<PAGE> 1
<TABLE>
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====================================================================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended April 27, 1996
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-26114
TELTREND INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3476859
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
620 STETSON AVENUE
ST. CHARLES, ILLINOIS 60174
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(708) 377-1700
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
------------- -------------
As of June 6, 1996, there were 6,414,380 shares of the Registrant's Common Stock, $.01 par value per share,
and no shares of the Registrant's Class A Common Stock, $.01 par value per share, outstanding.
=========================================================================================================================
</TABLE>
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TELTREND INC.
<TABLE>
<CAPTION>
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
PAGE NO.
<S> <C>
Item 1 -- Financial Statements:
Statements of Operations for the quarters and
nine-month periods ended April 29, 1995 and April 27, 1996 . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets as of July 29,
1995 and April 27, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the
nine-month periods ended April 29, 1995 and April 27, 1996 . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
- ---------------------------
Item 2 -- Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
- ---------
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
- -------------
OMITTED FINANCIAL STATEMENTS
- ----------------------------
None
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TELTREND INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------- ---------------------------
APRIL 29, APRIL 27, APRIL 29, APRIL 27,
1995 1996 1995 1996
------------ ------------ -------------- ------------
<S> <C>
Net sales . . . . . . . . . . . . . . . $14,986 $20,764 $44,617 $62,147
Cost of sales . . . . . . . . . . . . . 8,895 11,030 26,602 33,874
----------- ------------ ------------- -----------
Gross profit . . . . . . . . . . . . . 6,091 9,734 18,015 28,273
----------- ------------ ------------- -----------
Operating expenses:
Sales and marketing . . . . . . . . 1,592 1,774 4,525 5,493
Research and development . . . . . . 1,495 1,992 4,122 5,658
General and administrative . . . . . 671 900 2,014 2,908
------------ ------------ ------------ -----------
3,758 4,666 10,661 14,059
------------ ------------ ------------ -----------
Income from operations . . . . . . . . 2,333 5,068 7,354 14,214
------------ ------------ ------------ -----------
Other expense (income):
Interest expense to related parties. 1,601 - 7,711 -
Interest expense-other . . . . . . . 5 - 24 1
Interest income . . . . . . . . . . - (242) - (555)
Other-net . . . . . . . . . . . . . 1 14 1 31
------------- ------------ ------------ -------------
1,607 (228) 7,736 (523)
----------- ------------- ----------- --------------
Income (loss) before income taxes . . . 726 5,296 (382) 14,737
Provision for income taxes . . . . . . (30) (2,170) (70) (6,066)
------------- ------------- ------------ --------------
Net income (loss) . . . . . . . . . . . $696 $3,126 ($452) $8,671
=========== =========== =========== ============
Net income (loss) per share of
common equity . . . . . . . . . . . $0.32 $0.46 ($0.20) $1.33
=========== =========== =========== ===========
Average common equity shares
outstanding . . . . . . . . . . . . 2,205,657 6,738,635 2,205,657 6,500,661
========= ========= ========= =========
Pro forma net income . . . . . . . . . $1,424 $3,126 $4,483 $8,671
========== =========== =========== ===========
Pro forma net income per share
of common equity . . . . . . . . . . $0.24 $0.46 $0.75 $1.33
=========== =========== =========== ===========
Pro forma average common equity
shares outstanding . . . . . . . . . 5,943,385 6,738,635 5,943,385 6,500,661
========= ========= ========= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 4
TELTREND INC.
BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
JULY 29, APRIL 27,
1995 1996
----------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 4,416 $21,810
Trade accounts receivable, net of
allowance . . . . . . . . . . . . . . . . . . . . . 8,100 8,824
Inventories . . . . . . . . . . . . . . . . . . . . . . 7,929 12,469
Deferred income taxes . . . . . . . . . . . . . . . . . 2,328 2,383
Prepaid expenses and other current
assets . . . . . . . . . . . . . . . . . . . . . . . 697 691
--------- ----------
23,470 46,177
Machinery and equipment . . . . . . . . . . . . . . . . . . . 10,539 13,064
Leasehold improvements . . . . . . . . . . . . . . . . . . . 783 863
Accumulated depreciation . . . . . . . . . . . . . . . . . . (6,963) (8,145)
---------- -----------
4,359 5,782
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 672 641
Other assets, net . . . . . . . . . . . . . . . . . . . . . . 198 219
--------- ----------
$28,699 $52,819
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 5,414 $ 4,864
Accrued expenses . . . . . . . . . . . . . . . . . . . 6,910 8,437
Income taxes payable . . . . . . . . . . . . . . . . . 721 672
Current portion of long-term debt . . . . . . . . . . . 237 -
--------- ----------
13,282 13,973
Stockholders' equity:
Common stock:
Common Stock, $0.01 par value,
15,000,000 shares authorized and
5,748,679 and 6,414,380 issued and
outstanding, respectively . . . . . . . . . . . . 57 64
Class A Common Stock, convertible into
Common Stock, $0.01 par value,
1,000,000 shares authorized and
75,122 and none issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . 1 -
Additional paid-in capital . . . . . . . . . . . . . . 84,108 98,860
Accumulated deficit . . . . . . . . . . . . . . . . . . (68,749) (60,078)
---------- -----------
15,417 38,846
--------- -----------
$28,699 $52,819
======== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
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TELTREND INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------
APRIL 29, APRIL 27,
1995 1996
------------- -------------
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OPERATING ACTIVITIES:
Net income (loss) for period . . . . . . . . . . . . . . . . . . . . . . . ($452) $8,671
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . 1,010 1,268
Loss on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . - 2
Issuance of additional Series A and B debentures in
lieu of interest payments . . . . . . . . . . . . . . . . . . . . . . 3,099 -
Changes in certain assets and liabilities:
Accounts receivable and prepaid expenses . . . . . . . . . . . . . . (429) (718)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 (4,540)
Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . - (24)
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 31 (49)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 1,089 977
--------- ---------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . 4,877 5,587
FINANCING ACTIVITIES:
Exercise of common stock options . . . . . . . . . . . . . . . . . . . . . 38 3
Second public offering . . . . . . . . . . . . . . . . . . . . . . . . . . - 14,754
Payment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (3,488) (237)
--------- ---------
Net cash provided by (used for) financing activities . . . . . . . . . . . (3,450) 14,520
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,070) (2,650)
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . . . 41 12
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . (42) (75)
--------- ---------
Net cash used for investing activities . . . . . . . . . . . . . . . . . . (1,071) (2,713)
-------- --------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 17,394
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 144 4,416
-------- --------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $500 $21,810
======== =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
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<PAGE> 6
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
GENERAL
The unaudited financial statements included herein have been prepared by
Teltrend Inc. (the "Company") in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X,
and should be read in conjunction with the Company's financial statements (and
notes thereto) included in the Company's Annual Report on Form 10-K for the
year ended July 29, 1995. Accordingly, the accompanying statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter and nine months ended April 27, 1996 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 27, 1996. The Company's fiscal year ends on the last Saturday of
July each year. All references to fiscal years in this report refer to fiscal
years ending in the calendar year indicated (e.g., Fiscal 1995 refers to the
fiscal year ended July 29, 1995 and Fiscal 1996 refers to the fiscal year
ending July 27, 1996).
THE RECAPITALIZATION
During the fourth quarter of Fiscal 1995, the Company completed a
recapitalization (the "Recapitalization"). The principal components of the
Recapitalization included: (i) the reclassification of all of the Company's
existing capital stock whereby each issued and outstanding share of Class A
common stock, $.01 par value per share, of the Company was converted into
6.086133 shares of a new class of common stock, $.01 par value per share (the
"Common Stock"), of the Company and each issued and outstanding share of Class
B common stock, $.01 par value per share, and Class C common stock, $.01 par
value per share, of the Company was cancelled (the "Common Stock Conversion");
(ii) the sale by the Company of 3,737,500 shares of Common Stock in an initial
public offering (the "IPO") at a price per share of $16.00 (less underwriting
discounts and commissions of $1.12 per share); (iii) the issuance by the
Company of shares of a new Class A common stock, $.01 par value per share (the
"Class A Stock"), to certain stockholders in exchange for an equal number of
shares of Common Stock in an amount calculated so that such stockholders'
aggregate Common Stock holdings as a result of the Common Stock Conversion did
not exceed 4.9% of the total outstanding Common Stock upon consummation of the
Recapitalization (the "Common Stock Exchange"); (iv) the merger of all of the
Company's subsidiaries with and into the Company; and (v) the payment, using
the net proceeds of the IPO, of all of the Company's outstanding indebtedness
under its Series B Debentures and its credit agreement with The Prudential
Insurance Company of America and Pruco Life Insurance Company (the "Former
Credit Agreement," which consisted of term loans, a revolving loan facility and
Series A Debentures), as well as certain related obligations. Unless the
context otherwise requires, all references to the "Company" herein refer to
Teltrend Inc. and, for periods (or portions thereof) prior to the consummation
of the Recapitalization, collectively to Teltrend Inc. and its subsidiaries.
For further details regarding the Recapitalization, reference should be made
to the Company's Registration Statement on Form S-1 (Registration No. 33-91104
and Commission File No. 0-26114), originally filed with the Securities and
Exchange Commission on April 11, 1995, as amended.
NET INCOME PER SHARE
For the quarter and nine months ended April 29, 1995, average common equity
shares outstanding has been adjusted to give effect to the Common Stock
Conversion and Common Stock Exchange. The unaudited pro forma net income per
share data for the quarter and nine months ended April 29, 1995 is based on the
historical net income (loss) for each respective period adjusted to reflect the
Recapitalization as if it had occurred as of August 1, 1993.
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<PAGE> 7
2. INVENTORIES
<TABLE>
<CAPTION>
July 29, 1995 April 27, 1996
----------------------- ----------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . $ 4,481 $7,531
Work-in-process . . . . . . . . . . . . . . . . . 1,387 1,668
Finished goods . . . . . . . . . . . . . . . . . 2,061 3,270
------ -------
$ 7,929 $12,469
======= =======
</TABLE>
3. SECOND PUBLIC OFFERING
In the second quarter of Fiscal 1996, the Company sold an additional 575,000
shares of its Common Stock pursuant to a registered public offering (the
"Second Public Offering") of shares of Common Stock by the Company and certain
stockholders of the Company at a price of $28.00 per share (less underwriting
discounts and commissions of $1.50 per share).
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2 - FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements, which are
generally followed (and therefore identified) by a cross reference to "Factors
That May Affect Future Results," represent the Company's present expectations
or beliefs concerning future events. The Company cautions that such statements
are qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements, including the factors
described below under "Factors That May Affect Future Results." Results
actually achieved thus may differ materially from expected results included in
these statements.
RESULTS OF OPERATIONS
NET SALES. Net sales for the third quarter of Fiscal 1996 increased 38.6%,
or approximately $5.8 million, to approximately $20.8 million, from
approximately $15.0 million in the third quarter of Fiscal 1995. For the first
nine months of Fiscal 1996, net sales totaled approximately $62.1 million
compared to approximately $44.6 million for the first nine months of Fiscal
1995, representing an increase of approximately $17.5 million, or 39.3%. The
increase in net sales for the third quarter was due to an increase in unit
volume sales of DDS, T1, POTS/SPOTS and ISDN products of approximately $2.5
million, $2.1 million, $1.2 million and $1.1 million, respectively, which was
partially offset by a $1.1 million decrease in unit volume sales of VF
products. The increase in net sales for the nine month period was due to an
increase in unit volume sales of T1, DDS, ISDN and POTS/SPOTS products of
approximately $8.6 million, $5.6 million, $3.1 million and $0.8 million,
respectively. Unit volume sales of the Company's T1 products increased during
each comparative period primarily as a result of qualifying certain new
products for sale during Fiscal 1995 and the first quarter of Fiscal 1996. In
addition, the Company experienced higher sales of existing T1 products to
certain customers who had previously purchased lesser amounts of such products.
The increase in unit volume DDS sales for each comparative period resulted
primarily from an increase in the number of RBOCs that had qualified DDS
products from two in the first quarter of Fiscal 1995 to seven by the third
quarter of Fiscal 1996. Sales of the Company's initial ISDN product commenced
in the third quarter of Fiscal 1995. By the third quarter of Fiscal 1996 five
RBOCs and GTE had qualified this product for use. POTS/SPOTS unit volume sales
increased in the third quarter of Fiscal 1996 compared to the third quarter of
Fiscal 1995 due to the initial sales of a new product of two RBOCs. Unit
volume sales of VF products declined during each comparative period as a result
of the gradual decline in overall demand for analog VF products as
telecommunication applications increasingly require the improved speed and
reliability offered by digital transmission. See "Factors That May Affect
Future Results -- Dependence on Two Product Lines."
GROSS PROFIT. Gross profit in the third quarter of Fiscal 1996
increased 59.8%, or approximately $3.6 million, to approximately $9.7 million
from approximately $6.1 million for the third quarter of Fiscal 1995. For the
first nine months of Fiscal 1996, gross profit totaled approximately $28.3
million compared to approximately $18.0 million for the first nine months of
Fiscal 1995, representing an increase of approximately $10.3 million, or 56.9%.
Gross profit margin for the third quarter and the first nine months of Fiscal
1996 increased to 46.9% and 45.5%, respectively, from 40.6% and 40.4%,
respectively, for the corresponding Fiscal 1995 periods. While the increase in
gross profit for each comparative period was primarily attributable to the
increase in net sales, the increase in gross profit margin was due primarily to
the ability to spread fixed manufacturing overhead costs over a larger revenue
base. Other factors contributing to the increase in gross profit and gross
profit margin were the introduction of several new products with higher gross
profit margins, and reduced labor and material costs for many of the Company's
established products. Further increases in gross profit margin may be
difficult to attain because of recent contract negotiations with certain RBOCs
which have resulted in lower prices for selected products. See "Factors That
May Affect Future Results -- Reliance on Certain Customers."
SALES AND MARKETING. Sales and marketing expenses in the third quarter of
Fiscal 1996 increased 11.4%, or approximately $0.2 million, to approximately
$1.8 million from approximately $1.6 million in the third quarter of Fiscal
1995. For the first nine months of Fiscal 1996, sales and marketing expenses
totaled approximately $5.5 million compared to approximately $4.5 million for
the first nine months of Fiscal 1995, representing an increase
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<PAGE> 9
of approximately $1.0 million, or 21.4%. As a percentage of net sales, sales
and marketing expenses decreased to 8.5% for the third quarter of Fiscal 1996
from 10.6% for the third quarter of Fiscal 1995, and for the first nine months
of Fiscal 1996 decreased to 8.8% from 10.1% for the first nine months of Fiscal
1995. The increase in the dollar amount of sales and marketing expenses for
each comparative period was due primarily to increased sales commissions
resulting from higher sales, greater expenditures on new product and other
marketing promotions, and an increase in expenses resulting from the hiring of
several additional sales and marketing personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses in the
third quarter of Fiscal 1996 increased 33.2%, or approximately $0.5 million, to
approximately $2.0 million from approximately $1.5 million in the third quarter
of Fiscal 1995. For the first nine months of Fiscal 1996, research and
development expenses totaled approximately $5.7 million compared to
approximately $4.1 million for the first nine months of Fiscal 1995,
representing an increase of approximately $1.5 million, or 37.3%. As a
percentage of total net sales, research and development expenses decreased to
9.6% in the third quarter of Fiscal 1996 from 10.0% in the third quarter of
Fiscal 1995, and for the first nine months of Fiscal 1996 decreased to 9.1%
from 9.2% for the first nine months of Fiscal 1995. The increase in dollar
amount of this expense for each comparative period was due primarily to
increases in personnel associated expenses, such as recruiting and salaries for
newly hired personnel, and to related expenditures for computers and laboratory
equipment. The Company's intention is to increase expenditures for research
and development at a rate greater than its rate of sales growth until its
research and development expenses total 11% to 12% of net annual sales. The
attainment of this goal has been made difficult by the fact that sales have
been increasing at a rate faster than the rate at which the Company has been
able to add qualified research and development personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in
the third quarter of Fiscal 1996 increased 34.1%, or approximately $0.2
million, to approximately $0.9 million from approximately $0.7 million in the
third quarter of Fiscal 1995. For the first nine months of Fiscal 1996,
general and administrative expenses totaled approximately $2.9 million compared
to approximately $2.0 million for the first nine months of Fiscal 1995,
representing an increase of approximately $0.9 million, or 44.4%. As a
percentage of total net sales, general and administrative expenses decreased to
4.3% in the third quarter of Fiscal 1996 from 4.5% in the third quarter of
Fiscal 1995, and for the first nine months of Fiscal 1996 increased to 4.7%
from 4.5% for the first nine months of Fiscal 1995. The dollar increase in
this expense for each comparative period was largely attributable to accruals
for employee bonuses that are based, to a significant degree, on Company
performance; higher accruals for license fees; and to additional professional
fees incurred as a result of being a publicly-owned company during the third
quarter and first nine months of Fiscal 1996 but not during the comparative
periods of Fiscal 1995.
INTEREST. The Company incurred no interest expense in the third
quarter of Fiscal 1996, compared to approximately $1.6 million in the third
quarter of Fiscal 1995. The Company incurred minimal interest expense for the
first nine months of Fiscal 1996, compared to approximately $7.7 million for
the first nine months of Fiscal 1995. The decrease in interest expense for
both comparative periods was due to the repayment of substantially all of the
Company's long-term indebtedness upon consummation of the IPO and the other
components of the Recapitalization in June 1995. During the first quarter of
Fiscal 1996, the remaining long-term indebtedness, a note payable to a former
shareholder, was also repaid in full.
INCOME TAXES. A provision for income taxes of approximately $2.2
million was recorded for the third quarter of Fiscal 1996 compared to $30,000
in the comparable prior year period. A provision for income taxes of
approximately $6.1 million was recorded for the first nine months of Fiscal
1996 compared to a provision of $70,000 for the first nine months of Fiscal
1995. These increases are a function of the increases in the levels of the
Company's net income before income taxes in the third quarter and the first
nine months of Fiscal 1996 compared to the comparable Fiscal 1995 periods.
LIQUIDITY AND CAPITAL RESOURCES
Prior to consummation of the IPO and the other components of the
Recapitalization in June 1995, the Company financed its operations and growth
primarily with cash flow from operations, borrowings under the Former Credit
Agreement and the issuance of Series A and Series B Debentures. Since the
consummation of the IPO and the other components of the Recapitalization, the
Company has financed its operations solely with cash flow generated from
operations. At April 27, 1996, the Company had no long-term indebtedness and
had working capital of approximately $32.2 million, which included cash and
cash equivalents of approximately $21.8 million. The increase in working
capital from approximately $10.2 million at the end of Fiscal 1995 was due
primarily to the
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<PAGE> 10
Second Public Offering that occurred at the beginning of the second quarter of
Fiscal 1996, and to cash flow from operations.
Cash used for capital expenditures was approximately $2.7 million in
the first nine months of Fiscal 1996 compared to approximately $1.1 million for
the first nine months of Fiscal 1995. Most of the expenditures were for the
purchase of manufacturing test equipment and engineering equipment.
As of April 27, 1996, the Company had net trade accounts receivable of
approximately $8.8 million, compared to approximately $8.1 million as of the
end of Fiscal 1995. This increase was due primarily to increased net sales,
partially offset by a decrease in the average number of days receivables
outstanding. For the first nine months of Fiscal 1996, inventories increased
by approximately $4.5 million, from approximately $7.9 million at the end of
Fiscal 1995 to approximately $12.5 million as of April 27, 1996. The increase
in inventory was primarily a result of the Company's effort to acquire
sufficient raw material to respond to anticipated customer demand for both
existing and new products. See "Factors That May Affect Future Results --
Increased Inventory Levels and Need to Make Advance Purchase Commitments."
In connection with the IPO, the Company entered into a new credit
facility (the "Bank Facility"), which provides, subject to certain restrictions
and based on the Company's accounts receivable and inventory levels, up to
$15.0 million on an unsecured basis for working capital financing. There are
no amounts presently outstanding under the Bank Facility. Based on the
Company's accounts receivable and inventory levels as of April 27, 1996, the
Company estimates that approximately $12.9 million is available to it under the
Bank Facility as of the date hereof. Borrowings under the Bank Facility will
mature on June 30, 1998 and bear interest at a floating rate based on (i) LIBOR
or the prime rate offered by the lender from time to time, and (ii) the
Company's debt-to-equity ratio, determined quarterly by the Company. The terms
of the Bank Facility prohibit the Company from declaring and paying dividends
in any fiscal year which exceed, in the aggregate, 50% of the Company's net
income for the immediately preceding fiscal year.
In the second quarter of Fiscal 1996 the Company sold an additional
575,000 shares of its Common Stock pursuant to the Second Public Offering. The
Company expects to use the net proceeds it received from the Second Public
Offering, which totaled approximately $14.7 million (after deducting
underwriting discounts, commissions and expenses), for general corporate
purposes, but has not yet identified specific uses for such net proceeds. The
Company may use some or all of the net proceeds to acquire related product
lines or businesses, although there are no existing agreements, understandings
or commitments pending with respect to any such acquisitions.
The Company expects that existing cash and cash equivalents, cash from
operations, plus available borrowings under the Bank Facility will be adequate
to fund the Company's working capital needs for the foreseeable future.
FACTORS THAT MAY AFFECT FUTURE RESULTS
DEPENDENCE ON TWO PRODUCT LINES. The Company's T1 and VF products have, on
a combined basis, accounted for over 84% of the Company's total net sales in
each of the Company's last five fiscal years and 77% of the Company's total net
sales for the first nine months of Fiscal 1996. The Company expects to derive
the majority of its net sales for the foreseeable future from the sale of its
T1 and, to a lesser extent, VF products. Consequently, the Company's inability
to maintain or increase net sales of its T1 and VF products in the future, or
to offset any shortfall in sales of such products with sales within its other
existing or future product lines, could have a material adverse effect on the
Company. In addition, the Company believes that the domestic market for its VF
products is decreasing and will continue to decrease as the higher speed
digital data transmission services demanded by customers within the local loop
become less costly and more widely deployed. Furthermore, the Company is
facing increasing competition with respect to its T1 products from suppliers of
systems based on HDSL technology as an alternate method of delivering T1
services in the local loop. Because HDSL is easier to provision than
traditional T1 service, the Company expects that HDSL products will adversely
affect the demand for its T1 products as the cost of HDSL systems decline.
Although the Company is currently developing its own HDSL product line, the
HDSL market is highly competitive and is dominated by two competitors, PairGain
Technologies, Inc. and ADTRAN, Inc. Accordingly, there can be no assurance
that the Company's new HDSL product line will achieve market acceptance or
generate any significant sales in the future.
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<PAGE> 11
POTENTIAL COMPETITION FROM RBOCS AND FORMER AT&T BUSINESS UNIT. The
Telecommunications Act of 1996, enacted on February 8, 1996, has generally
eliminated the restrictions which had previously prohibited the RBOCs from
manufacturing telecommunications equipment (subject to prior approval by the
Federal Communications Commission). These restrictions had been imposed under
the Modification of Final Judgment, which governed the structure of the 1984
divestiture by AT&T Corp. ("AT&T," formerly known as American Telephone and
Telegraph Company) of its local operating telephone company subsidiaries. The
passage of the Telecommunications Act of 1996 may have an adverse effect on the
Company because the RBOCs, which are presently the Company's principal
customers, may now become manufacturers of some or all of the products
currently manufactured and sold by the Company and, consequently, may no longer
purchase telecommunications equipment produced by the Company at the levels
historically experienced.
In addition, AT&T has recently pursued a restructuring to divide its
existing business units into three distinct entities. One of these new
entities is comprised of AT&T's former telecommunications equipment
manufacturing unit, and currently manufactures certain products manufactured
and sold by the Company. There can be no assurance that this will not have a
material adverse effect on the Company.
RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS. The market for
the Company's products is characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements and frequent
product introductions and enhancements. Any failure by the Company to
anticipate and respond to technological developments or changes in industry
standards or customer requirements could have a material adverse effect on the
Company. Further, all of the Company's existing products are designed
primarily to facilitate and enhance the delivery of communications over the
existing copper wireline in the local loop and the Company expects that
telephone companies will increasingly replace this copper wireline with fiber
optic, coaxial cable, wireless and other technologies (each of which uses a
significantly different method of delivery), which will adversely affect demand
for certain of its existing products.
RELIANCE ON CERTAIN CUSTOMERS. The Company depends, and is likely to
continue to depend, on sales to the seven RBOCs for substantially all of its
net sales. Furthermore, approximately 82.8% of the Company's net sales for
each of Fiscal 1995 and the first nine months of Fiscal 1996 were derived from
five of the RBOCs alone. During Fiscal 1995 and the first nine months of
Fiscal 1996, one of these customers purchased T1 products which accounted for
approximately 20.2% and 16.9% of the Company's total net sales, respectively.
The Company is party to multi-year supply contracts with all of its major
customers which govern the terms and conditions applicable to purchases of the
Company's products, including prices, but do not establish minimum purchase
commitments. Because such contracts generally prohibit the Company from
increasing the price of its products sold thereunder for stated periods of
time, any significant increase in the Company's costs during such periods which
the Company is unable to offset with a corresponding increase in prices due to
such prohibitions could have a material adverse effect on the Company.
Further, there can be no assurance that sales of the Company's products to the
RBOCs or other customers will continue or that the Company's customer base will
become less concentrated. The loss of one or more of the RBOCs as a customer,
the reduction of orders for the Company's products, or a failure or delay in
the deployment of the Company's products by the RBOCs could materially and
adversely affect the Company. In addition, the RBOCs and the Company's other
customers are significantly larger than, and are able to exert a high degree of
influence over, the Company.
HIGHLY COMPETITIVE INDUSTRY. The markets for the Company's products are
highly competitive, especially with respect to price, product features, quality
and conformance to industry standards and the Company expects its competition
to increase in the future both from existing and new competitors, including
possibly the RBOCs and a former AT&T business unit. See "-- Potential
Competition from RBOCs and Former AT&T Business Unit." Increased competition
could reduce gross profit margins and may require increased spending by the
Company on product development and sales and marketing, or may otherwise
adversely affect the Company.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain key components which are required
to manufacture the Company's products are available from only one source. Such
components include the Company's application specific integrated circuits,
which are built to Company specifications, and its proprietary design
integrated circuits, which are the design and property of the manufacturer from
which they are purchased. The Company generally obtains its components on a
purchase order basis. Accordingly, there can be no assurance that the Company
will be able to continue to obtain sufficient quantities of key components as
required or that such components, if obtained, will be available to the Company
on commercially favorable terms. Further, certain components require
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<PAGE> 12
an order lead time of up to 11 months. Failure by the Company to order
sufficient quantities of components in advance could prevent the Company from
meeting customer demand for its products.
Although the Company has, in the past, experienced delays in receipt of
key components resulting from actual customer demand exceeding forecasted
demand, industry capacity constraints and vendor production problems, the
Company has been able to adjust its order lead times for such components and/or
promised delivery dates for its products to avoid material delivery delays of
its products. However, there can be no assurance that the Company will be able
to continue to adjust its order lead times and/or promised delivery dates to
avoid material delivery delays of its products in the future. Under certain of
the Company's supply contracts, a delay in the delivery of products would
permit the customer to cancel the purchase order or, in limited circumstances,
assess a late delivery charge. In addition, late deliveries could adversely
affect the Company's ability to obtain additional sales from a particular
customer. The Company's inability to obtain sufficient quantities of components
as required, or to develop alternative sources of such components on
commercially favorable terms if and as required in the future, could result in
delays or reductions in product shipments or could otherwise have a material
adverse effect on the Company's customer relationships and, consequently, on
its business, results of operations and financial condition. See " --
Increased Inventory Levels and Need to Make Advance Purchase Commitments."
INCREASED INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS.
To respond to anticipated customer demand, the Company maintains high inventory
levels. In addition, at the request of three of its customers, the Company has
entered into arrangements to maintain certain of its finished goods inventory
at the various locations of such customers which result in higher levels of
inventory than are necessary in the absence of such arrangements. Maintaining
high inventory levels substantially increases the risk that the Company's
profitability and results of operations may from time to time be materially and
adversely affected by inventory obsolescence. To procure adequate supplies of
certain components, the Company must regularly make advance commitments to
purchase relatively large quantities of such components. The inability of the
Company to incorporate such components in its products could also have a
material adverse effect on the Company.
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated and may continue to fluctuate as a result of various factors
affecting the Company and its competitors including, but not limited to, the
timing of significant orders and shipments, competition, new product
introductions by the Company or its competitors, production or quality
problems, availability and cost of components and changes in general economic
conditions.
PROPRIETARY RIGHTS AND RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT. The
telecommunications industry is characterized by an increasing number of patents
and frequent litigation based on allegations of patent infringement. There can
be no assurance that third parties will not assert intellectual property
infringement claims against the Company or that any such assertions will not
result in costly litigation. Further, there can be no assurance that the
Company would prevail against any such claims or that licenses of any
third-party intellectual property would be available to the Company on
commercially reasonable terms. In addition, a substantial number of the
Company's products are intended to plug into telephone network equipment
designed and manufactured by third parties, some of which are competitors of
the Company. The design or modification of such equipment so that it is
incompatible with the Company's products could adversely affect the Company's
ability to maintain its current level of, or achieve additional, net sales.
The Company is presently a party to various agreements pursuant to
which it licenses certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products. The terms of virtually all of these license agreements
expired at varying times during Fiscal 1995, subject to a right of continuation
at an increased royalty rate with respect to specified Company products. The
Company is currently evaluating its continuing obligations under these
agreements and the extent to which its current products employ technology
covered by the unexpired patents licensed thereunder. There can be no
assurance that the results of the Company's evaluation of these agreements
and/or subsequent negotiations with the licensors of this technology will not
result in the Company's payment of royalties at increased rates with respect to
all or a substantial number of the Company's products. Any substantial
increase in royalty rates could have a material adverse effect on the Company.
One of the Company's subsidiaries that existed prior to the
Recapitalization also licensed under a license agreement certain technology
from AT&T. The term of this license agreement continued through July 1995,
subject to a right of continuation of the license under certain circumstances
at substantially higher royalty rates. In
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<PAGE> 13
connection with the mergers of the Company's subsidiaries into the Company
pursuant to the Recapitalization, the Company sought AT&T's consent to
assignment of this license agreement to the Company. At that time, AT&T
indicated it would give such consent after resolving certain issues with the
Company with respect to the license. However, the term of the license
agreement expired before the parties had the opportunity to resolve these
issues and the parties have since discussed a replacement license agreement.
There can be no assurance that the Company will be able to obtain a replacement
license at royalty rates which do not exceed those in effect during Fiscal 1995
and any substantial increase in royalty rates could have a material adverse
effect on the Company. The Company is also evaluating its continuing
obligations with respect to its former subsidiary's license agreement with
AT&T, including the extent to which the Company's current products employ
technology covered by the unexpired patents licensed thereunder. Any
resolution of this issue which applies the maximum royalty increase provided
for in the AT&T license to a substantial number of the Company's products would
have a material adverse effect on the Company's results of operations.
Further, in the context of the Company's discussions with AT&T, AT&T
indicated that the Company's initial ISDN product may make use of certain of
AT&T's patented technology and has expressed a willingness to enter into
licensing negotiations with respect to such technology. AT&T's willingness to
enter into such a licensing arrangement was expressed prior to division of its
existing business units into three separate entities and it is not clear at
this time whether or to what extent such division will effect to Company's
ability to obtain a new licensing arrangement. See "-- Potential Competition
from RBOCs and Former AT&T Business Unit." Accordingly, there can be no
assurance as to the resolution of this matter.
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<PAGE> 14
PART II. OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES
The terms of the Bank Facility prohibit the Company from declaring and
paying in any fiscal year dividends which exceed, in the aggregate, 50% of the
Company's net income for the immediately preceding fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
<TABLE>
<CAPTION>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Plan of Recapitalization of the Registrant, which became effective on June 14, 1995 in connection with the
Registrant's initial public offering. (1)
3.1 Restated Certificate of Incorporation of the Registrant, as amended. (1)
3.2 Amended and Restated Bylaws of the Registrant. (2)
4.1 Specimen Common Stock Certificate. (2)
4.2 Articles Fourth, Seventh, Eighth, Tenth and Twelfth of the Restated Certificate of Incorporation of the
Registrant, as amended (filed as Exhibit 3.1). (2)
4.3 Articles I, II (Sections 1 and 3), IV (Sections 1 through 6), V (Section 3) and VI of the Amended and Restated
Bylaws of the Registrant (filed as Exhibit 3.2). (2)
10.1 Credit Agreement between the Registrant and LaSalle National Bank, dated June 14, 1995. (1)
10.2 Indemnification Agreement, dated June 8, 1995, between the Registrant and Howard L Kirby, Jr., together with a
schedule of each of the other directors and executive officers of the Registrant with whom the Registrant has
entered into such an Indemnification Agreement. (1)
10.3 Teltrend Inc. 1995 Stock Option Plan. (2)
10.4 Form of Nonqualified Stock Option Agreement under the Teltrend Inc. 1995 Stock Option Plan, together with a
schedule of Nonqualified Stock Option Agreements to be entered into by directors and executive officers of the
Registrant. (1)
10.5 TI Investors Inc. Stock Option Plan. (2)
10.6 Forms of Nonqualified Stock Option Agreement under the TI Investors Inc. Stock Option Plan, dated August 1,
1994, between Donald G. Bozeman and the Registrant, together with Amended and Restated Nonqualified Stock
Option Agreement under the TI Investors Inc. Stock Option Plan, dated May 13, 1994, between Donald G. Bozeman
and the Registrant. (1)
10.7 Second Amended and Restated Stock Option Agreements, dated May 13, 1994, under the TI Investors Inc. Stock
Option Plan, between Gilbert H. Hosie and the Registrant. (1)
10.8 Teltrend Inc. 1996 Non-Employee Director Stock Option Plan (5)
10.9 Registration Rights and Lock-Up Agreement between the Registrant, The Prudential Insurance Company of America,
Pruco Life Insurance Company, AEA Investors Inc. and those stockholders of the Registrant whose names are
subscribed thereto. (1)
10.10 Debt Payment and Conversion Agreement, dated as of April 10, 1995, between the Registrant, Teltrend Subsidiary
Inc., The Prudential Insurance Company of America, Pruco Life Insurance Company and AEA Investors Inc. (2)
10.11 Stock Exchange Agreement, dated as of May 26, 1995, between the Registrant the Prudential Insurance Company of
America and Pruco Life Insurance Company. (2)
</TABLE>
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<PAGE> 15
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.12 Management Agreement, dated as of September 2, 1988, between AEA Investors Inc. and Teltrend Subsidiary Inc.
(2)
10.13 Lease, dated April 22, 1983, between CMD Corporation and the Registrant, together with First Amendment to
Lease, dated August 9, 1985, between Morgan Guaranty Trust Company of New York and the Registrant, and
Memorandum of Lease, First Amendment to Lease and Ratification of First Amendment to Lease, dated August 29,
1988. (2)
10.14 Second Amendment to Lease, dated September 1995, between Morgan Guaranty Trust Company of New York and the
Registrant. (4)
10.15 Form of Custody Agreement and Power of Attorney, dated as of October 2, 1995, by and among the Registrant,
LaSalle National Trust, N.A., as depositary, Henry F. Skelsey and Prescott C. Romeyn, as attorneys-in-fact,
and the Selling Stockholders. (3)
10.16 Indemnification Agreement, dated April 10, 1996, between the Registrant and Bernard F. Sergesketter.*
10.17 Indemnification Agreement, dated April 10, 1996, between the Registrant and William R. Delk.*
11 None
15 None
18 None
19 None
22-24 None
27 Financial Data Schedule.*
99 None
______________________________________
* Filed herewith
(1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
April 29, 1995 (Commission File No. 0-26114).
(2) Incorporated by reference to the Registrant's Registration Statement on Form S-1, as amended (Registration
No. 33-91104), originally filed with the Securities and Exchange Commission on April 11, 1995.
(3) Incorporated by reference to the Registrant's Registration Statement on Form S-1, as amended (Registration
No. 33-97796), originally filed with the Securities and Exchange Commission on October 4, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended July 29,
1995 (Commission File No. 0-26114).
(5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
January 27, 1996 (Commission File No. 0-26114).
Teltrend Inc. will furnish any of the above exhibits to its stockholders upon written request addressed to the
Secretary at the address given on the cover page of this Form 10-Q. The charge for furnishing copies of the exhibits is
$.25 per page, plus postage.
(b) Reports on Form 8-K: The Company did not file any Current Report on Form 8-K during the quarter ended April
27, 1996.
</TABLE>
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<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
TELTREND INC.
Date: June 10, 1996 By: /s/ Douglas P. Hoffmeyer
------------------------------------------------
Douglas P. Hoffmeyer
Vice President, Finance
(Principal Financial Officer)
</TABLE>
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<PAGE> 17
TELTREND INC.
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.16 Indemnification Agreement, dated April 10, 1996, between the Registrant and Bernard F. Sergesketter.
10.17 Indemnification Agreement, dated April 10, 1996, between the Registrant and William R. Delk.
27 Financial Data Schedule.
</TABLE>
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<PAGE> 1
Exhibit 10.16
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered
into on the 10 day of April, 1996 between TELTREND INC., a Delaware
corporation (the "Corporation"), and Bernard F. Sergesketter
("Indemnitee").
INTRODUCTION
------------
The Corporation is engaged in the business of designing,
manufacturing and marketing transmission products used by telephone
companies to provide voice and data transmission services over the
telephone network. At the Corporation's request, Indemnitee currently
serves as a director and/or executive officer of the Corporation and, in
connection therewith, may be a party or threatened to be made a party
to, or a witness or other participant in, actions, suits or proceedings.
As an inducement to Indemnitee to continue to serve as a director and/or
executive officer of the Corporation, the Corporation has agreed to
indemnify Indemnitee against expenses, judgments, fines, penalties and
amounts paid in settlement incurred by Indemnitee in connection with any
such actions, suits or proceedings, in accordance with, and to the
fullest extent authorized by law, including, without limitation, the
Delaware General Corporation Law as it may be in effect from time to
time. The parties to this Agreement desire to set forth their agreement
as to such indemnification.
IT IS, THEREFORE, AGREED:
1. INCORPORATION OF INTRODUCTION. The introduction set
forth above is hereby incorporated in and made part of this Agreement.
2. INDEMNIFICATION. The Corporation shall forever
indemnify, and keep indemnified, Indemnitee from and against any and all
expenses (including, without limitation, expenses of investigation and
preparation and reasonable fees and disbursements of Indemnitee's
counsel, accountants or other experts), judgments, fines, penalties and
amounts paid in settlement actually and reasonably incurred by
Indemnitee in connection with any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether or not such action is by or in the right of
the Corporation, its subsidiaries or such other enterprise with respect
to which Indemnitee serves or has served as a director, officer,
employee or agent, by reason of or relating to the fact that Indemnitee
is or was a director or executive officer of the Corporation or a
subsidiary of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, and
whether or not the cause of such action, suit or proceeding occurred
before or after the date of this Agreement. For purposes of this
Agreement, the terms "other enterprise," "fines" and "serving at the
request of the Corporation" shall have the meanings provided in Section
145 of the Delaware General Corporation Law. The term "expenses" shall
include those incurred to establish a right to and compel payment of
indemnification and/or contribution under this Agreement, any other
Agreement, the Corporation's Bylaws or the Delaware General Corporation
Law and to establish coverage and compel payment under a directors' and
officers' liability insurance policy.
<PAGE> 2
In the event that, under applicable law, the entitlement of Indemnitee
to be indemnified hereunder shall depend upon whether Indemnitee shall have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and with respect to criminal
actions or proceedings, had no reasonable cause to believe his conduct was
unlawful, or shall have acted in accordance with some other defined standard of
conduct, or whether fees and disbursements of counsel and other costs and
amounts are reasonable, the burden of proof of establishing that Indemnitee has
not acted in accordance with such standard and that such costs and amounts are
unreasonable shall rest with the Corporation and Indemnitee shall be presumed
to be reasonable and Indemnitee shall be entitled to indemnification unless,
and only unless, based upon a preponderance of the evidence, it shall be
determined by a court of competent jurisdiction that Indemnitee has not met
such standard or, with respect to the amount of indemnification, that such
costs and amounts are not reasonable (in which case Indemnitee shall be
indemnified to the extent such costs and amounts are determined by such court
to be reasonable). The foregoing shall not be construed to limit
indemnification under this Agreement to circumstances in which Indemnitee has
acted within the standards of conduct set forth in Section 145 of the Delaware
General Corporation Law. In any event and not as a condition or in limitation
of the foregoing, indemnification to which Indemnitee is entitled hereunder
shall be made immediately upon the determination that Indemnitee has met such
standard (i) by the Board of Directors of the Corporation by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, (ii) if such a quorum is not obtainable, or even if obtainable, if
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by stockholders of the Corporation.
3. NOTICE. Indemnitee shall notify the Corporation in writing of
any matter with respect to which Indemnitee intends to seek indemnification
hereunder as soon as reasonably practicable following the receipt by Indemnitee
of written threat thereof, provided, however, that failure to so notify the
Corporation shall not constitute a waiver by Indemnitee of his rights hereunder.
4. ADVANCEMENT. In the event of any action, suit or proceeding
against Indemnitee which may give rise to a right of indemnification from the
Corporation pursuant to this Agreement, following written request to the
Corporation by Indemnitee, the Corporation shall advance to Indemnitee amounts
to cover expenses incurred by Indemnitee in defending such action, suit or
proceeding in advance of the final disposition thereof upon receipt of (i) an
undertaking by or on behalf of Indemnitee to repay such amount if it shall
ultimately be determined by final judgment of a court of competent jurisdiction
that he is not entitled to be indemnified by the Corporation hereunder and (ii)
satisfactory evidence as to the amount of such expenses. Indemnitee's written
certification together with a copy of the statement paid or to be paid by
Indemnitee shall constitute satisfactory evidence absent manifest error.
5. CONTRIBUTION.
(a) If the Indemnification provided in Section 2 should under
applicable law be unenforceable or insufficient to hold Indemnitee harmless in
respect of any and all expenses, judgments, fines, penalties and amounts paid
in settlement, then the Corporation agrees, subject to the provisions of
Section 5(b) below, that for purposes of this Section 5 only, the Corporation
shall,
<PAGE> 3
upon written notice from Indemnitee, be treated as if it were a party who was
or was threatened to be made a party to such threatened, pending or
contemplated action, suit or proceeding and the Corporation shall contribute to
the amounts paid or payable by the Indemnitee as a result of such expenses,
judgments, fines, penalties and amounts paid in settlement in such proportion
as is appropriate to reflect the relative benefits accruing to the Corporation
on the one hand and Indemnitee on the other which arose out of the event
underlying such action, suit or proceeding and also the relative fault of the
Corporation on the one hand and Indemnitee on the other in connection with such
event, as well as any other relevant equitable considerations. For purposes of
this Section 5, the relative benefit of the Corporation shall be deemed to be
the benefits accruing to it and to all of its directors, executive officers,
employees and agents (other than Indemnitee) on the one hand, as a group and
treated as one entity, and the relative benefit of Indemnitee shall be deemed
to be an amount not greater than Indemnitee's annual compensation from the
Corporation and its subsidiaries during the first calendar year in which the
event forming the basis for such action, suit or proceeding was alleged to have
occurred. The relative fault shall be determined by reference to, among other
things, the fault of the Corporation and all of its directors, executive
officers, employees and agents (other than Indemnitee) on the one hand, as a
group and treated as one entity, and Indemnitee's and such group's relative
intent, knowledge, access to information and opportunity to have altered or
prevented the action or inaction, or alleged action or inaction, forming the
basis for such action, suit or proceeding.
(b) No provision of this Section 5 shall operate to create a right of
contribution in favor of Indemnitee if it is judicially determined that, with
respect to any such action, suit or proceeding to which paragraph (a) pertains,
Indemnitee intentionally caused or contributed to the injury complained of
with the actual knowledge that such injury would occur.
6. Right of Indemnitee to Bring Suit. If a claim for indemnification
(including the advancement of expenses) under Part 2 is not paid in full by the
Corporation within 45 days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the Indemnitee may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim. If successful in whole or in part in any such suit, or in
a suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be
paid also the expense of procuring or defending such suit. In any suit brought
by the Indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
Indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Agreement shall be on the Corporation.
7. Other Indemnification. The indemnification rights granted to
Indemnitee under this Agreement shall not be deemed exclusive of, or in
limitation of, any rights to which Indemnitee may be entitled under Delaware
law, the Corporation's Certificate of Incorporation or Bylaws, any other
agreement, vote of stockholders or directors or otherwise. If Indemnitee is
entitled to indemnification other than pursuant to this Agreement, or is
entitled to receive payments pursuant to a directors' and officers' liability
insurance policy, Indemnitee may choose one or more sources or bases of such
indemnification and payments in his sole discretion, provided, however, that
Indemnitee
<PAGE> 4
shall not be entitled to duplicate payments if such payments would cause the
total amount received by Indemnitee to exceed the total sum of expenses,
judgments, fines, penalties and amounts paid in settlement actually incurred by
Indemnitee.
8. Binding Effect. The rights granted to Indemnitee hereunder
shall inure to the benefit of Indemnitee, his personal representative, heirs,
executors, administrators and beneficiaries, and this Agreement shall be
binding upon the Corporation, its successors and assigns. The Indemnification,
contribution and advancement of expenses pursuant to this Agreement shall
continue after Indemnitee ceases his service as either a director or executive
officer of the Corporation.
9. Delaware Law; Construction. This Agreement shall be governed by
the laws of the State of Delaware. If any provision of this Agreement is
invalid as applied to any fact or circumstance, it shall be modified to the
minimum extent necessary to render it valid, and its invalidity shall not
affect the validity of any other provision or of the same provision as applied
to any other fact or circumstance.
10. Counterparts. This Agreement may be executed by any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
11. Amendment. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by each of the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above stated.
TELTREND INC.
By: Howard C. Kirby, Jr.
----------------------------------
Name: Howard C. Kirby, Jr.
Title: President
Bernard F. Sergesketter
--------------------------------------
Bernard F. Sergesketter
<PAGE> 1
Exhibit 10.17
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("Agreement") is made and entered into
on the 10th day of April, 1996 between TELTREND INC., a Delaware corporation
(the "Corporation"), and William R. Delk ("Indemnitee").
INTRODUCTION
The Corporation is engaged in the business of designing, manufacturing
and marketing transmission products used by telephone companies to provide
voice and data transmission services over the telephone network. At the
Corporation's request, Indemnitee currently serves as a director and/or
executive officer of the Corporation and, in connection therewith, may be a
party or threatened to be made a party to, or a witness or other participant
in, actions, suits or proceedings. As an inducement to Indemnitee to continue
to serve as a director and/or executive officer of the Corporation, the
Corporation has agreed to indemnify Indemnitee against expenses, judgments,
fines, penalties and amounts paid in settlement incurred by Indemnitee in
connection with any such actions, suits or proceedings, in accordance with, and
to the fullest extent authorized by law, including, without limitation, the
Delaware General Corporation Law as it may be in effect from time to time. The
parties to this Agreement desire to set forth their agreement as to such
indemnification.
IT IS THEREFORE, AGREED:
1. INCORPORATION OF INTRODUCTION. The introduction set forth above is
hereby incorporated in and made part of this Agreement.
2. INDEMNIFICATION. The Corporation shall forever indemnify, and keep
indemnified, Indemnitee from and against any and all expenses (including,
without limitation, expenses of investigation and preparation and reasonable
fees and disbursements of Indemnitee's counsel, accountants or other experts),
judgments, fines, penalties and amounts paid in settlement actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative and whether or not such action is by or in the right of the
Corporation, its subsidiaries or such other enterprise with respect to which
Indemnitee serves or has served as a director, officer, employee or agent, by
reason of or relating to the fact that Indemnitee is or was a director or
executive officer of the Corporation or a subsidiary of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, and whether or not the cause of such action, suit or
proceeding occurred before or after the date of this Agreement. For purposes of
this Agreement, the terms "other enterprise," "fines" and "serving at the
request of the Corporation" shall have the meanings provided in Section 145 of
the Delaware General Corporation Law. The term "expenses" shall include those
incurred to establish a right to and compel payment of indemnification and/or
contribution under this Agreement, any other Agreement, the Corporation's
Bylaws or the Delaware General Corporation Law and to establish coverage and
compel payment under a directors' and officers' liability insurance policy.
<PAGE> 2
In the event that, under applicable law, the entitlement of Indemnitee
to be indemnified hereunder shall depend upon whether Indemnitee shall have
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and with respect to criminal
actions or proceedings, had no reasonable cause to believe his conduct was
unlawful, or shall have acted in accordance with some other defined standard of
conduct, or whether fees and disbursements of counsel and other costs and
amounts are reasonable, the burden of proof of establishing that Indemnitee has
not acted in accordance with such standard and that such costs and amounts are
unreasonable shall rest with the Corporation and Indemnitee shall be presumed
to be reasonable and Indemnitee shall be entitled to indemnification unless,
and only unless, based upon a preponderance of the evidence, it shall be
determined by a court of competent jurisdiction that Indemnitee has not met
such standard or, with respect to the amount of indemnification, that such
costs and amounts are not reasonable (in which case Indemnitee shall be
indemnified to the extent such costs and amounts are determined by such court
to be reasonable). The foregoing shall not be construed to limit
indemnification under this Agreement to circumstances in which Indemnitee has
acted within the standards of conduct set forth in Section 145 of the Delaware
General Corporation Law. In any event and not as a condition or in limitation
of the foregoing, indemnification to which Indemnitee is entitled hereunder
shall be made immediately upon the determination that Indemnitee has met such
standard (i) by the Board of Directors of the Corporation by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, (ii) if such a quorum is not obtainable, or even if obtainable, if
a quorum of disinterested directors so directs, by independent legal counsel
in a written opinion, or (iii) by stockholders of the Corporation.
3. Notice. Indemnitee shall notify the Corporation in writing of
any matter with respect to which Indemnitee intends to seek indemnification
hereunder as soon as reasonably practicable following the receipt by Indemnitee
of written threat thereof, provided, however, that failure to so notify the
Corporation shall not constitute a waiver by Indemnitee of his rights
hereunder.
4. Advancement. In the event of any action, suit or proceeding
against Indemnitee which may give rise to a right of indemnification from the
Corporation pursuant to this Agreement, following written request to the
Corporation by Indemnitee, the Corporation shall advance to Indemnitee amounts
to cover expenses incurred by Indemnitee in defending such action, suit or
proceeding in advance of the final disposition thereof upon receipt of (i) an
undertaking by or on behalf of Indemnitee to repay such amount if it shall
ultimately be determined by final judgment of a court of competent jurisdiction
that he is not entitled to be indemnified by the Corporation hereunder and (ii)
satisfactory evidence as to the amount of such expenses. Indemnitee's written
certification together with a copy of the statement paid or to be paid by
Indemnitee shall constitute satisfactory evidence absent manifest error.
5. Contribution.
(a) If the Indemnification provided in Section 2 should under
applicable law be unenforceable or insufficient to hold Indemnitee harmless in
respect of any and all expenses, judgments, fines, penalties and amounts paid
in settlement, then the Corporation agrees, subject to the provisions of
Section 5(b) below, that for purposes of this Section 5 only, the Corporation
shall,
<PAGE> 3
upon written notice from Indemnitee, be treated as if it were a party who was
or was threatened to be made a party to such threatened, pending or
contemplated action, suit or proceeding and the Corporation shall contribute to
the amounts paid or payable by the Indemnitee as a result of such expenses,
judgments, fines, penalties and amounts paid in settlement in such proportion
as is appropriate to reflect the relative benefits accruing to the Corporation
on the one hand and Indemnitee on the other which arose out of the event
underlying such action, suit or proceeding and also the relative fault of the
Corporation on the one hand and Indemnitee on the other in connection with such
event, as well as any other relevant equitable considerations. For purposes of
this Section 5, the relative benefit of the Corporation shall be deemed to be
the benefits accruing to it and to all of its directors, executive officers,
employees and agents (other than Indemnitee) on the one hand, as a group and
treated as one entity, and the relative benefit of Indemnitee shall be deemed
to be an amount not greater than Indemnitee's annual compensation from the
Corporation and its subsidiaries during the first calendar year in which the
event forming the basis for such action, suit or proceeding was alleged to have
occurred. The relative fault shall be determined by reference to, among other
things, the fault of the Corporation and all of its directors, executive
officers, employees and agents (other than Indemnitee) on the one hand, as a
group and treated as one entity, and Indemnitee's and such group's relative
intent, knowledge, access to information and opportunity to have altered or
prevented the action or inaction, or alleged action or inaction, forming the
basis for such action, suit or proceeding.
(b) No provision of this Section 5 shall operate to create a right
of contribution in favor of Indemnitee if it is judicially determined that,
with respect to any such action, suit or proceeding to which paragraph (a)
pertains, Indemnitee intentionally caused or contributed to the injury
complained of with the actual knowledge that such injury would occur.
6. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim for
indemnification (including the advancement of expenses) under Part 2 is not
paid in full by the Corporation within 45 days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement
of expenses, in which case the applicable period shall be twenty days, the
Indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the Indemnitee
shall be entitled to be paid also the expense of procuring or defending such
suit. In any suit brought by the Indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden or proving that the Indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Agreement shall be
on the Corporation.
7. OTHER INDEMNIFICATIONS. The indemnification rights granted to
Indemnitee under this Agreement shall not be deemed exclusive of, or in
limitation of, any rights to which Indemnitee may be entitled under Delaware
law, the Corporation's Certificate of Incorporation or Bylaws, any other
agreement, vote of stockholders or directors or otherwise. If Indemnitee is
entitled to indemnification other than pursuant to this Agreement, or is
entitled to receive payments pursuant to a directors' and officers' liability
insurance policy. Indemnitee may choose one or more sources or bases of such
indemnification and payments in his sole discretion, provided, however, that
Indemnitee
<PAGE> 4
shall not be entitled to duplicate payments if such payments would cause the
total amount received by Indemnitee to exceed the total sum of expenses,
judgments, fines, penalties and amounts paid in settlement actually incurred
by Indemnitee.
8. BINDING EFFECT. The rights granted to Indemnitee hereunder
shall inure to the benefit of Indemnitee, his personal representative, heirs,
executors, administrators and beneficiaries, and this Agreement, shall be
binding upon the Corporation, its successors and assigns. The Indemnification,
contribution and advancement of expenses pursuant to this Agreement shall
continue after Indemnitee ceases his service as either a director or executive
officer of the Corporation.
9. DELAWARE LAW: CONSTRUCTION. This Agreement shall be governed
by the laws of the State of Delaware. If any provision of this Agreement is
invalid as applied to any fact or circumstance, it shall be modified to the
minimum extent necessary to render it valid, and its invalidity shall not affect
the validity of any other provision or of the same provision as applied to any
other fact or circumstance.
10. COUNTERPARTS. This Agreement may be executed by any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
11. AMENDMENT. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by each of the parties
hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above stated.
TELTREND INC.
By: Howard L. Kirby, Jr.
--------------------------------
Name: Howard L. Kirby, Jr.
Title: President
William R. Delk
------------------------------------
William R. Delk
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Teltrend
Inc. Consolidated Statements of Operations for the Quarters and Nine-Month
Periods ended April 29, 1995 and April 27, 1996 and the Teltrend Inc. Balance
Sheets as of July 29, 1995 and April 27, 1996 included elsewhere herein and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-27-1996
<PERIOD-START> JUL-30-1995
<PERIOD-END> APR-27-1996
<CASH> 335,000
<SECURITIES> 21,475,000
<RECEIVABLES> 9,001,000
<ALLOWANCES> 177,000
<INVENTORY> 12,469,000
<CURRENT-ASSETS> 46,177,000
<PP&E> 13,927,000
<DEPRECIATION> 8,145,000
<TOTAL-ASSETS> 52,819,000
<CURRENT-LIABILITIES> 13,973,000
<BONDS> 0
<COMMON> 64,000
0
0
<OTHER-SE> 38,782,000
<TOTAL-LIABILITY-AND-EQUITY> 52,819,000
<SALES> 62,147,000
<TOTAL-REVENUES> 62,147,000
<CGS> 33,874,000
<TOTAL-COSTS> 33,874,000
<OTHER-EXPENSES> 31,000
<LOSS-PROVISION> 75,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 14,737,000
<INCOME-TAX> 6,066,000
<INCOME-CONTINUING> 8,671,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,671,000
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.33
</TABLE>
