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FORM 10-K FY 1995
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended AUGUST 27, 1995
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OR
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{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Delaware 94-2178777
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(State or other jurisdiction of (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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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. {X }
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $115,283,000 as of November 15, 1995.
On November 15, 1995 there were 10,264,517 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(2) Portions of the definitive proxy statement (the "Definitive
Proxy Statement") required to be filed with Securities and Exchange Commission
relative to the Company's 1995 annual meeting of shareholders are incorporated
by reference into Part III.
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Item 1. Business
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General
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The Company was incorporated in California on September 7, 1972,
and reincorporated in Delaware on December 17, 1986. Its principal office is
located at 63 Nahatan Street, Norwood, Massachusetts 02062 (telephone number is
(617) 551-0300). Unless the context indicates otherwise, the terms "Company"
and "Telco Systems" refer to Telco Systems, Inc. The Company has three
operating business units. The Broadband Transmission Products Business Unit,
formerly the Fiber Optic Transmission Products Division, is referred to as
"Broadband", the Network Access Products Business Unit is referred to as
"Network Access", and the Bandwith Optimization Business Unit, formerly the
Magnalink Communications Division, is referred to as "Bandwith Optimization".
Telco Systems, Inc., is a manufacturer of broadband transmission
equipment, customer premises network access equipment, and bandwith
optimization equipment for the telecommunications industry. Its products,
which can be found most often in telephone company central offices and in
private communications networks, perform functions that range from basic
signaling and multiplexing to high-speed, high-capacity digital fiber optic
transmission. Primary customers are the Bell Operating Companies, independent
telephone companies, interexchange carriers and private network end users.
In January 1983, the Company acquired the Broadband Transmission
Products Business Unit from Raytheon Company. Sales of broadband transmission
products in fiscal year 1995 comprised about 41% of the Company's total
revenue. This business unit has approximately 210 employees at its
manufacturing facility located in Norwood, Massachusetts.
In August 1984, the Company acquired TeleBit, Inc., a manufacturer
of digital transmission systems based in Lombard, Illinois. Later, this
acquisition was merged with the Company's Voice Frequency Products Division
which together formed the Network Access Products Business Unit. The
consolidation was completed in August 1986 and was designed to focus the new
division's activities towards the customer premise network access equipment
market. Located in Fremont, California, the Network Access Products Business
Unit has approximately 183 employees. In May 1992, the Company acquired
Magnalink Communications Corporation, a developer and manufacturer of bandwith
optimization products to form the Company's Bandwith Optimization Business
Unit. These products optimize wide area network (WAN) links in LAN/WAN
applications. Located in Norwood, Massachusetts, this business unit has
approximately 26 employees.
For fiscal 1995, the Company reported sales of $89.1 million and a
net income of $.6 million. Working capital at year end amounted to $49.9
million, including cash and short term investments of $29.1 million. For a
more complete discussion of the results of operations, please refer to
Management's Discussion and Analysis of Results of Operations and Financial
Condition found on page 11 of this report.
Broadband Transmission Products
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Fiber optic systems are based on the physical property of light
which allows rapid transmission of light pulses in a coded digital format
through a glass fiber about the diameter of a human hair. To accomplish this,
a light source such as a laser or light-emitting diode is connected to the
fiber. This light source converts an electronic input signal into a series of
light pulses by blinking on and off millions of times per second. This stream
of light pulses, or bits, is the combination of many lower rate bit streams
formed using digital multiplexing techniques resulting in a very efficient,
high-capacity communications transmission mode. At the other end of the fiber,
detectors capture the light pulses and convert them back into their original
electronic form.
The advantages of fiber optic transmission systems over other
transmission systems include greater information-carrying capacity, immunity
from electrical interference, immunity from hostile environmental conditions
such as temperature and moisture, significantly lower installation costs due to
smaller size and lighter weight cable and associated electronics, and reduced
maintenance costs. In addition, since the fiber optic systems
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used by the telephone companies are usually entirely digital, they are suitable
for transmission of digitized voice, data, video, or a combination thereof.
The Company sells its broadband transmission products ($36.6
million sales in fiscal 1995) primarily to Bell Operating Companies and major
independent telephone companies either as complete systems or as stand-alone
equipment installed by the Company, third party installers, or by the Company's
customers. A complete system may include the fiber optic cable, which is not
manufactured by the Company but is purchased from a number of suppliers.
The most common application of the Company's broadband transmission
products is for distribution of fiber optic service in local loop applications
between the telephone company central office, or hubbing sites and customers'
business premises. The Company believes that such local loop applications
offer the most growth potential.
Broadband transmission products currently manufactured by the
Company can be grouped into three categories: fiber optic terminals,
multiplexers and network monitoring and control systems. The Company's
transmission products operate primarily at asynchronous transmission rates.
More advanced competitive systems operate at synchronous transmission rates to
be in compliance with Synchronous Optical Network (SONET) standards. The
Company has recently introduced a SONET compliant transmission system and has
ATM platforms in development.
FIBER OPTIC TERMINALS: These systems typically consist of digital
multiplexing and a fiber optic transmitter/receiver integrated into one
functional unit. The multiplexer portion of the terminal unit combines digital
inputs from multiple sources into one digital output. Multiplexers can be
combined in order to achieve higher transmission rates. The basic function of
the transmitter portion of a terminal is to convert electronic input into a
series of light pulses for transmission over optical fiber. The receiver
function of a terminal reconverts the light pulses received over the fiber into
digital electronic signals. To meet the various needs of the public and
private telephone networks, the Company offers products for transmitting at
different capacities.
The Company offers modular fiber optic terminals that enable the
customer to upgrade its system by adding modules as increased capacity is
required. The Company's terminals, depending on bit-rate and other design
configurations, can accommodate transmission over distances of up to 60
kilometers. Prices for a typical system are dependent on configuration and
accordingly can range from $5,000 to $30,000 per terminal.
MULTIPLEXERS: The Company also offers a digital multiplexer with an
output of 155 megabits per second which can serve as the electronic input to a
fiber optic terminal or digital microwave radio. In addition to fiber optic
terminals, these systems also connect into digital cross- connect systems.
NETWORK MONITORING AND CONTROL SYSTEMS: The Company offers a
modular computer-based system to identify failure of specific multiplexers or
terminals in the network. It also detects and reports system signal
degradation, allowing an operator to identify potential failures before they
occur and to schedule preventative maintenance.
Network Access Products
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The Company's network access products ($46.9 million sales in
fiscal 1995) are designed for the digital multiplexing of voice and data
traffic up to T1 and E1 rates. The trend towards increased use of public
network services for voice, data and video applications has created greater
demand for customer premises access multiplexers. The Company's equipment
enables integration of multiple slower-speed lines and services onto a single,
high-speed, T1/E1 access facility, ultimately saving access line charges for
end users. In addition, the Company provides a network management system which
is designed to control its intelligent transmission products. Typical prices
for network access equipment range from $5,000 to $15,000.
DIGITAL MULTIPLEXER PRODUCTS: The Company's products use digital
technology and provide over 40 different plug-in printed circuit cards to
support a large variety of voice, data, and video applications. The products
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provide conversion of analog signals into digital information, combine them
with additional digital data inputs and enable them to be processed and
transmitted at high rates of speed over cable, microwave or fiber optic
transmission systems. The Company provides a full range of products from cost
effective channel banks to very sophisticated network access servers.
NETWORK MANAGEMENT AND CONTROL SYSTEM: The Company offers a
software-based management and control system, which is designed to control the
Route-24 network access multiplexer. This system remotely manages voice and
data mix, bandwidth allocation, and selective access to special services
offered by T1 carriers. In addition, it can be used to modify the network as
user requirements change.
Bandwith Optimization Products
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The Company's bandwith optimization products ($5.5 million sales in
fiscal 1995) interconnect geographically remote local area networks (LANs)
through wide area networks (WANs), with an emphasis on optimizing the
utilization of WAN links. In LAN/WAN applications, WAN links have the lowest
throughput, the highest expense, the lowest reliability, and the least
security. The Bandwith Optimization Business Unit products significantly
increase throughput via data compression; reduce expense by enabling usage of
lower-speed links; and offer features for improved redundancy, fault tolerance,
security and privacy. Typical units are in the $3,000 to $9,000 price range.
Marketing and Customers
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Telco Systems is engaged in a single business segment constituting
the development, manufacturing, marketing and service of electronic equipment
for the telecommunications industry. Primary users of the Company's products
are the Regional Bell Operating Companies (RBOCs), independent telephone
companies, interexchange carriers, value added resellers and private network
end users.
The Company's broadband transmission products and network access
products are generally sold to specialized common carriers and telephone
operating companies on an off-the-shelf basis. Typically, the products have
been evaluated by such customers and approved for purchase in advance. Both
network access and broadband products are manufactured by the Company based on
forecasted usage. Sales to the RBOCs accounted for 29% of sales in fiscal
1995, 37% of sales in fiscal 1994 and 38% of sales in fiscal 1993. RBOC sales
include sales to NYNEX of 17% in fiscal 1995, 21% in fiscal 1994 and 12% in
fiscal 1993. NYNEX has become a significant customer of the Broadband
Transmission Products Business Unit. A material curtailment in the NYNEX order
rate, if not offset by sales to other customers, would result in insufficient
gross margin to cover the current level of operating costs and would adversely
impact total company results. Other significant customers are Sprint which
represented 18% of sales in fiscal 1995 and 14% of sales in fiscal 1994. No
other customer accounted for more than 10% of sales in any of the three years.
The Company markets its products primarily through its own sales
force, as well as interexchange carriers and distributors. Installation is
primarily performed by third party providers. The Company has technical
support and applications engineering personnel and offers training of customer
personnel.
Orders and Backlog
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In fiscal 1995, the Company received orders totaling $87.3 million.
Of this amount, $35.5 million was for broadband transmission products, $46.1
was for network access products, and $5.7 million was for bandwith optimization
products. Firm backlog shippable within a twelve-month period was
approximately $5.5 million at the end of fiscal 1995, compared to approximately
$7.3 million at the end of fiscal 1994. Broadband transmission products
comprised 7% of the backlog for fiscal year 1995 and 23% for fiscal 1994.
Network access products represented 85% of backlog in 1995 and 73% of backlog
in 1994. The Company's order trend is characterized by short
customer-scheduled delivery cycles. Accordingly, a substantial portion of
sales in each fiscal quarter are derived from orders booked in the quarter. In
the Company's experience, its backlog at a given time is not necessarily
indicative of prospective sales volume. In addition to the short delivery
cycles, customers may revise scheduled delivery dates or revise product
configuration.
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Competition
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The Company competes in its markets based upon price/performance
advantages offered by a number of its products, certain product features, and
its ability to meet customer delivery requirements on a timely basis. Most of
the Company's competitors have greater financial, technological and personnel
resources than the Company. The Company's competitors in the fiber optic
communications systems market are predominantly large, full-line, integrated
manufacturers of telecommunications equipment, such as AT&T, Fujitsu, Northern
Telecom Limited, Alcatel, NEC and ADC. Many of these competitors have
introduced newer SONET transmission products which the telephone operating
companies are deploying in public networks. The availability of such SONET
products by competitors provides a distinct product advantage for them in
certain customer applications. The Company's principal competitors with
respect to the network access product area include Newbridge Networks, Tellabs
and Coastcomm. Primary competitors for bandwith optimization products are
Fastcom and Symplex.
Research and Development
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In the broadband transmission product area, the Company is
concentrating its research and development efforts on new products for use in
the local loop distribution portion of the telephone network. Development
efforts are continuing at a high level for a family of SONET-compatible
products employing ATM (Asynchronous Transfer Mode) technology. In the network
access product area, development programs continue for enhancements of the
Company's Route-24 intelligent access multiplexer and advanced network
management systems as well as new products such as the Access30 CSU/DSU and
Access60 Integrated Access Device. Development programs in the internetworking
area concentrate on enhancements to the bridge/router and data compression
product lines. Programs for new products are based on market analysis and
estimates of customer demand which are subject to continuing change.
Therefore, there can be no assurance that sales of such products will meet
current expectations.
Spending on research and development activities of $18.2 million
represented 20% of sales in fiscal 1995. This compares with $16.0 million in
fiscal 1994 and $15.6 million in fiscal 1993 which represented 16% and 19% of
sales in each year, respectively. The Company's overall spending for research
and development is expected to remain at a high level in fiscal 1996 to meet
schedules for SONET products, new network access products and enhancements to
internetworking products.
From time to time the Company has employed consultants to perform
research and development functions. The Company plans to continue this
practice as a means of augmenting its internal research and development
capabilities.
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Employees
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As of August 27, 1995, the Company had 436 employees, of whom 122
were in sales, sales support and marketing, 94 in product development, 169 in
manufacturing and 51 in administration. The Company believes its success in
achieving its business objectives is largely dependent upon its ability to
attract and retain qualified engineering and marketing personnel and other
industry specialists. Such personnel are generally in short supply, and
competition to recruit and retain them is intense. The Company considers its
employee relations to be excellent and is not a party to any collective
bargaining agreement.
Manufacturing
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The Company's manufacturing process primarily involves the assembly
of electronic components onto custom-designed printed circuit boards,
incorporating these boards into larger system packages, and testing the
finished products to assure their proper functioning in accordance with
customers' specifications. Most components used in the process are standard
electrical, electronic and mechanical parts available from many suppliers. The
Company does, however, currently depend on various single sources to supply
certain custom-designed components used in its products. To balance single
source dependence, the Company will maintain higher inventory levels or seek to
qualify secondary sources where appropriate.
Approximately 85% of the Company's network access equipment is
manufactured by a subcontractor at facilities in Malaysia and Singapore.
Inspection, final test and system assembly is performed at the Company's
Fremont, California facility. Approximately 20% of the Company's broadband
transmission products are manufactured by a subcontractor in Singapore.
Inspection, final test and system assembly is performed at the Company's
Norwood, Massachusetts facility. The Company presently maintains a favorable
relationship with these vendors and does not presently anticipate any
difficulties that would prevent timely procurement of scheduled product. As a
backup to these principal sub-contractors, the Company maintains an in-house
ability to manufacture these products.
Although the Company has not experienced significant difficulty in
obtaining desired quantities from any of its single sources or other vendors,
business could be adversely affected if components used in its products were
not available on a timely basis.
Regulatory and Legislative Matters
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Regulations of the Federal Communications Commission affect various
products of the Company. Certain regulations require that products which
reside on a customer's premises and interconnect the public switched network
meet certain standards to prevent harm to the network. Other regulations limit
the levels of electromagnetic radiation which may emanate from an electronic
device located on a customer's premise. The Company currently complies with
these regulations and sees no problem in complying with these regulations in
the future. Changes in existing laws and regulations which govern the
telecommunication industry could affect the business of the Company.
Patents
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The Company currently holds several patents and has patent
applications pending approval. Management believes, however, that timely
implementation of technological advances, responsiveness to market
requirements, depth of technical expertise and a high level of customer service
and support are more important to its success than patent rights.
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Corporate Officers of Registrant
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Following is a list of the Company's corporate officers, including
persons who may be deemed executive officers of the Company within the meaning
of item 401 (b) of Regulation S-K under the Securities Exchange Act of 1934.
(indicated with an asterisk (*))
Name Age Position
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*John A. Ruggiero 59 Chief Executive Officer
*William B. Smith, Ph.D. 51 President and Chief Operating Officer
Robert J. Bauer 54 Vice President, International Business Development
*Daniel A. DiPietro 57 Vice President, Corporate Controller
Kenneth J. Hamer Hodges 50 Vice President, Chief Technical Officer
Richard J. Nardone 47 Vice President, Human Resources
*Surya R. Panditi 36 Vice President, General Manager
Access Products Group
*Anand Parikh 36 Vice President, Market Development and
Business Planning
*Bill Waters 43 Vice President, North American Sales
Mr. Ruggiero has been Chief Executive Officer since 1994. Prior
to that he was Chief Operating Officer since 1993 and Executive Vice
President, Chief Financial Officer and Secretary since 1986.
Dr. Smith joined the Company as President and Chief Operating
Officer in 1995. Prior to that he was Senior Vice President of US West, Inc.
and President of US West Advanced Technologies since 1991. Prior to that, he
was Executive Director of AT&T Bell Laboratories since 1986.
Mr. DiPietro joined the Company in 1992 as Vice President and
Corporate Controller. Prior to that he held various financial management and
control positions at Bank of Boston (a multinational financial institution)
from 1990 to 1991, and at Computervision Corporation (a manufacturer of
hardware/software products and computer systems) including Corporate
Controller, Vice President-Accounting and Director-Management Reporting.
Mr. Panditi has been Vice President, General Manager of the Access
Products Group since 1995 and Vice President, General Manager of the Bandwith
Optimization Business Unit (formerly the Magnalink Communications Division)
since 1994. Prior to that Mr. Panditi held various marketing, sales and
management positions with UB Networks (formerly Ungerman-Bass, Inc.) a
manufacturer of network equipment and software, for nine years, most recently
as General Manager of the Access/One Business Unit.
Mr. Parikh joined the Company as Vice President of Market
Development and Business Planning in 1995. Prior to that he was with
Lightstream Corporation in Billerica, Massachusetts as Vice President,
Strategic Business Development since 1994 and Vice President, Marketing since
1993. Prior to that, he was General Manager of the Broadband Networks Business
Unit of UB Networks (formerly Ungerman Bass)
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Vice President, Strategic Business Development since 1994 and Vice President,
Marketing since 1993. Prior to that, he was General Manager of the Broadband
Networks Business Unit of UB Networks (formerly Ungermena Bass) a manufacturer
of network equipment and software, since 1991. Prior to that, he held various
senior management positions at Digital Equipment Corp. for nine years.
Mr. Waters has been Vice President of North American Sales since
1995 and was Vice President, Network Access Division Sales since 1993. Prior
to that, he was Vice President, Western Area Sales for Racal Datacom (a
manufacturer of data communications equipment) for four years.
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Item 2. Properties
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The Company's corporate offices are located in Norwood,
Massachusetts in combination with the manufacturing, sales and engineering
facilities of the Broadband Transmission Business Unit and the Bandwith
Optimization Business Unit.
The Company has facilities at two locations. The Company leases a
216,000 square foot manufacturing, research and administration facility in
Norwood, Massachusetts, that is owned by a limited partnership in which the
Company has a 50% partnership interest. The lease commenced on December 16,
1985, for an original term of 13 years with an option to extend the term for
three successive periods of five years each. Effective January 1, 1994, the
lease was modified through a lease amendment which extended the lease term to
January 31, 2004, and deleted the lease extension provisions. Approximately
60% of this facility is utilized by the Company. Excess costs associated with
idle portions of the facility have been included in the restructuring charge
recorded by the Company in fiscal 1993. On November 11, 1994, the Network
Access Business Unit entered into a tentative agreement for the lease of an
85,000 square foot manufacturing, research and administration facility in
Fremont, California. The expected occupancy of the new facility will occur in
November 1995. The Network Access Business Unit currently leases a 62,000
square foot manufacturing, research and administration facility in Fremont,
California. This lease has been extended by the landlord until the
aforementioned new facility is available for occupancy.
The Company leases additional facilities, primarily for sales and
sales support in California, Georgia, Kansas, Texas, Hong Kong and Belgium
under one to five-year leases, each facility being between 1,000 and 5,000
square feet. The Company believes that its present facilities are adequate for
its current level of operations.
The Company owns substantially all of its equipment.
Item 3. Legal Proceedings
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There are no material legal proceedings to which the Company is a
party or of which any of its properties is the subject.
Item 4. Submission of Matters to a Vote of Securities Holders
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No matters were submitted to a vote of security holders of the
Company through solicitation of proxies or otherwise, during the fourth quarter
of fiscal 1995.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
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Matters
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Telco Systems' common stock is traded on the NASDAQ National Market under the
symbol "TELC." The quarterly price ranges for the Company's common stock are
as follows:
Fiscal Year
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1994 1995
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High Low High Low
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First Quarter . . . . . . . . . . . . . . . . 18 11 5/8 10 3/4 8
Second Quarter . . . . . . . . . . . . . . . . 17 3/4 12 1/2 10 3/4 7 7/8
Third Quarter . . . . . . . . . . . . . . . . 13 5/8 9 5/8 15 3/8 9
Fourth Quarter . . . . . . . . . . . . . . . . 14 9 5/8 15 1/4 10 1/8
The Company has never declared or paid any dividends on its common stock
and does not plan to pay cash dividends in the foreseeable future.
At August 27, 1995, the number of holders of the Company's common stock
was 535. The Company believes that many of its shares are held by individual
participants in security listing positions or "street names" and estimates
there are an additional 7,300 beneficial holders as of August 27, 1995.
Item 6. Selected Financial Data
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Five years ended August 27, 1995
1995 1994 1993 1992 1991
(Dollars in thousands except per share amounts)
Summary of Operations
Backlog . . . . . . . . . . . . . . $ 5,527 $ 7,251 $ 6,714 $ 3,146 $ 8,562
Sales . . . . . . . . . . . . . . . . 89,070 100,470 83,222 96,661 102,725
Net income (loss)* . . . . . . . . . 628 4,770 (16,285) 5,909 10,120
Earnings (loss) per share . . . . . . $ .06 $ .48 $ (1.75) $ .62 $ 1.08
Average shares and
equivalents (thousands) . . . . . . . . 10,345 9,858 9,300 9,567 9,406
Year-end employment . . . . . . . . . . 436 443 442 478 442
Balance Sheet
Working capital . . . . . . . . . . . . $ 49,915 $ 43,210 $ 36,989 $ 52,318 $ 48,750
Total assets . . . . . . . . . . . . . 82,439 82,202 80,551 88,932 83,200
Long-term liabilities . . . . . . . . . 3,490 4,443 7,852 5,615 7,295
Total shareholders' equity . . . . . . $ 67,405 $ 61,548 $ 54,872 $ 70,695 $ 61,419
<FN>
* 1995 Net income includes $420 of restructuring credits;.1993 net loss
includes $13,605 of restructuring costs. The Company has never declared or
paid any dividends on its common stock.
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Item 7. Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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FISCAL 1995 COMPARED WITH FISCAL 1994
Sales for fiscal 1995 decreased 11% to $89.1 million compared with $100.5
million in fiscal 1994. This decrease was principally related to a lower level
of shipments of broadband transmission products and network access products and
was partially offset by an increase in shipments of bandwidth optimization
products.
Sales of broadband transmission products amounted to $36.6 million in
fiscal 1995, a decrease of 21% compared with fiscal 1994. The Company
experienced a decline in demand for its principal FOX and 828 families of
broadband transmission products as customers increased deployment of
competitive synchronous optical network transmission (SONET) products. The
Company's new SONET product is presently planned for initial customer shipments
in calendar 1996. Sales to Regional Bell Operating Companies (RBOCs)
represented 58% and 60% of broadband transmission product sales in fiscal 1995
and fiscal 1994, respectively. Approximately 80% of the Company's sales of
these products continued to be for provision of high bandwidth fiber optic
services in the feeder or distribution section of the public telephone network.
Sales of network access products decreased 6% to $46.9 million compared
with $50.0 million in fiscal 1994. A lower level of shipments of the
Company's DCB-24 and Route 24 access multiplexers resulted from increased
competition in the low end of the access products market.
Sales of bandwidth optimization products increased 41% to $5.5 million.
The increase in sales resulted from increased customer acceptance for the
Company's local and wide area network (LAN/WAN) optimizer products in both the
domestic and international marketplaces.
Total Company orders booked during fiscal 1995 amounted to $87.3 million
which reflected a decrease of 14% compared with fiscal 1994. The backlog of
unfilled orders was $5.5 million at year end compared with $7.3 million at the
previous year end. The Company's order trend is characterized by short
customer-scheduled delivery cycles. As a result, a substantial portion of
sales in each fiscal quarter is derived from orders booked during the quarter.
The Company's major customers include telephone operating companies and
interexchange carriers. The RBOCs and major telephone companies accounted for
35% of sales in fiscal 1995 and 43% of sales in fiscal 1994. The major
interexchange carriers represented 23% of total sales in fiscal 1995 and 19% of
total sales in fiscal 1994.
Net income for the year amounted to $.6 million or $.06 per share compared
with $4.8 million or $.48 per share in fiscal 1994. Lower net income was
principally related to lower sales levels and increased spending for research
and development, offset in part by higher interest income.
Gross profit in fiscal 1995 was $40.5 million or 45.5% of sales. In
comparison, fiscal 1994 gross profit was $44.7 million or 44.5 % of sales.
Most significant to the lower gross profit amount was the reduced sales volume,
somewhat offset by an improvement in gross margin percent principally due to
favorable product mix.
The Company continued heavy investment for next generation products with
research and development expense of $18.2 million in fiscal 1995, an increase
of 14% compared with fiscal 1994. Spending for research and development
represented 20% of sales in fiscal 1995, compared with 16% in fiscal 1994. The
Company expects research and development expense to remain at a high level in
fiscal 1996 as spending continues for ATM/SONET products, feature additions to
existing products and product modifications for international applications.
Sales, marketing and administration expense was $22.9 million in fiscal
1995, approximately the same level as fiscal 1994. During fiscal 1995,
existing resources were realigned to focus on strategic business initiatives
and planning for opportunities in the international marketplace.
The fiscal 1993 restructuring charge of $13.6 million associated with the
reorganization of the Broadband Transmission Products Business Unit encompassed
a reduction in employment, consolidation of facilities, and the write-down of
certain assets (see Note 8 to Consolidated Financial Statements). At the end
of fiscal 1995, the status of the excess facilities was
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unchanged from fiscal 1993. Costs relating to the vacated space of $1.1
million and $1.4 million were charged to the restructuring reserve in fiscal
1995 and fiscal 1994, respectively. Final disposition of certain assets
previously written down resulted in a gain of $.4 million, which was reported
as a restructuring credit in the fiscal 1995 results of operations.
Amortization expense was $.8 million in both fiscal 1995 and 1994.
Amortization expense relates to the acquisition of the fiber optic products
area in 1983, certain channel bank products in 1984 and the acquisition of
Magnalink Communications Corporation in 1992.
Interest expense of $.2 million in fiscal 1994 related to the remaining
balance of 11% convertible subordinated notes which were paid in full during
the fourth quarter of fiscal 1994.
Interest income was $1.6 million and $.8 million in fiscal 1995 and fiscal
1994, respectively. This increase resulted from higher interest rates earned
on a higher level of cash equivalents and short-term investments.
Income tax expense in fiscal 1995 was not provided due to the utilization
of operating losses and tax credits not previously benefited. In fiscal 1994,
income tax expense was $.7 million, which represented an effective rate of
12.7% .
In March 1995, the Financial Accounting Standards Board issued FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", which specifies rules for asset impairment determination.
The Company will adopt FAS 121 in fiscal 1996 and believes that adoption will
not have a significant effect on its financial statements.
FISCAL 1994 COMPARED WITH FISCAL 1993
Sales for fiscal 1994 increased 21% to $100.5 million compared with $83.2
million in fiscal 1993. Sales of network access products increased 41% to
$50.0 million compared with $35.4 million in fiscal 1993. This increase
resulted from increased market demand for T1 network service and the effects of
broader distribution channels. Sales of broadband transmission products
increased 4% to $46.5 million as a result of increased sales of the Company's
FOX and 828 transmission products. Sales of bandwidth optimization products of
$3.9 million in fiscal 1994 reflected an increase of 32% compared with fiscal
1993. This increase resulted from new customers and sales channels for the
Company's LAN/WAN Optimizer products.
New orders booked in fiscal 1994 totaled $101.7 million, an increase of 16%
compared with fiscal 1993. The backlog of unfilled orders at year-end amounted
to $7.3 million compared with $6.7 million at the end of fiscal 1993. The
Company's major customers include telephone operating companies and
interexchange carriers. The RBOCs and major telephone companies accounted for
43% of sales in both fiscal 1994 and fiscal 1993. The major interexchange
carriers represented 19% of total sales in fiscal 1994 and 13% of total sales
in fiscal 1993.
Net income for fiscal 1994 was $4.8 million or $.48 per share compared with
a net loss of ($16.3 million) or ($1.75) per share in fiscal 1993. The return
to profitability in fiscal 1994 was due principally to higher sales of network
access products, an improved gross profit percent, and reduced operating
expenses in the Broadband Transmission Products Business Unit due to
restructuring actions taken in fiscal 1993.
The gross profit percent in fiscal 1994 increased to 44.5% of sales
compared with 41.0% in fiscal 1993. The improvement in the gross percentage in
fiscal 1994 resulted from higher sales volumes, product cost reductions and, in
the broadband transmission business, reduced manufacturing costs due to
restructuring actions taken in fiscal 1993.
Research and development expense was $16.0 million in fiscal 1994 and $15.6
million in fiscal 1993. Spending increased for the development of ATM/SONET
multiplexers and other broadband transmission products and for intelligent
network access multiplexers and bandwidth optimization products.
Sales, marketing and administration expenses were $23.1 million in fiscal
1994 compared with $22.4 million in fiscal 1993 which represented an increase
of 3%. Higher spending in fiscal 1994 included increased expenditures for
product line management and expanded selling and marketing activities for new
products.
12
13
Amortization expense was $.8 million in both fiscal 1994 and fiscal 1993.
Amortization expense relates to the acquisition of the broadband transmission
products area in 1983, certain channel bank products in 1984 and the
acquisition of Magnalink Communications Corporation in 1992.
Interest expense was $.2 million in fiscal 1994, compared with $.6 million
in fiscal 1993. Interest expense relates to primarily to $10.0 million of 11%
convertible subordinated notes issued in January of 1985, which were paid in
full during the third quarter of fiscal 1994.
Interest income was $.8 million in fiscal 1994, compared with $.7 million
in fiscal 1993. This increase resulted from higher interest rates earned on a
higher level of cash equivalents and short-term investments.
Income taxes in fiscal 1994 were provided at an effective tax rate of 12.7%
for financial statement purposes, reflecting the utilization of operating
losses and tax credits not previously benefited. A tax benefit of 10% was
taken against the loss in fiscal 1993. This benefit was less than the 35.6%
effective tax rate in the prior year due primarily to the deferral to future
periods of tax benefits relating to the 1993 restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments increased by $2.9 million in fiscal 1995,
resulting in a year end total of $29.1 million. The increase of $2.9 million
essentially reflects a net inflow of $5.2 million attributable to the proceeds
and related tax benefits from employee stock plans and $5.0 million from lower
accounts receivable, partially offset by higher inventories and lower accounts
payable due to the reduced sales volume in the second half of the year.
Working capital at August 27, 1995 was $49.9 million compared with $43.2
million at August 28, 1994. The current ratio increased to 5.3 at the end of
fiscal 1995 versus 3.7 at the previous year end.
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 August 27, 1995.
Management believes that cash and short-term investments of $29.1 million
and funds provided by continuing operations will be adequate to satisfy
operating cash requirements for the foreseeable future.
The Company has never declared or paid cash dividends on its capital stock
and does not anticipate a change to this practice in the foreseeable future.
13
14
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Financial Schedules Page
------------------------------------------------------------------ ----
Report of Ernst & Young LLP Independent Auditors 15
Consolidated Statements of Operations 16
Consolidated Balance Sheets 17
Consolidated Statements of Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Supplementary Data (Unaudited) 27
Consolidated Financial Statement Schedules: 28
Schedule II-Valuation and Qualifying Accounts
(All other schedules for which provision is made in
Regulation S-X are not required or are inapplicable and
therefore have been omitted.)
14
15
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Telco Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Telco Systems, Inc. as of August 27, 1995, and August 28, 1994 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended August 27, 1995. Our audits also
included the financial statement schedule listed in the index at Item 14 (a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Telco Systems, Inc. at August 27, 1995, and August 28, 1994, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended August 27, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the financial statements
taken as a whole, present fairly, in all material respects the information set
forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
October 12, 1995
15
16
CONSOLIDATED STATEMENTS OF OPERATIONS Telco Systems, Inc.
Three years ended August 27, 1995 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
Sales
Broadband transmission products . . . . . . . . . . $36,626 $46,549 $44,840
Network access products . . . . . . . . . . . . . . 46,946 50,025 35,425
Bandwidth optimization products . . . . . . . . . . 5,498 3,896 2,957
------- ---------- -------
89,070 100,470 83,222
------ -------- ------
Costs and expenses
Cost of products sold . . . . . . . . . . . . . . . 48,559 55,768 49,139
Research and development . . . . . . . . . . . . . 18,207 15,955 15,551
Sales, marketing and administration . . . . . . . . 22,945 23,082 22,444
Restructuring costs (credit) . . . . . . . . . . . (420) -- 13,605
Amortization of intangible assets . . . . . . . . . 783 824 830
Interest expense . . . . . . . . . . . . . . . . . -- 225 558
Interest income . . . . . . . . . . . . . . . . . . (1,632) (845) (740)
------- -------- --------
88,442 95,009 101,387
------ ------- --------
Income (loss) before income taxes . . . . . . . . . 628 5,461 (18,165)
Income tax provision (benefit) . . . . . . . . . . -- 691 ( 1,880)
---------- ---------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . $ 628 $ 4,770 $(16,285)
========= ======= =========
Average shares and equivalents . . . . . . . . . . 10,345 9,858 9,300
Net income (loss) per share . . . . . . . . . . . . $ .06 $ .48 $ (1.75)
See accompanying notes to consolidated financial statements.
16
17
CONSOLIDATED BALANCE SHEETS TELCO SYSTEMS, INC.
August 27, 1995 and August 28, 1994 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Current assets:
Cash and equivalents . . . . . . . . . . . . . . . . . . . . $ 18,208 $ 15,262
Short-term investments . . . . . . . . . . . . . . . . . . . 10,895 10,946
Accounts receivable, less allowance for
doubtful accounts of $649 in 1995
($797 in 1994) . . . . . . . . . . . . . . . . . . . . . . 10,047 15,064
Refundable income taxes . . . . . . . . . . . . . . . . . . 1,251 -- -
Inventories, net . . . . . . . . . . . . . . . . . . . . . . 18,473 15,244
Other current assets . . . . . . . . . . . . . . . . . . . . 2,585 2,905
------- -------
Total current assets . . . . . . . . . . . . . . . . . 61,459 59,421
------- -------
Plant and equipment, at cost . . . . . . . . . . . . . . . . . . 41,720 39,861
Less accumulated depreciation . . . . . . . . . . . . . . . 31,114 27,745
------- -------
Net plant and equipment . . . . . . . . . . . . . . . . 10,606 12,116
------- -------
Intangible and other assets, less accumulated
amortization of $10,292 in 1995
($9,249 in 1994) . . . . . . . . . . . . . . . . . . . . . . . . 10,374 10,665
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 82,439 $ 82,202
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . $ 3,952 $ 5,519
Payroll and related liabilities . . . . . . . . . . . . . . 2,628 3,436
Other accrued liabilities . . . . . . . . . . . . . . . . . 4,964 7,256
------- -------
Total current liabilities . . . . . . . . . . . . . . . 11,544 16,211
------- -------
Restructuring and other long-term liabilities . . . . . . . . . . 3,490 4,443
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized; no shares outstanding . . . . . . . . . . -- --
Common stock, $.01 par value, 24,000,000
shares authorized; shares outstanding:
10,230,624 at August 27, 1995;
9,649,051 at August 28, 1994 . . . . . . . . . . . . . . 102 96
Capital in excess of par value . . . . . . . . . . . . . . . 71,566 66,343
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (4,263) (4,891)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . 67,405 61,548
-------- --------
Total liabilities and shareholders'equity . . . . . . . . . $ 82,439 $ 82,202
======== ========
See accompanying notes to consolidated financial statements.
17
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY TELCO SYSTEMS, INC.
Three years ended August 27, 1995
- ----------------------------------------------------------------------------------------------------------------------
Retained
Common Stock Capital in earnings
------------ excess of (accumulated
Shares Amount par value deficit) Total
------ ------ ---------- ------------ -----
(Dollars in thousands)
Balance, August 30, 1992 . . . . . . . . . 9,236,571 $ 92 $ 63,979 $ 6,624 $ 70,695
--------- ----- -------- ------- --------
Net loss for year . . . . . . . . . . . . . (16,285) (16,285)
Issuance of common stock:
Employee stock purchase plan . . . . . . 53,535 1 267 268
Exercise of stock options . . . . . . . . 55,554 194 194
---------- -------- ------- ---------- -------
Balance, August 29, 1993 . . . . . . . . . 9,345,660 93 64,440 (9,661) 54,872
--------- ------ ------ ------- ------
Net income for year . . . . . . . . . . . . 4,770 4,770
Issuance of common stock:
Employee stock purchase plan . . . . . . 53,105 389 389
Exercise of stock options . . . . . . . . 250,286 3 1,514 1,517
---------- ------- ----- ----------- -------
Balance, August 28, 1994 . . . . . . . . . 9,649,051 96 66,343 (4,891) 61,548
--------- ------ ------ --------- -------
Net income for year . . . . . . . . . . . . 628 628
Issuance of common stock: . . . . . . . . .
Employee stock purchase plan . . . . . . 56,005 1 504 505
Exercise of stock options . . . . . . . . 525,568 5 4,719 4,724
------------ ------ --------- ------------ ----------
Balance, August 27, 1995 . . . . . . . . . 10,230,624 $102 $ 71,566 $ (4,263) $ 67,405
========== ==== ======== ========= ========
See accompanying notes to consolidated financial statements.
18
19
CONSOLIDATED STATEMENTS OF CASH FLOWS TELCO SYSTEMS, INC.
Three years ended August 27, 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
Cash Flows from Operating Activities
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 628 $ 4,770 $ (16,285)
Depreciation and amortization . . . . . . . . . . . . . 4,982 5,330 5,537
Restructuring costs (credit) . . . . . . . . . . . . . . (420) -- 13,605
Change in assets and liabilities
Accounts receivable, net . . . . . . . . . . . . . . . . 5,017 (4,051) 2,356
Refundable income taxes . . . . . . . . . . . . . . . . (1,251) 2,060 (2,060)
Inventories, net . . . . . . . . . . . . . . . . . . . . (3,229) 2,335 (3,039)
Other current assets . . . . . . . . . . . . . . . . . . 320 (529) (803)
Other assets . . . . . . . . . . . . . . . . . . . . . . (924) (128) (1,311)
Accounts payable and other current liabilities . . . . . (4,401) 2,271 1,824
Restructuring liabilities . . . . . . . . . . . . . . . (469) (3,176) (784)
Long-term liabilities . . . . . . . . . . . . . . . . . (330) (120) (552)
------- --------- ---------
Net cash provided by (used in) operating activities . . . (77) 8,762 (1,512)
------- --------- ---------
Cash Flows from Investing Activities
Additions to plant and equipment, net . . . . . . . . . (2,257) (2,248) (7,832)
Purchase of short-term investments . . . . . . . . . . . (29,665) (15,692) --
Maturities of short-term investments . . . . . . . . . . 29,716 4,746 --
------- -------- --------
Net cash (used in) investing activities . . . . . . . . (2,206) (13,194) (7,832)
-------- --------- ---------
Cash Flows from Financing Activities
Proceeds and related tax benefits from sale of common
shares under employee stock plans . . . . . . . . . . 5,229 1,906 462
Payments on long-term debt . . . . . . . . . . . . . . -- (4,000) (2,000)
------- -------- --------
Net cash provided by (used in) financing activities . . 5,229 (2,094) (1,538)
------- -------- --------
Increase (decrease) in cash and equivalents . . . . . . . . 2,946 (6,526) (10,882)
Cash and equivalents at beginning of year . . . . . . . . . 15,262 21,788 32,670
-------- -------- --------
Cash and equivalents at end of year . . . . . . . . . . . . $ 18,208 $ 15,262 $ 21,788
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Year
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 299 $ 550
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 1,235 $ 544 $ 647
See accompanying notes to consolidated financial statements.
19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The financial statements consolidate the accounts
of Telco Systems, Inc., and its subsidiaries (the Company). Intercompany
accounts and transactions have been eliminated. The Company's fiscal year is
the 52- or 53-week period ending on the last Sunday in August. Certain amounts
reported in prior years have been reclassified to be consistent with the
current year's presentation.
The Company has 50% limited partnership interests in two real estate
partnerships which are accounted for by the equity method of accounting. The
aggregate net investment in these partnerships on the accompanying balance
sheets is not material (See Note 7).
In March 1995, the Financial Accounting Standards Board issued FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of". This rule specifies when assets should be reviewed for
impairment, how to determine and measure impairment loss and what disclosures
are required. The Company will adopt FAS 121 in fiscal 1996 and believes that
adoption will not have a significant effect on its financial statements.
REVENUE RECOGNITION Revenues from product sales are recognized at
time of shipment to customer.
PRODUCT WARRANTY Expected future product warranty liability is provided
for when the product is sold.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS In fiscal 1995, the
Company adopted FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities", which had no material impact on the Company's financial position
or results of operations. In accordance with FAS 115, the Company classifies
all of its marketable securities as available-for-sale securities. These
securities are stated at their fair value. There are currently no unrealized
holding gains and losses. The Company considers all highly liquid investments
with maturity of 91 days or less to be cash equivalents. Those instruments
with maturities greater than 91 days and less than twelve months are classified
as short-term investments. Cash equivalents and short-term investments are
carried at market, and consist of U.S. Government securities, bank certificates
of deposit and corporate issues. All securities mature within twelve months.
INVENTORIES Inventories are stated at the lower of cost or market. The
cost of products sold is based on standard costs, which approximate actual
costs as determined by the first-in, first-out method.
Inventories at fiscal year end were as follows:
1995 1994
------------------------
(in thousands)
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,101 $ 6,656
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,060 2,305
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,312 6,283
------------------------
$18,473 $15,244
========================
PLANT AND EQUIPMENT Additions to plant and equipment are recorded at cost.
Depreciation is determined by using the straight-line method over the estimated
useful lives of the assets -- three to eight years. Leasehold improvements are
amortized on a straight-line basis over the shorter of their estimated useful
life or the lease term.
Plant and equipment, at cost, at fiscal year end were as follows:
1995 1994
------------------------
(in thousands)
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,154 $28,743
Furniture and leasehold improvements . . . . . . . . . . . . . . . . . . . . . 11,566 11,118
------------------------
$41,720 $39,861
========================
20
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 1 (continued)
INTANGIBLE AND OTHER ASSETS Intangible assets arising in connection with
business acquisitions were $8,922,000 and $9,749,000 at August 27, 1995 and
August 28, 1994, respectively. They are amortized over lives ranging from
seven to twenty-five years using the straight-line method, with an average
remaining life of 11.8 years. Software development costs are capitalized after
a product's technological feasibility has been established. At August 27,
1995 and August 28, 1994, intangible and other assets included $279,000 and
$547,000, respectively, of software development costs. Amortization of
software development costs is provided using the straight-line method over an
estimated economic life of three years. During the three fiscal years ended
1995, related amortization expense charged to cost of goods sold was $273,000,
$44,000, and $115,000, respectively.
CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash
equivalents, short-term investments, and accounts receivable. The Company's
temporary cash investments, which are principally limited to U.S. Government
securities and bank certificates of deposit, are subject to minimal risk. The
Company routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk exposure
is limited.
EARNINGS (LOSS) PER SHARE Earnings (loss) per share is based on the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive. Fully diluted earnings per share did not differ significantly from
primary earnings per share in any year.
NOTE 2 DESCRIPTION OF BUSINESS
The Company is engaged in a single business segment constituting the
development, manufacturing, and marketing of broadband transmission products,
network access products, and bandwidth optimization products for the
telecommunications industry. Regional Bell Operating Companies (RBOC),
independent telephone companies, and interexchange carriers are the primary
users of the Company's products. Sales to the RBOCs accounted for 29% of sales
in fiscal 1995, 37% of sales in fiscal 1994, and 38% of sales in fiscal 1993.
RBOC sales include sales to NYNEX of 17% in fiscal 1995, 21% in fiscal 1994 and
12% in fiscal 1993. Sprint represented 18% of sales in fiscal 1995 and 14% of
sales in fiscal 1994.
NOTE 3 INCOME TAXES
The components of the provision (benefit) for income taxes were as follows:
Fiscal Year
1995 1994 1993
-------------------------------------------------
Federal (in thousands)
Current . . . . . . . . . . . . . . . . . . . . . . . . . $(821) $1,321 $(1,280)
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 821 (730) (690)
State
Current . . . . . . . . . . . . . . . . . . . . . . . . . -- 100 90
--------------------------------------------------
$ -- $ 691 $(1,880)
==================================================
Effective August 30, 1993, the Company adopted FAS 109 "Accounting for
Income Taxes." Prior years' financial statements have not been restated,
accordingly, the amounts shown for 1993 reflect income tax accounting under FAS
96. The cumulative effect of adoption was not material to the Company's
financial position or results of operations.
At August 27, 1995, and August 28, 1994, the Company had a net deferred
tax asset of $1,105,000 and $1,926,000, respectively. FAS 109 requires that a
valuation reserve be established up if it is "more likely than not" that
realization of the tax benefits will not occur. The valuation allowance was
$6,709,000 at August 27, 1995. The net change in the valuation allowance for
deferred tax assets was a decrease of $162,000 in fiscal 1995, and a decrease
of $114,000 in fiscal 1994, related to the use of previously unbenefited
losses.
21
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC.
NOTE 3 (continued)
For financial reporting and income tax purposes, the Company had unused
research and development tax credit carryovers of $2.7 million at August 27,
1995, which expire from fiscal years 1998 through 2010.
The provision (benefit) for income taxes differs from the amount computed
using the statutory rate as follows:
Fiscal Year
-----------
1995 1994 1993
----------------------------------------
(in thousands)
Federal income taxes at statutory rate . . . . . . . . . . . . . . . . $ 214 $1,857 $(6,441)
Previously unbenefited deferred items . . . . . . . . . . . . . . . . (566) -- --
Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . 267 280 289
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (810) (493)
Loss benefited at lower alternative minimum tax rate . . . . . . . . . -- -- 1,114
Benefit of loss carryforward . . . . . . . . . . . . . . . . . . . . . -- (730) --
State income taxes, net of federal tax benefits . . . . . . . . . . . . -- 66 60
Loss producing no current tax benefit . . . . . . . . . . . . . . . . . -- -- 3,179
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 28 412
----- ------ -------
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . $ -- $ 691 $(1,880)
===== ====== =======
The components of deferred tax assets and liabilities at fiscal year end are as follows:
1995 1994
----------------------------
(in thousands)
Deferred tax assets
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,403 $ 3,991
Inventory and other reserves . . . . . . . . . . . . . . . . . . . . . 3,675 3,600
Federal tax credit carryforward . . . . . . . . . . . . . . . . . . . . 2,700 2,250
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 425
----------------------------
9,082 10,266
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . (6,709) (6,871)
----------------------------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . 2,373 3,395
----------------------------
Deferred tax liabilities
Accelerated tax deduction . . . . . . . . . . . . . . . . . . . . . . 1,110 1,016
Depreciation and Amortization . . . . . . . . . . . . . . . . . . . . . 198 470
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (17)
---------------------------
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . 1,268 1,469
-------------------------
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . $ 1,105 $ 1,926
========================
22
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TELCO SYSTEMS, INC,
NOTE 3 (continued)
The following is a summary of the components of deferred tax under FAS 96
applicable to fiscal 1993:
Fiscal Year
1993
------------------
(in thousands)
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,217)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 200
Doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
-------
$ (690)
=======
NOTE 4 ACCRUED LIABILITIES
Accrued liabilities at fiscal year end were as follows:
1995 1994
-------------------------
(in thousands)
Warranty and rework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 772 $ 930
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,295 1,562
All other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897 4,764
-------------------------
$ 4,964 $ 7,256
=========================
NOTE 5 LINE OF CREDIT
The Company has a $10 million line of credit with the Bank of Boston.
Under the facility, which expires September 30, 1996, borrowings may be made at
the bank's prime rate plus one half of one percent. During fiscal 1995 and
fiscal 1994, the Company had no borrowing under the line of credit and had no
other short-term bank debt outstanding. Portions of the line have been
reserved to support various guarantees including the loan discussed in Note 7,
leaving unreserved credit of $8.9 million available at August 27, 1995.
NOTE 6 LONG-TERM LIABILITIES
During fiscal 1994, the Company repaid $4.0 million of 11% convertible
subordinated notes which included a $2.0 million prepayment to fully extinguish
the debt. There was no prepayment premium due for payments made during the
final year of the notes.
At August 27, 1995, and August 28, 1994, restructuring and other long-term
liabilities include $2.9 million and $3.5 million, respectively, of
restructuring costs discussed in Note 8. Amounts relating to real estate
partnership matters were $.6 million and $.9 million at August 27, 1995, and
August 28, 1994, respectively.
NOTE 7 LEASE COMMITMENTS
The Company leases a 216,000 square-foot manufacturing, research and
administration facility in Norwood, Massachusetts, from a limited partnership
in which the Company has a 50% interest. Neither the Company nor the other
partners have made or anticipate making any substantial capital contributions
or advances to the partnership. Under the partnership agreement, the Company,
in addition to its 50% interest, is entitled to a priority payment (which would
proportionately increase with an increase in the property value) out of the
proceeds of any sale or future refinancing of the property.
NOTE 7 (continued)
The lease with the partnership commenced on December 16, 1985, for a term
of 13 years with an option to extend the term for three successive periods of
five years each. Effective January 1, 1994, the original lease was modified
through a lease amendment which extended the lease term to January 31, 2004,
and deleted the lease extension provisions. Commencing on January 1, 1994, the
gross rent payable is $1.5 million annually through January 31,1999. For the
remainder of the lease term ending January 31, 2004, gross rent payable is $1.7
million annually. In the pre-amended lease, the gross rent payable was $2.5
million annually.
23
24
The Company has issued a $900,000 guarantee on a bank loan to a second
limited partnership. This partnership has granted a 100% security interest and
collateral assignment to the Company in a parcel of undeveloped land owned by
the partnership. The land, comprised of approximately 7.5 acres, is adjacent to
the Company's leased facility in Norwood, Massachusetts. The Company believes
the value of the land is adequate to satisfy any obligation under the
guarantee.
The Company leases other facilities and certain equipment under
noncancelable operating leases expiring at various dates through 2005. The
Company is required to pay property taxes, insurance and normal maintenance
costs. Certain of the lease agreements provide for five-year renewal options,
and future lease payments could increase based on the Consumer Price Index.
Minimum annual lease commitments under non-cancelable operating leases for
facilities and equipment as of August 27, 1995 are set forth in the following
table. Amounts relating to excess facilities included herein have been accrued
as discussed in Note 8:
Fiscal Year Net Lease Payments
- ---------------------------------------------------------------------------------------------------------------
(in thousands)
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,542
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,507
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,625
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,715
Beyond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,666
--------
$ 24,586
========
Rent expense under operating leases was $2.4 million in fiscal 1995, $3.0
million in fiscal 1994, and $3.1 million in fiscal 1993.
NOTE 8 RESTRUCTURING COSTS
In the fourth quarter of fiscal 1993, the Company restructured its
broadband transmission products business unit due to lower sales of certain
products and to increase focus on its SONET (synchronous) product program.
Activities were restructured, divisional employment was reduced by
approximately 25%, and facilities were consolidated.
Restructuring charges totalling $13.6 million were recognized in fiscal 1993 as follows:
(in thousands)
Excess facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,543
Write-down of assets to net realizable value . . . . . . . . . . . . . . . . . . . . . . 5,477
Employee severance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,144
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
-------
$13,605
=======
24
25
NOTES TO CONSOLIDATED FINANCIAL STATEM TELCO SYSTEMS, INC.
NOTE 8 (continued)
The reserve for excess facilities costs was established for future cash
expenditures relating to unoccupied space. These costs include primarily lease
payments, utilities, maintenance, security and other related expenses, net of
anticipated rental income to be derived from the vacant space for the remaining
lease term. In fiscal 1995 and 1994, actual expenses relating to the excess
facilities were $1.1 million and $1.4 million, respectively. These amounts
have been reduced by $.2 million of sublet income in both years. Disposition
of all other restructuring costs reserved in fiscal 1993 has been completed,
consistent with original estimates, except the reevaluation of inventory
previously written down resulted in a restructuring credit of $.4 million which
was included in the fiscal 1995 results of operations. As of August 27, 1995,
the remaining restructuring reserve of $4.2 million was for excess facility
costs.
NOTE 9 EMPLOYEE BENEFIT PLANS
Under the Company's 1980 Stock Option Plan, the 1988 Non-Qualified Stock
Option Plan, and the 1990 Stock Option Plan (the Plans), officers, directors,
and key employees have been granted options to purchase shares of the Company's
common stock at a price equal to the market value at the date of grant.
Options normally become exercisable ratably over a 48 month period, commencing
six months from the date of grant, and expire after ten years. At August 27,
1995, 1,139,051 shares of common stock were reserved for issuance under the
Plans. A summary of the activity in the stock option plans for fiscal 1995,
1994, and 1993 is presented as follows:
Available Options Outstanding Option Price
--------------------
Stock Option Plans For Options Non-qualified Incentive Per Share
----------- ------------- --------- ----------
Balance at August 30, 1992 . . . . . . . . . 188,608 1,050,293 1,000 $ 1.30 - $17.125
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (177,250) 177,250 -- $6.125 - $ 9.00
Authorized under 1990 plan . . . . . . . . . 500,000 -- --
Exercised . . . . . . . . . . . . . . . . . . -- (54,554) (1,000) $ 1.30 - $ 7.75
Canceled . . . . . . . . . . . . . . . . . . 57,431 (57,431) -- $3.375 - $14.375
Expired . . . . . . . . . . . . . . . . . . . (17,775) -- --
-------------------------------------------------------------------
Balance at August 29, 1993 . . . . . . . . . 551,014 1,115,558 -- $2.125 - $17.125
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (527,500) 527,500 -- $8.375 - $ 14.50
Exercised . . . . . . . . . . . . . . . . . . -- (250,286) -- $2.125 - $ 11.25
Canceled . . . . . . . . . . . . . . . . . . 143,922 (143,922) -- $3.375 - $17.125
Expired . . . . . . . . . . . . . . . . . . . (500) -- --
-------------------------------------------------------------------
Balance at August 28, 1994 . . . . . . . . . 166,936 1,248,850 -- $2.125 - $15.875
-------------------------------------------------------------------
Grants . . . . . . . . . . . . . . . . . . . (395,456) 395,456 -- $9.875 - $16.750
Authorized under 1990 plan . . . . . . . . . 250,000 -- --
Exercised . . . . . . . . . . . . . . . . . . -- (525,568) -- $2.125 - $ 15.50
Canceled . . . . . . . . . . . . . . . . . . 159,439 (159,439) -- $3.375 - $16.250
Expired . . . . . . . . . . . . . . . . . . . (1,167) -- --
-------------------------------------------------------------------
Balance at August 27, 1995 . . . . . . . . . 179,752 959,299 -- $ 2.25 - $ 16.75
===================================================================
At August 27, 1995, August 28, 1994, and August 29, 1993, there were
413,495 shares, 729,480 shares, and 657,354 shares exercisable, respectively.
NOTE 9 (continued)
Under the Company's 1983 Employee Stock Purchase Plan, eligible employees
may purchase shares of common stock through payroll deductions (up to a maximum
of 10% of their salary) at a price equal to 85% of the lower of the stock's
fair market value at the beginning or at the end of each six month offering
period. There were 54,747 shares issuable under the Plan for fiscal 1995 of
which 28,838 were outstanding at August 27, 1995. For fiscal 1994 and 1993,
53,105 and 53,535 shares, respectively, were issued under the Plan. At August
27, 1995, 158,504 shares of common stock were reserved for issuance under the
Plan.
Under the Company's Savings Plan, a defined contribution savings plan
under the provisions of Internal Revenue Code Section 401(k), the Company
contributes up to 3% of base pay to a fund which is held by a trustee. All
employees are
25
26
eligible to participate in the plan and are entitled, upon termination or
retirement, to receive their vested portion of the savings fund assets. The
unvested portion remains in the Plan and is used to reduce future Plan expense.
Total Plan expense was $525,000 in fiscal 1995, $503,000 in fiscal 1994, and
$490,000 in fiscal 1993.
26
27
SUPPLEMENTARY DATA
QUARTERLY INFORMATION
TELCO SYSTEMS, INC.
Quarterly financial information (unaudited) is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1995 (Dollars in thousands except per share amounts)
Sales . . . . . . . . . . . . . . . . . . . . $26,217 $22,877 $20,656 $19,320
Gross profit . . . . . . . . . . . . . . . . . $11,835 $10,812 $ 9,596 $ 8,268
Net income (loss) . . . . . . . . . . . . . . . $ 1,544 $ 1,255 $ (940) * $(1,231)
Net income (loss) per share . . . . . . . . . . $ .15 $ .12 $ (.09) $ (.12)
1994
Sales . . . . . . . . . . . . . . . . . . . . $22,219 $24,245 $26,040 $27,966
Gross profit . . . . . . . . . . . . . . . . . $ 9,267 $10,697 $11,840 $12,898
Net income . . . . . . . . . . . . . . . . . . $ 266 $ 820 $ 1,600 $ 2,084
Net income per share . . . . . . . . . . . . . $ .03 $ .08 $ .16 $ .21
<FN>
* Fourth quarter 1995 net loss includes $420 restructuring credit
27
28
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Three Years Ended August 27, 1995
---------------------------------
1995 1994 1993
---- ---- ----
Allowance for Doubtful Accounts:
Balance at beginning of period . . . . . . . . . . $ 797 $ 806 $1,539
Charges to costs and expenses . . . . . . . . . . . 63 220 51
Deductions . . . . . . . . . . . . . . . . . . . . (211) (229) (784)
---------------------------------------
Balance at end of period . . . . . . . . . . . . . $ 649 $ 797 $ 806
=======================================
Warranty and Rework Reserve:
Balance at beginning of period . . . . . . . . . . $ 930 $ 969 $1,225
Charges to costs and expenses . . . . . . . . . . . 432 182 560
Deductions . . . . . . . . . . . . . . . . . . . . (590) (221) (816)
---------------------------------------
Balance at end of the period . . . . . . . . . . . $ 772 $ 930 $ 969
=======================================
28
29
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
Not applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
Incorporated by reference from the Definitive Proxy Statement, with
the exception that information regarding the executive officers of Telco
Systems, Inc. is contained in Item 1 Part I on page 7 of this report.
Item 11. Executive Compensation
----------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management of
Telco Systems, Inc.
-----------------------------------------------------------------
Incorporated by reference from the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
Incorporated by reference from the Definitive Proxy Statement.
29
30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
See index to Consolidated Financial Statements at page 14.
(a) 2. Financial Statement Schedules
-----------------------------
See index to Consolidated Financial Statements at page 14.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and therefore
have been omitted.
(a) 3. Exhibits
--------
Management contracts and compensatory plans or
agreements required to be filed as exhibits pursuant to
item 14(a) (3) of Form 10-K are identified by asterisks
(*).
3.1 Certificate of Incorporation of Telco Systems, Inc. (1)
3.2 Bylaws of Telco Systems, Inc., as amended. (2)
3.3 Form of Common Stock Certificate. (2)
10.3 Telco Systems, Inc. Employee Stock Purchase Plan, as
amended through July, 1991 (4)*
10.4 Amendment to Telco Systems, Inc. Employee Stock Purchase
Plan, adopted August, 1991. (6)*
10.5 Telco Systems, Inc. 1988 Non-Statutory Stock Option Plan,
as amended. (6)*
10.8 Partnership Agreement relating to facilities of Telco
Systems Fiber Optics Corporation located at 63 Nahatan
Street, Norwood, Massachusetts, dated August 29, 1985.
(5)
10.23 Lease of facilities of Telco Systems Fiber Optics
Corporation located at 63 Nahatan Street, Norwood,
Massachusetts, dated December 12, 1985. (7)
10.35 Agreement between the Registrant and John A. Ruggiero
dated October 4, 1989. (3)*
10.38 Telco Systems, Inc. 1990 Stock Option Plan, as amended.
(8)*
10.39 Lease dated May 3, 1990 between the Registrant and
Pactel Properties for facilities located at 4305 Cushing
Parkway, Fremont, California (5)
10.40 Stock Purchase Agreement between Registrant and
Magnalink Communications Corporation dated May 29, 1992.
(7)
30
31
10.42 Amendment to lease of facility located at 63 Nahatan
Street, Norwood, MA dated January 1, 1994. (8)
10.43 Separation Agreement between Registrant and Howard C.
Salwen dated September 19, 1994. (Schedules omitted.)
(8)*
10.44 Stock Purchase Agreement and Registration Rights
Agreement between the Registrant and Unitech Telecom,
Inc. dated March 29, 1995
10.45 Amendments one and two to lease of facility in Fremont,
California between the Registrant and Riggs National
Bank of Washington D.C. as trustee of the Multi-Employer
Property Trust, (successor to Pactel Properties) dated
April 12, 1995 and May 8, 1995, respectively.
10.46 Agreement between the Registrant and John A. Ruggerio
dated March 15, 1995.*
10.47 Agreement between the Registrant and William B. Smith
dated February 2, 1995.*
10.48 Agreement between the Registrant and William B. Smith
dated March 6, 1995.*
22.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule
Notes: (1) Incorporated by reference to Exhibit 3.1 to
Appendix II of the definitive proxy statement of
the Company dated November 20, 1986 relating to the
Annual Meeting of Shareholders on December 17,
1986.
(2) Incorporated by reference to Exhibits 3.2 and 3.3,
respectively, to the Registrant's Report on Form
10-K for its fiscal year ended August 30, 1987.
(3) Incorporated by reference to Exhibit 10.35, to the
Registrant's Report on Form 10-K for its fiscal
year ended August 27, 1989.
(4) Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 (File No. 33-26976).
(5) Incorporated by reference to Exhibits 10.8 and
10.39, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 26,
1990.
(6) Incorporated by reference to Exhibits 10.4 and
10.5, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 25,
1991.
(7) Incorporated by reference to Exhibits 10.23 and
10.40, respectively, to the Registrant's Report on
Form 10-K for its fiscal year ended August 30,
1992.
(8) Incorporated by reference to Exhibit 10.38, 10.42
and 10.43 Registrant's Report on Form 10-K for its
fiscal year ended August 28, 1994.
(b) Reports on Form 8-K
-------------------
There were no reports filed on Form 8-K during the fourth quarter
of fiscal 1995.
31
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: November 16, 1995 TELCO SYSTEMS, INC.
/s/ John A. Ruggiero
--------------------------------
By John A. Ruggiero
Chief Executive Officer/Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ John A. Ruggiero Chief Executive Officer/Director Nov. 16, 1995
- ------------------------- Principal Financial Officer -------------
John A. Ruggiero Date
/s/ William B. Smith President and Chief Operating Nov. 16, 1995
- ------------------------- Officer/Director -------------
William B. Smith Date
/s/ Daniel A. DiPietro Vice President and Nov. 16, 1995
- ------------------------- Corporate Controller, -------------
Daniel A. DiPietro Principal Accounting Officer Date
/s/ Dean C. Campbell Director Nov. 16, 1995
- ------------------------- -------------
Dean C. Campbell Date
/s/ Sheldon Horing Director Nov. 16, 1995
- ------------------------- -------------
Sheldon Horing Date
/s/ Steward Flaschen Director Nov. 16, 1995
- ------------------------- -------------
Steward Flaschen Date
33
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- -------------------------------------------------------------------------------------------------------
10.44 Stock Purchase Agreement and Registration Rights Agreement
between the Registrant and Unitech Telecom, Inc. dated March 29, 1995
10.45 Amendments one and two to lease of facility in Fremont, California
between the Registrant and Riggs National Bank of Washington D.C.
as trustee of the Multi-Employer Property Trust, (sucessor to Pactel
Properties) dated April 12, 1995 and May 8, 1995, Respectively..
10.46 Agreement between the Registrant and John A. Ruggerio dated March 15, 1995
10.47 Agreement between the Registrant and William B. Smith dated February 2, 1995
10.48 Agreement between the Registrant and William B. Smith dated March 6, 1995
22.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors as
to incorporation by reference.
27 Financial Data Schedule