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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 October 26, 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: (670) 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 December 6, 1996, there were 6,425,239 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
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TELTREND INC.
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INDEX TO FORM 10-Q
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1 -- Financial Statements:
Statements of Income for the quarters ended
October 28, 1995 and October 26, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Balance Sheets as of July 27, 1996 and October 26, 1996 . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows for the quarters ended
October 28, 1995 and October 26, 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
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Item 2 -- Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
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OMITTED FINANCIAL STATEMENTS
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None
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
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TELTREND INC.
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STATEMENTS OF INCOME
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(Unaudited)
(Dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------
OCTOBER 28, OCTOBER 26,
1995 1996
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<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . $ 20,851 $ 22,591
Cost of sales . . . . . . . . . . . . . . . . . . . 11,394 12,227
---------- ----------
Gross profit . . . . . . . . . . . . . . . . . . . 9,457 10,364
---------- ----------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . 1,875 1,944
Research and development . . . . . . . . . . . . 1,704 2,256
General and administrative . . . . . . . . . . . 1,082 1,095
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4,661 5,295
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Income from operations . . . . . . . . . . . . . . 4,796 5,069
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Other expense (income):
Interest expense . . . . . . . . . . . . . . . . 1 1
Interest income . . . . . . . . . . . . . . . . (49) (317)
Other-net . . . . . . . . . . . . . . . . . . . 10 (1)
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(38) (317)
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Income before income taxes . . . . . . . . . . . . 4,834 5,386
Provision for income taxes . . . . . . . . . . . . (2,005) (2,154)
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Net income . . . . . . . . . . . . . . . . . . . . $ 2,829 $ 3,232
========== ==========
Net income per share of common stock . . . . . . . $ 0.47 $ 0.48
========== ==========
Average common shares outstanding . . . . . . . . . 6,075,611 $6,731,773
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELTREND INC.
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JULY 27, OCTOBER 26,
1996 1996
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(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 22,889 $20,187
Marketable securities . . . . . . . . . . . . . . . . . - 6,933
Trade accounts receivable, net of allowance . . . . . . 11,941 9,042
Inventories . . . . . . . . . . . . . . . . . . . . . . 12,349 13,158
Deferred income taxes . . . . . . . . . . . . . . . . . 2,227 2,227
Prepaid expenses and other current assets . . . . . . . 1,134 1,498
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50,540 53,045
Machinery and equipment . . . . . . . . . . . . . . . . . . . 12,554 13,115
Leasehold improvements . . . . . . . . . . . . . . . . . . . 896 896
Accumulated depreciation . . . . . . . . . . . . . . . . . . (7,580) (7,986)
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5,870 6,025
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 767 767
Other assets, net . . . . . . . . . . . . . . . . . . . . . . 107 341
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$ 57,284 $60,178
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 6,017 $ 5,311
Accrued expenses . . . . . . . . . . . . . . . . . . . 8,622 7,153
Income taxes payable . . . . . . . . . . . . . . . . . - 1,821
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14,639 14,285
Stockholders' equity:
Common Stock, $0.01 par value, 15,000,000 shares
authorized and 6,422,596 and 6,425,239 issued and
outstanding, respectively . . . . . . . . . . . . . . . 64 64
Additional paid-in capital . . . . . . . . . . . . . . 99,165 99,182
Accumulated deficit . . . . . . . . . . . . . . . . . . (56,584) (53,353)
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42,645 45,893
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$ 57,284 $60,178
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELTREND INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
OCTOBER 28, OCTOBER 26,
1995 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income for period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,829 $ 3,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 400 487
Loss (gain) on sale of equipment . . . . . . . . . . . . . . . . . . . 2 (13)
Changes in certain assets and liabilities:
Accounts receivable and prepaid expenses . . . . . . . . . . . . . (1,145) 2,535
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,712) (809)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 342
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 1,155 1,821
Accounts payable and accrued expenses . . . . . . . . . . . . . . . 717 (2,175)
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . -- (152)
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Net cash provided by operating activities . . . . . . . . . . . . . . . . 1,588 4,926
FINANCING ACTIVITIES:
Exercise of common stock options . . . . . . . . . . . . . . . . . . . . 16
Payment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (237)
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Net cash provided by (used for) financing activities . . . . . . . . . . (237) 16
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (908) (647)
Purchase of marketable securities . . . . . . . . . . . . . . . . . . . . - (6,933)
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . . 12 21
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . (33) (85)
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Net cash used for investing activities . . . . . . . . . . . . . . . . . (929) (7,644)
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Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . 422 (2,702)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . 4,416 22,889
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Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . $ 4,838 $ 20,187
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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 27, 1996. 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 ended October 26, 1996 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 26, 1997. 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 1996 refers to the fiscal year ending July 27, 1996 and
Fiscal 1997 refers to the fiscal year ending July 26, 1997).
2. THE SECOND PUBLIC OFFERING
During 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. The net proceeds of the Second Public Offering
received by the Company totalled approximately $14.7 million (after deducting
underwriting discounts, commissions and expenses).
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3. INVENTORIES (Dollars in thousands)
<TABLE>
<CAPTION>
JULY 27, 1996 OCTOBER 26, 1996
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<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . $ 7,904 $ 7,503
Work-in-process . . . . . . . . . . . . . . . . . 1,795 2,080
Finished goods . . . . . . . . . . . . . . . . . 2,650 3,575
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$12,349 $13,158
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</TABLE>
4. LAND ACQUISITION
On August 20, 1996, the Company entered into an agreement to purchase
land for approximately $1.7 million. The Company plans to initiate construction
of a new office, research and manufacturing facility on this land in Fiscal
1997. The Company estimates the cost of the manufacturing facility to be
approximately $20.0 million and expects to fund the purchase price of the land
and the construction of the facility from existing cash, operating cash flows
and possibly debt.
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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 following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains various "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,
which represent the Company's expectations or beliefs concerning future events,
including the statement under "Liquidity and Capital Resources" regarding the
customer demand anticipated by the Company which has led to the Company's
decision to increase its inventory levels. 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 first quarter of Fiscal 1997 increased
8.3%, or approximately $1.7 million, to approximately $22.6 million, from
approximately $20.9 million in the first quarter of Fiscal 1996. The increase
in net sales was due to an increase in unit volume sales of all product
divisions. Increases in unit volume sales were recorded by VF/DLC (Voice
Frequency/Digital Loop Carrier), T1/Wireless and DDS/ISDN (Dataphone Digital
Services/Integrated Services Digital Network) products of approximately $0.5
million, $0.6 million and $0.7 million, respectively. The unit volume sales of
the Company's fourth division, Broadband Products, were minimal in the first
quarter of Fiscal 1997.
The increase in unit volume sales of VF/DLC sales was the net result of
generally declining VF sales and an increase in the sales of new DLC products.
The decline in sales for VF products was a continuation of a long-term downward
trend in VF sales. The Company believes that, although there are international
opportunities, the domestic market for its VF products is decreasing as digital
data transmission services within the Local Loop become less costly and more
widely deployed. The Company is experiencing a resurgence in its DLC business.
In late Fiscal 1996, the Company introduced a new, advanced 2-wire foreign
exchange unit ("2FXO") for the Lucent Technologies, Inc. ("Lucent") SLC-96 and
D4 systems. Currently this unit is approved and being purchased at several of
the regional bell operating companies ("RBOCs"). Another new product, the dial
pulse terminator/gain transfer unit (DPT/GT) provides direct inward dial (DID)
service support for PBXs from D4 digital systems. Production for this product
began in the fourth quarter of fiscal 1996 with significant shipments occurring
in the current quarter to two RBOCs. The product is under study at several
other RBOCs.
The rate of growth of unit volume sales of the Company's T1/Wireless
products decreased in the current quarter as compared with the first quarter of
fiscal 1996. The sales of Teltrend's intelligent T1 repeaters were negatively
affected during the quarter by overstocking and budget constraints at certain
RBOCs. The Company expects these overstocking issues and budget constraints to
be, for the most part, resolved by the beginning of the new calendar year. On
the other hand, the sales of the Company's T1 NIU (Network Interface Unit) and
associated mountings experienced positive growth, in certain cases due to the
consummation of new sales agreements.
The increase in unit volume DDS/ISDN sales resulted primarily from an
increase in the number of RBOCs that have qualified these products rom the first
quarter of Fiscal 1996 to the current quarter. In addition, the Company
believes that the overall demand for DDS services and, to a greater extent, ISDN
services is growing. New ISDN products, including repeater cards and a new ISDN
channel bank, are currently being tested by various RBOCs, with other product
concepts in the design phase of the development cycle. See "Factors That May
Affect Future Results -- Dependence on Two Product Lines."
GROSS PROFIT. Gross profit in the first quarter of Fiscal 1997
increased 9.6%, or approximately $0.9 million, to approximately $10.4 million
from approximately $9.5 million for in the first quarter of Fiscal 1996. Gross
profit margin for the first quarter of Fiscal 1997 increased to 45.9% from 45.4%
for the first quarter of Fiscal 1996. While the increase in gross profit 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
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<PAGE> 9
factors contributing to the increase in gross profit margin were reduced
labor and material costs for some of the Company's established products and
lower bonus expense allocated to Operations. 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 first quarter
of Fiscal 1997 increased 3.7%, or approximately $0.1 million, to approximately
$2.0 million from approximately $1.9 million in the first quarter of Fiscal
1996. As a percentage of net sales, sales and marketing expenses decreased to
8.6% for the first quarter of Fiscal 1997 from 9.0% for the first quarter of
Fiscal 1996. The increase in the dollar amount of sales and marketing expenses
was due primarily to an increase in expenses resulting from the hiring of
additional sales and marketing personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses in the
first quarter of Fiscal 1997 increased 32.4%, or approximately $0.6 million, to
approximately $2.3 million from approximately $1.7 million in the first quarter
of Fiscal 1996. As a percentage of total net sales, research and development
expenses increased to 10.0% in the first quarter of Fiscal 1997 from 8.2% in the
first quarter of Fiscal 1996. The increase in the dollar amount of this expense
was due primarily to increases in personnel associated expenses, such as
recruiting and salaries for newly-hired personnel, related support equipment and
outsourcing of certain development costs. 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in the
first quarter of Fiscal 1997 remained approximately equal to the $1.1 million
recorded in the first quarter of Fiscal 1996. As a percentage of total net
sales, general and administrative expenses decreased to 4.9% in the first
quarter of Fiscal 1997 from 5.2% in the first quarter of Fiscal 1996. The lack
of change in this expense was the net result of an increase in salaries and
related expenses and a decrease in bonuses which are based, to a significant
degree, on Company performance.
OTHER INCOME. Other income increased by $0.3 million, as the Company
used the proceeds from the Second Public Offering to invest in certain cash
equivalents and short-term marketable securities.
INCOME TAXES. A provision for income taxes of $2.2 million was
recorded for the first quarter of Fiscal 1997 compared to $2.0 million in the
comparable prior year period. These provisions are a function of the level of
the Company's net income before income taxes in each quarter.
LIQUIDITY AND CAPITAL RESOURCES
At October 26, 1996, the Company had no long-term indebtedness and had
working capital of approximately $38.8 million, which included cash and cash
equivalents of approximately $20.2 million and marketable securities of
approximately $6.9 million. The increase in working capital from approximately
$35.9 million at the end of Fiscal 1996 was due primarily to cash flow from
operations.
Cash used for capital expenditures was approximately $0.6 million in
the first quarter of Fiscal 1997 compared to approximately $0.9 million for the
first quarter of Fiscal 1996. Most of the expenditures were for the purchase
of manufacturing test equipment and engineering equipment.
As of October 26, 1996, the Company had net trade accounts receivable
of approximately $9.0 million, compared to approximately $11.9 million at the
end of Fiscal 1996. This decrease was due primarily to the collection in the
quarter of certain past-due receivables, resulting in a decrease in the average
number of days receivables outstanding. For the first quarter of Fiscal 1997,
inventories increased by approximately $0.8 million, from approximately $12.3
million at the end of Fiscal 1996 to approximately $13.2 million as of October
26, 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."
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The Company maintains a 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 October 26, 1996, the Company estimates that approximately $12.8
million is available 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.
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 products accounted
for approximately 48.0%, 55.6% and 53.9% of the Company's total net sales in
Fiscal 1994, 1995 and 1996, respectively. For these same periods, sales of the
Company's VF products accounted for approximately 43.7%, 32.0% and 21.0%,
respectively, of the Company's total net sales. 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. 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. 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 costs of HDSL systems decline. Consequently, while net sales of the
Company's T1 products have increased from year to year since Fiscal 1991, there
can be no assurance that the Company will be able to sustain or improve this
trend. If increasing competition causes the Company to reduce selling prices
for its T1 or VF products, there can be no assurance that the Company will be
able to increase unit sales volumes of such products, reduce its costs of sales
of such products or maintain or increase revenues or gross margins attributable
to such products to offset in full or in part the reduced revenue effects of
such selling price reductions.
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,
price-competitive bidding and frequent product introductions and enhancements.
The introduction of telephone network voice and data transmission products
involving new technologies, the emergence of new industry standards or changes
in customer requirements or service offerings could adversely affect the
Company's ability to sell its existing products and products currently under
development. 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 Telcos 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). Furthermore, the Company faces increasing competition
with respect to its T1 products from suppliers of HDSL systems as an alternate
method of delivering conventional T1 services. The Company believes that the
continued installation of new technologies in the Local Loop will adversely
affect demand for certain of its existing products and that its future success
will largely depend upon its ability, on a cost-effective and timely basis, to
continue to enhance its existing products and develop and achieve commercial
acceptance of new products. There can be no assurance that developments by
others will not render the Company's products or technologies obsolete or
unmarketable or that the Company will be able to successfully anticipate or
adapt to changing technology, industry standards or customer requirements on a
timely basis. 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.
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RELIANCE ON CERTAIN CUSTOMERS. The Company depends, and is likely to
continue to depend, on the RBOCs for substantially all of its net sales. Sales
to the RBOCs accounted for approximately 96.5%, 96.3% and 95.2% of the
Company's total net sales in Fiscal 1994, 1995 and 1996, respectively. Among
the RBOCs, sales to BellSouth, US WEST, SBC Communications, Ameritech and NYNEX
accounted for approximately 20.6%, 18.4%, 18.2%, 15.2% and 10.7%,
respectively, of the Company's net sales in Fiscal 1996. During this same
period, one of these customers purchased T1 products which accounted for
approximately 15.6% of the Company's total net sales. The Company has no
supply agreements with any of the RBOCs or its other customers which establish
minimum purchase commitments and 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. See "Factors That May
Affect Future Results -- Potential Competition from RBOCs and AT&T." 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, recent contract negotiations with certain RBOCs have resulted in
lower prices for selected products. 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. The Company's competitors in
the United States and elsewhere are numerous and the Company expects its
competition to increase in the future both from existing and new competitors,
including possibly the RBOCs and AT&T Corp. ("AT&T," formerly known as American
Telephone and Telegraph Company). See "Factors That May Affect Future Results
- -- Potential Competition from RBOCs and AT&T." 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. The Company has generally been required to reduce the selling
prices of its products over time to meet increasing competition and will likely
be required to do so in the future. The Company's ability to maintain or
increase net sales will depend largely upon its ability to increase unit sales
volumes of its products to counter declines in the average sales prices of its
products. Declining average sales prices would also adversely affect gross
margins on the Company's products if not offset by reductions in the Company's
cost of sales. There can be no assurance that the Company will be able to
increase unit sales volumes of its products, reduce its costs of sales of such
products or maintain or increase revenues or gross margins attributable to such
products. Most of the Company's competitors and potential competitors have
significantly greater financial, technological, manufacturing, marketing and
personnel resources and experience than the Company. In addition, certain of
the Company's competitors have long-standing relationships with certain Telcos
which may adversely affect the Company's ability to successfully compete for
business at these Telcos.
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 an order
lead time of up to six months. Failure by the Company to order sufficient
quantities of components in advance could prevent the Company from meeting
customer demand for its products. The Company has been able to adjust its
order lead times and/or promised delivery dates 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 key 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 "Factors That May Affect Future Results -- Reliance on Certain Customers."
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. Although the
Company believes these arrangements facilitate sales
-11-
<PAGE> 12
to its customers, they 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 have a material adverse
effect on the Company.
POTENTIAL COMPETITION FROM RBOCS AND AT&T. The Telecommunications Act
has generally eliminated the restrictions which had previously prohibited the
RBOCs from manufacturing telecommunications equipment (subject to first
satisfying certain conditions designed to facilitate local exchange competition
and receipt of 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 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, the
operation, as an independent entity, of Lucent after its spin-off from AT&T may
have an adverse effect on the business of the Company. There can be no
assurance that this will not have a material adverse effect on the Company.
GOVERNMENT REGULATION. The telecommunications industry is subject to
regulation in the United States and other countries. While such regulation
does not typically apply directly to the Company, federal and state regulatory
agencies and commissions regulate most of the Company's domestic customers.
The effects of such regulations, which are under continuous review and subject
to change, on the Company's customers may adversely affect the Company.
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.
From time to time, third parties may assert exclusive patent, copyright and
other intellectual property rights to technologies which are important to the
Company. While the Company does not believe that its present products and
technology infringe the intellectual property rights of others, there can be no
assurance that third parties will not assert 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 inability of the Company to develop
products for such equipment which do not infringe the intellectual property
rights associated with such equipment, or to obtain the right to use such
intellectual property on commercially reasonable terms, could have a material
adverse effect on the Company. In addition, any infringement claims or
litigation against the Company could have a material adverse effect on the
Company. The Company is a party to agreements with certain of the RBOCs
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 licenses
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 RBOCs 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. Prior to the IPO, the
Company's operating
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<PAGE> 13
subsidiary also licensed certain technology from AT&T, the technology
has since been transferred to Lucent. The term of this license continued
through July 1995, subject to a right of continuation under certain
circumstances at substantially higher royalty rates. In connection with the
Recapitalization, the Company sought AT&T's consent to assignment of this
license from the operating subsidiary 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 agreement 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 the Operating Subsidiary's Pre-IPO
license agreement with AT&T (now Lucent), including the extent to which its
current products employ technology covered by the unexpired patents licensed
thereunder. Any resolution of these issues which applies the maximum royalty
increase provided for in the license to a substantial number of the Company's
products could have a material adverse effect on the Company's results of
operations. Further, in the context of its discussions with AT&T and Lucent,
Lucent indicated that the Company's initial ISDN product may make use of
certain of Lucent's patented technology and has expressed a willingness to
enter into licensing negotiations with respect to such technology. The Company
is currently evaluating Lucent's claim. However, there can be no assurance as
to the resolution of this matter. See "Factors That May Affect Future Results
- -- Potential Competition from RBOCs and AT&T."
POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES. The Company's
products are required to meet rigorous standards imposed by its customers,
including written technical requirements and various mechanical, electrical
performance, environmental operating and storage conditions, and to interface
in a complex and changing environment with telecommunication network equipment
produced by numerous other suppliers. In the event there are material
deficiencies or defects in the design or manufacture of the Company's products
or if such products become incompatible with existing third-party network
equipment, the affected products could be subject to a recall. Although the
Company has not experienced any complete recall of a product from the field in
the past, the Company has from time to time agreed to upgrade certain of its
products in response to product design issues raised by certain of its
customers. There can be no assurance that the Company will not experience a
material product recall in the future. Any product recall and associated
negative publicity could have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes factors such
as announcements of new products or technological innovations by the Company or
third parties, as well as variations in the Company's results of operations,
the gain or loss of significant customers, legislative or regulatory changes,
general trends in the industry, market conditions, analysts' estimates, the
stock market and other events or factors may cause the market price of the
Common Stock to fluctuate significantly. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies and which have
often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Common
Stock.
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.
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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."
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Disclosure Schedule (filed as exhibit 27).
</TABLE>
(b) Reports on Form 8-K: The Company did not file any
Current Report on Form 8-K during the quarter ended October
26, 1996.
-14-
<PAGE> 15
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.
TELTREND INC.
Date: December 6, 1996 By: /s/ DOUGLAS P. HOFFMEYER
------------------------
Douglas P. Hoffmeyer
Vice President, Finance
(Principal Financial Officer)
-15-
<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> TELETREND INC.
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<FISCAL-YEAR-END> JUL-26-1997
<PERIOD-START> JUL-28-1996
<PERIOD-END> OCT-26-1996
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