<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 26, 1997
OR
[ ] 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)(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 377-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
(Title of Class)
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 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of October 17, 1997, 6,436,321 shares of the Company's Common Stock,
$.01 par value per share ("Common Stock"), were outstanding. On that date, the
aggregate market value of voting and non-voting common equity (based upon the
last sale price of the registrant's Common Stock on October 17, 1997) held by
non-affiliates of the registrant was $113,440,158 (6,436,321 shares at $17.625
per share).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED JULY 26, 1997 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS FORM
10-K.
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD DECEMBER 11, 1997 ARE TO BE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K, including the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" incorporated
herein by reference, contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among other
things, the prospects, developments and business strategies for the Company (as
defined) and its operations, including the development and marketing of certain
new products and the anticipated future growth in certain markets in which the
Company currently markets and sells its products or anticipates selling and
marketing its products in the future. These forward-looking statements (i) are
identified by their use of such terms and phrases as "expected," "expects,"
"believe," "believes," "will," "anticipated," "emerging," "intends," "could,"
"may," "estimates," "should," and (ii) are subject to risks and uncertainties
and represent the Company's present expectations or beliefs concerning future
events. The Company cautions that the forward-looking statements are qualified
by important factors that could cause actual results to differ materially from
those in the forward-looking statements, including (a) risks of general market
conditions, including demand for the Company's products and services,
competition and price levels and the Company's historical dependence on
relatively few product lines, certain suppliers and certain key customers, and
(b) risks inherent to the telecommunications industry, including rapidly
changing technology, evolving industry standards, increasing numbers of patent
infringement claims, changes in customer requirements, price-competitive
bidding, changing government regulations and potential competition from the
Regional Bell Operating Companies and Lucent Technologies, Inc., and others.
Therefore, results actually achieved may differ materially from expected
results included in, or implied by, these statements. See Subparagraph d. of
Item 1 -- "Factors That May Affect Future Results."
ITEM 1 - DESCRIPTION OF BUSINESS
a. GENERAL DEVELOPMENT OF BUSINESS
(i) BACKGROUND
Teltrend Inc. ("Teltrend" or the "Company") designs, manufactures and
markets a broad range of transmission products, such as channel units,
repeaters and termination units, used by telephone companies ("Telcos") to
provide voice and data services over the telephone network. Substantially all
of the Company's products have historically been sold directly to the Regional
Bell Operating Companies and their local affiliates (collectively, the "RBOCs")
for use with the copper wireline in the local telephone subscriber loop (the
"Local Loop").
The Company's principal executive offices are located at 620 Stetson
Avenue, St. Charles, Illinois, 60174 and its telephone number at that location
is (630) 377-1700. Unless the context otherwise requires, all references to
the "Company" or "Teltrend" in this Annual Report on Form 10-K (the "Report")
collectively refer to Teltrend Inc. and its subsidiaries. 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 1997 refers to the year ended July 26, 1997).
(ii) 3NET ACQUISITION
On September 18, 1997, the Company consummated the purchase of all the
outstanding shares (the "Shares") in the capital of Securicor 3 Net Limited of
Basingstoke, England and its U.S. affiliate Securicor 3Net Inc. (collectively,
"3net") from 3 Net Holdings Limited of Surrey, England ("3Net Holdings"). 3Net
Holdings is a subsidiary of Securicor Communications Limited of Surrey, England
("Securicor Communications"). With operations in England, New Zealand, China
and the United States, 3net is a leading developer of Integrated Services
Digital Network ("ISDN") products for communications equipment and service
providers. 3net also supplies local area networking ("LAN") internetworking,
ISDN remote access and secure virtual private networking solutions for business
customers worldwide. The Company believes 3net will help it to expand into
foreign markets and will allow the Company to deliver ISDN products for the
infrastructure and terminal equipment markets.
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Pursuant to a Share Purchase Agreement, dated August 28, 1997,
negotiated and entered into among the Company, Securicor 3 Net Limited, 3Net
Holdings, Securicor Communications and Security Services plc (the parent
company of 3Net Holdings and Securicor Communications), the Company acquired
all of the Shares for a total acquisition cost of approximately U.S. $16.0
million in cash. 3net will adopt Teltrend's name and identity, but the Company
does not expect any redundancies or major organization changes due to the
acquisition. The Company funded its acquisition of 3net with its cash and cash
equivalents on hand and the proceeds from the sale of certain of its
investments in debt securities.
(iii) TELTREND INC. RIGHTS AGREEMENT
On January 16, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of common stock, par value $.01 per share, of the Company (the "Common
Stock"). The dividend was payable on January 27, 1997 to the holders of record
of the Common Stock as of the close of business on that date. Each Right
entitles the registered holder to purchase from the Company, under certain
circumstances involving the acquisition or the announcement of the intent to
acquire 15% or more of the Company's Common Stock, one one-hundredth of a share
of Series A Junior Participating Preferred Stock, par value $.01 per share, of
the Company (the "Preferred Stock") at a price of $160.00 per one one-hundredth
of a share of Preferred Stock, subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement dated as of January 16,
1997, as the same may be amended from time to time (the "Rights Agreement"),
between the Company and LaSalle National Bank, as Rights Agent (the "Rights
Agent"), a copy of which is filed herewith as an exhibit to this Annual Report
on Form 10-K.
b. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
During each of the last three fiscal years, the Company has operated in
only one industry segment.
c. NARRATIVE DESCRIPTION OF BUSINESS
(i) GENERAL
The Company designs, manufactures and markets a broad range of
transmission products, such as channel units, repeaters and termination units,
that are used by Telcos to provide voice and data services over the existing
telephone network, primarily in the Local Loop. In recent years, the demand
for high speed digital transmission over the telephone network has increased as
a result of the demand for high capacity voice lines and the growing
communications requirements of LAN interconnections, wide area networks
("WANs"), on-line data networks (which typically connect point-of-sale credit
card authorization terminals, automatic teller machines, lottery terminals and
reservation stations to a central computer), the Internet, other on-line data
services and, to a lesser extent, video conferencing. The Company's products
enhance the transmission of voice and data over the copper network and permit
the Telcos to maximize use of the existing infrastructure of copper wireline.
The Company's principal customers are the RBOCs, but the Company also
sells its products to certain independent Telcos and other companies. The
Company's traditional principal product lines include: (i) Tl/Wireless
products which allow Telcos to deploy 1.544 Mbit/sec digital services; (ii)
Voice Frequency ("VF") products which are primarily used to provide analog data
transmission services via dedicated lines; (iii) Dataphone Digital Services
("DDS") products which are used to provide switched and dedicated line digital
transmissions at rates from 2.4 to 64 Kbit/sec; (iv) ISDN products which
provide switched digital transmission of voice or data at rates of up to 128
Kbit/sec over copper wireline; and (v) digital loop carrier ("DLC") products
which are cabinets and plug-in channel units that are compatible with D4,
SLC(R)*/ Series 5 and SLC(R) 96 systems. DLC products include plain old
telephone service ("POTS") and special plain old telephone service ("SPOTS")
products, which are used to provide traditional analog voice and modem
services. In addition, the Company recently began selling both 2 and 4-wire
High bit-rate Digital Subscriber Line ("HDSL") products which allow Telcos to
provide T1 service without the need to condition the copper wireline or install
mid-span repeaters for distances up to 12,000 feet.
- ----------
*/SLC is a registered trademark of Lucent Technologies Inc. ("Lucent")
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With the September 1997 acquisition of 3net, the Company has expanded
its principal product lines to include ISDN products for communications
equipment and service providers in the international market, as well as LAN
internetworking, ISDN remote access and secure virtual private networking
solutions for business customers worldwide.
(ii) INDUSTRY BACKGROUND
OVERVIEW. Transmission through the telephone network has traditionally
been accomplished by analog transmission. Analog transmission, however, has
been unable to provide the requisite data rates and reliability to support the
growing communications requirements of LAN interconnections, WANs, on-line data
networks and services and, to a lesser extent, video conferencing. Digital
transmission emerged in the 1970s as a reliable high bandwidth alternative to
analog transmission. As a result, demand for digital communications service by
end-users is growing, and will likely continue to grow.
INCREASING DEPLOYMENT OF DIGITAL SERVICE IN THE LOCAL LOOP. While
Telcos generally utilize fiber optic or other systems to permit high
speed digital transmission between their switching facilities ("Central
Offices") and from their Central Offices to DLC systems within the Local Loop,
transmission over copper wireline remains the principal method by which
telecommunication services are provided in the "last mile", the final link
between the Central Office or DLC and the end-user. Increasing demand for
digital transmission by end-users has given the Telcos considerable incentive
to upgrade service in the Local Loop. Although replacement of the "last mile"
copper wireline in the Local Loop with fiber optic, coaxial cable, hybrid
fiber-coax, wireless and other higher bandwidth and quality transmission media
has occurred to a certain extent, widespread replacement of the copper wireline
has not occurred because of the labor and capital intensive nature of the
replacement process. Consequently, technologies have emerged which enhance the
transmission capabilities of the copper wireline and allow the Telcos to
respond to customer demand for digital service in the Local Loop at affordable
rates and at a level of quality approaching that of fiber.
TECHNOLOGICAL DEVELOPMENTS AND TRENDS. DDS, when introduced in the
early 1970s, was one of the first digital transmission services offered
by Telcos in the Local Loop. DDS provides dedicated service at rates up to 64
Kbit/sec and has typically been deployed for point-of-sale applications and
other on-line data networks. The next digital service to be widely deployed in
the Local Loop was T1, which is a 1.544 Mbit/sec dedicated service that can be
provided over two twisted pair of copper telephone wires. Applications for T1
service include connections between the Central Office and customer private
branch exchanges ("PBXs") and T1 multiplexers and, more recently, cellular
base-stations. Traditional T1 service is provided by "conditioning" the
existing copper wireline to meet the standards for T1 service. This
conditioning requires the removal of all bridge taps, the separation of the
wire pairs and the installation of mid-span repeaters to regenerate the signal
every 3,000 to 6,000 feet (which is necessary because the T1 signal degrades as
it passes along the copper wireline). Consequently, installation and
maintenance of repeatered T1 lines is labor intensive and can be costly,
depending on the length of the loop and the amount of conditioning required
along the copper wireline. HDSL technology is an accepted alternate method of
providing T1 service across the copper network which does not require
conditioning the lines or the installation of line repeaters for distances of
up to 12,000 feet.
Switched digital services are increasingly being deployed in the Local
Loop in response to customer demand for flexible, high-bandwidth transmission
services. Whereas dedicated lines are fixed connections between two points,
switched services permit the flexibility of connecting with any similarly
equipped location. A newer DDS-based service provides switched 56 Kbit/sec
digital transmission. In addition, basic rate ISDN technology allows a Telco
to deliver switched digital transmission over the copper network at rates up to
128 Kbit/sec (plus an additional 16 Kbit/sec for special services). These
technologies can support telecommuting, video conferencing and remote-LAN
access. Although basic rate ISDN technology has been available for over ten
years, it had not been widely deployed by Telcos until recently. Its recent
increase in popularity is largely attributable to the emergence of widespread
Internet usage, and cost effective customer premises equipment ("CPE") which
utilizes ISDN capabilities and features.
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Other emerging technologies that provide high bandwidth digital
services include primary rate ISDN, a switched digital line which
operates at T1 speeds, and Asynchronous Digital Subscriber Line ("ADSL"), which
provides sufficient capacity for delivery of video-on-demand over the copper
wireline.
OTHER INDUSTRY TRENDS. Faced with increasing competition for
customers, Telcos are demanding enhanced functionality in the equipment
they deploy to deliver telecommunications services. In response, equipment
manufacturers have developed, and will likely continue to develop, products
which can be tested, adjusted and reconfigured from a remote location (i.e.,
"intelligent" products) to assist Telcos in achieving labor cost savings and
efficiency gains. For instance, Telcos are now deploying sophisticated T1
transmission gear that includes inherent performance monitoring ("PM")
capabilities. These PM systems allow the Telcos to constantly monitor the
quality of service being delivered to their T1 customers.
The technologies which have emerged to replace the existing copper
infrastructure (such as fiber optic, coaxial cable, hybrid fiber-coax and
wireless systems) remain relatively costly to install. While the transition
from copper wireline to telecommunications networks based on newer technology
is generally expected to be gradual, it is anticipated that the markets for and
the pace of deployment of these technologies will grow as their costs decrease.
Accordingly, demand for products applicable to the copper wireline will
decrease and new products and services will need to be developed to address the
demands of these growing markets. See Subparagraph d. (ii) of this Item 1 --
"Factors That May Affect Future Results -- Rapid Technological Changes and
Dependence on New Products" and Subparagraph d. (i) of this Item 1 -- "Factors
That May Affect Future Results--Dependence on T1/Wireless Product Line."
(iii) PRODUCTS
(a) GENERAL
Digital and analog signals from each subscriber are gathered at a
Telco's Central Office. While most of these lines are connected
directly to the Central Office switch, special service lines are attached to an
assembly which provides the speed and functionality of the particular circuit.
These circuit assemblies, known as channel units, connect the subscriber line
to a channel bank or similar equipment which converts voice and data
transmission signals as required (e.g., from analog to digital), combines or
separates them as necessary (e.g., into or from a single digital stream for T1
service) and directs the signals through the telephone network. Channel banks
are typically located in the Central Offices. A DLC within the Local Loop
performs the same function as a channel bank and typically interfaces fiber
optic or some other medium which has been deployed between the Central Office
and the copper wireline that runs to the end-user's premises. Along the copper
wireline in the Local Loop, electronic equipment such as repeaters may be
required to restore and amplify the signal. In the case of dedicated lines, a
Telco typically installs a termination unit at the end-user's premises which
allows testing and adjustment of the subscriber line.
The Company manufactures a broad range of products necessary to
provision the Local Loop which are designed for installation either at
the end-user's premises, along the Local Loop or at the Central Offices. The
Company's products include channel units, repeaters and termination units used
by the Telcos for the provisioning, testing and termination of analog and
digital transmission services in the Local Loop at speeds of up to 1.544
Mbit/sec.
Most of the Company's products consist of a single printed circuit
board upon which a microprocessor and other electronic components are
mounted. These units generally plug into a housing at either the customer's
location, the Central Office or an intermediate point along the telephone
network. While the Company offers many of the housings into which these units
plug, some of the units are designed specifically to plug into housings or
systems manufactured by others, and virtually all of the units are plug
compatible with various industry-standard systems, such as the Lucent SLC(R)-5
DLC system. To meet customer requirements, the Company regularly produces
customized versions of its standard products to incorporate customer-specific
"firmware" (embedded memory) or unique hardware (such as a customized
electronic assembly) or to mount unique parts on an otherwise standard printed
circuit board. Many of the Company's products enhance traditional voice and
data transmission
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products, incorporating onboard microprocessors which allow them to
perform many functions automatically and to be provisioned and tested from a
remote location, thereby reducing labor costs and achieving efficiency gains.
(B) THE COMPANY'S PRODUCT LINES
T1/WIRELESS PRODUCTS. The Company is a supplier of intelligent
repeatered T1 products for the Local Loop. These products allow Telcos
to quickly deploy high speed (1.544 Mbit/sec) digital service over the existing
infrastructure of copper wireline in the Local Loop at affordable rates and at
a level of quality which approaches that of fiber. T1 service is frequently
deployed for PBX and dedicated lines. The Company was the first to
successfully introduce cost-effective intelligent T1 repeaters, which spurred
the sales growth of the Company's T1 products.
Within its T1 product line the Company currently offers intelligent
network interface units ("NIUs"), intelligent office repeaters, intelligent
line repeaters, T1 maintenance shelves and T1 mountings. The Company's NIUs
are installed by Telcos to terminate a T1 line at the customer's premises and
to allow testing of the circuit. The Company's T1 repeater products are
installed by Telcos to regenerate a T1 signal that has degraded due to
transmission over a long distance of copper wireline. These repeaters contain
addressable loopback circuits that allow rapid fault isolation from a remote
location. This remote testing capability allows Telcos to offer improved
service at a lower cost in the increasingly competitive telecommunications
environment.
A new generation of NIUs is being introduced to Telcos throughout the
United States. These new NIUs contain extensive performance monitoring
capabilities for both directions of T1 transmission (toward the customer and
toward the network). The PM NIUs provide crucial information to the network
provider regarding the quality and availability of their delivered T1 services.
PM NIUs can be deployed ubiquitously at the network interface, terminating all
forms of T1 transmission facilities - repeatered T1, HDSL, or fiber-based. The
Company has developed a PM NIU product that it began to sell in January 1997 to
help the Company successfully compete in the PM NIU market. While there is no
assurance that the Company will be able to compete in the PM NIU market, the
Company believes that its PM NIU sales and the market for PM NIU products will
show moderate growth over the next several years.
HDSL technology is an accepted alternate method of providing T1 service
over the copper wireline in the Local Loop. HDSL is easier to provision than
traditional T1 service because it eliminates the need to condition the wireline
and to install line repeaters for distances of up to 12,000 feet. Despite the
use of HDSL, Telcos continue to deploy traditional repeatered T1 service, since
it is presently more cost-effective than HDSL on short lines and on established
repeatered T1 routes. However, the Company expects that demand for its
T1/Wireless products (which provide traditional repeatered T1 service) will
decline as the cost of HDSL systems declines. The Company has recently
introduced a 4-wire HDSL product line in response to the anticipated decline in
demand for repeatered T1 products. See Subparagraph d. (i) of this Item 1 --
"Factors That May Affect Future Results--Dependence on T1/Wireless Product
Line."
In fiscal 1996, the Company introduced a T1 product called the
CellPak(TM). The CellPak(TM) provides T1 transport in a completely
self-contained, pre-tested, outdoor package for connecting a cellular or
personal communications services antenna cell site back to its local telephone
Central Office using metallic or fiber optic lines. Coordination problems that
are often encountered between the wireless operator and the telephone company
are greatly reduced by the CellPak(TM), both in original installation and in
maintenance situations. Teltrend's CellPak(TM) systems are available with
HDSL, conventional T1 or fiber optic feeds.
Sales of the Company's T1/Wireless products accounted for approximately
56.2%, 54.3% and 55.6% of the Company's total net sales for fiscal 1997, 1996
and 1995, respectively.
VF/DLC PRODUCTS. The Company is a supplier of intelligent VF products.
Within its VF product line the Company currently offers data station
termination ("DST") units, VF channel units and mountings which Telcos use
primarily to provide dedicated analog data lines. The Company's DST and VF
channel units are installed by Telcos at the customer's premises and in a
channel bank or DLC system, respectively, to terminate both ends of
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an analog data line. In addition, these units contain onboard microprocessors
which allow all testing and adjustment to be performed from a remote location.
The Company's VF products are principally used by Telcos to provision
the 4-wire analog data lines typically leased by Telco customers to connect
geographically dispersed computer terminals (such as point-of-sale credit card
authorization terminals, automatic teller machines, lottery terminals and
reservation stations) to a central computer. Although there are several other
ways to link these terminals to a central computer (most notably DDS), analog
data lines remain, for several reasons, a primary method for accomplishing
these links. An analog data line is the only practical way to add a terminal
to an existing analog data network (of which there is a large installed base).
In addition, analog data line transmission is often the more economical, more
easily installed or, in certain locations, the only service available.
The Company believes that the domestic market for its VF products is
decreasing, and will likely continue to decrease, as digital data transmission
services within the Local Loop become less costly and more widely deployed.
However, the Company will endeavor to partially offset the effects of this
decline by expanding its marketing efforts for its VF products to independent
Telcos and to international markets.
Voice services, referred to generally as plain old telephone service or
special plain old telephone service, still represent the dominant use of the
telephone network in the United States. The Company manufactures POTS/SPOTS
channel units which plug into a channel bank or DLC system and provide the
interface necessary for Telcos to furnish these voice services. The Company's
POTS/SPOTS channel units are microprocessor controlled and provide the exacting
gain, reflection and low noise performance required to accommodate advanced
POTS/SPOTS features, such as caller identification, which are increasingly
being offered by Telcos. The flexibility of microprocessor design has allowed
the Company to solve a variety of special performance problems encountered in
the telephone network.
Late in fiscal 1996, Teltrend introduced a product called the
CyberBlock(R), which improves voice and data transmission over ordinary
telephone loops. In addition to solving various common voice and modem
problems, the CyberBlock(R) also furnishes a lower cost way for telephone
companies to provision 2-wire special service lines. The CyberBlock(R) employs
a modern microprocessor design which allows it to automatically adjust gain and
equalization of the loop in both directions. The CyberBlock(R) has been used
in small quantities at each of the RBOCs and is officially approved by three
RBOCs.
Sales of the Company's VF products accounted for approximately 15.4%,
21.0% and 32.0% of the Company's total net sales for fiscal 1997, 1996 and
1995, respectively.
Within its DLC product line, the Company manufactures an advanced
2-wire foreign exchange unit ("2FXO") for the Lucent SLC(R)96 and D4 systems.
The 2FXO uses microprocessor control to compensate for network anomalies caused
by variations in PBX's and Central Office switches. It thereby eliminates
various operational and billing problems commonly experienced with foreign
exchange lines.
In late fiscal 1996, the Company introduced a new advanced 2-wire dial
pulse terminate unit with gain transfer ("DPT/GT") for D4 channel bank systems.
The DPT/GT uses microprocessor control to provide an automated precision
balance. This saves time and manpower in provisioning service and eliminates
operational performance problems (such as "howling") due to maladjustment from
manual trial-and-error balancing.
In the past, the Company has competed in the DLC market largely by
supplying special service channel units for the existing infrastructure of
Lucent DLC systems (SLC(R)96, SLC(R)5). The Company is now in the process of
becoming an original equipment manufacturer of channel units by selling channel
units to Next Level System, Inc., which is an emerging DLC systems company. The
Company also recently began supplying very small DLC systems that are SLC(R)5
plug-compatible.
DDS/ISDN PRODUCTS. The Company's DDS products are used by Telcos to
deliver digital service across two twisted pair of copper wires in the Local
Loop at speeds from 2.4-64 Kbit/sec. The majority of DDS service
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is provided by means of a dedicated line, but switched 56 Kbit/sec service
is also available. As with the Company's analog VF data transmission products,
DDS service is typically used by customers who need to connect geographically
dispersed computer terminals to a central computer. In recent years, DDS has
benefited from the trend toward digital service described above, including
frame relay service for Internet access.
The Company manufactures DDS channel units (known as "dataports"),
which the Telcos plug into a channel bank or DLC system to connect a DDS line
to the rest of the telephone network. The Company also manufactures
intelligent DDS termination units, which are installed by Telcos at the
end-user's premises to configure and maintain a DDS line. These products are
sold to all of the RBOCs and to Southern New England Telephone.
The Company is currently manufacturing, developing and marketing
products based on basic rate ISDN technology. This technology allows Telcos to
provide to their customers two 64 Kbit/sec digital channels, plus an additional
16 Kbit/sec for special purposes, over a single twisted pair of copper wires.
Whereas most digital transmission services require a dedicated line, ISDN is a
switched service. This offers the end-user the flexibility of conventional
dial-up service with the speed and quality of digital transmission. In
addition, multiple ISDN lines can be aggregated to provide the bandwidth
required for applications such as video conferencing.
The Company currently manufactures and markets an ISDN channel unit
which plugs into Lucent's SLC(R)5 DLC system, an ISDN line repeater unit (which
is required every 12,000 to 18,000 feet along a line furnishing ISDN service)
and an ISDN channel unit for use with channel banks at Telco Central Offices
(which is necessary to interface the ISDN signal for interoffice transport when
the local Central Office switch cannot support ISDN service). See Subparagraph
d. (ix) of this Item 1 -- "Factors That May Affect Future Results --
Proprietary Rights and Risks of Third Party Claims of Infringement."
The Company's acquisition of 3net in September 1997 has increased its
ISDN product offerings. 3net supplies ISDN access networking solutions such as
protocol conversion, port concentration, routing and remote management units
for telecommunications service and equipment providers which facilitate basic
rate and primary rate delivery by European and other international Telcos. 3net
also supplies network routers, a line of terminal equipment that makes ISDN
more attractive to the end-user.
BROADBAND PRODUCTS. The Company is currently selling both 2 and 4-wire
HDSL products. HDSL technology allows Telcos to provide T1 service without the
need to condition the copper wireline or install mid-span repeaters for
distances of up to 12,000 feet. The HDSL market in the United States is highly
competitive and currently dominated by three companies: PairGain Technologies,
Inc. ("PairGain"); ADC Telecommunications; Inc. ("ADC"); and ADTRAN, Inc.
("ADTRAN"). See Subparagraph c. (ix) of this Item 1 -- "Narrative Description
of Business -- Competition".
(iv) CUSTOMERS
The Company has historically sold substantially all of its products to
the RBOCs and a small portion of its products to independent Telcos, such as
GTE and Sprint and international Telcos. Sales to the RBOCs accounted for
approximately 95.8%, 95.2% and 96.3% of the Company's total net sales in fiscal
1997, 1996 and 1995, respectively. In fiscal 1997, sales to BellSouth
Telecommunications Inc., SBC Communications Inc., Ameritech Corp., Pacific Bell
and US West Inc. accounted for 25.9%, 19.3%, 13.4%, 11.2% and 10.8%,
respectively, of the Company's total net sales and one of these customers
purchased T1 products which accounted for approximately 13.3% of the Company's
total net sales. No other customer accounted for more than 10% of the
Company's total net sales during fiscal 1997. The Company believes that its
acquisition of 3net will give the Company an opportunity to expand its customer
base to include international Telcos and international small businesses,
distributors and other end-users of networking routers, thereby somewhat
reducing the Company's overall dependence on sales to the RBOCs. See
Subparagraph d. (iii) of this Item 1 -- "Factors That May Affect Future
Results--Reliance on Certain Customers."
Prior to selling a product to a Telco customer, the Company generally
must first submit that product for qualification by the customer. Accordingly,
the Company is continually submitting successive generations of its current
products as well as new products to its customers for qualification. Although
the qualification process varies
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<PAGE> 9
somewhat among customers, the Company's experience is that the process
can take anywhere from a few weeks to a year or more and generally consists of
the following three phases:
- Laboratory Evaluation. The product's function and
performance are tested against all relevant industry standards,
such as those set by Bell Communications Research, Inc.
("Bellcore").
- Field Trial. A number of telephone lines are equipped with the
product for simulated operation in a field trial. The field
trial is used to evaluate performance, assess ease of
installation and establish troubleshooting procedures.
- Product Selection and Deployment. Prior to product selection
and deployment, the customer develops and implements a variety of
methods and procedures relating to ordering, stocking,
installation, maintenance, returns and all other activities
associated with the use of the product.
(v) MARKETING, SALES AND DISTRIBUTION
As of July 26, 1997, the Company's marketing, sales and distribution
programs were conducted by 39 employees. The majority of the Company's sales
in the United States are made by its field sales organization, which consists
of 23 salespersons deployed throughout the United States. The marketing, sales
and customer service employees based at the Company's headquarters support
these field salespersons and often become involved in the sales process. With
the acquisition of 3net, the Company increased its sales organization with 9
salespersons based in the U.K., 3 salespersons based in New Zealand and 3
salespersons based in China. The Company also sells its products through
distributors. Although the Company has agreements with many of these
distributors, these agreements do not establish minimum purchase commitments
and are generally terminable by either party on 60 days notice. For each of
the Company's last five fiscal years, no distributor has accounted for more
than 1.5% of the Company's total net sales. The Company believes that its
success has, to a significant degree, been due to the performance of its sales
and distribution teams and that its future success will depend, in part, on its
ability to attract and retain qualified sales and marketing personnel who can
successfully increase the Company's sales revenue in the highly competitive
telecommunications equipment marketplace.
The Company has multi-year supply agreements with virtually all of its
major customers, which cover products representing a majority of the Company's
sales. These agreements only govern the terms and conditions applicable to
purchases of the Company's products, including prices, and generally do not
establish any minimum purchase commitments. Sales of the Company's products
under these agreements are made on a purchase order basis. Because these
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. See Subparagraph d. (iii) of
this Item 1 -- "Factors That May Affect Future Results--Reliance on Certain
Customers." In addition, the Company has arrangements with four of its
customers which require the Company to maintain a portion of its finished goods
inventory at the various locations of such customers. As of July 26, 1997,
approximately 33% of the Company's finished goods inventory was maintained at
these locations. The Company may enter into additional similar arrangements as
the RBOCs increasingly seek ways to reduce their inventory costs. These
arrangements generally require the Company to maintain higher inventory levels
than would otherwise be required. See Subparagraph d. (v) of this Item 1 --
"Factors That May Affect Future Results--Increased Inventory Levels and Need to
Make Advance Purchase Commitments" and Subparagraph d. (x) of this Item 1 --
"Factors That May Affect Future Results--Potential Product Recalls and Warranty
Expenses."
(vi) RESEARCH AND PRODUCT DEVELOPMENT
The Company is market driven and works closely with its current and
potential customers in connection with product development. Using feedback
received from such customers, the Company identifies and develops new products
and enhancements to its existing products.
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<PAGE> 10
As of July 26, 1997, the Company's research and product development was
carried out by a total of 76 engineers and engineering support personnel. These
individuals are organized into teams corresponding to the Company's product
lines, with each team being responsible for providing technical support for the
Company's existing products and conceiving new products in cooperation with
others within the Company. Utilizing computer-aided design tools, each product
team also implements the Company's ongoing "value engineering" programs which
are designed to periodically replace all of the Company's major products with
successive generations having additional product features, such as
"intelligence," or new mechanics and/or lower costs. The September 1997
acquisition of 3net increased the Company's research and product development
team with 29 people based in the United Kingdom and 14 people based in New
Zealand.
All product development expenses are charged to operations as incurred.
The Company's expenditures on research and product development were
approximately $9.7 million, $7.9 million and $5.3 million for fiscal 1997, 1996
and 1995, respectively. The Company believes its future success will depend in
part on its ability to, on a cost effective and timely basis, continue to
enhance its products, develop and introduce new products for the telephone
network transmission market and other markets, address new industry standards
and changing customer needs and achieve market acceptance for its products.
Accordingly, the Company intends to continue to make significant investments in
research and product development, with a goal of maintaining its annual
research and development expenses at between 11% and 12% of its annual net
sales. See Subparagraph d. (ii) of this Item 1 -- "Factors That May Affect
Future Results--Rapid Technological Changes and Dependence on New Products."
See also Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Fiscal 1997 Compared with Fiscal 1996."
(vii) CUSTOMER SERVICE AND SUPPORT
The majority of service, repair and technical support of the Company's
products is performed at the Company's headquarters. Under certain
circumstances, the Company also provides comprehensive on-site field support to
its customers. The Company also offers telephone technical support to its
domestic customers 24 hours a day, seven days a week and also provides training
to its principal customers with respect to its products.
Most of the Company's products carry a seven year limited warranty,
which generally covers defects in materials or workmanship and failure to meet
published specifications, but excludes damages caused by improper use, and all
other express or implied warranties. Products returned which have
malfunctioned or failed to operate during the warranty period through no fault
of the customer are either repaired or replaced promptly. The Company's
warranty covers only Company products and is not extended to related equipment
or components used in conjunction with these products. For each of the past
five fiscal years, the Company's warranty expense has been relatively
insignificant, representing less than 1.0% of the Company's annual net sales.
The Company believes its low return rate is the result of its rigorous product
quality program. Although the Company maintains a comprehensive quality
control program and has a high level of confidence in the quality and
reliability of its products, there can be no assurance that in the future
certain of the Company's products will not suffer from defects or other
deficiencies. In addition, the Company is a party to supply contracts with
certain of its major customers pursuant to which the Company may, under certain
circumstances, be required to accept certain returns of products or to
indemnify such customers against certain liabilities arising out of use of the
Company's products. See Subparagraph d. (x) of this Item 1 -- "Factors That
May Affect Future Results--Potential Product Recalls and Warranty Expenses."
(viii) MANUFACTURING AND SUPPLIERS
To successfully compete for Telco business, telecommunications
equipment manufacturers must offer products which assist Telcos in meeting
customer demand for high quality, reliable transmission services. The Company
is committed to customer satisfaction in the design and manufacture of its
products and maintains comprehensive quality control systems to monitor product
and service quality throughout all of its processes. This commitment has
resulted in the Company's domestic operations achieving CSQP(SM) (Customer
Supplier Quality Process) and ISO 9001 Registration recognition from Bellcore.
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<PAGE> 11
At July 26, 1997, the majority of the Company's manufacturing and
quality processes were conducted by 236 employees. The Company's manufacturing
process consists of several distinct phases: material planning and procurement,
assembly, burn-in, testing and quality audit. The Company procures electronic
and mechanical components from outside manufacturers and assembles them using a
substantially automated production process. Incoming components are subject to
quality inspection and testing. In addition, all products manufactured by the
Company are 100% tested prior to shipment to customers. The Company's quality
control systems are designed to assure product conformance with Bellcore
standards, high reliability in the field and complete customer satisfaction.
To date, the Company has experienced no significant field failure conditions.
All of the products offered and sold by the 3net operations are
manufactured by independent contractors, generally pursuant to manufacturing
agreements entered into with 3net. These products have all achieved ISO9002
recognition, and 3net's software products have achieved "Ticket" recognition
for quality performance. In addition, the contract manufacturers generally
give 3net a 12-month warranty against product defects.
Historically, the Company has used industry standard components for its
products. Some components, however, including application specific integrated
circuits ("ASICs"), are custom made to the Company's specifications. In
addition, the Company uses proprietary design integrated circuits ("PDICs") in
the manufacture of its products which are the design and property of the
manufacturer from which they are purchased. Certain key components required to
manufacture the Company's products, principally its ASICs and PDICs, are
currently available from only one source. The Company continually evaluates
its sources of supply and will establish additional supply relationships where
available and advisable to increase the reliability of receipt of components.
The Company generally obtains its components on a purchase order basis.
Components that currently are readily available may become difficult to obtain
in the future. In response to long order lead times and delays in the supply
of key components, the Company keeps an inventory of certain components at its
production facility on a consignment basis. See Subparagraph d. (v) of this
Item 1 -- "Factors That May Affect Future Results--Dependence on Certain
Suppliers."
The Company's customers typically require delivery of products shortly
after an order is placed which requires the Company to maintain relatively high
inventory levels and increases the risk of inventory obsolescence. In addition,
certain of the components used by the Company require an order lead time of up
to six months and the Company must regularly make advance noncancelable
commitments to purchase relatively large quantities of such components. The
Company continually monitors and reviews its inventories and purchasing
practices in an effort to minimize inventory related costs and the risk of
obsolescence. Members of the Company's management team meet each month to
review current inventories for potential obsolescence and, based on a rolling
six-month sales forecast, inventory aging data and purchasing trends, to
establish appropriate inventory reserves and inventory purchasing levels for
the succeeding month. See Subparagraph d. (vi) of this Item 1 -- "Factors That
May Affect Future Results -- Increased Inventory Levels and Need to Make
Advance Purchase Commitments." See also Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(ix) COMPETITION
The markets for the Company's products are highly competitive and
characterized by rapid technological change, evolving industry standards,
changes in customer requirements, price-competitive bidding and frequent
product introductions and enhancements. With the development of the worldwide
telecommunications market and increasing demand for high speed digital
transmission over the existing telephone network, many companies have emerged
to offer products for these markets. Moreover, the Company expects competition
to increase both from existing competitors and from other companies which may
enter the Company's existing or future markets, including the RBOCs and Lucent.
Lucent currently manufactures certain products also manufactured and sold by
the Company. See Subparagraph d. (iii) of this Item 1 -- "Factors That May
Affect Future Results--Reliance on Certain Customers" and Subparagraph d. (vii)
of this Item 1 -- "Factors That May Affect Future Results--Potential
Competition from RBOCs and Lucent." See also Subparagraph c. (x) of this Item
1 -- "Narrative Description of Business -- Regulation." The Company competes
for customers on the basis of price, product features, conformance with
industry standards and specifications, performance and reliability, technical
support and the maintenance of close customer relationships.
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<PAGE> 12
The Company's competitors in the United States and elsewhere are
numerous and, in most cases, have significantly greater financial,
technological, manufacturing, marketing and personnel resources 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. The Company's
principal competitors with respect to T1 products are ADC, Troncom and Westell,
Inc. In addition, because HDSL is easier to provision than traditional T1
service, the Company is facing increasing competition with respect to its
repeatered T1 products from suppliers of HDSL systems, which is an accepted
alternate method of delivering T1 services in the Local Loop. The HDSL market
is dominated by PairGain, ADC and ADTRAN. The Company's principal competitor
with respect to VF products is Tellabs, Inc. and the domestic market for VF
products generally is experiencing decreasing demand as higher speed digital
data transmission services become less costly and more widely deployed. The
Company's principal competitor with respect to DDS products is ADTRAN. Lucent
and Pulse Communications, Inc. ("Pulsecom"), a subsidiary of Hubbell
Incorporated, are the Company's principal competitors with respect to the
Company's DLC products. With respect to the Company's ISDN products, the
Company's principal competitor is ADTRAN. See Subparagraph d. (i) of this Item
1 -- "Factors That May Affect Future Results--Dependence on T1/Wireless Product
Line" and Subparagraph d. (iv) of this Item 1 -- "Factors That May Affect
Future Results -- Highly Competitive Industry."
(x) REGULATION
The telecommunications industry is subject to regulation in the United
States, the United Kingdom and other countries. Federal and state regulatory
agencies regulate most of the Company's domestic customers. While such
regulation does not typically affect the Company directly, the effects of such
regulation on the Company's customers may adversely impact the Company's sales
and operating results. For example, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs, the taxation of telecommunications services and regulatory
policies affecting terms on which common carriers conduct their business. These
policies are under continuous review and are subject to change. See
Subparagraph d. (viii) of this Item 1 -- "Factors That May Affect Future
Results--Government Regulation."
The Telecommunications Act of 1996 (the "Telecommunications Act"),
enacted on February 8, 1996, 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 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. See Subparagraph d. (vii) of this Item 1 -- "Factors That May
Affect Future Results -- Potential Competition from RBOCs and Lucent."
(xi) PROPRIETARY RIGHTS
The name "Teltrend" is a registered trademark of the Company in the
U.S. The Company has also registered six of its product names and has applied
for trademark registration for ten additional product identifiers or names in
the U.S. The Company has pursued and intends to continue to pursue patent
protection of inventions that it considers important to the Company's business
and for which such protection is available. The Company presently holds
patents on thirteen inventions relating to its products and has fourteen patent
applications pending in the U.S. The Company also has a registered copyright
in the U.S. with respect to a certain software program used in a number of its
products. In addition, as part of its confidentiality procedures, the Company
generally enters into nondisclosure agreements with its key employees and
certain suppliers, and limits access to and distribution of its proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's technology without
authorization. Accordingly, there can be no assurance that the Company will be
successful in protecting its proprietary rights or that the Company's
proprietary rights will preclude competitors from developing products or
technology equivalent or superior to that of the Company. Moreover, the laws
of some foreign countries do not protect the Company's proprietary rights in
its products to the same extent as do the laws of the United States.
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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. Moreover, a substantial number of the Company's
products are intended to plug into telephone network equipment manufactured by
third parties, some of which are also competitors of the Company. Such
equipment may be originally designed or subsequently modified so that it is
incompatible with the Company's existing or future products. Further,
intellectual property rights may be associated with certain of such equipment
and the Company may not be able to design products so they do not infringe
these rights or license such rights on commercially favorable terms.
The Company is a party to agreements with two of the RBOCs whereby the
Company licenses certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products.
Prior to the Company's initial public offering in June 1995 (the
"IPO"), the subsidiary through which the Company then conducted its operations
(the "Operating Subsidiary") also licensed certain technology from AT&T, which
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
merger of the Operating Subsidiary into Teltrend Inc., 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 to AT&T (now Lucent) with respect
to the Operating Subsidiary's pre-IPO license agreement with 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. See Subparagraph d. (ix) of
this Item 1 -- "Factors That May Affect Future Results -- Proprietary Rights
and Risks of Third Party Claims of Infringement."
Further, in the context of its discussions with Lucent, Lucent
indicated that the Company's initial ISDN product may make use of certain of
Lucent's patented technology and Lucent has expressed a willingness to license
such technology. The Company is currently evaluating Lucent's claim and the
advisability of entering into such licensing agreement. However, there can be
no assurance as to the resolution of this matter. See Subparagraph d. (ix) of
this Item 1 -- "Factors That May Affect Future Results -- Proprietary Rights
and Risks of Third Party Claims of Infringement."
(xii) EMPLOYEES
As of July 26, 1997, the Company had 371 full-time employees, including
76 in engineering, 39 in sales and marketing, 236 in manufacturing and quality
assurance and 20 in finance and administration. The acquisition of 3net
increased the Company's total number of full-time employees by 113 to a total
of 484. The Company's future success will depend largely upon its ability to
attract and retain highly qualified personnel. The Company's employees are not
represented by any collective bargaining agreements, and the Company has never
experienced a work stoppage. The Company believes that its employee relations
are good.
(xiii) BACKLOG
At July 26, 1997, the Company's backlog of orders believed to be firm
was approximately $2.1 million, compared to approximately $4.0 million at July
27, 1996. The Company believes that backlog is not a meaningful indicator of
net sales that can be expected for any future period.
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<PAGE> 14
d. FACTORS THAT MAY AFFECT FUTURE RESULTS
(i) DEPENDENCE ON T1/WIRELESS PRODUCT LINE
The Company's T1/Wireless products accounted for approximately 56.2%,
54.3% and 55.6% of the Company's total net sales in fiscal 1997, 1996 and 1995,
respectively. The Company expects to derive a large percentage of its net
sales for the foreseeable future from the sale of its T1/Wireless products.
Consequently, the Company's inability to maintain or increase net sales of its
T1/Wireless 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 is facing increasing competition with respect to its
repeatered 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. If increasing competition causes the Company to reduce
selling prices for its repeatered T1 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.
(ii) 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 repeatered 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.
(iii) RELIANCE ON CERTAIN CUSTOMERS
The Company has historically depended, and is likely to continue to
depend, on the RBOCs for substantially all of its net sales. Sales to the
RBOCs accounted for approximately 95.8%, 95.2% and 96.3% of the Company's total
net sales in fiscal 1997, 1996 and 1995, respectively. Among the RBOCs, sales
to BellSouth Telecommunications Inc., SBC Communications Inc., Ameritech Corp.,
Pacific Bell and US WEST Inc. accounted for approximately 25.9%, 19.3%, 13.4%,
11.2% and 10.8%, respectively, of the Company's net sales in fiscal 1997.
During this same period, one of these customers purchased T1 products which
accounted for approximately 13.3% of the Company's total net sales. The
Company has no supply agreements with any of the RBOCs 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 materially less concentrated. See -- "Factors That
May Affect Future Results -- Potential Competition from RBOCs and Lucent." 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
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<PAGE> 15
the Company. In addition, recent contract negotiations with certain
RBOCs have resulted in lower prices for selected products. Also, the RBOCs and
most of the Company's other customers are significantly larger than, and are
able to exert a high degree of influence over, the Company.
(iv) 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 Lucent. See "--Factors that May Affect Future Results -- Potential
Competition From RBOCs and Lucent." 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 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.
(v) 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 or
products, or to develop alternative sources of such components or alternative
contract manufacturing relationships (in the case of the 3net operations) 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."
(vi) 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 several 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 to its customers, they result in
higher levels of inventory than are necessary in the
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<PAGE> 16
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. At July 26, 1997, the Company had open
noncancellable purchase commitments of approximately $2.6 million, covering
several different components. The inability of the Company to incorporate such
components in its products could have a material adverse effect on the Company.
See Subparagraph c. (viii) of this Item 1 -- "Narrative Description of Business
- -- Manufacturing and Suppliers" and Subparagraph c. (v) of this Item 1 --
"Narrative Description of Business -- Marketing, Sales and Distribution."
(vii) POTENTIAL COMPETITION FROM RBOCS AND LUCENT
The Telecommunications Act of 1996 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 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 operations of Lucent, as a supplier
to the Telcos, may have an adverse effect on the Company's business because
Lucent sells certain products that directly compete with the Company's
products.
(viii) GOVERNMENT REGULATION
The telecommunications industry is subject to regulation in the United
States, the United Kingdom and other countries. Federal and state regulatory
agencies regulate most of the Company's domestic customers. While such
regulation does not typically affect the Company directly, the effects of such
regulation on the Company's customers may adversely impact the Company's sales
and operating results. For example, the sale of the Company's products may be
affected by the imposition upon certain of the Company's customers of common
carrier tariffs, the taxation of telecommunications services and regulatory
policies affecting terms on which common carriers conduct their business. In
addition, certain countries may have or may develop rules and regulations that
will adversely affect the Company's ability to effectively compete in some
markets. Thus, there is no assurance that markets that are now open to the
Company's products will not be limited by government regulation in the future.
(ix) 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. 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.
-16-
<PAGE> 17
The Company was a party to agreements with certain of the RBOCs
pursuant to which it licensed 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 licensing
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
each of the remaining 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 Operating Subsidiary also licensed certain
technology from AT&T. This 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 IPO and the Company's recapitalization in connection
therewith, 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.
After AT&T's spin-off of Lucent and the simultaneous transfer of
certain technology and patent rights to Lucent, the Company continued its
discussions with Lucent instead of AT&T. In the context of these discussions,
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
include this technology in the context of a replacement license agreement. The
Company is currently evaluating Lucent's claim. The resolution of this matter
is uncertain at this time, and there can be no assurance that the Company will
be able to obtain a replacement license agreement with Lucent at royalty rates
which would not have a material adverse effect on the Company. See "--Factors
That May Affect Future Results -- Potential Competition from RBOCs and Lucent."
See also Item 3 -- "Legal Proceedings."
(x) 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.
(xi) 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 little apparent correlation with the
operating performance of these companies. Such broad market fluctuations may
adversely affect the market price of the Common Stock.
(xii) RISKS RELATED TO 3NET ACQUISITION
The Company completed its acquisition of 3net on September 18, 1997.
The Company expects the acquisition of 3net to increase its sales and the
markets for its existing and future product offerings. However, there
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<PAGE> 18
can be no assurance that 3net will provide the sales and market
opportunities that the Company expects. Furthermore, even if the acquisition
of 3net does provide such expected sales and market opportunities, there can be
no assurance that the Company will be able to successfully integrate 3net into
its business or take advantage of the synergies which the Company presently
believes will result from the integration of 3net's business. Any failure by
the Company to quickly and successfully integrate the 3net business such that
it is able to derive the benefit from contemplated synergies could have a
material adverse effect on the Company's results of operations.
ITEM 2 - PROPERTIES
The Company's headquarters and principal administrative, engineering
and manufacturing facilities are located in a facility containing approximately
105,000 square feet located on approximately seven acres of land in St.
Charles, Illinois. The Company leases this building under an operating lease
arrangement which expires in September 1999. The Company is also leasing an
additional 3,712 square feet in an office building also located in St. Charles,
Illinois. This building is used to provide office and lab space for marketing
and engineering personnel. The lease on this space expires in December 1998.
In October 1997, the Company offered to purchase another building in St.
Charles, Illinois to provide 19,890 square feet of office and lab space for
$915,000. The offer was preliminarily accepted but all of the terms of the
purchase have not been agreed upon.
3net's principal administrative and engineering offices are located in
a 16,000 square foot facility in an office complex in Basingstoke, England
under two leases which expire in December 2005. 3net also leases sales and
engineering offices in Christchurch, New Zealand (approximately 8,000 square
feet under a lease that expires in March 2000, subject to a four-year renewal
right) and Beijing, China (approximately 2,000 square feet under a lease that
expires in 2007).
The Company believes that anticipated growth through September 1999 can
be accommodated by these facilities and by leasing additional space.
On March 5, 1997, the Company purchased 22.65 acres of land located in
Geneva, Illinois for approximately $1.8 million. The Company plans to commence
the construction of a new office, researching and manufacturing facility in
late fiscal 1998. The Company estimates the cost of this facility to be
approximately $20.0 million and expects to fund its construction from existing
cash, cash flows and possibly debt.
ITEM 3 - LEGAL PROCEEDINGS
On February 25, 1997, Wilcom, Inc. ("Wilcom") instituted a patent
infringement action against the Company in the United States District Court for
the Eastern District of New York (Wilcom, Inc. v. Teltrend Inc., Civil Action
No. 97-0918) seeking injunctive relief, damages, interest, costs and attorney's
fees. Wilcom alleges that certain of the Company's products infringe U.S.
Patent Nos. 4,961,218 and 5,504,811, which relate to enhanced line powered
amplifiers. The only Company product specifically identified as allegedly
infringing the patents is the CyberBlock(R) model LCR4002. The Company
believes that the CyberBlock(R) model LCR4002 does not infringe either of the
patents identified in the suit and, accordingly, that it has the meritorious
and complete defense of non-infringement. Nonetheless, in the event that
Wilcom prevails in the action, the Company does not believe that the suit is
likely to have a material adverse effect on the financial condition or results
of operations of the Company. Although sales of the CyberBlock(R) model
LCR4002 could increase in the future, sales of this product to date have not
been significant.
The Company is from time to time involved in various other legal
proceedings arising in the ordinary course of its business. In addition, the
Company has from time to time been notified by others who assert exclusive
rights to certain technology. The Company evaluates these claims on a case by
case basis and enters into licensing arrangements when it appears necessary or
desirable to do so. The Company believes the resolution of any other pending
matters will not materially affect the Company's financial position or results
of operations. See Subparagraph d. (ix) of Item 1 -- "Factors That May Affect
Future Results -- Proprietary Rights and Risks of Third Party Claims of
Infringement."
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<PAGE> 19
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the Company's 1997
fiscal year to a vote of security holders, through solicitation of proxies or
otherwise.
Pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, the following information is included as an
unnumbered item in Part I of this Report in lieu of being included in the Proxy
Statement for the Company's annual meeting of stockholders to be held on
December 11, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
HOWARD L. KIRBY, JR., PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD OF DIRECTORS--Mr. Kirby has served as the President, the Chief
Executive Officer and a director of the Company since January 1990. Mr. Kirby
was named Chairman of the Board of Directors in February 1997. Mr. Kirby began
his career in the telecommunications industry in 1962 with Collins Radio
Company (which subsequently became a part of Rockwell International
Corporation), where he spent 20 years in various management positions in
engineering, marketing and sales. From 1982 to 1984, Mr. Kirby was the
Director of Planning and Business Development for U.S. Telephone, now part of
Sprint Corporation. In 1984, Mr. Kirby became the Vice President and General
Manager at Pulse Communications, Inc. ("Pulsecom"), a subsidiary of Hubbell
Incorporated, and held that position until he joined the Company in 1990. Mr.
Kirby is 61 years old.
GILBERT H. HOSIE, VICE PRESIDENT, RBOC SALES--Mr. Hosie has served as Vice
President, RBOC Sales since March 1997. Mr. Hosie began his career as a
technician for New York Telephone Company in 1964. In 1969, he became District
Sales Manager for General Electric Company and held that position for six
years. In 1975, Mr. Hosie joined the Wescom Telephone Products Division
("Wescom") of Rockwell International Corporation ("Rockwell") as its Midwest
Regional Manager and remained at Wescom until 1985. Mr. Hosie joined the
Company in 1985 and served in various sales and marketing positions until he
was elected to serve as the Company's Vice President, Sales in August 1994.
Mr. Hosie is 56 years old.
DOUGLAS P. HOFFMEYER, VICE PRESIDENT, FINANCE, SECRETARY AND
TREASURER--Mr. Hoffmeyer joined the Company in 1986 and has served as the
Company's Vice President, Finance, Secretary and Treasurer since 1988. Mr.
Hoffmeyer began his career in 1969 with the public accounting firm of Arthur
Andersen & Co., where he remained for five years before joining a Chicago-area
accounting firm as a partner. Mr. Hoffmeyer is 50 years old.
LAURENCE L. SHEETS, VICE PRESIDENT/GENERAL MANAGER, BROADBAND PRODUCTS AND
CHIEF TECHNICAL OFFICER--Mr. Sheets has served as the Company's Vice
President/General Manager, Broadband Products since July 1996 and also as its
Chief Technical Officer since March 1997. Mr. Sheets joined Bell Telephone
Laboratories ("Bell Labs") as a member of its technical staff in 1966 and left
in 1984 as a Distinguished Member of Technical Staff. At that time, Mr. Sheets
joined Rockwell (Wescom) where he held various progressive positions, including
Manager and later Director of Advanced Technology as well as Director of
Engineering. From January 1991 to July 1996, Mr. Sheets was the Vice
President, Engineering for the Company. Mr. Sheets is 54 years old.
MICHAEL S. GRZESKOWIAK, VICE PRESIDENT, OPERATIONS--Mr. Grzeskowiak has
served as the Company's Vice President, Operations since February 1990. He
began his career as an engineer at Western Electric Company (now Lucent) in
1967, supporting the factory and field installations for switching systems. In
1975, he joined Wescom where he held various positions, including Director of
Manufacturing, Director of Production Operations and Director of Manufacturing
Planning, until he joined the Company in 1990. Mr. Grzeskowiak is 52 years old.
DONALD G. BOZEMAN, VICE PRESIDENT, NON-RBOC SALES--Mr. Bozeman has served
as the Company's Vice President, Non-RBOC Sales since May 1997. Mr. Bozeman
began his career in 1962 as a design engineer at Western Electric Company and
subsequently held various engineering, sales and product development positions
with a number of firms. From 1983 to 1986, Mr. Bozeman was employed by Telco
Systems, Inc. as its Vice President of Corporate Development and later as the
President of its VF Division. Mr. Bozeman served as Vice President
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<PAGE> 20
of Marketing for Pulsecom from 1986 until 1991. Mr. Bozeman joined the
Company in February 1992, and from August 1994 to July 1996, Mr. Bozeman was
the Vice President, Marketing for the Company. From July 1996 to May 1997, Mr.
Bozeman was Vice President/General Manager, T1/Wireless Products. Mr. Bozeman
is 62 years old.
JOHN A. MUNTEAN, VICE PRESIDENT/GENERAL MANAGER, ISDN AND DDS
PRODUCTS--Mr. Muntean joined the Company in this position in April 1997. He
began his career with Reliance Electric Company (which was acquired by Exxon
and later acquired by Rockwell) in 1974. His experience in telecommunications
began with Reliance Comm/Tec (now RELTEC Corporation) in 1981 where he served
in several marketing, sales and management positions. In 1990, he joined
Motorola where he held sales and marketing positions in the New Enterprises and
Computer Group. Most recently, from 1991 until joining the Company, he held
Vice President positions in sales and marketing, product management and
engineering with Charles Industries, Ltd., a privately held manufacturer of
telecommunications equipment (and acquirer of Wescom from Rockwell in 1991).
Mr. Muntean is 44 years old.
JACK C. PARKER, VICE PRESIDENT/GENERAL MANAGER, DLC, VF AND T1/WIRELESS
PRODUCTS--Mr. Parker joined the Company in September 1996 as the Company's Vice
President/General Manager, VF, DLC Products. In May 1997, Mr. Parker was also
made Vice President/General Manager, T1/Wireless Products, in addition to the
VF and DLC Products. Mr. Parker began his career with Harris Corporation's
Aerospace Group in 1969. From 1972 to 1980, Mr. Parker was employed by General
Electric's Telecommunications Division (which was later acquired by Wescom,
which was, in turn, later acquired by Rockwell) where he served as an
electronic design engineer and supervisor. In 1980, Mr. Parker joined Tellabs
Inc. as the Manager of Digital Processing. In 1985, Mr. Parker joined Pulsecom
as a Vice President of Engineering, before returning to Harris Corporation as
the Vice President of the Loop Systems Business Unit of the Dracon Division and
later as the Vice President of Engineering. Most recently, Mr. Parker was the
Vice President of Engineering and Marketing at Canoga Perkins, a Division of
Inductotherm Inc. Mr. Parker is 51 years old.
THEODOR A. MAXEINER, CHIEF ACCOUNTING OFFICER; ASSISTANT VICE PRESIDENT,
FINANCE; CONTROLLER; ASSISTANT SECRETARY; AND ASSISTANT TREASURER--Mr. Maxeiner
joined the Company as its Accounting Manager in 1985 and has served as the
Company's Controller, Assistant Secretary and Assistant Treasurer since 1988.
In May 1997, Mr. Maxeiner became the Chief Accounting Officer. Mr. Maxeiner is
52 years old.
NORMAN C. GUENTHER, ASSISTANT VICE PRESIDENT, QUALITY--Mr. Guenther joined
the Company in 1987 as Director of Quality Assurance and has served as the
Company's Assistant Vice President, Quality since June 1990. Prior to joining
the Company, Mr. Guenther spent six years in the United States Air Force as a
telecommunications system controller and held various quality management
positions with private firms. Mr. Guenther is 48 years old.
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<PAGE> 21
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "TLTN." The following table sets forth for the periods indicated
the high and low closing sale prices for the Common Stock as reported on the
Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
FISCAL 1996 High Low
<S> <C> <C>
First Quarter
(from July 30, 1995 through October 28, 1995)..... $33 $20
Second Quarter
(from October 29, 1995 through January 27, 1996).. $46 3/4 $28
Third Quarter
(from January 28, 1996 through April 27, 1996).... $51 $39 3/4
Fourth Quarter
(from April 28, 1996 through July 27, 1996)....... $57 1/4 $20
FISCAL 1997
First Quarter
(from July 28, 1996 through October 26, 1996)..... $52 3/4 $32
Second Quarter
(from October 27, 1996 through January 25, 1997).. $33 3/4 $16 7/8
Third Quarter
(from January 26, 1997 through April 26, 1997).... $21 1/2 $16 5/8
Fourth Quarter
(from April 27, 1997 through July 26, 1997)....... $19 1/8 $14 3/8
</TABLE>
On October 17, 1997, there were 127 registered holders of record of the Common
Stock.
The Company has not paid any dividends on its capital stock since 1988.
Restrictions or limitations on the payment of dividends may be imposed under
the terms of credit agreements or other contractual obligations. The terms of
the Company's credit 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. In the absence of such
restrictions or limitations, the declaration and payment of dividends will be
at the sole discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporation Law of the State of Delaware.
The timing, amount and form of dividends, if any, will depend, among other
things, on the Company's results of operations, financial condition, cash
requirements, plans for expansion and other factors deemed relevant by the
Board of Directors. The Company intends to retain any future earnings for use
in its business and therefore does not anticipate paying any cash dividends in
the foreseeable future.
ITEM 6 - SELECTED FINANCIAL DATA
The five-year Selected Historical Consolidated Financial Data and
accompanying notes contained on page 19 of the Company's Annual Report to
Stockholders for the fiscal year ended July 26, 1997 are incorporated herein by
reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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<PAGE> 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained on pages 20 through 24, inclusive, of the Company's Annual
Report to Stockholders for the fiscal year ended July 26, 1997 is incorporated
herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
a. The table presenting unaudited quarterly financial data for the
Company for the fiscal years ended July 26, 1997 and July 27, 1996 on page 36
of the Company's Annual Report to Stockholders for the fiscal year ended July
26, 1997 is incorporated herein by reference.
b. The report of independent auditors, financial statements and notes to
financial statements of the Company contained on pages 25 through 36,
inclusive, of the Company's Annual Report to Stockholders for the fiscal year
ended July 26, 1997 are herein incorporated by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements on any matters of accounting principles or
financial statement disclosure with the Company's independent accountants
during fiscal 1997 or 1996.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" contained in the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on December 11,
1997 are incorporated herein by reference. The section entitled "Executive
Officers of the Registrant" appearing immediately after Part I of this Report
is incorporated herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" contained in the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on December
11, 1997 is incorporated herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Section entitled "Security Ownership of Certain Beneficial Owners and
Management" contained in the Company's Proxy Statement for the Annual Meeting
of Stockholders to be held on December 11, 1997 is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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<PAGE> 23
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. (1) Financial Statements
The following financial statements of the Company, included in the
Company's Annual Report to Stockholders for the fiscal year ended July 26,
1997, are incorporated by reference in Part II, Item 8 of this Report.
Balance Sheets as of July 26, 1997 and July 27, 1996
Statements of Income for the years ended July 26, 1997, July 27, 1996 and July
29, 1995
Statements of Changes in Stockholders' Equity for the years ended July 26,
1997, July 27, 1996 and July 29, 1995
Statements of Cash Flows for the years ended July 26, 1997, July 27, 1996 and
July 29, 1995
Notes to Financial Statements
(2) Financial Statement Schedules
Schedules are omitted because of the absence of the conditions under which
they are required or because the information called for is included in the
consolidated financial statements or notes thereto.
(3) Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2 None.
3.1 Restated Certificate of Incorporation of Registrant, as amended. (1)
3.2 Amended and Restated Bylaws of the Registrant.(2)
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock, filed January 23, 1997.
4.1 Specimen form of Common Stock certificate.(2)
4.2 Articles Fourth, Seventh, Eighth, Tenth and Twelfth of the Restated
Certificate of Incorporation of the Registrant, as amended (incorporated
by reference to the Restated Certificate of Incorporation included in
Exhibit 3.1 herewith).
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
(incorporated by reference to the Amended and Restated Bylaws included in
Exhibit 3.2 herewith).
4.4 Credit Agreement between the Registrant and LaSalle National Bank, dated
June 14, 1995.(1)
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C>
4.5 Rights Agreement between the Registrant and LaSalle National Bank, as Rights Agent, dated January 16, 1997.(6)
4.6 Form of Rights Certificate (incorporated by reference to Exhibit B to the Rights Agreement included in Exhibit 4.5
herewith).
9 None.
*10.1 Indemnification Agreement, dated June 8, 1995, between the Registrant and Howard L. Kirby, Jr.(1)
*10.2 Schedule of each of the directors and executive officers of the Registrant with whom the Registrant has entered into an
Indemnification Agreement. (7)
*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.(1)
*10.5 Schedule of Nonqualified Stock Option Agreements which have been entered into by directors or executive officers of the
Registrant. (7)
*10.6 TI Investors Inc. Stock Option Plan.(2)
*10.7 Forms of Nonqualified Stock Option Agreement under the TI Investors Inc. Stock Option Plan, dated August 1, 1994,
between Donald G. Bozeman, together with Amended and Restated Nonqualified Stock Option Agreement under the TI Investors
Inc. Stock Option Plan, dated May 13, 1994, between the Registrant and Donald G. Bozeman.(1)
*10.8 Teltrend Inc. 1996 Non-Employee Director Stock Option Plan.(5)
*10.9 Schedule of Nonqualified Stock Option Agreements which have been entered into by directors of the Registrant. (7)
*10.10 Amended and Restated Stock Option Agreements, dated May 13, 1994, between the Registrant and Gilbert H. Hosie.(1)
10.11 Registration Rights and Lock-Up Agreement between the Registrant, The Prudential Insurance Company of America, Pruco
Life Insurance Company, AEA Investors Inc. and Stockholders of the Registrant prior to consummation of the Registrant's
initial public offering.(1)
10.12 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)
10.13 Second Amendment to Lease, dated September, 1995, between Morgan Guaranty Trust Company of New York and the
Registrant.(4)
10.14 Real Estate Sale Agreement, dated August 20, 1996, between the Registrant and Itasca Bank & Trust Co., as Trustee,
under Trust Agreement dated June 29, 1992 and known as Trust No. 11038 and The Kautz Road Business Park Joint Venture.
(7)
</TABLE>
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<PAGE> 25
<TABLE>
<S> <C>
10.15 Teltrend 1996 Stock Option Plan.
10.16 Share Purchase Agreement among Security Services PLC, Securicor
Communications Limited, 3 Net Holdings Limited, Securicor 3 Net Limited
and Teltrend Inc. (3)
13 1997 Annual Report to Stockholders
21 Subsidiaries of Teltrend Inc.
23.1 Consent of Ernst & Young LLP.
24 None.
27 Financial Data Schedule.
99 None.
</TABLE>
- ------------------------------
(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 April 11, 1995.
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K dated September 18, 1997 (Commission File No. 0-26114).
(4) Incorporated by reference to Registrant's 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).
(6) Incorporated by reference to the Registrant's Current Report on Form
8-K dated January 16, 1997 (Commission File No. 0-26114).
(7) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year ended July 27, 1996 (Commission File No. 0-26114).
(8) 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).
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Report pursuant to Item 14(c).
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-K. THE CHARGE FOR FURNISHING COPIES OF THE EXHIBITS
IS $.25 PER PAGE, PLUS POSTAGE.
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<PAGE> 26
b. Report on Form 8-K
The Company filed a current report on Form 8-K dated September 18, 1997
reporting under item 2 thereof the acquisition of 3net.
This report contains the following trademarks of the Company, some of
which are registered: Teltrend, CellPak and CyberBlock. Any other product or
brand names are trademarks, registered trademarks or service marks of their
respective companies.
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<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on October 24,
1997.
TELTREND INC.
By /s/ Howard L. Kirby, Jr.
-------------------------------------
Howard L. Kirby, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities indicated on October 24, 1997.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- --------------------------- ------------------------------------------------
<S> <C>
/s/ Howard L. Kirby, Jr. President and Chief Executive Officer and
- --------------------------- Chairman of the Board of Directors
Howard L. Kirby, Jr. (Principal Executive Officer)
/s/ Douglas P. Hoffmeyer
- --------------------------- Vice President, Finance, Secretary and Treasurer
Douglas P. Hoffmeyer (Principal Financial Officer)
/s/ Frank T. Cary
- ---------------------------
Frank T. Cary Director
/s/ Harry Crutcher, III
- ---------------------------
Harry Crutcher, III Director
/s/ William R. Delk
- ---------------------------
William R. Delk Director
/s/ Donald R. Hollis
- ---------------------------
Donald R. Hollis Director
/s/ Susan B. Major
- ---------------------------
Susan B. Major Director
/s/ Carl M. Mueller
- ---------------------------
Carl M. Mueller Director
/s/ Bernard F. Sergesketter
- ---------------------------
Bernard F. Sergesketter Director
</TABLE>
<PAGE> 1
EXHIBIT 3.3
State of Delaware
Office of the Secretary of State
PAGE 1
---------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "TELTREND INC.", FILED IN THIS OFFICE ON THE TWENTY-THIRD DAY OF
JANUARY, A.D. 1997, AT 11 O'CLOCK A.M.
Edward J. Freel
[SEAL] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
8713522
2116292 8100 DATE:
10-21-97
971354743
<PAGE> 2
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 11:00 AM 01/23/1997
971022708 - 2116292
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
TELTREND INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Teltrend Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware, in accordance with the provisions of
Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Certificate of Incorporation of the said
Corporation, the said Board of Directors on January 16, 1997 adopted the
following resolution creating a series of 80,000 shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board
of Directors of this Corporation in accordance with the provisions of
the Certificate of Incorporation, a series of Preferred Stock, par
value $.01 per share, of the Corporation be and hereby is created, and
that the designation and number of shares thereof and the voting and
other powers, preferences and relative, participating, optional or
other rights of the shares of such series and the qualifications,
limitations and restrictions thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 80,000.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; provided, however, that no decrease shall reduce the number of
shares of Series A Junior Participating Preferred Stock to less than the number
of shares then issued and outstanding plus the number of shares issuable upon
exercise of outstanding rights, options or warrants or upon conversion of
outstanding securities issued by the Corporation.
<PAGE> 3
2. Dividends and Distribution.
(A) Subject to the prior and superior rights of the holders
of any shares of any class or series of stock of the Corporation ranking prior
and superior to the shares of Series A Junior Participating Preferred Stock
with respect to dividends, the holders of shares of Series A Junior
Participating Preferred Stock, in preference to the holders of shares of any
class or series of stock of the Corporation ranking junior to the Series A
Junior Participating Preferred Stock in respect thereof, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on the
first day of April, July, October and January, in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share
or fraction of a share of Series A Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $.05
or (b) the Adjustment Number (as defined below) times the aggregate per share
amount of all cash dividends, and the Adjustment Number times the aggregate per
share amount (payable in kind) of all non-cash dividends or other distributions
other than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock, par value $.01 per share, of the Corporation (the "Common
Stock") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior Participating
Preferred Stock. The "Adjustment Number" shall initially be 100. In the event
the Corporation shall at any time after January 16, 1997 (the "Rights
Declaration Date") (i) declare and pay any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A)
above immediately after it declares a dividend or distribution on the Common
Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issue of such shares
of Series A Junior Participating Preferred Stock, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record
-2-
<PAGE> 4
date for the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series A Junior Participating Preferred Stock in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date
for the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 60 days prior to the
date fixed for the payment thereof.
3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred
Stock shall entitle the holder thereof to a number of votes equal to the
Adjustment Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as required by law and by Section 10 hereof,
holders of Series A Junior Participating Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Junior Participating Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on shares of
Series A Junior Participating Preferred Stock outstanding shall have been paid
in full, the Corporation shall not:
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for consideration
any shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Junior Participating Preferred Stock, except dividends paid ratably on the
Series A Junior Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled; or
-3-
<PAGE> 5
(iii) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by publication
(as determined by the Board of Directors) to all holders of Series A Junior
Participating Preferred Stock, or to such holders and holders of any such
shares ranking on a parity therewith, upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired promptly after the acquisition thereof. All such
shares shall upon their retirement become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors, subject
to any conditions and restrictions on issuance set forth herein.
6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation, dissolution or winding up of the Corporation, voluntary or
otherwise, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred
Stock shall have received an amount per share (the "Series A Liquidation
Preference") equal to the greater of (i) $160.00 plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, or (ii) the Adjustment Number times the per share
amount of all cash and other property to be distributed in respect of the Common
Stock upon such liquidation, dissolution or winding up of the Corporation.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other classes and series of
stock of the Corporation, if any, that rank on a parity with the Series A
Junior Participating Preferred Stock in respect thereof, then the assets
available for such distribution shall be distributed ratably to the holders of
the Series A Junior Participating Preferred Stock and the holders of such
parity shares in proportion to their respective liquidation preferences.
(C) Neither the Merger or consolidation of the Corporation
into or with another corporation nor the merger or consolidation of any other
corporation
-4-
<PAGE> 6
into or with the Corporation shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of this Section 6.
7. Consolidation, Merger, Etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the outstanding shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case each
share of Series A Junior Participating Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share equal to the
Adjustment Number times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into which or for
which each share of Common Stock is changed or exchanged.
8. No Redemption. Shares of Series A Junior Participating
Preferred Stock shall not be subject to redemption by the Company.
9. Ranking. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Preferred Stock as to the payment
of dividends and as to the distribution of assets upon liquidation, dissolution
or winding up, unless the terms of any such series shall provide otherwise, and
shall rank senior to the Common Stock as to such matters.
10. Amendment. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of two-thirds of the outstanding
shares of Series A Junior Participating Preferred Stock, voting separately as a
class.
11. Fractional Shares. Series A Junior Participating Preferred
Stock may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
-5-
<PAGE> 7
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
22nd day of January, 1997.
TELTREND INC.
By: Douglas P. Hoffmeyer
--------------------------------------
Douglas P. Hoffmeyer
Vice President - Finance and Secretary
-6-
<PAGE> 1
Teltrend Inc. - 620 Stetson Avenue - St. Charles, Illinois 60174
[Teltrend Logo]
Teltrend Inc. 1997 Annual Report
NO
SPEED
LIMITS
Market
Markets + Solutions + Products = Growth
Driven
[Teltrend Logo]
<PAGE> 2
At Teltrend, we believe the faster the traffic the more extraordinary the
opportunities.
[Inside Front and Back Cover Photos]
<PAGE> 3
Financial Highlights
[Bar Graph]
Sales
(dollars in millions)
[Bar Graph]
Net Income (Loss)
(dollars in millions)
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $39,365 $49,454 $62,052 $85,913 $81,243
Gross profit $12,789 $18,324 $26,061 $39,269 $35,947
Income from operations $2,519 $6,009 $11,391 $19,852 $14,433
Net income (loss) ($3,307) $8 $4,330 $12,164 $9,628
Working capital $2,205 $3,292 $10,188 $35,901 $44,088
Stockholders' equity (deficit) ($43,077) ($43,069) $15,417 $42,645 $52,435
</TABLE>
(dollars in thousands)
Teltrend Inc.
1
<PAGE> 4
President's Message
DEAR FELLOW SHAREHOLDER:
As you know, fiscal 1997 sales of $81.2 million, net income of $9.6 million,
and earnings per share of $1.45 were lower than expected. But as fiscal 1997
came to a close, a number of bright spots appeared that we believe point to a
better fiscal 1998. One bright spot was that cash and short-term investments
increased almost $10 million, to $32.8 million. Other bright spots included:
1. The expansion of our market focus to include Competitive Local Access
Providers and Independent Telephone Companies;
2. The expansion of our product offerings for various high-speed digital
services; and
3. The acquisition of the UK-based Securicor 3net (completed September 18,
1997), which we believe puts Teltrend squarely into the high-growth
international ISDN market.
But before talking about the future, let me first tell you a few things
about fiscal 1997. Overall, it was a very mixed bag. Of our 10 sales regions:
seven Regional Bell Operating Companies (RBOCs), GTE, Sprint, and
International, three showed large year-to-year gains, three were basically
level, three were moderately down, and one territory was sharply down. Of our
eight product lines, four showed large year-to-year percentage increases, two
were basically level, and two were sharply down. The product lines showing
large year-to-year percentage increases were Digital Loop Carrier (DLC), T1
Network Interface Units, CellPack, and High Density Subscriber Line Products
(HDSL). The two product lines that were down were Voice Frequency Products (VF)
and T1 repeaters.
In a very real sense, fiscal 1997 was revolutionary in our core RBOC
markets. A big contributor to this revolution was the reaction of the RBOCs to
the Telecommunications Act of 1996. Another factor was the announcement of the
merger of Bell Atlantic with NYNEX and the merger of Southwestern Bell with
Pacific Telesis. Additional key catalysts were the exploding use of the
Internet and the accelerating growth in high-capacity digital services for
voice and data. And underlying all this was the continuing push of
technological advancement.
All of these changes caused the RBOCs to focus on limiting their
expenditures and, consequently, on delaying some new programs. As Teltrend
worked to overcome the impact of these delays, we began to reformulate our
strategies and implement programs to compete better in what is turning out to
be an altered competitive landscape (see Markets section). By the fourth
quarter, Teltrend had in place a new non-RBOC sales force of eight seasoned
professionals and we had made key changes in our product development efforts.
Additionally, as fiscal 1997 drew to a close, we were finalizing our
acquisition of Securicor 3net. This exciting company, based in Basingstoke,
England, had fiscal 1996 sales of approximately $17 million and is a leading
supplier of ISDN, secure virtual private networking, and interconnectivity
solutions in the global marketplace.
Those of you who have followed Teltrend know that we grew from sales of
$29 million in fiscal 1992 to $86 million in fiscal 1996 (a 31 percent compound
annual growth rate). We achieved this growth by entering new markets in the
local loop (see Teltrend Strategic Map at right). During this period, the
emphasis was on innovative Open-Architecture solutions for the installed
telephone network infrastructure in the United States. This infrastructure of
approximately 160 million access lines has recently come under siege.
Originally designed for three-minute low-fidelity infrequent voice calls, a
growing army of users are asking it to pass 56,000 bits per second (bps) for
hours
2 Teltrend, Inc.
<PAGE> 5
on end. Teltrend has brought innovative solutions to this infrastructure
in the past, and we believe these sorts of solutions are needed even more
today.
We also believe that Teltrend's position as a broad-based supplier of
provisioning products will allow us to benefit from programs now underway at
the RBOCs to reduce the number of vendors with which they do business (see
Products section). We intend to continue vigorously with our historic role of
supplying a wide range of innovative, Open-Architecture, provisioning products
to the RBOCs. But we also intend to focus on developing more proprietary
equipment solutions, as well as diversifying our customer base. In recent
years, Teltrend has been granted 14 patents, and we have another 13 patent
applications in process. These patents, along with our technology licenses and
proprietary development programs, should pave the way to a strong, defensible
position in the dynamic and growing world marketplace that is
Telecommunications today.
Some of you may remember that six years ago we were a struggling,
one-product company. We shared the vision then of becoming a broad-based
supplier of local loop provisioning products for the RBOCs. Our goal was to
supply all the types of channel units, repeaters, network interface units, and
the like that the RBOCs need to provide voice and data services in the local
loop. We also envisioned bringing a new standard of innovation and utility to
these products by adding a "brain," or microprocessor to them. Along the way we
expanded that vision to include small digital loop carrier (DLC) systems and
proprietary ISDN customer premises equipment, and last year we expanded our
vision of the market to include the non-RBOC domestic market and the
international market. As a result of all this, Teltrend today addresses a
dynamic, growing market well in excess of $1 billion annually.
Fiscal 1997 was not the year we wanted or expected, but we believe we
learned enough from it not to be compelled to repeat it. The vision some of us
shared six years ago is alive and well. We have never felt better about the
future. The trend, we believe, is to Teltrend.
/s/ Howard L. Kirby, Jr.
- -----------------------------------
Howard L. Kirby, Jr.
President, Chief Executive Officer,
and Chairman of the Board
HOWARD L. KIRBY, JR.
President and Chief Executive Officer
[Photo of Howard L. Kirby]
[Teltrend Strategic Map]
Teltrend, Inc. 3
<PAGE> 6
Experienced Management
Key Teltrend executives left to right are:
1. Doug Hoffmeyer Vice President, Finance
2. Jan Lollini Director of Human Resources
3. Jack Parker Vice President/General Manager,
DLC, VF and T1/Wireless Products
4. Mike Grzeskowiak Vice President, Operations
5. Ted Maxeiner Assistant Vice President, Finance
and Controller
[Photo of Key Executives]
<PAGE> 7
6. Norm Guenther Assistant Vice President, Quality
7. Don Bozeman Vice President, Non-RBOC Sales
8. Larry Sheets Vice President/General Manager,
Broadband Products
9. Gil Hosie Vice President, RBOC Sales
10. John Muntean Vice President/General Manager,
ISDN and DDS Products
[Photo of Key Executives]
<PAGE> 8
1 2
Digital Loop Carrier and T1 and Wireless Products
Voice Frequency Products
Markets
FISCAL 1997: WELCOME TO THE FRENCH REVOLUTION
Teltrend's fiscal 1997 passed into history on July 26. From Teltrend's
perspective, this period was one of the most dynamic 12-month periods since
AT&T's divestiture in 1984. In many respects, fiscal 1997 was like the French
Revolution: the worst of times, the best of times.
Underlying the revolutionary market changes in fiscal 1997 was the
Telecommunications Act of 1996, which we believe dampened enthusiasm among the
RBOCs for investment in their loop facilities, and seemed to intensify the
perception at the RBOCs that they must continuously seek ways to reduce their
costs if they are to survive. The exact degree to which the Telecom Act of 1996
affected RBOC thinking during fiscal 1997 is open to debate. But one thing is
for sure, during fiscal 1997 the RBOCs took a broad range of actions to reduce
their costs, their investment levels, and the number of vendors with which they
do business.
Perhaps the most dramatic examples of RBOC strategic actions during fiscal
1997 were the announced mergers of Bell Atlantic with NYNEX and of Southwestern
Bell with Pacific Telesis, which resulted in across-the-board equipment pricing
studies and resulting pressures on vendors to reduce equipment prices.
Additionally, in fiscal 1997 the RBOCs introduced programs to incentivize
strongly their employees to reduce inventory levels and other investments in
plant and equipment. Fiscal 1997 also saw the introduction of RBOC programs to
off-load procurement and logistics responsibilities to third parties. Last, but
certainly not least, fiscal 1997 was characterized by ongoing technology shifts
in RBOC networks. These technology shifts included increased demand for more
automated and intelligent equipment solutions, as well as shifts to more
advanced transmission solutions, such as ISDN, DDS, HDSL, and fiber optics.
Teltrend believes that the impact of these changes on its business, while
negative on balance in fiscal 1997, should be positive in the future because:
1. Teltrend's improving position in ISDN, DDS, and HDSL should allow it to
benefit from the fundamental technology shifts to these technologies.
2. The accelerating use of fiber optics to deliver t1 should increase the
demand for metallic t1 terminating/extension equipment behind fiber
optics -- an area where teltrend is currently an industry leader.
6 Teltrend Inc.
<PAGE> 9
3 4
ISDN and DDS Products Broadband Products
[Photo of Products] [Photo of Products]
Full Line of ISDN Provisioning Units NetZap PlusTM Full T1 HDSL System
Teltrend provides a full line of ISDN Teltrend's new NetZap Plus full T1
provisioning units including channel HDSL system provides the latest in
units, repeaters, rapid-deployment "repeaterless" T1 connectivity.
channel banks, line powering units,
and housings.
Teltrend Inc. 7
<PAGE> 10
[Bar Graph]
Basic Rate Interface ISDN Lines in service in the U.S.*
*Estimated Projections
Source: The Yankee Group
3. Teltrend's improving positions with the Competitive Local Access
Providers and in the international market should help to reduce the impact
of RBOC buying swings on Teltrend's sales levels.
4. The RBOCs increasing emphasis on reducing the number of equipment vendors
should tend to favor Teltrend, which has a relatively broad product
offering.
1. THE DIGITAL LOOP CARRIER MARKET
In spite of the market vagaries previously discussed, the digital loop carrier
(DLC) market was healthy in fiscal 1997. Teltrend's fiscal 1997 DLC sales
increased 50 percent from $4.1 million to $6.1 million. Various studies
indicate that the United States presently has more than 125 million local loops
that have not been converted from the old twisted-wire to the new
fiber-optic/DLC combination. A recent report on "Telco Local Loop Technologies"
by Robertson Stephens and Company stated, "We believe the growth in DLC
installations has accelerated recently due to stronger new line growth as well
as the introduction of optical technology into the market in the early 1990s."
In the past, Teltrend has competed in the DLC market largely by supplying
special service channel units for the existing infrastructure of Lucent DLC
systems (SLC(R)-96, SLC-5). Teltrend is now in the process of becoming an
Original Equipment Manufacturer (OEM) supplier of channel units to emerging DLC
systems companies, including Next Level Systems, Inc. The Company also recently
began supplying very small DLC systems that are SLC-5 plug-compatible. The
Company's first product of this type, called the Integrated Digital Bank, the
IDB5000, was introduced last year.
The VF portion of Teltrend's DLC/VF business is highly profitable but
addresses a mature market in decline. VF products represent a very large
installed base at the RBOCs, and the Company's sales in this product market
were also negatively impacted during fiscal 1997 by the inventory consolidation
programs initiated by the RBOCs during the year.
2. THE T1 REPEATERED LINE AND FIBER-OPTIC METALLIC EXTENSION MARKET
Teltrend's overall T1 sales were slightly down in fiscal 1997, although T1
Customer Premise Equipment (CPE) sales were up 50 percent, and CellPak(TM)
sales were up 120 percent. The overall slight decline was caused by the
repeatered line T1 category, which was down 27 percent. We expect this
repeatered line T1 market to continue declining. Offsetting this decline,
however, is growing demand for T1 metallic termination/extension equipment
behind fiber-optic spans, which should generate greater sales for the Company's
T1 metallic extension equipment. Overall, we believe this T1 segment should see
small to moderate growth in fiscal 1998.
3. THE ISDN MARKET
ISDN provides dial-up data at 128 Kbs along with a broad range of voice and
voice-plus-data capabilities. ISDN is low cost, here today, and generally
available everywhere in the United States. The chart (in the upper right corner
of this page) from the Yankee Group shows its estimate of projected ISDN line
growth. It projects that the installed base of ISDN access lines in the United
States will almost triple over the next three years.
Teltrend produces ISDN products that the telephone companies use to
provide service over the local loop. The traditional Teltrend ISDN product line
consists of
(R) SLC is a registered trademark of Lucent Technologies, Inc.
Teltrend Inc. 8
<PAGE> 11
[Bar Graph]
U.S. HDSL Revenues*
*Estimated Projections
Source: The Yankee Group
line repeaters, basic rate channel units, and specialized channel banks.
Teltrend sales of ISDN products grew 7 percent in fiscal 1997. Late in
fiscal 1997, Teltrend started negotiating to buy 3net, a subsidiary of
Securicor, Ltd., based in Basingstoke, England. In September, the Company
acquired 3net and its subsidiaries. 3net is a leading company in the
international ISDN business. This acquisition increases significantly
Teltrend's ISDN business, especially in international ISDN markets. 3net has
two exciting ISDN related product lines. One, called "Telco" products,
facilitates basic rate and primary rate delivery by European and other
international telephone companies. The other, called "Network" products,
constitutes a line of terminal equipment that makes ISDN more attractive to
the end-user.
4. THE XDSL MARKET
The market for very high-speed (384 Kbs to 52 Mbs) telephone service over the
existing twisted-pair phone lines is referred to as xDSL, or broadband. This
market is currently divided into four principle segments:
- - HDSL: 1.5 Mbs both directions, over two twisted pairs
- - ADSL/RADSL: 1.5 Mbs to 25.0 Mbs toward the customer and 64 Kbs to
1.0 Mbs from the customer, over one twisted pair
- - SDSL: 384 Kbs to 1.5 Mbs both directions over one twisted pair
- - VDSL: 52 Mbs toward the customer and between 1.6 Mbs and 2.3 Mbs
from the customer, over one twisted pair
Teltrend presently competes in the HDSL and SDSL markets. Overall growth
of the HDSL market, has been rapid, and is expected by most experts to
continue. HDSL currently represents the bulk of the xDSL market. The projected
growth of the HDSL market, according to the Yankee Group, is shown in the chart
(in the lower left corner of this page). HDSL utilizes 4 wires just like
repeatered T1, and is arguably the best way to provision T1 service in about 60
percent of the cases. Teltrend entered this market late in fiscal 1997 and is
just beginning to receive orders.
Teltrend has been selling a fractional T1 SDSL product for two years. This
product reduces the cost to telephone companies of providing fractional T1
service to their customers. The market for fractional T1 services has not yet
fully developed, and Teltrend's emphasis is now on the 4-wire HDSL market.
A key factor in the overall T1 delivery market today is the movement
toward intelligent platforms or mechanics. These platforms replace traditional
non-intelligent mechanics, such as the AT&T 220, the AT&T DDM+ and the
Charles/Wescom STS. Intelligent platforms offer the extension of T1 by
repeatered T1, HDSL, and low-speed fiber optics. These intelligent systems also
provide remote monitoring and provisioning, comprehensive performance
monitoring, and other advanced capabilities. The Company is currently working
on such an intelligent platform and believes that such systems should enlarge
the utility of T1 service and could lead to new applications and increased
demand for Teltrend's T1 products.
Teltrend Inc. 9
<PAGE> 12
SOLUTIONS
FUTURE SHOCK
Teltrend's historic role has been to provide telephone companies (telcos) with
new, innovative versions of the basic electronic building blocks they need to
provision voice and data services over the local telephone line, or loop. These
new Teltrend upgrades have typically involved the adding of a "brain," or
microprocessor, to time-honored electronic units like repeaters, channel units,
and network interface units. This "brain" does the work previously done by
technicians (setting switches and making measurements). Also, the telcos can
communicate with the "brain" from a distance, thereby avoiding the cost of
dispatching personnel. The "brain" saves technician time and reduces the
technician skill level required. These factors have become very important as
the telcos find themselves "downsized" to fewer and fewer people.
Additionally, as the capacity of local network facilities has increased
and as data, versus voice, requirements have begun to drive the network, the
reliability of telephone service has become extremely critical. The presence of
a "brain" in a provisioning unit allows not only automated or remote
provisioning and maintenance, but also allows the accumulation of data on the
circuit (so-called performance monitoring data). This performance monitoring
feature, virtually unknown in the local loop a decade ago, when Teltrend first
put a "brain" in these types of telco units, is increasingly demanded today.
In addition to a shrinking work force and more demanding customers, telcos
today face problems not even dreamed of a few short years ago. The Internet
explosion continues to overload their networks. A network designed for three
minute voice calls must now accommodate millions of Internet surfers who stay
connected for hours on end. A network designed for low-fidelity voice (below
3000 hertz) now has patrons demanding their telephone circuit pass dial-up data
at 56,000 bits per second. Legacy digital loop carrier systems designed to
eliminate the hand-crank party line years ago are now expected to accommodate
ISDN data at 128,000 bits per second. T1 lines, at 1,544,000 bits per second,
once considered only of interest to the Fortune 500, are now routinely ordered
into residential garages and basements. Social changes are resulting in the
need to provide, in many cases, five or more telephones to residences where
only one was needed a few short years ago. And in a world in which twisted-pair
10 Teltrend Inc.
<PAGE> 13
[Photo of CyberBlock]
CyberBlock(R) LCR4002
The Teltrend CyberBlock is designed to
provide improved voice and data performance
on long loops. It also provides a
more economical way for Telcos to provision
special voice circuits like foreign
exchange lines.
wire is supposed to be passe, the telcos are finding themselves running out of
it at an alarming rate. And all this is complicated by the Telecommunications
Act of 1996.
What a world! The RBOCs can't change it. The independent telcos can't
change it. And Teltrend can't change it. But Teltrend can provide solutions
that allow its customers, the telcos, to meet these challenges and, hopefully,
prosper.
HELPING POTS
Although wireless voice and advanced data services like ISDN, DDS, and
T1 are growing rapidly, plain old telephone service (POTS) consisting of
dial-up voice or modem-data remains the bulk of U.S. telephone usage. Of the
approximately 160 million U.S. access lines, approximately 130 million, or more
than 80 percent, are still for POTS service. Of these 130 million lines,
approximately 75 percent are twisted-pair copper running all the way back to
the central office. Many of these loops are long or noisy or both, and many are
foreign exchange lines that must be "back hauled" to some very distant central
office.
Also, 25 percent of these local access lines are deployed via DLC. While
solving some problems, deploying access lines via DLC can create other
problems. DLC, and other channel banks, work by converting the analog
voice/modem information to digital form and reversing the process at the other
end. This analog-to-digital (A/D) then digital-to-analog (D/A) process can play
havoc with modem data, particularly the new 56,000-bit-per-second dial-up
modem.
All the conditions described above can significantly degrade voice and
modem performance. But Teltrend has developed a range of solutions to deal with
them. Here are three examples:
CYBERBLOCK An economical little device that installs in the plastic telephone
box outside a residence or business (see above left). The CyberBlock
automatically compensates for gain and frequency-response problems on the
twisted-pair, improving voice and modem performance.
Teltrend Inc. 11
<PAGE> 14
Teltrend's Products Connect
Subscribers to their Local Central Office Teltrend Products
<TABLE>
<S> <C> <C>
Telephone CB CyberBlock POTS - PLAIN OLD TELEPHONE SERVICE
Computer RO Router MB Minibank ISDN - DIAL-UP DATA & VOICE Repeater
Pay Telephone CB CyberBlock SPECIAL SERVICES VOICE - COIN, PRIVATE LINE, ETC.
ATM Machine DDI DDS Network Interface Unit DDS - PRIVATE LINE DATA Repeater
NIU T1 Network Interface Unit T1 - VIA REPEATERED LINE Repeater Repeater
Private Branch Exchange
HD HDSL T1 - VIA HDSL
Cellular or PCS Telephone CP CellPak CELLULAR & PCS
</TABLE>
ISP409 A channel unit that allows Internet service providers (ISPs) to connect
into a special part of the local central office switch. Connecting in this way
keeps the heavy-use ISP lines from blocking out ordinary telco customers trying
to make calls.
DCAC4570 A channel unit that takes the analog-to-digital-to-analog process out
of back-to-back telephone line interconnection, thus eliminating the modem
degradation that would otherwise occur.
HELPING HIGH-CAPACITY VOICE AND DATA
Beyond the world of POTS lies the exploding worlds of wireless communications
and high-speed data services. Here also, rapidly evolving requirements are
putting the telcos under the gun to provide clear high speed service. And here
also Teltrend is coming up with innovative solutions to help them. Here are
four examples:
PERFORMANCE MONITORING T1 NETWORK INTERFACE UNIT
This unit allows a telephone company to know if a problem has occurred
on a T1 access line and, if so, to pinpoint where the problem occurred.
CELLPAK(TM) This unit allows a telephone company to provide high-capacity
central office access to a cellular or Personal Communications System (PCS)
wireless base station by either repeatered T1, HDSL T1, or low-speed fiber
optics, and to provide this service in a pretested weatherproof package. With
the Teltrend CellPak, initial installation and subsequent maintenance do not
require access to the wireless operator's building.
IDB5000 VERY SMALL DIGITAL LOOP CARRIER SYSTEM The IDB5000 allows a telco to
provide ISDN and other special services from a DLC location, irrespective of
the capability of the installed DLC system. The IDB5000 is plug-compatible with
the existing infrastructure of SLC(R)-5 channel units. This provides significant
savings in logistics and training costs to the telephone company. The IDB5000
is variously described as a "rapid deployment bank," or a "bypass bank," or a
"mini-bank." All are very apt terms.
NETZAP PLUS(TM) HDSL The new Teltrend NetZap Plus HDSL system provides
repeaterless T1 service out to 12,000 feet. It can also be used out to 36,000
feet using two Teltrend HDSL doublers. This new Teltrend HDSL system has a
range of features, including provisioning from both ends, which the Company
believes will make it a favorite with discerning telco users.
(R)SLC is a registered trademark of Lucent Technologies, Inc.
12 Teltrend Inc.
<PAGE> 15
[Telephone Company Local Central Office Flow Chart]
[Photo of Product]
Performance Monitoring T1 Network
Interface Unit (NIU)
The Teltrend T1 Performance
Monitoring (PM) Network
Interface Unit, Model 5760,
continuously monitors the
performance of the T1 line
and stores a broad range of
performance data for later retrieval.
SOLUTIONS SUMMARY
These then are some of the solutions that Teltrend is providing to its
customers. These solutions are mostly geared to Open-Architecture and to the
imbedded mechanics used in the U.S. network. As the Company moves forward,
however, it is becoming evident that proprietary systems-oriented solutions
will also be required for the Company to prosper in the long run. A start
toward developing proprietary system oriented solutions at Teltrend was the 200
Mechanics(R), which we invented. The IDB5000 bypass DLC system was also a step
in this direction. And Teltrend is currently working on T1 delivery/extension
systems. Whether Open-Architecture or proprietary solutions eventually will
prevail in world telephone networks is, at this point, far from clear. But,
Teltrend intends to continue to develop innovative solutions to our customers'
problems using both approaches, standard plug-ins for industry infrastructure,
as well as proprietary systems.
CellPak(TM) 504
[Photo of Product]
The Teltrend CellPak 504 provides
a convenient weatherproof outdoor
Telco termination package at
Cellular and PCS antenna sites.
Products
Open here to discover the broad range of Teltrend telephone products.
Teltrend Inc. 13
Teltrend Inc. 14
<PAGE> 16
1 DIGITAL LOOP CARRIER AND
VOICE FREQUENCY PRODUCTS
<TABLE>
<CAPTION>
FEATURED PRODUCTS TECHNICAL SPECIFICATIONS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Teltrend offers a full Full Line Of Channel - The DCAC4570 is designed to eliminate
line of special services Units for interconnection, modem degradation in back-to-back circuits
channel units for the Internet Access, and while preserving testability
AT&T D4 channel bank Other Special Services
and the Lucent SLC(R)-96 - The ISP409 is designed to alleviate local
and SLC-5 Digital [Photo of Product] central office switch congestion caused by
Loop Carrier Systems. Internet Service Providers
- The DPT/GT4530 is designed to eliminate
howling and other problems on long
direct-inward-dial (DID) lines
- The FXO4520 is designed to eliminate many
problems commonly encountered with certain
PBX's and certain central office switches
- The Combo 4555 is designed to provide FXS,
DPO, TO, PLAR, all with gain transfer and
automatic balance
Not shown are Teltrend ETO and SPOTS
units for SLC-5 and D4
- ---------------------------------------------------------------------------------------------------------------------------
The Teltrend IDB5000 Series IDB5000 Series Special - Available in one or two T1 configurations
DLC Minibank is designed to Services DLC Minibank - Uses standard SLC-5 type channel units
provide an economical way to
implement small numbers of [Photo of Product]
special services circuits
in the local loop.
- -----------------------------------------------------------------------------------------------------------------------------
The Teltrend CyberBlock(R) CyberBlock LCR4002 - Designed to solve chronic problems with
is designed to provide residential and business lines
improved voice and data [Photo of Product]
performance on long loops. - Easy to install and align
- Lower cost and quicker way to
provision 2-wire special circuits
compared to using metallic facility
terminal (MFT) equipment
- --------------------------------------------------------------------------------------------------------------------------
Teltrend Ultraport is the Analog Data Line Provisioning - Teltrend's Ultraport(R) is line or local powered
universal way to Units
terminate analog data lines. - The Ultraport is designed to equalize the line
[Photo of Product] in both directions, improving modem performance
Teltrend ISQ installed in
the central office - The Ultraport and ISQ are designed to provide
channel bank, automates complete circuit testability
circuit alignment.
- The Ultraport is available in 200 Mechanics(R) or
Analog data lines are 400 Mechanics
typically used to tie
Automatic Teller Machines
and the like back to a
central computer.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
2 T1 AND WIRELESS PRODUCTS
<TABLE>
<CAPTION>
FEATURED PRODUCTS TECHNICAL SPECIFICATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Teltrend T1 Performance Performance Monitoring T1 Network - Compatible with all leading test/monitoring systems
Monitoring (PM) Network Interface Unit (NIU)
Interface Unit, Model 5760, - PM data is available through front panel jack or can
continuously monitors the [Photo of Product] be retrieved remotely
performance of the T1 line
and stores a broad range - 200 Mechanics(R) for space savings
of performance data for
later retrieval. - Line powered
- Stores PM data for up to 7 days
- -----------------------------------------------------------------------------------------------------------------------------------
Teltrend supplies a broad Full Line of Intelligent T1 Left to right
line of intelligent units Provisioning Units - Teltrend T1 Line Repeater
for provisioning T1
repeatered lines. [Photo of Product] - Teltrend Intelligent T1 Office Repeaters:
DDM+ Mechanics
All units are remotely STS Mechanics
addressable and provisionable. 220 Mechanics
- -----------------------------------------------------------------------------------------------------------------------------------
The Teltrend CellPak(TM) 504 CellPak 504 - Available for repeatered T1, HDSL T1,
provides a convenient and low-speed fiber configurations
weatherproof outdoor Telco [Photo of Product]
termination package at - Features separate secure access doors
Cellular and PCS antenna sites. for wireless operator and for the Telco
- Full line protection features
- UL certified
- -----------------------------------------------------------------------------------------------------------------------------------
Teltrend provides a broad range Mountings - Single and multiple mounts
of mountings for both digital
and analog services. [Photo of Product] - 400 Mechanics and 200 Mechanics
- Wall and equipment rack configurations
</TABLE>
(R) SLC is a registered trademark of Lucent Technologies, Inc.
<PAGE> 17
3 ISDN and DDS Products
<TABLE>
<CAPTION>
FEATURED PRODUCTS TECHNICAL SPECIFICATIONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Teltrend's IDB5008I and IDB5016 IDB5008/IDB5016 - IDB5008I provides up to eight (8) ISDN circuits
Channel Banks are designed to over a single DS1 and is ideal for customer
provide a quick economical way [Photo of Product] premise application
to provision basic rate ISDN
service in the local loop. Call - IDB5016 provides up to sixteen (16) ISDN circuits
these banks "bypass banks," over two (2) DS1s for central office and remote
"rapid deployment banks," or terminal applications
"mini-banks;" all these names
are apt. - Use standard SLC(R)- 5 type channel units
- Banks can also be used to supply POTS, SPOTS,
COIN, DDS and other special services
- -------------------------------------------------------------------------------------------------------------------------------
Teltrend provides a full line of ISDN Full Line of ISDN - D4, SLC-96, SLC-5, and SLC-2000 channel units
provisioning units including channel Provisioning Units - Repeaters available in single and dual configurations
units, repeaters, rapid-deployment
channel banks, line powering units, [Photo of Product]
and housings.
- --------------------------------------------------------------------------------------------------------------------------------
Teltrend provides a full line of DDS Full Line of DDS - D4, SLC-96, SLC-5 and SLC-2000 channel units
provisioning units including channel Provisioning Units - Full support of swtched 56 Kbs service
units, repeaters, network interface
units (NIU's) and housings. [Photo of Product]
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4 Broadband Products
<TABLE>
<CAPTION>
FEATURED PRODUCTS TECHNICAL SPECIFICATIONS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Teltrend's new NetZap Plus(TM) full NetZap Plus Full T1 - Central office unit available in 220, STS and DDM+
T1 HDSL system provides the latest in HDSL System mechanics
"repeaterless" T1 connectivity. - Central office units power up to two doublers
[Photo of Product] plus remote unit
- Provisionable from either end
- Doublers available in "dual wide," "H," and
"400 Mechanics"
- Graphical interface for ease of maintenance
- Central office 220 units works from -40V to -150V
- -----------------------------------------------------------------------------------------------------------------------------
Teltrend's NetZapTM fractional T1 HDSL NetZap Fractional T1 HDSL - Central office unit available in
system provides 2 to 12 DSO's over an System D4/SLC(R)-96 mechanics
ordinary 2-wire loop. NetZap allows two - Can be configured from either end
or more fractional T1 customers to be [Photo of Product]
aggregated on a single T1, saving
transmission and switching facilities.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(R) SLC is a registered trademark of
Lucent Technologies, Inc.
<PAGE> 18
Basic Drivers Behind Teltrend's U.S. Market,
and Associated Teltrend Products
<TABLE>
<CAPTION>
Telephone Service Approximate Approximate Associated Teltrend Products
Installed Base Annual Growth
of Access Lines of Access Lines
(end of fiscal '97) (fiscal '98)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
POTS 133,000,000 4,000,000 - CyberBlock(R)
- POTS/SPOTS DLC Channel Units
Private Line Voice 16,000,000 500,000 - Special Services Voice Channel Units
Private Line Data 3,000,000 200,000 - Data Station Termination Units
- ETO Channel Units
T1 via Repeatered Line 1,000,000 100,000 - Full Line of Intelligent Office &
Line Repeaters and NIU's
T1 via HDSL 500,000 400,000 - Full Line of Full T1 HDSL and
Fractional T1 HDSL Products
T1 via Fiber Optics 500,000 200,000 - CellPak(TM)
ISDN 1,000,000 600,000 - Full Line of ISDN Channel Units,
Repeaters, and Housings
- Protocol Converters
- ISDN Routers
DDS 5,000,000 500,000 - Full Line of DDS Channel
- Units, Repeaters, and NIU's
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL 160,000,000 6,500,000
</TABLE>
5 Teltrend Limited
Formerly Securicor 3net
Headquartered in Basingstoke, UK, with
locations in Christchurch, New Zealand and
Beijing, China, Teltrend Limited develops,
manufactures, and distributes products for the
International ISDN market.
<TABLE>
<CAPTION>
FEATURED PRODUCTS TECHNICAL SPECIFICATIONS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Teltrend supplies a variety of Interchange IQ Series The Interchange IQ Series provide:
ISDN access network solutions for Telecom - ISDN Protocol Conversion
service providers and telecom equipment [Photo of Product] - Port Concentration
vendors operating within European and - Service Grooming
other international markets. - Intelligent Routing
- Remote Management
- ---------------------------------------------------------------------------------------------------------------------------
Teltrend supplies high-performance Network IQ Series Shown at left are the following
multi-protocol ethernet routers which meet Network IQ products:
the needs of a wide range of users from [Photo of Product] - NiQ800 ISDN Small Office Router
small office through to telephone - NiQ1000 Remote Office Router
central office site. The Network IQ range - NiQ3100 Central Site Router
of routers meet the needs of a wide
range of general and special applications.
</TABLE>
<PAGE> 19
Locations of Teltrend's U.S. Sales Representatives
[MAP]
Locations of Teltrend's International Sales Representatives
[MAPS]
Teltrend Inc. 17
<PAGE> 20
19 Selected Historical Financial Data
20 Management Discussion and Analysis of Financial
Condition and Results of Operations
25 Report of Independent Auditors
26 Balance Sheets
27 Statements of Income
28 Statements of Changes in Stockholders' Equity
29 Statements of Cash Flows
30 Notes to Financial Statements
Financials
The statement of operations data set forth below with respect to fiscal 1997,
1996 and 1995 and the balance sheet data at July 26, 1997 and July 27, 1996 are
derived from, and are qualified by reference to, the financial statements as
audited by Ernst & Young LLP, and should be read in conjunction with those
financial statements and notes thereto and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The statement of
operations data set forth below with respect to Fiscal 1994 and 1993 and the
balance sheet data at July 29, 1995, July 30, 1994 and July 31, 1993 are
derived from the Company's audited financial statements not included in this
Report.
References to the "Company" herein refer to Teltrend Inc. The Company's
fiscal year ends each year on the last Saturday of July. All references to
fiscal years herein refer to fiscal years ending in the calendar year indicated
(e.g., fiscal 1997 refers to the year ended July 26, 1997).
18 Teltrend Inc.
<PAGE> 21
Selected Historical Financial Data (1)
<TABLE>
<CAPTION>
Fiscal Year Ended July(1)
(Dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993(6)
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $81,243 $85,913 $62,052 $49,454 $39,365
Cost of sales 45,296 46,644 35,991 31,130 26,576
------------------------------------------------------------------
Gross profit 35,947 39,269 26,061 18,324 12,789
------------------------------------------------------------------
Operating expenses:
Sales and marketing 7,333 7,309 5,908 4,914 4,016
Research and development 9,686 7,944 5,337 4,862 4,018
General and administrative 4,495 4,164 3,425 2,539 2,236
-------------------------------------------------------------------
Total operating expenses 21,514 19,417 14,670 12,315 10,270
-------------------------------------------------------------------
Income from operations 14,433 19,852 11,391 6,009 2,519
Other income (expense):
Interest 1,467 809 (8,484)(2) (5,978) (5,622)
Other (30) (44) (204) 27 (204)
-------------------------------------------------------------------
Income (loss) before income tax provision
(benefit) and extraordinary items 15,870 20,617 2,703 58 (3,307)
Income tax provision (benefit) 6,242 8,453 (2,038)(3) 50 -
-------------------------------------------------------------------
Income (loss) before extraordinary items 9,628 12,164 4,741 8 (3,307)
Extraordinary items(4) - - 411 - -
-------------------------------------------------------------------
Net income (loss) $9,628 $12,164 $4,330 $8 $(3,307)
-------------------------------------------------------------------
Net income per common share $1.45 $1.86
Average common shares outstanding 6,654,488 6,552,339
Pro forma earnings per share (unaudited)(5) $1.19 $0.63
Pro forma average common
shares (unaudited)(5) 5,951,485 5,943,395
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------
Working capital $44,088 $35,901 $10,188 $3,292 $2,205
Total assets 62,832 57,284 28,699 19,109 15,415
Long-term debt, net of current portion - - - 50,105 49,694
Stockholders' equity (deficit) 52,435 42,645 15,417 (43,069) (43,077)
------------------------------------------------------------------
</TABLE>
(1) The Company's fiscal year consists of four 13 week quarters, with each
of the first three quarters ending on the last Saturday of such quarter and
the fourth quarter ending on the last Saturday in July.
(2) Fiscal 1995 includes approximately $2.9 million of additional interest
expense resulting from the accretion in the aggregate outstanding principal
amount of a portion of the Company's outstanding long-term indebtedness.
Substantially all of the Company's long-term indebtedness was repaid in
full upon consummation of the IPO (as defined in Note 1 of Notes to
Financial Statements) and the other components of the Recapitalization (as
defined in Note 1 of Notes to Financial Statements).
(3) In fiscal 1995, the Company eliminated its valuation allowance for net
deferred tax assets of approximately $3.4 million.
(4) Extraordinary items include a Prepayment Penalty ("Prepayment Penalty")
of $500,000 associated with prepayment of the Company's former credit
Agreement in connection with the Recapitalization (as defined in Note 1 of
Notes to Financial Statements) and the write-off of the unamortized loan
financing costs of $162,500 related to a portion of the Company's long-term
indebtedness which was repaid upon consummation of the IPO (as defined in
Note 1 of Notes to Financial Statements) and the other components of the
Recapitalization, net of an income tax benefit of $251,750 related to the
Prepayment Penalty and write-off.
(5) Pro forma earnings per share and average number of shares for fiscal
1994 and fiscal 1995 give effect to the IPO (as defined in Note 1 of Notes
to Financial Statements) and the other components of the Recapitalization
(as defined in Note 1 of Notes to Financial Statements), as if they
occurred as of August 1, 1993.
(6) Fiscal 1993 consisted of 53 weeks. The extra week had no material impact
on the results.
Teltrend Inc. 19
<PAGE> 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
This Annual Report, including the following "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, including the development and marketing
of certain new products and the anticipated future growth in certain
markets in which the Company currently markets and sells its products
or anticipates selling and marketing its products in the future. These
forward-looking statements (i) are identified by their use of such
terms and phrases as "we believe," "are needed," "we intend," "we also
intend," "should pave the way," "never felt better about the future,"
"should be," "should allow," "should increase," "should help," "should
tend," "is now in the process of becoming," "we expect," "should
generate," "should see," "projected," "projects," "will almost
triple," "is expected," "should enlarge," "could lead," "can provide,"
"is coming up with," "will make," "will also be required," "intends,"
"will allow," "will help," "will continue," "will be," (ii) are
subject to risks and uncertainties and represent the Company's present
expectations or beliefs concerning future events, and (iii) in certain
cases (as indicated herein), are based on industry and market data and
estimates developed by others. The Company cautions that the
forward-looking statements are qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including (i) risks of general market
conditions, including demand for the Company's products and services,
competition and price levels and the Company's historical dependence
on relatively few product lines and on certain key customers, and (ii)
risks inherent to the telecommunications industry, including rapidly
changing technology, evolving industry standards, changes in customer
requirements, price-competitive bidding, frequent product
introduction, changing government regulations and potential
competition from AT&T, the RBOCs, Lucent Technologies, Inc. and
others. Results actually achieved thus may differ materially from
expected results included in these statements. See "Factors That May
Affect Future Results" in the Company's fiscal 1997 Annual Report on
Form 10-K as filed with the Securities and Exchange Commission.
GENERAL
- ------------------------------------------------------------------------------
Teltrend Inc. ("Teltrend" or the "Company") designs,
manufactures and markets a broad range of transmission products, such
as channel units, repeaters and termination units, that are used by
telephone companies ("Telcos") to provide voice and data services over
the existing telephone network. Substantially all of the Company's
products are sold directly to the Regional Bell Operating Companies
and their local affiliates (collectively, the "RBOCs") for use with
copper wireline in the local subscriber loop (the "Local Loop"). The
demand for high speed digital transmission over the telephone network
continues to increase as a result of the demand for high capacity
voice lines and the growing communications requirements of LAN
interconnections, WANs, on-line data networks (which typically connect
point-of-sale credit card authorization terminals, automatic teller
machines, lottery terminals and reservation stations to a central
computer), the Internet, other on-line data services and, to a lesser
extent, video conferencing. The Company's current products enhance the
transmission of voice and data over the copper network and permit the
Telcos to maximize use of the existing infrastructure of copper
wireline.
The Company's principal customers are the RBOCs, but the
Company also sells its products to certain independent Telcos and
other companies. The Company's principal product lines include: (i)
Tl products which allow Telcos to deploy 1.544 Mbit/sec digital
services; (ii) Voice Frequency ("VF") products which are primarily
used to provide analog data transmission services via dedicated lines;
(iii) Dataphone Digital Services ("DDS") products which are used to
provide switched and dedicated line digital transmissions at rates
from 2.4 to 64 Kbit/sec; (iv) Integrated Services Digital Network
("ISDN") products which provide switched digital transmission of voice
or data at rates of up to 128 Kbit/sec over copper wireline; and (v)
digital loop carrier ("DLC") products which are cabinets and plug-in
channel units that are compatible with D4, SLC(R) Series 5 and SLC 96
systems. DLC products include plain old telephone service ("POTS")
and special plain old telephone service ("SPOTS") products, which are
used to provide traditional analog voice and modem services. In
addition, the Company recently began selling both 2 and 4-wire High
bit-rate Digital Subscriber Line ("HDSL") products which allow Telcos
to provide T1 service without the need to condition the copper
wireline or install mid-span repeaters for distances of up to 12,000
feet.
20 Teltrend Inc.
<PAGE> 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
On September 18, 1997, the Company acquired all the outstanding
shares of Securicor 3net Limited of Basingstoke, England and its U.S.
affiliate Securicor 3net Inc. (collectively, "3net") from 3net
Holdings Limited of Surrey, England ("3net Holdings") for a total
acquisition cost of approximately $16 million. The Company funded its
acquisition of 3net with its cash and cash equivalents on hand and the
proceeds from the sale of certain of its investments in debt
securities. 3net Holdings is a subsidiary of Securicor Communications
Limited of Surrey, England ("Securicor Communications"). Based in the
United Kingdom, and with operations in New Zealand, China and the
United States, 3net is a leading developer of ISDN products for
communications equipment and service providers. 3net also supplies LAN
Internetworking, ISDN Remote Access and secure Virtual Private
Networking solutions for business customers worldwide. The Company
believes 3net will help it to expand into foreign markets and will
allow the Company to deliver ISDN products for the infrastructure and
terminal equipment markets.
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The following table sets forth certain statements of operations
data as a percentage of net sales for fiscal 1997, 1996 and 1995. The
Company's fiscal year typically consists of 52 weeks (four 13 week
quarters), with every fifth year consisting of 53 weeks.
<TABLE>
<CAPTION>
Fiscal Year Ended July
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 55.7 54.3 58.0
---------------------------
Gross profits 44.3 45.7 42.0
---------------------------
Operating expenses:
Sales and marketing 9.0 8.5 9.5
Research and development 11.9 9.3 8.6
General and administrative 5.5 4.8 5.5
---------------------------
Total operating expenses 26.4 22.6 23.6
---------------------------
Income from operations 17.9 23.1 18.4
Interest expense - - (13.7)(1)
Other income (expense) 1.7 0.9 (0.3)
---------------------------
Income before income taxes and extraordinary items 19.6 24.0 4.4
Income tax provision (benefit) 7.7 9.8 (3.3)(2)
---------------------------
Income before extraordinary items 11.9 14.2 7.7
Extraordinary items - - (0.7)(3)
---------------------------
Net income 11.9% 14.2% 7.0%
---------------------------
</TABLE>
(1) Includes approximately $2.9 million of additional expense (4.7% of net
sales) resulting from the accretion of the outstanding principal amount of
a portion of the Company's long-term indebtedness on August 1, 1994.
Substantially all of the Company's long-term indebtedness was repaid upon
consummation of the IPO and the other components of the Recapitalization.
See Note 1 of Notes to Financial Statements.
(2) Includes elimination of a valuation allowance for net deferred tax
assets of approximately $3.4 million (5.4% of net sales).
(3) Includes a Prepayment Penalty of $500,000 (0.8% of net sales) and the
write-off of the unamortized loan financing costs of $162,500 (0.3% of net
sales) related to a portion of the Company's long-term indebtedness which
was repaid upon consummation of the IPO and the other components of the
Recapitalization, net of an income tax benefit of $251,750 (0.4% of net
sales) related to the Prepayment Penalty and write-off. See Note 14 of
Notes to Financial Statements.
Teltrend Inc. 21
<PAGE> 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
FISCAL 1997 COMPARED TO FISCAL 1996
- ----------------------------------------------------------------------------
NET SALES. Net sales for fiscal 1997 decreased 5.4%, or approximately
$4.7 million, to approximately $81.2 million, from approximately $85.9
million in fiscal 1996. The decrease in net sales was primarily due to
a decrease in unit volume sales of the Company's VF/DLC, T1/Wireless
and ISDN/DDS products of approximately $3.7 million, $1.0 million and
$0.2 million, respectively. The decrease was partially offset by an
increase of approximately $0.1 million in unit volume sales of HDSL
products.
The decrease in the unit volume sales of VF/DLC products was
the result of generally declining sales of VF products throughout the
market, offset somewhat by an increase in the sale of DLC products.
The decline in sales of VF products was a continuation of a downward
trend in VF sales resulting from a decline in the demand for analog
services as demand for digital transmission services grows. The
Company believes demand for digital transmission services will
continue to grow as the cost of providing these services becomes less
expensive.
The decrease in the sales of the Company's T1/Wireless products
was caused largely by a decrease in the intelligent T1 repeater unit
volume sales. However, the losses were offset by an increase in T1 CPE
and CellPakTM unit volume sales. Sales of the Company's T1 intelligent
line repeaters ("ILRs") were negatively affected by the increased
installation of HDSL equipment at certain RBOCs. However, another
intelligent T1 repeater product, the intelligent high density
repeaters ("IHRs") increased in unit volume sales primarily due to
their deployment in conjunction with fiber optic installations. Sales
of the Company's T1 CPE products, consisting of Network Interface
Units ("NIUs") and associated mountings, increased due primarily to a
sales agreement signed in late fiscal 1996 and the approval by certain
RBOCs of new product iterations.
The small decrease in ISDN/DDS sales resulted primarily from a
decrease in the price paid by certain RBOCs for ISDN/DDS products
offset by an increase in the number of RBOCs that have qualified these
products since fiscal 1996.
GROSS PROFIT. Gross profit in fiscal 1997 decreased 8.5%, or
approximately $3.3 million, to approximately $35.9 million from
approximately $39.3 million for fiscal 1996. Gross profit margin in
fiscal 1997 decreased to 44.3% from 45.7% for fiscal 1996. The
decrease in gross profit and gross profit margin was primarily
attributable to decreased sales volume and the resulting smaller
revenue base over which the Company could spread its fixed
manufacturing costs. Other causes included increased pressure to
reduce the Company's prices, especially for ISDN products, and the
Company's sale of several relatively new products with lower gross
profit margins.
SALES AND MARKETING. Sales and marketing expenses in fiscal
1997 and fiscal 1996 were approximately $7.3 million. As a percentage
of net sales, sales and marketing expenses increased to 9.0% in
fiscal 1997 from 8.5% in fiscal 1996 due to the lower sales in fiscal
1997.
RESEARCH AND DEVELOPMENT. Research and development expenses in
fiscal 1997 increased 21.9%, or approximately $1.7 million, to
approximately $9.7 million from approximately $7.9 million in fiscal
1996. As a percentage of total net sales, research and development
expenses increased to 11.9% in fiscal 1997 from 9.2% in fiscal 1996.
The increase in dollar amount was due primarily to increases in
personnel associated expenses, such as recruiting and salaries for
newly hired personnel, related support equipment and the outsourcing
of certain development costs. The Company's goal is to maintain
expenditures for research and development at a level between 11% and
12% of net annual sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
in fiscal 1997 increased 7.9%, or approximately $0.3 million, to
approximately $4.5 million from approximately $4.2 million in fiscal
1996. As a percentage of total net sales, general and administrative
expenses increased to 5.5% in fiscal 1997 from 4.8% in fiscal 1996.
The dollar increase was largely the net result of an increase in
salaries and professional services and a reduction in bad debt expense
and accrued bonuses.
OTHER INCOME. Other income in fiscal 1997 was approximately
$1.4 million compared to approximately $0.8 million in fiscal 1996.
The increase was due to interest earned on cash equivalents and
marketable securities purchased with the proceeds from the Company's
sale in the second quarter of fiscal 1996 in a registered public
offering of 575,000 shares of its Common Stock, the "Second Public
Offering," and cash flow from operations. See Note 1 of Notes to
Financial Statements.
INCOME TAXES. A provision for income taxes of approximately
$6.2 million was recorded in fiscal 1997 compared to approximately
$8.5 million in fiscal 1996. This decrease in income tax provision is
principally a function of the change in the level of the Company's net
income before taxes in fiscal 1997 compared to fiscal 1996.
22 Teltrend Inc.
<PAGE> 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
FISCAL 1996 COMPARED TO FISCAL 1995
- -----------------------------------------------------------------------------
NET SALES. Net sales for fiscal 1996 increased 38.5%, or
approximately $23.9 million, to approximately $85.9 million, from
approximately $62.1 million in fiscal 1995. The increase in net sales
was due to an increase in unit volume sales of all product lines
except VF. Increases in unit volume sales were recorded by T1, DDS,
ISDN and POTS/SPOTS products of approximately $11.8 million, $7.4
million, $3.5 million and $2.6 million, respectively, which was
partially offset by a $1.9 million decrease in unit volume sales of VF
products. Unit volume sales of the Company's T1 products increased
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 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 all seven
RBOCs by the third quarter of fiscal 1996. Sales of the Company's ISDN
products commenced in the third quarter of fiscal 1995. By the fourth
quarter of fiscal 1996 five RBOCs and GTE had qualified one or more
ISDN products for use. POTS/SPOTS unit volume sales increased due to
significant sales of 2FX0, a new product, at two RBOCs in fiscal 1996.
Unit volume sales of VF products declined 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.
GROSS PROFIT. Gross profit in fiscal 1996 increased 50.7%, or
approximately $13.2 million, to approximately $39.3 million from
approximately $26.1 million in fiscal 1995. Gross profit margin for
fiscal 1996 increased to 45.7% from 42.0% for fiscal 1995. 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 of the Company to spread fixed manufacturing overhead
costs over a larger revenue base. Other factors contributing to the
increase in gross profit margin were the initial sales to several
customers of products with relatively high gross profit margins, and
reduced labor and material costs for many of the Company's established
products.
SALES AND MARKETING. Sales and marketing expenses in fiscal
1996 increased 23.7%, or approximately $1.4 million, to approximately
$7.3 million from approximately $5.9 million in fiscal 1995. As a
percentage of net sales, sales and marketing expenses decreased to
8.5% for fiscal 1996 from 9.5% for fiscal 1995. The increase in the
dollar amount of sales and marketing expenses was primarily due 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 additional sales and
marketing personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses in
fiscal 1996 increased 48.8%, or approximately $2.6 million, to
approximately $7.9 million from approximately $5.3 million in fiscal
1995. As a percentage of total net sales, research and development
expenses increased to 9.3% in fiscal 1996 from 8.6% in fiscal 1995.
The increase in dollar amount of this expense was due primarily to
increases in personnel associated expenses, such as recruiting and
salaries for newly hired personnel, and related support equipment.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
in fiscal 1996 increased 21.6%, or approximately $700,000, to
approximately $4.2 million from approximately $3.4 million in fiscal
1995. As a percentage of total net sales, general and administrative
expenses decreased to 4.8% in fiscal 1996 from 5.5% in fiscal 1995.
The dollar increase in this expense 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 and insurance expenses incurred as a
result of being a publicly-owned company during fiscal 1996 as opposed
to only two months of fiscal 1995.
INTEREST. The Company incurred $18,000 interest expense for
fiscal 1996, compared to approximately $8.5 million for fiscal 1995.
The decrease in interest expense 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
$8.5 million was recorded for fiscal 1996. This provision is a
function of the level of the Company's net income before income taxes
in fiscal 1996. In fiscal 1995, a benefit from income taxes of
approximately $2.0 million was recorded. This benefit resulted from
the elimination of the Company's valuation allowance for net deferred
tax assets in fiscal 1995 as a consequence of the Recapitalization
which reduced the Company's debt burden and thus provided the Company
the ability to generate taxable income.
Teltrend Inc. 23
<PAGE> 26
Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
At July 26, 1997, the Company had no long-term indebtedness and
had working capital of approximately $44.1 million, which included
cash and cash equivalents of approximately $11.8 million and
marketable securities of approximately $20.9 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
$4.2 million in fiscal 1997 compared to approximately $3.2 million for
fiscal 1996. Most of the expenditures were for the purchase of land
for the construction of a new facility, manufacturing test equipment
and engineering equipment.
As of July 26, 1997, the Company had net trade accounts
receivable of approximately $7.8 million, compared to approximately
$11.9 million as of the end of fiscal 1996. This decrease was due
primarily to (i) a decrease in net sales for the fourth quarter
compared to the Company's net sales for the fourth quarter of fiscal
1996, and (ii) the collection of certain past-due receivables,
resulting in a decrease in the average number of days receivables were
outstanding. For fiscal 1997, inventories decreased by approximately
$1.3 million, from approximately $12.3 million at the end of fiscal
1996 to approximately $11.0 million as of July 26, 1997. The decrease
in inventory was primarily a result of decreased sales volume and
lower standard material costs.
On September 18, 1997, the Company purchased all of the shares
of 3net for a total acquisition cost of approximately $16 million. The
Company funded the purchase price for 3net with its cash and cash
equivalents on hand and the proceeds from the sale of certain of its
investments in debt securities.
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 July 26,
1997, the Company estimates that approximately $11.3 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.
The Company expects that existing cash and cash equivalents,
marketable securities, 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.
24 Teltrend Inc.
<PAGE> 27
Report of Management
The management of Teltrend Inc. has prepared and is responsible
for the integrity of the information presented in this Annual Report,
including the Company's financial statements. These statements have
been prepared in conformity with generally accepted accounting
principles and include, where necessary, informed estimates and
judgments by management, with due consideration given to materiality.
The Company maintains systems of accounting and internal
controls designed to provide assurance that assets are properly
accounted for, and that the financial records are reliable for
preparing financial statements. The systems are augmented by qualified
personnel and reviewed on a periodic basis.
Our independent auditors, Ernst &Young LLP, conduct annual
audits of our financial statements in accordance with generally
accepted auditing standards, which include the review of internal
controls for the purpose of establishing audit scope, and issue an
opinion on the fairness of such financial statements.
The Company has an audit committee, composed solely of outside
directors that meets periodically with management and the independent
auditors to review the manner in which they are discharging their
responsibilities and to discuss auditing, internal accounting
controls, and financial reporting matters. The independent auditors
periodically meet alone with the Audit Committee and have free access
to the Audit Committee at any time.
/s/ Howard L. Kirby, Jr. /s/ Douglas P. Hoffmeyer
----------------------------------------- -----------------------------
Howard L. Kirby, Jr. Douglas P. Hoffmeyer
President and Chief Executive Officer Vice President, Finance
Report of Independent Auditors
To the Stockholders and Board of Directors Teltrend Inc.,
We have audited the accompanying balance sheets of Teltrend
Inc. as of July 26, 1997 and July 27, 1996, and the related statements
of income, changes in stockholders' equity and cash flows for the
years ended July 26, 1997, July 27, 1996 and July 29, 1995. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Teltrend Inc. as of July 26, 1997 and July 27, 1996, and the results
of its operations and its cash flows for the years ended July 26,
1997, July 27, 1996 and July 29, 1995 in conformity with generally
accepted accounting principles.
/s/Ernst & Young LLP
- ----------------------
Ernst & Young LLP
Chicago, Illinois
August 25, 1997
except for Note 15, as to which the date is September 18, 1997
Teltrend Inc. 25
<PAGE> 28
Teltrend Inc.
Balance Sheets
<TABLE>
<CAPTION>
ASSETS July 26, 1997 July 27, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $11,837,265 $22,889,192
Marketable securities 20,930,326 -
Trade accounts receivable, net of allowance for
doubtful accounts of $100,000 and $260,192 7,833,708 11,940,566
Inventories 11,048,285 12,349,169
Deferred income taxes 1,870,560 2,227,232
Prepaid expenses and other current assets 964,092 1,133,831
--------------------------
54,484,236 50,539,990
Land 1,949,234 -
Machinery and equipment 14,527,782 12,554,728
Leasehold improvements 934,897 895,506
Accumulated depreciation (9,372,063) (7,579,651)
--------------------------
8,039,850 5,870,583
Deferred income taxes 134,428 766,694
Other assets, less accumulated amortization of $123,828 and $100,091 173,020 106,819
--------------------------
$62,831,534 $57,284,086
--------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $3,443,249 $6,017,340
Accrued expenses 6,903,763 8,621,970
Income taxes payable 49,032 -
--------------------------
10,396,044 14,639,310
Commitments and Contingencies
Stockholders' equity:
Common Stock:
Common stock, $0.01 par value, 15,000,000 shares
authorized and 6,436,321 and 6,422,596 issued and
outstanding respectively 64,363 64,226
Additional paid-in capital 99,327,697 99,165,221
Accumulated deficit (46,956,570) (56,584,671)
--------------------------
52,435,490 42,644,776
--------------------------
$62,831,534 $57,284,086
</TABLE>
The accompanying notes are an integral part of these financial statements
26 Teltrend Inc.
<PAGE> 29
Teltrend Inc.
Statements of Income
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
July 26, 1997 July 27, 1996 July 29, 1995
---------------------------------------------
<S> <C> <C> <C>
Net sales $81,242,707 $85,912,819 $62,052,041
Cost of sales 45,296,096 46,643,923 35,991,032
--------------------------------------------
Gross profit 35,946,611 39,268,896 26,061,009
--------------------------------------------
Operating expenses:
Sales and marketing 7,333,068 7,308,716 5,907,864
Research and development 9,685,832 7,943,964 5,337,455
General and administrative 4,494,643 4,163,984 3,424,860
--------------------------------------------
21,513,543 19,416,664 14,670,179
--------------------------------------------
Income from operations 14,433,068 19,852,232 11,390,830
--------------------------------------------
Other income (expense):
Interest expense to related parties - - (8,422,937)
Interest expense - others (776) (17,931) (78,419)
Interest income 1,467,750 826,672 17,350
Other - net (29,954) (44,112) (204,306)
--------------------------------------------
1,437,020 764,629 (8,688,312)
--------------------------------------------
Income before income taxes and
extraordinary items 15,870,088 20,616,861 2,702,518
Provision (benefit) for income taxes 6,241,987 8,452,913 (2,038,250)
--------------------------------------------
Income before extraordinary items 9,628,101 12,163,948 4,740,768
Extraordinary items - - (410,750)
--------------------------------------------
Net income $9,628,101 $12,163,948 $4,330,018
--------------------------------------------
Net income per common share $1.45 $1.86
-----------------------------
Average common shares outstanding 6,654,488 6,552,339
-----------------------------
Pro forma net income (unaudited) $7,105,524
Pro forma net income per common ----------
share (unaudited) $1.19
----------
Pro forma average common shares
outstanding (unaudited) 5,951,485
---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Teltrend Inc. 27
<PAGE> 30
Teltrend Inc.
Statements of Changes in Stockholder's Equity
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Paid-in Capital Deficit
-----------------------------------------
<S> <C> <C> <C>
Balance, July 30, 1994 $ 3,902 $30,006,143 $(73,078,637)
Conversion of shares as described in Recapitalization 16,558 (16,558) -
Initial public offering 37,375 54,079,817 -
Options exercised 403 37,902 -
Net income - - 4,330,018
----------------------------------------
Balance, July 29, 1995 58,238 84,107,304 (68,748,619)
Second public offering 5,750 14,750,001 -
Options exercised 238 3,581 -
Tax benefit from exercise of stock options - 304,335 -
Net income - - 12,163,948
----------------------------------------
Balance, July 27, 1996 64,226 99,165,221 (56,584,671)
Options exercised 137 17,899 -
Tax benefit from exercise of stock options - 144,577 -
Net income - - 9,628,101
----------------------------------------
Balance, July 26, 1997 $64,363 $99,327,697 $(46,956,570)
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28 Teltrend Inc.
<PAGE> 31
Teltrend Inc.
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------
OPERATING ACTIVITIES July 26, 1997 July 27, 1996 July 29, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $9,628,101 $12,163,948 $4,330,018
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,028,221 1,741,465 1,336,941
Write-off of deferred financing costs - - 162,500
(Gain) loss on sale of equipment (13,795) 6,739 191,706
Tax benefit from exercise of common stock options 144,577 304,335 -
Issuance of additional Series A and B debentures
in lieu of interest payments - - 3,099,204
Changes in certain assets and liabilities:
Accounts receivable 4,106,858 (3,840,996) (2,101,261)
Inventories 1,300,884 (4,420,147) 851,478
Deferred income taxes 988,938 6,074 (3,000,000)
Prepaid expenses and other current assets 169,739 (436,907) (254,472)
Accounts payable (2,574,091) 603,470 1,977,061
Income taxes payable 49,032 (720,773) 720,772
Accrued expenses (1,718,208) 1,712,028 261,337
----------------------------------------
Net cash provided by operating activities 14,110,256 7,119,236 7,575,284
FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
Exercise of common stock options 18,036 3,819 38,308
Proceeds from public stock offerings - 14,755,751 54,117,191
Payment of long-term debt - (237,464) (69,954,098)
Proceeds from issuance of long-term debt - - 15,000,000
----------------------------------------
Net cash provided by (used for)
financing activities 18,036 14,522,106 (798,599)
INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
Capital expenditures (4,192,152) (3,203,557) (2,419,686)
Purchase of marketable securities (40,744,863) - -
Proceeds from sale of marketable securities 19,814,537 - -
Proceeds from sale of equipment 32,197 18,464 49,670
Other investing activities (89,938) 16,522 (133,980)
----------------------------------------
Net cash used for investing activities (25,180,219) (3,168,571) (2,503,996)
----------------------------------------
Net increase (decrease) in cash and
cash equivalents (11,051,927) 18,472,771 4,272,689
Cash and cash equivalents, beginning of year 22,889,192 4,416,421 143,732
----------------------------------------
Cash and cash equivalents, end of year $11,837,265 $22,889,192 $4,416,421
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Teltrend Inc. 29
<PAGE> 32
Teltrend Inc.
Notes to Financial Statements
1 BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
THE RECAPITALIZATION
During the fourth quarter of fiscal 1995, Teltrend Inc. (the
"Company") completed a recapitalization (the "Recapitalization"). The
principal components of the Recapitalization included (i) the
conversion 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 (the "Old Class A Stock") 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
(the "Old Class B Stock"), and Class C common stock, $.01 par value
per share (the "Old Class C Stock"), of the Company was canceled (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 (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 (the "Debt
Payment").
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. The net proceeds of the Second Public Offering received by the
Company totalled approximately $14.7 million (after deducting
underwriting discounts, commissions and expenses). In connection with
the Second Public Offering all of the outstanding shares of Class A
Stock were sold, and upon such sale automatically converted into an
equal number of shares of Common Stock. Accordingly, no shares of the
Company's Class A Stock were outstanding as of July 26, 1997.
PRO-FORMA NET INCOME PER SHARE
Pro forma net income and pro forma net income per share data is
based on historical net income adjusted to reflect the
Recapitalization as if it had occurred as of August 1, 1993.
2 DESCRIPTION OF BUSINESS
- -------------------------------------------------------------------------------
The Company is an independent equipment supplier to the special
service segment of the telecommunication industry. The Company
manufactures and markets telecommunication equipment and related
products that monitor, clarify, convert, switch, transmit, or
otherwise process signals in telecommunication lines of voice and data
communication networks. The Company's year-end is the last Saturday in
July for financial reporting and tax purposes.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
MARKETABLE SECURITIES
The Company invests in debt instruments with a maturity of
greater than three months and less than or equal to one year. Such
securities are classified as held-to-maturity, as the Company has the
intent and the ability to hold these securities until maturity. These
securities are carried at amortized cost, which approximates fair
value.
INVENTORIES
Inventories are stated at the lower of cost as determined by
the first in, first out method or market value.
30 Teltrend Inc.
<PAGE> 33
Teltrend Inc.
Notes to Financial Statements (continued)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT)
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes revenue upon shipment of goods and
transfer of title to customers.
INCOME TAXES
The Company accounts for income taxes using the
liability method as required by Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes".
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. The
Company uses the straight-line method of computing provisions for
depreciation and amortization of equipment and leasehold improvements
over estimated useful lives ranging from three to ten years.
GOODWILL
At each balance sheet date, the Company evaluates for
recognition of potential impairment its recorded goodwill against its
projected discounted cash flows.
USE OF ESTIMATES
The preparation of financial statements of conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from these estimates.
EARNINGS PER SHARE
The Company computes earnings per share by dividing net income
by the weighted average number of shares of common stock and common
stock equivalents outstanding. In February 1997, the Financial
Accounting Standards Board issued Statement No. 128, Earnings per
Share, which is required to be adopted on December 31, 1997. At that
time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under
the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. The impact is
expected to result in an increase in basic earnings per share for each
of the fiscal years ending July 26, 1997 and July 27, 1996 and the pro
forma earnings per share for the fiscal year ending July 29, 1995 of
$.05, $.08 and $.03 per share respectively. The impact of Statement
No. 128 on the calculation of diluted earnings per share for these 12
month periods is not expected to be material.
STOCK OPTIONS
Stock options are accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB #25"). Under APB #25, no compensation expense is
recognized when the exercise price of the option equals the fair value
of the underlying stock on the grant date.
RECLASSIFICATION
Certain amounts in the fiscal 1996 Financial Statements have
been reclassified to conform to fiscal 1997 presentation.
4 RETIREMENT INVESTMENT PLAN
- -------------------------------------------------------------------------------
The Company has a defined-contribution plan covering all full
and part-time personnel who have a minimum of one-half year of service
and have attained the age of 21. The plan became effective January 1,
1990. Participants may contribute between 1% and 15% of their annual
compensation. Since January 1, 1994, the Company contributes $.40 for
each $1.00 contributed to the plan by the participant up to a maximum
of 5% of the participant's annual compensation. Beginning on August 1,
1996, the Company contributes a discretionary amount on the employee's
behalf out of the Company profits earned during the plan year. Since
the amount of the contribution depends upon profits, the amount of
contribution may vary from year to year. Company contributions were
$348,646, $183,900, and $142,369 for the years ended July 26, 1997,
July 27, 1996, and July 29, 1995, respectively.
Teltrend Inc. 31
<PAGE> 34
Teltrend Inc.
Notes to Financial Statements (continued)
5 INVENTORIES
- -------------------------------------------------------------------------------
Inventories at July 26, 1997 and July 27, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Raw materials $ 6,238,143 $ 7,904,341
Work-in-process 1,650,867 1,795,233
Finished goods 3,159,275 2,649,595
------------------------
$11,048,285 $12,349,169
</TABLE>
6 ACCRUED EXPENSES
- -------------------------------------------------------------------------------
Accrued expenses at July 26, 1997 and July 27, 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Salaries, wages, and bonuses $2,432,269 $3,756,607
Warranty 1,425,297 1,453,340
Other 3,046,197 3,412,023
-----------------------
$6,903,763 $8,621,970
</TABLE>
7 LONG-TERM DEBT
- -------------------------------------------------------------------------------
In connection with the Recapitalization, the term notes, Series
A and B Debentures and revolving note payable were retired with the
proceeds of the IPO. Also, in connection with the Recapitalization, the
Company entered into a new credit facility (the "Bank Facility") which
provides, subject to certain restrictions, up to $15 million on an
unsecured basis for working capital financing. As of July 26, 1997, no
amounts were outstanding under the Bank Facility. At July 26, 1997,
Teltrend was eligible to borrow up to $11,285,039. The Bank Facility
will expire on June 30, 1998.
Under the Bank Facility agreement, the Company is restricted
to declare and pay dividends on its Common Stock not to exceed 50% of
net income for the immediately preceding fiscal year.
Interest paid in fiscal years 1997, 1996 and 1995 was $776,
$17,931 and $6,526,593 respectively.
8 COMMON STOCK OPTIONS
- -------------------------------------------------------------------------------
Prior to the Recapitalization, the Company had a stock option plan
(the "Plan") which provided for the grant of both incentive stock
options and nonqualified stock options to purchase shares of the Old
Class A Stock. Unless the applicable agreement expressly provided
otherwise, each option granted under the Plan was exercisable as to
20% of the shares covered thereby immediately upon grant and as to an
additional 20% of such shares on each of the next four anniversaries
of the date of grant.
In fiscal year 1994, the Board of Directors approved a
resolution to decrease the exercise price of all options outstanding
under the Plan to the then-estimated value of $.1643 per share from
$4.1077 per share. In connection with the Recapitalization, all options
outstanding under the Plan were converted into options to purchase
shares of Common Stock and the Company's Board of Directors amended the
Plan to provide that no additional options could be granted thereunder
in the future. As of July 26, 1997, 79,921 options were outstanding
under the Plan.
During June 1995, the Company adopted the Teltrend Inc. 1995
Stock Option Plan (the "1995 Stock Option Plan") which provides for the
grant of both incentive stock options in accordance with Section 422A
of the Internal Revenue Code and nonqualified stock options. A maximum
of 440,000 shares of Common Stock may be issued in the aggregate to key
employees of the Company. The Compensation Committee of the Company's
Board of Directors which administers the 1995 Stock Option Plan will
determine when and to whom options will be granted. Unless the
applicable agreement expressly provides otherwise, options shall
32 Teltrend Inc.
<PAGE> 35
Teltrend Inc.
Notes to Financial Statements (continued)
8 COMMON STOCK OPTIONS (CONT)
- -----------------------------------------------------------------------------
become exercisable as to 25% of the shares covered thereby on the
first anniversary of the date of grant and as to an additional 25% of
such shares on each of the next three anniversaries of the date of
grant. As of July 26, 1997, 329,000 options were outstanding under the
1995 Stock Option Plan, all with an exercise price of $16.
During January 1996, the Company adopted the Teltrend Inc. 1996
Non-Employee Director Stock Option Plan (the "Director Option Plan")
which provides for the grant of nonqualified stock options. A maximum
of 240,000 shares of Common Stock may be issued to non-employee
directors of the Company. Each individual elected as a director of the
Company at the January 11, 1996 Annual Meeting who qualified as a
non-employee director received an option to purchase up to 12,000
shares of Common Stock as of the date of the Annual Meeting.
Thereafter, each non-employee director, who has not previously served
on the Company's Board of Directors, will receive an option to
purchase up to 12,000 shares of Common Stock on the date of his or her
initial election to the Board. A non-employee director may receive
only one option grant under the Director Option Plan. Options granted
under the Director Option Plan will vest and become exercisable as to
25% of the shares covered thereby on the first anniversary of the date
of grant and as to an additional 25% of such shares on each of the
next three anniversaries of the date of grant. As of July 26, 1997,
84,000 options were outstanding under the Director Option Plan with a
range of exercise prices of $20 to $41.
During September 1996, the Company adopted the Teltrend
Inc. 1996 Stock Option Plan (the "1996 Stock Option Plan") which
provides for the grant of both incentive stock options in accordance
with Section 422A of the Internal Revenue Code and nonqualified stock
options. A maximum of 700,000 shares of Common Stock may be issued in
the aggregate to key employees of the Company. The Compensation
Committee of the Company's Board of Directors which administers the
1996 Stock Option Plan will determine when and to whom options will be
granted. Unless the applicable agreement expressly provides otherwise,
options shall become exercisable as to 25% of the shares covered
thereby on the first anniversary of the date of grant and as to an
additional 25% of such shares on each of the next three anniversaries
of the date of grant. As of July 26, 1997, 160,600 options were
outstanding under the 1996 Stock Option Plan with a range of exercise
prices of $17.50 to $20.
Transactions involving stock options granted under the Plan
(after giving effect to the Recapitalization), the Key Employee
Option, the 1995 Stock Option Plan, the Director Option Plan and the
1996 Stock Option Plan are summarized as follows:
<TABLE>
<CAPTION>
Number of Options Exercise Price
-----------------------------------
<S> <C> <C>
Outstanding, July 30, 1994 313,613 $.16
Granted 54,808 .16
Granted 330,000 16.00
Exercised (233,139) .16
Canceled (14,734) .16
-------------------------------
Outstanding, July 29, 1995 450,548 11.76
Granted 129,000 28.75 to 47.00
Exercised (23,794) .16
-------------------------------
Outstanding, July 27, 1996 555,754 19.10
Granted 273,600 17.50 to 46.25
Exercised (13,725) .16 to 16.00
Canceled (162,108) .16 to 47.00
------------------------------
Outstanding, July 26, 1997 653,521 $17.59
</TABLE>
The weighted average remaining contractual life of the options
outstanding is 8.0 years. Of the 653,521 stock options outstanding at
July 26, 1997, 235,923 are currently exercisable with a weighted
average exercise price of $13.25.
Teltrend Inc. 33
<PAGE> 36
Teltrend Inc.
Notes to Financial Statements (continued)
Pro forma information regarding net income and earnings per
share is required by FASB Statement No. 123. "Accounting for
Stock-Based Compensation" and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for fiscal 1997
and fiscal 1996; risk-free interest rate of 6.0 percent; dividend
yields of 0.0 percent; volatility factors of the expected market price
of the Company's Common Stock of 0.25; and a weighted-average expected
life of the option of 6 years.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The weighted-average fair value of options was $7.04 for
options granted in fiscal 1997 and $12.47 for options granted in
fiscal 1996.
For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows (in thousands
except for earnings per share information):
<TABLE>
<CAPTION>
Fiscal Year Ended July
----------------------
1997 1996
----------------------
<S> <C> <C>
Net earnings - as reported $9,628,101 $12,163,948
Net earnings - pro forma $8,723,200 $11,768,925
Earnings per share - as reported $1.45 $1.86
Earnings per share - pro forma $1.31 $1.80
</TABLE>
The pro forma effect on net income for fiscal 1997 and fiscal
1996 is not representative of the pro forma effect on net income in
future years because it does not take into consideration pro forma
compensation expense related to grants made prior to fiscal 1996 and an
increased vesting period for grants made in fiscal 1997.
9 LEASE COMMITMENTS
- ------------------------------------------------------------------------------
The Company leases its office and manufacturing facilities and
pays real estate taxes, insurance, and general repairs and maintenance
on the leased facilities. Rent expense for the fiscal years ended July
26, 1997, July 27, 1996 and July 29, 1995 totaled $539,611, $697,280
and $690,373, respectively.
Future minimum annual rental payments required under the lease
are as follows:
<TABLE>
<S> <C>
Fiscal Year 1998 $545,848
Fiscal Year 1999 514,915
Fiscal Year 2000 83,241
----------
$1,144,004
----------
</TABLE>
34 Teltrend Inc.
<PAGE> 37
Teltrend Inc.
Notes to Financial Statements (continued)
10 INCOME TAXES
- -------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effect of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
July 26, 1997 July 27, 1996
------------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 293,083 $ 964,334
Product warranty accruals 570,119 581,336
Inventory reserves 522,376 826,118
Vacation accrual 400,622 362,152
Medical reserve 219,583 242,487
Unicap adjustment 102,560 86,528
Other 99,724 173,035
------------------------------
Total deferred tax assets 2,208,067 3,235,990
Tax over book depreciation (203,079) (242,064)
------------------------------
Net recorded deferred tax assets $2,004,988 $2,993,926
------------------------------
Recognized in balance sheet:
Net deferred tax assets - current $1,870,560 $2,227,232
Net deferred tax assets - noncurrent 134,428 766,694
------------------------------
Net deferred tax assets $2,004,988 $2,993,926
</TABLE>
At July 26,1997, the Company has available for tax purposes
approximately $.8 million of net operating loss carryforwards which
expire in fiscal year 2010.
Significant components of the provision (benefit) for income
taxes are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended July
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Current provision
Federal $4,458,751 $7,407,115 $ 731,750
State 794,298 1,039,724 230,000
------------------------------------------
5,253,049 8,446,839 961,750
Deferred tax provision
(benefit) 988,938 6,074 (3,000,000)
------------------------------------------
Provision (benefit) for
income taxes $6,241,987 $8,452,913 $(2,038,250)
</TABLE>
Income taxes paid in fiscal years 1997, 1996 and 1995 totaled
$4,826,000, $9,080,000 and $35,000, respectively.
Total income tax provision (benefit) for each year varied from
the amount computed by applying the statutory U.S. federal income tax
rates to income before taxes and extraordinary items for the reasons
set forth in the following reconciliation.
<TABLE>
<CAPTION>
Fiscal Year Ended July
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Income tax provision at
the statutory rate $5,554,531 $7,215,901 $918,860
Increase (reduction)
resulting from:
Decrease in valuation
reserve for
non-realizable
tax benefits - - (3,375,548)
State income taxes,
net of federal
tax benefit 794,298 1,039,724 230,000
Other, net (106,842) 197,288 188,438
------------------------------------------
Actual income tax
provision (benefit) $6,241,987 $8,452,913 $(2,038,250)
------------------------------------------
</TABLE>
Teltrend Inc. 35
<PAGE> 38
Teltrend Inc.
Notes to Financial Statements (continued)
11 COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------------------------------------
The Company has commitments to purchase raw materials under
purchase contracts with various vendors totaling approximately
$6,320,865 at July 26, 1997 and $9,719,931 at July 27, 1996.
12 RELATED PARTY TRANSACTIONS
- ------------------------------------------------------------------------------
For the year ended July 29, 1995, pursuant to an agreement
between the Company and one of its principal stockholders, the
stockholder provided management and consulting services to the Company
for fees and related expenses of approximately $717,000, which
includes an additional fee of $500,000 paid in consideration of the
early termination of the management and consulting contract upon
consummation of the Recapitalization.
13 SIGNIFICANT CUSTOMERS
- ------------------------------------------------------------------------------
For the year ended July 26, 1997, four customers comprised
approximately 25.9%, 19.3%, 13.4% and 11.2% of net sales, 20.6%,
18.4%, 18.2% and 15.2% for the year ended July 27, 1996 and 22.3%,
20.7%, 17.1% and 12.6% for the year ended July 29, 1995.
At July 26, 1997, four customers comprised approximately
20.2%, 19.9%, 16.1% and 13.5% of accounts receivable, and 24.9%,
17.5%, 17.4% and 10.4% at July 27, 1996.
14 EXTRAORDINARY ITEMS
- ------------------------------------------------------------------------------
Extraordinary items for the year ended July 29, 1995 include a
$500,000 penalty paid upon prepayment of the Former Credit Agreement
in connection with the Recapitalization, the write-off of the
unamortized loan financing costs of $162,500 related to the Former
Credit Agreement and a tax benefit of $251,750 relating
to the prepayment penalty and write-off.
15 SUBSEQUENT EVENTS
- ------------------------------------------------------------------------------
On September 18, 1997, the Company purchased the outstanding
shares of Securicor 3net Limited (3net) for a total acquisition cost
of approximately $16.0 million. 3net is a telecommunication equipment
and software company based in the United Kingdom with operations in
New Zealand, China and the United States. In 3net's last fiscal year
they recorded revenues of approximately $17 million.
16 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal 1997
-----------------------------------------------------------------
October 26, 1996 January 25, 1997 April 26, 1997 July 26, 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $22,590,930 $18,824,794 $21,302,597 $18,524,386
Gross profit 10,364,151 8,186,215 9,383,705 8,012,540
Net income $3,231,561 $1,994,744 $2,438,024 $1,963,772
-----------------------------------------------------------------
Net income per common share $0.48 $0.30 $0.37 $0.30
-----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996
-----------------------------------------------------------------
October 28, 1995 January 27, 1996 April 27, 1996 July 27, 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $20,851,281 $20,531,673 $20,763,736 $23,766,129
Gross profit 9,457,120 9,081,897 9,734,209 10,995,670
Net income $2,828,641 $2,716,180 $3,126,274 $3,492,853
-----------------------------------------------------------------
Net income per common share $0.47 $0.41 $0.46 $0.52
-----------------------------------------------------------------
</TABLE>
36 Teltrend Inc.
<PAGE> 39
Teltrend Inc.
Market for Company's Securities and Related Matters
The authorized capital stock of the Company consists of
15,000,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), and 750,000 shares of Preferred Stock, par value $.01
per share (the "Preferred Stock"). As of September 29, 1997, 6,436,321
shares of Common Stock were outstanding and no shares of Preferred
Stock were outstanding.
The Common Stock began trading on the Nasdaq National Market on
June 9, 1995 under the symbol "TLTN." Prior to that date, there was no
market for the Company's Common Stock. The following table sets forth
for the period indicated the high and low closing sale prices for the
Common Stock as reported on the Nasdaq National Market:
<TABLE>
<CAPTION>
Price Range of Common Stock
--------------------------------
High Low
--------------------------------
<S> <C> <C>
FISCAL 1996
- ----------------------------------------------------------------------------------------------
First Quarter
(from July 30, 1995 through October 28, 1995) $33 $20
Second Quarter
(from October 29, 1995 through January 27, 1996) $46 3/4 $28
Third Quarter
(from January 28, 1996 through April 27, 1996) $51 $39 3/4
Fourth Quarter
(from April 28, 1996 through July 27, 1996) $57 1/4 $20
FISCAL 1997
- ----------------------------------------------------------------------------------------------
First Quarter
(from July 28, 1996 through October 26, 1996) $52 3/4 $32
Second Quarter
(from October 27, 1996 through January 25, 1997) $33 3/4 $16 7/8
Third Quarter
(from January 26, 1997 through April 26, 1997) $21 1/2 $16 5/8
Fourth Quarter
(from April 27, 1997 through July 26, 1997) $19 1/8 $14 3/8
FISCAL 1998
- ------------------------------------------------------------------------------------------
First Quarter
(from July 27, 1997 through September 29, 1997) $17 5/8 $14 7/8
</TABLE>
On September 29, 1997, the last reported sale price of the
Common Stock as reported on the Nasdaq National Market was $17 1/8 per
share. On that same date, there were 127 registered holders of record
of the Common Stock.
The Company has not paid any dividends on its capital stock
since 1988. Restrictions or limitations on the payment of dividends may
be imposed under the terms of credit agreements or other contractual
obligations. 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. In the absence of such restrictions or
limitations, the declaration and payment of dividends will be at the
sole discretion of the Board of Directors of the Company and subject to
certain limitations under the General Corporation Law of the State of
Delaware. The timing, amount and form of dividends, if any, will
depend, among other things, on the Company's results of operations,
financial condition, cash requirements, plans for expansion and other
factors deemed relevant by the Board of Directors. The Company intends
to retain any future earnings for use in its business and therefore
does not anticipate paying any cash dividends in the foreseeable
future.
Teltrend Inc. 37
<PAGE> 40
Officers
HOWARD L. KIRBY, JR.
Chairman of the Board,
President and Chief Executive Officer
of the Company
DONALD G. BOZEMAN
Vice President, Non-RBOC Sales
MICHAEL S. GRZESKOWIAK
Vice President, Operations
NORMAN C. GUENTHER
Assistant Vice President, Quality
DOUGLAS P. HOFFMEYER
Vice President, Finance;
Secretary and Treasurer
GILBERT H. HOSIE
Vice President, RBOC Sales
THEODOR A. MAXEINER
Chief Accounting Officer;
Assistant Vice President, Finance;
Controller; Assistant Secretary
and Assistant Treasurer
JOHN MUNTEAN
Vice President/General Manager,
ISDN and DDS Products
JACK C. PARKER
Vice President/General Manager,
DLC, VF and T1/Wireless Products
LAURENCE L. SHEETS
Vice President/General Manager,
Broadband Products
Board of Directors
HOWARD L. KIRBY, JR. (3), (4)
Chairman of the Board,
President and Chief Executive Officer
of the Company
CARL M. MUELLER*
Former Vice Chairman of Bankers
Trust Company and a Director of
BT Capital Partners Corporation,
and AEA Investors, Inc.
FRANK T. CARY (1), (2)
Former Chairman and Chief
Executive Officer of International
Business Machines Corporation
and Director of Celgene Corporation,
Cygnus Therapeutic Systems, ICOS
Corporation, Lincare, Inc., SPS
Transaction Services, and Seer
Technologies
WILLIAM R. DELK (1), (2)
Retired Vice President
BellSouth Corporation, Inc.
BERNARD F. SERGESKETTER (4)
Former Vice President of AT&T,
President of Sergesketter &Associates, Inc.,
a private consulting firm
HARRY CRUTCHER, III (3), (4)
President, Resorts Financial
Services Co. (financial consulting
firm), Managing Partner, Grouse
Mountain Associates, Ltd. (hotel
owner and operator) and President,
Crutcher Enterprises, Inc. (financial
strategic planning firm)
DONALD R. HOLLIS (4)
President, DRH Strategic Consulting Inc.;
former Executive Vice President,
First Chicago Corporation; also a
Director of Deluxe Corporation,
Information Advantage Open Port
Technology and Cambridge Assessment
Centre
SUSAN B. MAJOR (1), (2)
Vice President, A.T. Kearney, Inc.,
former Director of Paging and
Wireless Data for Ameritech
Cellular Services, Inc.
Corporate Information
CORPORATE OFFICE
Teltrend Inc.
620 Stetson Avenue
St. Charles, Illinois 60174
ANNUAL MEETING
The Annual Meeting of Teltrend Inc.
will be held at 9:00 a.m. on Thursday,
December 11, 1997 at the Company's
facility in St. Charles, Illinois.
ANNUAL REPORT ON FORM 10-K
Single copies of the Company's Annual
Report on Securities and Exchange
Commission Form 10-K (without
exhibits) will be provided without
charge to stockholders upon written
request directed to Douglas P.
Hoffmeyer, Secretary, at the
Corporate Office.
COMMON STOCK
The Common Stock of Teltrend Inc.
is traded on the Nasdaq National
Market under the symbol "TLTN."
COUNSEL
Jenner & Block
Chicago, Illinois
AUDITORS
Ernst & Young LLP
Chicago, Illinois
TRANSFER AGENT AND REGISTRAR
LaSalle National Bank
Chicago, Illinois
* Mr. Mueller has informed the Company that he will
not seek re-election to the Board of Directors at the
Annual Meeting
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
(4) Member of Executive Committee
38 Teltrend Inc.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
LIST OF TELTREND INC.'S SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
ENTITY INCORPORATION SUBSIDIARY DOES BUSINESS AS
- ------ -------------- ---------------------------
<S> <C> <C>
Teltrend 3net, Inc. Delaware Teltrend 3net, Inc.
Teltrend Limited England and Wales Teltrend Limited
Teltrend (NZ) Limited New Zealand Teltrend (NZ) Limited
Teltrend (Australia) Pty. Limited Australia Teltrend (Australia) Pty. Limited
Securicor 3Net (Beijing) People's Republic Securicor 3Net (Beijing)
Networking Co. Limited (Name to of China Networking Co. Limited (Name to
be changed to "Teltrend (Beijing) be changed to "Teltrend (Beijing)
Networking Company") Networking Company")
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Teltrend Inc. of our report dated August 25, 1997 (except for Note 15, as to
which the date is September 18, 1997), included in the fiscal year 1997 Annual
Report to Stockholders of Teltrend Inc.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-95316, 33-95314, 333-35683 and 333-00254)
pertaining to stock option plans of Teltrend Inc. of our report dated August
25, 1997 (except for Note 15, as to which the date is September 18, 1997), with
respect to the financial statements incorporated herein by reference.
/s/ Ernst & Young LLP
---------------------
Chicago, Illinois
October 24, 1997
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