
Net product development expense was $2.0 million in the second quarter of 1996,
or 16% of revenue, as compared with $2.3 million, or 19% of revenue, for the
same period last year. Net product development expense was $3.9 million in the
first six months of 1996, or 15% of revenue, as compared with $4.6 million, or
15% of revenue, for the same period last year. The reduction in absolute dollars
for both periods was due primarily to lower personnel and facility-related costs
resulting from the 1995 Restructuring.
The Company intends to develop additional new products and technology, including
its MICA technology, and improve product functionality, cost and performance of
certain existing products. Accordingly, the Company expects that product
development expenses may increase in subsequent quarters. There can be no
assurances that the Company will not experience difficulties that could delay
the successful development, introduction and marketing of the MICA technology or
MICA products, or that products or technologies developed by others will not
render the MICA technology or MICA products uncompetitive or obsolete. In
<PAGE>
addition, there can be no assurance that the Company's MICA technology will
achieve market acceptance, or result in cost effective, commercially successful
new technology or products in the future. Any such failure would have a material
adverse impact on the Company's business and results of operations. Furthermore,
as the Company enters new markets, distribution channels, technical requirements
and basis of competition may be different than those in the Company's current
markets and there can be no assurance that the Company will be able to compete
successfully.
Sales and Marketing
Sales and marketing expenses were $2.8 million in the second quarter of 1996, or
23% of revenue, as compared with $4.8 million, or 39% of revenue, for the same
period last year. Sales and marketing expenses were $5.7 million in the first
six months of 1996, or 23% of revenue, as compared with $9.2 million, or 30% of
revenue, for the same period last year. The reduction in absolute dollars for
both periods was due primarily to (i) lower personnel-related costs in
connection with the 1995 Restructuring; (ii) lower promotional-related
expenditures and (iii) the provision for doubtful accounts during the second
quarter of 1995 of approximately $505,000. The Company expects that sales and
marketing expenses may increase in subsequent quarters as a result of
promotional expenditures, including such costs relating to its MICA technology
and MICA products.
General and Administrative
General and administrative expenses were $1.0 million in the second quarter of
1996, or 8% of revenue, as compared with $1.1 million, or 9% of revenue, for the
same period last year. General and administrative expenses were $1.8 million in
the first six months of 1996, or 7% of revenue, as compared with $2.2 million,
or 7% of revenue, for the same period last year. The decline in absolute dollars
for both periods was due to lower personnel-related costs in connection with the
1995 Restructuring, which was partially offset by higher legal costs incurred in
connection with the Merger and Asset Sale, and the shareholder litigation (see
Part II, Item 5 - Other Information and Part II, Item 1 - Legal Proceedings,
respectively). The Company expects that general and administrative expenses may
increase in subsequent quarters as a result of continued costs incurred in
connection with the shareholder litigation, the Merger and Asset Sale.
Interest Income and Expense
Interest income totaled $121,000 and $235,000 for the second quarter of 1996 and
1995, respectively. Interest income totaled $239,000 and $432,000 for the first
six months of 1996 and 1995, respectively. The decrease for both periods was due
primarily to lower cash, cash equivalents and short-term investment balances
during the second quarter and first six months of 1996 when compared to the same
periods last year.
Interest expense totaled $1,000 and $3,000 for the second quarter of 1996 and
1995, respectively. Interest expense totaled $2,000 and $8,000 for the first six
months of 1996 and 1995, respectively. The decrease for both periods was due
primarily to the repayment of capital lease obligations.
Income Taxes
The Company's tax provisions of $17,000 and $47,000 for the second quarter of
1996 and 1995, respectively, as well as $54,000 and $115,000 for the first six
months of 1996 and 1995, respectively, represent primarily taxes on foreign
operations. No provision for federal income taxes was made during either period,
as the Company had significant tax net operating loss and credit carryforwards
available for utilization.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 1996, the Company's primary sources of liquidity included cash,
cash equivalents and short-term investments, aggregating $8.7 million. The
Company is currently negotiating revised terms and covenants to its bank line of
credit which expired in April 1996. The Company has sought and received periodic
funding from capital lease arrangements and equipment loans to finance portions
of its property and equipment additions. The Company did not have any material
committed capital expenditures at June 29, 1996.
The Company's cash and cash equivalents decreased by $0.6 million during the
first six months of 1996 to $1.7 million. Net cash used for operating activities
during the first six months of 1996 was $4.1 million, as compared with $0.8
million for the same period last year. The difference was due primarily to (i)
reductions in accrued expenses, consisting primarily of severance and retention
bonus-related payments in connection with the 1995 Restructuring; and (ii) an
increase in receivables of $1.7 million. Net cash provided by investing
activities for the first six months of 1996 was $2.7 million, as compared with
$2.5 million net cash used for investing activities for the same period last
year. The difference was due to a decrease in short term investments during the
first six months of 1996, as compared with an increase during the same period
last year. Net cash provided by financing activities for the first six months of
1996 was $0.8 million, as compared with $1.2 million for the same period last
year.
Except with respect to issuances of common stock (i) under employee benefit
plans; (ii) in connection with the Company's buyout of a joint venture partner
in 1991; and (iii) in connection with the Company's merger with Octocom, the
Company has not issued any common stock since its initial public offering
completed in April 1990, which raised approximately $20.2 million, net of
issuance costs.
The Company's ability to meet its future liquidity requirements is dependent in
part upon its ability to operate profitably, or in the absence thereof, to
obtain additional financings. Should the Company need to secure additional
financing to meet its future liquidity requirements, there can be no assurance
that the Company will be able to secure such financing, or that such financing,
if available, will be on terms favorable to the Company. The Company believes
that, with its current levels of cash, cash equivalents, short-term investments,
and bank line of credit facility currently being negotiated, it has adequate
sources of cash to meet its operations and capital expenditure requirements
through at least June 30, 1997.
To date, inflation has not had a significant impact on the Company's operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time including statements
contained in, or incorporated by reference into, this Form 10-Q which are not
historical facts, are so-called "forward-looking statements," and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. In particular, statements contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(including, but not limited to, the percentage of revenues attributable to sales
to distributors and VARs, the portion of revenues from Export Sales, increases
in expenses and need for liquidity, including completion of a bank line of
credit currently under negotiation), "Other Information" and "Legal Proceedings"
which are not historical facts may be "forward-looking" statements. The
Company's actual future results may differ significantly from those stated in
any forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below and elsewhere within this
Form 10-Q, as well as from time to time in the Company's other filings with the
Commission, including the Company's Form 10-K.
The Company's future results are subject to substantial risks and uncertainties.
The Company's business and results of operations have been, and future results
may be, affected by various industry trends and factors which are beyond the
Company's control. The markets for the Company's products are increasingly
<PAGE>
competitive, and the Company's results of operations have been, and may in the
future be, adversely affected by factors, including, but not limited to, the
presence of existing or future competitors, many of which have broader product
lines and greater financial resources; the development of new technologies and
the introduction of new products by the Company and others; the assertion by
third parties of patent or similar intellectual property rights and the
reduction of prices by competitors to gain or retain market share. The Company
has in the past, and may in the future, reduce product prices or increase
spending in response to competition or to pursue new market opportunities.
The markets for the Company's products are characterized by evolving industry
standards, rapidly changing technologies and frequent new product introductions.
The Company has from time to time experienced delays in introducing new products
and product enhancements and there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products or technologies, including the MICA
technology and products, or product enhancements. In addition, there can be no
assurance that such new products or product enhancements will meet the
requirements of the marketplace and achieve market acceptance. Any such failure
could have a material adverse effect on the Company's business and results of
operations. In addition, from time to time, the Company or others may announce
products, features or technologies which have the potential to shorten the life
cycle of or replace the Company's then existing products. Such announcements
could cause customers to defer the decision to buy or determine not to buy the
Company's products or cause the Company's distributors to seek to return
products to the Company, any of which would have a material adverse effect on
the Company's business and results of operations. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's products or technologies uncompetitive or obsolete.
The Company derives a significant percentage of its revenue from sales to
distributors and VARs. The Company provides most of its distributors and VARs
with "stock balancing" and "price protection" rights. Stock balancing rights
permit these distributors and VARs to return current products to the Company for
credit, within specified limits (generally not to exceed 10% of the previous
quarter's purchases) and subject to purchasing an equal amount of other products
of the Company. Price protection rights may require that, in certain cases, the
Company grant retroactive price adjustments for inventories of the Company's
products held by distributors if the Company lowers the price of those products.
While the Company believes that it has adequate reserves to cover its stock
balancing and price protection obligations, there can be no assurance that the
Company will not experience significant returns or price protection adjustments
in the future.
The Company derives a substantial amount of its revenue from Export Sales and
expects that Export Sales will continue to account for a significant portion of
its revenue in the future. Export Sales are subject to a number of risks,
including the following: agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign customers
may have longer payment cycles; foreign countries could impose additional
withholding taxes or otherwise tax the Company's foreign income, impose tariffs
or adopt other restrictions on foreign trade; fluctuations in exchange rates
could affect product demand; and the protection of intellectual property in
foreign countries may be more difficult to enforce.
The market price of the Company's common stock has been, and may continue to be,
extremely volatile. Factors such as new product announcements by the Company or
its competitors, quarterly fluctuations in the Company's operating results and
general conditions in the remote network access market may have a significant
impact on the market price of the Company's common stock. These conditions, as
well as factors which generally affect the market for stock of high technology
companies, could cause the price of the Company's stock to fluctuate
substantially.
The Company's revenue is typically derived from orders booked within the same
fiscal quarter. The Company has also historically experienced significant
volatility in revenue. The Company's future success will depend in substantial
part on sustained profitability on a quarterly and annual basis. Additionally,
shipment quantities and delivery schedules, under cancelable customer purchase
orders outstanding from time to time, frequently
<PAGE>
are revised to reflect changes in customer needs. Because the Company's
operating expenses are based on anticipated revenue levels and a high percentage
of the Company's expenses are relatively fixed in the short term, variations in
the timing of recognition of revenue could cause significant fluctuations in
operating results from quarter to quarter and may result in unanticipated
quarterly earnings shortfalls or losses. In addition, the Company's operating
results may fluctuate as a result of a number of other factors, including demand
for the Company's products, product mix, production or quality problems, changes
in material or labor costs, customer discounts, the timing of orders from and
shipments to major customers, general economic conditions, government regulation
or intervention affecting the remote network access market. There can be no
assurance that the Company will be successful in maintaining or improving its
profitability or avoiding losses in any future period.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In August 1995, two class action lawsuits were filed in the United States
District Court for the District of Massachusetts in which the Company was named
as a defendant, along with certain of its officers and directors. The plaintiffs
in the two suits filed a consolidated amended complaint on November 9, 1995. The
suits relate to disclosures made by the Company, including in its public filings
and press releases, and assert violations of federal securities laws. The
defendants moved to dismiss the complaint on December 8, 1995. On February 1,
1996, the Court denied defendants' motion to dismiss. No class has yet been
certified in the litigation. Although the Company denies all material
allegations of the complaint and intends to vigorously defend against all claims
brought against it, the ultimate outcome, including amount of possible loss, if
any, of the litigation cannot be determined at this time. No provision for any
liability that may result from this litigation has been made in the accompanying
Consolidated Financial Statements. There can be no assurance that the ultimate
outcome of this matter will not have a material adverse affect on the Company's
business and results of operations.
On August 2, 1996, a complaint was filed in the Middlesex County,
Massachusetts, Superior Court, entitled Dr. Herb Golden v. James P. (sic)
Norrod, Michael K. Ballard, C. Richard Kramblich (sic), Scott J.
Loftesness, Cisco Systems, Inc. and Telebit Corporation (Civil Action No.
96-4537). The lawsuit relates to the Merger and the Asset Sale.
The suit alleges, among other things, that the Merger and Asset Sale will not be
in the best interest of Telebit's shareholders. The suit also alleges that the
consideration being paid in connection with the Asset Sale and the proposed
merger consideration of $13.35 per share are below market value. The suit asks
the court to enjoin the closing of the transactions, or, alternatively, to award
unspecified damages from the defendants in the event the transactions are
consummated.
Cisco and Telebit believe that the suit is without merit and intend to defend it
vigorously.
ITEMS 2-3 - Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 30, 1996, pursuant to the
Notice of Annual Meeting of Shareholders dated April 24, 1996:
1. the proposal to amend the By-Laws of the Company to fix the number of
directors of the Company at not less than four (4) nor more than seven (7)
directors was approved (11,505,311 shares in favor; 109,353 shares against;
65,345 shares abstaining; and 394,336 broker non-votes).
2. the proposal to elect the following nominees as directors, to hold office
until the next Annual Meeting of Shareholders of the Company and until their
successors are elected and qualified, was approved (vote results as follows):
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
<S> <C> <C>
Michael K. Ballard 11,538,433 535,912
C. Richard Kramlich 11,543,733 530,612
Scott J. Loftesness 11,542,333 532,012
James D. Norrod 11,522,633 551,712
</TABLE>
<PAGE>
3. the proposal to approve an amendment to the Company's 1995 Employee Stock
Option Plan to increase the number of shares reserved for issuance thereunder
was approved (10,572,713 shares in favor; 1,169,123 shares against; 91,338
shares abstaining; and 241,171 broker non-votes).
4. the proposal to approve an amendment of the Company's 1995 Employee Stock
Purchase Plan to increase the number of shares reserved for issuance thereunder
was approved (11,429,609 shares in favor; 303,090 shares against; 98,225 shares
abstaining; and 243,421 broker non-votes).
5. the proposal to ratify the appointment of Price Waterhouse LLP as the
Company's independent accountants for the fiscal year ending December 31, 1996
was approved (11,964,169 shares in favor; 68,446 shares against; 41,730 shares
abstaining; and no broker non-votes).
ITEM 5 - OTHER INFORMATION
On July 21, 1996, the Company, Cisco Systems, Inc. ("Cisco") , and Cobra
Acquisition Corporation, a California corporation and a wholly-owned subsidiary
of Cisco ("Merger Sub"), entered into an Agreement and Plan of Reorganization
(the "Merger Agreement") pursuant to which (a) Merger Sub will merge with and
into the Company and the Company will be the surviving corporation and become a
wholly-owned subsidiary of Cisco and (b) each share of common stock, no par
value per share (the "Common Stock"), of the Company (including shares
represented by vested options) will be converted into the right to receive
$13.35 per share in cash, without interest (the "Merger"). The obligations of
Cisco and Merger Sub to consummate the Merger are subject to shareholder and
regulatory approval and certain other conditions, including consummation of the
Asset Sale described below.
In connection with the Merger, the Company granted Cisco an option to purchase
2,071,000 (or approximately fifteen percent (15%) prior to issuance) of the
authorized but unissued shares of the Company's Common Stock at a price of
$13.35 per share, payable in cash, subject to adjustment. The option is
exercisable by Cisco, in whole or in part, after any event occurs which would
permit Cisco to terminate the Merger Agreement and recover a termination fee and
certain out-of-pocket costs and expenses pursuant to the Merger Agreement. The
Cisco option will terminate upon the consummation of the Merger, or upon the
occurrence of certain other events.
Concurrently with the Merger Agreement, the Company and Telebit (Newco) Inc., a
Delaware corporation formed by James D. Norrod, President and Chief Executive
Officer of the Company for the sole purpose of effecting the Asset Sale, entered
into an Asset Purchase Agreement (the "Asset Agreement"). Under the Asset
Agreement, Newco will acquire substantially all of the assets of the Company,
excluding, among other things, the Company's MICA technology, the trademark
MICA, all other patents and patent applications of the Company and $3.5 million
in cash, and will assume substantially all of the liabilities of the Company in
consideration for $31.5 million aggregate principal amount of Secured
Subordinated Promissory Notes due 2001 (the "Notes") of Newco (the "Asset
Sale"). The rights of the Company as holder of the Notes are set forth in a
Preferred Stock and Noteholder Rights Agreement. The Preferred Stock and
Noteholder Rights Agreement further provides for the sale and issuance by Newco
of 3,500 shares of Class A Redeemable Preferred Stock, $.01 par value per share
(the "Preferred Stock"), for an aggregate purchase price of $3.5 million.
Consummation of the Asset Sale is subject to approval by the Company's
shareholders and certain other closing conditions, including the certification
by the parties to the Merger Agreement that all conditions precedent closing the
Merger, other than consummation of the Asset Sale, have been satisfied.
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
10.1 Agreement and Plan of Reorganization dated as of
July 21, 1996 by and among Cisco Systems, Inc.
("Cisco"), Cobra Acquisition Corporation and the
Company (incorporated by reference to Annex A
to the Company's Preliminary Proxy Statement as
filed with the Securities and Exchange Commission
August 7, 1996 (the "Preliminary Proxy
Statement").
10.2 Asset Purchase Agreement dated as of July 21, 1996
between Telebit (Newco) Inc. and the Company
(incorporated by reference to Annex B to the
Preliminary Proxy Statement).
10.3 Preferred Stock Purchase and Noteholder Rights
Agreement dated as of July 21, 1996 between
Telebit (Newco) Inc. and the Company (incorporated
by reference to Annex C to the Preliminary
Proxy Statement).
(b) Reports on Form 8-K
Not applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEBIT CORPORATION
/s/ Brian D. Cohen
Date: August 13, 1996 Brian D. Cohen
Chief Financial Officer
(signing as duly authorized
signatory on behalf of the
Registrant and in his
capacity as Principal
Financial and Accounting
Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-29-1996
<CASH> 1,735
<SECURITIES> 7,007
<RECEIVABLES> 7,035
<ALLOWANCES> 2,895
<INVENTORY> 8,023
<CURRENT-ASSETS> 24,336
<PP&E> 9,638
<DEPRECIATION> 6,586
<TOTAL-ASSETS> 27,597
<CURRENT-LIABILITIES> 11,306
<BONDS> 0
0
0
<COMMON> 58,438
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,597
<SALES> 25,288
<TOTAL-REVENUES> 25,288
<CGS> 15,445
<TOTAL-COSTS> 15,445
<OTHER-EXPENSES> 11,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (1,279)
<INCOME-TAX> 54
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,333)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
