UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-9692
TELLABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3831568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4951 Indiana Avenue, Lisle, Illinois 60532-1698
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (630) 378-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common shares, with $.01 par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
On February 28, 1997, 180,419,637 common shares of Tellabs, Inc., were
outstanding, and the aggregate market value (based upon the closing sale
price of the National Market System) of such shares held by nonaffiliates
was approximately $6,326,636,000.
Documents incorporated by reference: Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended December 27, 1996, are
incorporated by reference into Parts I and II, and portions of the
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registrant's Proxy Statement dated March 14, 1997 are incorporated by
reference into Part III.
PART I
ITEM I. BUSINESS
Tellabs, Inc., an Illinois corporation, began operations in 1975 and became
publicly owned in 1980. During 1992, the Illinois corporation merged with
and into Tellabs Operations, Inc., a wholly owned subsidiary. As a result
of the merger, Tellabs Operations, Inc., became a subsidiary of Tellabs,
Inc., a Delaware corporation (with its subsidiaries, unless the context
indicates otherwise, "Tellabs" or the "Company"). The Company designs,
manufactures, markets and services voice and data transport and network
access systems that are used worldwide by public telephone companies,
long-distance carriers, alternate service providers, cellular and other
wireless service providers, cable operators, government agencies,
utilities, and business end-users.
Products provided by the Company include digital cross-connect systems,
managed digital networks, network access and wireless system products.
Digital cross-connect systems include the Company's TITAN (a registered
trademark of Tellabs Operations, Inc.) 5500 and 5300 series of digital
cross-connect systems. Managed digital networks include the Company's
Martis (a registered Finnish trademark of Tellabs Oy) DXX (a registered
Finnish trademark of Tellabs Oy) integrated access and transport system
(the Martis DXX system), statistical multiplexers, packet switches, and T1
multiplexers, and network management systems. Network access products
include digital signal processing (DSP) products such as echo cancellers
and T-coders; special service products (SSP) such as voice frequency
products; and local access products such as the CABLESPAN (a registered
trademark of Tellabs Operations, Inc.) system. The Company, through the
acquisition of the outstanding shares of the Steinbrecher Corporation
(presently known as the Tellabs Wireless Systems Division), acquired
technology that will form the basis of a new wireless local loop product
which is expected to be introduced during 1997 as well as the existing
DataCell (a trademark of Tellabs Operations, Inc.) Mobile Data Base Station
product.
The Company's products are sold in both the domestic and international
marketplaces (under the Tellabs name and trademarks and under private
labels) through the Company's field sales force and selected distributors
to a major customer base. This base includes Regional Bell Operating
Companies (RBOCs), independent telephone companies (ITCs), interexchange
carriers (IXCs), local telephone administrations (PTTs), local exchange
carriers (LECs), original equipment manufacturers (OEMs), cellular and
other wireless service companies, cable operators, alternate service
providers, system integrators, government agencies, and business end-users
ranging from small businesses to Fortune 500 companies.
The availability of digital technology along with the use of
microprocessors and other custom and standard very large-scale integrated
(VLSI) circuitry continues to make it economically possible for the Company
to expand its product lines to meet the changing customer demands and
industry trends inherent in today's dynamic telecommunications environment.
This expansion primarily involves the development of broad lines of
service-provider-oriented networking systems that meet the ever increasing
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demands for efficient, multipurpose data, video, and voice communications
services.
This same availability of technology in capital equipment makes it possible
for the Company to efficiently and competitively continue to produce its
own products in its world class manufacturing facilities located throughout
the world.
Each of the Company's manufacturing operations is registered under the ISO
9000 standard. ISO 9000 is an international set of standards developed to
provide quality assurance for companies seeking to improve their quality
standards and customer service.
Digital Cross-Connect Systems
The TITAN product family consists of software intensive digital
cross-connect systems and network management platforms. These flagship
products address the needs of RBOCs, PTTs, IXCs, alternate local exchange,
cellular, cable, government and Fortune 500 companies. These complex
transmission systems are designed to meet or exceed domestic and
international telephone industry standards.
The SONET (synchronous optical network) digital cross-connect systems
operate under software control and are typically used to build and control
the wideband and broadband transmission infrastructure of telecommunication
service providers. Telecommunication managers utilize the digital
cross-connect systems to reduce cycle time while minimizing capital and
operating expense. Key applications include centralized and remote testing
of transmission facilities, grooming of voice, data, and video signals,
automated provisioning of new services, and restoration of failed
facilities. All of the TITAN systems include a feature for monitoring
facility performance which enhances "process of elimination
troubleshooting" in a complex network. The user can determine the early
warnings of facility degradation rather than reacting to a network outage.
The digital cross-connect system also converts international to domestic
transmission and signaling standards. These products augment the ability
of users to provide current, emerging, and future service to business and
residential customers. Advanced survivable business services also utilize
the TITAN products for interconnecting fiber transmission.
The TITAN systems vary in switching rate and facility interface speed.
Tellabs offers the SONET TITAN 5300 series of cross-connect systems that
can interface facilities at STS-1, DS3, DS1, E1, DS0, and subrate levels,
and can switch them at DS0 levels and below. The systems in this series
allow modular non-service affecting growth with capacities ranging from 8
to 4,000 ports.
Tellabs also offers the Company's flagship SONET TITAN 5500 system which
interfaces facilities at the DS1, DS3, STS-1 and/or fiber optic OC-N
levels, and cross-connects them at levels of DS1/VT1.5 and above. The
TITAN 5500 is the first digital cross-connect system in the world to
integrate optical (N=3,12) equipment. A single TITAN 5500 system can
carry the equivalent of 700,000 simultaneous phone conversations.
In 1997, the Company plans to introduce the TITAN 5200 Broadband Node,
which will extend the benefits of the wideband digital cross-connect
system, such as the TITAN 5500, to small end office, point-of-presence,
outside plant, and customer premise locations. This product, which is
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based on technology acquired from TRANSYS Networks, Inc. in June of 1996,
will interoperate with TITAN 5500 nodes on OC-3 and OC-12 rings and provide
flexible bandwidth management for DS1, DS3, and other customer facilities.
Digital cross-connect system products accounted for approximately 57
percent, 49 percent, and 46 percent of 1996, 1995, and 1994 sales,
respectively.
Managed Digital Networks
Since Tellabs' entry into the data communications marketplace in 1983, the
Company has developed a comprehensive family of networking products to
address the requirements and flexibility demanded by the users of
communications services. Products within this group include the Martis DXX
system and the CROSSNET ( a registered trademark of Tellabs Operations,
Inc.) family of network-compatible T1/E1 time division multiplexers.
The Martis DXX system is a complete managed access and transport network
system designed to be used by telecommunications service providers
worldwide for the delivery of business services, digital leased lines and
integrated customer access. Typical business service applications include
PABX networking, high speed data access, value added data services such as
frame relay and X.25, and voice telephony. An additional application of
the Martis DXX system is the provision of the transport infrastructure for
mobile networks such as digital and analog cellular, paging, trunked mobile
radio and mobile data. The Martis DXX systems are also used as general
purpose backbone networks carrying the wide variety of services that may be
provided by the public telecommunications service provider.
Recent enhancements to the DXX system have focused on extending the
current product portfolio with new features and functions including a wider
variety of access configurations and speeds as well as significant
enhancements to the DXX network management system to provide advanced
management options to the public telecommunications service provider. The
DXX system has also been enhanced to provide high speed optical synchronous
digital hierarchy (SDH) interfaces and to support cell and packet-based
technologies such as frame relay and ATM planned for the future.
The CROSSNET 440, 441 and 442 products are a family of intelligent T1/E1
multiplexers that interface voice, data and video devices (up to 2.048Mbps)
and multiplex them over private time division multiplexing networks. The
CROSSNET 445 provides timeslot interchange and DS0/DS1 switching and is
used to network 440, 441 and 442 nodes. This family of intelligent
multiplexers can be provisioned (network-wide) from any one node. In
addition, they can automatically provision many of the voice and data
applications and have an integrated network management system that can
adjust the bandwidth in 400bps increments for highly efficient use of the
DS1 or fractional DS1 facility. The CROSSNET family of multiplexers
provides low bit rate voice (LBRV) compression at 8 and 16 kbps in its DS0
channels and T1 trunks, enhanced analog voice capability for competing in
the growing branch office multiplexer market and a variable-speed network
interface (NX64) to the CROSSNET 44X for use with international networks or
satellite radio channels.
These products compete in the Wide Area Network (WAN) access market. End-
users buy these products through value added re-sellers, service providers
and direct from the Company. The products are used to combine voice, data
and video applications for transmission over T1, FT1, E1, NX56 and NX64
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facilities. They provide for more efficient utilization of the bandwidth
and access to dedicated services.
Although the CROSSNET product line serves a maturing market that is
migrating to newer technologies such as frame relay and ATM, there
continue to be significant opportunities for the traditional CROSSNET
multiplexers in both the domestic and international markets.
Managed digital networks accounted for approximately 28 percent, 28
percent, and 27 percent, of 1996, 1995, and 1994 sales, respectively.
Network Access Systems
Network access products are primarily modular in design and can be used
either individually or in complex systems and assemblies. The three areas
making up network access products are DSP products, SSP products, and local
access products. The products are designed to meet telephone industry
standards, and, in many applications, they directly interface with customer
premises equipment. These products enhance the ability of LECs, PTTs,
IXCs, wireless, private networks, alternate service providers and cable
providers to provide current, emerging, and future services to their
business customers through innovative products and systems that provide
more cost-effective provisioning of existing basic services. In order to
continue to grow this product area, state-of-the-art technology will be
deployed and value-added content will be provided.
DSP products primarily address the needs of cellular companies, LECs, and
IXCs, both domestically and internationally. Such products include the
Company's echo cancellation (or control) and voice compression products.
The echo control products primary function is to provide voice quality
enhancements such as the removal of irritating feedback (from one's own
voice) that occurs on virtually all long distance connections and many
wireless connections. The voice compression product (T-Coder) doubles the
capacity of digital transmission facilities used for voice and data
services. This product has great economic appeal to cellular companies,
IXCs, and end-users who want to double T1 or E1 capacity without incurring
the cost of a new facility. These DSP products have benefited from the
growth of the markets that these products address.
SSP products provide transmission and signaling conversion between the
central office and the customers' terminal equipment. These products
include: line amplifiers that compensate for loss and distortion in voice
and analog data transmission applications; terminating devices that provide
conversion between 4 wire transmission facilities and 2 wire local lines;
signaling equipment and systems that convert station on-hook/off-hook,
dialing and ringing information to signaling formats compatible with
transmission over metallic voice channels; and loop treatment equipment
typically used to extend the distance from a central office at which a
telephone functions satisfactorily. The Company also designs, manufactures
and sells a line of voice conferencing and alerting systems and a series of
products with remote alignment and diagnostic maintenance capabilities.
The Company's CABLESPAN 2300 system is a local access product developed
between the Company and Advanced Fibre Communications, Inc. (AFC),
designed to address the emerging cable and alternate service provider
markets. The CABLESPAN 2300 "Universal Telephony Distribution System" is a
next-generation, multiple services delivery system that allows cable
television (CATV) providers, alternate access carriers (ALTs), and
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competitive access providers (CAPs) to build flexible communication
networks that support the integrated delivery of video, voice, data and
information services. The product provides maximum application flexibility
through its ability to support a wide variety of network topologies,
interface with various forms of transmission media and provide the
modularity required to support both residential and business customers.
The CABLESPAN system can be managed either directly from an integral
interface that provides local and remote management or from a PC-based
stand-alone Element Management System (EMS) that allows the management of
multiple CABLESPAN systems and supports multiple network operators while
interfacing with other operational support systems.
Network access products accounted for approximately 15 percent, 21
percent, and 26 percent of 1996, 1995, and 1994 sales, respectively.
Wireless Systems Division
In April 1996, the Company acquired all of the outstanding shares of
Steinbrecher Corporation. This acquisition formed the basis of a new
division within the Company, the Tellabs Wireless Systems Division
(Wireless Systems Division).
Steinbrecher, through over 20 years of performing subcontractor activities,
primarily in military projects, had gained unique insights in the
development of sophisticated radio frequency (RF) designs. The new
Wireless Systems Division is engaged in the completion of a software
programmable wideband digital base station (base station) which was
initiated prior to the Company's acquisition of Steinbrecher. This base
station product will be used in conjunction with the Company's other
products such as the TITAN digital cross-connects, Martis DXX system and
echo cancellers to expand the product portfolio offered to the wireless
marketplace as well as to allow the Company to provide more comprehensive
wireless solutions.
The Company's intention is for the Wireless Systems Division to pursue
two markets. The first target market is wireless local loop - a new market
for wireless technology which uses radio technology to provide residential
and small business with telephony services. This type of sophisticated
radio is proving to be a very economical alternative to the traditional
method of installing buried copper wires to provide these same services.
The Company believes that the primary addressable markets for this wideband
wireless local loop technology will be in the Asia/Pacific and Latin
America regions.
The second marketplace for this technology lies in providing microcell
solutions using this same wideband base station. The market for this
technology is primarily in developed areas of the world (including the
United States) where cellular or PCS wireless networks are being built out.
The systems' small form factor and lower initial price allow it to be a
very effective tool to provide RF coverage in harder to cover areas such
as indoor and underlay applications or interleaving larger macrocells
where focused RF coverage is required. In addition, the system can also be
used to provide targeted increased capacity for higher congestion areas
such as busy airports or downtown areas where not enough simultaneous users
can be supported within the current macrocellular approach.
The Company expects to begin field trials of both the wireless local loop
and base station products during 1997.
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The DataCell Mobile Data Base Station, Steinbrecher's commercially
available product acquired in the acquisition, is used by 800 MHz AMPs
cellular companies to provide wireless packet services. The market for
this product is primarily in the United States and Latin America.
MARKETING
Sales are generated through the Company's direct sales organization and
selected distributors. The United States sales group consists of
approximately 77 direct sales personnel, and additional sales agents and
sales support personnel located throughout the United States. The
International sales group consists of approximately 50 direct sales
personnel, and additional sales agents and sales support personnel in
Canada, Latin America, South America, Europe, the Middle East, Africa, Asia
and Australia.
The United States sales organization conducts its activities from the
corporate headquarters and six regional or district offices. The
International sales organization conducts its activities from the corporate
headquarters and twenty-five regional offices. The regional offices are
generally staffed by a regional sales manager, system sales engineers, and
additional personnel as required.
Direct orders through the Company's field sales organization accounted for
approximately 89 percent of 1996 sales.
The Company has national account managers to coordinate sales activities
for its major customer groups, and product managers to coordinate the
marketing activities for each major product area.
The United States sales organization uses a vertical markets approach for
the sales of its products. As a result, large accounts such as RBOCs,
IXCs, Wireless, Alternate Service Providers, and General Market Customers
are serviced by teams to better represent both product and service
offerings. The International sales organization is structured to support
activities on a regional basis.
The Company has arrangements with a number of distributors of
telecommunications equipment, both in the United States and
internationally, some of whom maintain inventories of the Company's
products to facilitate prompt delivery. These distributors provide
information on the Company's products through their catalogs and through
trade show demonstrations. The Company's field sales force also assists
these distributors with regular calls to them and their customers.
Distributors, as a group, accounted for approximately 11 percent of 1996
sales. No single distributor accounted for more than 10 percent of 1996
sales.
CUSTOMER SERVICE
The Company maintains a worldwide customer service organization focused
on providing its customers high quality technical and administrative
product support. To ensure global support, Tellabs has five worldwide
logistic centers (Lisle, Illinois; Shannon, Ireland; Mississauga, Canada;
Espoo, Finland; and Hong Kong).
The Company's customer service organization supports its customers with a
wide range of services that include application engineering and support,
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installation, service agreements, on-site training, product repair
(warranty administration), on-site maintenance, third party maintenance,
consultation, logistics management, and 24-hour technical support via
telephone and the Internet.
The Company's technical support organization consists of unique and
highly-trained teams that focus on customer support of the TITAN 5500 and
5300 series, CROSSNET 44X and 33X, CABLESPAN, Voice Frequency and Martis
DXX product lines. All teams utilize a problem tracking system to capture,
collect and report on a number of data points specific to product
performance and overall customer profiles. The technical support teams
also utilize a call director system to track the status of customers'
calls until completion.
The Company provides product warranties for periods ranging from one to
five years for the repair or replacement of customer premises-located
modules and systems found to be faulty due to defective material. Tellabs
has an expedited replacement service that is used to immediately provide
the customer with needed module replacements in response to a time-critical
service outage.
CUSTOMERS
Sales to customer groups as a percentage of total sales were approximately
as follows:
1996 1995 1994
Bell Operating Companies 28% 28% 26%
Independent Telephone Companies 7% 5% 7%
Interexchange Carriers 18% 16% 16%
Corporate America, OEMs, Governmental
Agencies, Cellular Companies, Utility
and Railroad Companies, Alternate Service
Providers, and System Integrators 14% 14% 17%
Foreign Sales
Canada 3% 4% 4%
International 30% 33% 30%
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
At December 27, 1996, and December 29, 1995, backlogs were approximately
$118 million and $84 million, respectively. All of the December 27, 1996,
backlog is expected to be shipped in 1997. The Company considers backlog
to be an indicator, but not the sole predictor, of future sales.
COMPETITION
The Company's products are sold in global markets and compete on the
following key factors: responsiveness to customer needs, product features,
customer-oriented planning, price, performance, reliability, breadth of
product line, technical documentation, and prompt delivery.
The digital cross-connect systems compete principally with Lucent
Technologies, Alcatel and DSC Communications Corporation (DSC). The
managed digital network products compete in two areas. The principal
competition for the multiplexers are Newbridge Networks Corporation,
General DataComm Industries Inc., Premisys, and Timeplex, Inc. The major
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competitors of the managed access and transport systems are Newbridge
Networks Corporation, Nokia Telecommunications, and Network Equipment
Technologies.
The network access products currently compete in four product areas:
special services, echo cancellers, transcoders, and local access products.
The principal competitors in the special services market are Teltrend and
Westell. The leading competitors in the echo canceller market are Coherent
Communications, DSC and Ditech. The major competitors in the transcoder
market are DSC and Aydin. The local access competitors are Nortel,
Motorola, Scientific Atlanta and ADC Telecommunications, Inc.
The Company's wireless local loop systems compete against products
manufactured by Ericsson, Hughes, Lucent Technologies, Motorola, Nortel
and Qualcomm, while competition for the microcellular systems is
principally from Allen Telecom, Ericsson, Lucent Technologies, Motorola,
Nortel and Panasonic.
RESEARCH AND DEVELOPMENT
The telecommunications industry continues to be characterized by rapid
technological change. Historically, the technology of this industry had
been mainly analog, characterized by signals continuous in time with
information contained in the frequency and amplitude of the signals. The
industry has rapidly shifted toward digital technology in which information
is coded in discrete pulses. The Company's current product development
effort is directed almost entirely toward designing new products utilizing
digital, fiber optic and ATM technology. The Company has also focused much
of its research and development efforts on large system software
development and associated processes.
Many products used in network access system applications are well-suited to
the use of digital implementation techniques, including utilization of
microprocessors and other VLSI devices. The Company's ability to combine
analog and digital technologies has been an important ingredient in its
product development. The Company currently manufactures a number of
products using microprocessor control circuitry which make extensive use of
microprocessors and complex system software. The Company is also
actively developing products which utilize high speed fiber optic
technologies to provide higher performance transmission characteristics in
today's telecommunication networks. The Company is continually updating
its research and development capabilities through the addition of new
computer-aided design (CAD) and computer-aided software engineering (CASE)
tools, which assist in electronic, mechanical, and software design. Use of
such tools is imperative as the Company seeks to respond to industry and
customer demands for intelligent digital systems and networking products
with capabilities for automated remote maintenance and provisioning.
During 1996, the Company made two research and development-oriented
acquisitions designed at advancing and expanding the Company's existing
product portfolios and performance capabilities. In the first, the
acquisition of Steinbrecher Corporation in April 1996, the Company expanded
its product offerings to include wireless communications infrastructure
products and systems for use in cellular and other wireless networks in
order to create a comprehensive wireless network offering from the
Company. In the second acquisition, the Company acquired the broadband
access product line of TRANSYS Networks Inc in June 1996. The move was
designed to provide the Company with broadband access and transport
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technology that would complement the technology that already exists in its
TITAN line of SONET-based digital cross-connect systems.
In early January, 1997, the Company acquired wave-length division
multiplexing and optical networking technology from IBM's Thomas J. Watson
Research Center which included rights to or ownership of several patents
and patent applications and will compliment the Company's transport and
access product portfolio. Under the terms of the agreement, the Research
Center's optical network development team joined the Company.
The Company is also involved in product-oriented alliances. In December
1996, the Company and AFC, a Petaluma, California-based provider of
next-generation digital loop carrier equipment, terminated the joint
venture agreement signed in April 1994, and entered into a licensing
agreement for the development, manufacturing, and marketing of the
CABLESPAN product.
These acquisitions and alliances allow the Company access to technology
that is important to the future of its products. In addition, to ensure
that the technologies the Company uses reflect the most recent industry
developments and to increase the Company's ability to develop new
technologies, the Company conducts research at its laboratories in
Mishawaka, Indiana; Burlington, Massachusetts; Espoo and Oulu, Finland; and
Shannon, Ireland.
Research and development expenses were $107.3 million in 1996, $81.9
million in 1995, and $64.8 million in 1994. (The 1996 research and
development expense does not reflect the $74.7 million one-time charge
for acquired research and development taken in conjunction with the
Steinbrecher acquisition.) The Company plans to spend approximately $150
million on research and development in 1997. These expenditures reflect
the Company's commitment to the enhancement of existing products and
development of new products designed to satisfy the needs of communications
service providers worldwide.
MANUFACTURING AND EMPLOYEES
The Company assembles its products from standard components and from
fabricated parts which are manufactured by others to the Company's
specifications. Such purchased items represented approximately 74 percent
of cost of sales in 1996.
Most purchased items are standard commercial components available from a
number of suppliers with only a few items procured from a single-source
vendor. Management believes that alternate sources could be developed for
those parts and components of proprietary design and those available only
from single or limited sources. However, future shortages could result in
production delays that could adversely affect the Company's business.
As part of the manufacturing process, hazardous waste materials that are
present are handled and disposed of in compliance with all Federal, State
and local provisions. These waste materials and their disposal have no
significant impact on either the Company's production process or its
earnings or capital expenditures.
At December 27, 1996, the Company had 3,418 employees, of which 732 were
employed in the sales, sales support and marketing area, 997 in product
development, 1,385 in manufacturing, and 304 in administration. The
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Company considers its employee relations to be good. It is not a party to
any collective bargaining agreement.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company has various trade and service marks, both registered and
unregistered, in the U.S. and in numerous foreign countries (collectively,
Marks). All of these Marks are important in that they differentiate the
Company's products and services within the industry through brand name
recognition. Current Marks of the Company include TELLABS, MARTIS, 310
Datavoice System, ACSYS, ALTA, AN2100, ASC, ATM to the Core, CABLESPAN,
CLEARCALL, CROSSNET, DATACELL, DATAPLEXER, DXX, DYNAMIC SIGNAL TRANSFER,
ESQ, EXPRESSPAN, FLASHLOAD, FLEXWARE, MINICELL, NAVIGATING CHANGE, NMCS
2500, PARAMIXER, PORTSPAN, RADAR, RA SERIES, SELECT SOLUTIONS, SONET TO THE
CORE, T-CODER, TELEMARK, TITAN, TURNING YOUR COPPER INTO GOLD, UNLOCK THE
GOLD IN YOUR NETWORK, VANTAGE POINT, WE PUT THE WIRE IN WIRELESS, YOUR
NETWORKING PARTNER, 331 XPLEXER, and the Company's logos. The Company is
not aware of any factor which would affect its ability to utilize any of
its major trademarks.
The Company currently holds 25 U.S. and 3 Canadian patents. The Company
has also developed certain proprietary, confidential hardware designs and
software programs. The Company owns various rights, which are protectable
under copyright and trade secret laws, in such designs and programs.
The Company believes that trademarks, patents, copyrights and trade secrets
are important to its business.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in one business segment. Information with respect to
the Company's operations in its two geographical areas for the fiscal
years ended December 27, 1996, December 29, 1995 and December 30, 1994,
is set forth in Note I on page 32 of the registrant's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located on 18-1/2 acres of
Company-owned land approximately 30 miles west of Chicago in Lisle,
Illinois. Located on this property are three buildings. The first is a
65,000 square foot building that functions as the Company's headquarters
and houses a portion of the Digital Systems division's marketing and
engineering personnel. The second is a 103,000 square foot building which
houses customer service, research and development and administrative
functions. The third building is a 54,000 square foot building utilized by
the majority of the Digital Systems division's engineering operations.
The Company also owns 50 acres of land in Bolingbrook, Illinois (near
Lisle) where a 230,000 square foot manufacturing, engineering and office
building was completed and occupied in July 1993. During 1996, the Company
began construction of a new 308,000 square foot addition to this facility.
Construction of the addition is expected to be completed by mid-1997 at a
cost of approximately $33,000,000. The new addition will provide for
necessary manufacturing capacity expansion as well as allowing additional
space for expansion of the sales and administrative functions.
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The Company also owns approximately 75 acres of land in Round Rock, Texas,
and approximately 2.6 acres of land in Mississauga, Ontario, Canada. The
Texas property includes a recently expanded 125,000-square foot
manufacturing facility. The Canadian property includes a 20,000-square
foot office/warehousing building. The Company also owns three
office/manufacturing facilities in Espoo, Finland used as follows: a
52,000-square foot building which is currently being used for engineering,
marketing, and administrative offices; a 42,000-square foot production
facility; and a 35,000-square foot office building, which is currently used
for engineering offices. In addition, approximately 12 acres of land were
purchased in April, 1996 in Espoo for the construction of a new
150,000-square foot production and engineering facility scheduled for
completion in December 1997. Also existing on this property is a
100,000-square foot building (currently leased to a third party).
The Company leases additional facilities at the following locations: Lisle,
Illinois (training); Naperville, Illinois (sales); Mishawaka, Indiana
(research); Costa Mesa, California (sales); Littleton, Colorado (sales);
Atlanta, Georgia (sales); Rockville, Maryland (sales); St. Louis, Missouri
(sales); Irving, Texas (sales); White Plains, New York (customer service);
and two buildings (90,000 square feet) in Burlington, Massachusetts for
sales, research, production and administration. Some of the Company's
international subsidiaries also lease space for their operations,
including: a 56,000-square foot sales, research and production facility and
a 5,000-square foot administrative facility in County Clare, Ireland;
40,000 square feet in Espoo, Finland for administration and engineering,
and 15,000 square feet for production; and 12,000 square feet in Oulu,
Finland for research and development.
The Company owns substantially all the equipment used in its business. The
Company believes that its facilities are adequate for the level of
production anticipated in 1997, and that suitable additional space and
equipment will be available to accommodate expansion as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Except for historical information, the matters discussed or incorporated by
reference in Part I of this report may include forward-looking statements
that involve risks and uncertainties that may affect the Company's actual
results and cause actual results to differ materially from those in the
forward-looking statements. The foregoing discussion should be read in
conjunction with the financial statements and related notes and
management's discussion and analysis included in the Company's Annual
Report and incorporated in this report by reference in Part II, Items 7
and 8 herein.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
NAMES AND BUSINESS EXPERIENCE YEAR OF CURRENT
BIRTH POSITION
Michael J. Birck 1938 President, Chief
President, Chief Executive Officer Executive Officer and
and Director, Tellabs, Inc. since 1975. Director, Tellabs, Inc.
Peter A. Guglielmi 1942 President, Tellabs
President, Tellabs International, International, Inc.,
Inc. and Director, Tellabs, Inc. Executive Vice President,
since 1993; Executive Vice President, Chief Financial Officer,
Chief Financial Officer and Treasurer and Director,
Treasurer, Tellabs, Inc. since Tellabs, Inc., and Tellabs
1990; Secretary, Tellabs, Inc. Operations, Inc.
1988 to 1993.
Brian J. Jackman 1941 President, Tellabs
President, Tellabs Operations, Inc. Operations, Inc,
and Director, Tellabs, Inc. since 1993; Executive Vice President
Executive Vice President, Tellabs, Inc. and Director, Tellabs, Inc.
since 1990.
Charles C. Cooney 1941 Vice President, Sales and
Vice President, Sales and Service, Service, Tellabs Operations,
Tellabs Operations, Inc. since 1992; Inc.
Vice President, Sales, Tellabs, Inc.,
1979 to 1992.
Carol Coghlan Gavin 1956 Vice President, General
Vice President and General Counsel, Counsel and Secretary,
Tellabs Operations, Inc. since Tellabs Operations, Inc.,
1992; Secretary, Tellabs, Inc., since Secretary, Tellabs, Inc.
1993; General Counsel, Tellabs, Inc.,
1988 to 1992.
Jon C. Grimes 1947 Vice President and General
Vice President and General Manager, Manager, Network Access
Network Access Systems Division, Systems Division,
Tellabs Operations, Inc. since 1992; Tellabs Operations, Inc.
Vice President and General Manager,
Network Products Division, Tellabs
Inc., 1989 to 1992.
J. Thomas Gruenwald 1948 Vice President, Strategic
Vice President, Strategic Resources, Resources, Tellabs
Tellabs Operations, Inc. since 1995; Operations, Inc.
Director, Engineering, Tellabs
Operations, Inc. 1992 to 1995.
Jukka Harju 1956 Vice President and General
Vice President and General Manager, Manager, Tellabs Oy; Vice
Tellabs Oy and Vice President, President, Tellabs
Tellabs International, Inc. since International, Inc.
1996; Managing Director, Martis Oy
1994 to 1996.
13
J. Peter Johnson 1949 Vice President, Finance and
Vice President, Finance and Treasury, Treasury, Assistant Secretary
Assistant Secretary and Controller, and Controller, Tellabs, Inc.,
Tellabs Operations, Inc. since 1992; and Tellabs Operations, Inc.
Vice President, Finance and Treasury,
Assistant Secretary and Controller,
Tellabs, Inc., 1990 to 1992.
John C. Kohler 1952 Vice President, Manufacturing,
Vice President, Manufacturing, Tellabs Tellabs Operations, Inc.
Operations, Inc. since 1993; Vice
President, Product Support Services,
Tellabs, Inc., 1989 to 1993.
Harvey R. Scull 1949 Vice President, Advanced
Vice President, Advanced Business Development, Tellabs
Business Development, Tellabs Operations, Inc.
Operations, Inc. since 1993;
Director, New Business Development,
Tellabs, Inc., 1989 to 1993.
Richard T. Taylor 1948 Vice President and General
Vice President and General Manager, Manager, Digital Systems
Digital Systems Division, Tellabs Division, Tellabs
Operations, Inc. since 1993; Director Operations, Inc.
of Marketing and Product Development,
Digital Systems Division, Tellabs
Inc., 1989 to 1993.
Nicholas J. Williams 1947 Vice President and General
Vice President and General Manager, Manager, The Americas,
The Americas, Tellabs International, Tellabs International, Inc.
Inc. since 1993; Vice President and
General Manager, Advanced Technology
Products, AT&T Paradyne Corporation,
1992 to 1993.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections entitled "Common Stock Market Data" on pages 1 and 38 of the
Company's Annual Report to Stockholders for the year ended December 27,
1996 (the "Annual Report") are incorporated herein by reference. They are
also included in Exhibit 13, as filed with the SEC. See discussion
referred to in Item 7 below for dividend information.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Five-Year Summary of Selected Financial Data" on the
page preceeding page 1 of the Annual Report is incorporated herein by
reference. It is also included in Exhibit 13, as filed with the SEC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis" on Pages 34
to 36 of the Annual Report is incorporated herein by reference. It is
also included in Exhibit 13, as filed with the SEC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Certified Public Accountants and the Consolidated
Financial Statements and Notes thereto on pages 19 through 33 of the
Annual Report are incorporated herein by reference. They are also included
in Exhibit 13, as filed with the SEC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required is incorporated herein by reference to the section
entitled "Selection of Auditors" in the registrant's Proxy Statement (the
"Proxy Statement") dated March 14, 1997 and the Company's Current Report
on Form 8-K filed on or about August 21, 1996.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required, except for information relating to the executive
officers of the registrant which appears at the end of Part I above, is
incorporated herein by reference to the section entitled "Election of
Directors" in the registrant's Proxy Statement (the "Proxy Statement")
dated March 14, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Management and Certain Other
Beneficial Owners" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of Tellabs, Inc., and
Subsidiaries, included in registrant's Annual Report to Stockholders for
the year ended December 27, 1996, were previously incorporated by
reference in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets: December 27, 1996 and December 29, 1995
Consolidated Statements of Earnings: Years ended December 27, 1996,
December 29, 1995 and December 30, 1994
Consolidated Statements of Stockholders' Equity: Years ended
December 27, 1996, December 29, 1995, and December 30, 1994
Consolidated Statements of Cash Flows: Years ended December 27,
1996, December 29, 1995 and December 30, 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following Consolidated Financial Statement Schedules of Tellabs, Inc.,
and Subsidiaries are included herein pursuant to Item 14(d):
Report of Independent Certified Public Accountants on Schedules
Schedule II Valuation and Qualifying Accounts and Reserves
Schedules not included have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) The Registrant filed a report on Form 8-K on October 31, 1996, with
respect to the declaration of a two-for-one stock split payable in the
form of a 100 percent dividend on November 15, 1996, to stockholders
of record on October 31, 1996.
(c) Exhibits:
3.1 Restated Certificate of Incorporation 5/
3.2 Amended and Restated By-Laws, as amended 3/
4. Upon request of the Securities and Exchange Commission,
registrant hereby agrees to furnish to the Commission
copies of instruments (not filed) defining the rights
of holders of long-term debt of the Company. (This
undertaking is in lieu of a separate exhibit.)
10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its
related trust 6/
10.2 1981 Incentive Stock Option Plan, as amended and restated 1/
10.3 1984 Incentive Stock Option Plan, as amended and restated 1/
17
Exhibits: (Continued)
10.4 1986 Non-Qualified Stock Option Plan, as amended and
restated 1/
10.5 1987 Stock Option Plan for Non-Employee Corporate Directors,
as amended and restated 1/
10.6 1989 Stock Option Plan, as amended and restated 1/
10.7 Employee Quality Stock Award Program 2/
10.8 Form of Employment Agreement 3/
10.9 1991 Stock Option Plan, as amended and restated 1/
10.10 Description of Split-Dollar Insurance Arrangement with
the Michael J. Birck Irrevocable Trust 3/
10.11 1994 Stock Option Plan 4/
10.12 Tellabs, Inc. Stock Bonus Plan for Former Employees of
Steinbrecher Corporation 8/
10.13 Tellabs, Inc. Stock Bonus Plan for Former Employees of
TRANSYS Networks Inc.
10.14 Tellabs, Inc. Stock Bonus Plan for Former Employees of
International Business Machines Corporation
13. Annual Report to Stockholders
16. Letter Re: Change in Certifying Accountant 7/
21. Subsidiaries of the Registrant
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
Exhibits 10.1 through 10.14 are management contracts or compensatory plans
or arrangements required to be filed as an Exhibit to this Form 10-K
pursuant to Item 14(c) hereof.
(d) Schedules: See Item 14(a)2 above.
1/ Incorporated by reference from Tellabs, Inc. Post-effective
Amendment No. 1 on Form S-8 to Form S-4 filed on or about
June 29, 1992 (File No. 33-45788).
2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended April 1, 1988 (File No. 0-9692).
3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual
Report for the year ended January 1, 1993 (File No. 0-9692).
4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report
for the year ended December 31, 1993 (File No. 0-9692).
5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended June 30, 1995 (File No. 0-9692).
6/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report
for the year ended December 29, 1995 (File No. 0-9692).
7/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report
filed on or about August 21, 1996 (File No. 0-9692).
8/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended June 28, 1996 (File No. 0-9692).
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TELLABS, INC.
March 21, 1997 By /s Michael J. Birck
Date President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s Michael J. Birck President and Director March 21, 1997
(Principal Executive
Officer)
/s Peter A. Guglielmi Executive Vice President March 21, 1997
(Principal Financial
Officer) and Director
/s J. Peter Johnson Controller (Principal March 21, 1997
Accounting Officer)
/s Brian J. Jackman Director March 21, 1997
/s John D. Foulkes Director March 21, 1997
/s Frederick A. Krehbiel Director March 21, 1997
/s Stephanie Pace Marshall Director March 21, 1997
/s William F. Souders Director March 21, 1997
/s Thomas H. Thompson Director March 21, 1997
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors
Tellabs, Inc.
In connection with our audit of the consolidated financial statements of
Tellabs, Inc., and Subsidiaries, referred to in our report dated January
15, 1997, which is included in the annual report to shareholders and
incorporated by reference in Part II of this form, we have also audited
Schedule II for each of the three years in the period ended December 27,
1996. In our opinion, this schedule presents fairly in all material
respects the information required to be set forth therein.
Grant Thornton LLP
Chicago, Illinois
January 15, 1997
20
<TABLE>
<CAPTION>
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended December 27, 1996, December 29, 1995 and December 30, 1994
($ in thousands)
Additions
Balance at charged to Balance
beginning costs and Deduc- at end
of year expenses tions (A) of year
--------- --------- --------- -------
<S> <C> <C> <C> <C>
1996
Allowance for
doubtful receivables $2,317 $2,157 $792 $3,682
====== ======
1995
Allowance for
doubtful receivables $992 $1,407 $82 $2,317
====== ======
1994
Allowance for
doubtful receivables $844 $259 $111 $992
====== ======
<FN>
NOTE:
(A) - Uncollectible accounts charged off, net of recoveries.
</TABLE>
21
Exhibit 10.13
INFORMATION WITH REGARD TO
TELLABS, INC.
STOCK BONUS PLAN
1. INTRODUCTION
1.1 The purpose of the Tellabs, Inc. Stock Bonus Plan (the "Plan")
is (i) to align the interests of the stockholders of Tellabs,
Inc. ("Tellabs"), Groupe de Transport Tellabs Inc. / Tellabs TG,
Inc. ("Tellabs TG") and recipients of awards under this Plan by
increasing the proprietary interest of such recipients in the
growth and success of Tellabs and Tellabs TG and (ii) to advance
the interests of Tellabs and Tellabs TG by ensuring that key
employees of Tellabs TG remain with such company. For purposes of
this Plan, references to employment by Tellabs shall also mean
employment by Tellabs TG.
1.2 Certain Definitions
"Board" shall mean the Board of Directors of Tellabs.
"Bonus Stock" shall mean shares of Common Stock awarded under
the Plan.
"Bonus Stock Award" shall mean an award to an eligible
employee of a right to receive Bonus Stock under the Plan.
"Cause" shall mean any act of dishonesty, commission of an
indictable criminal offense, activities harmful to the reputation
of Tellabs or Tellabs TG, the refusal to perform or the
substantial disregard of duties properly assigned or a significant
violation of any legal duty of loyalty to Tellabs or Tellabs TG,
as determined by the Committee in its sole discretion.
"Closing Date" means June 28, 1996.
"Committee" shall mean the Compensation Committee of the Board
of Directors of Tellabs or any successor Committee thereto.
"Common Stock" means the common stock of Tellabs, Inc.
"Disability" shall mean the inability of the holder of an award
to perform substantially such holder's duties and
responsibilities for a continuous period of at least six months,
as determined by the Committee in its sole discretion.
"Fair Market Value" shall mean the average of the high and low
transaction prices of a share of Common Stock as reported in the
National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQNMS") on the date as of which
such value is being determined, or, if the Common Stock is not
1
listed on the NASDAQNMS, the average of the high and low
transaction prices of a share of Common Stock on the principal
national stock exchange on which the Common Stock is traded on
the date as of which such value is being determined, or, if there
shall be no reported transactions for such date, on the next
preceding date for which transactions were reported; provided,
however, that if Fair Market Value for any date cannot be so
determined, Fair Market Value shall be determined by the Committee
by whatever means or method as the Committee, in the good faith
exercise of its discretion, shall at such time deem appropriate.
1.3 Administration
This Plan shall be administered by the Committee. The Committee
shall, subject to the terms of this Plan, interpret this Plan and
the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan. All
such interpretations, rules and regulations shall be conclusive
and binding on all parties.
The Committee may delegate some or all of its power and authority
hereunder to the President and Chief Executive Officer or other
executive officer of Tellabs or Tellabs TG as the Committee deems
appropriate.
1.4 Eligibility
Participants eligible to participate in this Plan shall
consist of the full-time employees of Tellabs TG.
2. BONUS STOCK AWARDS
2.1 Bonus Stock Awards
Tellabs shall grant Bonus Stock Awards to employees of Tellabs
TG from time to time as determined by Tellabs' Board of Directors
or the Committee. Each such grant shall be evidenced by a notice
sent by Tellabs to each such employee to whom Bonus Stock Awards
are made. The maximum number of employees of Tellabs TG to whom
Bonus Stock Awards may be granted however is 50.
2.2 Terms of Bonus Stock Awards
Bonus Stock Awards shall be subject to the following terms and
conditions.
a) Number of Shares and Other Terms
The number of shares of Common Stock subject to Bonus Stock Award
granted to any one person pursuant to this Plan shall be no
greater than 500, subject to adjustment as provided in Section 3.3
hereof.
b. Vesting and Forfeiture
One-half of the number of shares of Common Stock subject to a
Bonus Stock Award shall vest and be payable on the first
2
anniversary of the Closing Date and the other half of such number
shall vest and be payable on the second anniversary of the
Closing Date, in each case, subject to Section 2.3 b), if the
holder of such award remains continuously in the employment of
Tellabs or Tellabs TG until such anniversary date of the Closing
Date. Such holder shall forfeit the unvested portion of any such
shares if such holder does not remain continuously in the
employment of Tellabs or Tellabs TG as specified above, except as
otherwise provided in Section 2.3 b) hereof.
c. Share Certificates
Upon the vesting of a portion of a Bonus Stock Award pursuant to
Section 2.2 b), 2.3 b) or 3.5, in each case subject to Tellabs or
Tellabs TG rights to require payment of any taxes in accordance
with Section 3.2, a certificate or certificates evidencing
ownership of the number of shares of Common Stock so vested shall
be delivered to and in the name of the holder of such award.
Notwithstanding the foregoing, in lieu of the delivery of shares
representing all or a portion of the vested portion of a Bonus
Stock Award, the Committee may, in its sole discretion, deliver
to the holder cash in an amount equal to the Fair Market Value on
the date such shares become vested equal to the vested portion of
such award, less any applicable withholding, as required by
Section 3.2, as the case may be.
d. Price
No payment shall be required or exigible by a recipient of a
Bonus Stock Award or Common Stock pursuant to this Plan. Bonus
Stock Awards and Common Stock issued pursuant to this Plan shall
be granted by Tellabs as consideration for a recipient's having
decided to remain as an employee of Tellabs TG following its
acquisition by Tellabs.
2.3 Termination of Employment.
a. Termination Resulting in Forfeiture
If the employment with Tellabs or Tellabs TG of the holder of
a Bonus Stock Award is (i) terminated by Tellabs or Tellabs TG
for Cause, (ii) if such employment terminates by reason of the
holder's Disability, or death, or (iii) if a holder voluntarily
terminates his employment with Tellabs or Tellabs TG for any
reason, the portion of such award which is not vested pursuant
to Section 2.2(b) shall be forfeited by such holder and such
portion shall be canceled by Tellabs.
b. Other Termination
If Tellabs or Tellabs TG terminates the employment of the
holder of a Bonus Stock Award for any reason other than Cause or
Disability, the portion of such award which is not otherwise
vested shall vest pursuant to Section 2.2(b) without regard to
such termination.
3
3. GENERAL
3.1 Amendments
The Board may amend this Plan as it shall deem advisable,
provided, however, that no amendment shall be made if such
amendment would increase the maximum number of shares of Common
Stock available under this Plan (subject to Section 3.3). No
amendment may impair the rights of a holder of an outstanding
award without the consent of such holder.
3.2 Tax Withholding
Tellabs and Tellabs TG shall have the right to require, prior
to the issuance or delivery of any shares of Common Stock or the
payment of any cash pursuant to an award made hereunder, payment
by the holder of such award of any federal, provincial, local or
other taxes which may be required to be withheld or paid in
connection with such award. The Committee may allow shares of
Common Stock to be delivered or withheld having an aggregate Fair
Market Value not in excess of the minimum amount required to be
withheld. Any fraction of a share of Common Stock which would be
required to satisfy such an obligation shall be disregarded and
the remaining amount due shall be paid in cash by the holder.
3.3 Adjustment
In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other
similar change in capitalization or event, or any distribution to
holders of Common Stock other than a regular cash dividend, the
number and class of securities available under this Plan, the
number and class of securities subject to each outstanding Bonus
Stock Award shall be adjusted or modified accordingly, as
determined by the Committee, which adjustment may include providing
for payment of an asset not constituting a security upon the
vesting of an outstanding Bonus Stock Award. The decision of the
Committee regarding any such adjustment shall be final, binding
and conclusive. If any such adjustment would result in a
fractional security being (i) available under this Plan, such
fractional security shall be disregarded, or (ii) subject to an
award under this Plan, Tellabs or Tellabs TG shall pay the holder
of such award, in connection with the first vesting of such
award, in whole or in part, occurring after such adjustment, an
amount in cash determined by multiplying (i) the fraction of such
security (rounded to the nearest hundredth) by (ii) the excess,
if any, of the Fair Market Value on the vesting date.
3.4 Minimum Sum to be Collected
Given that Bonus Stock Awards and Common Stock issued pursuant
to this Plan without any payment being required or exigible, no
minimum sum will be collected. Bonus Stock Awards and Common
Stock issued pursuant to this Plan shall be granted by Tellabs
as consideration for a recipient's having decided to remain as
an employee of Tellabs TG following its acquisition by Tellabs.
4
3.5 No Assignment
It is a condition of this Plan, and the rights of all holders
of Bonus Stock Awards shall be subject thereto, that no right or
interest of any such holder shall be assignable or transferable
in whole or in part, either directly or by operation of law or
otherwise, including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge or bankruptcy, and no right
or interest of any such holder under this Plan shall be liable
for, or subject to, any obligation of any such holder, including
claims for alimony or the support of any spouse.
3.6 No Right of Employment
Neither this Plan nor any award made hereunder shall confer upon
any person any right to continued employment by Tellabs, Tellabs
TG or any subsidiary or affiliate thereof or affect in any manner
the right of Tellabs, Tellabs TG or any subsidiary or affiliate
thereof to terminate the employment of any person at any time
without liability hereunder.
3.7 Right as Stockholder
No person shall have any right as a stockholder of Tellabs with
respect to any shares of Common Stock or other equity security of
Tellabs which is subject to an award hereunder unless and until
such person becomes a stockholder of record with respect to such
shares of Common Stock or equity security. Tellabs's obligation
to deliver shares of Common Stock pursuant to this Plan shall be
unfunded, and Tellabs shall not be obligated to set aside any of
its assets for the purpose of satisfying its obligations
hereunder. The claims of holders of Bonus Stock Awards shall be
solely those of an unsecured creditor of Tellabs.
3.8 Governing Law
This Plan and each award hereunder, and all determinations made
and actions taken pursuant hereto, to the extent not otherwise
governed by the laws of the United States, shall be governed by
the laws of the State of Delaware and construed in accordance
therewith without giving effect to principles of conflicts of laws.
3.9 Effective Date
This Plan shall have retroactive effect from the Closing Date
following its approval by the Commission des valeurs mobilieres
du Quebec.
5
Exhibit 10.14
TELLABS, INC.
STOCK BONUS PLAN
1. INTRODUCTION
1.1 The purpose of the Tellabs, Inc. Stock Bonus Plan (the "Plan")
is (i) to align the interests of the stockholders of Tellabs,
Inc. ("Tellabs"), and its subsidiaries from time to time
(individually, a "Subsidiary" and collectively, the
"Subsidiaries") and recipients of awards under this Plan by
increasing the proprietary interests of such recipients in the
growth and success of Tellabs and (ii) to advance the interests
of Tellabs and its Subsidiaries by retaining key employees of
International Business Machines Corporation, a New York
corporation, as employees of Tellabs Operations, Inc. ("Tellabs
Operations").
1.2 Certain Definitions
"Board" shall mean the Board of Directors of Tellabs.
"Bonus Stock" shall mean shares of Common Stock awarded under
the Plan.
"Bonus Stock Award" shall mean an award to an eligible
employee of a right to receive Bonus Stock under the Plan.
"Cause" shall mean any act of dishonesty, commission of an
indictable criminal offense, activities harmful to the
reputation of Tellabs or a Subsidiary, the refusal to perform
or the substantial disregard of duties properly assigned or a
significant violation of any legal duty of loyalty to Tellabs
or a Subsidiary, as determined by the Committee in its sole
discretion.
"Closing Date" means January 10, 1997.
"Committee" shall mean the Compensation Committee of the Board
of Tellabs or any successor Committee thereto.
"Common Stock" means the common stock of Tellabs, Inc.
"Disability" shall mean the inability of the holder of an award
to perform substantially such holder's duties and
responsibilities for a continuous period of at least six months,
as determined by the Committee in its sole discretion.
"Fair Market Value" shall mean the average of the high and low
transaction prices of a share of Common Stock as reported in the
National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQNMS") on the date as of which
such value is being determined, or, if the Common Stock is not
listed on the NASDAQNMS, the average of the high and low
transaction prices of a share of Common Stock on the principal
national stock exchange on which the Common Stock is traded on
1
the date as of which such value is being determined, or, if there
shall be no reported transactions for such date, on the next
preceding date for which transactions were reported; provided,
however, that if Fair Market Value for any date cannot be so
determined, Fair Market Value shall be determined by the Committee
by whatever means or method as the Committee, in the good faith
exercise of its discretion, shall at such time deem appropriate.
1.3 Administration
This Plan shall be administered by the Committee. The Committee
shall, subject to the terms of this Plan, interpret this Plan and
the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan. All
such interpretations, rules and regulations shall be conclusive
and binding on all parties.
The Committee may delegate some or all of its power and
authority hereunder to the President and Chief Executive Officer
or other executive officer of Tellabs or a Subsidiary as the
Committee deems appropriate.
1.4 Eligibility
Participants eligible to participate in this Plan shall consist
of the full-time employees of Tellabs whose names appear on
Schedule A, attached hereto. No other persons shall be eligible
to participate in this Plan.
2. BONUS STOCK AWARDS
2.1 Bonus Stock Awards
Effective on the Closing Date, Tellabs shall grant Bonus Stock
Awards to employees of Tellabs Operations from time to time as
determined by Tellabs' Board or the Committee. Each such grant
shall be evidenced by a notice sent by Tellabs to each such
employee to whom Bonus Stock Awards are made.
2.2 Terms of Bonus Stock Awards
Bonus Stock Awards shall be subject to the following terms and
conditions.
a. Number of Shares and Other Terms
The number of shares of Common Stock subject to a Bonus Stock
Award granted pursuant to this Plan shall be the number of such
shares set forth opposite the name of such employee on Schedule
A hereto.
b. Vesting and Forfeiture
One-half of the number of shares of Common Stock subject to a
Bonus Stock Award shall vest and be payable on the first
anniversary of the Closing Date and the other half of such number
shall vest and be payable on the second anniversary of the
2
Closing Date, in each case, subject to Section 2.3(b), if the
holder of such award remains continuously in the employment of
Tellabs or a Subsidiary until such anniversary date of the
Closing Date. Such holder shall forfeit the unvested portion of
any such shares if such holder does not remain continuously in
the employment of Tellabs or a Subsidiary as specified above,
except as otherwise provided in Section 2.3(b) hereof.
c. Shares Certificates
Upon the vesting of a portion of a Bonus Stock Award pursuant
to Section 2.2(b) or 2.3(b), in each case subject to Tellabs or
a Subsidiary rights to require payment of any taxes in accordance
with Section 3.2, a certificate or certificates evidencing
ownership of the number of shares of Common Stock so vested shall
be delivered to and in the name of the holder of such award.
Notwithstanding the foregoing, in lieu of the delivery of shares
representing all or a portion of the vested portion of a Bonus
Stock Award, the Committee may, in its sole discretion, deliver
to the holder cash in an amount equal to the Fair Market Value on
the date such shares become vested equal to the vested portion of
such award, less any applicable withholding, as required by
Section 3.2, as the case may be.
2.3 Termination of Employment
a. Termination Resulting in Forfeiture
If (i) employment with Tellabs or a Subsidiary of the holder of a
Bonus Stock Award is terminated by Tellabs or a Subsidiary for
Cause, (ii) such employment terminates by reason of the holder's
Disability or death, or (iii) a holder voluntarily terminates his
employment with Tellabs or a Subsidiary for any reason, the
portion of such award which is not vested pursuant to Section 2.2(b)
shall be forfeited by such holder and such portion shall be
canceled by Tellabs.
b. Other Termination
If Tellabs or a Subsidiary terminates the employment of the
holder of a Bonus Stock Award for any reason other than as provided
in Section 2.3(a), the portion of such award which is not
otherwise vested shall vest pursuant to Section 2.2(b) without
regard to such termination and be payable within thirty (30) days
of such termination, in accordance with Section 2.2(c).
3. GENERAL
3.1 Amendments
The Board or the Committee may amend this Plan as it shall deem
advisable, provided, however, that no amendment shall be made if
such amendment would increase the maximum number of shares of
Common Stock available under this Plan (subject to Section 3.3).
No amendment may impair the rights of a holder of an outstanding
award without the consent of such holder.
3
3.2 Tax Withholding
Tellabs shall have the right to require, prior to the issuance
or delivery of any shares of Common Stock or the payment of any
cash pursuant to an award made hereunder, payment by the holder
of such award of any federal, provincial, local or other taxes
which may be required to be withheld or paid in connection with
such award. The Committee may allow shares of Common Stock to
be delivered or withheld having an aggregate Fair Market Value
not in excess of the minimum amount required to be withheld and
in such event, any fraction of a share of Common Stock which
would be required to satisfy such an obligation shall be
disregarded and the remaining amount due shall be paid in cash
by the holder.
3.3 Adjustment
In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other
similar change in capitalization or event, or any distribution to
holders of Common Stock other than a regular cash dividend, the
number and class of securities available under this Plan, the
number and class of securities subject to each outstanding Bonus
Stock Award shall be adjusted or modified accordingly, as
determined by the Committee, which adjustment may include providing
for payment of an asset not constituting a security upon the
vesting of an outstanding Bonus Stock Award. The decision of the
Committee regarding any such adjustment shall be final, binding
and conclusive. If any such adjustment would result in a
fractional security being (i) available under this Plan, such
fractional security shall be disregarded, or (ii) subject to an
award under this Plan, Tellabs shall pay the holder of such
award, in connection with the first vesting of such award, in whole
or in part, occurring after such adjustment, an amount in cash
determined by multiplying (a) the fraction of such security
(rounded to the nearest hundredth) by (b) the excess, if any, of
the Fair Market Value on the vesting date.
3.4 No Assignment
It is a condition of this Plan, and the rights of all holders
of Bonus Stock Awards shall be subject thereto, that no right or
interest of any such holder shall be assignable or transferable
in whole or in part, either directly or by operation of law or
otherwise, including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge or bankruptcy, and no right
or interest of any such holder under this Plan shall be liable
for, or subject to, any obligation of any such holder, including
claims for alimony or the support of any spouse.
3.5 No Right of Employment
Neither this Plan nor any award made hereunder shall confer upon
any person any right to continued employment by Tellabs, Tellabs
Operations or any Subsidiary or affiliate thereof or affect in
any manner the right of Tellabs, Tellabs Operations or any
4
Subsidiary or affiliate thereof to terminate the employment of
any person at any time without liability hereunder.
3.6 Right as Stockholder
No person shall have any right as a stockholder of Tellabs with
respect to any shares of Common Stock or other equity security of
Tellabs which is subject to an award hereunder unless and until
such person becomes a stockholder of record with respect to such
shares of Common Stock or equity security. Tellabs' obligation
to deliver shares of Common Stock pursuant to this Plan shall be
unfunded, and Tellabs shall not be obligated to set aside any of
its assets for the purpose of satisfying its obligations
hereunder. The claims of holders of Bonus Stock Awards shall be
solely those of an unsecured creditor of Tellabs.
3.7 Governing Law
The corporate law of the State of Delaware shall govern all
issues concerning the relative rights of Tellabs and the holders
of Bonus Stock Awards with respect to this Plan. The law of the
State of Illinois, except its law with respect to choice of law,
shall be controlling in all other matters relating to the Plan.
3.8 Effective Date
This Plan shall become effective on the Closing Date.
5
EXHIBIT 13
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(In thousands, except per-share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $868,975 $635,229 $494,153 $320,463 $258,560
Gross profit $519,243 $363,835 $270,003 $164,255 $125,876
Earnings before income taxes $175,282 $162,825 $97,824 $35,801 $19,152
Net earnings before cumulative effect $117,965 $115,606 $72,389 $30,467 $16,854
Cumulative effect of accounting change ---- ---- ---- $1,500 ----
Net earnings $117,965 $115,606 $72,389 $31,967 $16,854
Earnings per share before cumulative
effect of accounting change $0.64 $0.63 $0.40 $0.17 $0.10
Cumulative effect on earnings per share ---- ---- ---- $0.01 ----
Earnings per share $0.64 $0.63 $0.40 $0.02 $0.10
Stockholders' equity $591,276 $433,233 $292,790 $207,006 $167,144
Total assets $743,823 $552,051 $390,067 $328,766 $210,748
Net working capital $343,840 $267,806 $138,317 $64,285 $109,201
Long-term debt $2,850 $2,850 $2,850 $2,850 $2,850
No cash dividends per common share were paid. Per-share amounts are restated
to reflect stock splits in 1996, 1995, 1994 and 1993.
COMMON STOCK MARKET DATA
(Restated for stock splits in 1996 and 1995)
1996 1995
High Low High Low
First Quarter 26 3/8 15 1/4 16 7/8 11 3/4
Second Quarter 34 3/4 23 5/8 24 1/8 14
Third Quarter 38 1/8 24 1/2 26 3/8 19 5/8
Fourth Quarter 45 1/4 34 1/8 21 3/8 14 7/8
The Company's common stock is traded over-the-counter under the symbol
TLAB. The shares are included in the NASDAQ National Market System, which
reports sales prices for actual transactions. At February 17, 1997, there
were approximately 3,035 stockholders of record.
Management Statement of Financial Responsibilities
The financial statements of Tellabs, Inc., and Subsidiaries have been
prepared under the direction of management in conformity with generally
accepted accounting principles. In the opinion of management, the
financial statements set forth a fair presentation of the consolidated
financial condition of Tellabs, Inc., and Subsidiaries at December 27,
1996, and December 29, 1995, and the consolidated results of its operations
for the years ended December 27, 1996, December 29, 1995, and December 30,
1994.
The Company maintains accounting systems and related internal controls
which, in the opinion of management, provide reasonable assurances that
transactions are executed in accordance with management's authorization,
that financial statements are prepared in accordance with generally
accepted accounting principles, and that assets are properly accounted for
and safeguarded.
Ethical decision-making is fundamental to the Company's management
philosophy. Management recognizes its responsibility for fostering a
strong ethical climate so that the Company's affairs are conducted to the
highest standards of personal and corporate conduct. Employee awareness of
these objectives is achieved through key written policy statements.
The Board of Directors has appointed two of its non-employee members as an
Audit Committee. This committee meets periodically with management and the
independent certified public accountants, who have free access to this
committee without management present, to discuss the results of their
audit work and their evaluation of the internal control structure and the
quality of financial reporting.
Michael J. Birck Peter A. Guglielmi
President and Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer,
Tellabs, Inc. Tellabs, Inc.
January 15, 1997 January 15, 1997
Report of Independent Certified Public Accountants
We have audited the accompanying consolidated balance sheets of
Tellabs, Inc., and Subsidiaries as of December 27, 1996, and
December 29, 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended December 27, 1996,
December 29, 1995 and December 30, 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tellabs,
Inc., and Subsidiaries at December 27, 1996, and December 29, 1995, and the
consolidated results of its operations and its consolidated cash flows for
the years ended December 27, 1996, December 29, 1995 and December 30,
1994, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Chicago, Illinois
January 15, 1997
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share data)
Year Year Year
Ended Ended Ended
12/27/96 12/29/95 12/30/94
-------- -------- --------
<S> <C> <C> <C>
Net sales $868,975 $635,229 $494,153
Cost of sales 349,732 271,394 224,150
------- ------- -------
Gross Profit 519,243 363,835 270,003
Operating expenses
Marketing 112,206 85,843 67,310
Research and development 107,258 81,893 64,765
Acquired in-process research and development 74,658 --- ---
General and administrative 52,495 36,878 35,857
Goodwill amortization 3,683 2,568 2,389
------- ------- -------
350,300 207,182 170,321
------- ------- -------
Operating Profit 168,943 156,653 99,682
Other income (expense)
Interest income 7,371 5,855 3,185
Interest expense (1,173) (124) (1,773)
Other 141 441 (3,270)
------- ------- -------
6,339 6,172 (1,858)
Earnings Before Income Taxes 175,282 162,825 97,824
Income taxes 57,317 47,219 25,435
------- ------- -------
Net Earnings $117,965 $115,606 $72,389
======= ======= =======
Average number of common and common
equivalent shares outstanding 184,674 183,420 181,328
Earnings per Share $0.64 $0.63 $0.40
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS (In thousands)
12/27/96 12/29/95
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $90,446 $92,485
Investments in marketable securities 136,421 69,751
Accounts receivable -- primarily trade,
net of allowance for doubtful receivables
of $3,682,000 at December 27, 1996 and
$2,317,000 at December 29, 1995 167,928 127,565
Inventories
Raw materials 30,961 31,302
Work in process 12,046 11,694
Finished goods 35,512 24,719
------- -------
78,519 67,715
Other current assets 2,150 8,854
------- -------
Total Current Assets 475,464 366,370
Property, Plant and Equipment -- at Cost
Buildings and improvements 77,481 55,852
Equipment 180,758 139,117
------- -------
258,239 194,969
Less accumulated depreciation 104,254 84,419
------- -------
153,985 110,550
Land 8,775 6,472
------- -------
162,760 117,022
Goodwill, Net 64,785 44,958
Other Assets 40,814 23,701
------- -------
Total Assets $743,823 $552,051
======== ========
<FN>
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 12/27/96 12/29/95
(In thousands) -------- --------
<S> <C> <C>
Current Liabilities
Accounts payable-trade $36,931 $30,097
Accrued liabilities
Compensation 34,689 23,861
Payroll and other taxes 8,770 6,268
Other 17,918 12,054
------ ------
Total accrued liabilities 61,377 42,183
Deferred income taxes 9,881 ---
Income taxes 23,435 26,284
------ ------
Total Current Liabilities 131,624 98,564
Long-Term Debt 2,850 2,850
Other Long-Term Liabilities 10,964 6,179
Deferred Income Taxes 7,109 11,225
Commitments --- ---
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and
outstanding --- ---
Common stock: authorized 200,000,000 shares of
$.01 par value; issued 179,652,633 shares at
December 27, 1996, and 177,596,744 shares at
December 29, 1995 1,797 888
Additional paid-in capital 94,854 72,385
Cumulative translation adjustment 3,937 7,842
Unrealized net gains on
available-for-sale securities 21,551 48
Retained earnings 469,137 352,070
------- -------
Total Stockholders' Equity 591,276 433,233
------- -------
Total Liabilities and Stockholders' Equity $743,823 $552,051
<FN> The accompanying notes are an integral ======== ========
part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Cumulative Unrealized
Common Paid-In Translation Net Gains Retained
(In thousands) Stock Capital Adjustment (Losses) Earnings Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1994 $215 $45,072 ($3,042) $28 $164,733 $207,006
Net earnings --- --- --- --- 72,389 72,389
Stock options exercised 4 8,883 --- --- --- 8,887
Employee stock awards --- 195 --- --- --- 195
Stock split 217 --- --- --- (217) ---
Unrealized net losses on
available-for-sale
marketable securities --- --- --- (831) --- (831)
Foreign currency
translation adjustment --- --- 5,144 --- --- 5,144
Balance at ------ ------ ------ ------ ------- -------
December 30, 1994 436 54,150 2,102 (803) 236,905 292,790
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 115,606 115,606
Stock options exercised 11 18,128 --- --- --- 18,139
Employee stock awards --- 107 --- --- --- 107
Stock split 441 --- --- --- (441) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 851 --- 851
Foreign currency
translation adjustment --- --- 5,740 --- --- 5,740
Balance at ------ ------ ------ ------ ------- -------
December 29, 1995 888 72,385 7,842 48 352,070 433,233
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 117,965 117,965
Stock options exercised 11 22,393 --- --- --- 22,404
Employee stock awards --- 76 --- --- --- 76
Stock split 898 --- --- --- (898) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 21,503 --- 21,503
Foreign currency
translation adjustment --- --- (3,905) --- --- (3,905)
Balance at ------ ------ ------ ------ ------- -------
December 27, 1996 $1,797 $94,854 $3,937 $21,551 $469,137 $591,276
====== ======= ====== ====== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Year Year
Ended Ended Ended
(In thousands) 12/27/96 12/29/95 12/30/94
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings $117,965 $115,606 $72,389
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 32,648 23,682 19,502
Provision for doubtful receivables 2,157 1,396 254
Deferred income taxes (23,486) 9,214 (1,757)
Acquired in-process research
and development 74,658 --- ---
Gain on sale of long-term investment --- (929) ---
Net (increase) decrease in current assets,
net of effects from acquisitions:
Accounts receivable (43,535) (42,689) (7,660)
Inventories (7,434) (14,696) 92
Other current assets (1,206) 353 (724)
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable 6,348 7,067 7,001
Accrued liabilities 14,801 2,807 9,991
Income taxes (2,221) 3,793 9,054
Net increase in other assets (10,272) (3,637) (665)
Net (decrease) increase in other liabilities (120) (4,312) 3,638
------ ------ ------
Net Cash Provided by Operating Activities 160,303 97,655 111,115
Investing Activities
Acquisition of property, plant and
equipment, net (64,831) (35,191) (22,956)
Proceeds from sales and maturities of 99,642 65,780 7,543
marketable securities
Payments for purchases of marketable
securities (122,679) (111,168) (15,602)
Payments for purchases of long-term
investments --- (1,215) (9,005)
Proceeds from sale of long-term
investment --- 3,429 ---
Payments for acquisitions,
net of cash acquired (91,732) --- ---
Origination of loan receivable (5,822)
------- ------- -------
Net Cash Used by Investing Activities (185,422) (78,365) (40,020)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Year Year
Ended Ended Ended
12/29/95 12/29/95 12/30/94
-------- -------- --------
<S> <C> <C> <C>
Financing Activities
Common stock sold through stock-option plans 22,480 18,246 9,082
Proceeds from notes payable 40,000 --- ---
Payments of notes payable (40,000) --- (60,000)
------ ------ ------
Net Cash Provided(Used) by Financing Activities 22,480 18,246 (50,918)
Effect of Exchange Rate Changes on Cash 600 3,489 1,694
Net (Decrease) Increase in Cash
And Cash Equivalents (2,039) 41,025 21,871
Cash and Cash Equivalents At Beginning of Year 92,485 51,460 29,589
------- ------- -------
Cash and Cash Equivalents At End of Year $90,446 $92,485 $51,460
======= ======= =======
Other Information
Interest paid $1,165 $111 $1,798
Income taxes paid $67,887 $28,646 $10,664
Supplemental Schedule of Non-cash Investing and Financing Activities:
In acquiring all of the outstanding shares of Steinbrecher Corporation
and TRANSYS Network's SONET product line during 1996, the Company paid
direct costs totaling $94,261,000. In conjunction with the acquisition,
liabilities were assumed as follows:
(In thousands)
Fair value of assets acquired $104,944
Costs in excess of fair value 22,977
Direct costs paid (94,261)
-------
Liabilities assumed $33,660
=======
<FN> The accompanying notes are an integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Summary of Significant Accounting Policies
Nature of Business
Operating in one business segment, the Company and its Subsidiaries
design, assemble, market and service a diverse line of electronic
communications equipment used in public and private communications
networks worldwide.
Consolidation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries. All significant intercompany balances and
transactions have been eliminated. The results of the Tellabs Wireless
Systems Division and the Tellabs Transport Group are included since
their respective purchase dates of April 17, 1996, and June 28, 1996.
(See Note K.)
Certain reclassifications have been made in the 1994 and 1995 consolidated
financial statements to conform to the 1996 presentation. The presentation
of the consolidated financial statements requires the use of estimates by
management.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
marketable securities, cost-basis investments, and long-term debt. The
carrying value of the cash and cash equivalents and long-term debt
approximates their estimated fair values based upon quoted market prices.
The fair value of investments in marketable securities is estimated based
on quotes from brokers or current rates offered for instruments with
similar characteristics.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on
both the declining-balance and straight-line methods.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases at enacted tax rates when such amounts are expected to be
realized or settled.
Goodwill
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net income generated by the related subsidiaries to
determine that no impairment has occurred. Goodwill is amortized over
both 20 and 10 years using the straight-line method. The accumulated
amortization of goodwill is approximately $9,775,000 and $6,092,000 as of
December 27, 1996 and December 29, 1995, respectively.
Note A: Summary of Significant Accounting Policies (continued)
Stock Awards
The Company has a program to award shares of the Company's common stock
to employees in recognition of their past service. Each full-time
employee who has worked for a continuous 5- or 20-year period is awarded
10 or 25 shares, respectively. When an employee stock award is granted,
compensation expense is charged for the fair market value of the shares
issued.
Revenue Recognition
The Company recognizes revenue at the date of shipment.
Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during each period along with the
dilutive effect of outstanding stock options. On April 22, 1994, April 25,
1995, and October 24, 1996, the Company declared 2-for-1 stock splits
payable in the form of a 100 percent stock dividend. All references to the
number of common shares and per share amounts have been retroactively
restated to give effect to the stock dividends.
Foreign Currency Translation
The financial statements of the Company's subsidiaries are generally
measured using the local currency as the functional currency. Accordingly,
the effect of translating a subsidiary's financial statements into U.S.
dollars is recorded as a separate component of stockholders' equity.
Foreign Exchange
Gains and losses from changes in exchange rates are recognized in "Other
Income (Expense)". Net losses of $273,000, $302,000 and $1,555,000 were
recorded in 1996, 1995 and 1994, respectively.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts as a hedge against
net foreign accounts receivable and payable. Market value gains and
losses on the contracts are recognized and are combined with offsetting
foreign exchange gains or losses on those accounts.
<TABLE>
<CAPTION>
Note B: Investments
Available-for-sale marketable securities are accounted for at market with
the unrealized gain or loss net of deferred income taxes shown as a
separate component of stockholders' equity. At December 27, 1996, and
December 29, 1995, they consisted of the following:
Amortized Unrealized Market
(In thousands) Cost Gain (Loss) Value
1996 ------- ------- -------
<S> <C> <C> <C>
State and municipal securities $7,345 ($25) $7,320
Preferred and common stocks 18,907 41,797 60,704
U.S. government and corporate
debt obligations 36,215 (126) 36,089
Foreign government debt obligations 32,389 (81) 32,308
------- ------- -------
$94,856 $41,565 $136,421
======= ======= =======
Amortized Unrealized Market
Cost Gain (Loss) Value
------- ------- -------
<S> <C> <C> <C>
1995
State and municipal securities $39,938 $151 $40,089
Preferred and common stocks 12,423 (30) 12,393
U.S. government and corporate
debt obligations 16,022 (53) 15,969
------- ------- -------
$68,383 $68 $68,451
======= ======= =======
</TABLE>
Held-to-maturity securities are carried at their amortized cost. During
1996, all such investments had matured. At December 29, 1995, the
balance of $1,300,000, consisting entirely of U.S. government and
corporate debt obligations, was included in "Investments in Marketable
Securities".
The Company has an investment in a company that had an initial public
offering (IPO) during 1996. The Company has marked this investment to
market subject to the constraints of the security sale limitations of the
IPO. Under these constraints, only those shares that can be traded within
the next year are included in "Investment in Marketable Securities" while
the remaining shares are included in "Other Assets" at their historical
cost.
During 1996, the Company committed to make a $8,500,000 contribution to the
Tellabs Foundation. The contribution will consist of stock from the
aforementioned investment. Investments in marketable securities have been
reduced accordingly.
In the ordinary course of managing its assets and liabilities, the Company
uses financial instruments, which are not reflected in the financial
statements, to reduce or eliminate its exposure to foreign exchange risks.
Foreign currency risk is managed through forward exchange contracts.
Note B: Investments (Continued)
The Company had forward exchange contracts, generally having maturities of
less than 120 days, in the amount of $57,409,000 and $41,914,000 at
December 27, 1996, and December 29, 1995, respectively. These contracts
are primarily denominated in Finnish markka, Irish punts and Canadian
dollars.
Note C: Long-Term Debt
The long-term debt of $2,850,000 comprises industrial revenue bonds that
were issued on December 20, 1991, with the principal payable in October
2014. Interest is payable quarterly based on a variable interest rate set
weekly based on market conditions for similar instruments. The effective
rates for 1996, 1995 and 1994 were 3.51 percent, 3.94 percent and 2.88
percent, respectively. The debt is unsecured. The provisions of the loan
agreement contain restrictive covenants, including a minimum net worth and
debt-to-equity ratio.
Note D: Stock Options
At December 27, 1996, the Company had seven stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and its
related interpretations in accounting for its plans. No compensation cost
has been recognized for its fixed stock option plan grants. Had
compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year Ended Year Ended
(In Thousands, Except Per-Share Data) 12/27/96 12/29/95
------- -------
<S> <C> <C>
Net Earnings As reported $117,965 $115,606
Pro forma $113,315 $114,691
Earnings per share As reported $0.64 $0.63
Pro forma $0.61 $0.63
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield
of zero percent for both years; expected volatility of 51.2 percent and
52.4 percent; risk-free interest rates of 5.26 percent to 6.65 percent and
5.25 to 7.88 percent; and expected lives of 2.53 years to 5.53 years and
2.6 years to 5.6 years.
The Company's 1981 Incentive Stock Option Plan is a tax-qualified plan that
provided for 4,320,000 shares of common stock to be reserved for options
issued under the plan. No grants have been made under the 1981 Plan since
its expiration on November 24, 1991. At December 29, 1995, all shares
that had been granted under the 1981 Plan had been exercised or cancelled.
Note D: Stock Options (continued)
The Company's 1984 Incentive Stock Option Plan is a tax-qualified plan that
provides for 4,800,000 shares of common stock to be reserved for options
that may be issued under the plan. The plan also provides that the option
price shall be the market value of the shares as of the date of grant,
except for options granted to holders of 10 percent or more of the
outstanding shares, in which case the option price shall be 110 percent of
the market value of the shares as of the date of grant.
The Company's 1986 Non-Qualified Stock Option Plan provides for 12,000,000
shares of common stock to be reserved for options that may be issued under
the plan. The plan provides that the option price shall be the market
value of the shares as of the date of grant.
The Company's 1987 Stock Option Plan for Non-Employee Corporate Directors
provides for the non-discretionary grant of options to non-employee
directors of the Company to purchase a combined maximum of 1,200,000
shares of common stock of the Company at a per-share price not less than
the market value per share of the common stock on the date of grant. The
plan provides that each non-employee director, on the date such person
becomes a non-employee director, will be granted options to purchase 10,000
shares of common stock and, provided such person is still serving as a
non-employee director, will automatically be granted options to purchase
6,000 additional shares of common stock each year thereafter on the
anniversary of the last day of the month in which the initial options were
granted. Options granted under the 1987 plan expire five years from the
grant date.
The Company's 1989 Stock Option Plan provides for 12,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
12,000,000 shares and up to 12,000,000 stock appreciation rights (SARs).
The SARs may be granted in conjunction with, or independently of, the
options under the plan. The plan provides that the option price and the
SAR price shall be the market value of the Company's shares as of the date
of grant. At December 27, 1996, 1,524,000 SARs with grant prices ranging
from $0.75 to $1.08 and 5-year terms and 786,220 SARs with a grant price
of $1.58 and $28.63 and 10-year terms had been granted. At that date, a
total of 2,094,000 SARs had been exercised and 15,400 had been cancelled,
leaving 200,820 outstanding.
The Company's 1991 Stock Option Plan provides for 6,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
6,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant.
The Company's 1994 Stock Option Plan provides for 8,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
8,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant.
In July 1996, the Company began a Global Option Program under which all
full-time employees below the director level as of July 8, 1996, were
granted non-qualified options or SARs to purchase 400 shares plus 20 shares
for each year of service. The grants were dated July 22, 1996, with a
price of $28.63. The options were granted from the 1994 Plan and the SARs
from the 1989 Plan.
Note D: Stock Options (continued)
Unless the option agreements provide otherwise, options or SARs granted
under the 1981, 1984, 1986, 1989, 1991, and 1994 plans become exercisable
on a cumulative basis at a rate of 25 percent on each of the second through
fifth anniversaries of the grant date. Unless the option agreements
provide otherwise, options under the 1981 and 1986 plans terminate at the
end of 5 years after the grant while options or SARs granted under the
1984, 1989, 1991, and 1994 plans terminate at the end of 10 years after the
grant.
<TABLE>
<CAPTION>
A summary of the status of the Company's seven option plans as of
December 27, 1996, December 29, 1995, and December 30, 1994, and changes
during the years ending on these dates is presented below:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
<S>
Outstanding - <C> <C> <C> <C> <C> <C>
beginning of year 10,331,146 $4.53 12,745,348 $3.04 12,948,432 $2.26
Granted 3,266,420 28.61 889,000 16.94 2,576,404 6.77
Exercised (2,053,399) 3.18 (3,013,066) 1.92 (2,616,952) 1.42
Cancelled (258,420) 11.19 (290,136) 4.82 (162,536) 2.98
Outstanding - ---------- ---------- ----------
end of year 11,285,747 $11.59 10,331,146 $4.53 12,745,348 $3.04
========== ========== ==========
Exercisable at end of year 5,878,597 5,719,896 5,964,432
Available for grant 4,078,436 7,086,436 7,685,296
Weighted average fair
value of options
granted during the year $13.22 $7.84 N/A
</TABLE><TABLE><CAPTION>
Options Outstanding and Exercisable as of December 27, 1996, by Price Range:
Outstanding Exercisable
--------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Contractual Exercise Exercise
Exercise Prices: Shares Life Price Shares Price
$0.77 - $1.53 3,821,512 4.52 $1.35 3,821,512 $1.35
$1.54 - $6.59 3,339,135 6.92 $5.68 1,771,735 $5.41
$6.84 - $27.63 1,004,100 7.76 $16.86 280,350 $16.82
$28.63 - $28.63 3,041,000 9.44 $28.63 5,000 $28.63
$29.88 - $39.50 80,000 8.70 $33.31 --- ---
----------- ---------
$0.77 - $39.50 11,285,747 6.87 $11.59 5,878,597 $3.33
=========== =========
</TABLE>
Note E: Employee Benefit and Retirement Plans
The Company maintains a defined contribution 401(k) retirement plan for the
benefit of eligible employees. Under the plan, a participant may elect to
defer a portion of annual compensation. Matching contributions equal to
the first 3 percent of annual compensation were made by the Company for
all eligible participants. The Company may contribute additional amounts
at the discretion of the Board of Directors. Company contributions to the
plan were $6,035,000, $4,707,000, and $3,480,000 in 1996, 1995 and 1994,
respectively. Contributions to the plan are immediately vested in plan
participants' accounts.
The Company maintains a deferred compensation plan that permits officers
and certain management employees to defer portions of their compensation.
Unless the plan is amended by the Company, the deferred amounts earn an
annual interest rate of 12 percent during the term of the plan. The
liabilities for the deferred salaries plus interest are included in "Other
Long-Term Liabilities".
The Company maintains money purchase and profit sharing plans for the
benefit of eligible employees. Under the plans, 4 percent of eligible
annual compensation was contributed by the Company for each participant. No
part of the contribution is vested until after a service period of five
years, at which time the participant is fully vested. Company
contributions to the plan were $4,056,000, $3,451,000, and $3,134,000 for
1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
Note F: Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1996 and 1995 is as follows:
(In thousands, except per-share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1996
Net sales $172,256 $189,473 $234,340 $272,906 $868,975
Gross profit 97,774 112,315 139,529 169,625 519,243
Net earnings (loss) 31,127 (18,678) 46,117 59,399 117,965
Earnings (loss) per share $0.17 ($0.10) $0.25 $0.32 $0.64
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1995
Net sales $142,212 $159,939 $151,754 $181,324 $635,229
Gross profit 79,269 90,956 84,415 109,195 363,835
Net earnings 22,941 27,118 27,441 38,106 115,606
Earnings per share $0.13 $0.15 $0.15 $0.21 $0.63 *
<FN>
Per-share amounts are restated to reflect stock splits in 1996 and 1995.
* The earnings-per-share computation for the year is a separate, annual
calculation. Accordingly, the sum of the quarterly earnings-per-share
amounts do not necessarily equal the earnings per share for the year.
</TABLE>
Note G: Income Taxes
(In thousands) Year Ended Year Ended Year Ended
12/27/96 12/29/95 12/30/94
Components of the Company's -------- -------- --------
earnings before income taxes are as follows:
Domestic source $70,835 $97,372 $50,962
Foreign source 104,447 65,453 46,862
------- ------- -------
Total $175,282 $162,825 $97,824
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $47,371 $24,111 $16,689
State 9,751 2,220 1312
Foreign 23,681 11,674 9,191
------ ------ ------
80,803 38,005 27,192
Deferred:
Federal (23,615) 7,435 (906)
Reduction of valuation allowance ---- ---- (1,544)
Foreign and State 129 1,779 693
------ ------ ------
(23,486) 9,214 (1,757)
------ ------ ------
Total $57,317 $47,219 $25,435
====== ====== ======
Deferred tax assets (liabilities) for 1996
and 1995 are comprised of the following:
Ending Ending
(In thousands) Balance Balance
12/27/96 12/29/95
Deferred tax assets -------- --------
Inventory reserves $3,050 $2,710
Deferred employee benefit expenses 4,294 2,933
Deferred compensation plan 2,563 1,607
Accrued liabilities 3,135 2,502
NOL and research and development
credit carryforwards 21,604 457
Other 476 61
------ ------
Gross deferred tax assets 35,122 10,270
Deferred tax liabilities
Depreciation (13,912) (12,625)
Unrealized gain on marketable securities (20,016) (20)
Other untaxed reserves - Martis Oy 246 (614)
Amortizable intangibles (4,290) ---
Other (840) (312)
------ ------
Gross deferred tax liabilities (38,812) (13,571)
------ ------
Valuation allowance (13,300) ---
------ ------
Net Deferred Tax (Liability) ($16,990) ($3,301)
====== ======
<TABLE>
<CAPTION>
Note G: Income Taxes (continued)
Year Ended Year Ended Year Ended
12/27/96 12/29/95 12/30/94
--------- --------- ---------
<S> <C> <C> <C>
Federal income taxes at the statutory rate are reconciled with the
Company's income tax provision as follows:
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Foreign income taxes (4.6) (5.1) (7.2)
Tax benefits associated with merger of
Finland subsidiaries (2.0) (1.7) --
Charitable contribution (1.7) -- --
Foreign tax credit and research and
development credit (1.2) (0.6) (2.9)
Benefits attributable to foreign
sales corporation (0.3) (0.3) (0.9)
State income tax, net of federal benefits 3.6 1 0.9
Acquired in-process research and
development charge 3.2 -- --
Reduction of valuation allowance -- --- (1.6)
Other - net 0.7 0.7 2.7
---- ---- ----
Effective Income Tax Rate 32.7% 29.0% 26.0%
==== ==== ====
</TABLE>
Note G: Income Taxes (continued)
The net deferred income tax liability increased to $16,990,000 at
December 27, 1996, from $3,301,000 at December 29, 1995. The increase of
the deferred tax balance is attributable to deferred taxes provided on the
mark-to-market adjustment on investments in accordance with FASB 115 and
the intangibles associated with the acquisition of the Wireless Systems
Division offset by a net operating loss also attributable to the acquisition.
The Company recorded deferred tax assets for research and development
credits and net operating loss carryovers associated with the acquisition
in the amount of approximately $21,100,000. A valuation allowance is
provided when it is more likely than not that some portion of the
deferred tax asset will not be realized. The Company has established a
valuation allowance of $13,300,000 associated with the net operating
losses and research and credit carryovers of the acquisition. The net
operating loss carryforwards and research and development tax credits
will expire at various dates through the year 2010. If the Company
utilizes these carryforwards, they will be recognized as a reduction of
goodwill.
Deferred U.S. income taxes are not provided on the undistributed
cumulative earnings of foreign subsidiaries because such earnings are
considered to be permanently invested in those operations. The cumulative
earnings of foreign subsidiaries were approximately $173,549,000 at
December 27, 1996. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at December 27,
1996, was approximately $28,893,000.
Note H: Major Customers
No single customer accounted for more than 10 percent of consolidated net
sales in 1996 and 1995. A single customer accounted for approximately
15.3 percent of consolidated net sales in 1994.
<TABLE>
<CAPTION>
Note I: Business Segment and Geographical Information
The Company operates in one business segment. Products include voice and
data communications and networking equipment used in public and private
communication networks worldwide.
The Company operates in two principal geographic areas: North America and
Europe. A summary of the Company's operations by area is presented
below.
Adjustments
(In thousands) North and Consolidated
America Europe Elimination Total
1996 ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Sales
Unaffiliated customers $628,679 $240,296 --- $868,975
Intergeographic 2,641 8,504 ($11,145) ---
------- ------- ------- -------
Total $631,320 $248,800 ($11,145) $868,975
Operating profit $67,008 $101,935 --- $168,943
Identifiable assets $491,298 $252,525 --- $743,823
1995
Net Sales
Unaffiliated customers $457,161 $178,068 --- $635,229
Intergeographic 2,751 7,156 ($9,907) ---
------- ------- ------- -------
Total $459,912 $185,224 ($9,907) $635,229
Operating profit $87,573 $69,080 --- $156,653
Identifiable assets $371,729 $180,322 --- $552,051
1994
Net Sales
Unaffiliated customers $377,554 $116,599 --- $494,153
Intergeographic 5,796 5,034 ($10,830) ---
------- ------- ------- -------
Total $383,350 $121,633 ($10,830) $494,153
Operating profit $53,277 $46,405 --- $99,682
Identifiable assets $249,224 $140,843 --- $390,067
</TABLE>
Operating profit is net sales less all related costs of sales, marketing,
research and development, general and administrative and goodwill
amortization, excluding interest and income taxes. Identifiable assets
are those assets considered as necessary for the ongoing activities and
operations of each geographic area.
Intergeographic sales are accounted for as sales and as cost of sales
between the domestic parent and its subsidiaries. The sales price or cost
is dependent upon the product, consists of a discount from list price and
is sufficient to recover cost plus an appropriate markup for profit.
North American operating revenues include export sales to unaffiliated
customers of approximately $23,722,000, $33,105,000, and $31,018,000 in
1996, 1995, and 1994, respectively.
Note J: Commitments
The Company and its Subsidiaries have a number of operating lease agreements
primarily involving office space, buildings and office equipment. These
leases are non-cancellable and expire on various dates through 2009.
As of December 27, 1996, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In thousands)
1997 $6,998
1998 5,397
1999 3,824
2000 1,929
2001 1,548
2002 and thereafter 2,626
------
Total Minimum Lease Payments $22,322
======
Rental expense for the years ended December 27, 1996, December 29, 1995,
and December 30, 1994, was approximately $5,734,000, $3,420,000 and
$2,782,000, respectively.
Note K: Business Acquisitions
In April 1996, the Company acquired all of the outstanding shares of
Steinbrecher Corporation for approximately $77,000,000, financed with bank
loans and cash. This acquisition has been accounted for through the use of
the purchase method of accounting, and, accordingly, the accompanying
financial statements include the results of its operations since the
acquisition date. Goodwill arising from this acquisition of approximately
$6,865,000 is being amortized over 10 years.
The following table summarizes on an unaudited pro forma basis the combined
results of operations of the Company as though the above acquisition were
made at December 31, 1994. The pro forma amounts give effect to
appropriate adjustments to amortize goodwill, intangible assets and
acquisition costs and to reflect the reduction of interest income
resulting from the use of cash for the acquisition; the increase in
interest expense on the acquired bank debt; and, the corresponding income
tax effects. In accordance with the Company's practice, in-process
research and development as well as its deferred income tax effects (a net
amount of approximately $54 million) was written of as reflected in the
1995 pro forma results presented below.
Year Ended Year Ended
(In Thousands, Except Per-Share Data) 12/27/96 12/29/95
Net Sales $869,171 $644,730
Net Earnings $165,713 $51,703
Earnings per common share $0.90 $0.28
The pro forma financial information presented above does not purport to be
indicative of either the results that would have occurred had the
acquisition taken place at the beginning of the period presented or of
future results of operation of the combined businesses.
In June 1996, the Company through the Tellabs Transport Group acquired
TRANSYS Network's SONET product line for approximately $17,000,000 in cash.
This acquisition has been accounted for through the use of the purchase
method of accounting, and, accordingly, the accompanying financial
statements include the results of its operations since the acquisition
date. Goodwill resulting from this acquisition, in the amount of
$15,799,000, is being amortized over 10 years. This acquisition did not
have a material impact on the Company's financial results.
Subsequent to year end, the Company acquired, for $6,000,000 in cash,
certain wavelength-division multiplexing and optical networking
technology, including the rights to or ownership of several patents and
patent applications, from IBM's Thomas J. Watson Research Center. Under
the terms of the agreement, the Research Center's optical network
development team joined the Company.
In conjunction with each of the above acquisitions, a stock bonus plan was
established under which certain acquired employees are entitled to a
specific number of shares of the Company's stock over a two-year vesting
period.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
1996 vs. 1995
Sales during 1996 reached an all-time high as they climbed to
$868,975,000, surpassing 1995's previous record sales of $635,229,000. The
1996 sales growth of 36.8 percent was driven by increased sales on both the
domestic and international fronts. Domestic sales grew by 46 percent,
primarily as the result of the continuing strong sales of the TITAN (a
registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect system. International sales, which grew by 21 percent, were
driven by the Martis DXX (a trademark of Martis Oy, a subsidiary of
Tellabs, Inc.) managed access and transport system.
Digital cross-connect sales for 1996 of $479,174,000 represent an
increase of $179,041,000 over those of the previous year. Sales of the
Titan 5500 digital cross-connect system grew by 69 percent and continue to
drive this product group primarily through higher sales to existing local
exchange customers and the addition of a new major interexchange carrier.
These service providers seek to enhance their competitive advantage by
providing more robust networks to meet the needs of business customers, the
increasing demands of Internet traffic, and the desire for enhanced data
and video services. The digital cross-connect group accounted for
approximately 57 percent of total product sales as it continues to lead all
product groups.
The managed digital networks area exceeded last year's sales by almost 33
percent, reaching $231,602,000. The continued expansion of DXX system
sales outside the Scandinavian market in response to growth in
infrastructure helped drive its $70,979,000 increase in sales during 1996,
reaching a new annual record of $201,198,000. As was expected, the
remaining products in this group, such as the CROSSNET (a registered
trademark of Tellabs Operations, Inc.) data multiplexer and 33X packet
switch products, experienced decreases in their sales over those of the
previous year.
Sales of network access products, which include analog voice-frequency
products, digital echo cancellers and digital transcoders, fell short of
the previous year's sales for the first time since 1991, although sales of
digital echo cancellors reached an all-time high. This product group
continues to decrease as a percent of total product sales as the Company
concentrates its efforts on providing larger value-added system solutions
to its customers.
Net earnings for 1996 were a record $117,965,000, up 2.0 percent from 1995
earnings of $115,606,000. This slight increase in earnings was the net
effect of the significant increase in sales during 1996 being offset by
the one-time, net-of-tax charge of $54,100,000 for acquired in-process
research and development related to the acquisition of the Wireless
Systems Division (see Note K) and increased operating expenses and income
taxes. Earnings per share were 64 cents in 1996, compared with 63 cents in
1995. (The earnings-per-share amounts for both years are adjusted to
reflect the effect of the 2-for-1 stock splits that occurred in November
1996 and May 1995.)
Sales during the fourth quarter of 1996 were a record $272,906,000,
consistent with the Company's typically strong fourth-quarter sales
pattern. Sales of the TITAN 5500 system and DXX system led the 50.5
percent sales increase over the 1995 fourth quarter. Net earnings for the
quarter were $59,399,000, a 55.9 percent increase over 1995 earnings of
$38,106,000. Earnings per share were 32 cents for the fourth quarter of
1996 and 21 cents for the fourth quarter of 1995. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
stock splits that occurred in November 1996 and May 1995.)
The gross profit margin for 1996 improved again to a new record level of
59.8 percent versus the previous record 57.3 percent achieved in 1995.
This improvement reflects both the sales of higher-margin products,
including software sales and hardware expansions, and the benefits provided
by the Company's highly productive and efficient manufacturing operations.
It will once again be a challenge to sustain the gross profit margin at
this record-setting level.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses increased 33.0 percent
during 1996. During the year, new items such as the expenses of the
Wireless Systems Division and the Transport Group and the cost of the
enterprise-wide business system conversion were included in operating
expenses. Headcount and related expenses grew to support and service
international and domestic products while additional expenses related to
employee compensation programs were incurred. As a percentage of sales,
total 1996 operating expenses (excluding the one-time charge) decreased to
31.7 percent as compared to 32.6 percent in 1995 while each expense
category as a percentage of sales decreased from the prior year as has
occurred since 1993.
Interest income increased to $7,371,000 in 1996, a 25.9 percent increase,
compared with $5,855,000 in 1995. This increase was due to higher
average cash balances throughout the year as well as a shift in
investment holdings from federally tax-free municipal bonds to fully
taxable investments. Interest expense for 1996 of $1,173,000 increased
by $1,049,000 from 1995 expense of $124,000. The expense incurred in 1996
was primarily related to the bank debt used to partially finance the
Wireless Systems Division acquisition. The debt was entirely repaid by the
fourth quarter of 1996.
The effective tax rate was approximately 32.7 percent for 1996 and 29
percent for 1995. The increase in the effective tax rate for 1996 is
primarily due to the tax effects of the in-process research and development
one-time charge taken in conjunction with the Wireless Systems Division
acquisition and the increase in domestic taxable income being partially
offset by the tax benefits received as a result of the $8,500,000
charitable contribution made to the Tellabs Foundation. The 1996 effective
rate reflects adjustments from the federal statutory rate attributable to
the benefits of foreign tax rates, the merger of Finnish subsidiaries, the
charitable contribution, and tax credits offset by state taxes and the
one-time charge.
1995 vs. 1994
Sales during 1995 hit a then-record high as they exceeded the
half-billion-dollar mark to reach $635,229,000 versus $494,153,000 in 1994.
The 1995 sales growth of 28.5 percent was representative of both the
continued strength and acceptance in the domestic marketplace of the TITAN
5500 digital cross-connect system and the growth of the Company's leading
international product, the DXX managed access and transport system. Each
of these products addresses a different geographic marketplace, which
provided for growth of 24 percent domestically and 38 percent
internationally. Additionally, all of the major product groups posted
gains over 1994 sales, as was the case in the prior two years.
Digital cross-connect sales for 1995 reached the $300,000,000 mark, with an
increase of almost $81,000,000 over those of the previous year. Sales of
the Titan 5500 digital cross-connect system grew by 46 percent and
continued to drive this product group. By the end of 1995, the Titan 5500
system was standard in all but one of the major local exchange carriers and
in most of the interexchange carriers in North America. The digital
cross-connect group accounted for approximately 49 percent of total product
sales as it continued to lead all product groups.
The managed digital networks area exceeded 1994's sales by 34 percent in
1995. The acceptance of the DXX system in the international marketplace
and agreements with Ericsson helped drive its $53,000,000 increase in sales
during 1995. As was expected, the remaining products in this group, such
as the CROSSNET data multiplexer and 33X packet switch products,
experienced decreases in their sales over those of the previous year.
Sales of network access products, which include analog voice-frequency
products, digital echo cancellers and digital transcoders, exceeded the
previous year's sales in each of the last five years, even though they
continued to decrease as a percent of total product sales. Sales of the
digital products within this group continued to grow as the products are
incorporated into cellular networks. However, sales of the analog
products continued to decline as customers migrate to digital technology.
Net earnings for 1995 were $115,606,000, up 59.7 percent from 1994
earnings of $72,389,000. Earnings per share were 63 cents in 1995,
compared with 40 cents in 1994. (The earnings-per-share amounts for both
years have been adjusted to reflect the effect of the 2-for-1 stock
splits that occurred in November 1996, May 1995 and May 1994.) This
significant increase in earnings was primarily due to the increase in sales
during 1995 and a corresponding 34.7 percent increase in gross profit
dollars. Although operating expenses exceeded 1994's total, they continued
to decrease as a percentage of sales.
Sales during the fourth quarter of 1995 were a then-record $181,324,000,
consistent with the Company's typically strong fourth-quarter sales
pattern. Sales of the TITAN 5500 system and DXX system led the 22
percent sales increase over the 1994 fourth quarter. Net earnings for the
quarter were $38,106,000, a 46.1 percent increase over 1994 earnings of
$26,075,000. Earnings per share were 21 cents for the fourth quarter of
1995 and 14 cents for the fourth quarter of 1994. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
stock splits that occurred in November 1996 and May 1995.)
The gross profit margin for 1995 improved significantly to a then-record
level of 57.3 percent versus 54.6 percent in 1994. This improvement
reflects both the sales of higher-margin products, including a small amount
of higher-margin software sales, and the continuation of highly productive
and efficient manufacturing operations.
Total operating expenses increased 21.6 percent during 1995, an increase
that was evenly divided between marketing and research and development.
Marketing expenses increased 27.5 percent due to headcount-related
expenses, international marketing activities, and customer support and
service expenses. Research and development expenses increased 26.4 percent
due to increased headcount-related expenses in support of planned
enhancements to the Company's domestic and international product base. As
a percentage of sales, total 1995 operating expenses were 32.6 percent
compared to 34.5 percent in 1994. Each category as a percentage of sales
decreased from 1994.
Interest income increased to $5,855,000 in 1995, an 83.8 percent increase
compared with $3,185,000 in 1994. This was the result of
interest-bearing investments more than doubling during 1995. Interest
expense for 1995 of $124,000 decreased by $1,649,000 from 1994 expense of
$1,773,000. The expense incurred in 1994 was primarily related to the
bank debt used to finance the acquisition of Martis Oy. The debt was
entirely repaid by the fourth quarter of 1994.
Other income in 1995 was $441,000, of which foreign exchange losses of
$302,000 were the result of the strength of the Finnish markka and the
Irish punt versus the U.S. dollar. The significantly higher foreign
exchange losses of $1,555,000 in 1994 were primarily the result of the
strength of the Finnish markka versus the Swedish krona, U.S. dollar and
other European currencies to which the Company has exposure.
Other income also includes the write-down of the Company's investment in
Advanced Access Labs, a joint venture between Advanced Fibre
Communications, Inc. (AFC) and the Company by which the two companies
combined their efforts in the local loop transport area to develop the
CABLESPAN (a registered trademark of Tellabs Operations, Inc.) 2300 system.
The investment was written down to reflect the Company's share of the
losses of the joint venture in accordance with the equity method of
accounting. The equity in cumulative losses of the joint venture increased
to $2,000,000 by the end of 1995 from $1,012,000 at the end of 1994.
The effective tax rate was approximately 29 percent for 1995 and 26 percent
for 1994. The increase in the effective tax rate for 1995 was primarily
due to the reduction of research and development tax credits and reduced
foreign tax rate benefits. The 1995 effective rate reflected adjustments
from the federal statutory rate attributable to foreign tax rate benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has never paid a cash dividend, and current policy is to retain
earnings to provide funds for the operation and expansion of the business.
The Company does not anticipate paying cash dividends in the foreseeable
future.
Net working capital at December 27, 1996, was $343,840,000, compared with
working capital of $267,806,000 at December 29, 1995. The Company's
current ratio at December 27, 1996 was 3.6 to 1. The increase in net
working capital is primarily the result of the Company's record earnings
being offset by the use of cash and cash equivalents to partially finance
the Company's second-quarter acquisitions. Management believes this level
of working capital will be adequate to meet the Company's liquidity needs
related to normal operations both currently and in the foreseeable future.
Sufficient resources exist to support the Company's growth either through
currently available cash, through cash generated from future operations, or
through additional short-term or long-term financing.
Operating activities provided the Company with a significant amount of cash
due to net earnings of $117,965,000. Net trade accounts receivable
increased by $40,363,000 to a year-end balance of $167,928,000, due
primarily to the record-level sales volume in the fourth quarter of 1996.
Total inventory levels increased by $10,804,000 from 1995 levels due to
1997 sales forecast requirements for digital cross-connect systems and
the inventory purchased in the Wireless Systems Division acquisition. The
inventory turnover ratio increased to 4.8 times from 4.5 times in 1995.
Goodwill increased by $19,827,000 principally as a result of the Transport
Group and Wireless System Division acquisitions. Other assets increased by
$17,113,000 primarily due to $18,216,000 worth of developed research and
development acquired in the Wireless Systems Division acquisition. Accrued
liabilities increased from the 1995 balance by $19,194,000 primarily as a
result of the year-end obligations related to employee compensation
programs and the liabilities assumed as part of the acquisitions. The
increase in the Company's liability for deferred income taxes of $9,881,000
reflects the future obligations related to the unrealized gains on
marketable securities as of year end.
The Company's holdings in marketable securities increased by $66,670,000.
Approximately $43,648,000 is due to the mark-to-market adjustment of an
investment in a certain company that had an initial public offering during
1996. The Company also invested approximately $64,831,000 during 1996 in
property, plant and equipment (exclusive of acquisitions) as additions were
made primarily to increase manufacturing capacity and expand research and
development efforts worldwide.
The Company utilized $40,000,000 of bank debt to finance the acquisition
of the Wireless Systems Division. This debt was entirely repaid by the end
of year. Finally, an additional $22,480,000 of cash was provided to the
Company through the exercise of stock options under the Company's stock
option plans.
OUTLOOK
Driven by sales growth in both the international and domestic markets,
sales for 1997 are expected to reach $1 billion for the first time in the
Company's history. Domestic growth continues to be dependent upon the
continued strength of TITAN 5500 system sales. International growth will
be primarily driven by sales of the DXX system. In addition, late 1997
should see the introduction of several new products related to the 1996
acquisitions. At December 27, 1996, backlog increased to approximately
$118,000,000 from $84,000,000 at the end of the prior year. All of the
1996 backlog is expected to be shipped in 1997. The Company considers
backlog to be an indicator, but not the sole predictor, of future sales.
During 1997, the Company will continue to focus on providing the
resources to support revenue growth in the most cost-effective method
possible. To that end, total operating expenses for 1997 are expected to
average approximately 31 percent of planned revenues. Research and
development expenses are expected to maintain an average of approximately
13 percent of sales, consistent with 1996 and 1995 percentages. Marketing
and general and administrative expenses are expected to decrease by
almost 2 percent to approximately 17 percent of sales. Management believes
these levels can be attained while supporting the sales and product growth
slated for 1997 and beyond as the Company continues to invest in its
future.
The 1997 capital expenditure plan totals approximately $96,000,000. It is
anticipated that 1997 working capital requirements and capital expenditures
will be met with funds currently on hand and funds generated by future
earnings. Earnings for 1997 are expected to be taxed at a 34 percent rate.
The Company believes that the formation of business relationships with
compatible organizations is important to future growth in that it allows
the Company the opportunity to share in the development of new markets,
products and technologies. It is for this reason that the Company will
continue to pursue the establishment of such relationships.
Except for historical information, the matters discussed or incorporated by
reference in this report are forward-looking statements that involve risks
and uncertainties including, but not limited to, economic conditions,
product demand and industry capacity, competitive products and pricing,
manufacturing efficiencies, research and new product development,
protection of intellectual property, patents and technology, ability to
attract and retain highly qualified personnel, availability of components
and critical manufacturing equipment, facility construction and startups,
the regulatory and trade environment, and other factors indicated from time
to time in the Company's filings with the Securities and Exchange
Commission.
EXHIBIT 21
TELLABS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 28, 1997
State or Other
Jurisdiction of
Name Incorporation
Tellabs Operations, Inc. Delaware
Tellabs Wireless, Inc. Delaware
Tellabs Export, Inc. Delaware
Telecommunications Laboratories, Inc. Illinois
Tellabs International, Inc. Illinois
Tellabs do Brasil Ltda. Brazil
Tellabs Singapore Private Limited Singapore
Tellabs Communications Canada Ltd. Ontario, Canada
Tellabs (V.I.), Inc. U.S. Virgin Islands
Tellabs H.K. Ltd. Hong Kong
Tellabs N.Z. Limited New Zealand
Tellabs Korea, Inc. Korea
Tellabs Pty. Limited Australia
Tellabs Holdings Ltd. Ireland
Tellabs Ltd. Ireland
Tellabs (Ireland) Ltd. Ireland
Tellabs Research Ltd. Ireland
Tellabs U.K. Ltd. United Kingdom
Tellabs GmbH Germany
Tellabs Southern Europe, S.A. Spain
Tellabs Mexico, Inc. Delaware
Tellabs de Mexico, S.A. de C.V. Mexico
Tellabs Oy Finland
Tellabs AB Sweden
Tellabs SAS France
Tellabs Pty. Ltd. South Africa
Tellabs TG, Inc. Delaware
Tellabs Transport Group Inc. Quebec, Canada
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS
We have issued our reports dated January 15, 1997, accompanying the
consolidated financial statements and schedule incorporated by reference
or included in the Annual Report of Tellabs, Inc. and Subsidiaries on Form
10-K (Exhibit 13) for the year ended December 27, 1996. We hereby
consent to the incorporation by reference of said reports in the
Registration Statements of Tellabs, Inc. on Form S-8 (File Nos. 33-48972,
33-45788 and 33-55487).
GRANT THORNTON LLP
Chicago, Illinois
March 21, 1997
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This schedule contains summary financial information extracted from the
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