-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GhnP0o0i/mAC/PlCSYVryMNnyQM2ToMDTosXyiXdqhxkTmB6CSkVMyEaSYkiM/Sf iWqozY+8W5NFkStxbkvEDg== 0000903893-96-000579.txt : 19960918 0000903893-96-000579.hdr.sgml : 19960918 ACCESSION NUMBER: 0000903893-96-000579 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960629 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEBIT CORP CENTRAL INDEX KEY: 0000744550 STANDARD INDUSTRIAL CLASSIFICATION: 3661 IRS NUMBER: 770007049 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18374 FILM NUMBER: 96611815 BUSINESS ADDRESS: STREET 1: ONE EXECUTIVE DRIVE CITY: CHELMSFORD STATE: MA ZIP: 01824 BUSINESS PHONE: 5084412181 10-Q 1 TELEBIT CORP FORM 10-Q FOR QTR ENDED 6/29/96 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 TELEBIT CORPORATION FORM 10-Q For the Quarter Ended June 29, 1996 INDEX
Page Number 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
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TELEBIT CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
June 29, Dec. 31, 1996 1995 ----------- ----------- (Unaudited) 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.
TELEBIT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 29, July 1, June 29, July 1, 1996 1995 1996 1995 ----------- ----------- ---------- ---------- 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.
TELEBIT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Six Months Ended June 29, July 1, 1996 1995 ---------- ---------- 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.
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):
June 29, Dec. 31, 1996 1995 ----------- ----------- Raw materials $5,202 $5,986 Work-in-process 1,974 791 Finished goods 847 1,384 ----------- ----------- $8,023 $8,161 =========== ===========
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):
Second Second Balance Quarter Quarter Balance March 30, Accruals Charges June 29, 1996 1996 1996 1996 ----------- ----------- ----------- ----------- Provisions for severance payments to terminated employees $275 $ - $(154) $121 ----------- ----------- ----------- ----------- $275 $ - $(154) $121 =========== =========== =========== ===========
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. 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. 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:
Three Months Ended Six Months Ended June 29, July 1, June 29, July 1, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ 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%) ============ ============ ============ ============
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 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. 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 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 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. 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):
Nominee Votes For Votes Withheld 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
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. 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. 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) EX-27 2 TELEBIT CORP. ARTICLE 5 FDS - 6 MOS ENDED 6/29/96
5 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-29-1996 1,735 7,007 7,035 2,895 8,023 24,336 9,638 6,586 27,597 11,306 0 0 0 58,438 0 27,597 25,288 25,288 15,445 15,445 11,421 0 2 (1,279) 54 0 0 0 0 (1,333) (0.10) (0.10)
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