<PAGE> 1
.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 25, 1997
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-26114
TELTREND INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3476859
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
620 STETSON AVENUE
ST. CHARLES, ILLINOIS 60174
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 377-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of February 28, 1997, there were 6,430,631 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
====================================================================
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TELTREND INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1 -- Financial Statements:
Statements of Income for the quarters ended
January 27, 1996 and January 25, 1997.......................... 3
Balance Sheets as of July 27, 1996 and January 25, 1997........ 4
Statements of Cash Flows for the quarters ended
January 27, 1996 and January 25, 1997.......................... 5
Notes to Financial Statements 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 7
PART II. OTHER INFORMATION
- ---------------------------
Item 1 -- Legal Proceedings ............................................ 15
Item 2 -- Changes in Securities......................................... 15
Item 5 -- Other Information............................................. 15
Item 6 -- Exhibits and Reports on Form 8-K.............................. 15
SIGNATURE ..................................................................... 16
- ---------
OMITTED FINANCIAL STATEMENTS
None
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
- ------------------------------
TELTREND INC.
STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
-------------------------------- --------------------------------
JANUARY 27, JANUARY 25, JANUARY 27, JANUARY 25,
1996 1997 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
$20,532 $18,825 $41,383 $41,416
Net sales........................ 11,450 10,639 22,844 22,866
Cost of sales.................... --------------- --------------- --------------- ---------------
Gross profit..................... 9,082 8,186 18,539 18,550
--------------- --------------- --------------- ---------------
1,844 1,715 3,719 3,659
Operating expenses: 1,963 2,461 3,666 4,717
Sales and marketing............. 925 1,075 2,008 2,170
Research and development........ --------------- --------------- --------------- ---------------
General and administrative...... 4,732 5,251 9,393 10,546
--------------- --------------- --------------- ---------------
Income from operations........... 4,350 2,935 9,146 8,004
--------------- --------------- --------------- ---------------
263 346 313 663
Other income (expense): (6) (13) (18) (13)
Interest income................. --------------- --------------- --------------- ---------------
Other-net....................... 257 333 295 650
--------------- --------------- --------------- ---------------
4,607 3,268 9,441 8,654
Income before income taxes....... 1,891 1,273 3,896 3,428
Provision for income taxes....... --------------- --------------- --------------- ---------------
Net income....................... $2,716 $1,995 $5,545 $5,226
=============== =============== =============== ===============
Net income per share of
common stock.................... $0.41 $0.30 $0.87 $0.78
=============== =============== =============== ===============
Average common shares outstanding 6,686,152 6,654,232 6,375,777 6,695,961
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
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TELTREND INC.
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
JULY 27, JANUARY 25,
1996 1997
-------- -----------
<S> <C> <C>
(Unaudited)
ASSETS
- ------
Current Assets:
Cash and cash equivalents........................ $22,889 $12,168
Marketable securities............................ -- 14,968
Trade accounts receivable, net of allowance...... 11,941 8,992
Inventories...................................... 12,349 13,681
Deferred income taxes............................ 2,227 2,474
Prepaid expenses and other current assets........ 1,134 1,173
-------- -----------
50,540 53,456
Land and building................................. -- 181
Machinery and equipment........................... 12,554 13,586
Leasehold improvements............................ 896 929
Accumulated depreciation.......................... (7,580) (8,499)
-------- -----------
5,870 6,197
Deferred income taxes............................. 767 233
Other assets, net................................. 107 372
-------- -----------
$57,284 $60,258
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable.................................. $6,017 $4,215
Accrued expenses.................................. 8,622 6,973
Income taxes payable.............................. -- 1,090
-------- -----------
14,639 12,278
Stockholders' equity:
Common stock:
Common Stock, $0.01 par value, 15,000,000 shares
authorized and 6,422,596 and 6,429,414 issued
and outstanding, respectively.................. 64 64
Additional paid-in capital........................ 99,165 99,274
Accumulated deficit............................... (56,584) (51,358)
-------- -----------
42,645 47,980
-------- -----------
$57,284 $60,258
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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TELTREND INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income for period............................... $5,545 $5,226
Adjustments to reconcile net income to net cash
provided by operation actives:
Depreciation and amortization...................... 842 1,013
Loss (gain) on sale of equipment................... 2 (13)
Tax benefit from exercise of common stock options -- 92
Changes in certain assets and liabilities:
Accounts receivable and prepaid expenses.......... 1,076 2,910
Inventories....................................... (3,787) (1,332)
Deferred income taxes............................. 180 287
Income taxes payable.............................. (481) 1,090
Accounts payable and accrued expenses............. (524) (3,451)
Other assets and liabilities...................... -- (201)
----------- -----------
Net cash provided by operating activities........... 2,853 5,621
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options...... 3 17
Second public offering.............................. 14,724 -
Payment of long-term debt........................... (238) -
Net cash provided by financing activities........... ----------- -----------
14,489 17
INVESTING ACTIVITIES:
Capital expenditures................................ (1,674) (1,332)
Purchase of marketable securities................... - (14,968)
Proceeds from sale of equipment..................... 12 21
Other investing activities.......................... (39) (80)
----------- -----------
Net cash used for investing activities.............. (1,701) (16,359)
----------- -----------
Net increase in cash................................ 15,641 (10,721)
Cash and cash equivalents, beginning of period...... 4,416 22,889
----------- -----------
Cash and cash equivalents, end of period............ $20,057 $12,168
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
General
The unaudited financial statements included herein have been prepared by
Teltrend Inc. (the "Company") in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X,
and should be read in conjunction with the Company's financial statements (and
notes thereto) included in the Company's Annual Report on Form 10-K for the
year ended July 27, 1996. Accordingly, the accompanying statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the quarter ended January 25, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending July 26, 1997.
The Company's fiscal year ends on the last Saturday of July each year. All
references to fiscal years in this report refer to fiscal years ending in the
calendar year indicated (e.g., Fiscal 1996 refers to the fiscal year ending
July 27, 1996 and Fiscal 1997 refers to the fiscal year ending July 26, 1997).
2. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 27, 1996 JANUARY 25, 1997
------------- ----------------
<S> <C> <C>
$ 7,904 $ 7,806
1,795 2,580
Raw materials........ 2,650 3,295
Work-in-process ..... ------------- ----------------
Finished goods....... $12,349 $13,681
============= ================
</TABLE>
3. SECOND PUBLIC OFFERING
In the second quarter of Fiscal 1996, the Company sold an additional
575,000 shares of its Common Stock pursuant to a registered public offering
(the "Second Public Offering"). These shares were offered by the Company and
certain stockholders of the Company at a price of $28.00 per share (less
underwriting discounts and commissions of $1.50 per share).
4. LAND ACQUISITION
On August 20, 1996, the Company entered into an agreement to purchase land
for approximately $1.7 million. The Company plans to initiate construction of
a new office, research and manufacturing facility on this land sometime in
Fiscal 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2 - FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains "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 (i) the Company's belief (as stated
below in "- Results of Operations - Gross Profit") that increases in gross
profit margin for at least the balance of the year may be difficult to attain,
(ii) the development and marketing of certain new products, and (iii) the
statement under "- Liquidity and Capital Resources" regarding the customer
demand anticipated by the Company which has led to the Company's decision to
increase its inventory levels. These forward-looking statements (i) are
identified by their use of such terms and phrases as "believes," "expected",
"long-term downward trend," "anticipated," "is growing" and "growing practice,"
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 the factors described below under
"Factors That May Effect Results." Results actually achieved thus may differ
materially from expected results included in these statements.
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 telephone companies ("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 rapidly as a result of the demand for high capacity voice
lines in the growing communication requirements of local area network
interconnections, wide area networks, 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 seven Regional Bell Operating
Companies and their local affiliates (collectively, the "RBOCs"), but the
Company also sells its products to certain independent Telcos and other
companies. The Company's principal products are divided into four product line
categories as follows: (i) Digital Loop Carrier and Voice Frequency Products
("DLC/VF"), which includes small DLC systems and plug-in units for existing DLC
systems, CYBERBLOCK(TM), which solves various modem and voice problems on long
metallic loops, and traditional voice frequency products; (ii) T1/Wireless
Products, which includes T1 line and office repeaters and T1 network interface
units, and CellPak(TM) units for cellular and wireless base station sites;
(iii) ISDN/DDS Products, which includes Integrated Services Digital Network
("ISDN") and Digital Data System ("DDS") line repeaters, ISDN and DDS D4
channel units and an ISDN mini-bank; and (iv) Broadband Products, which
includes NetZap(TM) and NetZap Plus(TM) and HDSL systems, which help Telcos
reduce the number of costly digital cross connect system ports required for
frame relay services.
RESULTS OF OPERATIONS
NET SALES. Net sales for the second quarter of Fiscal 1997 decreased
oximately $1.7 million, to approximately $18.8 million, from approximately
$20.5 million in the second quarter of Fiscal 1996. For the first six months
of both Fiscal 1997 and Fiscal 1996 net sales totaled approximately $41.4
million. The decrease in net sales for the second quarter of Fiscal 1997 was
due to decreases in unit volume sales of the Company's two largest product
lines, T1/Wireless and DLC/VF, of approximately $1.4 million and $1.2 million,
respectively. These decreases were offset somewhat, however, by an increase in
unit volume sales of the Company's ISDN/DDS (Integrated Services Digital
Network/Dataphone Digital Services) products of approximately $0.9
million. The lack of change in net sales for the first six months of Fiscal
1997 was the net result of a decrease in unit volume
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sales of T1/Wireless and DLC/VF products of $0.9 million and $0.6 million,
respectively, and an increase of $1.5 million in unit volume sales of ISDN/DDS
products. The unit volume sales of the Company's fourth product line, Broadband
Products, were minimal for both the second quarter and first six months of
Fiscal 1997 and Fiscal 1996.
The decrease in unit volume sales of DLC/VF products during each
comparative period was the net result of generally declining sales of VF
products and an increase in the sales of new DLC products. The decline in
sales for VF products was a continuation of a long-term downward trend in VF
sales, accelerated, at certain RBOCs, by a growing practice of reusing
equipment that has previously been taken out of service. The Company believes
that, although there may be international opportunities, the domestic market
for its VF products is decreasing as digital data transmission services within
the Local Loop become less costly and more widely deployed. See "Factors That
May Affect Future Results - Dependence on Two Product Lines." On the other
hand, the Company is experiencing increased demand for certain of its DLC
products. In late Fiscal 1996, the Company introduced a new, advanced 2-wire
foreign exchange unit ("FXO") for the Lucent SLC-96 and D4 systems. Currently,
this unit is approved and being purchased by several RBOCs. Another new
product, the dial pulse terminator/gain transfer unit ("DPT/GT"), provides
direct inward dial ("DID") service support for private branch exchanges
("PBXs") from D4 digital systems. Production for this product began in the
fourth quarter of Fiscal 1996, and monthly shipments are currently being made
to three RBOCs. Both of these DLC products are under study at several other
RBOCs. See "Factors That May Effect Future Results - Rapid Technological
Changes and Dependence on New Products."
The decrease in the unit volume sales of the Company's T1/Wireless
products, during each comparative period, was the net effect of a decrease in
intelligent T1 repeater unit volume sales and an increase in T1 CPE unit volume
sales. The sales of Teltrend's intelligent T1 repeaters were negatively
affected during the quarter by overstocking and budget constraints at certain
RBOCs. See "Factors That May Affect Future Results - Reliance on Certain
Customers." While these overstocking issues and budget constraints may be
to a large extent by the end of the third quarter, the Company believes that
the increased installation of new high density subscriber line ("HDSL")
equipment at certain RBOCs is also a factor leading to the decrease of
intelligent T1 repeater sales. See "Factors That May Effect Future Results -
Dependence on Two Product Lines." On the other hand, sales of the Company's T1
CPE products, consisting of Network Interface Units ("NIUs") and associated
mountings, increased some during the second quarter of Fiscal 1997. This
increase in sales was due primarily to the consummation of new sales agreements
and the approval by certain RBOCs of new product iterations.
The increase in unit volume sales of the Company's ISDN/DDS products
during each comparative period resulted primarily from an increase in the
number of RBOCs that have qualified these products since the second quarter of
Fiscal 1996. In addition, the Company believes that the overall demand among
the Telcos' customers for DDS services and, to a greater extent, ISDN services
is growing. New ISDN products, such as a new ISDN channel bank, are currently
being tested by various RBOCs and independent Telcos, with other product
concepts in the design phase of the development cycle. See "Factors That May
Affect Future Results - Reliance on Certain Customers" and "Factors That May
Affect Future Results - Rapid Technological Changes and Dependence on New
Products."
GROSS PROFIT. Gross profit in the second quarter of Fiscal 1997 decreased
9.9%, or approximately $0.9 million, to approximately $8.2 million from
approximately $9.1 million in the second quarter of Fiscal 1996. For the
first six months of both Fiscal 1997 and Fiscal 1996 gross profit totaled
approximately $18.5 million. Gross profit margin for the second quarter of
Fiscal 1997 decreased to 43.5% from 44.2% for the second quarter of Fiscal
1996. Gross profit margin for the first six months of Fiscal 1997 was 44.8%,
approximately the same as for the comparable Fiscal 1996 period. The decrease
in gross profit and gross profit margin for the first quarter of Fiscal 1997
was due primarily to (i) spreading fixed manufacturing overhead costs over a
smaller revenue base, (ii) the introduction of several new products with lower
gross profit margins, and (iii) price reductions on certain other selected
products. Increases in gross profit margin may be difficult to attain for at
least the balance of the Fiscal Year because of the expected sales of new
products that, initially, will likely have below-average margins, and due to
anticipated price pressure on certain of the Company's established product
lines. See "Factors That Affect Future Results - Highly Competitive Industry."
SALES AND MARKETING. Sales and marketing expenses in the second quarter
of Fiscal 1997 decreased 7.0%, or approximately $0.1 million, to approximately
$1.7 million from approximately $1.8 million in the second quarter of Fiscal
1996. Sales and marketing expenses for the first six months of each of Fiscal
1996 and 1997 totaled approximately
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$3.7 million. As a percentage of net sales, sales and marketing
expenses increased to 9.1% for the second quarter of Fiscal 1997 from 9.0% for
the second quarter of Fiscal 1996, and for the first six months of Fiscal 1997
decreased to 8.8% from 9.0% for the comparable prior year period. The decrease
in the dollar amount of sales and marketing expenses was due primarily to
decreased sales commissions resulting from the lower sales.
RESEARCH AND DEVELOPMENT. Research and development expenses in the second
quarter of Fiscal 1997 increased 25.4%, or approximately $0.5 million, to
approximately $2.5 million from approximately $2.0 million in the second
quarter of Fiscal 1996. For the first six months of Fiscal 1997, research and
development expenses totaled approximately $4.7 million compared to
approximately $3.7 million for the first six months of Fiscal 1996,
representing an increase of approximately $1.1 million, or 28.7%. As a
percentage of total net sales, research and development expenses increased to
13.1% in the second quarter of Fiscal 1997 from 9.6% in the second quarter of
Fiscal 1996, and for the first six months of Fiscal 1997 research and
development expenses increased to 11.4% from 8.9% for the first six months of
Fiscal 1996. The increase in the dollar amount of this expense for each
comparative period was due primarily to increases in personnel associated
expenses, such as recruiting and salaries for newly-hired personnel, related
support equipment and the outsourcing of certain development costs. The
Company's goal has been to increase expenditures for research and development
at a rate greater than its rate of sales growth, with a view towards having its
research and development expenses total 11% to 12% of net annual sales. The
increase in the dollar amount of research and development expenses coupled with
the decrease in net sales for the second quarter of Fiscal 1997 compared to the
second quarter of Fiscal 1996 resulted in research and development expenses
exceeding this target level for the quarter.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in the
second quarter of Fiscal 1997 increased 16.2%, or approximately $0.2 million,
to approximately $1.1 million from approximately $0.9 million in the second
quarter of Fiscal 1996. For the first six months of Fiscal 1997, general and
administrative expenses totaled approximately $2.2 million compared to
approximately $2.0 million for the first six months of Fiscal 1996,
representing an increase of approximately $0.2 million, or 8.1%. General and
administrative expenses as a percentage of total net sales increased to 5.7% in
the second quarter of Fiscal 1997 from 4.5% in the second quarter of Fiscal
1996, and for the first six months of Fiscal 1997 increased to 5.2% from 4.9%
for the first six months of Fiscal 1996. The increase in the dollar amount of
this expense for each comparative period was largely the net result of an
increase in salaries and related expense and higher license fees. This
increase, however, was offset by a decrease in the amount the Company accrued
for bonuses during the first six months of Fiscal 1997 compared to Fiscal 1996.
OTHER INCOME. Other income for the second quarter and the first six
months of Fiscal 1997 increased by $0.1 million and $0.4 million, respectively,
from the corresponding Fiscal 1996 periods.
INCOME TAXES. A provision for income taxes of $1.3 million was recorded
for the second quarter of Fiscal 1997 compared to $1.9 million for the second
quarter of Fiscal 1996. A provision for income taxes of $3.4 million was
recorded for the first six months of Fiscal 1997 compared to $3.9 million for
the first six months of Fiscal 1996. These decreases in income tax provisions
are due to the Company's net income before taxes in the second quarter and
first six months of Fiscal 1997 being less than its net income in the
comparable prior year periods.
LIQUIDITY AND CAPITAL RESOURCES
At January 25, 1997, the Company had no long-term indebtedness and had
working capital of approximately $41.2 million, which included cash and cash
equivalents of approximately $12.2 million and marketable securities of
approximately $15.0 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 $1.3 million in the
first six months of Fiscal 1997 compared to approximately $1.7 million for the
first six months of Fiscal 1996. Most of the expenditures were for the
purchase of manufacturing test equipment and engineering equipment.
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As of January 25, 1997, the Company had net trade accounts receivable of
approximately $9.0 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 current 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 that
receivables remain outstanding.
For the first six months of Fiscal 1997, inventories increased by
approximately $1.3 million, from approximately $12.3 million at the end of
Fiscal 1996 to approximately $13.7 million as of January 25, 1997. This
increase in inventory was primarily a result of the Company's effort to acquire
sufficient raw materials to meet anticipated customer demand for certain new
products, and to a slowdown in demand for the Company's existing products
during the second quarter. See "Factors That May Affect Future Results -
Increased Inventory Levels and Need to Make Advance Purchase Commitments." See
also " - Results of Operations -- Net Sales."
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 January 25, 1997, the Company estimates that approximately $12.6
million is available under the Bank Facility as of the date hereof. Borrowings
under the Bank Facility will mature on June 30, 1998 and bear interest at a
floating rate based on (i) LIBOR or the prime rate offered by the lender from
time to time, and (ii) the Company's debt-to-equity ratio, determined quarterly
by the Company. The terms of the Bank Facility prohibit the Company from
declaring and paying in any fiscal year dividends 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
DEPENDENCE ON TWO PRODUCT LINES. The Company's T1 products accounted for
approximately 48.0%, 55.6% and 53.9% of the Company's total net sales in Fiscal
1994, 1995 and 1996, respectively. For these same periods, sales of the
Company's VF products accounted for approximately 43.7%, 32.0% and 21.0%,
respectively, of the Company's total net sales. The Company expects to derive
the majority of its net sales for the foreseeable future from the sale of its
T1 and, to a lesser extent, VF products. Consequently, the Company's inability
to maintain or increase net sales of its T1 and VF products in the future, or
to offset any shortfall in sales of such products with sales within its other
existing or future product lines, could have a material adverse effect on the
Company. The Company believes that the domestic market for its VF products is
decreasing and will continue to decrease as the higher speed digital data
transmission services demanded by customers within the Local Loop become less
costly and more widely deployed. The Company is facing increasing competition
with respect to its T1 products from suppliers of systems based on HDSL
technology as an alternate method of delivering T1 services in the Local Loop.
Because HDSL is easier to provision than traditional T1 service, the Company
expects that HDSL products will adversely affect the demand for its T1 products
as the costs of HDSL systems decline. Consequently, while net sales of the
Company's T1 products have increased from year to year since Fiscal 1991, there
can be no assurance that the Company will be able to sustain or improve this
trend. If increasing competition causes the Company to reduce selling prices
for its T1 or VF products, there can be no assurance that the Company will be
able to increase unit sales volumes of such products, reduce its costs of sales
of such products or maintain or increase revenues or gross margins attributable
to such products to offset in full or in part the reduced revenue effects of
such selling price reductions.
RAPID TECHNOLOGICAL CHANGES AND DEPENDENCE ON NEW PRODUCTS. The market
for the Company's products is characterized by rapidly changing technology,
evolving industry standards, changes in customer requirements,
price-competitive bidding and frequent product introductions and enhancements.
The introduction of telephone network voice and data transmission products
involving new technologies, the emergence of new industry standards or changes
in customer requirements or service offerings could adversely affect the
Company's ability to sell its existing products and products currently under
development. All of the Company's existing products are designed primarily to
facilitate
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and enhance the delivery of communications over the existing copper wireline in
the Local Loop and the Company expects that Telcos will increasingly replace
this copper wireline with fiber optic, coaxial cable, wireless and other
technologies (each of which uses a significantly different method of delivery).
Furthermore, the Company faces increasing competition with respect to its T1
products from suppliers of HDSL systems as an alternate method of delivering
conventional T1 services. The Company believes that the continued installation
of new technologies in the Local Loop will adversely affect demand for certain
of its existing products and that its future success will largely depend upon
its ability, on a cost-effective and timely basis, to continue to enhance its
existing products and develop and achieve commercial acceptance of new
products. There can be no assurance that developments by others will not
render the Company's products or technologies obsolete or unmarketable or that
the Company will be able to successfully anticipate or adapt to changing
technology, industry standards or customer requirements on a timely basis. Any
failure by the Company to anticipate and respond to technological developments
or changes in industry standards or customer requirements could have a material
adverse effect on the Company.
RELIANCE ON CERTAIN CUSTOMERS. The Company depends, and is likely to
continue to depend, on the RBOCs for substantially all of its net sales. Sales
to the RBOCs accounted for approximately 96.5%, 96.3% and 95.2% of the
Company's total net sales in Fiscal 1994, 1995 and 1996, respectively. Among
the RBOCs, sales to BellSouth, US WEST, SBC Communications, Ameritech and NYNEX
accounted for approximately 20.6%, 18.4%, 18.2%, 15.2% and 10.7%,
respectively, of the Company's net sales in Fiscal 1996. During this same
period, one of these customers purchased T1 products which accounted for
approximately 15.6% of the Company's total net sales. The Company has no
supply agreements with any of the RBOCs or its other customers which establish
minimum purchase commitments and there can be no assurance that sales of the
Company's products to the RBOCs or other customers will continue or that the
Company's customer base will become less concentrated. See "Factors That May
Affect Future Results -- Potential Competition from RBOCs and AT&T." The loss
of one or more of the RBOCs as a customer, the reduction of orders for the
Company's products, or a failure or delay in the deployment of the Company's
products by the RBOCs could materially and adversely affect the Company. In
addition, recent contract negotiations with certain RBOCs have resulted in
lower prices for selected products. In addition, the RBOCs and the Company's
other customers are significantly larger than, and are able to exert a high
degree of influence over, the Company.
HIGHLY COMPETITIVE INDUSTRY. The markets for the Company's products are
highly competitive, especially with respect to price, product features, quality
and conformance to industry standards. The Company's competitors in the United
States and elsewhere are numerous and the Company expects its competition to
increase in the future both from existing and new competitors, including
possibly the RBOCs and AT&T Corp. ("AT&T," formerly known as American Telephone
and Telegraph Company). See "Factors That May Affect Future Results --
Potential Competition From RBOCs and AT&T". Increased competition could reduce
gross profit margins and may require increased spending by the Company on
product development and sales and marketing, or may otherwise adversely affect
the Company. The Company has generally been required to reduce the selling
prices of its products over time to meet increasing competition and will likely
be required to do so in the future. The Company's ability to maintain or
increase net sales will depend largely upon its ability to increase unit sales
volumes of its products to counter declines in the average sales prices of its
products. Declining average sales prices would also adversely affect gross
margins on the Company's products if not offset by reductions in the Company's
cost of sales. There can be no assurance that the Company will be able to
increase unit sales volumes of its products, reduce its costs of sales of such
products or maintain or increase revenues or gross margins attributable to such
products. Most of the Company's competitors and potential competitors have
significantly greater financial, technological, manufacturing, marketing and
personnel resources and experience than the Company. In addition, certain of
the Company's competitors have long-standing relationships with certain Telcos
which may adversely affect the Company's ability to successfully compete for
business at these Telcos.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain key components which are
required to manufacture the Company's products are available from only one
source. Such components include the Company's application specific integrated
circuits, which are built to Company specifications, and its proprietary design
integrated circuits, which are the design and property of the manufacturer from
which they are purchased. The Company generally obtains its components on a
purchase order basis. Accordingly, there can be no assurance that the Company
will be able to continue to obtain sufficient quantities of key components as
required or that such components, if obtained, will be available to the Company
on commercially favorable terms. Further, certain components require an order
lead time of up to six months. Failure by the Company to order sufficient
quantities of components in advance could prevent the Company from
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<PAGE> 12
meeting customer demand for its products. The Company has been able to
adjust its order lead times and/or promised delivery dates to avoid material
delivery delays of its products. However, there can be no assurance that the
Company will be able to continue to adjust its order lead times and/or promised
delivery dates to avoid material delivery delays of its products in the future.
Under certain of the Company's supply contracts, a delay in the delivery of
products would permit the customer to cancel the purchase order or, in limited
circumstances, assess a late delivery charge. In addition, late deliveries
could adversely affect the Company's ability to obtain additional sales from a
particular customer. The Company's inability to obtain sufficient quantities of
key components as required, or to develop alternative sources of such components
on commercially favorable terms, if and as required in the future, could result
in delays or reductions in product shipments or could otherwise have a material
adverse effect on the Company's customer relationships and, consequently, on its
business, results of operations and financial condition. See "Factors That May
Affect Future Results -- Reliance on Certain Customers."
INCREASED INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS.
To respond to anticipated customer demand, the Company maintains high inventory
levels. In addition, at the request of three of its customers, the Company has
entered into arrangements to maintain certain of its finished goods inventory
at the various locations of such customers. Although the Company believes
these arrangements facilitate sales to its customers, they result in higher
levels of inventory than are necessary in the absence of such arrangements.
Maintaining high inventory levels substantially increases the risk that the
Company's profitability and results of operations may from time to time be
materially and adversely affected by inventory obsolescence. To procure
adequate supplies of certain components, the Company must regularly make
advance commitments to purchase relatively large quantities of such components.
The inability of the Company to incorporate such components in its products
could have a material adverse effect on the Company.
POTENTIAL COMPETITION FROM RBOCS AND AT&T. The Telecommunications Act has
generally eliminated the restrictions which had previously prohibited the RBOCs
from manufacturing telecommunications equipment (subject to first satisfying
certain conditions designed to facilitate local exchange competition and
receipt of prior approval by the Federal Communications Commission). These
restrictions had been imposed under the Modification of Final Judgment, which
governed the structure of the 1984 divestiture by AT&T of its local operating
telephone company subsidiaries. The passage of the Telecommunications Act may
have an adverse effect on the Company because the RBOCs, which are presently
the Company's principal customers, may now become manufacturers of some or all
of the products currently manufactured and sold by the Company and,
consequently, may no longer purchase telecommunications equipment produced by
the Company at the levels historically experienced. In addition, the
operation, as an independent entity, of Lucent after its spin-off from AT&T may
have an adverse effect on the business of the Company.
GOVERNMENT REGULATION. The telecommunications industry is subject to
regulation in the United States and other countries. While such regulation
does not typically apply directly to the Company, federal and state regulatory
agencies and commissions regulate most of the Company's domestic customers.
The effects of such regulations, which are under continuous review and subject
to change, on the Company's customers may adversely affect the Company.
PROPRIETARY RIGHTS AND RISKS OF THIRD PARTY CLAIMS OF INFRINGEMENT. The
telecommunications industry is characterized by an increasing number of patents
and frequent litigation based on allegations of patent infringement. From time
to time, third parties may assert exclusive patent, copyright and other
intellectual property rights to technologies which are important to the
Company. While the Company does not believe that its present products and
technology infringe the intellectual property rights of others, there can be no
assurance that third parties will not assert infringement claims against the
Company or that any such assertions will not result in costly litigation.
Further, there can be no assurance that the Company would prevail against any
such claims or that licenses of any third-party intellectual property would be
available to the Company on commercially reasonable terms. In addition, a
substantial number of the Company's products are intended to plug into
telephone network equipment designed and manufactured by third parties, some of
which are competitors of the Company. The design or modification of such
equipment so that it is incompatible with the Company's products could
adversely affect the Company's ability to maintain its current level of, or
achieve additional, net sales. The inability of the Company to develop
products for such equipment which do not infringe the intellectual property
rights associated with such equipment, or to obtain the right to use such
intellectual
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<PAGE> 13
property on commercially reasonable terms, could have a material
adverse effect on the Company. In addition, any infringement claims or
litigation against the Company could have a material adverse effect on the
Company.
The Company is a party to agreements with certain of the RBOCs pursuant to
which it licenses certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products. The terms of virtually all of these license agreements
expired at varying times during Fiscal 1995, subject to a right of continuation
at an increased royalty rate with respect to specified Company products. The
Company is currently evaluating its continuing obligations under these
agreements and the extent to which its current products employ technology
covered by the unexpired patents licensed thereunder. There can be no
assurance that the results of the Company's evaluation of these agreements
and/or subsequent negotiations with the 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 Company's initial public offering in 1995 (the "IPO"), the
Company's operating subsidiary also licensed certain technology from AT&T, the
technology has since been transferred to Lucent. The term of this license
continued through July 1995, subject to a right of continuation under certain
circumstances at substantially higher royalty rates. In connection with the
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. However, the term of the license agreement expired before the parties
had the opportunity to resolve these issues and the parties have since
discussed a replacement license agreement. There can be no assurance that the
Company will be able to obtain a replacement license agreement at royalty rates
which do not exceed those in effect during Fiscal 1995, and any substantial
increase in royalty rates could have a material adverse effect on the Company.
The Company is also evaluating its continuing obligations with respect to
the operating subsidiary's Pre-IPO license agreement with AT&T (now Lucent),
including the extent to which its current products employ technology covered by
the unexpired patents licensed thereunder. Any resolution of these issues
which applies the maximum royalty increase provided for in the license to a
substantial number of the Company's products could have a material adverse
effect on the Company's results of operations. Further, in the context of its
discussions with AT&T and Lucent, Lucent indicated that the Company's initial
ISDN product may make use of certain of Lucent's patented technology and has
expressed a willingness to enter into licensing negotiations with respect to
such technology. The Company is currently evaluating Lucent's claim. However,
there can be no assurance as to the resolution of this matter. See "Factors
That May Affect Future Results -- Potential Competition from RBOCs and AT&T."
See also "Item 1 - Legal Proceedings," under "Part II Other Information."
POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES. The Company's products
are required to meet rigorous standards imposed by its customers, including
written technical requirements and various mechanical, electrical performance,
environmental operating and storage conditions, and to interface in a complex
and changing environment with telecommunication network equipment produced by
numerous other suppliers. In the event there are material deficiencies or
defects in the design or manufacture of the Company's products or if such
products become incompatible with existing third-party network equipment, the
affected products could be subject to a recall. Although the Company has not
experienced any complete recall of a product from the field in the past, the
Company has from time to time agreed to upgrade certain of its products in
response to product design issues raised by certain of its customers. There
can be no assurance that the Company will not experience a material product
recall in the future. Any product recall and associated negative publicity
could have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes factors such as
announcements of new products or technological innovations by the Company or
third parties, as well as variations in the Company's results of operations,
the gain or loss of significant customers, legislative or regulatory changes,
general trends in the industry, market conditions, analysts' estimates, the
stock market and other events or factors may cause the market price of the
Common Stock to fluctuate significantly. In addition, the stock market has
experienced extreme price and volume fluctuations which have particularly
affected the market price for many high technology companies and which have
often been unrelated to the operating performance of these companies. These
broad market fluctuations may adversely affect the market price of the Common
Stock.
-13-
<PAGE> 14
FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have
fluctuated and may continue to fluctuate as a result of various factors
affecting the Company and its competitors including, but not limited to, the
timing of significant orders and shipments, competition, new product
introductions by the Company or its competitors, production or quality
problems, availability and cost of components and changes in general economic
conditions.
-14-
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. 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 Teltrend product specifically identified as allegedly
infringing the patents is the CYBERBLOCK(TM) model LCR4002. The Company
believes that the CYBERBLOCK(TM) 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(TM) model
LCR4002 could increase in the future, sales of this product to date have not
been significant.
ITEM 2 - CHANGES IN SECURITIES
The terms of the Bank Facility prohibit the Company from declaring and
paying in any fiscal year dividends which exceed, in the aggregate, 50% of the
Company's net income for the immediately preceding fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 5 -- OTHER INFORMATION
The Company's 1997 Annual Meeting of Stockholders was held on February 7,
1997 for the purpose of (i) electing directors, (ii) ratifying the action of
the Company's Board of Directors in appointing Ernst & Young LLP as the
Company's independent auditors for Fiscal 1997, and (iii) transacting such
other business properly brought before the meeting. The meeting proceeded and
the holders of the Company's common stock elected the following persons to the
Company's Board of Directors: (a) Howard L. Kirby, Jr., by a vote of 4,780,143
votes cast for and 23,680 votes withheld; (b) Carl M. Mueller, by a vote of
4,778,958 votes cast for and 24,865 votes withheld; (c) Frank T. Cary, by a
vote of 4,776,348 votes cast for and 27,475 votes withheld; (d) Harry Crutcher,
III, by a vote of 4,778,603 votes cast for and 25,220 votes withheld; (e)
William R. Delk, by a vote of 4,778,803 votes cast for and 25,020 votes
withheld; (f) Donald R. Hollis, by a vote of 4,778,503 votes cast for and
25,320 votes withheld; and (g) Bernard F. Sergesketter, by a vote of 4,778,603
votes cast for and 25,220 votes withheld. The holders of the Company's common
stock also ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for Fiscal 1997 by a vote of 4,789,263 votes cast for
ratification, 2,650 votes cast against ratification and 11,910 abstentions.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Disclosure Schedule (filed as exhibit 27).
(b) Reports on Form 8-K: The Company did not file any Current Report on
Form 8-K during the quarter ended January 25, 1997.
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<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELTREND INC.
By /S/ Michael S. Grzeskowiak /S/ Theodor A.Maxeiner
-------------------------- ---------------------------
Michael S. Grzeskowiak Theodor. A. Maxeiner
Vice President, Operations Controller
(Chief Accounting Officer)
Date: March 11, 1997 Date: March 11, 1997
-16-
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