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 1, 1999
[ ] 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. [X]
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 22, 1999, 194,899,159 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 $15,311,765,000.
Documents incorporated by reference: Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended January 1, 1999, are
incorporated by reference into Parts I and II, and portions of the
1
registrant's Proxy Statement dated March 10, 1999 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 digital cross-connect systems,
managed digital networks, network access products, and fiber optic
systems. Digital cross-connect systems include the Company's TITAN (a
registered trademark of Tellabs Operations, Inc.) 5500/5500S and 5300
series of digital cross-connect systems. Managed digital networks include
the Company's MartisDXX (a 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 voice quality enhancement products such as echo
cancellers; 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. Products recently
introduced or to be introduced include the AN2100 Gateway Exchange System
(AN2100 System), (a trademark of Tellabs Operations, Inc.), TITAN 4500GS
global services delivery system (TITAN 4500GS system), and an optical
networking product.
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), competitive local exchange carriers (CLECs), 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.
2
This same availability of technology in capital equipment makes it possible
for the Company to efficiently and competitively continue to produce its
own products in its world class manufacturing facilities located throughout
the world.
Each of the Company's manufacturing operations is registered under the ISO
9000 standard. ISO 9000 is an international set of standards developed to
provide quality assurance for companies seeking to improve their quality
standards and customer service.
GLOBAL SYSTEMS AND TECHNOLOGIES
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,
wireless, cable, government and Fortune 500 companies. These complex
transmission systems are designed to meet or exceed domestic and
international telephone industry standards.
The 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 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 TITAN 5500 system which
interfaces facilities at the DS1, DS3, STS-1 and fiber optic OC-N levels,
and cross-connects them at levels of DS1/VT1.5 and above. The TITAN 5500
system 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.
Digital cross-connect system products accounted for approximately 60
percent of 1998 and 1997 product sales, and approximately 57 percent of
1996 product sales.
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 business network services.
Typical business service applications include private branch exchange (PBX)
networking, local area network (LAN) interconnectivity (including frame
relay), leased lines, asynchronous transfer mode (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 carry the wide variety
of services that may be provided by the public telecommunications service
provider.
The latest enhancement to the system, synchronous digital hierarchy (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 2.048
Megabits per second) and multiplex them over private time division
multiplexing networks. The CROSSNET 445 system 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 400 bits per
second 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 kilobits per second 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 system 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.
4
Managed digital networks accounted for approximately 26 percent of product
sales in 1998, and approximately 28 percent of product sales in each of
1997 and 1996.
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 voice quality enhancement 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, CLECs, wireless service providers, 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.
In 1998, the Company created the Network Enhancing Technologies Solutions
Group (NETS). NETS was formed by the combination of Coherent
Communications Systems Corporation (Coherent), which was acquired in 1998,
with the Network Access Systems Division of the Company. This group is
focused on developing leading-edge voice quality enhancement and echo
cancellation solutions.
Voice quality enhancement 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) 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. These voice quality enhancement 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 four wire transmission facilities and two 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's CABLESPAN 2300 system is a local access product developed by
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 providers, alternate access carriers, and competitive access
providers 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
5
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 that
allows the management of multiple CABLESPAN systems and supports multiple
network operators while interfacing with other operational support systems.
Network access products accounted for approximately 13 percent, 10 percent,
and 14 percent of 1998, 1997, and 1996 product 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. In
1998, this division became part of the Digital Systems Division to
reflect a change in 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 radio frequency (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.
Emerging Products
During 1998, the Company released its AN2100 Gateway Exchange System, which
is the first in a series of products designed to enable the Company's
customers to cost-effectively migrate from current networks to future
networks. The AN2100 system is a next-generation voice/data switch, which
blends echo canceller and digital cross-connect technology with packet and
cell technologies to perform multimedia adaptation and switching.
In March 1999, the Company announced the TITAN 4500GS global services
delivery system. The TITAN 4500GS system is an integrated system that will
enable service providers to seamlessly deliver high-bandwidth, global
services over synchronous optical network (SONET) and SDH access networks.
As a single platform that operates in both SONET and SDH environments, the
TITAN 4500GS system increases the efficiency and manageability of SONET and
SDH access rings when delivering global services.
In 1999, the Company expects to introduce an optical networking product.
Optical networking uses dense wavelength-division multiplexing (DWDM)
technology to expand the carrying capacity of fiberoptic strands. DWDM
technology splits traditional fiberoptic signals into several different
wavelengths that serve as a separate channel to carry information over the
same fiber allowing service providers to expand bandwidth without adding
more fibers.
GLOBAL SALES AND MARKETING
Sales are generated through the Company's direct sales organization and
selected distributors. The North American sales group consists of
approximately 95 direct sales personnel and an additional 72 sales support
personnel located throughout the United States and Canada. The
international sales group consists of approximately 62 direct sales
personnel, and additional 49 sales support personnel located in Latin
America, South America, Europe, the Middle East, Africa, Asia and
Australia.
6
The North American sales organization conducts its activities from the
the Company's corporate headquarters and six regional offices. The
international sales organization conducts its activities from the the
Company's 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 87 percent of 1998 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 13 percent of 1998 sales. No single distributor accounted
for more than 10 percent of 1998 sales.
GLOBAL SOLUTIONS AND SERVICES
The Company maintains a worldwide service organization focused on providing
its customers high quality technical and administrative product support.
Early in 1999, the group was reorganized to provide greater focus on
meeting the expanding needs of its global customer base and to provide a
consistent suite of high-quality service offerings worldwide. The group
currently offers these services through its service centers in Lisle,
Illinois; Ashburn, Virginia; Shannon, Ireland; and Espoo, Finland with
further expansion into Latin America, Europe and Asia planned for 1999.
The Company's service organization supports its customers with a wide
range of services that include application engineering and support,
installation, service support, 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 application engineering, support and installation group is
focused on meeting the customer's needs for installation and integration of
the Company's products and third party equipment into the customer's
network. The group uses a combined workforce of Company and subcontracted
personnel to provide teams of trained professionals that manage the job
from its conceptual, engineering stage through to its successful system
integration and commissioning.
The Company's technical support group consists of unique and highly-trained
teams that focus on customer support of the TITAN 5500/5500S and 5300
series systems, CROSSNET 44X and 33X systems, CABLESPAN system, Voice
Frequency and MartisDXX product lines and will provide support for the
Company's emergin 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
7
support teams also utilize a call director system to track the status of
customers' calls until completion.
The Company's customer training group offers an expansive choice of course
offerings designed to meet the existing customer needs, as well as,
newly-designed course offerings that address the rapidly changing industry
needs. Courses are offered at the Company's technologically- advanced
training facilities and on-site at customer premises.
The Company provides product warranties for periods ranging from one to
five years for the repair or replacement of modules and systems found to be
faulty due to defective material and additionally for other requirements
as described in the customer contract. 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:
1998 1997 1996
Regional Bell Operating Companies 31% 32% 28%
Independent Telephone Companies 3% 4% 7%
Interexchange Carriers 12% 17% 18%
Corporate America, OEMs, Governmental
Agencies, Wireless Companies, Utility
and Railroad Companies, Alternate Service
Providers, and System Integrators 22% 14% 14%
Foreign Sales
Canada 2% 2% 3%
International 30% 31% 30%
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
In 1998, sales to Bell Atlantic accounted for approximately 12.2 percent
of consolidated net sales. In 1997, sales to SBC Communications Inc.
accounted for approximately 11.5 percent of consolidated net sales. No
other customer in 1998 or 1997 accounted for more than 10 percent of
consolidated net sales. No single customer accounted for more than 10
percent of consolidated net sales in 1996.
At January 1, 1999, and January 2, 1998, backlogs were approximately $164
million and $109 million, respectively. All of the January 1, 1999,
backlog is expected to be shipped in 1999. The Company considers backlog
to be an indicator, but not the sole predictor, of future sales.
COMPETITION
The Company's products are sold in global markets and compete on the
following key factors: responsiveness to customer needs, product features,
customer-oriented planning, price, performance, reliability, breadth of
product line, technical documentation, and prompt delivery.
The digital cross-connect systems compete principally with Lucent
Technologies and Alcatel. The major competitors of the managed access
and transport systems are Newbridge Networks Corporation, Nokia
Telecommunications, and Network Equipment Technologies.
8
The network access products currently compete in four product areas:
special services, echo cancellers, T1 Multiplexers, and local access. 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, Ericsson, Ditech, and Nortel. The
principal competition for the multiplexers are Newbridge Networks
Corporation, Premisys, and Ascom/Timeplex. The local access products
competitors are Arris, ADC Telecommunications, Inc., and Motorola.
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 and computer-aided software engineering 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.
In 1998, the Company acquired Coherent, a developer, manufacturer and
marketer of voice-quality enhancement products for wireless (including
digital cellular and personal communication systems), satellite-based,
cable communication, and wireline telecommunications systems throughout the
world. This acquistion has allowed the Company to combine technologies and
resources with Coherent to provide the greatest number of options in
sophisticated echo canceller and speech processing technology. In 1998,
the Company also acquired Switched Network Technologies, Inc., a developer,
manufacturer and marketer of ATM-based switches, and consolidated it into
the Company's Digital Systems Division.
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
9
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 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 Lisle
and Bolingbrook, Illinois; Mishawaka, Indiana; Hawthorn, New York;
Burlington and Cambridge, Massachusetts; Ashburn, Virginia; Montreal and
Ottawa, Canada; Espoo, Oulu and Tampere, Finland; and Shannon, Ireland.
Research and development expenses were $202.6 million in 1998, $158.1
million in 1997, and $107.3 million in 1996. (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 $250
million to $290 million on research and development in 1999. 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 77 percent
of cost of sales in 1998.
Most purchased items are standard commercial components available from a
number of suppliers with only a few items procured from a single-source
vendor. Management believes that alternate sources could be developed for
those parts and components of proprietary design and those available only
from single or limited sources. However, future shortages could result in
production delays that could adversely affect the Company's business.
10
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 1, 1999, the Company had 4,980 employees, of which 1,145 were
employed in the sales, sales support and marketing area, 1,588 in product
development, 1,796 in manufacturing, and 451 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. The Company is not aware of any factor which would affect its
ability to utilize any of its major Marks.
The Company currently holds numerous United States and foreign 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 patents and other 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 and
to the extent available on reasonable terms and conditions, 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 products of the Company or otherwise.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company manages its business in one business segment. Information with
respect to the Company's net sales by product group, net sales by
country, and net long-lived assets by country for the fiscal years ended
January 1, 1999, and January 2, 1998, is set forth in Note 9 on page 40
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
11
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.
The Texas property includes a 127,000-square foot manufacturing facility.
The Company also owns three office facilities in Espoo, Finland totaling
127,000 square feet used for administrative offices and research and
development. In addition, the Company owns a 154,000-square foot
production and engineering facility in Espoo. During 1998, the Company
finished construction of a 135,000-square foot manufacturing facility in
Shannon, Ireland. This facility was built on land obtained through a
long-term lease entered into during 1997. Construction of the Shannon
facility was completed at a cost of approximately $15,000,000.
The Company leases additional facilities at the following locations: two
locations in Bolingbrook, Illinois (157,000 square feet, total) used for
administrative and engineering; two locations in Lisle, Illinois (86,000
square feet, total) used for research and development; Naperville, Illinois
(sales); Mishawaka, Indiana (research); Santa Ana, California (sales);
Littleton, Colorado (sales); Atlanta, Georgia (sales); Rockville, Maryland
(sales); Irving, Texas (sales); Ft. Lauderdale, Florida (administrative);
Hauppauge, New York (manufacturing); Hawthorn, New York (research and
development); Boston, Massachusetts (research and development); and two
buildings (90,000 square feet) in Burlington, Massachusetts for sales,
research and administration; Ashburn, Virginia (72,000 square feet) used
for research and development; Gloucester, Ontario (research and
development); Mississauga, Ontario (sales); St. Laurent, Quebec (research
and development); two locations in Espoo, Finland (60,000 square feet,
total) used for administrative and engineering; Oulu, Finland (research and
development); and Tampere, Finland (research and development). The Company
also has small leased sales offices in eighteen foreign countries.
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 1999, 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. The Company has
been named in a lawsuit recently filed by the Lemelson Medical, Education
and Research Foundation, Limited Partnership (Lemelson) in the United
States District Court for the District of Arizona against eighty-eight
electronics industry companies. The lawsuit alleges patent infringement,
and the patents at issue are characterized by Lemelson as relating to
manufacturing methods and semiconductor structures. The relief sought by
Lemelson includes a judgment against the defendants of willful
infringement, injunctive relief, trebled actual damages and attorneys'
fees. Lemelson has contacted the Company and offered to license the
12
patents at issue. The Company is in the process of reviewing its defenses
to Lemelson's claims and Lemelson's offers, and while no assurances
regarding the eventual resolution of this matter can be made at this time,
the Company does not believe that it will have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
FORWARD LOOKING STATEMENTS
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.
13
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.
Brian J. Jackman 1941 President, Global Systems
President, Global Systems and and Technologies;
Technologies since 1998; Director, Executive Vice President
Tellabs, Inc. since 1993; Executive and Director, Tellabs, Inc.
Vice President, Tellabs, Inc.
since 1990; President, Tellabs
Operations, Inc. 1993 to 1998.
John E. Vaughan 1947 President, Tellabs
President, Tellabs Global Sales Global Sales and Services;
and Services since 1998; Executive Executive Vice President,
Vice President, Tellabs, Inc. since Tellabs, Inc.
1997; President, Tellabs International,
Inc. 1997 to 1998; Vice President of
Business 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.
Charles C. Cooney 1941 Vice President, North America
Vice President, North America Sales, Tellabs Operations,
Sales, Tellabs Operations, Inc. Inc.
since 1998; Vice President, Sales
and Service, Tellabs Operations,
Inc. 1992 to 1998.
14
Carol Coghlan Gavin 1956 Vice President, General
Vice President and General Counsel, Counsel and Secretary,
Tellabs Operations, Inc. and Secretary, Tellabs Operations, Inc.;
Tellabs, Inc., since 1999; Counsel, Secretary, Tellabs, Inc.
Tellabs Operations, Inc. 1998 to 1999; Vice
President and General Counsel, Tellabs
Operations, Inc. 1992 to 1998; Secretary,
Tellabs, Inc., 1993 to 1998.
J. Thomas Gruenwald 1948 Vice President and General
Vice President and General Manager, Broadband Media
Manager, Broadband Media Group Group and Network Solutions
and Network Solutions Group, Tellabs Group, Tellabs
Operations, Inc. since 1998; Vice Operations, Inc.
President, Strategic Resources,
Tellabs Operations, Inc. 1995 to 1998;
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.
John C. Kohler 1952 Vice President, Global
Vice President, Global Manufacturing Manufacturing, Tellabs
Tellabs Operations, Inc. since 1998; Operations, Inc.
Vice President, Manufacturing, Tellabs
Operations, Inc. 1993 to 1998.
Stephen M. McCarthy 1954 Vice President, Global
Vice President, Global Solutions Solutions and Service,
and Service, Tellabs Operations, Inc. Tellabs Operations, Inc.
since 1999; Senior Vice President,
Major Accounts Central Division, ADP
1997 to 1999; Vice President, Sales,
Ameritech 1994 to 1997; Vice
President, Marketing, Ameritech
1993 to 1994.
David Powell 1951 Vice President and General
Vice President and General Manager, Manager, Network
Network Enhancing Technologies Enhancing Technologies
Solutions Group, Tellabs Operations, Solutions Group, Tellabs
Inc. since 1999; Vice President and Operations, Inc.
General Manager, Coherent OEM Division,
Tellabs Operations, Inc. 1998 to 1999;
President and Chief Operating Officer,
Coherent Communications Systems
Corporation 1994 to 1998.
15
Harvey R. Scull 1949 Vice President, Global
Vice President, Global Strategy Strategy and Business
and Business Development, Development, Tellabs
Tellabs Operations, Inc. since Operations, Inc.
1998; Vice President, Advanced
Business Development, Tellabs
Operations, Inc. 1993 to 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections entitled "Common Stock Market Data" on pages 1 and 44 of the
Company's Annual Report to Stockholders for the year ended January 1, 1999
(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 1 of the Annual Report is incorporated herein by reference. It is
also included in Exhibit 13, as filed with the SEC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis" on Pages 22 to
25 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
its 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 at January 1, 1999, and
January 2, 1998. 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.
16
Notional
Value Average
Maturing Contract Fair Value
Currency in 1999 Rate at 1/1/99
- -------------------------- ---------- -------- ----------
Forward Contracts to Sell Foreign
Currencies for Finnish Markka: (In Thousands) (In Thousands)
United States Dollar $63,770 5.0660 $63,770
Irish Punt 15,950 7.5448 17,285
European Currency Unit 15,442 5.9640 15,386
Spanish Peseta 8,878 0.0357 9,442
Austrian Schilling 3,829 0.4319 3,814
Swedish Krone 3,563 0.6277 3,530
Deutsche Marks 1,889 3.0403 1,889
Danish Krone 1,774 0.7981 1,769
Norwegian Krone 1,689 0.6626 1,676
British Pound 1,576 8.4557 1,573
All Others 858 - 864
------------ ------------
$119,218 $120,998
Forward Contracts to Sell Foreign
Currencies for Irish Punts:
United States Dollar $4,960 1.1254 $4,960
Netherlands Guilder 1,988 2.7995 1,985
French Franc 1,021 8.3297 1,019
All Others 366 - 361
------------ ------------
$8,335 $8,325
------------ ------------
Total Contracts Outstanding
at January 1, 1999: $127,553 $129,323
============ ============
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
17
Forward Contracts to Sell
Foreign Currencies for Irish Punts:
Netherlands Guilder $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 26 through 41 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
None.
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 10, 1999.
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.
18
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 1, 1999, were previously incorporated by reference
in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets: January 1, 1999 and January 2, 1998
Consolidated Statements of Earnings: Years ended January 1, 1999,
January 2, 1998 and December 27, 1996
Consolidated Statements of Stockholders' Equity: Years ended
January 1, 1999, January 2, 1998, and December 27, 1996
Consolidated Statements of Cash Flows: Years ended January 1,
1999, January 2, 1998 and December 27, 1996
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 December 14, 1998, with
respect to the agreement to supply Sprint Corporation with the
Registrant's AN2100 Gateway Exchange system.
(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.)
19
Exhibits: (Continued)
10.1 Tellabs, Inc. Deferred Compensation Plan, as amended and its
related trust, as amended (amendment filed herewith) 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/
10.17 1998 Stock Option Plan 12/
10.18 Tellabs, Inc. Stock Bonus Plan for Former Employess of
Switched Network Technologies, Inc.
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 10.18 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).
20
(d) Schedules: (Continued)
8/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended June 28, 1996 (File No. 0-9692).
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).
12/ Incorporated by reference from Tellabs, Inc. Definitive Proxy
Statement filed on or about March 16, 1998 (File No. 0-9692).
21
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 29, 1999 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 29, 1999
(Principal Executive
Officer)
/s Peter A. Guglielmi Executive Vice President March 29, 1999
(Principal Financial
Officer) and Director
/s Robert E. Swininoga Vice President (Principal March 29, 1999
Accounting Officer)
/s Brian J. Jackman Director March 29, 1999
/s John D. Foulkes Director March 29, 1999
/s Frederick A. Krehbiel Director March 29, 1999
/s Stephanie Pace Marshall Director March 29, 1999
/s William F. Souders Director March 29, 1999
/s Jan H. Suwinski Director March 29, 1999
22
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 1, 1999, and January 2, 1998, and for the
years then ended, and have issued our report thereon dated January 20,
1999. 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 for the year ended December 27,
1996, 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 20, 1999
23
<TABLE>
<CAPTION>
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended January 1, 1999, January 2, 1998, and December 27, 1996
(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>
1998
Allowance for
doubtful receivables $3,440 $7,572 $303 $10,709
====== ======
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
====== ======
<FN>
NOTE:
(A) - Uncollectible accounts charged off, net of recoveries.
</FN>
</TABLE>
24
EXHIBIT INDEX
Exhibit 10.1 Amendment to Tellabs, Inc. Deferred Compensation Plan
Exhibit 10.18 Tellabs, Inc. Stock Bonus Plan for Former Employees of
Switched Network Technologies, Inc.
Exhibit 13 Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Registrant
Exhibit 23 Consent of Independent Auditors - Ernst & Young LLP
Exhibit 23.1 Consent of Independent Auditors - Grant Thornton LLP
Exhibit 27 Financial Data Schedule
25
Exhibit 10.1
TELLABS OPERATIONS, INC.
(formerly Tellabs, Inc., an Illinois corporation)
Deferred Income Plan
Amendment
Effective January 1, 1999 and pursuant to Article XII, paragraph 35 of the
Tellabs Operations, Inc. Deferred income Plan dated April 1, 1992, as
previously amended, the Plan is hereby further amended as follows:
Article XIII, Paragraph 43: A new Paragraph 43 shall be added to Article
XIII to read as follows:
43. The Company, in its discretion, may make additional contributions
to the Plan as determined by the Company or the Committee. The
Company has determined to make additional contributions
commencing after January 1, 1999 for those participants having
"Vacation Rollover Amounts", as defined below. For purposes of
this Plan, "Vacation Rollover Amount(s)" shall mean an amount
calculated for any participant equal to the number of vacation days
or portions thereof (calculated on the participant's employment
anniversary date based on 8-hour days) in excess of the annual
vacation days allocated for the participant (to a maximum of 15
vacation days per calendar year with any excess days being
forfeited) multiplied by the "hourly salary rate", as defined
below, of the participant. (e.g. A participant eligible to take
20 vacation days has 40 vacation days remaining on the
participant's employment anniversary date in 1999. For such
participant, 20 vacation days shall remain available to be
utilized prior to the participant's employment anniversary date
in 2000, an amount equal to 15 vacation days multiplied by the
participant's 1999 hourly salary rate shall be contributed on
behalf of the participant to the Plan and 5 vacation days shall be
forfeited). The "hourly salary rate" shall be determined by
dividing the bi-weekly salary of the participant on the
participant's employment anniversary date (including any salary
increases, effective as of such anniversary date) by 80. In the
event a participant becomes entitled to payments or benefits, as
provided in Article V, prior to the contribution by the Company
of any Vacation Rollover Amounts designated for contribution to
such participant's Account, such contribution shall not be made
by the Company. The initial contributions shall be calculated
during the 1999 calendar year and made during the first quarter
of 2000, provided that for vacation days forfeited during the
1998 calendar year (to a maximum of 15 vacation days) a
contribution shall be made during the first quarter of 1999 on
behalf of a participant based on the above formula. Thereafter,
contributions of Vacation Rollover
44. Amounts shall be made for each qualifying participant in
subsequent years during the first quarter of the year following the
Vacation Rollover Amount determination, but only if the Company
has adopted this Plan during such year, as provided in Article
XII, Paragraph 36.
Effective as of January 1, 1999 and signed this 1st day of November 1998,
with the approval and authorization of the Board of Directors.
Tellabs Operations, Inc.
(Tellabs, Inc., formerly)
By: /s Brian J. Jackman
----------------
Brian J. Jackman
Title: President
Exhibit 10.18
TELLABS, INC.
STOCK BONUS PLAN
1. INTRODUCTION
1.1 The purpose of the Tellabs, Inc. Stock Bonus Plan (the "Plan")
is (i) to align the interests of the stockholders of Tellabs,
Inc. ("Tellabs"), and its subsidiaries from time to time
(individually, a "Subsidiary" and collectively, the
"Subsidiaries") and recipients of awards under this Plan by
increasing the proprietary interests of such recipients in the
growth and success of Tellabs and (ii) to advance the interests
of Tellabs and its Subsidiaries by retaining key employees of
Switched Network Technologies, Inc. , a Minnesota corporation, as
employees of Tellabs Operations, Inc. ("Tellabs Operations").
1.2 Certain Definitions
"Board" shall mean the Board of Directors of Tellabs.
"Bonus Stock" shall mean shares of Common Stock awarded under
the Plan.
"Bonus Stock Award" shall mean an award to an eligible employee
of a right to receive Bonus Stock under the Plan.
"Cause" shall mean any act of dishonesty, commission of an
indictable criminal offense, activities harmful to the reputation
of Tellabs or a Subsidiary, the refusal to perform or the
substantial disregard of duties properly assigned or a significant
violation of any legal duty of loyalty to Tellabs or a
Subsidiary, as determined by the Committee in its sole discretion.
"Closing Date" means September 22, 1998.
"Committee" shall mean the Compensation Committee of the Board of
Tellabs or any successor Committee thereto.
"Common Stock" means the common stock of Tellabs, Inc.
"Disability" shall mean the inability of the holder of an award
to perform substantially such holder's duties and
responsibilities for a continuous period of at least six months, as
determined by the Committee in its sole discretion.
"Fair Market Value" shall mean the average of the high and low
transaction prices of a share of Common Stock as reported in the
National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQNMS") on the date as of which such
value is being determined, or, if the Common Stock is not listed
on the NASDAQNMS, the average of the high and low transaction
prices of a share of Common Stock on the principal national stock
exchange on which the Common Stock is traded on the date as of
which such value is being determined, or, if there shall be no
reported transactions for such date, on the next preceding date
for which transactions were reported; provided, however, that if
Fair Market Value for any date cannot be so determined, Fair
Market Value shall be determined by the Committee by whatever
means or method as the Committee, in the good faith exercise of
its discretion, shall at such time deem appropriate.
1.3 Administration
This Plan shall be administered by the Committee. The Committee
shall, subject to the terms of this Plan, interpret this Plan and
the application thereof, establish rules and regulations it deems
necessary or desirable for the administration of this Plan. All
such interpretations, rules and regulations shall be conclusive
and binding on all parties.
The Committee may delegate some or all of its power and authority
hereunder to the President and Chief Executive Officer or other
executive officer of Tellabs or a Subsidiary as the Committee
deems appropriate.
1.4 Eligibility
Participants eligible to participate in this Plan shall consist
of the full-time employees of Tellabs whose names appear on
Schedule A, attached hereto. No other persons shall be eligible to
participate in this Plan.
1.5 Shares Available
Subject to adjustment as provided in Section 3.3, 12,000 shares
of Common Stock shall be available under this Plan.
2. BONUS STOCK AWARDS
2.1 Bonus Stock Awards
Effective on the Closing Date, Tellabs shall grant Bonus Stock
Awards to employees of Tellabs Operations from time to time as
determined by Tellabs' Board or the Committee. Each such grant
shall be evidenced by a notice sent by Tellabs to each such
employee to whom Bonus Stock Awards are made.
2.2 Terms of Bonus Stock Awards
Bonus Stock Awards shall be subject to the following terms and
conditions.
a. Number of Shares and Other Terms
The number of shares of Common Stock subject to a Bonus
Stock Award granted pursuant to this Plan shall be the
number of such shares set forth opposite the name of such
employee on Schedule A hereto.
b. Vesting and Forfeiture
One-half of the number of shares of Common Stock subject to
a Bonus Stock Award shall vest and be payable on the first
anniversary of the Closing Date and the other half of such
number shall vest and be payable on the second anniversary
of the Closing Date, in each case, subject to Section
2.3(b), if the holder of such award remains continuously in
the employment of Tellabs or a Subsidiary until such
anniversary date of the Closing Date. Such holder shall
forfeit the unvested portion of any such shares if such
holder does not remain continuously in the employment of
Tellabs or a Subsidiary as specified above, except as
otherwise provided in Section 2.3(b) hereof.
c. Shares Certificates
Upon the vesting of a portion of a Bonus Stock Award
pursuant to Section 2.2(b) or 2.3(b), in each case subject
to Tellabs or a Subsidiary rights to require payment of any
taxes in accordance with Section 3.2, a certificate or
certificates evidencing ownership of the number of shares of
Common Stock so vested shall be delivered to and in the name
of the holder of such award. Notwithstanding the foregoing,
in lieu of the delivery of shares representing all or a
portion of the vested portion of a Bonus Stock Award, the
Committee may, in its sole discretion, deliver to the holder
cash in an amount equal to the Fair Market Value on the date
such shares become vested equal to the vested portion of
such award, less any applicable withholding, as required by
Section 3.2, as the case may be.
2.3 Termination of Employment
a. Termination Resulting in Forfeiture
If (i) employment with Tellabs or a Subsidiary of the holder
of a Bonus Stock Award is terminated by Tellabs or a
Subsidiary for Cause, (ii) such employment terminates by
reason of the holder's Disability or death, or (iii) a
holder voluntarily terminates his employment with Tellabs
or a Subsidiary for any reason, the portion of such award
which is not vested pursuant to Section 2.2(b) shall be
forfeited by such holder and such portion shall be canceled
by Tellabs.
b. Other Termination
If Tellabs or a Subsidiary terminates the employment of the
holder of a Bonus Stock Award for any reason other than as
provided in Section 2.3(a), the portion of such award which
is not otherwise vested shall vest pursuant to Section
2.2(b) without regard to such termination and be payable
within thirty (30) days of such termination, in accordance
with Section 2.2(c).
3. GENERAL
3.1 Amendments
The Board or the Committee may amend this Plan as it shall deem
advisable, provided, however, that no amendment shall be made if
such amendment would increase the maximum number of shares of
Common Stock available under this Plan (subject to Section 3.3).
No amendment may impair the rights of a holder of an outstanding
award without the consent of such holder.
3.2 Tax Withholding
Tellabs shall have the right to require, prior to the issuance or
delivery of any shares of Common Stock or the payment of any cash
pursuant to an award made hereunder, payment by the holder of
such award of any federal, provincial, local or other taxes which
may be required to be withheld or paid in connection with such
award. The Committee may allow shares of Common Stock to be
delivered or withheld having an aggregate Fair Market Value not in
excess of the minimum amount required to be withheld and in such
event, any fraction of a share of Common Stock which would be
required to satisfy such an obligation shall be disregarded and the
remaining amount due shall be paid in cash by the holder.
3.3 Adjustment
In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other
similar change in capitalization or event, or any distribution to
holders of Common Stock other than a regular cash dividend, the
number and class of securities available under this Plan, the
number and class of securities subject to each outstanding Bonus
Stock Award shall be adjusted or modified accordingly, as
determined by the Committee, which adjustment may include providing
for payment of an asset not constituting a security upon the
vesting of an outstanding Bonus Stock Award. The decision of the
Committee regarding any such adjustment shall be final, binding
and conclusive. If any such adjustment would result in a
fractional security being (i) available under this Plan, such
fractional security shall be disregarded, or (ii) subject to an
award under this Plan, Tellabs shall pay the holder of such
award, in connection with the first vesting of such award, in
whole or in part, occurring after such adjustment, an amount in
cash determined by multiplying (a) the fraction of such security
(rounded to the nearest hundredth) by (b) the excess, if any, of
the Fair Market Value on the vesting date.
3.4 No Assignment
It is a condition of this Plan, and the rights of all holders of
Bonus Stock Awards shall be subject thereto, that no right or
interest of any such holder shall be assignable or transferable
in whole or in part, either directly or by operation of law or
otherwise, including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge or bankruptcy, and no right
or interest of any such holder under this Plan shall be liable
for, or subject to, any obligation of any such holder, including
claims for alimony or the support of any spouse.
3.5 No Right of Employment
Neither this Plan nor any award made hereunder shall confer upon
any person any right to continued employment by Tellabs, Tellabs
Operations or any Subsidiary or affiliate thereof or affect in
any manner the right of Tellabs, Tellabs Operations or any
Subsidiary or affiliate thereof to terminate the employment of
any person at any time without liability hereunder.
3.6 Right as Stockholder
No person shall have any right as a stockholder of Tellabs with
respect to any shares of Common Stock or other equity security of
Tellabs which is subject to an award hereunder unless and until
such person becomes a stockholder of record with respect to such
shares of Common Stock or equity security. Tellabs' obligation
to deliver shares of Common Stock pursuant to this Plan shall be
unfunded, and Tellabs shall not be obligated to set aside any of
its assets for the purpose of satisfying its obligations
hereunder. The claims of holders of Bonus Stock Awards shall be
solely those of an unsecured creditor of Tellabs.
3.7 Governing Law
The corporate law of the State of Delaware shall govern all
issues concerning the relative rights of Tellabs and the holders
of Bonus Stock Awards with respect to this Plan. The law of the
State of Illinois, except its law with respect to choice of law,
shall be controlling in all other matters relating to the Plan.
3.8 Effective Date
This Plan shall become effective on the Closing Date.
EXHIBIT 13
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(In Thousands, Except Per-Share Data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $1,660,102 $1,203,546 $868,975 $635,229 $494,153
Gross profit $1,081,238 $758,003 $519,243 $363,835 $270,003
Earnings before income taxes $590,115 $399,529 $175,282 $162,825 $97,824
Net earnings $398,328 $263,689 $117,965 $115,606 $72,389
Earnings per share $2.13 $1.46 $0.66 $0.66 $0.42
Earnings per share, assuming dilution $2.07 $1.42 $0.64 $0.63 $0.40
Stockholders' equity $1,376,597 $933,109 $591,276 $433,233 $292,790
Total assets $1,627,591 $1,183,379 $743,823 $552,051 $390,067
Net working capital $1,034,564 $637,114 $343,840 $267,806 $138,317
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
1998 1997
High Low High Low
First Quarter 69 1/2 44 1/2 46 1/8 32
Second Quarter 74 5/8 60 5/8 58 5/8 33
Third Quarter 93 1/8 36 65 50 1/2
Fourth Quarter 72 11/16 31 3/8 59 13/16 42 5/8
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 15, 1999, there
were approximately 4,371 stockholders of record.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations, 1998 vs. 1997
Sales recorded during 1998 increased 37.9 percent to $1,660,102,000 from
1997's then-record sales of $1,203,546,000. Significant sales growth
during 1998 was realized worldwide. Sales within the United States grew by
40.5 percent, primarily as the result of the continued strong sales of the
TITAN (a registered trademark of Tellabs Operations, Inc.) 5500/5500S
digital cross-connect system. Sales outside the United States grew by
32.7 percent, driven by the MartisDXX (a trademark of Tellabs Oy) managed
access and transport system and digital echo cancellers.
Digital cross-connect sales for 1998 totaled $949,057,000, up from 1997
sales of $692,507,000. Sales of the TITAN 5500/5500S systems continued to
lead this product group, growing 38.2 percent from 1997 sales levels. The
balance of this product group, consisting of the narrowband members of the
TITAN family, experienced sales of approximately $96,000,000 during 1998,
up 27.8 percent from 1997 sales, making it a more significant contributor
to the digital cross-connect product group. The increased sales of the
other members of the TITAN family were attributable to the demand from a
growing base of emerging telecommunications service providers requiring
such systems.
Sales of managed digital networks products during 1998 were $415,665,000,
an increase of 29.1 percent from 1997 sales. MartisDXX system sales in
1998 made up 97.2 percent of the sales of this group. One significant
driver in the growth of MartisDXX system sales in 1998 was a focus on sales
to countries with emerging telecommunications infrastructures. In line
with the Company's expectations, the more mature products in this group,
such as the CROSSNET (a registered trademark of Tellabs Operations, Inc.)
data multiplexer and 33X packet switch products, continued their decline in
sales over the previous year.
Sales of network access products in 1998 increased $70,276,000, to
$188,213,000. The increase was mostly attributable to the addition of
sales from Tellabs Virginia (formerly Coherent Communications Systems
Corporation ("Coherent"), which was acquired in the third quarter of 1998).
However, sales of network access products, excluding Tellabs Virginia
sales, increased 17 percent from 1997 levels. Contributing to this
increase were sales of the CABLESPAN (a registered trademark of Tellabs
Operations, Inc.) 2300 universal telephony distribution system of
$23,862,000 in 1998, a 53.3 percent increase over 1997 sales levels.
During 1998, customer service revenue became a more significant source of
the Company's sales than in the past. Customer service revenues resulted
primarily from activities involving the installation and testing of large
systems, generally the TITAN family of products. Revenues during 1998
were $74,409,000, an increase of 124 percent over 1997 revenues of
$33,227,000.
Net earnings for 1998 were a record $398,328,000, up 51.1 percent from 1997
earnings of $263,689,000. The 1998 earnings included a pre-tax gain on the
sale of stock held as an investment and the settlement of related hedge
contracts of $73,374,000, a pre-tax charge for impaired assets at the
Company's Wireless System Division of $24,793,000, and a pre-tax charge of
$12,991,000 for costs related to the Coherent merger and the unsuccessful
merger attempt with CIENA Corporation. Net earnings for 1997 included a
pre-tax gain on the sale of stock held as an investment in the amount of
$20,803,000. Excluding the effects of these items, net earnings for the
year increased $124,470,000, primarily as the result of the record sales.
Diluted earnings per share were $2.07 in 1998 ($1.95 excluding the effect
of the stock sale, the asset impairment charge, and the merger costs),
compared with $1.42 in 1997 ($1.35 excluding the effect of the stock
sale).
Fourth-quarter sales in 1998 were a record $521,333,000, an increase of
47.1 percent over the then-record sales in the fourth quarter of 1997 of
$354,314,000. Sales of the TITAN 5500 system, MartisDXX system, and the
addition of Tellabs Virginia sales drove the increase over sales in the
fourth quarter of 1997. Net earnings for the quarter were $123,279,000, a
59.0 percent increase over 1997 earnings of $77,534,000. Diluted earnings
per share were 62 cents for the fourth quarter of 1998 and 42 cents for the
fourth quarter of 1997, due largely to the record sales in 1998.
The gross profit margin for 1998 improved again to a new record level of
65.1 percent versus the previous record of 63.0 percent achieved in 1997.
This improvement reflects both a product mix skewed toward higher-margin
products, including customer service revenue, and increased efficiencies by
the Company's manufacturing operations.
As a percentage of sales, operating expenses remained at 32.8 percent when
compared with 1997, excluding the aforementioned asset impairment charge
and merger costs. Overall, operating expenses in 1998 (excluding the asset
impairment charge and merger costs) increased 38 percent when compared with
1997. Contributing to the overall increase were the expenses incurred for
the installation of TITAN systems; the inclusion of expenses of Tellabs
Virginia; and the continued worldwide research and development of products
and the expansion of service and support capabilities.
Other income was $68,901,000 in 1998, compared with $24,002,000 in 1997.
Included in the results of both 1998 and 1997 were gains on the sale of
stock held as an investment. The gain in 1997 was $20,803,000, while the
gain on the stock sale, along with the settlement of related hedge
contracts, was $73,374,000 in 1998. Other income in 1998 also included
foreign exchange losses of $4,057,000, compared with foreign exchange gains
of $1,933,000 during 1997. The strength of the U.S. dollar and Swedish
krona versus the Finnish markka, the strength of the U.S. dollar versus the
Irish punt during 1997, and the subsequent weakening of the same currencies
in 1998 caused the swing in foreign exchange income. Interest income in
1998 contributed $22,404,000 to income, a 79.6 percent increase, compared
with $12,476,000 in 1997. This increase was primarily due to higher
average cash balances throughout the year.
The effective tax rate was 32.5 percent for 1998 and 34.0 percent for 1997.
The decrease in the 1998 effective tax rate is primarily due to the tax
benefits associated with contributions to the Tellabs Foundation, as well
as the asset impairment charge at the Company's Wireless Systems Division.
The Company's 1998 and 1997 effective tax rates reflect the benefits of
lower foreign tax rates as compared with the U.S. federal statutory rate.
Results of Operations, 1997 vs. 1996
Sales during 1997 hit a then 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 worldwide. Sales within the United States grew by 41.1
percent, primarily as the result of the continued strong sales of the
TITAN 5500 digital cross-connect system. Sales outside the United States,
which grew by 33.1 percent, were driven by the MartisDXX managed access
and transport system.
Digital cross-connect sales for 1997 of $692,507,000 represented 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
continued 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 1996 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 then-record $298,158,000. 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 rebounded in 1997 to exceed 1996 sales by
$16,710,000. The increase was again driven by then-record digital echo
canceller sales, combined 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 continued to decrease as a percent of
total product sales.
Net earnings for 1997 were a then-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 3). 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.
Sales during the fourth quarter of 1997 were a then-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 gross profit margin for 1997 increased again to a then-record level of
63 percent versus the previous record of 59.8 percent achieved in 1996.
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.
Operating expenses increased 43.1 percent during 1997, excluding the
one-time charge to earnings for the acquired in-process research and
development. Contributing to the overall increase were the higher
full-year expenses of the Tellabs Wireless Systems Division and Tellabs
Transport Group; the 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 as 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 represented 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 U.S. dollar and Swedish krona versus the Finnish markka and
the strength of the U.S. dollar versus the Irish punt. The losses in 1996
were the result of a weakened U.S. 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 was primarily due to the
increase in domestic taxable income and the reduction of foreign tax rate
benefits. The 1997 effective rate reflected 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.
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 1, 1999, was $1,034,564,000, compared with
net working capital of $637,114,000 at January 2, 1998. The Company's
current ratio at January 1, 1999, was 5.7 to 1. The increase in net
working capital is primarily due to 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.
Cash flows from operating activities during 1998 provided the Company with
approximately $209,000,000. Accounts receivable, net of allowance, at the
end of 1998 increased $196,536,000 from the balance of the previous year,
due primarily to high sales volume in the fourth quarter of 1998. Total
inventory levels increased by $32,810,000 from 1997 but decreased as a
percentage of total current assets. During the second quarter of 1998,
the Company determined that the value of the assets acquired as part of
the 1996 acquisition of the Company's Wireless System Division was
impaired, resulting in the write-down of assets totaling $24,793,000,
including goodwill and intangible assets.
The Company's holdings in marketable securities increased by $29,941,000
during 1998 despite the significant decrease in the balance of a certain
investment due to the partial sale of this investment, as well as a
decrease in the market value of the remaining portion of the investment.
The Company also invested approximately $75,870,000 during 1998 in
property, plant and equipment (exclusive of acquisitions). These additions
primarily consisted of the Company's continued expansion of manufacturing
and research and development capacity worldwide.
Current liabilities decreased during 1998 to $218,127,000 from $225,820,000
at the end of 1997. Increases in accounts payable, accrued compensation,
and income taxes payable were offset by a decrease in the Company's
deferred income tax liability due to the partial sale and devaluation of a
certain investment. Common stock outstanding increased by approximately
12,824,000 shares, primarily due to shares issued in the acquisition of
Coherent.
OUTLOOK
Sales in 1999 are expected to surpass $2 billion, a year ahead of the
Company's goal of "$2B by 2K." Sales growth within the United States will
continue to be led by the strength of digital cross-connect system sales,
while sales growth outside the United States will be driven by sales of
the MartisDXX system, as well as a full year of Tellabs Virginia sales of
digital echo cancellers. At January 1, 1999, backlog increased
significantly to approximately $164,000,000 from $109,000,000 at the end of
the prior year. All of the backlog at the end of 1998 is expected to be
shipped in 1999. The Company considers backlog to be an indicator, but not
the sole predictor, of future sales.
During 1999, the Company will continue to focus on providing the resources
to support revenue growth in the most cost-effective method possible.
Total operating expenses for 1999 are expected to average approximately 30
percent of planned revenues. Research and development expenses are
expected to be between 12 percent and 13 percent of sales. Marketing and
general and administrative expenses are expected to approximate 17 percent
of sales. Management believes these levels can be attained while
supporting the sales and product growth slated for 1999 and beyond as the
Company continues to invest in its future.
The 1999 capital expenditure plan totals approximately $125,000,000. It is
anticipated that 1999 working capital requirements and capital expenditures
will be met with funds currently on hand and funds generated by future
earnings. Earnings for 1999 are 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. Equally as important, strategic business
relationships can shorten the time it takes to bring new products and
solutions to market. It is for these reasons that the Company will
continue to pursue the establishment of such relationships.
YEAR 2000 READINESS
The Company continues to address its readiness for Year 2000 issues. At
the end of 1998, the Company believes, based on our test plans, all
products available for sale were Year 2000 compliant. The Company's
information technology (IT) systems and non-IT systems were not fully
compliant but are expected to be compliant by the second quarter of 1999.
Potentially non-compliant systems consist only of non-critical systems.
The extent of the impact of any non-compliance will be limited to minor
personnel productivity inefficiencies caused by the need for alternative
processes and procedures. Costs incurred to date and projected future
costs to remedy the Company's Year 2000 issues are expected to be
immaterial to the Company's financial results. In addition, the Company
believes that no material Year 2000 issues exist with a third party.
Actual outcomes and results could be affected by other factors, including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remedy software code problems, critical
suppliers and subcontractors meeting their commitments to be Year 2000
ready, and timely actions by customers. The most current information about
Year 2000 readiness for Tellabs' products is available on our web site at
www.tellabs.com.
FORWARD-LOOKING STATEMENTS
Except for historical information, the matters discussed or incorporated
by reference in this report are forward-looking statements that involve
risks and uncertainties. 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;
Year 2000 readiness; facility construction and start-ups; the regulatory
and trade environment; availability and terms of future acquisitions;
uncertainties relating to the synergies, charges and expenses associated
with business combinations and other transactions; and other risks that may
be detailed from time to time in the Company's filings with the Securities
and Exchange Commission. The Company's actual future results could differ
materially from those discussed here. The Company undertakes no obligation
to revise or update these forward-looking statements.
Management Statement of Financial Responsibility
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 1, 1999
and January 2, 1998, and the consolidated results of its operations for
the years ended January 1, 1999, January 2, 1998, and December 27, 1996.
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 and
training.
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.
/s Michael J. Birck /s Peter A. Guglielmi
Michael J. Birck Peter A. Guglielmi
President and Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer,
Tellabs, Inc. Tellabs, Inc.
January 20, 1999 January 20, 1999
Report of Independent Auditors
We have audited the accompanying consolidated balance sheet of Tellabs,
Inc., and Subsidiaries as of January 1, 1999, and January 2, 1998, 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 year ended
December 27, 1996, were audited by other auditors whose report dated
January 15, 1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Tellabs, Inc., and Subsidiaries at January 1, 1999, and at
January 2, 1998, and the consolidated results of its operations and its
consolidated cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
January 20, 1999
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per-Share Data)
Year Year Year
Ended Ended Ended
01/01/99 01/02/98 12/27/96
-------- -------- --------
<S> <C> <C> <C>
Net Sales $1,660,102 $1,203,546 $868,975
Cost of sales 578,864 445,543 349,732
------- ------- -------
Gross Profit 1,081,238 758,003 519,243
Operating expenses
Marketing 251,598 156,701 112,206
Research and development 202,639 158,129 107,258
Acquired in-process research and development --- --- 74,658
General and administrative 84,399 73,717 52,495
Asset impairment 24,793 --- ---
Merger costs 12,991 --- ---
Goodwill amortization 5,713 5,992 3,683
------- ------- -------
582,133 394,539 350,300
------- ------- -------
Operating Profit 499,105 363,464 168,943
Other income (expense)
Interest income 22,404 12,476 7,371
Interest expense (295) (413) (1,173)
Other 68,901 24,002 141
------- ------- -------
91,010 36,065 6,339
Earnings Before Income Taxes 590,115 399,529 175,282
Income taxes 191,787 135,840 57,317
------- ------- -------
Net Earnings $398,328 $263,689 $117,965
======= ======= =======
Earnings per Share $2.13 $1.46 $0.66
Earnings per Share, Assuming Dilution $2.07 $1.42 $0.64
Average number of common shares outstanding 187,251 180,925 178,509
Average number of common shares outstanding,
assuming dilution 192,215 186,221 183,030
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(In Thousand, Except Share Amounts)
ASSETS 01/01/99 01/02/98
-------- --------
<S> <C> <C>
Current Assets
Cash and cash equivalents $234,718 $109,048
Investments in marketable securities 407,927 377,986
Accounts receivable, net of allowance
of $10,709 and $3,440 480,620 284,084
Inventories
Raw materials 48,774 28,335
Work in process 23,276 15,664
Finished goods 50,374 45,615
------- -------
122,424 89,614
Other current assets 7,002 2,202
------- -------
Total Current Assets 1,252,691 862,934
Property, Plant and Equipment
Buildings and improvements 129,822 108,905
Equipment 275,004 220,251
------- -------
404,826 329,156
Less: accumulated depreciation 159,100 128,967
------- -------
245,726 200,189
Land 9,065 9,140
------- -------
254,791 209,329
Goodwill, Net 55,559 61,453
Other Assets 64,550 49,663
-------- --------
Total Assets $1,627,591 $1,183,379
========== ==========
</TABLE>
<TABLE>
<CAPTION>
(In Thousands, Except Share Amounts) 01/01/99 01/02/98
LIABILITIES AND STOCKHOLDERS' EQUITY -------- --------
<S> <C> <C>
Current Liabilities
Accounts payable $63,083 $50,422
Accrued liabilities
Compensation 49,093 38,168
Payroll and other taxes 15,943 7,788
Other 16,891 19,712
------ ------
Total accrued liabilities 81,927 65,668
Deferred income taxes --- 50,249
Income taxes 73,117 59,481
------ ------
Total Current Liabilities 218,127 225,820
Long-Term Debt 2,850 2,850
Other Long-Term Liabilities 18,164 14,870
Deferred Income Taxes 11,853 6,730
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; 194,451,133 and 181,626,660
shares issued and outstanding 1,945 1,816
Additional paid-in capital 192,612 130,378
Accumulated other comprehensive income
Cumulative translation adjustment (9,207) (27,901)
Unrealized net gains on
available-for-sale securities 20,423 95,990
------- -------
Total accumulated other comprehensive income 11,216 68,089
Retained earnings 1,170,824 732,826
------- -------
Total Stockholders' Equity 1,376,597 933,109
------- -------
Total Liabilities and Stockholders' Equity $1,627,591 $1,183,379
======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated
Additional Other Comp-
Common Paid-In rehensive Retained
(In Thousands) Stock Capital Income Earnings Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at
December 29, 1995 $888 $72,385 $7,890 $352,070 $433,233
Comprehensive income:
Net earnings --- --- --- 117,965 117,965
Other comprehensive income,
net of tax:
Unrealized holding gains on
marketable securities arising
during period (net of deferred
income taxes of $14,384) --- --- 21,551 --- 21,551
Less: reclassification adjustment
for gains included in net
earnings (net of deferred income
taxes of $32) --- --- (48) --- (48)
------- ------- ------- ------- -------
Net unrealized holding gains
on marketable securities --- --- 21,503 --- 21,503
Foreign currency
translation adjustment --- --- (3,905) --- (3,905)
------- ------- ------- ------- -------
Comprehensive income 135,563
Stock options exercised 11 22,393 --- --- 22,404
Employee stock awards --- 76 --- --- 76
Stock split 898 --- --- (898) ---
Balance at ------ ------ ------ ------- -------
December 27, 1996 1,797 94,854 25,488 469,137 591,276
====== ======= ====== ======== ========
Comprehensive income:
Net earnings --- --- --- 263,689 263,689
Other comprehensive income,
net of tax:
Unrealized holding gains on
marketable securities arising
during period (net of deferred
income taxes of $58,492) --- --- 87,787 --- 87,787
Less: reclassification adjustment
for gains included in net
earnings (net of deferred income
taxes of $8,916) --- --- (13,348) --- (13,348)
------- ------- ------- ------- -------
Net unrealized holding gains
on marketable securities --- --- 74,439 --- 74,439
Foreign currency
translation adjustment --- --- (31,838) --- (31,838)
------- ------- ------- ------- -------
Comprehensive income 306,290
Stock options exercised 19 34,739 --- --- 34,758
Stock retention programs --- 427 --- --- 427
Employee stock awards --- 358 --- --- 358
Balance at ------ ------ ------ ------- -------
January 2, 1998 1,816 130,378 68,089 732,826 933,109
====== ======= ====== ======== ========
Consolidated Statements of Stockholders' Equity (continued)
Comprehensive income:
Net earnings --- --- --- 398,328 398,328
Other comprehensive income,
net of tax:
Unrealized holding gains on
marketable securities arising
during period (net of deferred
income taxes of $22,508) --- --- (33,566) --- (33,566)
Less: reclassification adjustment
for gains included in net
earnings (net of deferred income
taxes of $27,968) --- --- (42,001) --- (42,001)
------- ------- ------- ------- -------
Net unrealized holding gains
on marketable securities --- --- (75,567) --- (75,567)
Foreign currency
translation adjustment --- --- 18,694 --- 18,694
-------
Comprehensive income 341,455
Stock options exercised 16 47,890 --- --- 47,906
Stock retention programs --- 348 --- --- 348
Employee stock awards --- 414 --- --- 414
Issuance of common stock for
acquisitions 113 13,582 --- --- 13,695
Acquired retained earnings --- --- --- 39,670 39,670
Balance at ------ ------ ------ ------- -------
January 1, 1999 $1,945 $192,612 $11,216 $1,170,824 $1,376,597
====== ======= ====== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Year Year
Ended Ended Ended
(In Thousands) 01/01/99 01/02/98 12/27/96
-------- -------- --------
<S> <C> <C> <C>
Operating Activities
Net earnings $398,328 $263,689 $117,965
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 56,085 46,892 32,648
Provision for doubtful receivables 7,572 1,494 2,157
Deferred income taxes 3,344 (3,260) (23,486)
Gain on the sale of investments (74,398) (21,098) (289)
Asset impairment charge 24,793 --- ---
Merger costs 12,991 --- ---
Acquired in-process research
and development --- --- 74,658
Net changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable (188,670) (126,835) (43,535)
Inventories (25,877) (14,129) (7,434)
Other current assets 1,289 (117) (1,206)
Long-term assets (38,975) (24,513) (10,272)
Accounts payable 9,937 14,518 6,348
Accrued liabilities 7,918 7,468 14,801
Income taxes 11,790 38,351 (2,221)
Long-term liabilities 3,018 2,836 (120)
------ ------ ------
Net Cash Provided by Operating Activities 209,145 185,296 160,014
Investing Activities
Acquisition of property, plant and
equipment, net (75,870) (84,717) (64,831)
Payments for purchases of marketable
securities (682,458) (315,947) (122,679)
Proceeds from sales and maturities of 616,119 212,274 99,931
marketable securities
Payments for acquisitions,
net of cash acquired 8,778 (7,821) (91,732)
Origination of loan receivable --- --- (5,822)
------- ------- -------
Net Cash Used for Investing Activities (133,431) (196,211) (185,133)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Financing Activities
Common stock sold through stock option plans* 47,906 34,759 22,480
Proceeds from notes payable --- --- 40,000
Payments of notes payable --- --- (40,000)
------ ------ ------
Net Cash Provided by Financing Activities 47,906 34,759 22,480
Effect of Exchange Rate Changes on Cash 2,050 (5,242) 600
Net Increase (Decrease) in Cash
And Cash Equivalents 125,670 18,602 (2,039)
Cash and Cash Equivalents At Beginning of Year 109,048 90,446 92,485
------- ------- -------
Cash and Cash Equivalents At End of Year $234,718 $109,048 $90,446
======= ======= =======
Other Information
Interest paid $187 $326 $1,165
Income taxes paid $148,188 $78,717 $67,887
<FN>
* "Common stock sold through stock option plans" contains non-cash deferred
tax benefits of $32,848, $24,298, and $15,878 in 1998, 1997, and 1996, respectively.
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
Notes to Consolidated Financial Statements
1. 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its Subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Certain reclassifications have been made in the 1996 and 1997 consolidated
financial statements to conform to the 1998 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
original maturities 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.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation is
computed using both the declining-balance and straight-line methods.
Buildings are depreciated over 25 to 40 years, improvements over 7 years,
and equipment over 3 to 10 years.
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 No. 25,
"Accounting for Stock Issued to Employees," 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.
1. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases at enacted tax rates when such amounts are expected to be
realized or settled.
Goodwill
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net earnings generated by the related assets to
determine that no impairment has occurred. Goodwill is amortized over
terms ranging from 7 to 20 years using the straight-line method. The
accumulated amortization of goodwill is approximately $19,677,000 and
$14,919,000 at January 1, 1999, and January 2, 1998, respectively.
Revenue Recognition
The Company recognizes revenue at the date of shipment or when services are
performed.
Earnings Per Share
In accordance with SFAS No. 128, "Earnings per Share," earnings per share
are based both on the weighted-average number of shares and the
weighted-average shares adjusted for assumed conversions of stock options.
(See Note 12.) On October 24, 1996, the Company declared a 2-for-1 stock
split, 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 ($4,057,000), $1,933,000, and ($273,000) were recorded in
1998, 1997, and 1996, respectively.
Fiscal Year
The Company operates on a 52-53 week fiscal year. The year ended
January 2, 1998, contains 53 weeks, while all other years presented
contain 52 weeks. The financial statement effect is not significant.
2. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("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. The Company has adopted SFAS No.
130 and has incorporated its requirements into this annual report.
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. The Company has adopted SFAS No. 131 and has provided
the disclosures needed to conform with its requirements. (See Note 9.)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance on the accounting treatment of costs related to software
obtained or developed for internal use. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company has evaluated the
requirements of SOP 98-1 and believes it will have no material impact on
the Company's reported consolidated results of operations, financial
position, or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives
to be recorded on the balance sheet at fair value. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company is
in the process of evaluating the impact of the reporting requirements of
SFAS No. 133.
3. Business Combinations
In August 1998, the Company acquired all of the outstanding shares of
Coherent Communications Systems Corporation ("Coherent"), a developer,
manufacturer and marketer of voice-quality enhancement products for
wireless (including digital cellular and personal communications systems),
satellite-based, cable communication, and wireline telecommunications
systems throughout the world. The Company issued approximately 11,212,000
shares of its common stock to Coherent shareholders in exchange for all
outstanding Coherent shares. The transaction has been recorded using the
pooling-of-interests accounting method. The results of operations of
Coherent have been included in the Company's consolidated results of
operations for periods subsequent to the combination. The Company's
consolidated financial statements prior to the combination have not been
restated to reflect the financial results of Coherent as these results were
not material to the Company. In 1998, the Company recognized a pre-tax
charge of $12,991,000 for costs related to the Coherent merger and an
unsuccessful merger attempt with CIENA Corporation.
In April 1996, the Company acquired all of the outstanding shares of
Steinbrecher Corporation (the Tellabs Wireless Systems Division), a
developer, manufacturer and marketer of wideband wireless communications
systems. The Tellabs Wireless Systems Division was acquired to provide
the Company entry into the wireless local loop market. This acquisition
has been recorded using the purchase method of accounting, and
accordingly, the accompanying financial statements include the results of
its operations since the acquisition date. The allocation of the purchase
price was as follows:
(In Thousands)
Fair value of assets acquired $103,944
Costs in excess of fair value 6,865
Liabilities assumed (33,555)
-------
Cash paid for acquisitions $77,254
=======
During 1998, the Company decided not to pursue the wireless local loop
market. Accordingly, the assets of the Tellabs Wireless Systems Division
were determined to be impaired. This determination resulted in a
$24,793,000 write-down of these assets and the related goodwill to fair
market value.
During the three years ended January 1, 1999, the Company made a number of
purchase acquisitions. Pro forma results of operations have not been
presented because the effects of these acquisitions were not material on
either an individual or aggregated basis.
<TABLE>
<CAPTION>
4. 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 1,
1999, and January 2, 1998, they consisted of the following:
Amortized Unrealized Market
(In Thousands) Cost Gain (Loss) Value
1998 ------- ------- -------
<S> <C> <C> <C>
State and municipal securities $72,174 $1,084 $73,258
Preferred and common stocks 49,312 31,324 80,636
U.S. government and agency
debt obligations 76,802 (21) 76,781
Corporate debt obligations 32,956 (247) 32,709
Foreign government debt obligations 143,882 661 144,543
------- ------- -------
$375,126 $32,801 $407,927
======= ======= =======
Amortized Unrealized Market
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
======= ======= =======
In 1998, the Company sold stock of a certain investment and related hedge
contracts for a pre-tax gain of $73,374,000. The Company also sold stock
of the same investment in 1997 for a pre-tax gain of $20,803,000.
During 1998 and 1997, the Company contributed $13,100,000 and $8,500,000,
respectively, in the form of stock from a certain investment to the Tellabs
Foundation.
</TABLE>
5. Financial Instruments
The Company conducts business on a global basis in several major
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 or losses on
the net foreign accounts receivable and payable. Net losses on forward
exchange contracts were $339,000, $3,794,000, and $1,971,000 for 1998,
1997, and 1996, respectively.
The table below presents a summary of the notional and fair values of
forward contracts by currency at January 1, 1999. 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 1, 1999:
Related forward contracts to sell
foreign currencies for Finnish markka $119,218 $120,998
Related forward contracts to sell
foreign currencies for Irish punts 8,336 8,325
------- -------
Total $127,554 $129,323
======= =======
6. Employee Benefit and Retirement Plans
The Company maintains a defined contribution 401(k) savings plan ("401(k)
plan") for the benefit of eligible employees. Under the 401(k) 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's Board of
Directors may authorize discretionary contributions to the 401(k) plan, for
which no amounts were authorized in 1998, 1997 or 1996. Contributions to
the 401(k) plan are immediately vested in plan participants' accounts. The
Company maintains similar plans for the benefit of eligible employees at
its subsidiaries in Finland and Ireland.
The Company maintains defined contribution retirement and profit-sharing
plans for the benefit of eligible employees. Under both plans, the
Company's contributions totaled 5 percent of eligible annual compensation
for each eligible participant in 1998 and 1997 and 4 percent in 1996. No
part of the contributions is vested until after a service period of five
years, at which time the participant is fully vested. The Company's
contributions to the profit sharing plan, which were 0.5 percent of
eligible annual compensation in 1998 and 1997 and 0.4 percent in 1996, are
maintained as part of the 401(k) plan.
Company contributions to the 401(k) savings and profit-sharing plan were
$9,515,000, $8,697,000 and $6,426,000 for 1998, 1997 and 1996,
respectively. Company contributions to the retirement plan were
$6,166,000, $5,559,000 and $3,665,000 for 1998, 1997 and 1996,
respectively.
The Company provides a deferred compensation plan that permits certain
officers and 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 an employee stock purchase plan. Under the plan,
employees elect to withhold a portion of their compensation to purchase the
Company's common stock at fair market value. The Company matches 15
percent of each employee's withholdings. Compensation expense is
recognized for the amount that the Company contributes to the plan through
its matching of participant withholdings.
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.
7. Stock Options
At January 1, 1999, the Company had nine stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 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 earnings and earnings per share would have been reduced to
the pro forma amounts indicated in the following chart:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(In Thousands, Except Per-Share
Data) 1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Net Earnings As reported $398,328 $263,689 $117,965
Pro forma $375,721 $250,506 $110,990
Earnings per As reported $2.13 $1.46 $0.66
common share Pro forma $2.01 $1.38 $0.62
Earnings per common As reported $2.07 $1.42 $0.64
share, assuming dilution Pro forma $1.95 $1.35 $0.61
</TABLE>
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 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 1998, 1997 and 1996:
1998 1997 1996
--------- --------- -----------
Expected volatility 64.6% 52.1% 51.2%
Risk-free interest rate 4.9% 6.2% 6.0%
Expected life 4.3 yrs. 4.3 yrs. 4.0 yrs.
Expected dividend yield 0.0% 0.0% 0.0%
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 Company's 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 Company's shares as of the date of grant. All
options under the plan have been granted.
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 Company's shares as of the date of grant. All options under
the plan have been granted.
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 at a per-share price not less than the market value of
the Company's shares 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 that may be issued 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 1, 1999, 1,524,000 SARs with grant prices
ranging from $0.75 to $1.08 and 5-year terms and 804,520 SARs with grant
prices of $1.52 to $71.50 and 10-year terms had been granted. As of that
date, a total of 2,216,748 SARs had been exercised and 16,350 had been
canceled, leaving 95,422 outstanding.
The Company's 1991 Stock Option Plan provides for 6,000,000 shares of
common stock to be reserved for options that may be issued 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 that may be issued 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.
The Company's 1998 Stock Option Plan provides for 8,000,000 shares of
common stock to be reserved for options that may be issued under the plan,
allowing grants to employees of incentive or non-qualified options for up
to 8,000,000 shares and up to 8,000,000 SARs. The SARs may be granted in
conjunction with, or independently of, the options under the plan. 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 1982 and 1993 Stock Option Plans provide for 633,173 shares
of common stock to be reserved for options that may be issued under the
plans. The plans were acquired in 1998 through the merger with Coherent.
No further awards may be made under the plans.
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
7. Stock Options (continued)
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. In October 1998, the Company
continued the Program by granting non-qualified options or SARs to
purchase 200 shares to all full-time employees below the management level.
The grants were dated October 8, 1998, with a price of $34.25. The
options were granted from various plans and the SARs from the 1989 Plan.
Unless the option agreements provide otherwise, options or SARs granted
under the 1982, 1984, 1986, 1989, 1991, 1993, 1994, and 1998 plans become
exercisable on a cumulative basis at a rate of 25 percent on each of the
first through fourth anniversaries of the grant date. Unless the option
agreements provide otherwise, options under the 1986 plan terminate at
the end of 5 years after the grant; options under the 1982 and 1993 plans
terminate at the end of seven years after the grant; and options or SARs
granted under the 1984, 1989, 1991, 1994 and 1998 plans terminate at the
end of 10 years after the grant.
<TABLE>
<CAPTION>
A summary of the status of the Company's option plans as of
January 1, 1999, January 2, 1998, and December 27, 1996, and of changes
during the years ending on these dates is presented in the following chart:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 10,903,494 $18.86 11,285,747 $11.59 10,331,146 $4.53
Granted 3,415,832 35.41 1,846,295 49.43 3,266,420 28.61
Exercised (1,741,439) 8.78 (1,949,028) 5.41 (2,053,399) 3.18
Forfeited (351,136) 34.91 (279,520) 21.09 (258,420) 11.19
Outstanding - end of year ---------- ---------- ----------
12,226,751 $24.46 10,903,494 $18.86 11,285,747 $11.59
========== ========== ==========
Exercisable at end of year 6,343,469 5,958,723 5,878,597
Available for grant 8,056,132 2,511,661 4,078,436
Weighted-average fair value
of options granted during the year $20.45 $23.71 $13.22
7. Stock Options (continued)
Options Outstanding and Exercisable as of January 1, 1999, by Price Range:
Outstanding Exercisable
--------------------------------- -------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Exercise Prices: Contractual Exercise Exercise
Shares Life Price Shares Price
$0.77 - $1.53 2,075,935 2.89 $1.38 2,075,935 $1.38
$1.54 - $16.75 2,795,746 5.17 $7.88 2,594,960 $7.41
$17.00 - $28.63 2,522,676 7.20 $28.32 1,158,731 $28.19
$28.65 - $34.25 2,470,262 9.56 $34.19 7,653 $32.11
$34.38 - $89.00 2,362,132 8.28 $49.87 506,190 $49.03
----------- ---------
$0.77 - $89.00 12,226,751 6.69 $24.46 6,343,469 $12.59
=========== =========
</TABLE>
8. Income Taxes
(In Thousands) Year Ended Year Ended Year Ended
01/01/99 01/02/98 12/27/96
Components of the Company's -------- -------- --------
earnings before income taxes
are as follows:
Domestic source $377,038 $230,088 $70,835
Foreign source 213,077 169,441 104,447
------- ------- -------
Total $590,115 $399,529 $175,282
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $113,400 $79,516 $47,371
State 17,662 15,467 9,751
Foreign 57,381 44,117 23,681
------ ------ ------
188,443 139,100 80,803
Deferred:
Federal 2,899 (3,622) (23,615)
State and Foreign 445 362 129
------ ------ ------
3,344 (3,260) (23,486)
------ ------ ------
Total $191,787 $135,840 $57,317
====== ====== ======
(In Thousands)
Deferred tax assets (liabilities) for 1998 Ending Ending
and 1997 consist of the following: Balance Balance
01/01/99 01/02/98
Deferred tax assets -------- --------
Inventory reserves $7,399 $5,456
Deferred employee benefit expenses 4,049 5,264
Deferred compensation plan 4,500 3,547
Accrued liabilities 5,595 3,452
NOL and research and development
credit carryforwards --- 21,100
Other 2,417 1,291
------ ------
Gross deferred tax assets 23,960 40,110
------ ------
Deferred tax liabilities
Unrealized gain on marketable securities (13,299) (63,914)
Depreciation (16,352) (14,588)
Amortizable intangibles --- (4,026)
Other (2,382) (1,260)
------ ------
Gross deferred tax liabilities (32,033) (83,788)
Valuation allowance --- (13,300)
------ ------
Net Deferred Tax Liability ($8,073) ($56,978)
====== ======
<TABLE>
<CAPTION>
8. Income Taxes (continued)
Year Ended Year Ended Year Ended
01/01/99 01/02/98 12/27/96
(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 (2.0) (2.4) (4.6)
Research and development credit (0.7) (0.9) (1.2)
Tax benefits associated with merger of
Finland subsidiaries (0.5) (0.7) (2.0)
Benefit attributable to foreign
sales corporation (0.2) (0.1) (0.3)
State income tax, net of federal benefits 1.8 2.5 3.6
Charitable contribution (0.8) -- (1.7)
Acquired in-process research and
development charge -- -- 3.2
Other - net (0.1) 0.6 0.7
---- ---- ----
Effective Income Tax Rate 32.5% 34.0% 32.7%
==== ==== ====
</TABLE>
The net deferred tax liability decreased to $8,073,000 at January 1, 1999,
from $56,978,000 at January 2, 1998. The decrease in the deferred tax
balance is primarily attributable to deferred taxes required for the
mark-to-market adjustment in investments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
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 had established a valuation allowance of
$13,300,000 associated with the net operating losses and research and
credit carryforwards of the acquisition. In 1998, the Company determined
that the assets of the Tellabs Wireless Systems Division were impaired,
resulting in the write-down of the assets including all related deferred
tax items.
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 $448,397,000 at
January 1, 1999. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at
January 1, 1999, was approximately $61,601,000.
9. Segment and Geographical Information
The Company manages its business in one operating segment.
Consolidated net sales by product group are as follows:
(In Thousands) 1998 1997
------ ------
Digital Cross-Connect Systems $949,057 $692,507
Managed Digital Networks 415,665 321,980
Network Access Systems 188,213 117,937
Other 107,167 71,122
-------- --------
Total $1,660,102 $1,203,546
========== ==========
Consolidated net sales by country, based on the location of the customers,
are as follows:
(In Thousands) 1998 1997
------ ------
United States $1,129,302 $803,641
Other Geographical Areas 530,800 399,905
-------- --------
Total $1,660,102 $1,203,546
========== ==========
Long-lived assets by country are as follows:
(In Thousands) 1998 1997
------ ------
United States $237,900 $212,516
Finland 103,342 89,301
Other Geographical Areas 33,658 18,628
-------- --------
Total $374,900 $320,445
======== ========
In 1998 a single customer accounted for approximately 12.2 percent of
consolidated net sales; in 1997 another single customer 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.
10. 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 2012.
As of January 1, 1999, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In Thousands)
1999 $15,849
2000 12,992
2001 9,783
2002 7,759
2003 3,198
2004 and thereafter 12,452
------
Total Minimum Lease Payments $62,033
======
Rental expense for the years ended January 1, 1999, January 2, 1998, and
December 27, 1996, was approximately $15,647,000, $8,146,000, and
$5,734,000, respectively.
11. 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 1998, 1997 and 1996 were 3.47 percent, 3.71 percent and 3.51
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.
<TABLE>
<CAPTION>
12. Earnings Per Share
(In Thousands, Except Per-Share Data)
The following chart sets forth the computation of earnings per share:
<S> <C> <C> <C>
1998 1997 1996
Numerator:
Net earnings $398,328 $263,689 $117,965
Denominator:
Denominator for basic earnings
per share - weighted average shares 187,251 180,925 178,509
Effect of dilutive securities:
Employee stock options and awards 4,964 5,296 4,521
-------- -------- --------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions 192,215 186,221 183,030
Earnings per share $2.13 $1.46 $0.66
Earnings per share, assuming dilution $2.07 $1.42 $0.64
</TABLE>
<TABLE>
<CAPTION>
13. Quarterly Financial Data (unaudited)
Selected quarterly financial data for 1998 and 1997 is as follows:
(In Thousands, Except Per-Share Data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1998
Net sales $327,502 $387,719 $423,548 $521,333 $1,660,102
Gross profit $207,283 $248,834 $277,308 $347,813 $1,081,238
Net earnings $68,244 $119,042 (1) $87,763 (2)$123,279 $398,328
Earnings per share $0.38 $0.65 $0.46 $0.63 $2.13 *
Earnings per share,
assuming dilution $0.37 $0.63 (1) $0.45 (2) $0.62 $2.07
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 (3) $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 (3) $0.32 $0.34 $0.42 $1.42
<FN>
* 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.
(1) Net earnings and earnings per share include a $24,793 pre-tax asset
impairment charge at the Company's Wireless Systems Division and a
$73,374 pre-tax gain on the sale of stock held as an investment and
the settlement of related hedge contracts. Pro forma net earnings
and earnings per share, assuming dilution, excluding these items, net
of tax, would have been $86,250 and $0.46, respectively.
(2) Net earnings and earnings per share include a $12,991 pre-tax charge
for merger costs related to the merger with Coherent and the
unsuccessful merger attempt with CIENA Corporation. Pro forma net
earnings and earnings per share, assuming dilution, excluding these
items, net of tax, would have been $96,532 and $0.49, respectively.
(3) Net earnings and earnings per share include a $20,803 pre-tax gain
on the sale of stock held as an investment. Pro forma net earnings
and earnings per share, assuming dilution, excluding this item, net
of tax, would have been $49,233 and $0.27, respectively.
</FN>
</TABLE>
EXHIBIT 21
TELLABS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF FEBRUARY 24, 1999
State or Other
Jurisdiction of
Name Incorporation
Tellabs Operations, Inc. Delaware
CCSC International Corp. Virgin Islands
E. Coherent Communications Systems Ltd. United Kingdom
Telecommunications Laboratories, Inc. Illinois
Telecon Acquisition Corp. Delaware
Tellabs Export, Inc. Delaware
Tellabs Japan, Inc. Delaware
Tellabs Manufacturing, Inc. Delaware
Tellabs International, Inc. Illinois
Tellabs Communications Canada Ltd. Canada
Tellabs do Brasil Ltda. Brazil
Tellabs H.K. Ltd. Hong Kong
Tellabs International de Mexico Mexico
Tellabs Italia S.r.l. Italy
Tellabs Korea, Inc. Korea
Tellabs Netherlands B. V. Netherlands
Tellabs N.Z. Limited New Zealand
Tellabs Pty. Limited Australia
Tellabs Singapore Private Limited Singapore
Tellabs (Thailand) Co., Ltd. Thailand
Tellabs (V.I.), Inc. U.S. Virgin Islands
Tellabs Holding B.V. Netherlands
Tellabs Enterprises B.V. Netherlands
Tellabs Oy Finland
Kiinteisto Oy Mestarinkaare Finland
Trelcom Oy Finland
Tellabs (S. A.) (Proprietary) Limited South Africa
Kiinteisto Oy Sinimaientie 6 Finland
Tellabs AB Sweden
Tellabs SAS France
Tellabs Holdings Ltd. Ireland
Tellabs (Ireland) Ltd. Ireland
Tellabs Ltd. Ireland
Tellabs Southern Europe, S.A. Spain
Tellabs GmbH Germany
Tellabs Research Ltd. Ireland
Tellabs U.K. Ltd. United Kingdom
Tellabs Mexico, Inc. Delaware
Tellabs de Mexico, S.A. de C.V. Mexico
Tellabs TG, Inc. Delaware
Tellabs Transport Group Inc. Quebec
White Oak Merger Corp. Delaware
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 20, 1999, 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 1, 1999.
/s Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
March 26, 1999
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).
/s Grant Thornton LLP
GRANT THORNTON LLP
Chicago, Illinois
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the January 1, 1999, Income Statement and Balance Sheet and
is qualified in its entirety by reference to such 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> JAN-01-1999
<CASH> 234718000
<SECURITIES> 407927000
<RECEIVABLES> 491329000
<ALLOWANCES> 10709000
<INVENTORY> 122424000
<CURRENT-ASSETS> 1252691000
<PP&E> 413891000
<DEPRECIATION> 159100000
<TOTAL-ASSETS> 1627591000
<CURRENT-LIABILITIES> 218127000
<BONDS> 2850000
0
0
<COMMON> 1945000
<OTHER-SE> 1374652000
<TOTAL-LIABILITY-AND-EQUITY> 1627591000
<SALES> 1660102000
<TOTAL-REVENUES> 1660102000
<CGS> 571292000
<TOTAL-COSTS> 571292000
<OTHER-EXPENSES> 582133000
<LOSS-PROVISION> 7572000
<INTEREST-EXPENSE> (91010000)
<INCOME-PRETAX> 590115000
<INCOME-TAX> 191787000
<INCOME-CONTINUING> 398328000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 398328000
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.07
</TABLE>
