<PAGE> 1
Filed Pursuant to Rule 424(a)
Registration No. 333-44776
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS
NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 12, 2000
[TELECT LOGO]
--------------------------------------------------------------------------------
12,000,000 Shares
Common Stock
--------------------------------------------------------------------------------
This is the initial public offering of Telect, Inc. and we are offering
12,000,000 shares of our common stock. No public market currently exists for our
common stock. We anticipate the initial public offering price will be between
$9.00 and $11.00 per share. We have applied to list our common stock on the
Nasdaq National Market under the symbol "TLEC."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS TELECT
<S> <C> <C> <C>
Per share $ $ $
Total $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to 1,800,000
additional shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 2
DESCRIPTION OF ARTWORK
OUTSIDE PORTION OF GATEFOLD:
GRAPHIC DEPICTING: Six concentric rings surround a circular graphic of
a service person against a background montage featuring a cell phone, the Telect
website, and the Earth. Three progressively smaller graphics show a picture of a
Telect Board, an individual viewing a computer screen, and the Earth as seen
from space. The left side of the page is black except for the concentric rings,
and a vertical copper-colored band with white lettering that reads, "connecting
the world as one." On the bottom of the black portion of the page, in
copper-colored lettering, is the Telect logo, which reads "Telect-connecting the
future."
GATEFOLD:
GRAPHIC DEPICTING: A copper-colored band extends across the top of the
page, where it merges with a photograph of people assembling Telect products.
White lettering against the copper-colored band reads "global telecom network."
Beneath the copper-colored band, black lettering against a white background
reads "our products." A graphic of Earth as seen from space is centered on the
page, surrounded by seven circular graphics showing, clockwise from the right:
(1) Internal wiring with caption: "Telzon Cross Connect Systems."
(2) Various cables and patch cords with caption: "Teraband and
Gigawave Fiber Optic Cables and Bantam and Coax Patchcords."
(3) Telect Board with caption "T3 Broadband Cross Connect
Systems."
(4) Frame with drawer extended with caption "LINXS Fiber Optic
Frames."
(5) Circuit breaker panel with caption "Configured Circuit Breaker
Panel."
(6) Circuit board with caption "TeleMIX T1 Digital Signal Cross
Connects."
(7) Fiber optic cables with caption "Cablelinks Fiber Cable
Management Systems."
A black band extends across the bottom of the page. In the left corner,
copper-colored lettering reads, "Telect-connecting the future."
BACK COVER:
GRAPHIC DEPICTING: Against a black background, four white concentric
circles surround a graphic of Earth as seen from space. A thin copper-colored
line extends from earth, moves 90 degrees to the right, and then moves 90
degrees again off the top of the page. Above the horizontal portion of the
copper-colored line white lettering reads, "connecting the world as one." In the
lower left corner, copper-colored lettering reads, "Telect-connecting the
future."
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEING OFFERS TO BUY, SHARES OF
COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE
OF OUR COMMON STOCK.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
The Offering................................................ 2
Summary Consolidated Financial Data......................... 3
Risk Factors................................................ 5
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Subchapter S Corporation and Termination of Subchapter S
Corporation Status........................................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 34
Management.................................................. 44
Certain Transactions........................................ 53
Principal Shareholders...................................... 56
Description of Capital Stock................................ 58
Shares Eligible for Future Sale............................. 60
Underwriting................................................ 62
Legal Matters............................................... 64
Experts..................................................... 64
Where You Can Find More Information......................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS
ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that investors
should consider before investing in our common stock. Investors should carefully
read the entire prospectus, including "Risk Factors" and our financial
statements, before making an investment decision.
OUR BUSINESS
We manufacture and supply telecommunications network connectivity and power
distribution products and services for the telecommunications industry. Our
products are used primarily in telecommunications network facilities that
contain network equipment. We sell our products and services in the United
States primarily to telecommunications service providers, including incumbent
local exchange carriers, which were the primary telecommunications service
providers prior to 1996; competitive local exchange carriers, which are new
entrants in the telecommunications market; original equipment manufacturers,
which bundle our products with their products for resale; equipment installers;
equipment distributors and private network operators. Internationally, we sell
our products to original equipment manufacturers and telecommunications service
providers in the public and private telecommunications network markets. Our five
largest customers, based on 1999 net revenues, are AT&T, Sprint North Supply,
Verizon, Walker and Associates and WorldCom. These customers accounted for 37.9%
of our 1999 net revenues.
We offer a range of telecommunications network connectivity and power
distribution products and services. Our connectivity products interconnect
copper, coaxial cable and fiber optic telecommunications networks and are key
elements of telecommunications network facilities, including facilities commonly
referred to as central and remote offices, remote terminals and wireless base
stations. Our connectivity products are designed to be compact but allow for
maximum circuit capacity, which is called density. These products also are
designed to be configurable and modular, to facilitate easy integration into
existing telecommunications networks. Our power distribution products provide
power management throughout central and remote offices and other network
facilities. We also offer engineering, configuration and installation services
to assist our customers in configuring telecommunications solutions using our
products and integrating these solutions into a telecommunications network. We
operate manufacturing facilities in the United States and abroad and also
outsource a portion of our manufacturing.
Our objective is to become the leading provider of telecommunications
network connectivity and power products and services. We plan to achieve this
objective by leveraging our technology expertise to continue to develop
high-density network connectivity and power distribution equipment for worldwide
use. We also plan to increase our manufacturing capacity by expanding our
manufacturing facilities and hiring additional operations personnel, and intend
to broaden our offerings and are working to develop new products, such as
optical components, and expand our global engineering, configuration and
installation services. We also intend to expand our global presence by designing
and developing localized versions of our products for use in specific global
regions and enhancing our relationships with original equipment manufacturers to
develop our product offerings. We sell our products and services worldwide
through our direct sales force and domestic and international distributors, as
well as through original equipment manufacturers which incorporate our equipment
into the network products and services they offer.
We were incorporated in Washington on October 14, 1982. Our principal
executive offices are located at 2111 N. Molter Road, P.O. Box 665, Liberty
Lake, WA 99019-0665. Our telephone number is (509) 926-6000. Our web site is
www.telect.com. The information contained on, or linked to, our web site does
not constitute part of this prospectus.
1
<PAGE> 5
THE OFFERING
Common stock offered by
Telect........................ 12,000,000 shares
Common stock to be outstanding
after this offering......... 131,170,000 shares
Use of proceeds............... To make a distribution of undistributed
Subchapter S corporation income of
approximately $73 million as of September 30,
2000, to fund our operations, including
continued development of existing products and
research and development of additional
products, to fund potential acquisitions of
complementary businesses, technologies or
products and for general corporate purposes,
including working capital and expansion of our
manufacturing facilities. We may also use the
net proceeds of the offering to repay some or
all of our outstanding debt, which was
approximately $34 million as of September 30,
2000. See "Use of Proceeds" on page 18 for more
detailed information.
Proposed Nasdaq National
Market symbol................. TLEC
Unless otherwise indicated, the information in this prospectus assumes that
the underwriters do not exercise the over-allotment option granted to them to
purchase additional shares in this offering and also assumes a 1,000-for-one
stock split that occurred on July 18, 2000.
The number of shares of common stock to be outstanding after completion of
this offering is based on the number of shares outstanding as of September 30,
2000 and excludes:
- 3,219,300 shares of common stock issuable on the exercise of stock
options outstanding as of September 30, 2000 at an exercise price of
$11.00 per share; and
- 16,156,200 shares of common stock reserved for issuance under our equity
incentive plan and our employee stock purchase plan.
2
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
The information below should be read in conjunction with our consolidated
financial statements and the notes thereto and the sections of this prospectus
captioned "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
included elsewhere in this prospectus.
For all periods presented, we operated as a Subchapter S corporation and
were not subject to federal and certain state corporate income taxes. Upon
completion of this offering, we will become subject to federal and state
corporate income taxes applicable to Subchapter C corporations. Pro forma net
income reflects the provision for income taxes that would have been recorded had
we been a Subchapter C corporation during the periods presented. Pro forma net
income per share is based on the weighted average number of shares of common
stock outstanding during the period plus 7,300,000 shares, which is the
estimated portion of the shares being offered that would be necessary to fund
the distribution of undistributed Subchapter S corporation income, based upon an
assumed initial public offering price of $10.00 per share. Our undistributed
Subchapter S corporation income is approximately $73 million as of September 30,
2000. See "Subchapter S Corporation and Termination of Subchapter S Corporation
Status" and notes 2 and 11 of our consolidated financial statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales, net of discounts..... $ 82,858 $ 114,580 $ 168,252 $ 118,967 $ 201,797
Gross profit................ 37,045 51,925 82,686 60,279 100,235
Operating expenses.......... 25,806 33,382 44,894 31,743 50,390
Interest expense, net....... 1,004 2,001 1,675 1,411 1,471
Income from continuing
operations................ 11,400 17,000 41,445 28,491 47,201
Net income as reported...... 11,332 14,368 41,552 28,932 47,201
=========== =========== =========== =========== ===========
Net income per share from
continuing operations..... $ 0.09 $ 0.14 $ 0.35 $ 0.24 $ 0.40
Net income per share from
discontinued operations... 0.00 (0.02) 0.00 0.00 0.00
----------- ----------- ----------- ----------- -----------
Net income per share........ $ 0.09 $ 0.12 $ 0.35 $ 0.24 $ 0.40
=========== =========== =========== =========== ===========
Shares used in calculation
of net income per share... 121,321,000 121,321,000 120,059,866 120,359,747 119,170,000
=========== =========== =========== =========== ===========
Pro forma provision for
income taxes.............. 3,952 5,114 14,479 10,201 16,843
----------- ----------- ----------- ----------- -----------
Pro forma net income........ $ 7,380 $ 9,254 $ 27,073 $ 18,731 $ 30,358
=========== =========== =========== =========== ===========
Pro forma net income per
common share -- basic and
diluted................... $ 0.21 $ 0.24
=========== ===========
Pro forma weighted average
common shares
outstanding -- basic and
diluted................... 127,359,866 126,470,000
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ 38,999 $(32,036) $77,964
Property, plant and equipment, net........................ 28,467 28,467 28,467
Total assets.............................................. 131,260 133,224 243,224
Long-term debt............................................ 3,050 3,050 3,050
Total stockholders' equity (deficit)...................... 69,848 (2,241) 107,758
</TABLE>
3
<PAGE> 7
The preceding table summarizes:
- Our actual balance sheet as of September 30, 2000.
- Our pro forma balance sheet reflecting the declaration and payment of the
Subchapter S corporation distribution, estimated to be approximately $73
million as of September 30, 2000. It also reflects the deferred income
tax assets and liabilities that would have been recorded at that date had
we not elected to be taxed as a Subchapter S corporation.
- Our pro forma as adjusted balance sheet reflects our sale of 12,000,000
shares of common stock in this offering at an assumed initial public
offering price of $10.00 per share, after deducting underwriting
discounts and commissions and our estimated offering expenses.
4
<PAGE> 8
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties and the other information in this prospectus before
deciding whether to invest in shares of our common stock. Any of the following
risks could cause the trading price of our common stock to decline and you could
lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE EXPECT THAT THE RECENT RATE OF GROWTH IN DEMAND FOR OUR PRODUCTS WILL
DECLINE, WHICH COULD HARM OUR BUSINESS AND OUR OPERATING RESULTS.
Our business depends on continued growth in the telecommunications
industry. Demand for high data transmission capacity, commonly referred to as
broadband, connectivity and power distribution products has been growing at an
exceptionally high rate in recent periods. We expect the current rate of growth
of this demand to subside. In addition, if overall demand for these products
were to decrease for any reason, our sales would likely decline, and there could
be increased price competition among equipment and service providers, which
would further decrease our sales, harm our business and operating results and
cause our stock price to decline. Demand for broadband connectivity and power
products may decline based on a number of factors, including:
- a decrease in the rate of network infrastructure build-out, which
historically has occurred on a cyclical basis;
- a decrease in the number of telecommunications service providers in the
United States seeking to install their equipment in the central and
remote offices of other service providers;
- a downturn in the telecommunications industry in general, or in our
customers' financial performance; or
- a decrease in demand for high-bandwidth applications.
We do not know how long the current cycle of network infrastructure build-out
might last, or how long the current collocation trend in the United States might
continue. Our sales may not continue to grow at the current rate, or they may
decline.
WE EXPECT OUR GROSS MARGIN TO DECLINE AS OUR BUSINESS EVOLVES, WHICH COULD HARM
OUR BUSINESS AND OUR OPERATING RESULTS.
We derive a majority of our net sales from our higher-margin products.
These are our digital signal cross-connect, commonly referred to as DSX,
products, which connect equipment within or between telecommunications network
facilities. We expect our gross margin to decrease over time as a result of
several factors, including:
- the likelihood that demand will subside for our higher-margin DSX
products;
- our plans to expand our lower-margin product and service offerings;
- our plans to increase the percentage of our net sales represented by
lower-margin sales to original equipment manufacturer customers; and
- price competition, which we expect will increase as the current excess of
demand for broadband connectivity and power distribution products
subsides.
We believe that each of these factors will exert downward pressure on our
gross margin in the future. A decrease in our gross margin would adversely
affect our operating results and could cause our stock price to decline.
5
<PAGE> 9
IF WE DO NOT DECREASE THE TIME IT TAKES US TO FILL OUR CUSTOMERS' ORDERS WE WILL
LIKELY LOSE CURRENT AND POTENTIAL FUTURE ORDERS, WHICH WOULD REDUCE OUR SALES
AND INCOME.
If we do not increase our manufacturing capacity to meet the increasing
demand for telecommunications network equipment and the delivery schedules of
our customers, our business and operating results may suffer. We believe a
customer's selection of telecommunications network equipment is based, in part,
on which supplier can supply the requested equipment within the shortest time
period. Customers can cancel their purchase orders with us at any time, and we
have lost, and may continue to lose, potential or current orders because of our
inability to fill orders as quickly as our customers request.
During the first nine months of 2000, the amount of time it took us to fill
a customer order increased from approximately one to two weeks to approximately
6 to 8 weeks. In addition, our backlog of unshipped customer orders was
approximately $14 million at December 31,1999 and increased to approximately $30
million at September 30, 2000. We are currently unable to increase our
manufacturing capacity, internal or outsourced, at a rate that allows us to keep
up with customer orders. Our inability to meet the full demand of our existing
customers may cause them to cancel orders or decline to place future orders with
us. In addition, our limited manufacturing capacity may inhibit our ability to
attract new customers.
OUR BUSINESS HAS GROWN RAPIDLY IN THE PAST AND IF WE EXPERIENCE RAPID GROWTH IN
THE FUTURE WE MAY HAVE DIFFICULTIES MANAGING THE GROWTH, WHICH COULD HARM OUR
BUSINESS.
In recent periods, our business has grown more rapidly than our management,
operational and financial resources. Insufficient resources could:
- prevent or delay expansion of our operations, which would prevent or
delay growth of sales and income;
- reduce the quality of our products and services, which could cause us to
lose sales and income;
- reduce the effectiveness of our management, which could harm our
operating results; or
- prevent or delay development of new or improved products and services,
which could cause us to lose sales and income.
Within the past five years we have experienced rapid growth and expansion
that is straining our resources. For example, in the first nine months of 2000,
our net sales increased by $82.8 million, a 69.6% increase over our sales levels
in the first nine months of 1999. In the 12 months ended September 30, 2000, we
increased our number of employees from 1,045 to 2,086 and increased our total
manufacturing floor space by 160,000 square feet, a 50% increase.
In general, we plan to continue to expand our operations rapidly and to
significantly add to our infrastructure. This expansion is expected to place a
further strain on our management, operational and financial resources, and we
may not effectively manage this growth. We will not be able to adequately manage
our current growth or anticipated future growth unless we invest substantial
amounts of time and capital in and successfully expand:
- technical, sales, operations and management personnel;
- manufacturing capacity; and
- management and operational control systems.
Our failure to manage our growth effectively could substantially harm our
business and operating results and cause our stock price to decline.
6
<PAGE> 10
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH WOULD
LIKELY CAUSE OUR STOCK PRICE TO DECLINE.
Our quarterly operating results have fluctuated in the past and are likely
to fluctuate in the future depending on a number of factors described below and
elsewhere in this "Risk Factors" section of the prospectus, including:
- the availability and cost of key product components and raw materials on
which we rely, particularly copper, brass and ceramics, and fiber optic
components, have varied in the past;
- the ability to deliver our products and services on a timely basis;
- our manufacturing capacity has tended to fluctuate with technological and
regulatory changes;
- the overall level of capital expenditures by our customers and potential
customers;
- variations in the mix of products and services we offer; and
- operating results in the first quarter of the year that tend to be
relatively lower than other quarters' results.
Due to these and other factors, our operating results could fluctuate
substantially in the future, and quarterly comparisons may not be reliable
indicators or provide a reliable indication of future performance. If our
operating results do not meet or exceed the expectations of securities analysts
and investors, our stock price is likely to decline.
OUR INABILITY TO OBTAIN NECESSARY COMPONENT PARTS OR RAW MATERIALS FROM
SUPPLIERS MAY ADD TO OUR ORDER BACKLOG AND OUR INABILITY TO MEET CUSTOMER
DELIVERY TIME DEMANDS, WHICH COULD HARM OUR BUSINESS.
The telecommunications industry is currently facing shortages of copper,
brass and ceramics, as well as various components used in the manufacture of
network equipment. We have in the past experienced difficulties obtaining sheet
metal, copper, brass, ceramics, fiber optic cable and some electrical components
used to manufacture our products. These shortages reduced our productivity and
increased the time required to satisfy customer orders. If suppliers of
equipment components and raw materials are unable to meet our demands for these
products, we may be unable to meet our customers' demands for our products and
may have to delay release of some new products, which would increase our order
backlog and could harm our business and operating results.
WE OBTAIN KEY INPUTS FROM SOLE OR LIMITED SOURCES OF SUPPLY WITHOUT LONG TERM
CONTRACTUAL COMMITMENTS TO AVAILABILITY OF THE INPUTS. IF THESE SOURCES ARE NO
LONGER AVAILABLE, OUR PRODUCTION AND PRODUCT QUALITY MAY DECLINE WHICH COULD
HURT OUR RELATIONSHIPS WITH OUR CUSTOMERS AND OUR FINANCIAL RESULTS.
We obtain key components for a number of our products from single sources
or a small number of sources. These arrangements do not provide us with
long-term contractual rights to obtain these inputs. In the past, some suppliers
have been unable to supply us with adequate inputs and have required us to work
closely with them to meet our needs. If one or more of these suppliers in the
future is unable or unwilling to continue to provide us with inputs meeting our
requirements, any of the following consequences could result:
- we may not be able to find alternative sources of the inputs in time to
prevent decreased production capacity and delayed order fulfillment;
7
<PAGE> 11
- we may not be able to find alternative sources of the inputs on terms
that are acceptable to us;
- alternative sources for inputs may be more costly; and
- alternative sources of inputs may compromise the quality of our products.
Any of these consequences could result in customer dissatisfaction, loss of
orders and loss of revenues.
IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL SKILLED PERSONNEL TO MEET OUR CURRENT
AND FUTURE STAFFING NEEDS, WE WILL NOT BE ABLE TO GROW OUR BUSINESS TO MEET
CURRENT AND FUTURE DEMAND, WHICH WILL HURT OUR BUSINESS.
To successfully satisfy demand for our products, increase our manufacturing
capacity and grow our business, we must identify, attract, retain and motivate
skilled sales, marketing, technical, administrative and operations personnel.
Much of the slowdown in the time it takes to fill our customers' orders is the
result of our difficulty in hiring and training new employees, particularly
engineering and manufacturing employees, at a sufficient rate to keep up with
our growth. As of September 30, 2000, we had approximately 223 outstanding
unfilled job openings, and are outsourcing some of our manufacturing and product
assembly in response to labor shortages in the telecommunications industry.
Competition for highly qualified and experienced personnel is intense due
to the limited number of people available with the necessary technical skills.
The Spokane, Washington metropolitan area, the location of our largest
manufacturing facilities, has a relatively small pool of potential employees
with the technical skills that we require. Spokane is also a small city in a
relatively rural part of the country, making it more difficult for us to recruit
employees from larger metropolitan areas of the country where there are larger
numbers of people with the technical skills we require. In addition, competition
for qualified technical and operations personnel is increasing for our
Guadalajara operation due to an increase in other manufacturing plants opening
or expanding in the area. Failure to attract and retain the necessary personnel
would inhibit our growth and harm our business.
IF WE ARE UNABLE TO ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY, OUR
EXISTING PRODUCTS MAY BECOME OBSOLETE OR UNMARKETABLE.
We compete in the market for telecommunications network equipment and
services. This market is characterized by rapid technological changes, evolving
industry standards, particularly for fiber optic transmission products, changing
customer needs and frequent new equipment and service introductions. These
changes could make our existing products or products under development obsolete
or unmarketable. Our future success will depend, in large part, on our ability
to timely and cost-effectively:
- respond to emerging industry standards and other technological changes;
- develop and enhance our internal technical capabilities and expertise;
- broaden our network equipment and service offerings; and
- adapt our products and services to new technologies, new markets and new
customer requirements as they emerge.
If we fail to anticipate or respond on a cost-effective and timely basis to
these market changes, our business, operating results and financial condition
will be harmed and our stock price will decline. Even if we are successful in
developing products in a timely and cost-effective manner to meet these market
changes, we may not effectively market those products.
8
<PAGE> 12
Development efforts necessary to meet these technological and market challenges
will require us to incur substantial expenses, which will reduce our operating
results in the near term.
POOR QUALITY PRODUCTION FROM SUBCONTRACTORS COULD DELAY OUR FULFILLMENT OF
ORDERS OR RESULT IN DECREASED QUALITY OF OUR PRODUCTS, WHICH WOULD RESULT IN
CUSTOMER DISSATISFACTION AND POTENTIAL LOST SALES.
We rely on subcontractors to perform some aspects of the manufacture of our
products, including light assembly. Quality problems with subcontractors could
delay production, or degrade the quality, of our products. This could cause
customer dissatisfaction and loss of sales and revenues. We have less control
over the manufacturing processes of our subcontractors than we have over our own
manufacturing processes. This means that we are not able to monitor
manufacturing quality as closely as we do with our own manufacturing processes.
Also, if a subcontractor experiences quality problems in its manufacturing
processes, we may not discover the problem until after the problem components
have been incorporated into our products. Additionally, we may not be able to
cause the subcontractor to correct the problem in time to prevent delays in
production, or at all.
INDEPENDENT MANUFACTURERS WITH WHOM WE CONTRACT MAY NOT BE ABLE TO MANUFACTURE
OR ASSEMBLE OUR PRODUCTS IN A TIMELY MANNER, WHICH COULD HARM OUR BUSINESS.
We currently use several independent manufacturers to assemble and
manufacture our products. Our reliance on independent manufacturers involves a
number of risks, including the absence of adequate capacity and reduced control
over delivery schedules, manufacturing yields and costs. Some of our independent
manufacturers may be undercapitalized. Our independent manufacturers may not be
able to continue to provide manufacturing services to us. Also, we do not have
long-term contractual commitments with our independent manufacturers. They could
discontinue providing us manufacturing services at any time. If these
independent manufacturers are unable or unwilling to continue to manufacture or
assemble our products in required volumes, we will have to identify and qualify
acceptable additional or alternative manufacturers, which could take in excess
of three months. Alternative sources may not be available to us quickly enough
to satisfy our production requirements on a timely basis or may not be available
to us at all.
WE HAVE SIGNIFICANT INTERNATIONAL MANUFACTURING OPERATIONS AND SELL OUR PRODUCTS
IN SEVERAL COUNTRIES AND OUR INTERNATIONAL OPERATIONS EXPOSE US TO NUMEROUS
RISKS THAT COULD HARM OUR BUSINESS.
International sales accounted for approximately 14.2% of our net sales in
fiscal 1999, 15.0% of our net sales in fiscal 1998 and 1.0% of our net sales in
fiscal 1997. We expect international sales to increase as a percentage of our
net sales in the future. In support of our international sales, we operate
manufacturing and assembly facilities in Mexico and Poland and plan to develop
manufacturing facilities in Brazil and China. Our international sales and
international manufacturing operations expose our business to numerous risks
that could harm our business, including:
- difficulties in managing our remote facilities or the need to rely on
new, local management;
- significant parts of our manufacturing operations are located in
countries that are less developed and are more at risk for political,
social and economic instability;
- unexpected changes in, or impositions of, legislative or regulatory
requirements;
- fluctuations in the exchange rate of the U.S. dollar and other foreign
currencies;
- tariffs and other barriers and restrictions;
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<PAGE> 13
- difficulties in enforcing intellectual property and contract rights;
- the burdens of complying with a variety of foreign laws and
telecommunications standards; and
- risks associated with natural occurrences because our factory in Mexico
is in an earthquake zone.
Any of these factors could harm our business and operating results.
EMPLOYEES AT OUR MEXICO AND POLAND FACILITIES ARE MEMBERS OF LABOR UNIONS. IF
THESE EMPLOYEES STRIKE OR TAKE OTHER COLLECTIVE LABOR ACTION, PRODUCTION AT THE
AFFECTED FACILITIES COULD BE REDUCED AND CUSTOMERS COULD BECOME DISSATISFIED.
A significant number of employees at our facilities in Mexico and Poland
are union members and their employment is governed by collective bargaining
agreements with those unions. The fact that the employees are organized makes it
more likely that they would take collective action. It also increases the
employees' bargaining power, which increases their ability to negotiate for
benefits that are more expensive. Any collective action by these employees could
stop production at the affected facilities. This could prevent us from filling
customer orders in a timely manner which could cause customer dissatisfaction
and loss of sales and market share. While the collective bargaining agreements
for both Mexico and Poland are for indefinite terms, at some point the
collective bargaining agreements will be renegotiated. The terms of the
renegotiated agreements may be less favorable to us and may increase our
production costs.
WE PLAN TO PURSUE THE ACQUISITION OF NEW AND COMPLEMENTARY BUSINESSES, PRODUCTS
AND TECHNOLOGIES TO GROW OUR BUSINESS. UNSUCCESSFUL ACQUISITIONS COULD HARM OUR
OPERATING RESULTS, BUSINESS AND GROWTH.
We have acquired in the past, and plan to acquire in the future,
businesses, products and technologies that complement or augment our existing
businesses, services and technologies as opportunities for such acquisitions
come to our attention. If we are not able to integrate any newly acquired
entities or technologies effectively, our operating results, business and growth
could be harmed. Integrating any newly acquired businesses or technologies may
be expensive and time consuming, and will divert our management's attention away
from our day-to-day operating activities. In addition, acquisition of new
businesses, products and technologies can lead to disputes, which will further
divert our management's attention. For example, we recently resolved in our
favor a dispute with a company from which we acquired a product line. We may
also not be able to operate any acquired businesses profitably or otherwise
implement our business strategy successfully.
OUR SUCCESS DEPENDS ON THE CONTINUING CONTRIBUTION OF OUR KEY PERSONNEL, WHO MAY
LEAVE US AT ANY TIME, INCLUDING SEVERAL KEY MEMBERS OF OUR MANAGEMENT TEAM, AND
OUR ABILITY TO INTEGRATE NEW PERSONNEL.
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel. In particular, the
loss of the services of Wayne E. Williams, our president and chief executive
officer, could harm our business. We do not have employment agreements with any
of our key personnel, and they may leave us at any time and compete with us. If
we are unable to retain our executive officers and key personnel, the search for
replacements could be time consuming and could distract our management team from
the day-to-day operations of our business.
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A SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR NET SALES AND
THE LOSS OF, OR A REDUCTION IN ORDERS FROM, A KEY CUSTOMER COULD HAVE A
SIGNIFICANT NEGATIVE IMPACT ON OUR OPERATING RESULTS AND CAUSE OUR STOCK PRICE
TO DECLINE.
A small number of customers account for a significant portion of our net
sales. The loss of any of our key customers could result in lower than expected
net sales and cause our stock price to decline. For the fiscal year ended
December 31, 1999, sales to our ten largest customers accounted for
approximately 59% of net sales. For the nine months ended September 30, 2000,
sales to our top ten customers were 58% of net sales. Substantially all of our
sales are made on a purchase order basis and most of our customers are not
obligated to purchase additional products or services from us or to continue
using our products or services. This makes us vulnerable to losing our customers
to providers of competing products. The future loss or deferral of, or any
reduction in orders from, one or more significant customers could have a
negative impact on our net sales and could harm our business and operating
results.
OUR PRODUCTS ARE USED BY TELECOMMUNICATIONS SERVICE PROVIDERS THAT INSIST ON
HIGHLY RELIABLE PRODUCTS AND ANY DEFECTS OR PERCEIVED DEFECTS IN OUR PRODUCTS
COULD GREATLY DAMAGE OUR REPUTATION AND OUR BUSINESS.
To be successful in the telecommunications industry, participants in the
industry must believe that we offer high quality, timely and reliable products
and services that will reduce their costs. If we deliver equipment with
undetected defects, if our equipment fails, or if our equipment is perceived to
be defective, our reputation and equipment sales could suffer. This is
especially true because our customers are telecommunications service providers.
Telecommunications service providers insist on high standards of quality and
reliability from equipment suppliers because the services they provide are often
critical to their customers. Perceived defects in our products could result from
any of the following factors:
- Our products require customers to conduct occasional maintenance. Failure
to do proper maintenance could result in performance problems that could
be perceived as defects.
- Most of the products we sell are not installed by us and our products
work with other equipment in a complex environment that is densely packed
with other complex equipment. This can lead to incorrect installation of
our products, which could be perceived to be a defect in our products.
For example, we are currently working to resolve an issue with a customer
relating to a power distribution product that we believe was incorrectly
installed by the end user. Resolution of this issue may involve
replacement and installation of some or all of the products at a
substantial cost.
- Our equipment is often integrated with our customers' equipment, and it
can be difficult to identify the source of a problem should one occur.
Our equipment may be erroneously identified as the source of a problem
caused by equipment other than our own.
The occurrence of defects, errors or failures, or perceived defects or
errors, could result in delays in installation, product returns, product
liability and warranty claims and other losses to us or to our customers. We may
be exposed to a higher risk of product defects due to our foreign manufacturing
facilities and outsourcing, each of which is more difficult to manage than our
domestic manufacturing facilities. We carry insurance policies covering some of
these possible liabilities, but these policies may not provide sufficient or any
protection should a claim be asserted. A material product liability claim or
rejection or return of products, whether successful or not, could be costly,
damage our reputation and distract key personnel, any of which could harm our
business and operating results.
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<PAGE> 15
IF WE ARE NOT ABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR
FINANCIAL CONDITION AND OPERATING RESULTS MAY SUFFER.
We seek to protect our intellectual property by relying on a combination of
patent, copyright, trademark and trade secret laws, and contractual
restrictions. If these efforts are not successful, our competitors will be
better able to compete against us. This could reduce our sales and our margins.
We hold 25 domestic patents and have filed 18 domestic pending patent
applications to protect our proprietary technology. We also pursue limited
patent protection for some of our technology outside the United States. These
pending applications may not be approved or, if approved, may not be issued with
the scope of the claims we seek. Also, any patents we receive may be challenged
or invalidated, or may otherwise be ineffective in protecting our proprietary
technology. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States. We
generally enter into confidentiality agreements with our employees. We also
limit access to and distribution of our proprietary information. We cannot
assure you that we or our customers will continue to take the steps we currently
take or that the steps will be adequate to prevent our respective proprietary
rights from being compromised, particularly as we increase our foreign
operations.
Despite our efforts to protect our intellectual property, third parties may
obtain or infringe upon our intellectual property. That party might be able to
capture a portion of our market and, if they can manufacture less expensively
than we do, they could become a price leader in our market, which would reduce
our margins and could adversely impact our net sales. For example, we believe a
company in Taiwan is manufacturing DSX products based on our DSX designs and is
selling them in Taiwan and elsewhere in Asia. These sales are adversely
affecting our Taiwanese and other Asian sales. This and other pirating of our
intellectual property could adversely affect our business, gross margin and
operating results.
WE HAVE IN THE PAST BEEN INVOLVED IN LITIGATION WITH RESPECT TO OUR INTELLECTUAL
PROPERTY RIGHTS AND COULD BE INVOLVED IN SIMILAR LITIGATION IN THE FUTURE, WHICH
COULD HARM OUR BUSINESS AND OPERATING RESULTS.
We have in the past sued, and have been sued by, third parties concerning
our intellectual property rights. New products or technology applications may
subject us to patent infringement suits in the future. If we do not prevail, we
may be required to pay substantial damages, be required to stop using some of
our intellectual property, or be required to pay license fees to a third party
to use the intellectual property. Any required licenses, if available, could be
very costly. Whether or not we prevail, involvement in litigation can be very
expensive and can divert a significant amount of our management's time and could
harm our business and operating results. In addition, new product introductions
could be delayed until potential patent issues are resolved.
IF WE ARE UNABLE TO MEET OUR ADDITIONAL CAPITAL NEEDS IN THE FUTURE, WE MAY NOT
BE ABLE TO EXECUTE OUR BUSINESS GROWTH STRATEGY.
We intend to seek additional financing in the future to fund the growth of
our operations. We currently anticipate that our available cash resources,
combined with the net proceeds from this offering, will be sufficient to meet
our anticipated working capital and capital expenditure requirements for at
least the next 18 months. However, our resources may not be sufficient to
satisfy our requirements. We may need to raise additional funds sooner than
anticipated, through public or private debt or equity financings. We may also
need to raise additional funds to finance any acquisitions of businesses,
products or technologies. Any additional financing we
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<PAGE> 16
may need might not be available on terms favorable to us, or at all. If we are
unable to obtain additional funds on acceptable terms, then we could be unable
to:
- take advantage of potential business opportunities, including more rapid
expansion;
- make selective acquisitions of complementary businesses or technologies;
- develop and maintain higher working capital levels;
- devote more funds to our research and development efforts; or
- respond to competitive pressures.
If additional funds are raised through the issuance of equity securities,
the percentage of ownership of our shareholders will be reduced. Newly issued
equity securities may have rights, preferences and financing privileges senior
to those of the common shares sold in this offering. The terms of any debt could
impose restrictions on our operations and our ability to secure additional
financing through equity securities. Debt financing could also require interest
payments that could divert cash from other productive uses.
OUR FORMER STATUS AS A SUBCHAPTER S CORPORATION COULD EXPOSE US TO LIABILITY IF
IT IS DETERMINED THAT WE WERE NOT ENTITLED TO SUBCHAPTER S STATUS.
We elected Subchapter S corporation status under the Internal Revenue Code
on April 1, 1987, and held such status prior to the completion of this offering.
If the Internal Revenue Service were to challenge our status and determine that
we did not meet the Internal Revenue Code requirements for Subchapter S
corporations, we could be liable for unpaid federal and state corporate income
taxes for all or a part of the time that we elected Subchapter S corporation
status, plus interest and possible penalties. Prior to the consummation of the
offering, we will enter into a tax indemnification agreement with our
shareholders that may not cover all liabilities to which we would be subject.
HAZARDOUS SUBSTANCES IN OUR MANUFACTURING PROCESSES OR FACILITIES COULD SUBJECT
US TO LIABILITY.
We use hazardous substances in our manufacturing processes and have
purchased facilities where hazardous substances may have been used in the past.
Use of hazardous substances is regulated by federal, state, local and
international governments. If we violate these regulations in our handling of
hazardous substances or our use of facilities containing hazardous substances,
we may face monetary penalties or other legal obligations. We may also have
limitations imposed on how we operate our business. If a release of hazardous
substances occurs on or from any of the properties that we lease or use, we may
be held liable and may be required to pay the cost of remediation and other
financial penalties. The amount of any such liability could be material and
could harm our business and operating results. Changing regulations could also
force us to change material used in some of our products. Such changes could
increase our expenses and delay product shipments.
RISKS RELATED TO OUR INDUSTRY
THE TELECOMMUNICATIONS NETWORK EQUIPMENT AND SERVICES MARKET IN WHICH WE OPERATE
IS HIGHLY COMPETITIVE, AND IF WE CANNOT COMPETE EFFECTIVELY, OUR BUSINESS WILL
SUFFER.
Competition among companies who supply telecommunications network equipment
and services to telecommunications service providers is intense. If we are
unable to compete effectively against our current or future competitors, our
operating results will suffer and our business will be harmed. We currently face
competition for the sale of all of our products and services from at least three
substantially larger, established telecommunications suppliers: ADC
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<PAGE> 17
Telecommunications, Inc., Lucent Technologies Inc. and Corning, Inc., which
acquired Siecor Corporation and Siecor GmbH, in February 2000. We face
competition for our broadband connectivity products and services principally
from ADC Telecommunications, Corning and Lucent Technologies. The principal
competitors for our power distribution products are Hendry Telephone Products
Plc., Marconi Communications Plc., PECO II, Inc., Siemens and TSI, a division of
Emerson Electric Co. We expect increased competition from existing competitors
and from other companies that may offer new or improved broadband connectivity
or power products. Increased competition may result in price reductions, a
reduced gross margin and loss of market share.
Several of our competitors have significantly greater financial,
manufacturing, sales and marketing, technical and labor resources than we do.
For example, many of these competitors have the ability to provide customers
with end-to-end telecommunications networks and systems, including the network
connectivity and power distribution equipment that we provide. As a result, such
competitors may be able to respond more rapidly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products, than we can. Such competitors
may enter our existing or future markets with solutions that may be less costly,
provide higher performance or additional features or may be introduced earlier
than our solutions. In addition, some of our competitors are also able to
provide purchase financing, which is an increasingly important element of the
equipment market. We do not provide purchase financing to our customers. Some of
our customers manufacture telecommunications equipment and may in the future
decide to manufacture products they have previously purchased from us.
CONSOLIDATION IN THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE DEMAND FOR OUR
PRODUCTS.
In recent years, several telecommunications service providers have been
acquired by their competitors. Our contracts do not require that a customer
purchase a minimum level of equipment from us. As a result, if one of our
customers is acquired by a company that does not buy our products, we may lose
that business. Acquisitions have in the past negatively impacted our sales as
the merged entities reassessed their collective network equipment. In the
future, orders from a customer that acquires, or is acquired by, another company
may temporarily decrease or entirely cease as the customer coordinates or
streamlines its purchasing efforts.
WE SELL OUR PRODUCTS AND SERVICES TO CUSTOMERS THAT ARE SUBJECT TO GOVERNMENT
REGULATIONS THAT ARE CHANGING AND THAT COULD REDUCE DEMAND FOR OUR PRODUCTS AND
SERVICES.
We sell our products and services to customers in the telecommunications
industry, which is subject to regulation in the United States and other
countries. These regulatory requirements continue to change. It is possible that
future changes in regulations applicable to our customers, or future effects
from past regulatory changes, could reduce the demand for our products. We
cannot accurately predict what the effects of these changes will be.
Our success will depend in part on the reaction of our existing and
prospective customers to regulatory trends, including the enactment of the
Telecommunications Act of 1996. The full impact of these regulatory changes on
the market for our products is difficult to predict. Competition in the market
for telecommunications network equipment could intensify as a result of the
changes in regulation. Changes in current or future laws or regulations in the
United States or elsewhere could adversely affect our business.
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MANY OF OUR PRODUCTS REQUIRE GOVERNMENT AND/OR INDUSTRY CERTIFICATION AND OUR
BUSINESS COULD BE NEGATIVELY IMPACTED IF CERTIFICATION OF OUR PRODUCTS BY
CERTIFICATION AGENCIES IS DELAYED.
Many of our products must meet governmental and industry safety
requirements, either directly or because our customers are required to comply
with safety regulations and require that the products they order from us comply
with the regulations. Typically, our products must be compliant with and
certified by certifying agencies and bodies, including the Underwriters
Laboratories, Canadian Safety Agency, European Conformity and, more recently,
the Network Equipment Building Standard and Federal Communications Commission
requirements for electro-magnetic emissions from active products. Certification
typically requires a company to secure lab time to perform testing on the
equipment to be certified. It is often difficult to secure adequate lab time
because there are a limited number of labs that are capable of providing
certification services. We may not be able to obtain the regulatory approvals
and certifications we need to sell our products on a timely basis, or at all. If
a product fails these tests, we would incur significant redesign expense and
product release would be delayed. If we fail to obtain these approvals and
certifications on a timely basis, we would likely lose sales and revenues and
our stock price could decline. If any of our approvals or certifications are
revoked, we would likely lose a portion of our sales and our business and stock
price would likely be harmed.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE SUCCESS OF EMERGING
TELECOMMUNICATIONS SERVICE PROVIDERS, WHICH MAY BE UNABLE TO EFFECTIVELY COMPETE
AGAINST ESTABLISHED COMPANIES.
Some of our customers are emerging telecommunications service providers who
compete against existing telephone companies. These new participants only
recently began to enter these markets, and many of these service providers are
still building their networks and introducing their services. They require
substantial capital for the development, construction and expansion of their
networks and the introduction of their services. If emerging telecommunications
service providers fail to acquire and retain customers or are unsuccessful in
raising needed funds or responding to any other trends, such as price reductions
for their services or diminished demand for telecommunications services in
general, they could be forced to reduce their capital spending programs, which
would harm our business.
RISKS RELATED TO THIS OFFERING
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL HAVE SIGNIFICANT VOTING CONTROL OVER
US AND MAY APPROVE OR REJECT MATTERS CONTRARY TO SOME OF OUR SHAREHOLDERS' VOTE.
Our executive officers and directors, together with their affiliates, will
beneficially own an aggregate of approximately 72.4% of our outstanding common
stock following the completion of this offering. These shareholders, if acting
together, will be able to significantly influence all matters requiring approval
by our shareholders, including the election of directors and the approval of
mergers or similar transactions, even if other shareholders disagree. This
concentration of ownership may also have the effect of delaying or preventing a
change in control, which could result in a lower stock price and prevent
shareholders from realizing a premium price for their shares associated with an
acquisition.
WE HAVE BROAD DISCRETION TO USE THE NET OFFERING PROCEEDS AND OUR INVESTMENT OF
THESE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part of
your investment decision, to
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assess whether the proceeds are being used appropriately. We intend to use the
net proceeds from this offering to fund our operations, including continued
development of existing products and research and development of additional
products, to make a distribution of undistributed Subchapter S income of
approximately $73 million as of September 30, 2000, to expand our manufacturing
facilities, to fund potential acquisitions and for general corporate purposes,
including working capital. We may also use the net proceeds of this offering to
repay some or all of outstanding debt which was approximately $34 million as of
September 30, 2000. The net proceeds of this offering may be used for corporate
purposes that do not increase our operating results or our market value.
ANTI-TAKEOVER PROVISIONS THAT APPLY TO US COULD DELAY OR PREVENT AN ACQUISITION
OF OUR COMPANY.
Provisions of our articles of incorporation, bylaws and Washington law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our shareholders. Provisions with possible anti-takeover
effects include those which:
- divide our board of directors into three classes;
- authorize the issuance of preferred shares that can be created and issued
by the board of directors without prior shareholder approval, commonly
referred to as "blank check" preferred shares, with rights senior to
those of common shares;
- prohibit shareholders from calling special meetings;
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by shareholders at a meeting; and
- prohibit transactions, including mergers and asset sales, without
approval of our board of directors.
See "Description of Capital Stock" for a description of these documents and
statutes.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL OFFERING PRICE AND WE MAY BE SUBJECT TO COSTLY LITIGATION.
The initial public offering price for our common stock will be determined
through negotiations between the underwriters and us. The initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price.
If an active public market for our common stock does not develop, the
liquidity of your investment may be limited, and our stock price may fluctuate
or decline below our initial public offering price. The market price of our
common stock may fluctuate significantly in response to factors, some of which
are beyond our control, including the following:
- actual or anticipated fluctuations in our operating results;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- additions or departures of key personnel;
- future debt or equity offerings or our announcements of these offerings;
and
- changes in financial estimates or recommendations by securities analysts
regarding us or our competitors.
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In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of telecommunications companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of individual companies. These broad market fluctuations may
materially adversely affect our stock price, regardless of our operating
results. Securities class action litigation has often been instituted against a
company following periods of volatility in the company's stock price. This type
of litigation, if filed against us, could result in substantial costs and could
divert our management's attention and resources.
SHARES ELIGIBLE FOR FUTURE SALE AFTER THIS OFFERING COULD CAUSE OUR STOCK PRICE
TO DECLINE.
If our shareholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could decline. Such sales might also make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. In addition, the sale of these shares could impair our ability
to raise capital through the sale of additional stock, as potential investors
could purchase shares in the public market, instead of directly from us. See
"Shares Eligible for Future Sale" for more information regarding future sales of
our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"intends," "believes," "estimates," "predicts," "potential" or "continue" or the
negative of these terms or other comparable terminology. These statements
involve a number of risks and uncertainties. Actual events or results may differ
materially from any forward-looking statement as a result of various factors,
including those we discuss in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Before investing in our common stock, you
should be aware that the occurrence of the events described under "Risk Factors"
and elsewhere in this prospectus could have a material adverse effect on our
business, financial condition and operating results.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 12,000,000 shares of
common stock we are offering at an assumed initial public offering price of
$10.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses, will be approximately $110.0
million. If the underwriters' over-allotment option is exercised in full, we
estimate that our net proceeds will be approximately $126.7 million. We
anticipate using:
- approximately $73 million of the net proceeds to make a distribution of
undistributed Subchapter S income as of September 30, 2000;
- approximately $21 million of the net proceeds to fund capital
expenditures for fiscal 2001; and
- the remaining net proceeds for general corporate purposes, including
working capital, additional sales and marketing efforts and continued
development of existing products and research and development of
additional products and expansion of our manufacturing facilities.
We also intend to use some of the net proceeds from the offering to repay
some or all of our outstanding debt and to fund potential acquisitions of
complementary businesses, technologies or products, although we have no
arrangements or understandings for any acquisitions at this time. Our
outstanding debt is approximately $34 million as of September 30, 2000. Interest
on $28 million of this debt is payable monthly at the Bank of America fully
floating prime rate of 9.00% at September 30, 2000, or, at our option, at the
LIBOR rate plus 1.75%. The remaining $6 million of debt bears interest at rates
between 5.70% and 9.50% and matures on varying dates between December 2000 and
August 2004.
Timing and amount of our actual expenditures will be based on many factors,
including cash flows from operations and the growth of our business. Until we
use the net proceeds from this offering for the above purposes, we intend to
invest the funds in short-term, investment grade, interest-bearing securities.
We cannot predict whether the proceeds invested will yield a favorable return.
Our actual use of the net proceeds of the offering could vary materially from
the amounts described above. See "Risk factors -- We have broad discretion to
use the net offering proceeds and our investment of these proceeds may not yield
a favorable return."
DIVIDEND POLICY
Except for the Subchapter S corporation distribution and our contractual
obligations under the tax indemnification agreement, we do not anticipate
declaring or paying cash dividends in the foreseeable future. We currently
intend to retain all future earnings, if any, to finance the expansion and
continued development of our business. Restrictions or limitations on the
payment of dividends currently exist and may be imposed in the future under the
terms of credit agreements or under other contractual provisions. In the absence
of such restrictions or limitations, the declaration and payment of any
dividends will be at the discretion of our board of directors.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2000:
- on an actual basis;
- on a pro forma basis to give effect to the intended distributions to
Subchapter S corporation shareholders of approximately $73 million of
undistributed Subchapter S corporation income as of September 30, 2000,
for which shareholders of record prior to the closing of this offering
have been or will be taxed; and
- on a pro forma as adjusted basis to give effect to the sale of 12,000,000
shares of common stock by us in this offering at an assumed initial
public offering price of $10.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
(UNAUDITED)
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Long-term debt......................................... $ 3,050 $ 3,050 $ 3,050
Stockholders' equity:
Preferred stock, $0.001 par value -- authorized,
100,000,000 shares; issued and outstanding, 0;
issued and outstanding, pro forma and pro forma as
adjusted, 0....................................... -- -- --
Common stock, $0.001 par value -- authorized,
400,000,000 shares; issued and outstanding, actual
and pro forma, 119,170,000; issued and
outstanding, pro forma as adjusted, 131,170,000... 119 119 131
Additional paid-in capital........................... 581 581 110,569
Retained earnings (deficit).......................... 69,134 (2,955) (2,955)
Accumulated comprehensive loss ...................... 14 14 14
------- ------- --------
Total stockholders' equity (deficit) ............. 69,848 (2,241) 107,759
------- ------- --------
Total capitalization ............................. $72,898 $ 809 $110,809
======= ======= ========
</TABLE>
The preceding table is based on shares outstanding as of September 30, 2000.
This table does not include 3,219,300 shares of common stock issuable on the
exercise of outstanding options and 9,697,700 shares of common stock reserved
for issuance under our 2000 equity incentive plan and 6,458,500 shares of common
stock reserved for issuance under our 2000 employee stock purchase plan. This
table should be read in conjunction with the sections of this prospectus
captioned "Subchapter S Corporation and Termination of Subchapter S Corporation
Status," "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the consolidated financial
statements and the related notes included elsewhere in this prospectus.
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DILUTION
Our net tangible book value as of September 30, 2000 was approximately $65
million, or $0.55 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities, divided by the total number of shares of common stock
outstanding. After giving effect to an estimated Subchapter S corporation
distribution of approximately $73 million as of September 30, 2000 to be
declared immediately prior to completion of this offering, our net tangible book
value at September 30, 2000 would have been $(7.1) million, or $(0.06) per
share. After giving effect to our sale of the 12,000,000 shares of common stock
offered by this prospectus, based upon the initial public offering price of
$10.00 per share, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value at
September 30, 2000 would have been $102.9 million, or $0.78 per share. This
represents an immediate increase in net tangible book value of $0.23 per share
to existing shareholders and an immediate dilution of $9.22 per share to new
investors purchasing shares at the initial public offering price. Dilution is
determined by subtracting net tangible book value per share after this offering
from the initial public offering price per share. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
------
Net tangible book value per share as of September 30,
2000................................................... $0.55
Net decrease per share attributed to Subchapter S
corporation distributions.............................. (0.61)
-----
Increase in net tangible book value per share attributable
to this offering....................................... 0.84
-----
Adjusted net tangible book value per share after this
offering.................................................. 0.78
------
Dilution per share to new investors......................... 9.22
======
</TABLE>
The following table sets forth, as of September 30, 2000, the difference
between the number of shares of common stock purchased from us, the total
consideration paid, and the average price per share paid by existing
shareholders and by investors purchasing shares in this offering, based upon the
initial public offering price of $10.00 per share, before deducting underwriting
discounts and commissions and estimated offering expenses and excluding the
assumed issuance of 7,300,000 shares in connection with the Subchapter S
corporation distribution:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 119,170,000 90.9% $ 700,208 0.6% $ 0.01
New investors............. 12,000,000 9.1 120,000,000 99.4 10.00
----------- ----- ------------ ------
Total........... 131,170,000 100.0% $120,700,208 100.0%
=========== ===== ============ ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 13,800,000, or 10.4% of the
total shares of common stock outstanding after this offering.
In the event that we issue additional shares of common stock in the future,
purchasers of common stock in this offering may experience further dilution. As
of September 30, 2000, there were 3,219,300 options outstanding. We have
reserved 9,697,700 shares of common stock for issuance under our 2000 equity
incentive plan and 6,458,500 shares of common stock for issuance under our 2000
employee stock purchase plan. To the extent the options issuable under our
equity incentive plan are exercised, and to the extent common stock is issued
pursuant to our stock purchase plan, new investors will experience further
dilution.
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the consolidated financial statements and the notes to such statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The statement of operations
data for the years ended December 31, 1995, 1996, 1997, 1998 and 1999, and for
each of the nine-month periods ended September 30, 1999 and 2000, and the
balance sheet data as of December 31, 1995, 1996, 1997, 1998 and 1999, and at
September 30, 2000, are derived from our financial statements. The 1997, 1998
and 1999 annual financial statements, which have been audited by Deloitte &
Touche LLP, independent auditors, and their related report are included
elsewhere in this prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 are derived from our historical financial
statements not included in this prospectus. In the opinion of management, the
unaudited consolidated financial statements have been prepared on a basis
consistent with the audited consolidated financial statements which appear
elsewhere in this prospectus and include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair statement of
the financial position and results of operations for the unaudited periods.
Results for the nine months ended September 30, 2000 are not necessarily
indicative of results for the year.
As a Subchapter S corporation, we have not been subject to federal and
certain state corporate income taxes. Our Subchapter S corporation status will
terminate prior to completion of this offering. Therefore, the historical net
income and net income per share data set forth below do not include provisions
for federal and certain state corporate income taxes. The pro forma income tax
expense and pro forma net income data set forth below are unaudited and reflect
the provision for income taxes that would have been recorded had we been a
Subchapter C corporation. The pro forma balance sheet data set forth below
reflects the declaration and payment of the Subchapter S corporation
distribution, estimated to be approximately $73 million as of September 30,
2000. It also reflects the deferred income tax assets and liabilities that would
have been recorded at that date had we not elected to be taxed as a Subchapter S
corporation.
21
<PAGE> 25
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Sales, net of discounts....... $47,769 $66,575 $82,858 $114,580 $168,252 $118,967 $201,797
Cost of sales................. 25,498 37,236 45,813 62,655 85,566 58,688 101,561
------- ------- ------- -------- -------- -------- --------
Gross profit................ 22,271 29,339 37,045 51,925 82,686 60,279 100,235
Operating expenses:
Research, development and
engineering............... 1,815 2,479 3,515 3,997 5,544 3,783 6,975
Selling, general and
administrative............ 13,258 17,597 22,291 29,385 39,350 27,960 43,415
------- ------- ------- -------- -------- -------- --------
Total operating expenses.... 15,073 20,076 25,806 33,382 44,894 31,743 50,390
------- ------- ------- -------- -------- -------- --------
Operating income.............. 7,198 9,263 11,239 18,543 37,792 28,536 49,845
Interest expense, net......... (699) (557) (1,004) (2,001) (1,675) (1,411) (1,471)
Other income (expense), net... 279 529 1,459 619 7,024 2,343 (186)
------- ------- ------- -------- -------- -------- --------
Income before discontinued
operations and income tax... 6,778 9,235 11,694 17,161 43,141 29,468 48,188
State and foreign income tax
expense..................... 116 -- 294 161 1,696 978 987
------- ------- ------- -------- -------- -------- --------
Income from continuing
operations.................. 6,662 9,235 11,400 17,000 41,445 28,490 47,201
Income (loss) from
discontinued operations, net
of taxes.................... (747) (88) (68) (2,632) 107 442 --
------- ------- ------- -------- -------- -------- --------
Net income, as reported....... 5,915 9,147 11,332 14,368 41,552 28,932 47,201
Pro forma income tax
expense..................... 2,194 3,517 3,952 5,114 14,479 10,201 16,843
------- ------- ------- -------- -------- -------- --------
Pro forma net income.......... $ 3,721 $ 5,630 $ 7,380 $ 9,254 $ 27,073 $ 18,731 $ 30,359
======= ======= ======= ======== ======== ======== ========
Net income per share from
continuing operations:
Basic and diluted........... $ 0.06 $ 0.08 $ 0.09 $ 0.14 $ 0.35 $ 0.24 $ 0.40
------- ------- ------- -------- -------- -------- --------
Net income per share from
discontinued operations:
Basic and diluted........... $ (0.01) $ 0.00 $ 0.00 $ (0.02) $ 0.00 $ 0.00 $ 0.00
------- ------- ------- -------- -------- -------- --------
Net income per share:
Basic and diluted........... $ 0.05 $ 0.08 $ 0.09 $ 0.12 $ 0.35 $ 0.24 $ 0.40
------- ------- ------- -------- -------- -------- --------
Basic and diluted weighted
average shares
outstanding................. 121,321 121,321 121,321 121,321 120,060 120,360 119,170
------- ------- ------- -------- -------- -------- --------
Pro forma net income per
share:
Basic and diluted........... $ 0.21 $ 0.24
-------- --------
Pro forma basic and diluted
weighted average shares
outstanding................. 127,360 126,470
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31, 2000
------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
----------- ----------- ------- ------- ------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................. $ 9,449 $13,923 $16,008 $19,235 $40,000 $ 38,999 $(32,036)
Property, plant and equipment.... 5,167 7,685 14,986 16,672 18,447 28,467 28,467
Total assets..................... 24,997 34,601 48,469 69,549 83,347 131,260 133,224
Long-term debt, net of current
portion........................ 2,121 3,309 7,624 6,450 4,791 3,050 3,050
Total stockholders' equity....... 13,449 19,331 23,843 29,902 54,387 69,848 (2,241)
</TABLE>
22
<PAGE> 26
SUBCHAPTER S CORPORATION AND TERMINATION OF SUBCHAPTER S CORPORATION STATUS
We have been treated as a Subchapter S corporation for federal income tax
purposes since April 1, 1987. As a result, we have not been liable for federal
and certain state corporate income taxes, and all of our earnings have been
subject to federal and certain state income taxation directly at the shareholder
level. Our Subchapter S corporation status will terminate prior to the closing
of this offering, at which time we will become subject to corporate income
taxation under Subchapter C of the Internal Revenue Code and applicable state
income tax laws. Pro forma statement of operations data included in this
prospectus have been adjusted to include pro forma income tax provisions as if
we had been a Subchapter C corporation during the relevant periods.
In connection with the closing of this offering, we intend to make a
distribution to our existing shareholders on the effective date of this
offering, in the approximate amount of $73 million as of September 30, 2000.
This is the approximate amount of our cumulative Subchapter S income for the
period we were a Subchapter S corporation, minus distributions made to our
shareholders during that period. We are making the distribution to our
shareholders of record prior to the offering because they have been, or will be,
taxed on our net income and, as our shareholders prior to the offering, are
entitled to such distribution. The amount of the Subchapter S corporation
distribution will be determined by closing our books as of the date that our
status on a Subchapter S corporation terminates and determining the amount of
the undistributed Subchapter S corporation income as of such date. The
distribution will be made in the form of promissory notes bearing interest at
the Bank of America prime rate. The notes will be repaid following consummation
of this offering from the net proceeds of this offering. Investors purchasing
shares in this offering will not receive any portion of the distribution or
repayment.
Prior to the Subchapter S corporation distribution and completion of the
offering, we will enter into a tax indemnification agreement with our existing
shareholders providing for, among other things, the shareholders to indemnify us
for any federal and state income taxes, including interest and penalties,
incurred by us if for any reason we are deemed to be treated as a Subchapter C
corporation during any period in which we reported our taxable income as a
Subchapter S corporation. The tax indemnification obligation of each existing
shareholder is limited to the aggregate amount of all distributions made to such
shareholder by us since the first day of the first tax year that we are deemed
to be treated as a Subchapter C corporation, reduced by the amount of tax
actually owed by such shareholder on these distributions. We believe we have met
the requirements for a Subchapter S corporation and the tax indemnification
agreement will provide for payment by our existing shareholders to us and by us
to our existing shareholders to adjust for any increases or decreases in tax
liability arising from a tax audit that affects our tax liability and results in
a corresponding adjustment to the tax liability of our existing shareholders.
23
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial statements
and notes included elsewhere in this prospectus. The discussion in this
prospectus contains forward-looking statements that involve risks, uncertainties
and assumptions, such as statements of our plans, objectives, expectations and
intentions. Our actual results may differ materially from those discussed here
due to factors discussed in "Risk Factors," "Business" and elsewhere in this
prospectus.
OVERVIEW
Telect designs, manufactures and deploys network connectivity equipment for
the telecommunications industry. Our products monitor, interconnect and
physically organize copper, commonly referred to as twisted-pair, coaxial and
fiber optic cable and connections in telecommunications network facilities. We
also provide power distribution and protection equipment for telecommunications
networks, as well as engineering, configuration and installation services for
our customers.
We began business in 1982 as a manufacturer of custom cable assemblies for
the telecommunications industry. In response to our customers' needs, we have
gradually expanded our product line to include a variety of high data
transmission capacity, commonly referred to as broadband, network connectivity
and power distribution products. In 1998 and 1999, we divested certain lines of
business, including custom cable assemblies, in an effort to concentrate our
focus on connectivity and power distribution products. In March 2000, we
acquired our Telzon product line from Thomas & Betts Corporation. We intend to
increase our research, development and engineering expenditures in an effort to
further broaden our product line to include more fiber optic components and
power distribution products. We recently began offering engineering,
configuration and installation services through our integrated systems group.
Although our service revenues have not been material to date, we intend to
expand our global engineering, configuration and installation services in the
future.
Our primary manufacturing and administrative facilities are located near
Spokane, Washington. We have gradually expanded those facilities. In 1998, we
opened a manufacturing facility in Mexico and on February 29, 2000, we acquired
a manufacturing facility in Poland. We currently occupy approximately 480,000
square feet of manufacturing and administrative space, and expect to increase
this to approximately 645,000 square feet by the end of 2000.
We sell our products worldwide to telecommunications service providers
through direct sales and indirectly through distributors and, to a lesser
extent, original equipment manufacturers, which bundle our products with their
products for resale. All of our sales, net of discounts, are recognized at the
time of shipment to both end-user customers and distributors. We do not have a
written return policy and address customer return requests on a case-by-case
basis. Historically, returns have been immaterial. We derive a majority of our
revenues from the sale of broadband connectivity products. Power distribution
products accounted for 15.5% of our net sales in the first nine months of 2000,
and we expect sales of these products to account for a greater percentage of our
net sales in the future.
International sales were $0.9 million, $17.3 million and $24.1 million for
1997, 1998 and 1999, and we expect international sales to increase in absolute
dollars, and as a percentage of our net sales. Our sales are generally
denominated in U.S. dollars. Sales denominated in foreign currencies have not
been material, but are expected to increase as we expand our international
operations and sales.
Cost of sales consists primarily of raw materials, direct labor, shipping
and direct manufacturing overhead associated with the production and packaging
of our products. In July
24
<PAGE> 28
1999, we implemented a cost-reduction program, which included improvements to
manufacturing efficiency, inventory management and procurement practices, as
well as increased component and manufacturing outsourcing. Our cost of sales as
a percentage of net sales varies from quarter to quarter as a result of
variations in product mix, raw materials cost fluctuations and adjustments for
inventory obsolescence.
Research, development and engineering expenses consist principally of the
costs of personnel and materials associated with the development of new products
and changes to existing products, and are charged to operations as incurred. We
engage in applied research programs designed to develop new products and product
applications. We also have substantial ongoing product and process improvement
engineering and support programs relating to existing products.
Selling, general and administrative expenses primarily include salaries and
employee benefits, selling commissions, marketing and advertising costs,
software license fees, professional and consulting fees, facility lease
expenses, travel expenses and non-manufacturing related depreciation and
amortization expense.
We decided to discontinue two separate product groups in 1999 and 1998
because these product groups had limited markets, relatively lower margins and
were not strategic to our core competencies. Telect Control Products
manufactured and installed physical access control systems and was sold in late
1998. The Diversified Products Group was sold in 1999 and its products included
fuse panels, protector blocks and circuit breaker panels.
Our Subchapter S corporation status will terminate prior to the closing of
this offering, at which time we will become subject to corporate income taxation
under Subchapter C of the Internal Revenue Code and applicable state income tax
laws. Statement of operations data included in this prospectus have been
adjusted to include pro forma income tax provisions as if we had been a
Subchapter C corporation during the relevant periods.
In connection with the closing of this offering, we intend to make a
distribution to our existing shareholders on the effective date of this
offering, in the approximate amount of $73 million as of September 30, 2000.
This is the approximate amount of our cumulative Subchapter S income for the
period we were a Subchapter S corporation, minus distributions made to our
shareholders during that period. The distribution will be made in the form of
promissory notes bearing interest at the Bank of America prime rate. These notes
will be repaid following the consummation of this offering from the net proceeds
of this offering. Investors purchasing shares in this offering will not receive
any portion of this distribution or repayment.
25
<PAGE> 29
RESULTS OF OPERATIONS
The following table shows selected statement of operations data, expressed
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales, net of discounts...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 55.3 54.7 50.9 49.3 50.3
----- ----- ----- ----- -----
Gross margin............................... 44.7 45.3 49.1 50.7 49.7
Operating expenses:
Research, development and engineering...... 4.2 3.5 3.3 3.2 3.5
Selling, general and administrative........ 26.9 25.6 23.4 23.5 21.5
----- ----- ----- ----- -----
Total operating expenses................ 31.1 29.1 26.7 26.7 25.0
Operating income............................. 13.6 16.2 22.4 24.0 24.7
Interest expense, net........................ (1.2) (1.7) (1.0) (1.2) (0.7)
Other income, net............................ 1.8 0.5 4.2 1.9 (0.1)
State and foreign income tax expense......... (0.4) (0.1) (1.0) (0.8) (0.5)
----- ----- ----- ----- -----
Income from continuing operations....... 13.8 14.9 24.6 23.9 23.4
Income from operations of discontinued
divisions.................................. 0.3 0.1 0.2 0.4 0.0
Loss on disposal of divisions................ (0.4) (2.4) (0.1) 0.0 0.0
----- ----- ----- ----- -----
Net income as reported....................... 14.1 12.6 24.7 24.3 23.4
Pro forma Federal income tax expense......... (4.8) (4.5) (8.6) (8.6) (8.4)
----- ----- ----- ----- -----
Pro forma net income......................... 8.9% 8.1% 16.1% 15.7% 15.0%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET SALES. Net sales increased 69.6%, from $119.0 million in the first nine
months of 1999 to $201.8 million in the first nine months of 2000. The increase
was primarily due to increased customer demand for our broadband connectivity
products, sales of which increased by $64.2 million, or 60.4%, compared to the
first nine months of 1999. This increase was due in part to orders from new
entrants in the telecommunications field seeking to install their switching and
transmission equipment in the central and remote offices of traditional
telecommunications carriers, as well as sales of our Telzon product line, which
we acquired in March 2000. Sales of our power distribution products in the first
nine months of 2000 increased by $18.6 million, or 146.5%, compared to the first
nine months of 1999.
Historically, we have experienced lower sales growth during the first
quarter of the year, including the first quarter of 1999. During the first
quarter of 2000, however, we did not experience a seasonal slowdown, which
further contributed to the sharp percentage increase in net sales for the first
nine months of 2000 compared to the first nine months of 1999. We do not believe
the current rate of growth of our sales is sustainable, and we expect it to
subside as the current cycle of telecommunications infrastructure buildout
matures. If the rate of growth of our industry decreases as we expect it will,
we could face increased price competition, and our gross margin and net income
likely would decline, although it is not possible to quantify the anticipated
impact of a decline in the growth rate in our net sales.
COST OF SALES. Cost of sales increased 73.1%, from $58.7 million in the
first nine months of 1999 to $101.6 million in the first nine months of 2000. As
a percentage of net sales, cost of sales increased, from 49.3% to 50.3%, between
the nine-month periods, primarily due to
26
<PAGE> 30
increased expense for slow-moving and obsolete inventories and a shift of
product mix between periods to lower margin products in the first nine months of
2000. Gross profit as a percentage of net sales therefore decreased, from 50.7%
in the first nine months of 1999 to 49.7% in the first nine months of 2000.
We believe that demand for broadband connectivity and power distribution
equipment presently exceeds available supply, and that this has dampened price
competition for these products. We anticipate that price competition may
intensify in the future, and, as a result, our gross margins could decline
further. We also expect that the planned expansion of our offerings to include
additional lower margin products and services, subsiding demand for our higher
margin digital signal cross-connect products, which connect equipment within or
between telecommunications network facilities, and our efforts to increase lower
margin sales to original equipment manufacturers could exert downward pressures
on our gross margins in the future, which likely would cause our net income to
decline.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Research, development and
engineering expenses increased 84.4%, from $3.8 million in the first nine months
of 1999 to $7.0 million in the first nine months of 2000. This increase was
primarily due to an increase in engineering headcount from 69 at September 30,
1999 to 125 at September 30, 2000, resulting in a $1.9 million increase in
salaries and related benefits between the two periods, a $0.4 million increase
in prototype expenditures, and an increase in travel costs. We plan to continue
to increase our expenditures for research, development and engineering in an
effort to broaden our product offerings and adapt our products to meet the
requirements of an increasing number of original equipment manufacturer
customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 55.3%, from $28.0 million in the first nine
months of 1999 to $43.4 million in the first nine months of 2000. The increase
between periods was primarily due to an increase in the infrastructure required
to support the rapid growth of our sales. This included an increase in sales,
marketing and administration headcount from 278 at September 30, 1999 to 476 at
September 30, 2000, which resulted in a $8.2 million increase in salaries and
related benefits between the two periods. Travel, non-manufacturing related
depreciation and amortization, and miscellaneous expenses accounted for the
remainder of the increase between periods. As a percentage of our net sales,
selling, general and administrative expenses have decreased over the past
several years due to economies of scale that have allowed certain fixed costs to
be spread over an increasing sales base. We expect these expenses to increase in
the future, in part due to increased administrative costs associated with being
a publicly held company; however we expect these expenses to decrease as a
percentage of net sales if we can continue to increase our sales.
INTEREST EXPENSE, NET. Interest expense increased slightly from $1.4
million in the first nine months of 1999 to $1.5 million in the first nine
months of 2000. The increase was primarily due to demand for cash to fund higher
inventory levels and customer account balances associated with production and
sales growth.
OTHER INCOME (EXPENSE), NET. Other income (expense), net decreased from
$2.3 million of income, net in the first nine months of 1999 to $0.2 million of
expense, net in the first nine months of 2000. The decrease was primarily due to
a reduction in patent royalty income from $1.8 million in the first nine months
of 1999 to $0 in the first nine months of 2000 resulting from a $5.0 million
lump-sum royalty settlement in the second half of 1999.
INCOME FROM DISCONTINUED OPERATIONS. Income from operations of discontinued
divisions decreased for $0.4 in the first nine months of 1999 to $0 in the first
nine months of 2000 due to the sale of the Diversified Products division in
1999. The Diversified Products division recorded sales of $3.8 million and
operating income of $0.4 million in the first nine months of 1999 but had no
sales in 2000.
27
<PAGE> 31
PRO FORMA NET INCOME. As a result of the factors discussed above, our pro
forma net income increased 62.1%, from $18.7 million in the first nine months of
1999 to $30.4 million in the first nine months of 2000.
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NET SALES. Net sales increased 38.3%, from $82.9 million in 1997 to $114.6
million in 1998, and by 46.8% to $168.3 million in 1999. The increases during
both 1998 and 1999 were primarily due to increased customer demand for our
broadband connectivity and power distribution products. Sales of our broadband
connectivity products increased by $26.7 million, or 35.0%, in 1998, and by
$46.7 million, or 45.3%, in 1999. Sales of our power distribution products
increased by $5.0 million, or 75.4%, in 1998, and by $7.0 million, or 60.1%, in
1999. The percentage of our 1999 net sales derived from our broadband
connectivity and power distribution products was 88.9% and 11.1%. See note 12 to
our notes to consolidated financial statements.
COST OF SALES. Cost of sales increased 36.8%, from $45.8 million in 1997 to
$62.7 million in 1998, and by 36.6% to $85.6 million in 1999. As a percentage of
net sales, cost of sales decreased from 55.3% in 1997 to 54.7% in 1998, and to
50.9% in 1999. The decrease on a percentage basis during 1998 was primarily due
to more efficient utilization of our production facilities resulting in
economies of scale and a change in our product mix to lower-cost products. The
decrease on a percentage basis during 1999 was primarily attributable to a shift
in product mix toward lower cost products, lower labor costs associated with
operations in Mexico, as well as the effects of our cost reduction program. As a
result of these factors, gross profit as a percentage of net sales increased
from 44.7% in 1997 to 45.3% in 1998, and to 49.1% in 1999.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES. Research, development and
engineering expenses increased 13.7%, from $3.5 million in 1997 to $4.0 million
in 1998, and by 38.7% to $5.5 million in 1999. The increase in both 1998 and
1999 was primarily due to the hiring of more engineers to develop products, as
well as related product development costs and travel expenses. Engineering
headcount grew from 58 employees at December 31, 1997 to 74 at December 31,
1999, resulting in increased salaries and related benefits of $0.5 million in
1998 and $0.9 million in 1999. Additionally, prototype product expenses
increased in 1999 over 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 31.8%, from $22.3 million in 1997 to $29.4
million in 1998, and by 33.9% to $39.4 million in 1999. The increases in both
1998 and 1999 were primarily due to expansion of our infrastructure to support
sales growth. Sales, marketing and administrative salaries, as well as related
benefits, increased in both 1998 and 1999 as professional and support staff were
added in these areas. The total headcount in sales, marketing and administrative
functions increased from 217 at December 31, 1997 to 335 at December 31, 1999,
resulting in increased salaries and related benefits of $3.7 million in 1998 and
$4.7 million in 1999. Travel, samples, sales commission and advertising also
increased with the growth in sales during these periods. As a percentage of our
net sales, selling, general and administrative expenses decreased from 26.9% in
1997 to 25.6% in 1998, and to 23.4% in 1999, due to economies of scale that have
allowed fixed costs to be spread over an increasing sales base.
INTEREST EXPENSE, NET. Interest expense increased from $1.0 million in 1997
to $2.0 million in 1998, and decreased to $1.7 million in 1999. The increase in
1998 was primarily due to increased borrowings under our line of credit
necessary to fund increased working capital needs. The decrease in 1999 was
primarily due to increased cash flows from operations, which enabled us to
reduce our working capital borrowings under our line of credit.
28
<PAGE> 32
OTHER INCOME (EXPENSE), NET. Other income of $1.5 million in 1997 decreased
to $0.6 million in 1998, primarily due to a decrease of patent royalty income.
Other income increased to $7.0 million in 1999, primarily resulting from a $5.0
million lump-sum royalty settlement in the second half of 1999 and an increase
in patent royalty income. Before the royalty settlement, patent royalty income
varied significantly quarter to quarter.
INCOME FROM DISCONTINUED OPERATIONS. Income from operations of discontinued
divisions decreased from $0.2 million in 1997 to $0.1 million in 1998, and
increased to $0.3 million in 1999. The changes were due to the sale of the
control products division in November 1998 and the sale of the diversified
products division in June 1999. Both of these divisions experienced marginal
profitability during the years preceding their disposition.
PRO FORMA NET INCOME. As a result of the factors discussed above, our pro
forma net income increased 25.4%, from $7.4 million in 1997 to $9.3 million in
1998, and by 192.6% to $27.1 million in 1999.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents a summary of our consolidated results of
operations for our seven most recent quarters ended September 30, 2000. The
information for each of these quarters is unaudited and has been prepared on a
basis consistent with our audited consolidated financial statements appearing
elsewhere in this prospectus. This information includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
fair presentation of this information when read in conjunction with our audited
consolidated financial statements and related notes appearing elsewhere in this
prospectus. Statement of operations data included in this table have been
adjusted to include pro forma corporate income tax provisions as if we had been
a Subchapter C corporation during all of the quarterly periods. Our operating
results have varied on a quarterly basis and may fluctuate significantly in the
future. Results of operations for any quarter are not necessarily indicative of
results for any future quarter or for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
--------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net of discounts......... $32.3 $42.7 $44.0 $49.3 $58.8 $68.0 $75.0
Cost of sales................... 17.2 19.4 22.1 26.9 28.4 34.2 39.0
----- ----- ----- ----- ----- ----- -----
Gross profit.................. 15.1 23.3 21.9 22.4 30.4 33.8 36.0
Operating expenses:
Research, development and
engineering................. 1.2 1.2 1.4 1.8 2.0 2.3 2.7
Selling, general and
administrative.............. 8.6 9.8 9.6 11.3 12.4 14.8 16.2
----- ----- ----- ----- ----- ----- -----
Total operating expenses.... 9.8 11.0 11.0 12.9 14.4 17.1 18.9
----- ----- ----- ----- ----- ----- -----
Operating income................ 5.3 12.3 10.9 9.3 16.0 16.7 17.1
Interest expense, net........... (0.5) (0.5) (0.4) (0.3) (0.3) (0.6) (0.6)
Other income (expense), net..... 0.6 0.9 0.9 4.6 (0.2) 0.1
State and foreign income tax
expense....................... (0.3) (0.4) (0.3) (0.6) (0.2) (0.3) (0.5)
----- ----- ----- ----- ----- ----- -----
Income from continuing
operations................ 5.1 12.3 11.1 13.0 15.3 15.9 16.0
Income (loss) from operations of
discontinued divisions........ 0.2 0.2 -- (0.1) -- -- --
Loss on disposal of divisions... -- -- -- (0.2) -- -- --
----- ----- ----- ----- ----- ----- -----
Net income as reported.......... 5.3 12.5 11.1 12.7 15.3 15.9 16.0
Pro forma income tax expense.... 1.8 4.4 4.0 4.3 5.7 5.6 5.5
----- ----- ----- ----- ----- ----- -----
Pro forma net income............ $ 3.5 $ 8.1 $ 7.1 $ 8.4 $ 9.6 $10.3 $10.5
===== ===== ===== ===== ===== ===== =====
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THE QUARTER ENDED
------------------------------------------------------------------------------
MARCH 30, JUNE 30, SEPT. 30, DEC. 31, MARCH 30, JUNE 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
--------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales, net of discounts................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 53.3 45.4 50.2 54.6 48.3 50.3 52.0
----- ----- ----- ----- ----- ----- -----
Gross margin.......................... 46.7 54.6 49.8 45.4 51.7 49.7 48.0
Operating expenses:
Research, development and
engineering......................... 3.7 2.8 3.2 3.7 3.4 3.4 3.6
Selling, general and administrative... 26.6 23.0 21.8 22.9 21.1 21.8 21.6
----- ----- ----- ----- ----- ----- -----
Total operating expenses............ 30.3 25.8 25.0 26.6 24.5 25.2 25.2
----- ----- ----- ----- ----- ----- -----
Operating income........................ 16.4 28.8 24.8 18.8 27.2 24.5 22.8
Interest expense, net................... (1.5) (1.2) (0.9) (0.6) (0.5) (0.9) (0.8)
Other income (expense), net............. 1.9 2.1 2.0 9.3 (0.4) 0.1 0.0
State and foreign income tax expense.... (0.9) (0.9) (0.7) (1.2) (0.3) (0.4) (0.7)
----- ----- ----- ----- ----- ----- -----
Income from continuing operations... 15.9 28.8 25.2 26.3 26.0 23.3 21.3
Income (loss) from operations of
discontinued
divisions............................. 0.6 0.5 0.0 (0.2) 0.0 0.0 0.0
Loss on disposal of divisions........... 0.0 0.0 0.0 (0.4) 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- -----
Net income as reported.................. 16.5 29.3 25.2 25.7 26.0 23.3 21.3
Pro forma income tax expense............ 5.6 10.3 9.1 8.7 9.7 8.2 7.3
----- ----- ----- ----- ----- ----- -----
Pro forma net income.................... 10.9% 19.0% 16.1% 17.0% 16.3% 15.1% 14.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>
Gross margin increased from 46.7% in the first quarter of 1999 to 54.6% in
the second quarter of 1999 due to a favorable change in product mix to higher
margin products. Gross margin decreased from 54.6% in the second quarter of 1999
to 49.8% in the third quarter of 1999 due to relatively flat sales in higher
margin products and an increase in sales of lower margin products. Gross margin
decreased from 49.8% in the third quarter of 1999 to 45.4% in the fourth quarter
of 1999 primarily due to increased overhead associated with increasing capacity.
Gross margin increased from 45.4% in the fourth quarter of 1999 to 51.7% in the
first quarter of 2000 due to a favorable change in product mix to the higher
margin products. Gross margin decreased from 51.7% in the first quarter of 2000
to 49.7% in the second quarter due to an unfavorable change in product mix to
lower margin products. Gross margin increased from 49.7% in the second quarter
of 2000 to 48.0% in the third quarter due to a change in product mix.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our business primarily with cash generated
from operations. Temporary working capital needs have been provided by a bank
line of credit and term loans. Net cash provided by operations was $31.7 million
for the first nine months of 2000, and $34.0 million for the twelve months of
1999. Net cash provided by operations during those periods consisted primarily
of net income, as adjusted for increases in accounts payable and accrued
payroll, partially offset by increases in inventories and accounts receivable.
Net cash used for investing activities was $21.4 million for the first nine
months of 2000, and $5.5 million for the twelve months of 1999. Net cash used
for investing activities during those periods consisted primarily of equipment
and furniture purchases, as well as acquisitions of the Telzon product line and
our Polish manufacturing facility in the first nine months of 2000. Net cash
used for financing activities was $13.5 million for the first nine months of
2000, and $25.8 million for the twelve months of 1999, primarily representing
payments of dividends and the impact of net borrowings. At September 30, 2000,
we reported no cash equivalents, due to aggressive cash management designed to
minimize line of credit balances.
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<PAGE> 35
We have an unsecured revolving line of credit with Bank of America with a
maximum borrowing limit of $35.0 million until December 31, 2000, at which time
the maximum borrowing limit will be reduced to $30.0 million, maturing on May 1,
2001. Interest is payable monthly at the bank's fully floating prime rate of
9.00% at September 30, 2000, or, at our option, at the LIBOR rate plus 1.75%. At
September 30, 2000, the outstanding balance was $27.9 million. We intend to use
some of the net proceeds of this offering to repay a portion of this
indebtedness.
Total capital expenditures were $12.6 million for the first nine months of
2000, and $6.1 million for the twelve months of 1999. These expenditures were
primarily used to purchase manufacturing equipment to increase production
capacity. We anticipate total capital expenditures of approximately $16.4
million during fiscal 2000 primarily to purchase additional manufacturing
equipment. We anticipate total capital expenditures of approximately $21.0
million during fiscal 2001, although we have no firm commitments in this regard.
We plan to fund these capital expenditures with proceeds from the IPO.
We believe that cash generated from operations and amounts available under
our line of credit, together with the net proceeds of this offering, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for the next 18 months. However, if our anticipated levels of cash
flow are not realized, then we may need or desire to seek additional funding
through public or private financings or other arrangements prior to that time.
Adequate funds may not be available when needed or may not be available on terms
acceptable to us. If additional funds are raised by issuing equity securities,
dilution to existing shareholders will result. The terms of any debt could
impose restrictions on our operations and our ability to secure additional
financing through equity securities. If funding is insufficient at any time in
the future, we may be unable to develop or enhance our products, expand our
facilities, enter new markets, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be used specifically as a hedge,
the objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. In July 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133. We will adopt the requirements of SFAS No. 133 for
the year ending December 31, 2001. We do not expect the adoption of SFAS No. 133
to have a material effect on our financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, or SAB 101, Revenue Recognition in Financial
Statements. SAB 101 summarizes some of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In March 2000, the SEC issued SAB No. 101A to defer for one quarter, and in June
2000 issued SAB 101B to defer for an additional two quarters, the effective date
of implementing SAB 101, with earlier application encouraged. We are required to
adopt SAB 101 in the fourth quarter of 2000. We do not expect the adoption of
SAB 101 to have a material effect on our financial statements.
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<PAGE> 36
In March 2000, the FASB issued FASB Interpretation No. 44, or FIN 44,
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25, which clarifies the application of
Accounting Principles Board Opinion No. 25, Stock Issued to Employees, for
Certain Stock-Based Compensation Issues. Among other issues, this interpretation
clarifies:
- the definition of employee for purposes of applying Opinion No. 25;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 was effective July 1, 2000, except for certain provisions which were
effective before that date. The adoption of FIN 44 did not have a material
effect on our financial statements.
INFLATION AND INTEREST RATE RISK
Our operating results may be affected by changes in rates of inflation and
market interest rates. In particular, an increase in market interest rates could
adversely affect our sales by increasing the cost of financing construction of
telecommunications networks. Higher interest rates would also increase our
interest expense as most of our indebtedness bears interest at floating rates.
Inflation to date has not materially affected our operating results, although it
may in the future.
Our revolving credit facility and a subordinated term note facility with
Bank of America bear interest at floating rates. Accordingly, we are exposed to
potential losses related to changes in interest rates. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
As of September 30, 2000, approximately 84% of our outstanding borrowings were
exposed to interest rate risk. Assuming a one percent increase in interest
rates, based on our indebtedness outstanding on that date, our annual interest
expense would have increased by approximately $0.3 million.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our sales have been made predominantly to U.S.-based customers and
distributors in U.S. dollars. As a result, we have not had any material exposure
to factors such as changes in foreign currency exchange rates. However, in
future periods, we expect to expand selling into international markets,
including Europe and Asia. Because our sales are denominated in U.S. dollars, a
strengthening of the U.S. dollar could make our products less competitive in
international markets. Our interest income and expense are sensitive to changes
in interest rates, which can affect the interest earned on our cash equivalents.
33
<PAGE> 37
BUSINESS
OVERVIEW
We design, manufacture and deploy network connectivity equipment for the
telecommunications industry. Our products monitor, interconnect and physically
organize copper, coaxial and fiber optic cables and connections in network
facilities of telecommunications networks. We also provide power distribution
and protection equipment for telecommunications networks, as well as
engineering, configuration and installation services. We sell our products and
services in the United States primarily to telecommunications service providers,
including:
- incumbent local exchange carriers, commonly referred to as ILECs, which
were the primary telecommunications service providers prior to 1996;
- competitive local exchange carriers, commonly referred to as CLECs, which
are new entrants in the telecommunications market;
- original equipment manufacturers, commonly referred to as OEMs, which
bundle our products with their products for resale;
- equipment installers;
- equipment distributors; and
- private network operators.
Internationally, we sell our products to OEMs and telecommunications
service providers in the public and private telecommunications networks. Our
five largest customers, based on 1999 net revenues, are AT&T, Sprint North
Supply, Verizon, Walker and Associates and WorldCom. These customers accounted
for 37.9% of our 1999 net revenues.
INDUSTRY BACKGROUND
Growing demand for broadband communications
Consumers and businesses are demanding increased bandwidth as the amount of
high-speed data, video and voice traffic being carried over telecommunications
networks has grown dramatically. The substantial growth in bandwidth
requirements is being driven in part by the increasing use of the Internet by
businesses and consumers for communicating, conducting online business and
transactions and telecommuting. Growth is also being fueled by the increasing
demand for data-intensive applications, including secure data networks, internal
networks used by corporations, data-rich content and on-demand video services.
Bandwidth requirements are also being driven by the increasing deployment of
wireless voice and data communications systems, including greater use of
wireless Internet, which also require non-wireless broadband network
infrastructure equipment. An example of the increasing demand for high bandwidth
access infrastructure is the growth in digital subscriber line, commonly
referred to as DSL, deployments. According to TeleChoice, Inc., a third party
market strategy consulting firm, the DSL installed base, measured by the number
of lines in service, is projected to grow from 575,000 in 1999 to 9.6 million in
2003.
Global deregulation and privatization of the telecommunications industry
has dramatically changed the competitive environment for telecommunications
equipment providers. In the United States, deregulation has resulted in a
proliferation of CLECs that compete with the ILECs, which, until the
Telecommunications Act of 1996, had been the primary operators of
telecommunications networks. The Telecommunications Act requires ILECs to permit
CLECs to collocate, or install their network equipment in the ILECs' facilities,
allowing them to use the ILECs' local connections infrastructure. In addition,
in 1999, the Federal Communications
34
<PAGE> 38
Commission issued an order requiring ILECs to make new collocation arrangements
available to CLECs. When collocation space is exhausted at a particular
location, ILECs are required to permit collocation in adjacent structures.
Increasing investment in network architectures
Today, CLECs are actively engaged in efforts to collocate in the ILECs'
facilities and are rapidly deploying broadband services. According to New
Paradigm Resources Group, Inc., an independent research market report firm,
there are now over 147 CLECs in the United States that have installed network
hardware in their own sites or collocated within the ILECs' facilities, compared
to 48 in 1996. In response to this growing competition and the increasing demand
for broadband communication services, ILECs are quickly building or upgrading
network capabilities and adding new services to protect their customer base.
These investments in network infrastructure being made by ILECs and CLECs to
upgrade existing networks and to create new networks to provide reliable,
high-bandwidth services include:
- adoption of new network protocols, which enable switching among all
communications mediums;
- increased use of fiber optic cable, which can transmit large volumes of
data at high speeds, substantially increasing the efficiency and capacity
of telecommunications networks; and
- proliferation of high-speed data technology, such as DSL and coaxial
cable, which are being deployed by ILECs, CLECs and other
telecommunications service providers as cost-effective broadband access
solutions.
Telecommunications networks consist of multiple physical locations,
commonly referred to as points of presence, that contain the equipment
comprising the networks. Points of presence include:
- central offices, which are the largest physical network facilities;
- remote offices, which are smaller facilities located at various points in
a telecommunications network;
- remote terminals, which are network facilities that are smaller than
remote offices and that house network equipment; and
- wireless base stations, which are the facilities that house equipment for
wireless telecommunications networks.
Central and remote offices contain much of the connectivity and power
distribution equipment in a telecommunications network. The primary
communications equipment within central or remote offices includes switching,
transmission, network connectivity and power elements. Connectivity equipment is
used to physically connect transmission, switching and other equipment within
and between network points of presence. Power equipment directs or distributes
power to network equipment and protects the equipment from damage caused by
power faults.
Challenges faced by telecommunications service providers
Telecommunications providers and other service providers engaged in
upgrading or building new networks, or collocating in the central and remote
offices of other telecommunications service providers, face several challenges.
These include:
MANAGING PROLIFERATION OF BROADBAND LINES. The tremendous growth in
the amount of data being transmitted over networks has required
corresponding growth in the number of physical broadband lines that are
used in communications networks. This proliferation
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<PAGE> 39
has given rise to the need for connectivity equipment that allows easy
installation of new lines. Central and remote offices often have a fixed
amount of space in which to locate an increasing amount of equipment for a
growing number of telecommunications service providers. As a result, there
is a need for connectivity equipment that is compact while allowing for
maximum circuit capacity, a combination that is also known as density.
DEPLOYING NETWORK EQUIPMENT QUICKLY. Telecommunications service
providers desire network equipment that can be quickly delivered to and
installed in a central or remote office while physical space remains
available. Speed of network deployment is also an important factor in
capturing new customers.
ESTABLISHING GLOBAL MANUFACTURING RELATIONSHIPS. The rapid growth of
telecommunications infrastructure is occurring globally. Network equipment
must be configured for specific global regions due to differences in power
supplies, configurations and localized customer needs. To address this
demand, network equipment providers must be able to manufacture, deliver
and install products quickly, and provide ongoing product support on a
global basis.
OBTAINING TURNKEY SOLUTIONS. Upgrading or building a
telecommunications network requires skilled equipment installers, commonly
referred to as systems integrators, who can quickly install equipment in a
network point of presence. Many telecommunications service providers rely
on third party systems integrators for network configuration and
installation. We believe there is a growing demand for systems integrators
that can engineer, furnish and install network infrastructure products on a
global basis.
ADDRESSING INCREASED POWER DEMANDS. Power distribution and protection
are critical for transmission equipment to function reliably and
effectively. The rapid growth in telecommunications network infrastructure
is increasing the need for power and power distribution products to protect
network equipment.
Telecommunications service providers, including ILECs, CLECs, systems
integrators and other private network operators, need suppliers of network
connectivity and power distribution equipment that can solve these challenges.
OUR SOLUTION
We are a leading provider of broadband connectivity and power distribution
products and services for the telecommunications industry. We design,
manufacture and configure network connectivity and power solutions for
telecommunications service providers. Our solutions are designed to provide the
following benefits:
DENSITY AND RELIABILITY -- We help telecommunications service
providers to maximize use of limited space in network points of presence by
providing compact, high-density products. Our products are engineered for
reliability and peak performance. Many of our products incorporate
monitoring and configuration features that help users to maintain an
effective network.
CONNECTIVITY ACROSS MEDIA -- With the increased use of fiber optic
technology, there is a growing need for equipment using this technology
that is also interoperable with existing network transmission media, such
as copper and coaxial cable. Our understanding of these three types of
networks enables us to manufacture reliable and interoperable physical
connectivity products.
CONFIGURABLE AND MODULAR PORTFOLIO OF PRODUCTS -- Our modular products
are easily integrated into a telecommunications network. Our product
designs help customers to easily install and add new products to their
existing systems with simple configuration and with fewer cable connections
than are necessary for less modular products.
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<PAGE> 40
GLOBAL MANUFACTURING AND DEVELOPMENT -- Our global manufacturing and
development capabilities enable us to create regionalized products, scale
production quickly and efficiently and decrease delivery times. By
obtaining some materials locally for production in our international
manufacturing facilities, we manufacture products that help us and our OEM
partners meet product distribution and development requirements mandated by
local governments.
POWER DISTRIBUTION AND PROTECTION PRODUCTS -- We provide power
distribution and protection products that efficiently distribute power and
protect equipment within network points of presence. Our experience in
designing and manufacturing physical connectivity solutions enables us to
develop power products designed to meet the power requirements of network
points of presence.
INTEGRATED SYSTEMS AND OTHER SERVICES -- We offer broadband
connectivity and power distribution solutions that integrate the physical
network architecture. In addition to designing and manufacturing broadband
connectivity and power distribution products, we also assist our customers
in configuring solutions using our products and integrating these solutions
into a telecommunications network.
OUR STRATEGY
Our objective is to become the leading provider of telecommunications
network connectivity and power products and services. Our strategy to achieve
this objective consists of the following elements:
LEVERAGE TECHNOLOGY EXPERTISE. We intend to leverage our technology
expertise to continue to develop high-density network connectivity and
power distribution equipment for worldwide use. Our core competencies
include the design and development of high-density fiber and digital signal
cross-connect, commonly referred to as DSX, network connectivity equipment
which connects equipment within or between telecommunications network
facilities. We will continue to develop our expertise in copper, coaxial
cable, fiber optic and power technologies. We also plan to continue to
increase our research and development expenditures and to hire additional
engineers globally.
BROADEN PRODUCT AND SERVICE OFFERINGS. We intend to expand our share
of the telecommunications network connectivity and power distribution
equipment market by broadening our product and service offerings. We are
working to develop optical components, and are also seeking to extend our
power management and distribution offerings. We also intend to expand our
global engineering, configuration and installation services and use of the
Internet to help customers design, configure and order their network
equipment online. We plan to do this by continuing our efforts to develop
our product and service offerings, and will continue to explore potential
acquisitions of complementary technologies and product lines.
INCREASE MANUFACTURING CAPACITY. We plan to continue to increase our
manufacturing capacity to meet the growing demand for network connectivity
equipment and to increase market penetration of our products and services.
To achieve this goal, we intend to expand our manufacturing facilities,
increase capital expenditures and hire additional operations personnel. We
intend to continue to meet our short-term capacity requirements by
outsourcing manufacturing of some products.
EXPAND GLOBAL PRESENCE. We intend to expand the global reach of our
products by designing, developing and manufacturing localized versions of
our products for use in specific global regions. We currently manufacture
our products in the United States, Mexico and Poland, which helps us to
deliver our products on a global basis rapidly and cost-
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<PAGE> 41
effectively. We are expanding our geographic reach and customer base by
investing in our global sales, marketing and research and development
activities.
ENHANCE OEM RELATIONSHIPS. We intend to enhance relationships with
OEMs to develop our product offerings and to continue development of
private label versions of our products. We believe our broadband
connectivity and power distribution products and services will help OEMs to
satisfy their network connectivity and power needs from a single source
while expanding the global reach of our products.
PRODUCTS AND SERVICES
We design, manufacture and install network connectivity and power equipment
for use within network points of presence. Our offerings include broadband
connectivity and power distribution products and services.
BROADBAND CONNECTIVITY
Our broadband connectivity products interconnect copper, coaxial cable and
fiber optic telecommunications networks. These products facilitate the testing,
installation, monitoring and reconfiguration of our customers'
telecommunications systems. Our product portfolio includes key connectivity
elements of central and remote offices, remote terminals and wireless base
stations. Principal products in this group include:
DSX PRODUCTS. This product line consists of panels and bays used to
connect equipment within or between network points of presence. Our DSX
products are used for testing, monitoring and rearranging voice, data and
video signals that are transmitted over copper lines or coaxial cables.
This product line provides connections between high-bandwidth transmission
systems and telecommunications network equipment.
FIBER OPTIC CONNECTIVITY PRODUCTS. This product line includes cable
assemblies, distribution frames and cable management systems. Our fiber
optic products allow for the efficient connection and interconnection of
the fiber optic electronics required to support, transmit, receive, test
and monitor the quality and integrity of voice, data and video signals. Our
fiber optic connectivity products also include fiber cable management
solutions.
MAINFRAME TERMINATION PRODUCTS. This product line includes equipment
that terminates local exchange lines at distribution frames within network
points of presence. Each local exchange line that comes into a central
office must terminate at a location where it can be connected to either the
switch or to other equipment.
POWER DISTRIBUTION
Our power distribution products provide power management throughout central
and remote offices and other network points of presence. These products
distribute power to equipment racks and bays and protect network equipment and
cabling through fuse and breaker panels. Principal products in this group
include:
POWER DISTRIBUTION PANELS. We offer low, intermediate and high current
distribution panels that distribute direct current, or DC, power, from 20
to 100 amps of power, to equipment used throughout central and remote
offices and other network points of presence. These fuse and circuit panels
are used to distribute power from a single power source to multiple pieces
of network equipment. These panels also protect equipment and cabling from
damage caused by power faults.
BATTERY DISTRIBUTION FUSE BAYS. Battery distribution fuse bays are
equipment bays that provide the primary distribution point for DC power
within a central or remote office. These bays can provide power directly to
individual equipment or to secondary low,
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<PAGE> 42
intermediate or high current distribution panels. These bays utilize fuses
or breakers designed to manage and distribute up to 2000 amps of power.
PROTECTOR BLOCKS AND PANELS. Our protector blocks and panels are used
to protect telecommunications network lines from conducting potentially
damaging electricity into the network. These blocks are located where
copper lines enter the network and prevent electricity from damaging wires
or equipment.
PRIVATE LABEL PRODUCTS
Our StarDAX digital cross-connect and integrated access devices
electronically perform the same cross-connecting functions that our DSX products
manually perform plus additional circuit management functions. This product is
sold under the Telect brand name but is manufactured for us by a third party. We
also manufacture custom versions of our products for OEMs to sell on a private
label basis.
INTEGRATED SYSTEMS GROUP
We integrate broadband connectivity, power distribution and third party
equipment into racks, cabinets and frames that can be shipped pre-assembled to
expedite installation. In some cases, we hire subcontractors to complete the
installation on our behalf. In such cases, installation costs are deferred until
revenue is recognized at the completion of the installation.
SALES, MARKETING AND CUSTOMER SUPPORT
We sell our products and services in the United States primarily to
telecommunications service providers, including CLECs, ILECs, OEMs, systems
integrators, equipment distributors and private network operators.
Internationally, we sell our products and services to participants in the public
and private telecommunications network markets. We market and sell our products
and services through the following channels:
- DIRECT SALES. We have a direct sales force operating in various global
regions. Our domestic sales effort is organized by customer type and
regional territory. Our international sales personnel are located in
Canada, China, England, France, Hong Kong and Mexico. Our international
sales efforts are primarily organized by regional territory and cover
Europe, Canada, Africa, Latin America, including Mexico, and
Asia/Pacific. As of September 30, 2000, we had 164 direct sales
personnel.
- CONTRACTED DISTRIBUTORS, DEALER ORGANIZATIONS AND SALES
REPRESENTATIVES. We utilize nine domestic and multiple international
distributors, dealer organizations and sales representatives located in
the United States and abroad.
- ORIGINAL EQUIPMENT MANUFACTURERS. We sell to and through various domestic
and international OEMs, which incorporate our broadband connectivity and
power network equipment into the copper, coaxial cable and fiber optic
network products and services they offer. We also sell customized and
private label versions of our products to support their systems sales.
We engage in a number of marketing activities to create brand awareness,
market demand and sales opportunities. These include providing product exhibits
at industry tradeshows, targeted advertising in selected publications, public
relations activities with trade and business press, channel marketing programs
and co-marketing programs. Our marketing and sales activities also include
providing sales support, responding to requests for proposals, giving product
presentations, interfacing with operations, developing new business
opportunities and responding to customer requests for information.
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We also provide technical support, educational services and professional
services for customizing, installing and servicing our products. We recognize
the importance of offering quality service and support to all customers. Our web
site currently allows customers to retrieve product pricing and delivery
information and configure products online, and we expect that customers will be
able to submit purchase orders online in the fourth quarter of 2000. We also
employ sales engineers who work with our customers to design and configure
systems that meet their specific needs.
CUSTOMERS
We sell our products and services to customers in the United States public
communications network market, such as ILECs, CLECs, long distance carriers,
wireless service providers, cable television operators and other domestic public
network providers. We also sell to corporate and government customers.
Internationally, we sell our products and services to public and private
telecommunications service providers and other parties with a telecommunication
network point of presence. The following is an alphabetical list of our 10
largest customers, based on our 1999 net revenues:
<TABLE>
<S> <C>
AT&T Sprint North Supply
Anixter Time Warner
Graybar Electric Company Verizon
GTE Supply Walker and Associates
Power & Telephone Supply Company WorldCom
</TABLE>
These customers accounted for 68.6% of our net revenues in 1999 and 52.8% of our
net revenues during the nine months ended September 30, 2000. In 1999, none of
our customers individually accounted for more than 10% of our net revenues.
OPERATIONS
We currently operate manufacturing facilities in Spokane and Liberty Lake,
Washington; Wroclaw, Poland; and Guadalajara, Mexico. We expect shortly to begin
operating a manufacturing facility in Campinas, Brazil. We expect our
international facilities to enhance our global presence, reduce customer
delivery times and allow us to manufacture and sell our products more
cost-effectively.
Our facilities in the United States and Poland are ISO 9001 certified for
quality assurance in design and manufacturing and we are currently seeking
certification for our other manufacturing facilities. Many of our customers also
require that our products meet or exceed established domestic or international
quality standards. We utilize quality assurance tests and procedures in our
manufacturing processes to meet these standards.
We use a combination of standard components, which are generally available
from more than one vendor, and custom components, each of which we obtain from
sole sources. We have occasionally experienced difficulties obtaining supplies
from our vendors in the past. To alleviate these difficulties, we have added
vendors, increased purchasing staff and have taken steps to increase our
allocation of components from our suppliers. If we are unable to obtain
sufficient quantities of necessary supplies, or if there is a significant
increase in the price of key components or materials, delays or reductions in
manufacturing or product shipments could occur, which would harm our business
and adversely affect our operating results.
We are operating at approximately 95% of our manufacturing capacity. Our
backlog of firm orders as of September 30, 1999 was $15.0 million, and our
backlog increased by 100% to $30.0 million at September 30, 2000. We expect that
there will be a backlog of approximately $30.0 million at December 31, 2000.
Customers can cancel their purchase orders with us at any time, and we have
lost, and may continue to lose, potential or current orders because of
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our inability to meet a customer's time schedule. We intend to continue to meet
our short-term capacity requirements by outsourcing the manufacture of some of
our products to help meet increased demand and reduce our costs. If we are
unable to increase our manufacturing capacity to meet the increased demand for
telecommunications network equipment and the shortened delivery schedules of our
customers, our business and operating results may suffer.
PRODUCT DEVELOPMENT AND TECHNOLOGY
We believe that timely deployment of new and enhanced products is critical
to our success. Our product development process includes monitoring customer
needs and changes in the market place, obtaining input from customers,
developing product ideas and technologies, determining product requirements and
designing, testing and developing our products. Our principal product
development work is concentrated on enhancing our existing products, as well as
developing technologies that can lead to new products. During 1999, we spent
approximately $5.5 million on research, development and engineering and intend
to increase this amount in future periods.
We are focusing our technology development efforts on copper, coaxial cable
and high-bandwidth fiber optic technologies. We are also working to increase the
density of our products, improve power efficiency and integrate fiber optic
technology into additional products.
COMPETITION
Competition among telecommunications network equipment and service
providers is intense, with a large number of manufacturers and suppliers
providing a variety of products to diverse market segments within the
telecommunications industry. We believe that the principal competitive factors
in our markets include:
- customer service and support;
- performance, quality and reliability;
- total turnkey solutions;
- ability to respond to customer delivery schedules;
- ease and speed of product installation;
- price;
- custom design and configuration;
- technological capabilities;
- flexibility, scalability and ease of use; and
- scope of functions, features and benefits.
We believe that we compete favorably on each of these factors. We also
believe that customer financing, which we currently do not offer, is
increasingly becoming a competitive factor in our market. Our competitive
strategy includes leveraging our global reach and scale and our focus on a total
connectivity solution for network infrastructure environments.
We face competition for our broadband connectivity products and services
principally from ADC Telecommunications, Corning and Lucent Technologies. The
principal competitors for our power distribution products are Hendry Telephone
Products, Marconi Communications, PECO II, Siemens and TSI, a division of
Emerson Electric. We expect increased competition from existing competitors and
from other companies that may offer new or improved broadband connectivity or
power products. Several of our competitors have significantly greater financial,
manufacturing, sales and marketing, technical and labor resources than we do.
For example,
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many of these competitors have the ability to provide customers with end-to-end
telecommunications networks and systems, including the network connectivity and
power distribution equipment that we provide. As a result, such competitors may
be able to respond more rapidly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products, than we can. Our failure to successfully
compete in the telecommunications network equipment market would harm our
business, financial condition and operating results.
INTELLECTUAL PROPERTY
We depend on our proprietary information and technology. We rely primarily
on a combination of patent, copyright, trademark, trade secret laws and
contractual restrictions to establish and protect our rights in our products and
other proprietary technology. We generally require employees to enter into
confidentiality agreements to limit use of, access to, and distribution of, our
proprietary information. Despite these precautions, our means of protecting our
proprietary rights may not be adequate to prevent misappropriation. For example,
if an employee were to violate a nondisclosure agreement, we could lose rights
in our proprietary technology. Also, despite the steps taken by us to protect
our proprietary rights, unauthorized third parties may be able to copy aspects
of our products, reverse engineer our products or otherwise obtain and use
information that we regard as proprietary. Furthermore, others may independently
develop technologies similar or superior to our technology, or design around our
proprietary rights.
We have 25 issued patents with an additional 18 patent applications pending
in the United States. These patents include terminal block designs and features,
basic design of our DSX products, including switching jacks, fiber optic panels
and overhead cable management, and expire in years ranging from 2005 to 2017. We
also pursue limited patent protection for some of our technology outside the
United States. We may file additional patent applications in the future. Our
patent applications may not be approved or, if approved, may not be effective in
protecting our proprietary technology. In the past, we have been sued by parties
concerning our intellectual property rights. For example, in 1993, we entered
into an agreement with a competitor in which we settled litigation regarding one
of our patents. The telecommunications industry is characterized by a large
number of patents and fairly frequent litigation alleging patent infringement.
While our patents in the aggregate represent a valuable asset, we believe that
our business is not dependent on any single patent or group of related patents.
We have registered or filed applications to register in the United States
all principal trademarks used in the course of our business. The laws of some
foreign countries may not protect our proprietary rights as fully or in the same
manner as do the laws of the United States.
Telect(R), Telzon(R) and StarDAX(R) are registered trademarks of Telect,
Inc., including our subsidiaries, Telect de Mexico, S.A. de C.V., Telect Polska
S.A., Telect do Brasil Ltda., Telect Holdings, Inc., Telect International, Inc.,
and Telect Mfg. LLC. This prospectus also refers to trademarks and trade names
of other organizations.
FACILITIES
Our headquarters are located in Liberty Lake, Washington, where we lease
approximately 94,000 square feet of manufacturing space and approximately 58,000
square feet of office space. We are in the process of expanding these facilities
to add approximately 43,000 square feet of office space and approximately 53,000
square feet of manufacturing space.
We also lease approximately 138,000 square feet of manufacturing space and
approximately 10,000 square feet of office space in Spokane, Washington. We
currently occupy approximately 38,000 square feet of manufacturing space and
approximately
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20,000 square feet of office space in Poland. We also own an additional 273,000
square feet of administrative and manufacturing space in Poland that we sublease
to third parties on a month-to-month basis. The Polish government owns the real
estate on which our facilities are located. We lease approximately 100,000
square feet of manufacturing space in Guadalajara, Mexico and approximately
20,000 square feet of manufacturing space in Campinas, Brazil. Operations in
Brazil are expected to commence during the fourth quarter of 2000. We believe
that our current facilities, with these additions and expansions, will meet our
needs for the next 12 months and that we will be able to secure additional
facilities on acceptable terms if needed.
We use hazardous substances in our manufacturing processes and have
purchased facilities where hazardous substances may have been used in the past.
Use of hazardous substances is regulated by federal, state, local and
international governments. If we violate these regulations in our handling of
hazardous substances or our use of facilities containing hazardous substances,
we may face monetary penalties or other legal obligations or have limitations
imposed on how we operate our business. If a release of hazardous substances
occurs on or from any of the properties that we lease or use, we may be held
liable and may be required to pay the cost of remediation and other financial
penalties.
EMPLOYEES
As of September 30, 2000, we employed 2,086 full-time employees and 17
part-time employees, of whom 609 were in sales, marketing, administration and
technology and were in operations. We have 1,290 employees in the United
States and 813 in foreign countries. From time to time as our needs require, we
also hire temporary employees. Only our employees in Mexico and Poland are
covered by collective bargaining agreements. We have never experienced a work
stoppage and we believe we have good relations with our employees. We currently
have approximately 223 outstanding unfilled job openings. We may not be able to
attract and retain qualified personnel in sufficient numbers to meet our needs.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. From time
to time we have been, and expect to continue to be, subject to legal proceedings
and claims in the ordinary course of business, including claims of alleged
infringement of third-party trademarks and other intellectual property rights.
Such claims, even if not meritorious, could require the expenditure of
significant financial and managerial resources.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions of our current executive officers and
directors, as of October 10, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bill B. Williams, Jr. .......... 61 Chairman of the Board
Judith A. Williams.............. 61 Vice-Chairman of the Board, Secretary and Treasurer
Wayne E. Williams............... 36 President, Chief Executive Officer and Director
Timothy L. Szymanowski.......... 40 Vice-President of Sales and Marketing
E. Susan Meyer.................. 43 Vice-President of Human Resources and Corporate
Relations
William F. McMillan............. 52 Vice-President of Engineering and Technology
Stanley E. Hilbert.............. 47 Vice-President of Finance and Information
Technology
Jeffrey N. Gibson............... 41 Vice-President of Operations
Thomas C. Simpson............... 40 Director
Samuel L. Hayes III............. 65 Director
Walter M. Oliver................ 55 Director
</TABLE>
Executive Officers
Bill B. Williams, Jr. and his wife, Judith A. Williams, co-founded Telect
in October 1982. He has served as our Chairman of the Board since April 1995 and
as one of our directors since inception. He was our President from October 1982
to April 1995 and our Chief Executive Officer from March 1989 to April 1997.
Judith A. Williams is a co-founder of Telect along with her husband, Bill
B. Williams, Jr. She has served as our Vice-Chairman of the Board since April
1997 and as one of our directors since October 1985. She also has served as our
Treasurer since May 1999, as well as during various periods prior to that, and
as our Secretary since October 1995. She was our Executive Vice-President from
March 1993 to April 1997.
Wayne E. Williams has served as our President since April 1995 and as our
Chief Executive Officer since April 1997. He also has served as one of our
directors since March 1986. He joined us in September 1982 and has held various
positions, including Vice-President of Product Development, Sales and Marketing
from March 1993 to April 1995 and Vice-President of Sales and Marketing from
March 1989 to March 1993. Mr. Williams has completed the Owner/ President
Management Program at Harvard University. He is the son of Bill B. Williams, Jr.
and Judith A. Williams.
Timothy L. Szymanowski has served as our Vice-President of Sales and
Marketing since April 2000. He was our Vice-President of Sales from April 1998
to April 2000. Prior to that, he was with Van Waters & Rogers, Inc., a chemical
distribution company, in various positions, most recently as Branch Manager from
March 1996 to October 1997 and Materials Manager from September 1994 to February
1996. Mr. Szymanowski holds a B.A. in business administration from Northwest
Nazarene College and a M.Div. in theology from Western Seminary.
E. Susan Meyer has served as our Vice-President of Human Resources and
Corporate Relations since January 1999. From November 1995 until January 1998,
she was the Director of Community Relations for Washington and Idaho for the Gas
Transmission Division of Pacific Gas & Electric, a gas and electric utility.
From May 1988 to November 1995, she was the
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<PAGE> 48
Executive Director of Momentum, Inc., a non-profit economic development
organization. Ms. Meyer holds a B.A. in psychology and an M.B.A. from Eastern
Washington University.
William F. McMillan has served as our Vice-President of Engineering and
Technology since January 1999. He was our Director of Quality Assurance from May
1995 to December 1996 and he was our Director of Engineering from December 1996
to January 1999. Mr. McMillan holds a B.A. in mathematics and an M.S. in
computer science from Washington State University.
Stanley E. Hilbert has served as our Vice-President of Finance and
Information Technology since May 1999. He was our Director of Finance from
January 1999 to May 1999. Before joining us, he held various finance positions
with Hecla Mining Company, including Corporate Controller from May 1996 to
December 1999 and Assistant Controller from January 1992 to May 1996. Mr.
Hilbert holds a B.S. in business/accounting from the University of Idaho and is
a certified public accountant.
Jeffrey N. Gibson has served as our Vice-President of Operations since June
1999. From February 1993 to May 1999, he was employed by Key Tronic Corporation,
a keyboard manufacturer, in various positions, including Senior Manager of
Engineering, Director of Engineering, Director of Keyboard Technology and
Director of Technology. Mr. Gibson holds a B.S. in mechanical engineering from
California Polytechnic University.
Directors
Thomas C. Simpson has served as one of our directors since January 2000. He
has been the Managing Partner of Northwest Venture Associates, Inc., a venture
capital firm, since September 1995. From June 1987 to August 1995, he was a
Managing Director with Dain Bosworth, an investment banking firm. Mr. Simpson
holds a B.A. in business administration from the University of Washington and an
M.B.A. from the University of Pennsylvania, Wharton School of Business.
Samuel L. Hayes III has served as one of our directors since August 2000.
He holds the Jacob H. Schiff Chair in Investment Banking at the Harvard Business
School, where he has taught since 1971. He serves as a director of the
Eaton-Vance mutual funds, the Nvest and Kobrick mutual funds and Tiffany &
Company. Mr. Hayes holds an A.B. in political science from Swarthmore College
and an M.B.A. and a D.B.A. from Harvard Business School.
Walter M. Oliver has served as one of our directors since October 2000. He
has been a consultant with SBC Communications, a comprehensive
telecommunications provider since December 1999. From 1994 to 1999 he served as
Senior Vice President of Human Resources for Ameritech. He serves on the boards
of American Family Insurance Group, INROADS/ Chicago, the Ravinia Festival and
Whitworth College. Mr. Oliver holds a B.A. in psychology from Whitworth College
and a M.S. in human resources management from Gonzaga University.
BOARD OF DIRECTORS
Our board of directors is currently comprised of six directors. In
accordance with the terms of our articles of incorporation, our board of
directors is divided into three classes: Class 1, whose term will expire at the
annual meeting of shareholders in 2001, Class 2, whose term will expire at the
annual meeting of shareholders to be held in 2002, and Class 3, whose term will
expire at the annual meeting of shareholders to be held in 2003. The Class 1
directors are Bill B. Williams, Jr. and Walter M. Oliver, the Class 2 directors
are Judith A. Williams and Samuel L. Hayes III, and the Class 3 directors are
Wayne E. Williams and Thomas C. Simpson. At each annual meeting, commencing with
the 2001 shareholder meeting, each director will be elected to serve from the
time of election and qualification until the third annual meeting following
election. Any additional directorships resulting from an increase in the number
of
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directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of our directors.
BOARD COMMITTEES
Our board of directors has established an audit committee and a
compensation committee. The audit committee, which consists of Thomas C.
Simpson, Samuel L. Hayes III and Walter M. Oliver, reviews the results and scope
of the annual audit and meets with our independent auditors to review our
internal accounting policies and procedures. The compensation committee, which
consists of Thomas C. Simpson and Samuel L. Hayes III, makes recommendations to
the board of directors with respect to our general and specific compensation
policies and practices and administers our employee benefit plans.
DIRECTOR COMPENSATION
Non-employee directors receive $20,000 per year for services rendered as
members of our board of directors plus an additional $4,000 for attendance at
each quarterly board meeting and $500 for attendance at each committee meeting
or, in the case of a committee chairman, $1,000 for attendance at each committee
meeting. We also reimburse directors for reasonable expenses in connection with
their attendance at board of director and committee meetings. In addition, under
our 2000 equity incentive plan, our non-employee directors will receive stock
option grants to purchase 10,000 shares of common stock when first appointed to
the board, and grants to purchase 5,000 shares of common stock annually
thereafter.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a director or member of the
compensation committee or other board committee performing equivalent functions
of another entity that has one or more executive officers serving on the board
of directors or compensation committee of Telect. Prior to the formation of our
compensation committee, compensation decisions were made by the board of
directors.
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EXECUTIVE COMPENSATION
The following table sets forth in summary form information concerning the
compensation paid by us during the fiscal year ended December 31, 1999 to our
Chief Executive Officer and each of our six other most highly compensated
executive officers. These individuals are referred to as the named executive
officers in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
--------------------------- -------- -------- ------------
<S> <C> <C> <C>
Wayne E. Williams;
President and Chief
Executive Officer................................ $182,000 $307,066 $ 4,935(1)
Bill B. Williams, Jr.;
Chairman of the Board............................ 234,000 134,821 109,287(1)
Judith A. Williams;
Vice-Chairman of the
Board, Secretary and
Treasurer........................................ 182,000 134,821 109,287(1)
Timothy L. Szymanowski;
Vice-President of Sales
and Marketing.................................... 132,875 93,975 --
William F. McMillan;
Vice-President of
Engineering and Technology....................... 106,560 55,007 --
Stanley E. Hilbert;
Vice-President of Finance
and Information Technology....................... 104,390 40,356 --
E. Susan Meyer;
Vice-President of Human
Resources and Corporate
Relations........................................ 93,262 39,107 --
</TABLE>
-------------------------
(1) Premiums paid by us on life insurance policies.
EMPLOYEE BENEFIT PLANS
EQUITY INCENTIVE PLAN
Our 2000 equity incentive plan provides for the grant of incentive stock
options to our employees, including our officers and employee directors, and for
the grant of nonstatutory stock options, restricted stock purchase rights and
bonuses, performance shares and units and stock purchase rights to our
employees, directors and consultants. The equity incentive plan was adopted by
our board of directors and approved by our shareholders in August 2000. As of
September 30, 2000, there were 3,219,300 options outstanding and we have
reserved an additional 9,697,700 shares of our common stock for issuance under
the equity incentive plan.
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<PAGE> 51
Administration
Our board of directors or the compensation committee administers the equity
incentive plan. The administrator has the power to determine, among other
things:
- the persons to whom, and the time or times at which, awards shall be
granted;
- the number of shares subject to each award;
- the exercisability of each award; and
- the form of consideration payable upon the exercise of each award.
Options
The administrator determines the exercise price of options granted under
our equity incentive plan, but with respect to all incentive stock options and
nonstatutory stock options intended to qualify as performance-based compensation
within the meaning of Section 162(m) of the Internal Revenue Code, the exercise
price must at least equal the fair market value of our common stock on the date
of grant. The term of an incentive stock option may not exceed ten years, except
that with respect to any participant who owns 10% or more of the voting power of
all classes of our outstanding capital stock, the term must not exceed five
years and the exercise price must equal at least 110% of the fair market value
on the date of grant. The administrator determines the term of all other
options.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for six months. If termination follows a change in
control, the option will generally be exercisable for six months. If termination
is for cause, the option will generally terminate immediately upon such
termination. In all other cases, the option will generally remain exercisable
for one month. However, an option may never be exercised later than the
expiration of its term.
Restricted Stock Awards
The administrator determines the exercise price of restricted stock awards
under our equity incentive plan. A restricted stock award may be in the form of
a restricted stock bonus, which is a grant of our common stock, or restricted
stock purchase right, which is a grant of a right to purchase our common stock.
Unless the administrator determines otherwise, we will retain an option to
repurchase shares acquired pursuant to a restricted stock bonus or restricted
stock purchase right that we may exercise on the voluntary or involuntary
termination of the purchaser's services with us for any reason, including death
or disability. The purchase price for the shares we repurchase will generally be
the original price paid by the purchaser. The administrator determines the rate
at which our repurchase option will lapse.
Transferability of Options and Restricted Stock Awards
Our equity incentive plan generally does not allow for the transfer of
options or restricted stock awards, other than by will or by the laws of descent
or distribution, and only the optionee may exercise an option or restricted
stock award during his or her lifetime. The administrator determines if
nonstatutory options may be assignable or transferable subject to all applicable
securities laws.
Automatic Option Grants to Non-Employee Directors
Our equity incentive plan also provides for the automatic grant of 10,000
shares of common stock to non-employee directors effective upon initial
appointment to the board. Each non-employee director will automatically be
granted an option to purchase 5,000 shares of
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common stock each year following the date of our annual shareholders' meeting.
The option will fully vest upon the earlier of the first day of the twelfth
month following the date of grant or the day before the next annual
shareholders' meeting, provided that the non-employee director is then a board
member. All options automatically granted to non-employee directors will have a
term of five years and the exercise price will be 100% of fair market value per
share of common stock on the date of grant.
Performance Awards
Our equity incentive plan provides for performance awards in the form of
performance shares, which is a right to receive payment equal to the value of
the shares, or performance units, which is a right to receive payment equal to
the value of the units. The administrator determines the terms and conditions of
performance awards granted under the plan, including establishing performance
goals and performance periods. Unless the administrator determines otherwise,
the initial value of performance shares shall be equal to the fair market value
of our common stock on the date of grant and the initial value of each
performance unit shall be $100. The final value of a performance award depends
upon the attainment of certain performance goals determined by our
administrator. After completion of a performance period, the participant will be
paid the difference between the initial value and the final value of the award,
though the administrator will generally have the right to reduce the amount to
be awarded to the participant.
A performance award payment may be made in cash, shares of our common
stock, or a combination of cash and stock, as determined by the administrator.
The administrator determines if shares of our common stock will be subject to
vesting provisions when paid as a performance award. Upon the termination of one
of our employees due to death or disability, a performance award shall be
prorated based upon the number of days of the employee's service during the
performance period.
Our equity incentive plan provides that if an employee is terminated after
our merger with or into another corporation or a sale of substantially all of
our assets, the administrator may provide that a performance award is payable
for its final value, subject to certain accounting provisions. In all other
cases, a performance award will be forfeited in its entirety upon the voluntary
or involuntary termination of the employee.
Transferability of Performance Awards
Our equity incentive plan does not allow for the transfer, exchange or
pledging of performance shares or performance units, other than by will or by
the laws of descent and distribution until the completion of the performance
period. Only the employee may exercise a performance share or performance unit
during his or her lifetime.
Stock Appreciation Rights
Our equity incentive plan provides for the grant of stock appreciation
rights, meaning the right to receive a payment from us in an amount equal to the
excess of the fair market value of a share of our common stock on the date of
exercise over the strike price. The administrator determines the terms and
conditions of stock appreciation rights that may be granted under the plan. The
strike price of a stock appreciation right shall be the fair market value of a
share of our common stock on the date of the grant. The administrator determines
when and upon what conditions a stock appreciation right is exercisable, but in
no event shall a stock appreciation right become exercisable prior to the date a
participant commences service. The plan provides that the exercise of a stock
appreciation right shall be paid by us to the participant in the form of cash or
check or a cash equivalent.
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Upon termination of a participant due to death or disability, the final
value of a stock appreciation right will be determined and paid at the
completion of the exercisability period. The plan provides that if a participant
is terminated following our merger with or into another corporation or a sale of
substantially all of our assets, the administrator may provide that a stock
appreciation right is payable for its final value, subject to certain accounting
provisions. In all other cases, a stock appreciation right will be forfeited in
its entirety upon the voluntary or involuntary termination of the participant.
Transferability of Stock Appreciation Rights
Our equity incentive plan does not allow for the transfer of a stock
appreciation right other than by will or by the laws of descent and
distribution. Only the participant may exercise a stock appreciation right
during his or her lifetime.
Adjustments upon Merger or Asset Sale
Our equity incentive plan provides that, in the event of our merger with or
into another corporation or a sale of substantially all of our assets, the
successor corporation may assume or substitute an equivalent option or right for
each outstanding option or stock appreciation right. The board, at its
discretion, may accelerate the vesting or payment of any or all options,
restricted stock awards, stock appreciation rights and performance awards prior
to the effective date of the change in control. In the event of a change in
control, any non-employee director will have the right to exercise the option as
to all of the shares subject to the option, including shares that would not
otherwise be exercisable as of the date ten days prior to the date of the change
in control.
Amendment and Termination of the 2000 Equity Incentive Plan
The administrator has the authority to terminate or amend our equity
incentive plan at any time, provided it does not adversely affect any previously
granted option or restricted stock award or any previously issued shares of
common stock and subject to applicable laws and regulations requiring
shareholder approval of amendments.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 employee stock purchase plan was adopted by our board of directors
and approved by our shareholders in August 2000 and will become effective upon
the completion of this offering. A total of 6,458,500 shares of our common stock
has been reserved for issuance under the stock purchase plan.
Structure of the 2000 Employee Stock Purchase Plan
The stock purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, contains consecutive six month offering periods. The
offering periods generally start on the first trading day after February 1 and
August 1 of each year and terminate on or about the last day of July or January,
respectively, occurring thereafter, except for the first such offering period
which will start on the effective date of this offering and will end on or about
January 31, 2001.
Eligibility
All of our employees are eligible to participate if they are customarily
employed by us or any majority-owned subsidiary for more than 20 hours per week
and more than five months in
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any calendar year. However, an employee may not be granted an option to purchase
stock under our stock purchase plan if such employee:
- immediately after the acquisition of stock, possesses 5% or more of the
total combined voting power or value of all classes of our capital stock;
or
- accrues rights to purchase stock in excess of $25,000 worth of stock for
each calendar year.
Purchases
Our stock purchase plan permits participants to purchase common stock
through payroll deductions of up to 15% of their eligible compensation. The
price is 85% of the lesser of the fair market value of our common stock either:
- at the beginning of an offering period; or
- at the end of the offering period or such other purchase date as the
administrator establishes.
Participants may end their participation at any time during an offering
period and will be paid their payroll deductions accumulated during that
offering period. Participants may change their level of participation in the
plan at any time during an offering period. Participation ends automatically
upon termination of employment with us.
Transferability of Rights
A participant may not transfer rights granted under our stock purchase plan
other than by will, the laws of descent or distribution, or as otherwise
provided under the stock purchase plan.
Merger or Asset Sale
In the event of our merger with or into another corporation or sale of all
or substantially all of our assets, a successor corporation may assume or
substitute each purchase right. If the successor corporation refuses to assume
or substitute for the purchase rights, the offering period then in process will
be shortened, and a new purchase date will be established on a date prior to the
merger or sale.
Amendment and Termination of the 2000 Employee Stock Purchase Plan
Our board of directors has the authority to amend or terminate our stock
purchase plan, subject to applicable laws and regulations requiring shareholder
approval of amendments, except that no such action may adversely affect any
outstanding rights to purchase stock under the purchase plan.
401(k) PLAN
We maintain a tax-qualified retirement and deferred savings plan for our
employees, commonly known as a 401(k) plan. The 401(k) plan provides that each
participant may contribute up to 12% of his or her pre-tax gross compensation up
to the statutory limit, which was $10,000 in the 1999 calendar year. Under our
401(k) plan, we may make matching contributions of up to 8.0% of annual
compensation on a tiered matching scale. In 1999, we made an aggregate of
$835,000 in contributions to the 401(k) plan.
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<PAGE> 55
PERFORMANCE INCENTIVE PLAN
In August 2000, our board of directors adopted our 2000 performance
incentive plan. This plan is a bonus plan that covers our executive officers and
certain other management or key employees. The plan goals are set annually and
include corporate, financial and/or individual goals, which are weighted
differently depending on the employee's position. Depending upon the degree of
attainment of these goals, the eligible employee can receive a quarterly bonus
up to a percentage of his or her salary ranging from 15% to 35%.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation limit the liability of our directors to the
maximum extent permitted by Washington law. Washington law provides that a
corporation's articles of incorporation may contain a provision eliminating or
limiting the personal liability of directors for monetary damages for breach of
their fiduciary duty as directors, except liability for:
- acts or omissions that involve intentional misconduct or a knowing
violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 23B.08.310 of the Washington Business
Corporation Act; or
- any transaction from which the director derives a personal benefit in
money, property or services to which the director is not legally
entitled.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies, such as injunctive relief or rescission. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling us, we have been informed that in the opinion of
the Securities And Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Our articles of incorporation also provide that we shall indemnify our
directors and officers to the fullest extent permitted by law, and that we may
maintain insurance on behalf of any director, officer, employee or agent of
Telect, or of another company or enterprise if serving at our request,
regardless of whether we would have the power to indemnify such person against
liability under Washington law.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our articles of
incorporation. These agreements, among other things, indemnify our directors and
executive officers for certain liabilities and expenses, including attorneys
fees, judgments, fines and settlement amounts, incurred by such person in any
action or proceeding, including any action by or in the right of us, arising out
of such person's services as a director, officer, employee or agent of Telect,
or of another company or enterprise if serving at our request. These agreements
also provide officers with a similar limitation or release of liability for
monetary damages that the Washington Business Corporation Act and our articles
of incorporation provide to directors. These agreements may limit the liability
of, and indemnify, our directors and officers to a greater extent than otherwise
provided under Washington law or our articles of incorporation. We believe that
our articles of incorporation and indemnification agreements are necessary to
attract and retain qualified directors and officers. Upon completion of this
offering, we will also maintain directors and officers liability insurance.
At present, we are not aware of any pending litigation or proceeding
involving a director, officer, employee or agent of ours in which
indemnification is required or permitted, and we are not aware of any threatened
litigation or proceeding that may result in a claim for indemnification.
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<PAGE> 56
CERTAIN TRANSACTIONS
The following is a summary of transactions in the last three years to which
we have been a party, in which the amount involved in the transaction exceeds
$60,000 and in which any executive officer, director or holder of more than 5%
of our common stock had or will have a direct or indirect material interest
other than compensation arrangements which are otherwise described under
"Management."
We lease our existing facilities at Liberty Lake, Washington, from
Jubilation Enterprises, LLC, a Washington limited liability company whose sole
members are Bill B. Williams, Jr., and Judith A. Williams. Mr. and Mrs. Williams
are two of our directors, executive officers and major shareholders and the
parents of Wayne E. Williams, one of our directors, executive officers and major
shareholders. We paid rent for these facilities of approximately $712,000 in
1997, $1,380,000 in 1998 and $1,380,000 in 1999. We believe this rent paid to
Jubilation was as favorable as could have been obtained from an unaffiliated
third party. We are also responsible for payments to third parties for taxes,
insurance and maintenance. Jubilation Enterprises, LLC is currently constructing
two new buildings at our Liberty Lake facilities. One new building will be
leased to us under an amendment to our existing lease and the other new building
will be leased to us under a separate new lease. The amended lease and the new
lease provide for annual rent of $1,883,448 and $314,676, respectively. We will
continue to be responsible for payments to third parties for taxes, insurance
and maintenance. Jubilation Enterprises, LLC has recently purchased a facility
adjacent to our existing facilities at Liberty Lake, which will be leased to us
at market rental rates. This lease is estimated to commence in the second half
of 2001.
We have entered into two split dollar life insurance agreements with the
Wayne and Terina Williams Family Irrevocable Trust established for the benefit
of the children of Wayne E. Williams, and three split dollar life insurance
agreements with the Williams Family Irrevocable Trust established for the
benefit of the children of Bill B. Williams, Jr. and Judith A. Williams. Split
dollar life insurance involves an agreement under which a portion of the policy
premiums are paid by an employer and the policy proceeds, less reimbursement to
the employer of the premiums it has paid, are paid to the policy beneficiaries.
These agreements provide for the payment of a portion of the premiums on life
insurance policies on the lives of Bill B. Williams, Jr., Judith A. Williams,
Wayne E. Williams and Terina J. Williams, with a total death benefit for all
agreements of $13,000,000. Total premiums paid by us under the agreements were
$225,110 in 1997, $224,451 in 1998 and $223,510 in 1999. Under the terms of the
agreements, we are entitled to repayment of the amount of premium payments we
have advanced upon the death of an insured party or termination of the
agreements. The receivable was $1,242,405 at December 31, 1999.
We will terminate our Subchapter S corporation status prior to the closing
of this offering and, in connection with the closing of this offering, we intend
to distribute to our existing shareholders a final amount representing our
undistributed Subchapter S corporation income through the Subchapter S
corporation termination date. At September 30, 2000, the amount of our
undistributed Subchapter S corporation income was approximately $73 million. The
distribution will be made in the form of promissory notes bearing interest at
the Bank of America prime rate and will be repaid following the consummation of
this offering from the net proceeds of this offering.
In connection with this offering and the termination of our Subchapter S
corporation tax status, we will enter into a tax indemnification agreement with
our existing shareholders providing for, among other things, the shareholders to
indemnify us for any federal and state corporate income taxes, including
interest and penalties, incurred by us if for any reason we are deemed to be
treated as a Subchapter C corporation during any period in which we reported our
taxable income as a Subchapter S corporation. The tax indemnification obligation
of each
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<PAGE> 57
existing shareholder is limited to the aggregate amount of all distributions
made to such shareholder by us since the first day of the first tax year that we
are deemed to be treated as a Subchapter C corporation, reduced by the amount of
tax actually owed by such shareholder on those distributions.
We believe we have met the requirements for a Subchapter S corporation and
the tax indemnification agreement will provide for payment by our existing
shareholders to us and by us to our existing shareholders to adjust for any
increases or decreases in tax liability arising from a tax audit that affects
our tax liability and results in a corresponding adjustment to the tax liability
of our existing shareholders.
Some of our executive officers and directors are also our shareholders.
When we terminate our Subchapter S corporation status, they will receive a
portion of the Subchapter S corporation distribution. The estimated
distributions to these executive officers and directors, and to our 5%
shareholders according to their record ownership, based on the amount of our
undistributed Subchapter S corporation income at September 30, 2000, are as
follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER, DIRECTOR AND/OR 5% SHAREHOLDER ESTIMATED DISTRIBUTION
------------------------------------------------- ----------------------
<S> <C>
Bill B. Williams, Jr........................................ $16,247,346
Judith A. Williams.......................................... 16,247,346
Wayne E. Williams........................................... 22,731,679
Donna L. Zier............................................... 7,822,522
Karen S. Williams........................................... 4,165,477
Timothy L. Szymanowski...................................... 1,901
E. Susan Meyer.............................................. 1,901
William F. McMillan......................................... 1,901
Stanley E. Hilbert.......................................... 1,901
Jeffrey N. Gibson........................................... 1,901
</TABLE>
In 1997 and 1998, some of our existing shareholders made loans to us. These
loans were payable on demand or in monthly installments, were evidenced by
promissory notes and bore interest at the rate of 8.0% per annum. We have repaid
these loans in full. Each of the following shareholders or affiliates of
shareholders made loans to us in the aggregate amounts set forth opposite his or
her name in 1997 and 1998:
<TABLE>
<CAPTION>
SHAREHOLDER 1997 LOANS 1998 LOANS
----------- ---------- ----------
<S> <C> <C>
Bill B. Williams, Jr. and Judith A. Williams................ $300,000
Jubilation Enterprises, LLC................................. $937,882
Wayne E. Williams........................................... $248,332
Donna L. and Kelly G. Zier, including a $37,343 loan from
the Wyatt Alan Zier Trust, of which Donna Zier is the
trustee................................................... $171,982
Karen S. Williams........................................... $ 67,019
</TABLE>
In February 1994, we entered into a put option agreement with Wayne E.
Williams pursuant to which Mr. Williams had the right to require us to purchase
a certain number of his shares of our stock. This agreement has been terminated
and is of no further force or effect.
In December 1992, we entered into a Stockholders' Agreement with all of our
shareholders, including Bill B. Williams, Jr., Judith A. Williams, Wayne E.
Williams, Donna L. Zier and Karen S. Williams. Mrs. Zier and Ms. Williams are
daughters of Bill B. Williams, Jr. and Judith A. Williams. The agreement
provides for restrictions on transferability of our stock. This agreement will
terminate on the closing of this offering.
On June 1, 1999, we sold our diversified products group to Harold D.
Alexander, a former officer, 5% shareholder and director. The assets of the
diversified products group consisted of inventory and certain fixed assets with
a book and estimated fair market value of approximately $2.8 million. The
transaction was structured as an exchange of all the shares of our diversified
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<PAGE> 58
products group subsidiary for 2,151,000 shares of our common stock. The price
was determined by negotiation between the parties.
INDEBTEDNESS OF MANAGEMENT
In 1999 and 2000, we made loans to Jubilation Enterprises, LLC in the form
of construction advances in connection with the expansion of our Liberty Lake
facilities. These loans are paid off monthly, are not evidenced by promissory
notes and bear no interest. As of September 30, 2000, Jubilation Enterprises,
LLC was indebted to us in the amount of $673,333 on these loans. The highest
outstanding balance on these loans to that date was $1,946,658. We intend to
continue to make additional loans of this type to Jubilation Enterprises, LLC in
the future in connection with remaining construction of these expansions to our
Liberty Lake facilities.
In 1997 and 1998, we also made loans to Jubilation Enterprises, LLC in the
form of construction advances in connection with the prior expansion of our
Liberty Lake facilities. These loans remained outstanding during construction,
were not evidenced by promissory notes and bore interest at a variable rate not
exceeding 8.0% per annum. The highest outstanding balance on these loans was
$7,987,709. After completion of construction, a portion of these loans remained
outstanding and were payable in monthly installments, were evidenced by
promissory notes and bore interest at the rate of 8.0% per annum. These loans
have been repaid in full.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with our directors and
executive officers containing provisions that may require us to indemnify them
against liabilities that may arise by reason of their status or service as
directors or executive officers and to advance their expenses incurred as a
result of any proceeding against them. See "Management -- Limitation of
Liability and Indemnification Matters."
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<PAGE> 59
PRINCIPAL SHAREHOLDERS
The following table sets forth as of October 10, 2000, and as adjusted to
reflect the sale of the shares of common stock offered hereby, certain
information with respect to the beneficial ownership of the common stock as to:
- each person or group of affiliated persons who is known by us to own
beneficially 5% or more of our common stock;
- each of the named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Except as indicated in the table or footnotes below, and subject to
applicable community property laws, the persons named below have sole voting and
investment power with respect to all shares of common stock held by them.
Applicable percentage ownership in the table is based on 119,170,000 shares
of common stock outstanding as of October 10, 2000, and 131,170,000 shares
outstanding immediately following the completion of this offering. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. Shares of common stock subject to options that are
presently exercisable or exercisable within 60 days of October 10, 2000 are
deemed outstanding for the purpose of computing the percentage ownership of the
person or entity holding options, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person or entity.
Unless otherwise indicated below, each person named below has an address in
care of Telect, Inc., 2111 Molter Road, Liberty Lake, Washington 99019.
<TABLE>
<CAPTION>
BENEFICIALLY OWNED
PERCENTAGE OF SHARES
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(6) BEFORE OFFERING AFTER OFFERING
------------------------ --------------------- --------------- --------------
<S> <C> <C> <C>
Bill B. Williams, Jr.(1)................ 47,772,274 40.0% 36.4%
Judith A. Williams(2)................... 47,772,274 40.0 36.4
Wayne E. Williams(3).................... 41,901,488 35.1 31.9
Donna L. Zier(4)........................ 22,096,000 18.5 16.8
Karen S. Williams(5).................... 6,800,000 5.7 5.2
Timothy L. Szymanowski.................. 53,904 * *
Stanley E. Hilbert...................... 53,904 * *
E. Susan Meyer.......................... 41,404 * *
William F. McMillan..................... 28,904 * *
Thomas C. Simpson....................... 0 * *
Samuel L. Hayes III..................... 0 * *
Walter M. Oliver........................ 0 * *
All executive officers and directors as
a group (11 persons).................. 95,231,582 79.7% 72.4%
</TABLE>
-------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 21,223,237 shares held by Judith A. Williams in which Bill B.
Williams, Jr. has a community property interest. Also includes 5,300,000
shares held in a trust for which Mr. Williams serves as trustee.
(2) Includes 21,223,237 shares held by Bill B. Williams, Jr. in which Judith A.
Williams has a community property interest. Also includes 5,300,000 shares
held in a trust for which Mrs. Williams serves as trustee.
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<PAGE> 60
(3) Includes 3,519,000 shares held by trusts for the benefit of Mr. Williams'
three children. Mr. Williams exercises sole voting and dispositive power
over these shares. Also includes 1,173,000 shares held by Mr. Williams'
spouse. Mr. Williams disclaims beneficial ownership of the shares held in
trust and by his spouse, except to the extent of his financial interest in
these shares.
(4) Includes 3,519,000 shares held by trusts for the benefit of Mrs. Zier's
three children and 4,634,000 shares held in trust for the benefit of Mrs.
Zier's sister, Karen S. Williams. Mrs. Zier exercises sole voting and
dispositive power over these shares. Also includes 1,173,000 shares held by
Mrs. Zier's spouse. Mrs. Zier disclaims beneficial ownership of the shares
held in trust and by her spouse, except to the extent of her financial
interest in these shares.
(5) Includes 4,634,000 shares held by trusts for the benefit of Ms. Williams and
included in the beneficial ownership of Mrs. Zier as referenced in footnote
4. Ms. Williams has no voting or dispositive power over these shares.
(6) Includes the following options, which were granted on August 30, 2000 and
which are exercisable within 60 days of October 10, 2000: Bill B. Williams,
Jr., 25,800; Judith A. Williams, 25,800; Wayne E. Williams, 100,800; Timothy
L. Szymanowski, 50,800; E. Susan Meyer, 38,300; William F. McMillan, 25,800;
Stanley E. Hilbert, 50,800; and Jeffrey N. Gibson, 50,800. Does not include
options for 10,000 shares granted to Thomas C. Simpson and Samuel L. Hayes
III, which were granted on August 30, 2000, and also does not include an
option for 10,000 shares granted to Walter M. Oliver on October 9, 2000,
which are not exercisable within 60 days of October 10, 2000.
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<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
Our articles of incorporation provide for total authorized capital stock of
400,000,000 shares of common stock, $0.001 par value per share, and 100,000,000
shares of preferred stock, $0.001 par value.
COMMON STOCK
As of September 30, 2000, there were 119,170,000 shares of common stock
outstanding, held of record by 38 holders. Upon the closing of this offering,
there will be 131,170,000 shares of common stock outstanding. The number of
shares of common stock to be outstanding upon the closing of this offering does
not include 3,219,300 shares of common stock issuable upon exercise of stock
options outstanding as of October 10, 2000 and 16,156,200 shares of common stock
reserved for future issuance under our equity incentive plan or our employee
stock purchase plan.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. There are no
cumulative voting rights. Holders of common stock have no preemptive rights or
rights to convert their common stock into any other securities. Subject to
preferences that may be granted to any outstanding preferred stock, holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the board of directors out of funds legally available. If we are
liquidated, dissolved or wound up, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and liquidation
preferences that may be granted to any outstanding preferred stock. There are no
redemption or sinking funds provisions applicable to the common stock.
PREFERRED STOCK
Pursuant to our articles of incorporation, our board of directors has the
authority, without further action by the shareholders, to designate and issue up
to 100,000,000 shares of preferred stock in one or more series. Our board of
directors may designate the preferences, powers and privileges thereof,
including dividend rights, liquidation preferences, voting rights, conversion
rights and redemption or sinking fund provisions, any or all of which may be
greater than the rights of common stock. Our board, without shareholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued quickly with terms calculated
to delay or prevent a change in control of Telect or make removal of management
more difficult. Additionally, the issuance of preferred stock may have the
effect of decreasing the market price of our common stock. Upon the closing of
this offering, there will be no shares of preferred stock outstanding and we
have no current plans to issue any of the preferred stock.
ANTI-TAKEOVER EFFECTS OF ARTICLES OF INCORPORATION, BYLAWS AND OF WASHINGTON LAW
Charter Documents
There are provisions in our articles of incorporation and bylaws that could
discourage potential takeover attempts and could make attempts to change
management more difficult. These provisions could also adversely affect the
market price of our common stock and include:
- division of our board of directors into three separate classes with
staggered three-year terms;
- elimination of cumulative voting in the election of directors;
- limiting removal of directors for cause only;
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<PAGE> 62
- prohibiting our shareholders from calling special meetings; and
- establishing advance notice requirements for submitting nominations for
election to the board of directors and for proposing various matters that
can be acted upon by shareholders at a meeting.
In addition, subject to limitations prescribed by law, our board of
directors has the authority to issue up to 100,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights of any preferred stock so issued, without any further
vote or action by the shareholders, which rights may be superior to the rights
of our common stock. The issuance of preferred stock, while providing
flexibility in connection with possible financings or acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock.
Washington Law
Section 23B.19 of the Washington Business Corporation Act generally
prohibits a target corporation from engaging in certain significant business
transactions with an acquiring person, which is defined as a person or group of
persons that beneficially owns 10% or more of the voting securities of the
target corporation, for a period of five years after the acquisition, unless the
transaction or acquisition of shares is approved by a majority of the members of
the target corporation's board of directors prior to the time of acquisition.
Prohibited significant business transactions include, among other things:
- A merger or consolidation with, dispositions of assets to, or issuance or
redemption of stock to or from, the acquiring person;
- termination of 5% or more of the employees of the target corporation as a
result of the acquiring person's acquisition of 10% or more of the
shares; or
- allowing the acquiring person to receive any disproportionate benefits as
a shareholder.
After the five-year period, a significant business transaction, defined
under the Washington Business Corporation Act, may occur as long as it complies
with certain fair price provisions of this statute. A corporation may not opt
out of this statute. This provision may have the effect of delaying, deterring
or preventing a change in control of our company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services, L.L.C., Seattle, Washington.
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<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 131,170,000
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of options after September 30, 2000. Of these shares, all
of the shares sold in this offering will be freely tradable without restriction
or further registration under the Securities Act; provided however, that if
shares are purchased by affiliates as that term is defined in Rule 144 of the
Securities Act, their sales of shares would be subject to certain limitations
and restrictions that are described below.
The remaining 119,170,000 shares of common stock held by existing
shareholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of these shares will be
subject to lock-up agreements described below. These shares will become eligible
for sale as follows:
<TABLE>
<CAPTION>
NUMBER
DATE OF AVAILABILITY FOR SALE OF SHARES COMMENT
----------------------------- ----------- -------
<S> <C> <C>
90th day after the effective date of All holders of securities are bound
this offering...................... 0 by lock-up agreements
181st day after the date of this 180-day lock-up expires; shares
prospectus......................... 119,170,000 saleable under Rule 144, 144(k) or
701
Various dates thereafter............. 0 Restricted securities held for one
year or less as of the 181st day
after the date of this prospectus
</TABLE>
In addition, we have 16,156,200 shares of our common stock available for
future grant pursuant to our equity incentive plan and stock purchase plan, and
3,219,300 shares subject to outstanding options at September 30, 2000. All
outstanding options are also subject to a 180-day lock-up. We intend to
register, prior to the expiration of the lock-up, all of the shares of common
stock reserved for issuance under our equity incentive plan and stock purchase
plan. This registration will permit the resale of shares by non-affiliates in
the public market without restriction beginning on expiration of the lock-ups.
We, and each of our officers and directors and all of our shareholders and
option holders, have agreed with Deutsche Bank Securities Inc. not to sell or
otherwise dispose of any their shares for a period of 180 days after the date of
this prospectus without the prior written consent of Deutsche Bank Securities
Inc. Deutsche Bank Securities Inc., however, may in its sole discretion, at any
time and without notice, release all or any portion of the shares subject to
lock-up agreements. Deutsche Bank Securities Inc. does not have any current
plans to effect such a release.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,311,700 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market System during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
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<PAGE> 64
Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice filing and the availability of current public information
about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
these shares under Rule 144(k) without regard to the requirements described
above. Therefore, unless otherwise restricted, shares that may be sold under
Rule 144(k) may be sold immediately upon the completion of this offering.
RULE 701
In general, any employee, director, officer, consultant or advisor who
purchases shares from us in connection with a written compensatory plan or
contract before the effective date of the offering is entitled to resell these
shares 90 days after the effective date of the offering in reliance on Rule 144,
without having to comply with certain restrictions, including the holding
period, contained in Rule 144. The SEC has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, along with the
shares acquired upon exercise of these options, including exercises after the
date of this prospectus. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than affiliates subject only to the manner of sale restrictions of
Rule 144 and by affiliates under Rule 144 without compliance with its one-year
minimum holding requirement. Of the 119,170,000 shares of common stock held by
existing shareholders as of September 30, 2000, none will be eligible for resale
pursuant to Rule 701 upon the expiration of the 180-day lock-up.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray Inc. have severally
agreed to purchase from us the following respective number of shares of common
stock at a public offering price less the underwriting discounts and commissions
set forth on the cover page of this prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- -----------
<S> <C>
Deutsche Bank Securities Inc. ..............................
Chase Securities Inc. ......................................
U.S. Bancorp Piper Jaffray Inc. ............................
-----------
Total ............................................ 12,000,000
===========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to conditions precedent and that the underwriters will purchase all shares of
the common stock offered hereby, other than those covered by the over-allotment
option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $ per share to other
dealers. After the initial public offering, representatives of the underwriters
may change the offering price and other selling terms. We have granted to the
underwriters an option, exercisable not later than 30 days after the date of
this prospectus, to purchase up to additional shares of common stock at
the public offering price less the underwriting discounts and commissions set
forth on the cover page of this prospectus. The underwriters may exercise this
option only to cover over-allotments made in connection with the sale of the
common stock offered hereby. To the extent that the underwriters exercise this
option, each of the underwriters will become obligated, subject to conditions,
to purchase approximately the same percentage of additional shares of common
stock as the number of shares of common stock to be purchased by it in the above
table bears to the total number of shares of common stock offered hereby. We
will be obligated, as a result of the option, to sell these additional shares of
common stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which the 12,000,000 shares are
being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is % of the initial public offering price. We
have agreed to pay the underwriters the following fees, assuming either no
exercise or full exercise by the underwriters of the underwriters'
over-allotment option:
<TABLE>
<CAPTION>
TOTAL UNDERWRITING FEES
---------------------------------------
WITHOUT EXERCISE WITH FULL EXERCISE
FEE PER OF OVER-ALLOTMENT OF OVER-ALLOTMENT
SHARE OPTION OPTION
------- ----------------- ------------------
<S> <C> <C> <C>
Underwriting fees paid by Telect.... $ -- $ -- $ --
</TABLE>
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1.6 million. We have agreed to indemnify the underwriters against
some specified types of liabilities, including liabilities under
62
<PAGE> 66
the Securities Act, and to contribute to payments the underwriters may be
required to make in respect of any of these liabilities.
Each of our officers and directors, and all of our shareholders and holders
of options to purchase our stock, have agreed not to offer, sell, contract to
sell or otherwise dispose of, or enter into any transaction that is designed to,
or could be expected to, result in the disposition of any shares of our common
stock or other securities convertible into or exchangeable or exercisable for
shares of our common stock or derivatives of our common stock owned by these
persons prior to this offering or common stock issuable upon exercise of options
held by these persons for a period of 180 days after the date of this prospectus
without the prior written consent of Deutsche Bank Securities Inc. This consent
may be given at any time without public notice. We have entered into a similar
agreement with the representatives of the underwriters, except that we may grant
options and sell shares pursuant to our 2000 equity incentive plan and our 2000
employee stock purchase plan without such consent. There are no agreements
between the representatives and any of our shareholders or affiliates releasing
them from these lock-up agreements prior to the expiration of the 180-day
period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. Specifically, the underwriters may over-allot
shares of our common stock in connection with this offering, thus creating a
short sales position in our common stock for their own account. A short sales
position results when an underwriter sells more shares of common stock than that
underwriter is committed to purchase. A short sales position may involve either
"covered" short sales or "naked" short sales.
- Covered short sales are sales made for an amount not greater than the
underwriters' over-allotment option to purchase additional shares in the
offering described above. The underwriters may close out any covered
short position by either exercising their over-allotment option or
purchasing shares in the open market. In determining the source of shares
to close out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase shares
through the over-allotment option.
- Naked short sales are sales in excess of the over-allotment option. The
underwriters will have to close out any naked short position by
purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
a downward pressure on the price of the shares in the open market after
pricing that could adversely affect investors who purchase in the
offering.
To cover these short sales positions or to stabilize the market price of
our common stock, the underwriters may bid for, and purchase, shares of our
common stock in the open market. These transactions may be effected on the
Nasdaq National Market or otherwise. The representatives, on behalf of the
underwriters, may also reclaim selling concessions allowed to an underwriter or
dealer if the underwriting syndicate repurchases shares distributed by that
underwriter or dealer.
Similar to other purchase transactions, the underwriters' purchases to
cover the syndicate short sales or to stabilize the market price of our common
stock may have the effect of raising or maintaining the market price of our
common stock or preventing or mitigating a decline in the market price of our
common stock. As a result, the price of the shares of our common stock may be
higher than the price that might otherwise exist in the open market. The
underwriters are not required to engage in these activities. If they do engage
in these activities, they may end any of these activities at any time.
63
<PAGE> 67
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 960,000 shares for our vendors, employees, family
members of employees, customers and other third parties. The number of shares of
our common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved shares that are not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined by negotiation among Telect and the representatives of the
underwriters. Among the factors considered in determining the public offering
price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
that we and the representatives of the underwriters believe to be
comparable to us; and
- estimates of our business potential.
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters in connection with the offering will be passed upon for Telect by Paine,
Hamblen, Coffin, Brooke & Miller LLP, Spokane, Washington. Certain additional
legal matters in connection with the offering will be passed upon for Telect by
Gray Cary Ware & Freidenrich LLP, Seattle, Washington, and certain legal matters
in connection with the offering will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Kirkland,
Washington. As of the date of this prospectus, partners of Paine, Hamblen,
Coffin, Brooke & Miller LLP beneficially own an aggregate of 7,760 shares of our
common stock.
EXPERTS
The consolidated financial statements of Telect and its subsidiaries at
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, included in this prospectus have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
exhibits, schedules and amendments filed with this registration statement under
the Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all the information set forth in the
registration statement. For further information with respect to us and the
common stock to be sold under this prospectus, please refer to the registration
statement and its exhibits. Statements made in this prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
registration statement are not necessarily complete and you should refer to the
exhibits attached to the registration statement for the copies of the actual
contract, agreement or other document. When we complete this offering, we will
also be required to file annual, quarterly and special reports, proxy statements
and other information with the SEC.
64
<PAGE> 68
You can read our SEC filings, including this registration statement and
exhibits over the Internet at the SEC's web site at http://www.sec.gov. You may
also read and copy any document we file with the SEC at its public reference
facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may also obtain copies of the documents at prescribed rates by
writing to the Public Reference Section of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.
We intend to furnish our shareholders with annual reports containing, among
other information, financial statements audited by our independent public
accounting firm and quarterly reports containing unaudited financial information
for the first three quarters of each fiscal year.
65
<PAGE> 69
TELECT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
Board of Directors
Telect, Inc.
Spokane, Washington:
We have audited the accompanying consolidated balance sheets of Telect,
Inc. (the "Company") as of December 31, 1999 and 1998 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements 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 auditing standards generally
accepted in the United States of America. 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 also 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 financial position of Telect, Inc.
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
March 24, 2000
F-2
<PAGE> 71
TELECT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
-------------------------- SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 577,665 $ 3,238,957 $ -- $ --
Accounts receivable, net of allowance for
doubtful accounts of $400,000, $489,419,
$1,252,438 and $1,252,438, respectively..... 21,968,513 28,690,847 43,292,644 43,292,644
Notes receivable due from stockholders........ 1,047,698 369,840 677,131 677,131
Prepaid expenses and other current assets..... 931,678 1,567,955 4,935,111 4,935,111
Inventories, net.............................. 26,968,122 29,301,641 47,232,246 47,232,246
Deferred income tax assets.................... -- -- -- 1,964,315
----------- ----------- ------------ ------------
Total current assets........................ 51,493,676 63,169,240 96,137,132 98,101,447
PROPERTY, PLANT, AND EQUIPMENT, net............. 16,672,412 18,446,745 28,467,005 28,467,005
INTANGIBLE ASSETS, net of accumulated
amortization of $101,533, $117,022, $622,820
and $622,820.................................. 51,921 41,795 4,826,591 4,826,591
OTHER ASSETS.................................... 1,330,851 1,689,576 1,828,933 1,828,933
----------- ----------- ------------ ------------
TOTAL ASSETS................................ $69,548,860 $83,347,356 $131,259,661 $133,223,976
=========== =========== ============ ============
CURRENT LIABILITIES:
Accounts payable.............................. $ 9,048,891 $ 7,967,542 $ 17,175,364 $ 17,175,364
Accrued payroll............................... 3,036,307 3,780,277 8,437,948 8,437,948
Accrued expenses.............................. 1,033,659 1,160,674 1,018,355 1,018,355
Revolving line of credit...................... 14,990,043 7,000,000 27,850,000 27,850,000
Current portion of long-term debt............. 3,883,996 3,235,390 2,656,201 2,656,201
Current portion of notes payable to
affiliates.................................. 265,614 25,439 -- --
Notes payable to shareholders................. -- -- -- 73,000,000
----------- ----------- ------------ ------------
Total current liabilities................... 32,258,510 23,169,322 57,137,868 130,137,868
LONG-TERM DEBT, less current portion............ 6,450,390 4,791,371 3,050,413 3,050,413
NOTES PAYABLE TO AFFILIATES, less current
portion....................................... 937,882 -- -- --
DEFERRED INCOME TAXES........................... -- 696,781 724,470 1,778,128
OTHER LONG-TERM LIABILITIES..................... -- 303,124 498,939 498,939
----------- ----------- ------------ ------------
TOTAL LIABILITIES........................... 39,646,782 28,960,598 61,411,690 135,465,348
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value --
authorized, 100,000,000 shares; issued and
outstanding, 0,0,0 and 0 shares,
respectively................................ -- -- -- --
Common stock, $0.001 par value -- authorized,
400,000,000 shares; issued and outstanding,
121,321,000; 119,170,000; 119,170,000 and
119,170,000 shares, respectively............ 121,321 119,170 119,170 119,170
Additional paid-in capital.................... 382,949 376,176 581,038 581,038
Retained earnings(deficit).................... 29,485,156 53,948,537 69,133,454 (2,955,889)
Accumulated comprehensive loss................ (87,348) (57,125) 14,309 14,309
----------- ----------- ------------ ------------
Total stockholders' equity.................. 29,902,078 54,386,758 69,847,971 (2,241,372)
----------- ----------- ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $69,548,860 $83,347,356 $131,259,661 $133,223,976
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 72
TELECT, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------------------
1997 1998 1999 1999 2000
------------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES, net of discounts.......... $ 82,857,690 $114,579,852 $168,252,049 $118,966,871 $201,796,628
COST OF SALES.................... 45,812,253 62,655,160 85,566,493 58,687,661 101,561,343
------------- ------------ ------------ ------------ ------------
Gross profit................. 37,045,437 51,924,692 82,685,556 60,279,210 100,235,285
OPERATING EXPENSES:
Research, development and
engineering.................. 3,514,735 3,996,718 5,543,920 3,783,288 6,974,730
Selling, general and
administrative............... 22,291,718 29,385,022 39,349,788 27,960,036 43,415,237
------------- ------------ ------------ ------------ ------------
Total operating expenses..... 25,806,453 33,381,740 44,893,708 31,743,324 50,389,967
------------- ------------ ------------ ------------ ------------
OPERATING INCOME................. 11,238,984 18,542,952 37,791,848 28,535,886 49,845,318
INTEREST EXPENSE, net............ (1,004,326) (2,000,694) (1,675,225) (1,410,896) (1,470,994)
OTHER INCOME (EXPENSE), net...... 1,459,262 618,453 7,024,476 2,343,423 (185,759)
------------- ------------ ------------ ------------ ------------
Income before income taxes... 11,693,920 17,160,711 43,141,099 29,468,413 48,188,565
STATE AND FOREIGN INCOME TAX
EXPENSE........................ 293,728 160,981 1,696,217 977,913 987,200
------------- ------------ ------------ ------------ ------------
Income from continuing
operations................. 11,400,192 16,999,730 41,444,882 28,490,500 47,201,365
DISCONTINUED OPERATIONS:
Income from operations, net of
taxes (Note 9)............... 222,583 121,223 287,173 441,556 --
Loss on disposal of divisions,
net of taxes, including
provision of $0, $381,818,
$108,356, $0 and $0 for
operating losses during
phase-out period (Note 9).... (290,290) (2,752,884) (180,165) -- --
------------- ------------ ------------ ------------ ------------
Income (loss) from discontinued
operations................... (67,707) (2,631,661) 107,008 441,556 --
------------- ------------ ------------ ------------ ------------
NET INCOME....................... $ 11,332,485 $ 14,368,069 $ 41,551,890 $ 28,932,056 $ 47,201,365
============= ============ ============ ============ ============
NET INCOME PER SHARE FROM
CONTINUING OPERATIONS:
Basic and diluted.............. $ 0.09 $ 0.14 $ 0.35 $ 0.24 $ 0.40
NET INCOME PER SHARE FROM
DISCONTINUED OPERATIONS:
Basic and diluted.............. 0.00 (0.02) 0.00 0.00 0.00
------------- ------------ ------------ ------------ ------------
NET INCOME PER SHARE:
Basic and diluted.............. $ 0.09 $ 0.12 $ 0.35 $ 0.24 $ 0.40
============= ============ ============ ============ ============
SHARES USED IN CALCULATION OF NET
INCOME PER SHARE:
Basic and diluted.............. 121,321,000 121,321,000 120,059,866 120,359,747 119,170,000
============= ============ ============ ============ ============
PRO FORMA DATA (UNAUDITED):
Net Income..................... $ 11,332,485 $ 14,368,069 $ 41,551,890 $ 28,932,056 $ 47,201,365
Pro forma provision for Federal
income taxes................. 3,952,016 5,113,939 14,478,743 10,200,866 16,842,800
------------- ------------ ------------ ------------ ------------
Pro forma net income........... $ 7,380,469 $ 9,254,130 $ 27,073,147 $ 18,731,190 $ 30,358,565
============= ============ ============ ============ ============
PRO FORMA NET INCOME PER SHARE:
Basic and diluted................ $ 0.21 $ 0.24
============ ============
SHARES USED IN CALCULATION OF PRO
FORMA NET INCOME PER SHARE:
Basic and diluted.............. 127,359,866 126,470,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 73
TELECT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
---------------------- PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
----------- -------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997................. 121,321,000 $121,321 $382,949 $18,891,893 $ (64,870) $ 19,331,293
Comprehensive income:
Net income........................... 11,332,485 11,332,485
Other comprehensive income:
Foreign currency translation loss.... (47,916) (47,916)
Dividends paid ($0.06 per share)....... (6,772,690) (6,772,690)
----------- -------- -------- ----------- --------- ------------
BALANCE, December 31, 1997............... 121,321,000 121,321 382,949 23,451,688 (112,786) 23,843,172
Comprehensive income:
Net income........................... 14,368,069 14,368,069
Other comprehensive income:
Unrealized gain on securities, net... 25,438 25,438
Dividends paid ($0.07 per share)....... (8,334,601) (8,334,601)
----------- -------- -------- ----------- --------- ------------
BALANCE, December 31, 1998............... 121,321,000 121,321 382,949 29,485,156 (87,348) 29,902,078
Stock redemption....................... (2,151,000) (2,151) (6,773) (2,738,263) (2,747,187)
Comprehensive income:
Net income........................... 41,551,890 41,551,890
Other comprehensive income:
Unrealized gain on securities, net... 30,223 30,223
Dividends paid ($0.12 per share)....... (14,350,246) (14,350,246)
----------- -------- -------- ----------- --------- ------------
BALANCE, December 31, 1999............... 119,170,000 119,170 376,176 53,948,537 (57,125) 54,386,758
Stock compensation (unaudited)......... 204,862 204,862
Comprehensive income:
Net income (unaudited)............... 47,201,365 47,201,365
Other comprehensive income:
Foreign currency translation
(unaudited)........................ (1,520) (1,520)
Unrealized gain on securities, net
(unaudited)........................ 72,954 72,954
Dividends paid ($0.27 per share)
(unaudited)............................ (32,016,448) (32,016,448)
----------- -------- -------- ----------- --------- ------------
BALANCE September 30, 2000
(unaudited).............................. 119,170,000 $119,170 $581,038 $69,133,454 $ 14,309 $ 69,847,971
=========== ======== ======== =========== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 74
TELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................... $ 11,332,485 $ 14,368,069 $ 41,551,890 $28,932,056 $ 47,201,365
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization................ 2,470,612 4,091,347 4,150,493 3,032,813 4,994,988
Loss (gain) on disposal of
property and equipment...... 6,033 (152) 26,413 21,408 (75,611)
Write-off of fixed assets and
abandoned patents........... 589,024
Stock compensation............ 204,862
Loss on disposal of
discontinued operations..... 548,023
Reserve for bad debt.......... 25,000 250,000 89,419 84,340 763,019
Provision for obsolete
inventory................... 775,923 1,585,009 1,318,707 (411,560) 2,412,047
Reserve for warranty.......... 300,000 225,000 195,815
Cash provided (used) by
changes in operating assets
and liabilities, net of
effects from acquisition,
and disposition of
businesses:
Accounts receivable......... (135,888) (10,081,587) (8,295,640) (5,394,018) (15,364,816)
Prepaid expenses and other
current assets........... 33,988 (290,476) (91,945) 225,825 (3,039,190)
Inventories................. (6,340,407) (11,618,297) (5,634,823) (7,923,880) (19,301,991)
Accounts payable............ (2,499,649) 6,613,159 (1,081,349) 187,220 9,143,594
Accrued payroll............. (212,678) 1,075,001 743,970 111,488 4,657,671
Accrued expenses............ 145,830 332,011 946,133 683,906 (114,651)
------------ ------------ ------------ ----------- ------------
Net cash provided by
operating activities... 5,601,249 7,461,131 34,023,268 19,774,598 31,677,102
INVESTING ACTIVITIES:
Purchase of equipment and
furniture..................... (9,560,957) (5,361,539) (6,124,002) (4,241,108) (12,626,832)
Acquisition of Telect Polska,
net of cash acquired.......... (2,479,105)
Proceeds from sale of
equipment..................... 46,687 21,900 9,555
Proceeds of sale of division.... 100,000
Proceeds from sale of other
assets........................ 158,910
Decrease (increase) in notes
receivable from
stockholders.................. 16,765 (389,669) 677,858 1,045,650 (307,291)
Proceeds from notes
receivable.................... 129,457 73,315 177,444
Purchase of intangible assets... (607,682) (50,694) (5,363) (5,417,124)
Increase in other assets........ (210,755) (557,522) (223,510) (171,193) (908,525)
------------ ------------ ------------ ----------- ------------
Net cash used by investing
activities.................... $(10,315,942) $ (6,237,524) $ (5,536,005) $(3,293,336) $(21,402,523)
------------ ------------ ------------ ----------- ------------
(continued)
See notes to consolidated financial statements.
</TABLE>
F-6
<PAGE> 75
TELECT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from borrowings........ $ 7,164,876 $ 3,060,047 $ 1,131,942 $ 1,131,942 $ 495,706
Principal payments on
borrowings.................... (1,379,627) (3,140,723) (3,439,566) (2,901,338) (2,815,835)
Proceeds (payments) from (on)
line of credit, net........... 4,893,067 7,401,000 (7,990,044) (4,595,000) 20,850,000
Proceeds from notes payable to
affiliates.................... 1,554,692 300,000
Principal payments on notes
payable to affiliates......... (310,914) (619,103) (1,178,057) (1,255,898) (25,439)
Dividends paid.................. (6,772,690) (8,334,601) (14,350,246) (9,191,432) (32,016,448)
------------ ------------ ------------ ----------- ------------
Net cash provided (used) by
financing activities.......... 5,149,404 (1,333,380) (25,825,971) (16,811,726) (13,512,016)
------------ ------------ ------------ ----------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENT........ (47,916) (1,520)
------------ ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............ 386,795 (109,773) 2,661,292 (330,464) (3,238,957)
CASH AND CASH EQUIVALENTS:
Beginning of period............. 300,643 687,438 577,665 577,665 3,238,957
------------ ------------ ------------ ----------- ------------
End of period................... $ 687,438 $ 577,665 $ 3,238,957 $ 247,201 $ 0
============ ============ ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest...................... $ 1,233,898 $ 1,922,419 $ 1,641,775 $ 1,330,200 $ 1,306,611
State income taxes............ 326,338 179,896 669,380 516,965 1,434,201
Foreign taxes................. 59,000 47,652 188,798
Non cash activities:
Exchange of assets for note
receivable (Note 9)......... 400,000
Conversion of accounts
receivable to notes
receivable.................. 528,165
Exchange assets for Company
stock(Note 9)............... 2,800,000
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 76
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Description of business
Telect, Inc. and its wholly owned subsidiaries, Telect de Mexico, Telect
Polska (acquired February 29, 2000), Telect do Brasil and Telect International,
Inc., (collectively, the "Company") design, manufacture, and install broadband
connectivity and power distribution products for the telecommunications industry
on a worldwide basis.
2. PRO FORMA INFORMATION (UNAUDITED)
The Company intends to file a registration statement on Form S-1 for an
initial public offering (IPO) with the Securities and Exchange Commission.
Immediately prior to completion of the IPO, the Company's Subchapter S
corporation status will terminate and it will become subject to federal and
state income taxes applicable to a Subchapter C corporation. Additionally, upon
completion of the IPO, the Company will distribute the earned, but
undistributed, accumulated Subchapter S corporation earnings (the "S Corporation
Distribution") from April 1, 1987 through the date the Company becomes a
Subchapter C corporation. Undistributed Subchapter S corporation earnings
through September 30, 2000 were approximately $73 million. The difference
between the S Corporation Distribution and historical retained earnings consists
primarily of temporary timing differences between book and tax income, effect of
elimination entries and retained earnings of the subsidiaries.
Pro forma unaudited consolidated balance sheet
The pro forma unaudited consolidated balance sheet as of September 30, 2000
reflects the termination of the Company's Subchapter S corporation status and
the distribution of the S Corporation Distribution through the creation of a
shareholder note payable which will be satisfied subsequent to the IPO. It also
reflects the deferred income tax assets and liabilities that would have been
recorded as of that date. A reduction in shareholders' equity is reflected as a
result of the S Corporation Distribution.
Pro forma unaudited consolidated statements of income data
The unaudited pro forma results of operations information includes a pro
forma income tax benefit (provision) for each of the three years ended December
31, 1997, 1998 and 1999, assuming effective tax rates of 36.5%, 36.2%, and
37.4%, respectively, (see Note 11), comparable to what would have been reported
had the Company operated as a Subchapter C corporation.
F-8
<PAGE> 77
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma unaudited consolidated net earnings per common share
The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
for purposes of presenting pro forma basic and diluted net income per common
share. The following table reconciles the historical weighted average shares
outstanding to the pro forma weighted average shares outstanding:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------------- -------------------------
BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Historical weighted average
shares outstanding............ 120,059,866 120,059,866 119,170,000 119,170,000
Effect of dilutive shares --
number of shares required to
pay S Corporation
Distribution, estimated to be
$73 million at $10.00 per
share......................... 7,300,000 7,300,000 7,300,000 7,300,000
----------- ----------- ----------- -----------
Pro forma weighted
average shares
outstanding......... 127,359,866 127,359,866 126,470,000 126,470,000
=========== =========== =========== ===========
</TABLE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of Telect, Inc.
and its wholly owned subsidiaries which include Telect de Mexico, Telect Polska,
Telect do Brasil and Telect International, Inc. Intercompany transactions and
balances have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents are
recorded at cost, which approximates fair value.
Investments
The Company has classified its investment in marketable equity securities
as available-for-sale. The aggregate value of all available-for-sale securities
held on December 31, 1999 and 1998, are $27,841 and $58,064, respectively, and
are included in prepaid expenses and other current assets. Unrealized gains are
$25,438 and $30,223 for the years ended December 31, 1999 and 1998,
respectively, and are reported in accumulated other comprehensive income.
Derivative financial instruments
The Company uses interest rate swap agreements in the management of
interest rate exposure. The resulting amounts paid or received are recognized as
interest income or expense in the periods in which they accrue.
Inventories
Inventories are stated at the lower of average cost or market using the
first-in, first-out method. Cost includes raw materials and labor, plus direct
overhead. The Company provides for
F-9
<PAGE> 78
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
obsolete and unsaleable inventories based on specific identification of
inventory against current demand and recent usage.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the life of the related assets or the life of the
lease. The estimated useful lives of the Company's assets are as follows:
<TABLE>
<S> <C>
Molds, tools, and dies.............................. 2 - 8 years
Computer equipment.................................. 3 - 5 years
Software............................................ 5 years
Vehicles............................................ 5 years
Machinery and equipment............................. 8 - 10 years
Furniture and fixtures.............................. 8 - 10 years
Buildings........................................... 40 years
</TABLE>
On January 1, 1999, the Company adopted Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. This requires capitalization of certain costs incurred in connection with
developing and obtaining internal use software and amortization of these costs
over future periods which prior to the adoption of SOP 98-1 were expensed. The
costs capitalized are not material.
Intangible assets
Intangible assets consist primarily of acquired patents and trademarks
which are amortized on a straight-line basis over their estimated useful lives
of five years.
Impairment of long-lived assets
The Company periodically evaluates the carrying value of its long-lived
assets, including, but not limited to, property, equipment and leasehold
improvements, intangible assets and other long-lived assets. The carrying value
of a long-lived asset is considered impaired when the undiscounted net cash flow
from such asset is estimated to be less than its carrying value. Should a
long-lived asset be deemed to be impaired, the Company would record the
difference between the carrying value and fair value as impairment loss. No
impairment losses were recorded in 1997 and 1999. During 1998, $496,911 of
unamortized patent costs and $92,113 of equipment costs were written-off due to
impairment. This write-down is included in cost of sales.
Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of trade receivables. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for probable credit losses. For the years ended December 31, 1997, 1998
and 1999, the Company has not experienced significant losses related to
receivables from individual customers or groups of customers in any particular
industry or geographic region.
F-10
<PAGE> 79
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warranty costs
The Company provides, by a current charge to income, an amount it estimates
will be needed to cover future warranty obligations for products sold. The
accrued liability for warranty costs is included in the caption other long-term
liabilities in the accompanying consolidated balance sheets. The warranty costs
for the years ended December 31, 1997, 1998 and 1999 are $18,028, $77,121 and
$390,697 respectively. The accrued liability for warranty costs at December 31,
1999 is $300,000.
Revenue recognition
Revenue from product sales is recognized upon shipment. Revenue related to
our installation business is recognized when such installation is completed.
When our products are shipped to a customer for evaluation, revenue is
recognized after the evaluation process is complete and the customer has elected
to retain the product.
Research, development, and engineering expenses
The Company is actively engaged in technology and applied research programs
designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments. Engineering, research, and development costs are charged to
operations as incurred.
Advertising costs
Costs for advertising are recorded as expense the first time the
advertisement appears. Advertising expense totaled $2,134,362, $1,851,099 and
$2,475,658 for the years ended December 31, 1997, 1998 and 1999, respectively.
Other income
Other income in 1999 consisted primarily of quarterly patent royalty
payments and a $5,000,000 lump sum patent royalty settlement payment received
from a company for past, present and unlimited future use of a patent in lieu of
continued quarterly royalty payments.
Income taxes
In 1987, the Company elected to be treated as a Subchapter S corporation
for federal income tax purposes. Because the Company is a Subchapter S
corporation, income or loss is reported on the individual tax returns of the
owners. The Company recognized expense for certain state and foreign income
taxes, which totaled $291,984, $136,061 and $1,698,257 in 1997, 1998 and 1999,
respectively.
Net income per common share
Basic net income (loss) per common share was calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Dilutive net income per common share was calculated by dividing net
income by the weighted average number of shares outstanding plus all additional
common shares that would have been outstanding if potentially dilutive common
share equivalents had been issued. There were no dilutive common share
equivalents for each of the three years in the period ended December 31, 1999.
F-11
<PAGE> 80
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign currency translation
The consolidated financial statements are prepared in United States dollars
in accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation. Prior to January 1, 1998, the function currency of
the Company's consolidated Mexican subsidiary was the Mexican peso. As such,
costs of sales, and expenses for the subsidiary were translated using an average
exchange rate during the related reporting period. Assets and liabilities were
translated at the current exchange rate at the reporting date. Translation
adjustments resulting from this process are a component of comprehensive income
in stockholders' equity. On January 1, 1998, the functional currency of the
Mexican subsidiary became the United States dollar. Financial statements for
periods subsequent to this date are translated to the United States dollar for
consolidation purposes using current rates of exchange for monetary assets and
liabilities and historical rates of exchange for nonmonetary assets and related
elements of expense. Sales and other expense elements are translated at rates
which approximate the rates in effect on the transaction dates. Gains and losses
from this process are included in results of operations. The cumulative foreign
currency translation adjustments through the date of the change in the function
currency on January 1, 1998, are classified in accumulated other comprehensive
income (loss) as a component of stockholders' equity.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Because of various factors affecting future costs and
operations, actual results could differ from estimates.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
Interim financial information
The interim financial information as of September 30, 2000, and for the
nine-month periods ended September 30, 1999 and 2000, was prepared by the
Company in a manner consistent with the audited consolidated financial
statements and pursuant to the rules and regulations of the Securities and
Exchange Commission. The unaudited information, in management's opinion,
reflects all adjustments that are of a normal recurring nature and that are
necessary to present fairly the results for the periods presented. The results
of operations for the nine-month period ended September 30, 2000 are not
necessarily indicative of the results to be expected for the entire year.
Stock split
A 1000-for-1 stock split of the Company's Common Stock was effected on July
18, 2000. All references in the financial statements to shares, share price, per
share amounts and stock plans have been adjusted retroactively for the
1000-for-1 stock split.
F-12
<PAGE> 81
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 established new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS No. 133 requires that all derivatives
be recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income (loss), depending on the type of
hedging relationship that exists. In July 1999, the FASB issued SFAS No. 137
Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133. The Company will adopt the
requirements of SFAS No. 133 in its financial statements for the year ending
December 31, 2001. The Company does not expect adoption of SFAS No. 133 to have
a material effect on the financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In March 2000 the SEC issued SAB 101A to defer for one quarter, and in June 2000
issued SAB 101B to defer for an additional two quarters, the effective date of
implementing SAB 101, with earlier application encouraged. The Company is
required to adopt SAB 101 in the fourth quarter of 2000. The Company does not
expect the adoption of SAB 101 to have a material effect on the financial
statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, or FIN 44, Accounting for Certain Transactions Involving
Stock Compensation -- An Interpretation of APB Opinion No. 25, which clarifies
the application of Accounting Principles Board Opinion No. 25, Stock Issued to
Employees, for Certain Stock-Based Compensation Issues. Among other issues, this
Interpretation clarifies (a) the definition of employee for purposes of applying
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, except for certain provisions which were effective
before that date. The Company had no stock options outstanding as of December
31, 1999, and will apply the provisions of FIN 44 upon adoption of a stock
option plan.
4. BALANCE SHEET COMPONENTS
Inventories
The following is a summary of inventories by major category:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw material....................... $15,482,438 $21,468,734 $33,434,999
Work in progress................... 1,297,774 1,213,393 2,407,664
Finished goods..................... 13,268,851 11,019,162 18,201,370
----------- ----------- -----------
30,049,063 33,701,289 54,044,033
Provision for obsolescence......... 3,080,941 4,399,648 6,811,787
----------- ----------- -----------
$26,968,122 $29,301,641 $47,232,246
=========== =========== ===========
</TABLE>
F-13
<PAGE> 82
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property, plant and equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Buildings...................... $ -- $ -- $ 1,635,200
Machinery and equipment, molds,
tools, and dies.............. 7,234,286 8,948,950 13,539,374
Furniture and fixtures......... 2,991,576 3,325,972 5,684,720
Computer equipment and
software..................... 11,940,775 14,535,885 17,707,855
Leasehold improvements......... 4,171,823 5,115,294 5,529,631
Vehicles....................... 463,953 494,276 470,378
Construction in progress....... 7,065 12,753 531,311
Deposits on equipment.......... 367,432 453,613 1,709,598
------------ ------------ ------------
27,176,910 32,886,743 46,808,067
Accumulated depreciation and
amortization................. (10,504,498) (14,439,998) (18,341,062)
------------ ------------ ------------
$ 16,672,412 $ 18,446,745 $ 28,467,005
============ ============ ============
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT
Revolving Line of Credit
At December 31, 1999, the Company had an unsecured $20,000,000 line of
credit maturing September 1, 2000. Interest is payable monthly at the bank's
fully floating prime rate of 8.50% at December 31, 1999, or, at the Company's
option, at the LIBOR rate plus 1.75%. The Company has entered into interest rate
swap agreements with a bank to effectively convert $7,000,000 of the Company's
variable rate debt from variable to fixed rates ranging from 6.67% to 6.95% (see
Note 8 for fair value information). Swaps in the notional amount of $2,000,000
and $5,000,000 expire on November 2, 2000 and December 1, 2000, respectively.
Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Payable in monthly installments of $80,367,
including interest at a fixed rate of 7.5%,
maturing March 31, 2003..................... $ 3,550,926 $2,770,249 $2,190,915
Payable in monthly installments of $55,603,
including interest at a fixed rate of
7.158%, maturing December 1, 2000........... 1,239,930 642,084 166,442
Payable in monthly installments of $25,955,
including interest at a fixed rate of
7.418%, maturing December 1, 2002........... 1,075,159 835,408 644,256
</TABLE>
F-14
<PAGE> 83
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Payable in monthly installments of $26,175,
including interest at prime (7.75%, 8.5% and
9.5% at December 31, 1998, 1999 and
September 30, 2000), maturing December 31,
2001........................................ 855,303 578,945 377,485
Payable in quarterly installments of $119,890,
including interest at a fixed rate of 7.88%,
maturing August 1, 2001, available credit
line of $2,172,739 for software support
maintenance................................. 379,827 268,998 64,927
Payable in monthly installments of $18,448,
including interest of .125% above prime
(8.62% at December 31, 1999), maturing June
30, 2000.................................... 323,716 102,340
Payable in monthly installments of $11,667,
plus interest at a fixed rate of 8.05%,
maturing July 1, 2000....................... 221,667 81,667
Payable in monthly installments of $23,235,
including interest at a fixed rate of 7.42%,
repaid January 1, 2000...................... 273,634 23,235
Payable in monthly installments of $66,638,
including interest at a fixed rate of 7.16%,
maturing January 6, 2004.................... 969,314 818,790
Payable in monthly installments of $5,487,
including interest of .25% above prime (8.0%
at December 31, 1998), repaid in 1999....... 32,920
Payable in monthly installments of $3,875,
including interest at .1875% above prime
(8.68% at December 31, 1999) repaid in
2000........................................ 56,612 12,046
Payable in monthly installments of $4,000,
plus interest at .25% above prime (8.0% at
December 31, 1998 repaid in 1999............ 16,000
Payable in monthly installments of $26,258,
including interest at a fixed rate of
6.511%, matures August 1, 2002.............. 1,025,357 769,467 566,960
</TABLE>
F-15
<PAGE> 84
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1998 1999 2000
----------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Payable in monthly installments of $12,661,
including interest at a fixed rate of
6.7536%, matures February 1, 2004........... 653,791 546,383 458,412
Payable in monthly installments of $160,715,
including interest at a fixed rate of 5.70%,
matures February 1, 2001.................... 629,544 426,625 418,427
----------- ---------- ----------
10,334,386 8,026,761 5,706,614
Less current portion.......................... 3,883,996 3,235,390 2,656,201
----------- ---------- ----------
$ 6,450,390 $4,791,371 $3,050,413
=========== ========== ==========
</TABLE>
Annual principal payments required on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................ $3,235,390
2001........................................ 2,293,813
2002........................................ 1,783,006
2003........................................ 649,086
2004........................................ 65,466
----------
$8,026,761
==========
</TABLE>
Certain notes payable totaling $1,664,937 and $1,009,371 as of December
31,1999 and 1998, respectively, are secured by equipment, furniture and
fixtures.
Certain debt agreements contain debt covenants, including minimum working
capital, minimum net worth, minimum cash flow coverage, maximum
liabilities-to-stockholders' equity, and capital expenditure limitations. The
Company's line of credit includes a covenant that restricts it from declaring
any dividends on shares without the bank's prior written consent. The Company
was in compliance with all covenants at December 31, 1999.
6. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may be a party to various
legal claims, actions and complaints. The Company believes that the disposition
of these matters will not have a material adverse effect on the financial
statements.
The Company has noncancellable operating leases from related and unrelated
parties for office, production and storage space and equipment expiring at
various dates through September 2012. Certain leases allow the Company, at its
option, to renew the leases for a period of five years.
F-16
<PAGE> 85
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum payments required under operating leases at December 31,
1999, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000...................................... $ 1,972,538
2001...................................... 1,718,247
2002...................................... 1,639,962
2003...................................... 1,609,106
2004...................................... 1,483,385
Thereafter.................................... 10,695,000
-----------
$19,118,238
===========
</TABLE>
Total rent expense under noncancellable operating leases is approximately
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- SEPTEMBER 30,
1997 1998 1999 2000
---------- ---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Related parties................ $ 712,000 $1,380,000 $1,380,000 $1,035,000
Unrelated parties.............. 633,000 671,375 754,511 603,628
---------- ---------- ---------- ----------
$1,345,000 $2,051,375 $2,134,511 $1,638,628
========== ========== ========== ==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
Notes receivable due from stockholders represents construction advances on
behalf of Jubilation Enterprises, LLC, a Washington limited liability company
owned by majority stockholders of the Company, for construction of the Liberty
Lake, Washington manufacturing facility which is leased by the Company from
Jubilation Enterprises LLC. The Notes are due on demand and bear interest at
rates ranging from 7% to 8% for the years ended December 31, 1998 and 1999.
Notes payable to affiliates consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Payable on demand, interest at 8% due quarterly.... $ 25,439 $ 25,439
Payable monthly, interest at 8%.................... 1,178,057 --
---------- ----------
1,203,496 25,439
Less current portion............................... 265,614 25,439
---------- ----------
$ 937,882 $ --
========== ==========
</TABLE>
The Company's notes payable to affiliates are unsecured. Interest expense
to affiliates was $35,000, $44,000 and $34,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
The Company's stockholders' agreement gives the Company the option, but not
the obligation, upon death of a stockholder to purchase all or any part of the
stock owned by the deceased stockholder as of the date of his or her death. The
purchase price is determined by either mutual agreement of the parties, a
current appraisal, or through a formula specified in the shareholders'
agreement, depending on existing facts and circumstances. There is no
requirement that the Company maintain any life insurance on the life of the
stockholder.
F-17
<PAGE> 86
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has entered into split dollar life insurance agreements with
irrevocable family trusts (the "Trusts"). These agreements provide for the
partial payment of premiums on life insurance policies on the lives of certain
principal stockholders, with a total death benefit of $13,000,000. The policies
are owned by the Trusts. Under the terms of the agreements, the Company is
entitled to policy proceeds equal to the amount of premium payments advanced.
The receivable was $1,018,895, $1,242,405 and $1,432,619 (unaudited) at December
31, 1998 and 1999 and September 30, 2000, respectively.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to estimate
the value:
Cash, cash equivalents, accounts receivable and other current receivables
The carrying value approximates fair value due to the short maturity of
these instruments.
Notes receivable
The fair value of the Company's notes receivable with fixed interest rates
is estimated by discounting future cash flows using current rates at which
similar loans would be made with similar credit rating and maturities.
Debt
The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. Carrying value
of the variable rate debt approximates fair value.
Interest rate swap agreements
The fair value of the interest rate swaps is the amount at which they could
be settled. The estimated fair values of the Company's financial instruments
based on information available to management at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
NOTIONAL CARRYING FAIR
AMOUNT VALUE VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Fixed rate notes receivable............ $ 798,364 $ 790,470
Fixed rate debt........................ 7,325,619 7,382,244
Interest rate swap agreement........... $7,000,000 82,020
</TABLE>
9. DISCONTINUED OPERATIONS
Diversified Products Group
During March 1999, the Company adopted plans to sell its Diversified
Products Group. The division is accounted for as a discontinued operation and,
accordingly, its operations are segregated in the accompanying income statement.
Net sales, operating costs and expenses, and other income and expense for fiscal
years 1999, 1998 and 1997 have been reclassified to segregate items associated
with this discontinued division. The Company sold inventory and certain fixed
assets with a book and estimated fair market value of approximately $2.8 million
to the Company's previous Chief Financial Officer in exchange for 2,151,000
shares of the Company's common stock. No gain or loss was recognized on the sale
of this division as the
F-18
<PAGE> 87
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value of shares received approximated the book value of the net assets of
the division. The sale was closed on June 1, 1999.
Telect Control Products
During February 1998, the Company adopted plans to sell Telect Control
Products. The division is accounted for as a discontinued operation and,
accordingly, its operations are segregated in the accompanying income statement.
Net sales, operating costs and expenses, and other income and expense for fiscal
years 1999 and 1998 have been reclassified to segregate items associated with
this discontinued division.
On November 13, 1998, the Company completed the sale of the assets of the
division to an unrelated party for a purchase price of $500,000, of which
$100,000 was cash and the remaining $400,000 was a note receivable from buyer.
The Company retained interest in several contracts associated with the disposed
segment. All retained contracts should be completed in 2000.
Sales and related gains (losses), net of taxes associated with the
discontinued divisions for the prior three fiscal years were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
TELECT CONTROL PRODUCTS
Sales................................. $4,416,347 $ 3,255,349 $ 935,146
========== =========== ==========
Provision for estimated cost for
completion of remaining contracts... $ -- $ (378,236) $ (106,329)
Income (loss) from operations......... 158,225 (1,651,553) (73,836)
Loss on disposition of Telect Control
Product division.................... (542,883)
---------- ----------- ----------
Total gain (loss) from discontinued
division............................ $ 158,225 $(2,572,672) $ (180,165)
========== =========== ==========
DIVERSIFIED PRODUCTS GROUP
Sales................................. $8,496,631 $ 8,017,191 $3,761,869
========== =========== ==========
Loss from operations.................. $ (225,932) $ (58,989) $ (210,421)
Gain on disposition of Diversified
Products Group...................... 497,594
---------- ----------- ----------
Total gain (loss) from discontinued
division............................ $ (225,932) $ (58,989) $ 287,173
========== =========== ==========
</TABLE>
F-19
<PAGE> 88
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of net assets of discontinued operations included in the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
---------- ---------
<S> <C> <C>
TELECT CONTROL PRODUCTS
Cash................................................... $ -- $ --
Accounts receivable trade, net......................... 1,424,414 673,253
Cost in excess of billings............................. 4,567
Other current assets................................... 150
Forward loss accrual................................... (381,818) (108,356)
Billings in excess of costs............................ (4,567)
Accounts payable....................................... (191,287)
Accrued liabilities.................................... (53,668) (19,448)
---------- ---------
$ 797,791 $ 545,449
========== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
DIVERSIFIED PRODUCTS GROUP
Cash........................................................ $ 350
Accounts receivable trade, net.............................. 617,341
Miscellaneous receivables................................... 400
Inventory................................................... 2,524,606
Property, plant and equipment, net.......................... 260,051
Accounts payable............................................ (393,888)
Accrued liabilities......................................... (204,573)
----------
$2,804,287
==========
</TABLE>
10. PROFIT SHARING PLAN
The Company has a qualified employee profit sharing 401(k) plan which
covers substantially all employees who meet certain minimum age and service
requirements. The Company's discretionary profit sharing contributions to the
plan are determined annually by the Board of Directors and were $122,020,
$120,000 and $0 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Eligible employees may elect to defer up to 12% of their compensation each
year. The Company may make discretionary matching contributions equal to a
percentage of each participant's elective deferrals for the plan year. The
matching percentage is determined annually by the plan sponsor. The Company's
matching contributions for the years ended December 31, 1997, 1998 and 1999,
were $588,002, $735,549 and $834,942, respectively.
11. PRO FORMA INCOME TAXES (UNAUDITED)
The Company has elected to be a Subchapter S corporation, and therefore,
its federal taxable income and certain state taxable income has been reported on
the shareholders' individual income tax returns. The Company's subsidiary
operations in Mexico are subject to taxation in Mexico.
F-20
<PAGE> 89
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the IPO (see Note 2), the Company's Subchapter S
corporation status will terminate and it will become subject to federal and
state income taxes applicable to Subchapter C corporations. The consolidated
statements of income reflect a pro forma provision (benefit) for all periods for
federal and state taxes, as if the consolidated group had been subject to
taxation as a Subchapter C corporation at effective tax rates of 36.5%, 36.2%,
and 37.4% for 1997, 1998, and 1999, respectively.
The difference between the effective rate and the statutory rate of 35.0%
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate...................................... 35.0% 35.0% 35.0%
State taxes (net of federal benefit).................... 2.0 2.0 2.0
Research & experimentation credit....................... (1.2) (1.3) (0.6)
Foreign taxes........................................... 0.0 0.0 0.9
Other................................................... 0.7 0.5 0.1
---- ---- ----
Effective rate.......................................... 36.5% 36.2% 37.4%
==== ==== ====
</TABLE>
Upon termination of the Subchapter S corporation status, and based upon
management's determination that it is more likely than not that deferred tax
assets will be realized, the Company will record increases in net deferred tax
assets and liabilities and an accompanying one-time tax benefit to reflect the
differences between the financial statement and income tax bases of the assets
and liabilities at Subchapter C corporation rates.
If the Subchapter S corporation status had been terminated on September 30,
2000, deferred tax assets and liabilities for each temporary difference would
have been increased to the following amounts:
<TABLE>
<S> <C>
DEFERRED TAX LIABILITIES:
Basis differential in property, plant and
equipment.......................................... $(1,706,798)
Other................................................ (71,330)
-----------
Total deferred tax liabilities..................... $(1,778,128)
===========
DEFERRED TAX ASSETS:
Inventory............................................ $ 993,064
Accrued expenses..................................... 507,965
Allowance for bad debts.............................. 463,286
-----------
Total deferred tax assets.......................... $ 1,964,315
===========
Net deferred tax assets............................ $ 186,187
===========
</TABLE>
12. SEGMENT REPORTING
Telect operates in the global telecommunications industry and has four
reportable segments: Broadband Connectivity (DSX, fiber optic connectivity and
mainframe termination products), Power Distribution (power distribution panels,
battery distribution fuse bays and protector blocks and panels), Control
Products (security systems) and Diversified Products (custom cable assemblies).
These segments were identified around differences in product groups and
services. Additionally, the Control Products and Diversified Products segments
have been discontinued.
Broadband Connectivity products are used to interconnect copper, coaxial
cable and fiber optic devices used in the telecommunications industry. These
products include specialized and
F-21
<PAGE> 90
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
patented switching jacks, interoffice repeaters, electrical to optical
converters, fiber optic polishing, fiber and copper cable management and
protection systems. Power Distribution products direct or distribute power from
a power source to various loads or end uses. Products in this segment include
filtered and non-filtered fuse panels, battery distributed fused bays, protector
blocks and panels, and circuit breaker panels. Control Products design,
manufacture and install physical access control systems for prisons. This
segment was sold in late 1998. Diversified Products manufactured custom
electrical cabling. This segment was sold in 1999.
The "management approach" called for by SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," has been used to present the
segment information which follows. That approach is based upon the way
management organizes segments within an enterprise for making operating
decisions and assessing performance. Accounting policies used by the segments
are the same as those described in Note 3.
Intersegment sales were not significant. The following costs are not
allocated to segment results:
- Selling, general and administrative expenses;
- Interest income; and
- Other non-operating income or expense.
Corporate assets consist primarily of cash, leasehold improvements,
furniture and fixtures, data processing software and intangibles. Capital
expenditures do not include amounts arising from the purchase of businesses.
No single foreign country has property and equipment which is material
enough to warrant disclosure. Sales to one customer amounted to 17.3% (92.3%
broadband and 7.7% power), 10.4% (83.2% broadband and 16.8% power) and 9.4%
(91.4% broadband and 8.6%
F-22
<PAGE> 91
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
power) of Telect's consolidated sales in 1997, 1998 and 1999, respectively. No
other single customer accounted for more than ten percent of Telect's
consolidated sales.
<TABLE>
<CAPTION>
BROADBAND POWER CONTROL DIVERSIFIED
SEGMENT INFORMATION CONNECTIVITY DISTRIBUTION PRODUCTS PRODUCTS UNALLOCATED CONSOLIDATED
------------------- ------------ ------------ -------- ----------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997
External sales........ $ 76,199 $ 6,659 $ 4,416 $8,497 $ $ 95,771
Depreciation &
amortization........ 1,444 123 139 207 558 2,471
Operating income...... 30,958 2,344 162 66 (22,291) 11,239
Capital
expenditures........ 5,586 477 536 802 2,160 9,561
Long-lived assets..... 28,320 2,412 2,719 4,066 10,952 48,469
1998
External sales........ 102,900 11,680 3,255 8,017 125,852
Depreciation &
amortization........ 2,844 240 84 200 723 4,091
Operating income...... 46,872 3,713 (2,597) (60) (29,385) 18,543
Capital
expenditures........ 3,727 316 110 262 947 5,362
Long-lived assets..... 48,343 4,091 1,429 3,403 12,283 69,549
1999
External sales........ 149,558 18,694 935 3,762 172,949
Depreciation &
amortization........ 3,032 282 33 -- 803 4,150
Operating income...... 69,848 7,186 (184) 292 (39,350) 37,792
Capital
expenditures........ 4,474 416 49 -- 1,185 6,124
Long-lived assets..... 60,886 5,657 673 -- 16,131 83,347
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHICAL INFORMATION 1997 1998 1999
------------------------ ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SALES
Inside the United States............................ $94,901 $108,591 $148,840
Outside the United States........................... 870 17,261 24,109
------- -------- --------
Total............................................. $95,771 $125,852 $172,949
======= ======== ========
LONG-LIVED ASSETS
Inside the United States............................ $ 17,440 $ 18,781
Outside the United States........................... 615 1,397
-------- --------
Total............................................. $ 18,055 $ 20,178
======== ========
</TABLE>
The above sales figures include sales amounts classified as part of
discontinued operations in the consolidated statements of income.
F-23
<PAGE> 92
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
BROADBAND POWER CONTROL DIVERSIFIED
SEGMENT INFORMATION CONNECTIVITY DISTRIBUTION PRODUCTS PRODUCTS UNALLOCATED CONSOLIDATED
------------------- ------------ ------------ -------- ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER
30, 1999
(UNAUDITED)
External sales............ $106,282 $12,685 -- -- $ -- $118,967
Operating income.......... 51,788 4,708 -- -- (27,960) 28,536
Long-lived assets......... 8,888 575 9,734 19,197
NINE MONTHS ENDED SEPTEMBER
30, 2000
(UNAUDITED)
External Sales............ 170,527 31,270 -- -- -- 201,797
Operating income.......... 80,297 12,964 -- -- (43,416) 49,845
Long-lived assets......... 19,059 700 -- -- 15,380 35,139
</TABLE>
13. SUBSEQUENT EVENTS
Acquisitions:
On February 29, 2000, the Company purchased more than 99% of the
outstanding common stock of Zaklady Elektroniczne ELWRO S.A. (ELWRO) in Wroclaw,
Poland for $3,142,000. Acquired assets and liabilities primarily consisted of
property and equipment ($1,912,000), inventory ($275,000), other current assets
($1,659,000) and account payables and accruals ($704,000). The purchase gave the
Company ownership of all ELWRO assets, including the manufacturing plant,
equipment, and existing product lines. ELWRO offers advanced mold and tool
design, manufacturing and maintenance, injection molding, metal fabrication, and
engineering services to eastern and western European markets. The transaction
was accounted for under the purchase method of accounting.
On March 6, 2000, the Company purchased the assets of the Telzon(TM)
product line from Thomas & Betts Corporation for approximately $10,047,000,
subject to a post closing adjustment. The assets consisted primarily of
inventory (5,004,000), patents and trademarks (5,417,000) and equipment
(266,000). Additionally, the Company assumed $640,000 of noncancellable purchase
commitments. Telzon products include analog and digital copper cross-connect and
mainframe terminal block connectivity products.
Line of Credit (unaudited):
On September 27, 2000, the Company amended its line of credit agreement by
increasing the line from $20,000,000 to $35,000,000 and extending the maturity
date to May 1, 2001.
Authorized Shares (unaudited):
On July 18, 2000, the Company amended its Articles of Incorporation to
change the authorized number of shares of all classes of stock of the Company to
500,000,000 shares, consisting of 400,000,000 shares of common stock with a par
value of $0.001 per share and 100,000,000 shares of preferred stock with a par
value of $0.001 per share after giving effect to the 1,000-for-1 stock split.
F-24
<PAGE> 93
TELECT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Plans (unaudited):
2000 Employee Stock Purchase Plan
The Company adopted the 2000 Employee Stock Purchase Plan (the ESPP) on
August 24, 2000. The ESPP will be implemented upon the effectiveness of an IPO.
The ESPP is intended to qualify under Section 423 of the Code, and permits
eligible employees of the Company and its subsidiaries to purchase common stock
through payroll deductions of up to 15% of their compensation. Under the ESPP,
no employee may purchase common stock worth more than $25,000 in any calendar
year. In addition, owners of 5% or more of the Company's or subsidiary's common
stock may not participate in the ESPP. An aggregate of 6,458,500 shares of
common stock are authorized for issuance under the ESPP.
The ESPP will be implemented with six-month offering periods, the first
such period to commence upon the effectiveness of an IPO. Thereafter, offering
periods will begin on each February 1 and August 1. The price of common stock
purchased under the ESPP will be the lesser of 85% of the fair market value on
the first day of an offering period and 85% of the fair market value on the last
day of an offering period. The ESPP does not have a fixed expiration date, but
may be terminated by the Company's Board of Directors at any time. No shares
have been issued under the ESPP.
2000 Equity Incentive Plan
On August 24, 2000, the Board of Directors approved the implementation of
the 2000 Equity Incentive Plan (the Plan). The Plan provides employees an
opportunity to purchase shares of stock pursuant to options which may qualify as
incentive stock options under Section 422 of the Internal Revenue Code of 1986,
as amended (the Code), and employees, outside directors, and consultants of the
Company an opportunity to purchase shares of stock pursuant to options which are
not described in Section 422 of the Code (nonqualified stock options).
12,917,000 shares of stock were originally reserved for the grant of options or
the issuance of stock under the Plan. On August 30, 2000, the Company granted
options for 3,219,300 shares with an exercise price of $11 per share to
employees and directors under the terms of the Plan. The options vest over four
years, 25% per year from the date of grant and expire 6 years from the date of
grant; however, some of the options are immediately exercisable and subject to
repurchase by the Company subject to the same four year vesting schedule. The
Company will account for the grants under the provisions of APB 25. The Company
believes that these options were issued at fair market value. The Company may
grant stock options to international employees and newly hired domestic
employees in the near term.
F-25
<PAGE> 94
[TELECT LOGO]
SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
PROSPECTUS
, 2000
