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 January 2, 1998
[ ] 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 16, 1998, 181,771,682 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 $9,403,852,000.
Documents incorporated by reference: Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended January 2, 1998, are
incorporated by reference into Parts I and II, and portions of the
1
registrant's Proxy Statement dated March 16, 1998 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, data and video 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 fiber optic systems, digital
cross-connect systems, managed digital networks and network access
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 MartisDXX (a registered Finnish trademark of Tellabs Oy)
integrated access and transport system (the MartisDXX 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's products are sold in 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 increasing
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.
2
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 technologically-sophisticated 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 synchronous digital hierarchy (SDH)/SONET (synchronous optical network)
digital cross-connect systems operate under software control and are
typically used to build and control the narrowband, wideband and broadband
transmission infrastructure of telecommunication service providers.
Telecommunication managers utilize the digital cross-connect systems to
generate revenue or 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 (155 and 622 mb/s) equipment. A single TITAN 5500
system can carry the equivalent of 1,400,000 simultaneous phone
conversations.
In 1998, the Company will leverage its TITAN SONET digital cross-connect
system, echo cancellation and asynchronous transfer mode (ATM) technology
to introduce a voice over ATM adaptation system.
Digital cross-connect system products accounted for approximately 60
percent, 57 percent, and 49 percent of 1997, 1996, and 1995 sales,
respectively.
3
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 MartisDXX
system and the CROSSNET (a registered trademark of Tellabs Operations,
Inc.) family of network-compatible T1/E1 time division multiplexers.
The MartisDXX system is a complete managed access and transport network
system designed to be used by telecommunications service operators
worldwide for the delivery of both mobile and general transport network
services. Typical business service applications include private branch
exchange (PBX) networking, local area network (LAN) interconnectivity
(including frame relay), leased lines, ATM-based services, and X.21 and
X.25 data services. The range of mobile services includes analog and
digital cellular, paging as well as other public and private voice, data
and messaging services. The MartisDXX systems, as general-purpose backbone
networks, carry the wide variety of services that may be provided by the
public telecommunications service provider.
The latest enhancement to the system, SDH and ATM transmission and
switching technologies, provide the capability to deliver higher-bandwidth
services. New local loop technologies allow these higher-bandwidth
services to be delivered over existing copper lines. In addition, the
Company is developing digital subscriber line (DSL) technology for this
product portfolio.
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
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 of sales
in each of 1997, 1996, and 1995.
4
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
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.
5
Network access products accounted for approximately 10 percent, 14 percent,
and 21 percent of 1997, 1996, and 1995 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). In 1998, this division became part of the
Digital Systems Division as the result of a decision to change the primary
focus of this group from the development of wideband radio technology for
the local loop to optical networking and dense wave-division multiplexing.
In addition to pursuing this new direction, this group will continue to
provide core RF competencies to the rest of the Company, to support
existing customers, to expand and extend its RF capabilities and to
incorporate wireless technology applications into the Company's products.
MARKETING
Sales are generated through the Company's direct sales organization and
selected distributors. The North American sales group consists of
approximately 90 direct sales personnel and an additional 45 sales support
personnel located throughout the United States and Canada. The
International sales group consists of approximately 55 direct sales
personnel, and additional sales agents and sales support personnel in Latin
America, South America, Europe, the Middle East, Africa, Asia and
Australia.
The North American sales organization conducts its activities from the
corporate headquarters and six regional offices. The International sales
organization conducts its activities from the corporate headquarters,
twenty-four regional sales offices, and three regional headquarters. The
regional sales offices are generally staffed by a regional sales manager
or country manager, system sales engineers, and additional personnel as
required.
Direct orders through the Company's field organization accounted for
approximately 84 percent of 1997 sales.
The North American sales organization is structured by markets with
emphasis on large customers. The international sales organization is
structured to support activities on a regional basis, with "solution
centers" located strategically throughout the world.
The Company has arrangements with a number of distributors of
telecommunications equipment, both in North America 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 the distributors with regular
calls to them and their customers. Distributors, as a group, accounted for
approximately 16 percent of 1997 sales. No single distributor accounted
for more than 10 percent of 1997 sales.
CUSTOMER SERVICE
The Company maintains a worldwide customer service organization focused
on providing its customers high quality technical and administrative
6
product support. To ensure global support, Tellabs has four worldwide
logistic centers: Lisle, Illinois; Shannon, Ireland; Mississauga, Canada;
and Espoo, Finland.
The Company's customer service organization supports its customers with a
wide range of services that include application engineering and support,
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 MartisDXX
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. The
Company 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:
1997 1996 1995
Regional Bell Operating Companies 32% 28% 28%
Independent Telephone Companies 4% 7% 5%
Interexchange Carriers 17% 18% 16%
Corporate America, OEMs, Governmental
Agencies, Cellular Companies, Utility
and Railroad Companies, Alternate Service
Providers, and System Integrators 14% 14% 14%
Foreign Sales
Canada 2% 3% 4%
International 31% 30% 33%
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
In 1997, sales to SBC Communications Inc. accounted for approximately 11.5
percent of consolidated net sales. No single customer accounted for more
than 10 percent of consolidated net sales in 1996 or 1995.
At January 2, 1998, and December 27, 1996, backlogs were approximately $109
million and $118 million, respectively. All of the January 2, 1998,
backlog is expected to be shipped in 1998. The Company considers backlog
to be an indicator, but not the sole predictor, of future sales.
7
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
major 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 T1 Multiplexers.
The principal competitors in the special services market are Teltrend,
Westell, and Charles Industries. The leading competitors in the echo
canceller market are Lucent Technologies, Ericson, Coherent Communications
Systems Corporation (Coherent), Ditech, and Nortel. As referenced in Part
IV, Item 14(b), the Company has entered into an agreement and plan of
merger with Coherent to acquire all the outstanding securities of Coherent.
The major competitors in the transcoder market are DSC and Aydin. The
principal competition for the multiplexers are Newbridge Networks
Corporation, Premisys, and Ascom/Timeplex. The local access competitors
are Nortel, Motorola, NEXT LEVEL, and ADC Telecommunications, Inc.
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, SDH/SONET, wavelength division multiplexing, 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, digital and photonic 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.
8
In early 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. Only weeks later, the
Company's Finnish Subsidiary, Tellabs Oy, announced the acquisition of
Trelcom Oy of Finland, a company specializing in digital subscriber line
technology. In addition to securing the Company's access to this
technology, the acquisition was designed to accelerate the development of
future enhancements to the Company's access product portfolio.
During 1996, the Company made two research and development-oriented
acquisitions designed at advancing and expanding the Company's existing
product performance capabilities. In the first, the acquisition of
Steinbrecher Corporation in April 1996, the Company acquired certain
wireless communications technology for incorporation into the Company's
products. 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
technology that would complement the technology that already exists in its
TITAN line of SONET-based digital cross-connect systems.
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. That agreement was modified in early 1998 to expand
certain of the licenses and market rights.
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; Hawthorn, New York; Burlington, Massachusetts; Espoo
and Oulu, Finland; and Shannon, Ireland.
Research and development expenses were $158.1 million in 1997, $107.3
million in 1996, and $81.9 million in 1995. (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 $190
million on research and development in 1998. 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 75 percent
of cost of sales in 1997.
Most purchased items are standard commercial components available from a
number of suppliers with only a few items procured from a single-source
9
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 January 2, 1998, the Company had 4,087 employees, of which 868 were
employed in the sales, sales support and marketing area, 1,297 in product
development, 1,553 in manufacturing, and 369 in administration. The
Company considers its employee relations to be good. It is not a party to
any collective bargaining agreement.
INTELLECTUAL PROPERTY
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, 310 DATAVOICE
SYSTEM, 331 XPLEXER, ALTA, CABLESPAN, CROSSNET, DATACELL, DATAPLEXER, DXX,
ESQ, EXPRESSPAN, FLASHLOAD, MARTIS, NAVIGATING CHANGE, NMCS 2500, PARAMIXER
PORTSPAN, RA SERIES, SONET TO THE CORE, T-CODER, TELEMARK, THE CROSSNET
EFFECT, TITAN, TRAINING: YOUR PERFORMANCE PARTNER, TURNING YOUR COPPER INTO
GOLD, UNLOCK THE GOLD IN YOUR NETWORK, VANTAGE POINT, YOUR NETWORKING
PARTNER, AN2100, AN4100, AN4200, ASC, ATM TO THE CORE, EXPRESS/PATH,
FLEXWARE, TELLABS SELECT, THE LAST WORD IN ECHO CONTROL, TWS8700, 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 28 U.S. and 3 Canadian patents. The Company
has also developed certain proprietary hardware designs, software
programs, and other works in which the Company owns various intellectual
property rights, including rights under copyright and trade secret laws.
The Company believes that its intellectual property rights are important to
its business.
Through various licensing arrangements the Company grants certain rights
to its intellectual property and receives certain rights to intellectual
property of others. The Company expects to maintain current licensing
arrangements and in the future secure licensing arrangements, as needed,
to support continued development and marketing of the Company's products.
Some of such licensing arrangements require or may require the payment of
royalties, and the amount of such payments may depend upon various
factors, including but not limited to: the structure of royalty payments;
offsetting considerations, if any; and the degree of use of the licensed
technology in any past and/or future products. The Company believes that
in most cases any necessary licenses or other rights required in the
future can be obtained on commercially reasonable and nondiscriminatory
terms.
10
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 January 2, 1998, December 27, 1996, and December 29, 1995, is
set forth in Note K on page 39 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 19.1 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
57,200-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 107,800-square foot building which
houses customer service, research and development and administrative
functions. The third building is a 55,000-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 236,300 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 was completed by August 1997 at a
cost of approximately $33,000,000. The additional space allowed the
Company to more than double its manufacturing capacity while allowing for
the expansion of the engineering, sales and administrative areas.
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 127,000-square foot
manufacturing facility. The Canadian property includes a 20,000-square
foot office/warehousing building. The Company plans to sell the Canadian
property and lease new facilities during 1998. 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 33,000-square foot office building, which is currently used
for engineering and marketing offices. In addition, the construction of a
new 154,000-square foot production and engineering facility was just
completed in Espoo on land (approximately 12 acres) that was purchased in
April, 1996. Also existing on this same 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 (research and development); Naperville, Illinois (sales);
Mishawaka, Indiana (research); Costa Mesa, California (sales); Littleton,
Colorado (sales); Atlanta, Georgia (sales); Rockville, Maryland (sales);
Irving, Texas (sales); Hawthorn, New York (research and development);
Boston, Massachusetts (research and development); 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; 39,000 square feet in Espoo, Finland for
administration and engineering, and 44,000 square feet for production;
and 12,000 square feet in Oulu, Finland for research and development.
11
During 1997, the Company began construction of a new 130,000-square foot
production, research and development, and administrative office facility in
Shannon, Ireland. The facility will be built on land obtained through a
long term lease entered into during 1997. Construction of the new facility
is expected to be completed in mid-1998 at a cost of approximately
$15,000,000.
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 1998, 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 Executive Vice President,
Executive Vice President, Chief Chief Financial Officer and
Financial Officer, Tellabs, Inc. Treasurer, Tellabs, Inc., and
since 1990; Treasurer, Tellabs, Inc. Tellabs Operations, Inc.;
since 1988; Director, Tellabs, Inc. Director, Tellabs, Inc.
since 1993; President, Tellabs
International, Inc. 1993 to 1997;
Secretary, Tellabs, 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.
John E. Vaughan 1947 President, Tellabs
President, Tellabs International Inc., International, Inc.;
Executive Vice President, Tellabs, Inc. Executive Vice President,
since 1997; Vice President of Business Tellabs, Inc.
Unit Development and Strategy, Ameritech
1995 to 1997.
Richard T. Taylor 1948 Sr. Vice President and General
Sr. Vice President, Digital Systems Manager, Digital Systems
Division, Tellabs Operations, Inc. Division, Tellabs
since 1997; General Manager, Operations, Inc.
Digital Systems Division, Tellabs
Operations, Inc. since 1993;
Vice President, Digital Systems
Division, Tellabs Operations, Inc.
1993 to 1997; Director of Marketing
and Product Development, Digital
Systems Division, Tellabs Inc.,
1989 to 1993.
Charles C. Cooney 1941 Vice President, Sales and
Vice President, Sales and Service, Service, Tellabs Operations,
Tellabs Operations, Inc. since 1992; Inc.
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;
13
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.
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, Inc., and Tellabs and Tellabs Operations, Inc.
Operations, Inc. since 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.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections entitled "Common Stock Market Data" on pages 2 and 46 of the
Company's Annual Report to Stockholders for the year ended January 2,
1998 (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
page 2 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 41
to 44 of the Annual Report is incorporated herein by reference. It is
also included in Exhibit 13, as filed with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts business on a global basis in several major
international currencies. Foreign currency risk is managed through the use
of forward exchange contracts to hedge nonfunctional-currency receivables
and payables that are expected to settle in less than one year. The
Company does not enter into forward exchange contracts for trading
purposes and all foreign exchange contract activity is carried out under a
program authorized by the Company's Board of Directors. Under the program,
the Company enters into contracts to hedge between 50 and 90 percent of the
aggregate currency exposure for any single currency. The Company assesses
their outstanding currency exposure on a monthly basis. Foreign currency
transaction gains and losses resulting from changes in the exchange rates
are recognized in "Other Income (Expense)".
The foreign currency forward exchange contracts are used to manage
exposure to changes in currency exchange rates, principally Finnish markka
and Irish punts. The table that follows presents a summary of the notional
value and the fair value of forward exchange rate contracts for each
currency in which the Company has hedged exposure. The notional amounts
shown are the US dollar value of the agreed upon amounts in each foreign
currency that will be delivered to a third party on the agreed upon date.
15
Notional
Value Average
Maturing Contract Fair Value
Currency in 1998 Rate at 1/2/98
- -------------------------- ---------- -------- ----------
Forward Contracts to Sell Foreign
Currencies for Finnish Markka: (In Thousands) (In Thousands)
United States Dollar $33,240 5.3220 $32,986
Austrian Schilling 4,720 0.4291 4,712
Spanish Peseta 3,494 0.0355 3,476
Deutsche Marks 3,327 3.0246 3,330
Norwegian Krone 3,090 0.7369 3,077
Swedish Krone 3,057 0.6870 3,044
Danish Krone 2,870 0.7939 2,873
Irish Punt 1,622 7.7801 1,617
All Others 389 - 389
------------ ------------
$55,809 $55,504
Forward Contracts to Sell Foreign
Currencies for Irish Punts:
Dutch Guilders $4,833 2.8992 $4,868
United States Dollar 4,200 1.4611 4,184
------------ ------------
$9,033 $9,052
------------ ------------
Total Contracts Outstanding
at January 2, 1998: $64,842 $64,556
============ ============
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors and the Consolidated Financial
Statements and Notes thereto on pages 25 through 40 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 required information relating to a change in the Company's accountants
is incorporated herein by reference to the Company's Current Report on Form
8-K filed on or about August 21, 1996 and Form 8-K/A filed on or about
March 24, 1997.
16
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 16, 1998.
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.
17
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 January 2, 1998, were previously incorporated by
reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets: January 2, 1998 and December 27, 1996
Consolidated Statements of Earnings: Years ended January 2, 1998,
December 27, 1996 and December 29, 1995
Consolidated Statements of Stockholders' Equity: Years ended
January 2, 1998, December 27, 1996, and December 29, 1995
Consolidated Statements of Cash Flows: Years ended January 2,
1998, December 27, 1996 and December 29, 1995
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 Auditors on Financial Statement Schedule
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 February 20, 1998, with
respect to the agreement and plan of merger entered into among
Tellabs, Inc., Cardinal Merger Co., and Coherent Communications Systems
Corporation.
(c) Exhibits:
2.1 Agreement and Plan of Merger Among Tellabs, Inc., Cardinal
Merger Co. and Coherent Communications Systems Corporation 11/
3.1 Restated Certificate of Incorporation 5/
3.2 Amended and Restated By-Laws, as amended 3/
3.3 Certificate of Amendment to Restated Certificate of
Incorporation 9/
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.)
18
Exhibits: (Continued)
10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its
related trust, as amended 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/
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/
10.14 Tellabs, Inc. Stock Bonus Plan for Former Employees of
International Business Machines Corporation 10/
10.15 Severance Arrangement for John E. Vaughan 9/
10.16 Restricted Stock Award for John E. Vaughan 9/
13. Annual Report to Stockholders
16. Letter Re: Change in Certifying Accountant 7/
21. Subsidiaries of the Registrant
23. Consent of Independent Auditors - Ernst & Young LLP
23.1 Consent of Independent Auditors - Grant Thornton LLP
27. Financial Data Schedule
Exhibits 10.1 through 10.16 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 and Form 10-Q Quarterly Report
for the quarter ended September 26, 1997.
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).
19
(d) Schedules: (Continued)
9/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended June 27, 1997 (File No. 0-9692).
10/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report
for the year ended December 27, 1996 (File No. 0-9692).
11/ Incorporated by reference from Tellabs, Inc. Form 8-K Current Report
filed on or about February 20, 1998 (File No. 0-9692).
20
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 18, 1998 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 18, 1998
(Principal Executive
Officer)
/s Peter A. Guglielmi Executive Vice President March 18, 1998
(Principal Financial
Officer) and Director
/s J. Peter Johnson Controller (Principal March 18, 1998
Accounting Officer)
/s Brian J. Jackman Director March 18, 1998
/s John D. Foulkes Director March 18, 1998
/s Frederick A. Krehbiel Director March 18, 1998
/s Stephanie Pace Marshall Director March 18, 1998
/s William F. Souders Director March 18, 1998
/s Jan H. Suwinski Director March 18, 1998
21
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Tellabs, Inc.
We have audited the consolidated financial statements of Tellabs, Inc.
and Subsidiaries as of January 2, 1998, and for the year then ended, and
have issued our report thereon dated January 26, 1998. Our audit also
included the financial statement schedule listed in the Index at Item
14(a). This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audit. The
consolidated financial statements and financial statement schedule of
Tellabs, Inc. and Subsidiaries as of December 27, 1996 and for years
ended December 27, 1996 and December 29, 1995 were audited by other
auditors whose report dated January 15, 1997 expressed an unqualified
opinion on those statements and schedule.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
January 26, 1998
22
<TABLE>
<CAPTION>
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended January 2, 1998, December 27, 1996 and December 29, 1995
($ 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>
1997
Allowance for
doubtful receivables $3,682 $1,494 $1,736 $3,440
====== ======
1996
Allowance for
doubtful receivables $2,317 $2,157 $792 $3,682
====== ======
1995
Allowance for
doubtful receivables $992 $1,407 $82 $2,317
====== ======
<FN>
NOTE:
(A) - Uncollectible accounts charged off, net of recoveries.
</TABLE>
23
EXHIBIT 13
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(In Thousands, Except Per-Share Data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $1,203,546 $868,975 $635,229 $494,153 $320,463
Gross profit $758,003 $519,243 $363,835 $270,003 $164,255
Earnings before income taxes $399,529 $175,282 $162,825 $97,824 $35,801
Net earnings before cumulative effect
of accounting change $263,689 $117,965 $115,606 $72,389 $30,467
Cumulative effect of accounting change ---- ---- ---- ---- $1,500
Net earnings $263,689 $117,965 $115,606 $72,389 $31,967
Earnings per share before cumulative effect $1.46 $0.66 $0.66 $0.42 $0.18
Earnings per share before cumulative effect,
assuming dilution $1.42 $0.64 $0.63 $0.40 $0.17
Cumulative effect on earnings per share ---- ---- ---- ---- $0.01
Cumulative effect on earnings per share,
assuming dilution ---- ---- ---- ---- $0.01
Earnings per share $1.46 $0.66 $0.66 $0.42 $0.19
Earnings per share, assuming dilution $1.42 $0.64 $0.63 $0.40 $0.18
Stockholders' equity $933,109 $591,276 $433,233 $292,790 $207,006
Total assets $1,183,379 $743,823 $552,051 $390,067 $328,766
Net working capital $637,114 $343,840 $267,806 $138,317 $64,285
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 and 1994.
Common Stock Market Data
(Restated for stock split in 1996)
1997 1996
High Low High Low
First Quarter 46 1/8 32 26 3/8 15 1/4
Second Quarter 58 5/8 33 34 3/4 23 5/8
Third Quarter 65 50 1/2 38 1/8 24 1/2
Fourth Quarter 59 13/16 42 5/8 45 1/4 34 1/8
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 16, 1998, there
were approximately 3,725 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 January 2, 1998
and December 27, 1996, and the consolidated results of its operations for
the years ended January 2, 1998, December 27, 1996, and December 29, 1995.
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 auditors, 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 26, 1998 January 26, 1998
Report of Independent Auditors
We have audited the accompanying consolidated balance sheet of Tellabs,
Inc., and Subsidiaries as of January 2, 1998, and December 27, 1996, and
the related consolidated statements of earnings, stockholders' equity and
cash flows for the years then ended. 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 audit. The
financial statements of Tellabs, Inc., and Subsidiaries for the years ended
December 27, 1996, and December 29, 1995, were audited by other auditors
whose report dated January 15, 1997, expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Tellabs, Inc., and Subsidiaries at January 2, 1998, and the consolidated
results of its operations and its consolidated cash flows for the year
ended January 2, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
January 26, 1998
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per-Share Data)
Year Year Year
Ended Ended Ended
01/02/98 12/27/96 12/29/95
-------- -------- --------
<S> <C> <C> <C>
Net sales $1,203,546 $868,975 $635,229
Cost of sales 445,543 349,732 271,394
------- ------- -------
Gross Profit 758,003 519,243 363,835
Operating expenses
Marketing 156,701 112,206 85,843
Research and development 158,129 107,258 81,893
Acquired in-process research and development --- 74,658 ---
General and administrative 73,717 52,495 36,878
Goodwill amortization 5,992 3,683 2,568
------- ------- -------
394,539 350,300 207,182
------- ------- -------
Operating Profit 363,464 168,943 156,653
Other income (expense)
Interest income 12,476 7,371 5,855
Interest expense (413) (1,173) (124)
Other 24,002 141 441
------- ------- -------
36,065 6,339 6,172
Earnings Before Income Taxes 399,529 175,282 162,825
Income taxes 135,840 57,317 47,219
------- ------- -------
Net Earnings $263,689 $117,965 $115,606
======= ======= =======
Average number of common shares outstanding 180,925 178,509 176,388
Average number of common shares outstanding,
assuming dilution 186,221 183,030 183,255
Earnings per Share $1.46 $0.66 $0.66
Earnings per Share, assuming dilution $1.42 $0.64 $0.63
<FN>
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS (In Thousands)
01/02/98 12/27/96
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $109,048 $90,446
Investments in marketable securities 377,986 136,421
Accounts receivable --
net of allowance for doubtful receivables
of $3,440,000 at January 2, 1998, and
$3,682,000 at December 27, 1996 284,084 167,928
Inventories
Raw materials 28,335 30,961
Work in process 15,664 12,046
Finished goods 45,615 35,512
------- -------
89,614 78,519
Other current assets 2,202 2,150
------- -------
Total Current Assets 862,934 475,464
Property, Plant and Equipment -- at Cost
Buildings and improvements 108,905 77,481
Equipment 220,251 180,758
------- -------
329,156 258,239
Less accumulated depreciation 128,967 104,254
------- -------
200,189 153,985
Land 9,140 8,775
------- -------
209,329 162,760
Goodwill, Net 61,453 64,785
Other Assets 49,663 40,814
-------- -------
Total Assets $1,183,379 $743,823
========== ========
<FN>
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 01/02/98 12/27/96
(In Thousands) -------- --------
<S> <C> <C>
Current Liabilities
Accounts payable $50,422 $36,931
Accrued liabilities
Compensation 38,168 34,689
Payroll and other taxes 7,788 8,770
Other 19,712 17,918
------ ------
Total accrued liabilities 65,668 61,377
Deferred income taxes 50,249 9,881
Income taxes 59,481 23,435
------ ------
Total Current Liabilities 225,820 131,624
Long-Term Debt 2,850 2,850
Other Long-Term Liabilities 14,870 10,964
Deferred Income Taxes 6,730 7,109
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and
outstanding --- ---
Common stock: authorized 500,000,000 shares of
$.01 par value; issued 181,626,660 shares at
January 2, 1998, and 179,652,633 shares at
December 27, 1996 1,816 1,797
Additional paid-in capital 130,378 94,854
Cumulative translation adjustment (27,901) 3,937
Unrealized net gains on
available-for-sale securities 95,990 21,551
Retained earnings 732,826 469,137
------- -------
Total Stockholders' Equity 933,109 591,276
------- -------
Total Liabilities and Stockholders' Equity $1,183,379 $743,823
======== ========
<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
December 31, 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
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 263,689 263,689
Stock options exercised 19 34,739 --- --- --- 34,758
Stock retention programs --- 427 --- --- --- 427
Employee stock awards --- 358 --- --- --- 358
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 74,439 --- 74,439
Foreign currency
translation adjustment --- --- (31,838) --- --- (31,838)
Balance at ------ ------ ------ ------ ------- -------
January 2, 1998 $1,816 $130,378 ($27,901) $95,990 $732,826 $933,109
====== ======= ====== ====== ======== ========
<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) 01/02/98 12/27/96 12/29/95
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings $263,689 $117,965 $115,606
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 46,892 32,648 23,682
Provision for doubtful receivables 1,494 2,157 1,396
Deferred income taxes (3,260) (23,486) 9,214
Gain on the sale of certain investments (20,803) --- (929)
Acquired in-process research
and development --- 74,658 ---
Net (increase) decrease in current assets,
net of effects from acquisitions:
Accounts receivable (126,835) (43,535) (42,689)
Inventories (14,129) (7,434) (14,696)
Other current assets (117) (1,206) 353
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable 14,518 6,348 7,067
Accrued liabilities 7,468 14,801 2,807
Income taxes 38,351 (2,221) 3,793
Net increase in other assets (24,513) (10,272) (3,637)
Net increase (decrease) in other liabilities 2,836 (120) (4,312)
------ ------ ------
Net Cash Provided by Operating Activities 185,591 160,303 97,655
Investing Activities
Acquisition of property, plant and
equipment, net (84,717) (64,831) (35,191)
Proceeds from sales and maturities of 211,979 99,642 65,780
marketable securities
Payments for purchases of marketable
securities (315,947) (122,679) (111,168)
Payments for purchases of long-term
investments --- --- (1,215)
Proceeds from sale of long-term
investment --- --- 3,429
Payments for acquisitions,
net of cash acquired (7,821) (91,732) ---
Origination of loan receivable --- (5,822) ---
------- ------- -------
Net Cash Used for Investing Activities (196,506) (185,422) (78,365)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Year Year
Ended Ended Ended
12/27/96 12/27/96 12/29/95
-------- -------- --------
<S> <C> <C> <C>
Financing Activities
Common stock sold through stock option plans* 34,759 22,480 18,246
Proceeds from notes payable --- 40,000 ---
Payments of notes payable --- (40,000) ---
------ ------ ------
Net Cash Provided by Financing Activities 34,759 22,480 18,246
Effect of Exchange Rate Changes on Cash (5,242) 600 3,489
Net Increase (Decrease) in Cash
And Cash Equivalents 18,602 (2,039) 41,025
Cash and Cash Equivalents At Beginning of Year 90,446 92,485 51,460
------- ------- -------
Cash and Cash Equivalents At End of Year $109,048 $90,446 $92,485
======= ======= =======
Other Information
Interest paid $326 $1,165 $111
Income taxes paid $78,717 $67,887 $28,646
Supplemental Schedule of Non-Cash Investing and Financing Activities:
During 1997, in acquiring all of the outstanding shares of Trelcom Oy and
certain wavelength-division multiplexing and optical networking
technology and related assets from IBM, the Company paid direct costs
totaling $8,434,000.
During 1996, in acquiring all of the outstanding shares of Steinbrecher
Corporation and TRANSYS Network's SONET product line, the Company paid
direct costs totaling $94,261,000.
In conjunction with the acquisitions, the purchase prices are currently
allocated as follows:
(In Thousands) 1997 1996
-------- --------
Fair value of assets acquired $1,777 $104,944
Costs in excess of fair value 8,098 22,977
Liabilities assumed (1,441) (33,660)
------- -------
Cash paid for acquisitions $8,434 $94,261
======= =======
* "Common stock sold through stock option plans" contains non-cash deferred
tax benefits of $24,298,000, $15,878,000 and $12,370,000 in 1997, 1996
and 1995, respectively.
<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 acquired operations
since their respective purchase dates are included. (See Note L.)
Certain reclassifications have been made in the 1995 and 1996 consolidated
financial statements to conform to the 1997 presentation. The preparation
of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
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 useful lives, on
both the declining-balance and straight-line methods. Buildings are
depreciated over 40 years, improvements over 7 years, and equipment over 3
to 10 years.
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.
Note A: Summary of Significant Accounting Policies (continued)
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 20,
10 and 7 years using the straight-line method. The accumulated
amortization of goodwill is approximately $15,796,000 and $9,775,000 at
of January 2, 1998, and December 27, 1996, respectively.
Revenue Recognition
The Company recognizes revenue at the date of shipment.
Stock Options
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company
continues to apply Accounting Principles Board ("APB") Opinion 25 and its
related interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost has been recognized for its fixed
stock option plan grants. (See Note F.)
Earnings Per Share
In accordance with SFAS No. 128, earnings per share are based both on the
weighted-average number of shares and such weighted-average shares adjusted
for assumed conversions of stock options. (See Note M.) On 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 and SFAS No. 128 accounting
treatment.
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 stockholders' equity into U.S.
dollars is recorded as a cumulative translation adjustment in the
Consolidated Balance Sheets.
Foreign Exchange
Foreign currency transaction gains and losses resulting from changes in
exchange rates are recognized in "Other Income (Expense)." Net gains
(losses) of $1,933,000, ($273,000) and ($302,000) were recorded in 1997,
1996 and 1995, respectively.
Fiscal Year
The Company operates on a 52-53 week fiscal year. The year ended
January 2, 1998, contained 53 weeks, while all other years presented
contain 52 weeks. The financial statement effect is not significant.
Note B: New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 simplifies the standards
for computing earnings per share and is effective for financial statements
both interim and annual periods ending after December 15, 1997. The
Company has adopted SFAS No. 128 and has restated all prior periods
presented to conform with the requirements of SFAS No. 128. (See Note M.)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
The Company is in the process of evaluating the specific reporting
requirements of SFAS No. 130; however, it believes the adoption of SFAS
No. 130 will have no impact on the Company's consolidated results of
operations, financial position, or cash flows.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. SFAS No. 131 is effective for financial statements for
fiscal years beginning after December 15, 1997. The Company has evaluated
the disclosure requirements of SFAS No. 131 and believes that its adoption
will have no material impact on its future disclosure requirements.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2
provides guidance on the amounts and timing of software revenue
recognition. SOP 97-2 is effective for transactions occurring in fiscal
years beginning after December 15, 1997. The Company has evaluated the
requirements of SOP 97-2 and believes that it will have no material impact
on the Company's reported consolidated results of operations, financial
position, or cash flows.
<TABLE>
<CAPTION>
Note C: Investments
Available-for-sale marketable securities are accounted for at market
prices with the unrealized gain or loss net of deferred income taxes shown
as a separate component of stockholders' equity. At January 2, 1998, and
December 27, 1996, they consisted of the following:
Amortized Unrealized Market
(In Thousands) Cost Gain (Loss) Value
1997 ------- ------- -------
<S> <C> <C> <C>
State and municipal securities $36,863 $363 $37,226
Preferred and common stocks 21,257 158,727 179,984
U.S. government and agency
debt obligations 29,611 424 30,035
Corporate debt obligations 24,271 268 24,539
Foreign government debt obligations 106,031 169 106,200
------- ------- -------
$218,033 $159,951 $377,984
======= ======= =======
Amortized Unrealized Market
Cost Gain (Loss) Value
------- ------- -------
<S> <C> <C> <C>
1996
State and municipal securities $7,345 ($25) $7,320
Preferred and common stocks 18,907 41,797 60,704
U.S. government and agency
debt obligations 29,582 127 29,709
Corporate debt obligations 6,633 (253) 6,380
Foreign government debt obligations 32,389 (81) 32,308
------- ------- -------
$94,856 $41,565 $136,421
======= ======= =======
</TABLE>
The Company has an investment in a company that had an initial public
offering (IPO) during 1996 and a secondary offering in 1997. During
1996, the Company marked this investment to market subject to the
constraints of the security sale limitations of the IPO. Under these
constraints, only those shares that could be traded within the next year
were included in "Investment in Marketable Securities" while the remaining
shares were included in "Other Assets" at their historical cost. During
1997, as a result of the secondary offering, the Company reclassified the
remaining shares to "Investment in Marketable Securities" and marked the
entire investment to market.
During 1997, the Company contributed $8,500,000 in the form of stock from
the aforementioned investment to the Tellabs Foundation in satisfaction of
its 1996 commitment.
Note D: Financial Instruments
The Company conducts business on a global basis in several major
international currencies. Foreign currency risk is managed through the use
of forward exchange contracts to hedge nonfunctional currency receivables
and payables that are expected to be settled in less than one year. The
Company does not enter into forward exchange contracts for trading
purposes.
The foreign currency forward exchange contracts are primarily used to
manage exposure to changes in the Finnish markka and Irish punt exchange
rates. Gains and losses on the contracts are accounted for under the
accrual method with market value gains and losses on the contracts being
recognized and combined with offsetting foreign exchange gains and losses
on the net foreign accounts receivable and payable. Net losses on forward
exchange contracts were $3,794,000, $1,971,000 and $214,000 for 1997, 1996
and 1995, respectively.
The table below presents a summary of the notional and fair values of
forward contracts by currency at January 2, 1998. The notional amounts are
the U.S. dollar values of the agreed-upon amounts in each foreign currency
that will be delivered to a third party on the agreed-upon date.
Notional Fair
(In Thousands) Amount Value
Forward contracts at January 2, 1998:
Related forward contracts to sell
foreign currencies for Finnish markka $55,809 $55,504
Related forward contracts to sell
foreign currencies for Irish punts 9,033 9,052
------- -------
Total $64,842 $64,556
======= =======
Note E: 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 1997, 1996 and 1995 were 3.71 percent, 3.51 percent and 3.94
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 F: Stock Options
At January 2, 1998, 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. Accordingly, 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 SFAS No. 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 Year Ended
(In Thousands, Except Per-Share Data) 01/02/98 12/27/96 12/29/95
-------- ------- -------
<S> <C> <C> <C>
Net Earnings As reported $263,689 $117,965 $115,606
Pro forma $250,506 $110,990 $114,233
Earnings per share As reported $1.46 $0.66 $0.66
Pro forma $1.38 $0.62 $0.65
Earnings per share, As reported $1.42 $0.64 $0.63
assuming dilution Pro forma $1.35 $0.61 $0.62
</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 1997, 1996 and 1995, respectively: dividend
yield of zero percent for each year; expected volatility of 52.1 percent,
51.2 percent and 52.4 percent; risk-free interest rates of 5.47 percent
to 6.92 percent; 5.26 percent to 6.65 percent and 5.25 to 7.88 percent; and
expected lives of 2.81 years to 5.81 years; 2.53 years to 5.53 years and 2.6
years to 5.6 years.
These pro forma amounts may not be representative of future disclosures
because the estimated fair value of stock options is amortized to expense
over the vesting period, and additional options may be granted in future
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.
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 January 2, 1998, 1,524,000 SARs with grant prices ranging
from $0.75 to $1.08 and 5-year terms and 794,870 SARs with grant prices
of $1.52 to $50.50 and 10-year terms had been granted. At that date, a
total of 2,124,000 SARs had been exercised and 15,800 had been cancelled,
leaving 179,070 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. 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 (the 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. In 1997, the Company continued the Program by
granting 200 non-qualified options or SARs to all full-time employees
below director level hired from July 9, 1996, through October 24, 1997.
All such grants were dated October 24, 1997, with a price of $50.50. On
an ongoing basis, the Program allows that any employee below director
level hired after October 24, 1997, will receive a grant of 200
non-qualified options or SARs dated the last trading day of the fiscal
quarter in which the employee is hired.
Note F: 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
January 2, 1998, December 27, 1996 and December 29, 1995, and changes
during the years ending on these dates is presented below:
1997 1996 1995
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 11,285,747 $11.59 10,331,146 $4.53 12,745,348 $3.04
Granted 1,846,295 49.43 3,266,420 28.61 889,000 16.94
Exercised (1,949,028) 5.41 (2,053,399) 3.18 (3,013,066) 1.92
Forfeited (279,520) 21.09 (258,420) 11.19 (290,136) 4.82
Outstanding - ---------- ---------- ----------
end of year 10,903,494 $18.86 11,285,747 $11.59 10,331,146 $4.53
========== ========== ==========
Exercisable at end of year 5,958,723 5,878,597 5,719,896
Available for grant 2,511,661 4,078,436 7,086,436
Weighted-average fair
value of options
granted during the year $23.71 $13.22 $7.84
Options Outstanding and Exercisable as of January 2, 1998, by Price Range:
Outstanding Exercisable
--------------------------------- ------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Contractual Exercise Exercise
Exercise Prices: Shares Life Price Shares Price
$0.77 - $1.53 2,730,709 3.50 $1.34 2,730,709 $1.34
$1.54 - $6.59 2,670,250 6.03 $5.78 2,155,450 $5.58
$7.44 - $27.63 836,900 6.99 $17.30 404,234 $17.32
$28.63 - $28.63 2,772,040 8.42 $28.63 641,830 $28.63
$32.63 - $60.88 1,893,595 9.51 $48.96 26,500 $39.07
----------- ---------
$0.77 - $60.88 10,903,494 6.68 $18.86 5,958,723 $7.07
=========== =========
</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 $8,097,000, $6,035,000 and $4,707,000 in 1997, 1996 and 1995,
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, the Company contributed 5
percent of eligible annual compensation for each eligible participant in
1997 and 4 percent in 1996 and 1995. 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
$6,159,000, $4,056,000 and $3,451,000 for 1997, 1996 and 1995,
respectively.
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-, 15- or 20-year period is awarded 10, 25
or 50 shares, respectively. When an employee stock award is granted,
compensation expense is charged for the fair market value of the shares
issued.
The Company has a number of employee retention programs under which certain
employees, primarily as a result of the Company's acquisitions, are
entitled to a specific number of shares of the Company's stock over a
two-year vesting period.
<TABLE>
<CAPTION>
Note H: Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1997 and 1996 is as follows:
(In Thousands, Except Per-Share Data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997
Net sales $247,123 $292,701 $309,408 $354,314 $1,203,546
Gross profit 151,703 181,256 193,579 231,465 758,003
Net earnings 63,087 58,761 64,306 77,535 263,689
Earnings per share $0.35 $0.33 $0.35 $0.43 $1.46
Earnings per share,
assuming dilution $0.34 $0.32 $0.34 $0.42 $1.42
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 $0.18 ($0.10) $0.26 $0.33 $0.66 *
Earnings (loss) per share,
assuming dilution $0.17 ($0.10) $0.25 $0.32 $0.64
<FN>
Earnings per share have been recalculated to comply with SFAS No. 128.
* 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 I: Income Taxes
(In Thousands) Year Ended Year Ended Year Ended
01/02/98 12/27/96 12/29/95
Components of the Company's -------- -------- --------
earnings before income taxes are as follows:
Domestic source $230,088 $70,835 $97,372
Foreign source 169,441 104,447 65,453
------- ------- -------
Total $399,529 $175,282 $162,825
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $79,516 $47,371 $24,111
State 15,467 9,751 2,220
Foreign 44,117 23,681 11,674
------ ------ ------
139,100 80,803 38,005
Deferred:
Federal (3,622) (23,615) 7,435
State and Foreign 362 129 1,779
------ ------ ------
(3,260) (23,486) 9,214
------ ------ ------
Total $135,840 $57,317 $47,219
====== ====== ======
Deferred tax assets (liabilities) for 1997
and 1996 consist of the following:
Ending Ending
(In Thousands) Balance Balance
01/02/98 12/27/96
Deferred tax assets -------- --------
Inventory reserves $5,456 $3,050
Deferred employee benefit expenses 5,264 4,294
Deferred compensation plan 3,547 2,563
Accrued liabilities 3,452 3,135
NOL and research and development
credit carryforwards 21,100 21,604
Other 1,291 476
------ ------
Gross deferred tax assets 40,110 35,122
Deferred tax liabilities
Unrealized gain on marketable securities (63,914) (20,016)
Depreciation (14,588) (13,912)
Amortizable intangibles (4,026) (4,290)
Other (1,260) (594)
------ ------
Gross deferred tax liabilities (83,788) (38,812)
------ ------
Valuation allowance (13,300) (13,300)
------ ------
Net Deferred Tax Liability ($56,978) ($16,990)
====== ======
<TABLE>
<CAPTION>
Note I: Income Taxes (continued)
Year Ended Year Ended Year Ended
01/02/98 12/27/96 12/29/95
(In Percentages) --------- --------- ---------
<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 (2.4) (4.6) (5.1)
Research and development credit (0.9) (1.2) (0.6)
Tax benefits associated with merger of
Finland subsidiaries (0.7) (2.0) (1.7)
Benefit attributable to foreign
sales corporation (0.1) (0.3) (0.3)
State income tax, net of federal benefits 2.5 3.6 1.0
Charitable contribution -- (1.7) --
Acquired in-process research and
development charge -- 3.2 --
Other - net 0.6 0.7 0.7
---- ---- ----
Effective Income Tax Rate 34.0% 32.7% 29.0%
==== ==== ====
</TABLE>
Deferred income taxes increased to $56,978,000 at January 2, 1998, from
$16,990,000 at December 27, 1996. The increase of the deferred tax balance
is attributable to deferred taxes provided on the mark-to-market adjustment
in investments in accordance with SFAS No. 115, partially offset by a decrease
attributable to inventory reserves.
The Company recorded deferred tax assets for research and development
credits and net operating loss carryforwards associated with the 1996
acquisition of the Tellabs Wireless Systems Division 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 carryforwards of the acquisition. The net operating loss
carryforwards and research and development credits will expire at various
dates through the year 2010. When utilized, these carryforwards would 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 $286,986,000 at
January 2, 1998. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at
January 2, 1998, was approximately $41,704,000.
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 2002.
As of January 2, 1998, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In Thousands)
1998 $8,825
1999 7,032
2000 4,498
2001 2,282
2002 542
2003 and thereafter ---
------
Total Minimum Lease Payments $23,179
======
Rental expense for the years ended January 2, 1998, December 27, 1996, and
December 29, 1995, was approximately $8,146,000, $5,734,000 and $3,420,000,
respectively.
<TABLE>
<CAPTION>
Note K: Business Segment and Geographical Information
The Company operates in one business segment. Products include voice and
data communication and networking equipment used in public and private
communications 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 Eliminations Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Net Sales
Unaffiliated customers $842,095 $361,451 --- $1,203,546
Intergeographic 13,825 11,619 ($25,444) ---
------- ------- ------- -------
Total $855,920 $373,070 ($25,444)$1,203,546
Operating Profit $192,242 $171,222 --- $363,464
Identifiable Assets $804,049 $379,330 --- $1,183,379
1996
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
</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 taxes and the write-off of acquired
research and development. 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 $21,935,000, $23,722,000 and $33,105,000 in
1997, 1996 and 1995, respectively.
Note L: Business Acquisitions
In April 1996, the Company acquired all of the outstanding shares of
Steinbrecher Corporation (the Tellabs Wireless Systems Division) 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
of approximately $6,865,000 arising from this acquisition 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) were written off in the 1996 Consolidated Statement of
Earnings and are 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 $0.93 $0.29
Earnings per common share, assuming dilution $0.91 $0.28
The pro forma financial information presented above does not purport to be
indicative of either the results of operations that would have occurred had
the acquisition taken place at the beginning of the period presented or of
future results of operations 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 in the amount of $15,799,000 resulting from this
acquisition is being amortized over 10 years. This acquisition did not
have a material impact on the Company's financial results.
In 1997, the Company made two acquisitions for approximately $8,500,000 in
cash. These acquisitions have been accounted for through the use of the
purchase method of accounting, and, accordingly, the accompanying financial
statements include the results of their operations since the respective
acquisition dates. Goodwill of approximately $8,000,000 arising from these
acquisitions is being amortized over 7 years. These acquisitions did not
have a material impact on the Company's financial results.
<TABLE>
<CAPTION>
Note M: Earnings Per Share
(In Thousands, Except Per-Share Data)
The following table sets forth the computation of earnings per share:
<S> <C> <C> <C>
1997 1996 1995
Numerator:
Net Income $263,689 $117,965 $115,606
Denominator:
Denominator for basic earnings
per share - weighted average shares 180,925 178,509 176,388
Effect of diluted securities:
Employee stock options and awards 5,296 4,521 6,867
-------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 186,221 183,030 183,255
Earnings per share $1.46 $0.66 $0.66
Earnings per share, assuming dilution $1.42 $0.64 $0.63
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations - 1997 vs. 1996
Sales during 1997 hit an all-time record high as they exceeded the
$1 billion mark to reach $1,203,546,000, surpassing 1996's previous record
sales of $868,975,000. The 1997 sales growth of 38.5 percent was driven by
increased sales on both the domestic and international fronts. Domestic
sales grew by 41.1 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 33.1 percent, were driven by the MartisDXX (a trademark of Tellabs Oy, a
subsidiary of Tellabs, Inc.) managed access and transport system.
Digital cross-connect sales for 1997 of $692,507,000 represent an increase
of $213,333,000 over those of the previous year. Sales of the Titan 5500
digital cross-connect system grew by almost 54 percent and continue to
drive this product group in response to the continued demand for transport
of increasing quantities of voice, data and multimedia information across
telecommunications networks worldwide. The digital cross-connect group
accounted for approximately 60 percent of total product sales.
The managed digital networks area exceeded last year's sales by 39
percent, reaching $321,980,000. The continued expansion of MartisDXX
system sales fueled by the addition of 53 new customers in 1997, helped
drive the $96,960,000 increase in sales, to reach a new annual record of
$298,158,000. As was again 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 rebounded in 1997 to exceeded last year's
sales by $16,710,000. The increase was again driven by record digital echo
cancellors sales, combined this year with late-1997 sales for the CABLESPAN
2300 universal telephony distribution system. With the exception of the
continued strength of echo canceller sales and the emergence of the
CAPLESPAN system, this product group continues to decrease as a percent of
total product sales.
Net earnings for 1997 were a record $263,689,000, up 123.5 percent from
1996 earnings of $117,965,000. The 1997 earnings included the gain on
the sale of stock held as an investment in the amount of $20,803,000
($13,855,000 after tax), while the 1996 earnings included a 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 L). Excluding the effects of these items, net earnings for the
year increased $77,769,000 primarily as the result of the record sales
being only partially offset by increased operating expenses and income
taxes. Diluted earnings per share were $1.42 in 1997, compared with 64
cents in 1996. (The earnings-per-share amounts for both years have been
recalculated to comply with SFAS No. 128, Earnings per Share.)
Sales during the fourth quarter of 1997 were a record $354,314,000,
continuing the Company's typically strong fourth-quarter sales trend.
Sales of the TITAN 5500 system and MartisDXX system led the 29.8 percent
sales increase over the 1996 fourth quarter. Net earnings for the quarter
were $77,534,000, a 30.5 percent increase over 1996 earnings of
$59,399,000. Diluted earnings per share were 42 cents for the fourth
quarter of 1997 and 32 cents for the fourth quarter of 1996. (The 1996
earnings-per-share amount has been recalculated to comply with SFAS
No. 128, Earnings per Share.)
The gross profit margin for 1997 increased again to a new record level of
63 percent versus the previous record of 59.8 percent achieved in 1996.
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.
Operating expenses increased 43.1 percent during 1997, excluding the
one-time charge to earnings for the acquired in-process research and
development taken in 1996. Contributing to the overall increase were the
higher full-year expenses of the Tellabs Wireless Systems Division and
Tellabs Transport Group; expenses of the Tellabs Optical Networking Group;
the continuing worldwide research and development of products; the
expansion of service and support capabilities; and the expenses incurred as
part of the implementation of the Company's new globally integrated
information system. As a percentage of sales, total 1997 operating
expenses increased to 32.8 percent compared with 31.7 percent in 1996
(excluding the one-time charge).
Interest income increased to $12,476,000 in 1997, a 69.3 percent increase
compared with $7,371,000 in 1996. This increase was primarily due to
higher average cash balances throughout the year. Interest expense for
1997 of $413,000 decreased by $760,000 from 1996 expense of $1,173,000.
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.
Other income was $24,002,000 for 1997 compared with $141,000 during 1996.
The majority of the increase represents the gain of $20,803,000 on the sale
of the stock held as an investment. In addition, foreign exchange gains of
$1,933,000 were recorded during 1997, versus losses of $273,000 during
1996. The 1997 foreign exchange gains were the result of the strengthened
US dollar and Swedish krona versus the Finnish markka and the strength of
the US dollar versus the Irish punt. The losses in 1996 were the result of
a weakened US dollar against the Finnish markka and Irish punt.
The effective tax rate was 34.0 percent for 1997 and 32.7 percent for 1996.
The increase in the effective tax rate for 1997 is primarily due to the
increase in domestic taxable income and the reduction of foreign tax rate
benefits. The 1997 effective rate reflects adjustments from the federal
statutory rate attributable to the benefits of foreign tax rates, the
merger of Finnish subsidiaries, and tax credits offset by state taxes.
Results of Operations - 1996 vs. 1995
Sales during 1996 reached a then 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 5500
digital cross-connect system. International sales, which grew by 21
percent, were driven by the MartisDXX managed access and transport system.
Digital cross-connect sales for 1996 of $479,174,000 represented 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
customer. 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 1995 sales by almost 33
percent, reaching $231,602,000. The continued expansion of MartisDXX
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 then-annual record of $201,198,000. 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, fell short of
the previous year's sales for the first time since 1991, although sales of
digital echo cancellors reached a then-all-time high. This product group
continued to decrease as a percent of total product sales as the Company
concentrated its efforts on providing larger value-added system solutions
to its customers.
Net earnings for 1996 were a then-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 L) and increased operating expenses and income
taxes. Diluted 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 and the restatement of earnings-per-share amounts to
comply with SFAS No. 128.)
Sales during the fourth quarter of 1996 were a then-record $272,906,000,
consistent with the Company's typically strong fourth-quarter sales
pattern. Sales of the TITAN 5500 system and MartisDXX 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. Diluted 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
2-for-1 stock splits that occurred in November 1996 and May 1995 and
compliance with SFAS No. 128.)
The gross profit margin for 1996 improved again to a then-record level of
59.8 percent versus the previous record 57.3 percent achieved in 1995.
This improvement reflected 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.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses increased 33 percent during
1996. New items such as the expenses of the Tellabs Wireless Systems
Division and the Tellabs Transport Group and the cost of the
enterprise-wide business system conversion were included in 1996 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 had
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 was
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 to 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 reflected 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.
Liquidity
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 January 2, 1998, was $637,114,000 compared with
working capital of $343,840,000 at December 27, 1996. The Company's
current ratio at January 2, 1998 was 3.8 to 1. The increase in net
working capital is primarily the result of the increase in the Company's
marketable securities balance as a result of the mark-to-market adjustment
for a single investment of approximately $121,400,000, combined with the
Company's record earnings. 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 $263,689,000. Net trade accounts receivable
increased by $116,156,000 to a year-end balance of $284,084,000, due
primarily to the record-level sales volume in the fourth quarter of 1997.
Total inventory levels increased by $11,095,000 from 1996 levels due to
1998 sales forecast requirements while inventory turnover ratio increased
to 5.3 times from 4.8 times in 1996.
Deferred income taxes increased from the 1996 balance by $40,368,000,
primarily as a result of the Company's increased liability related to the
unrealized gains on marketable securities as of year end.
The Company's holdings in marketable securities increased by $241,565,000.
Approximately $121,400,000 is due to the mark-to-market adjustment of an
investment in a single company. The Company also invested approximately
$84,717,000 during 1997 in property, plant and equipment (exclusive of
acquisitions) as additions were made primarily to increase manufacturing
capacity and expand research and development efforts worldwide.
Finally, an additional $34,758,000 was provided to the Company through
the exercise of stock options, and the related tax benefit, under the
Company's stock option plans.
OUTLOOK
Driven by continuing sales growth in both the international and domestic
markets, sales for 1998 are expected to reach $1.5 billion. Domestic
growth continues to be dependent upon the continued strength of TITAN 5500
system sales, while international growth will be primarily driven by sales
of the MartisDXX system. At January 2, 1998, backlog decreased to
approximately $109,000,000 from $118,000,000 at the end of the prior year.
All of the 1997 backlog is expected to be shipped in 1998. The Company
considers backlog to be an indicator, but not the sole predictor, of future
sales.
During 1998, 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 1998 are expected to
average approximately 29 percent of planned revenues. Research and
development expenses are expected to fall within the 12 percent to 13
percent range, down slightly from the 1997 percent of sales. Marketing and
general and administrative expenses are expected to decrease by almost 3
percent to approximately 16 percent of sales. Management believes these
levels will adequate to support the sales and product growth slated for
1998 and beyond as the Company continues to invest in its future.
The 1998 capital expenditure plan totals approximately $100,000,000. It is
anticipated that 1998 working capital requirements and capital expenditures
will be met with funds currently on hand and funds generated by future
earnings. Earnings for 1998 are currently expected to be taxed at 34
percent.
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.
In furtherance of this philosophy, on February 16, 1998, the Company and
Coherent Communications Systems Corporation ("Coherent") announced a merger
agreement under which Coherent will become a subsidiary of the Company.
Under the terms of the agreement, all outstanding shares of Coherent stock
will be exchanged at a rate of 0.72 shares of the Company's common stock
for each share of Coherent common stock. Based on the closing price of the
Company's common stock on February 13, 1998, the transaction is valued at
approximately $670 million. The transaction is expected to be accounted
for as a pooling-of-interests and to qualify as a tax-free reorganization.
Closing of the transaction is subject to various conditions, including
approval by appropriate governmental agencies and Coherent stockholders.
If the merger occurs, future sales, expenses and results of the Company
will be affected.
The Company has taken actions to understand the nature and extent of the
work required to make its systems, products and infrastructure Year 2000
compliant. The Company began work several years ago to prepare its
products and its financial information and other computer-based systems for
the Year 2000, including replacing and updating existing legacy systems.
The Company continues to evaluate the estimated costs associated with these
efforts based on actual experience. While these efforts will involve
additional costs, the Company believes, based on available information,
that it will be able to manage its total Year 2000 transition without any
material adverse effect on its business operations, products or financial
prospects.
The Company cautions that except for historical information, the matters
discussed or incorporated by reference in this report are forward-looking
statements that involve risks and uncertainties that may affect the
Company's actual results and cause results to differ materially from such
forward-looking statements. Such risks and uncertainties include but are
not limited to, economic conditions, product demand and industry capacity,
competitive products and pricing, manufacturing efficiencies, research and
new product development, protection of and access to intellectual property,
patents and technology, ability to attract and retain highly qualified
personnel, availability of components and critical manufacturing equipment,
ability of vendors and third parties to respond to Year 2000 issues,
facility construction and start-ups, 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, 1998
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 Italia S.r.l. Italy
Tellabs International de Mexico Mexico
Tellabs Netherlands B. V. Netherlands
Tellabs (Thailand) Co., Ltd. Thailand
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
Trelcom Oy Finland
Tellabs AB Sweden
Tellabs SAS France
Tellabs (S. A.) (Proprietary) Limited South Africa
Tellabs TG, Inc. Delaware
Tellabs Transport Group Inc. Quebec, Canada
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-48972, 33-45788 and 33-55487) of Tellabs, Inc. of our
report dated January 26, 1998, with respect to the consolidated financial
statements and schedule of Tellabs, Inc. included and incorporated by
reference in the Annual Report (Form 10-K) for the year ended
January 2, 1998.
Ernst & Young LLP
Chicago, Illinois
March 17, 1998
EXHIBIT 23.1
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 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
January 2, 1998, Income Statement and Balance Sheet and is qualified
in its entirety by reference to such 10K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1998
<PERIOD-END> JAN-02-1998
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<ALLOWANCES> 3440000
<INVENTORY> 89614000
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<PP&E> 338296000
<DEPRECIATION> 128967000
<TOTAL-ASSETS> 1183379000
<CURRENT-LIABILITIES> 225820000
<BONDS> 2850000
0
0
<COMMON> 1816000
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<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.42
</TABLE>
