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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 25, 1998
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. [x]
As of October 16, 1998, there were outstanding 5,948,990 shares of the
registrant's Common Stock, $.01 par value per share ("Common Stock"), and no
shares of the registrant's Class A Common Stock, $.01 par value per share. 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 16,
1998) held by non-affiliates of the registrant was $76,519,902 (5,775,087 shares
at $13.25 per share).
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED JULY 25, 1998 ARE INCORPORATED BY REFERENCE INTO PART II OF THIS ANNUAL
REPORT ON FORM 10-K.
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING
OF STOCKHOLDERS TO BE HELD DECEMBER 10, 1998 ARE TO BE INCORPORATED BY REFERENCE
INTO PART III OF THIS ANNUAL REPORT ON FORM 10-K.
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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 "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:
(i) the Company's (as defined below) prospects, developments and business
strategies for its operations, including the development and sale of certain new
and established products; (ii) the Company's expectations regarding product
pricing and the impact of product pricing on gross profit margins; and (iii) the
Company's expectations regarding the upcoming year 2000. These forward-looking
statements are identified by their use of such terms and phrases as "believes,"
"anticipates," "planned," "will" and "expects," 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,
without limitation: (i) risks of general market conditions, including demand for
the Company's products, product mix, competition and the Company's historical
dependence on relatively few customers; (ii) risks related to the Company's
historical dependence on relatively few product lines (such as the Company's T1
product line, which faces competition from suppliers of alternate methods of
delivering repeatered T1 services); (iii) the extent to which the Company's
principal customers continue to exert pricing pressures on the Company; (iv)
risks inherent in the telecommunications industry, including rapidly changing
technology, evolving industry standards, changes in customer requirements,
frequent product introduction and changing government regulation; and (v) the
timing and occurrence (or non-occurrence) of transactions and events which may
be subject to circumstances beyond the Company's control. A reader of this
Report should understand that it is not possible to predict or identify all such
risk factors. Consequently, the reader should not consider such a list to be a
complete statement of all potential risks or uncertainties. The Company does
not assume the obligation to update any forward-looking statements. Results
actually achieved may differ materially from expected results included in these
statements. See Subparagraph d. of Item 1 - "Factors That May Affect Future
Results."
PART I
ITEM 1. BUSINESS.
A. GENERAL DEVELOPMENT OF BUSINESS
(I) BACKGROUND
Teltrend 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 service over the
telephone network. Historically, substantially all of Teltrend's products have
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 strong
reliance on the RBOCs continues, but the Company's purchase of U.K.-based
Securicor 3net Limited in September 1997 (since renamed Teltrend Limited) has
expanded the Company's markets and product lines. With the addition of Teltrend
Limited, the Company is now a leading developer of Integrated Services Digital
Network ("ISDN") products for communications equipment and service providers and
also supplies local area network ("LAN") internetworking, ISDN remote access and
secure virtual private networking solutions for business customers worldwide.
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, (i) all references to
the "Company" or "Teltrend" in this Annual Report on Form 10-K (the "Report")
collectively refer to Teltrend Inc. and its wholly owned subsidiaries, and (ii)
all references herein to "Teltrend Ltd." refer to Teltrend Limited and its
wholly owned 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 1998 refers to
the year ended July 25, 1998).
(II) TELTREND LTD. ACQUISITION
On September 18, 1997, the Company consummated the purchase of all the
outstanding shares of Securicor 3net Limited of Basingstoke, England and its
U.S. affiliate Securicor 3Net Inc. from 3 Net Holdings Limited of Surrey,
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England ("3Net Holdings") for a total acquisition cost of approximately $14.5
million. 3Net Holdings is a subsidiary of Securicor Communications Limited of
Surrey, England ("Securicor Communications"). Following the acquisition, the
name of Securicor 3net Limited was changed to Teltrend Limited. With operations
in England, New Zealand and China, Teltrend Ltd. is a leading developer of ISDN
products for communications equipment and service providers. Teltrend Ltd. also
supplies LAN internetworking, ISDN remote access and secure virtual private
networking solutions for business customers worldwide.
(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. 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 20% 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 amended on June 1, 1998 and as the same may be further
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
included as an exhibit to this Report.
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. The Company also manufactures a wide range
of remote LAN internetworking, ISDN remote access and virtual private networking
products and services. 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. The Company also sells
its products to certain independent U.S. and international Telcos. The
Company's principal products are as follows: (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) ISDN products which provide switched digital
transmission of voice or data at rates of up to 128 Kbit/sec over copper
wireline; (v) digital loop carrier ("DLC") products which are cabinets and
plug-in channel units that are compatible with D4, SLC(R)*-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); (vi) 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; and (vii) circuit switched products (which
provide the ability for various telephone switches to interwork with and support
dissimilar protocols) and packet switched products (a line of routers).
______________
* SLC is a registered trademark of Lucent Technologies, Inc. ("Lucent").
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(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 to cost effective customer premises equipment ("CPE") which
utilizes ISDN capabilities and features.
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.
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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 Products."
(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. The
Company also manufactures ISDN integrated access systems for many of the largest
telecommunications equipment and service providers worldwide.
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 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 PRODUCTS
T1/HDSL 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. 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. Sale of T1 products accounted for 48.7%, 55.2% and 53.9%
of the Company's total net sales in fiscal 1998, 1997 and 1996, respectively.
Within its T1 product line the Company currently offers intelligent
network interface units ("NIUs"), intelligent office repeaters, intelligent
line repeaters 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
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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.
Teltrend introduced a new generation of NIUs to Telcos throughout the
United States during late fiscal 1997 and fiscal 1998. These new NIUs contain
extensive performance monitoring ("PM") 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 at the
network interface, terminating all forms of T1 transmission facilities --
repeatered T1, HDSL or fiber-based. While there is no assurance that the
Company will be able to successfully 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
products (which provide traditional repeatered T1 service) will decline as the
cost of HDSL systems declines. The Company manufactures a 4-wire HDSL product
line which has been approved and purchased by two Telcos. See Subparagraph d.
(i) of this Item 1 -- "Factors That May Affect Future Results--Dependence on T1
Products." 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."
The CellPak(TM) product line provides T1 transport in a completely
self-contained, pre-tested, outdoor package for providing a Telco demarcation to
cellular or personal communications services providers via metallic or fiber
optic lines. Coordination problems that are often encountered between the
wireless operator and the Telco 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.
DLC/VF PRODUCTS. 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.
The Company also manufactures a 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
also becoming an original equipment manufacturer of channel units by selling
channel units to Next Level System, Inc., another DLC systems company.
The Company is a supplier of intelligent VF products. Within its VF
product line, the Company currently offers data station termination ("DST")
units and 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 an analog data line. 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
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lines remain, for several reasons, a commonly utilized 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 in certain locations is the only means
of transmission 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. Sales of VF products accounted for 11.0%,
15.2% and 21.0% of the Company's total net sales in fiscal 1998, 1997 and 1996,
respectively.
ISDN/DDS PRODUCTS. The Company is currently manufacturing, developing and
marketing products based on basic rate ISDN technology. This technology allows
Telcos to provide their customers with two 64 Kbit/sec digital channels for
voice or data, plus an additional data channel 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
used to extend service beyond 16,000 feet and an ISDN channel unit for use with
Lucent's SLC(R)96 DLC system. The Company also manufactures channel banks for
use at Telco Central Offices. These channel banks are used to interface the
ISDN signal for interoffice transport when the local Central Office switch
cannot support ISDN service.
The Company's acquisition of Teltrend Ltd. in September 1997 has increased
its ISDN product offerings. Teltrend Ltd. supplies ISDN access solutions such
as protocol conversion, port concentration, routing and remote management units.
These enable telecommunications service and equipment providers to facilitate
basic rate and primary rate delivery by providing support for interfaces and
services not otherwise available to them. The Company now also offers a total
networking solution that makes ISDN more attractive to the end-user. The
product range encompasses the Network iQ(TM) family of routers -- including
routers with built-in PBX functionality and a solution to provide secure or
encrypted virtual private networks (VPNs) across the Internet--and the Connect
iQ family of terminal adaptors for ISDN access.
The Company's DDS products are used by Telcos to deliver digital service
across copper wires in the Local Loop at speeds from 2.4-64 Kbit/sec. The
majority of DDS service 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 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 is currently a market leader in DDS channel units which plug
into Lucent's SLC(R)-5 DLC systems. The Company manufactures intelligent DDS
termination units, which are installed by Telcos at the end-user's premises to
configure and maintain a DDS line. A trend toward labor-saving Local Loop
equipment has increased the demand for this type of unit. The Company's DDS
products are sold to all of the RBOCs and to Southern New England Telephone.
(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
81.7%, 95.8% and 95.2% of the Company's total net sales in fiscal 1998, 1997 and
1996, respectively. In fiscal 1998, sales to SBC Communications Inc. (which
merged with Pacific Bell in fiscal 1998), BellSouth Telecommunications Inc.,
Bell Atlantic (which merged with NYNEX in fiscal 1998), Ameritech Corp., and US
WEST Inc. accounted for 30.1%, 16.8%, 13.8%, 10.8%, and 10.3%, respectively, of
the Company's total net sales. No other customer accounted for more than 10% of
the Company's total net sales in fiscal 1998. The acquisition of Teltrend Ltd.
has given 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
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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 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
The majority of the Company's sales in the United States are made by its
field sales organization, which is 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. Teltrend Ltd.'s salesforce consists of 8 salespersons based in
the U.K., New Zealand and 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 upon 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 or is in the process of negotiating 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 three 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 25, 1998, approximately 37% of the Company's finished
goods inventory was maintained at these locations. See Subparagraph d. (vi) of
this Item 1--"Factors That May Affect Future Results--Inventory Levels and Need
to Make Advance Purchase Commitments" and Subparagraph d. (ix) 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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The Company's research and product development is carried out by engineers
and engineering support personnel located in the U.S., U.K. and New Zealand.
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.
All product development expenses are charged to operations as incurred. The
Company's expenditures on research and product development were approximately
$14.3 million, $9.7 million, and $7.9 million in fiscal 1998, 1997 and 1996,
respectively. The Company believes its future success will depend in part on
its ability, on a cost effective and timely basis, to 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. 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 1998
Compared with Fiscal 1997."
(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 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 limited warranty of 12 months to
seven years, which generally covers defects in materials or workmanship and
failure to meet published specifications, but excludes damages caused by
improper use. 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. See Subparagraph d.(ix) 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 CSQPSM (Customer Supplier Quality
Process) and ISO 9001 Registration recognition from Bellcore.
The Company's domestic 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, the products manufactured by the Company are tested prior
to shipment to customers.
All of the products offered and sold by the Teltrend Ltd. operations are
manufactured by independent contractors, generally pursuant to manufacturing
agreements entered into with Teltrend Ltd. These manufacturers have all
achieved ISO 9002 recognition, and Teltrend Ltd.'s software products have
achieved "Ticket" recognition for quality performance.
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
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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. 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, non-cancelable
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. See Subparagraph d. (vi) of this Item 1 -- "Factors That May
Affect Future Results -- 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 -- Liquidity and Capital
Resources."
(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. 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.
The Company's competitors in the United States and elsewhere are numerous
and, in many 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 Charles Industries, Troncom and Westell, Inc. In
addition, because HDSL is easier to provision than traditional T1 service, the
Company faces 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, Pulse Communications, Inc. ("Pulsecom"), a
subsidiary of Hubbell Incorporated, and XEL 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 Products" and Subparagraph d. (iv) of this Item 1 --
"Factors That May Affect Future Results -- Highly Competitive Industry."
The Company's principal competitors with respect to its circuit-switched
products are Aculab and Telspec. With respect to the Company's pocket-switched
products, there are numerous competitors, although the market is dominated by
Cisco Systems.
(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 the terms upon which common carriers conduct their business.
These policies are under continuous review and are subject to change. See
Subparagraph d. (vii) of this Item 1 -- "Factors That May Affect Future
Results--Government Regulation."
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(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 seventeen inventions relating to its products and has thirteen patent
applications pending in the U.S. Also, the Company is a party to various
agreements (which generally continue for the life of the underlying patent)
whereby the Company licenses certain telecommunications technology, including
digital channel banks and signal decoding systems, in connection with the
manufacture of its products. The Company 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 the products and technology 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.
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 that they do not infringe these rights, or to license such
rights on commercially favorable terms.
(XII) EMPLOYEES
As of July 25, 1998, the Company had 519 full-time employees. 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 25, 1998, the Company's backlog of orders believed to be firm was
approximately $3.7 million, compared to approximately $2.1 million at July 26,
1997. The Company believes that backlog is not a meaningful indicator of net
sales that can be expected for any future period.
D. FACTORS THAT MAY AFFECT FUTURE RESULTS
(I) DEPENDENCE ON T1 PRODUCTS
The Company's T1 products, which include T1 line and office repeaters and
Tl network units, accounted for 48.7%, 55.2% and 53.9% of the Company's total
net sales in fiscal 1998, 1997 and 1996, respectively. The Company expects to
derive a large percentage of its net sales for the foreseeable future from the
sale of these products. Consequently, the Company's inability to maintain or
increase net sales of its T1 products in the future, or to offset any shortfall
in sales of such products with sales of other existing or future products, could
have a material adverse effect on the Company.
The Company is facing, and expects to continue to face, increasing
competition with respect to its repeatered T1 products from suppliers of systems
based on HDSL technology as an alternate method of delivering repeatered T1
services in the Local Loop. Because HDSL is easier to provide than traditional
T1 service, the Company expects that HDSL products will continue to adversely
affect the demand for its repeatered T1 products as the cost of HDSL
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systems declines. If increasing competition or other factors cause the Company
to reduce selling prices for its repeatered T1 products (as has recently
occurred due to pricing pressure from certain of the Company's customers), there
can be no assurance that the Company will be able to increase unit sales volumes
of such products or reduce its costs of sales of such products so as to offset
in full or in part the reduced revenue and gross profit margin effects of such
selling price reductions. See "Reliance on Certain Customers" and Item 7 --
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(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. Most of the Company's existing products are designed 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 the
installation of copper wireline with the installation of fiber optic, coaxial
cable, wireless and other technologies (each of which uses a significantly
different method of delivery). 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. See "-- Dependence on T1 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 on the RBOCs for substantially all of
its net sales and, although the Company's customer base has become less
concentrated in the RBOCs as a result of the Teltrend Ltd. acquisition,
dependence on the RBOCs for the preponderance of the Company's net sales is
likely to continue for the foreseeable future. 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 to other customers will continue or that the Company's customer base will
become materially less concentrated. 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. For example, recent negotiations with the RBOCs
have resulted in the Company offering reduced prices for selected products. The
loss of one or more of the RBOCs as a customer, a further reduction in the
number of RBOCs as a result of mergers or consolidations, or a failure or delay
in the deployment of the Company's products by the RBOCs could materially and
adversely affect 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. Increased competition could lead to reduced
gross profit margins and may necessitate increased spending by the Company on
product development and sales and marketing in order to remain competitive, or
may otherwise adversely affect the Company. The Company has generally been
required to reduce the selling prices of its products over time and will likely
be required to do so in the future. See "-- Reliance on Certain Customers." 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
corresponding reductions in product costs. See Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Fiscal 1998 Compared to Fiscal 1997 -- Gross Profit." Many of the Company's
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.
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(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 ASICs, which are built to Company specifications, and its PDICs, 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 do so 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 Teltrend
Ltd.) 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 "-- Reliance on Certain Customers."
(VI) INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS
The Company maintains inventory levels consistent with anticipated customer
demand. 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 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.
Accordingly, there is a 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.
(VII) 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.
(VIII) 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
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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.
(IX) 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.
(X) 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, gain or loss of significant customers,
legislative or regulatory changes, changes in analysts' estimates, stock market
volatility and other events or factors may cause the market price of the
Company's Common Stock to fluctuate significantly.
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 on September 30, 2000. In March 1998, the Company finalized the
purchase of another building in St. Charles, Illinois to provide 19,800 square
feet of office and lab space for marketing and engineering personnel.
Teltrend Ltd.'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. Teltrend Ltd. 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 2000 can be
accommodated by these facilities and, if necessary, 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 purchased the land
for the construction of a new office, research and manufacturing facility, but
currently has no plans to commence construction of such a facility in fiscal
1999.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time involved in various 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 pending matters will not
materially affect the Company's financial position or results of operations. See
Subparagraph d. (viii) of Item 1 -- "Factors That May Affect Future Results --
Proprietary Rights and Risks of Third-Party Claims of
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Infringement."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted in the fourth quarter of fiscal 1998 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 10,
1998.
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
("Rockwell")), 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 62 years old.
CRAIG D. ECKERT, SENIOR VICE PRESIDENT, SALES AND BUSINESS
DEVELOPMENT--Mr. Eckert joined the Company in June 1998. He has 25 years of
experience in the telecommunications industry. He has an extensive background
in engineering, marketing and sales with the telephone operating companies, as
well as with their vendors, such as NEC, Stromberg-Carlson and NORTEL. Mr.
Eckert joined the Company from CenturyTel where as Vice President of Marketing
and Sales he was instrumental in the restructuring of the marketing groups and
the turnarounds of the Long Distance and Call Center companies. He also led
the formation of its Internet Service company. Most recently he was Vice
President and CEO of CenturyTel's Call Center Business. Mr. Eckert is 49 years
old.
DOUGLAS P. HOFFMEYER, SENIOR VICE PRESIDENT, FINANCE, CHIEF FINANCIAL
OFFICER, 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. In October 1998, Mr. Hoffmeyer was appointed Senior Vice President,
Finance, Chief Financial Officer, Secretary and Treasurer. 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 51 years old.
JACK C. PARKER, SENIOR VICE PRESIDENT/GENERAL MANAGER, HIGH CAPACITY
COMMUNICATIONS 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. In June 1998, Mr. Parker was appointed
Vice President/General Manager of T1/HDSL Products. In October 1998, Mr. Parker
was appointed Senior Vice President/General Manager of High Capacity
Communications 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
Telephone Products ("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 52 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 53 years old.
15
<PAGE> 16
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 division of 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 57 years old.
LAURENCE L. SHEETS, VICE PRESIDENT AND CHIEF TECHNICAL OFFICER--Mr.
Sheets has served as the Company's Vice President and 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 55 years old.
JANICE LOLLINI, ASSISTANT VICE PRESIDENT, HUMAN RESOURCES-- Ms. Lollini
joined Teltrend in 1995 as Director of Human Resources. In October 1998, Ms.
Lollini was appointed Assistant Vice President, Human Resources. She has
fifteen years experience in management in the field of human resources, working
for both sales and manufacturing organizations, most recently with World Book
Educational Products. Ms. Lollini's career began in education, where she taught
and worked as a counselor at the college level. Ms. Lollini is 54 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 53
years old.
MICHAEL A. SAMOCKI, ASSISTANT VICE PRESIDENT, QUALITY--Mr. Samocki
joined Teltrend in 1988 as Senior Quality Engineer. From September 1995 to
November 1997 he was the Company's In-Process Quality Manager. He has served as
the Company's Assistant Vice President of Quality since November 1997. Mr.
Samocki began his career as a quality professional in 1980 at Shure Electronics,
and has subsequently held quality staff positions at Mylstar Inc. and Williams
Electronics, manufacturers of electronic amusement arcade games. Mr. Samocki
has been in the telecommunications industry since 1985 after being employed by
Reliable Electric Utility Products (now RELTEC Corporation) at which he held
quality management and quality engineering positions. Mr. Samocki is 46 years
old.
MICHAEL BURGESS, MANAGING DIRECTOR OF TELTREND LIMITED-- Mr. Burgess has
served as Managing Director of Teltrend Ltd. (formally Securicor 3net Limited)
since November 1996 (and was made an officer of Teltrend Inc. in October 1998),
having joined the company as Operations Director in July 1994. Mr. Burgess
began his career as a telecommunications technician in 1961 with A.E.I. Ltd. In
1967, he commenced his data communications career after joining R.C.A. as a
field service engineer. After joining SCICON in 1973 as a field service
engineer and having installed the company's data communications network, he
became associated with MICOM and was employed in a variety of roles. In 1988,
he was appointed Managing Director of Micom-Borer until it was acquired by
Tricom in 1989, at which time he was appointed Operations Director. In 1992, he
joined Black Box as the International Product Marketing Director, and
subsequently joined Securicor 3net. Mr. Burgess is 53 years old.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Market for Company's Securities and Related Matters contained on
page 40 of the Company's Annual Report to Stockholders for the fiscal year ended
July 25, 1998 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The five-year Selected Historical Financial Data and accompanying notes
contained on pages 17-18 of the Company's Annual Report to Stockholders for the
fiscal year ended July 25, 1998 are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations contained on pages 19 through 25, inclusive, of the Company's
Annual Report to Stockholders for the fiscal year ended July 25, 1998 is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Quantitative and Qualitative Disclosures About Market Risk contained on
page 25 of the Company's Annual Report to Stockholders for the fiscal year ended
July 25, 1998 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 25, 1998 and July 26, 1997 contained on page 39
of the Company's Annual Report to Stockholders for the fiscal year ended July
25, 1998 is incorporated herein by reference.
b. The report of independent auditors, financial statements and notes to
financial statements of the Company contained on pages 26 through 39, inclusive,
of the Company's Annual Report to Stockholders for the fiscal year ended July
25, 1998 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 in
fiscal 1998 or 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The section entitled "Election of Directors" contained in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
December 10, 1998 is 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 10, 1998 is incorporated herein by reference.
17
<PAGE> 18
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 10, 1998 is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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 25, 1998,
are incorporated by reference in Part II, Item 8 of this Report.
Balance Sheets as of July 25, 1998 and July 26, 1997
Statements of Income for the years ended July 25, 1998, July 26, 1997 and July
27, 1996
Statements of Changes in Stockholders' Equity for the years ended July 25,
1998, July 26, 1997 and July 27, 1996
Statements of Cash Flows for the years ended July 25, 1998, July 26, 1997 and
July 27, 1996
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
Exhibit
Number Description
------- ------------
2 None.
3.1 Restated Certificate of Incorporation of Registrant, as amended.(11)
3.2 Amended and Restated Bylaws of the Registrant.(2)
18
<PAGE> 19
3.3 Certificate of Designation of Series A Junior Participating Preferred
Stock, filed January 23, 1997.(11)
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)
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).
4.7 Amendment No. 1 to Rights Agreement, dated June 1, 1998, between the
Registrant and LaSalle National Bank, as rights agent.(10)
4.8 First Amendment to Credit Agreement, dated June 30, 1998, between the
Registrant and LaSalle National Bank.
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. 1997 Non-Employee Director Stock Option Plan.(5)
19
<PAGE> 20
*10.9 Amended and Restated Stock Option Agreements, dated May 13, 1994, between
the Registrant and Gilbert H. Hosie.(1)
10.10 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)
10.11 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)
10.12 Second Amendment to Lease, dated September, 1995, between Morgan Guaranty
Trust Company of New York and the Registrant.(4)
10.13 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)
*10.14 Teltrend 1996 Stock Option Plan.(9)
10.15 Share Purchase Agreement among Security Services PLC, Securicor
Communications Limited, 3 Net Holdings Limited, Securicor 3 Net Limited
and Teltrend Inc.(3)
10.16 Third Amendment to Lease between Morgan Guaranty Trust Company of New
York and the Registrant.
10.17 Fourth Amendment to Lease, dated July 2, 1998, between Morgan Guaranty
Trust Company of New York and the Registrant.
11 None.
12 None.
13 1998 Annual Report to Stockholders.
16 None.
18 None.
21 Subsidiaries of Teltrend Inc.
23 Consent of Ernst & Young LLP.
24 None.
27 Financial Data Schedule.
99 None.
20
<PAGE> 21
_________________________________
(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 Definitive Proxy Statement
for the Annual Meeting of Stockholders held on December 11, 1997 (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).
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended April 26, 1997 (Commission File No. 0-26114).
(10) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated June 1, 1998 (Commission File No. 0-26114).
(11) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 26, 1997 (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.
b. Report on Form 8-K
The Company filed a current report on Form 8-K dated June 1, 1998 reporting
under Item 5 thereof the amendment of the Company's Rights Agreement.
This report contains the following trademarks of the Company, some of which
are registered: Teltrend, Connect iQ, Network iQ and CellPak. Any other product
or brand names are trademarks, registered trademarks or service marks of their
respective companies.
21
<PAGE> 22
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 23, 1998.
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 23, 1998
<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 Sr. Vice President, Finance, Secretary and Treasurer
- ------------------------ (Principal Financial Officer)
Douglas P. Hoffmeyer
/s/ Frank T. Cary
- ----------------- Director
Frank T. Cary
/s/ Harry Crutcher, III
- ----------------------- Director
Harry Crutcher, III
/s/ William R. Delk
- ------------------- Director
William R. Delk
/s/ Donald R. Hollis
- -------------------- Director
Donald R. Hollis
/s/ Susan B. Major
- ------------------ Director
Susan B. Major
/s/ Bernard F. Sergesketter
- --------------------------- Director
Bernard F. Sergesketter
</TABLE>
22
<PAGE> 23
EXHIBIT INDEX
Exhibit
Number Description
------- ------------
2 None.
3.1 Restated Certificate of Incorporation of Registrant, as amended.(11)
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.(11)
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)
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).
4.7 Amendment No. 1 to Rights Agreement, dated June 1, 1998, between the
Registrant and LaSalle National Bank, as rights agent.(10)
4.8 First Amendment to Credit Agreement, dated June 30, 1998, between the
Registrant and LaSalle National Bank.
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. 1997 Non-Employee Director Stock Option Plan.(5)
<PAGE> 24
*10.9 Amended and Restated Stock Option Agreements, dated May 13, 1994, between
the Registrant and Gilbert H. Hosie.(1)
10.10 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)
10.11 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)
10.12 Second Amendment to Lease, dated September, 1995, between Morgan Guaranty
Trust Company of New York and the Registrant.(4)
10.13 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)
*10.14 Teltrend 1996 Stock Option Plan.(9)
10.15 Share Purchase Agreement among Security Services PLC, Securicor
Communications Limited, 3 Net Holdings Limited, Securicor 3 Net Limited
and Teltrend Inc.(3)
10.16 Third Amendment to Lease between Morgan Guaranty Trust Company of New
York and the Registrant.
10.17 Fourth Amendment to Lease, dated July 2, 1998, between Morgan Guaranty
Trust Company of New York and the Registrant.
11 None.
12 None.
13 1998 Annual Report to Stockholders.
16 None.
18 None.
21 Subsidiaries of Teltrend Inc.
23 Consent of Ernst & Young LLP.
24 None.
27 Financial Data Schedule.
99 None.
<PAGE> 25
_________________________________
(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 Definitive Proxy Statement
for the Annual Meeting of Stockholders held on December 11, 1997 (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).
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended April 26, 1997 (Commission File No. 0-26114).
(10) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated June 1, 1998 (Commission File No. 0-26114).
(11) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended July 26, 1997 (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).
<PAGE> 1
EXHIBIT 4.8
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of June 30, 1998 (the
"Amendment"), is entered into between TELTREND INC., a Delaware corporation
("Borrower"), and LASALLE NATIONAL BANK, a national banking association
("Lender").
R E C I T A L S:
A. Borrower and Lender entered into that certain Credit Agreement, dated
as of June 14, 1995 (the "Credit Agreement").
B. Borrower has requested that Lender enter into this Amendment in order
to extend the "Revolving Credit Termination Date" (as defined in the Credit
Agreement) and make certain other amendments to the Credit Agreement as
provided herein.
C. Capitalized terms used herein and not otherwise defined shall have the
meanings provided for in the Credit Agreement.
D. In consideration of the mutual agreements contained herein the parties
hereto agree as follows:
1. AMENDMENT
Upon satisfaction of the conditions set forth in Section 2 hereof, the
Credit Agreement is amended as follows:
1.1 Section 1 of the Credit Agreement is hereby amended by restating the
definition of "Applicable Revolving Credit Loan Margin" in its entirety to read
as follows:
""APPLICABLE REVOLVING CREDIT LOAN MARGIN" shall mean (i) with
respect to the unpaid principal amount of the Revolving Credit Loan
bearing interest at the Prime Rate, zero percent (0%); and (ii) with
respect to the unpaid principal amount of the Revolving Credit Loan
bearing interest at the LIBOR Rate, one and three-quarters percent
(1.75%). "
1.2 Section 1 of the Credit Agreement is hereby amended by deleting in
their entirety the definitions of "Borrowing Base", "Borrowing Base
Certificate", "Eligible Accounts Receivable" and "Eligible Inventory".
1.3 Section 1 of the Credit Agreement is hereby amended by restating the
definition of "Revolving Credit Availability" in its entirety to read as
follows:
<PAGE> 2
""REVOLVING CREDIT AVAILABILITY" shall mean the positive difference,
if any, between (i) the Maximum Revolving Credit Loan, and (ii) the sum of
the aggregate principal amounts outstanding in respect of the Revolving
Credit Loan plus the outstanding Letter of Credit Obligations."
1.4 Section 1 of the Credit Agreement is hereby amended by restating the
definition of "Revolving Credit Termination Date" in its entirety to read as
follows:
""REVOLVING CREDIT TERMINATION DATE" shall mean the earliest of (i)
July 31, 2001, (ii) the date of termination of this facility with respect
to further Revolving Credit Advances and Letter of Credit Obligations
pursuant to Section 8 hereof, and (iii) the date of termination of this
facility with respect to further Revolving Credit Advances and Letter of
Credit Obligations pursuant to Section 9.2 hereof."
1.5 The Credit Agreement is hereby amended by restating Section 2.1(a)
thereof in its entirety to read as follows:
"(a) Upon and subject to the terms and conditions hereof, Lender
agrees to make available, from time to time, on and after the initial
Closing Date and until the Revolving Credit Termination Date, for
Borrower's use and upon the request of Borrower therefor, advances (each,
a "Revolving Credit Advance") in an aggregate amount outstanding which
shall not at any given time exceed the positive remainder of (x) the
Maximum Revolving Credit Loan, minus (y) the outstanding Letter of Credit
Obligations. Subject to the provisions of Section 8 and Section 9.2 hereof
and until all amounts outstanding in respect of the Revolving Credit Loan
shall become due and payable on the Revolving Credit Termination Date,
Borrower may from time to time borrow, repay and reborrow under this
Section 2.l(a)."
1.6 The Credit Agreement is hereby amended by deleting the last sentence
of Section 2.1(c) thereof in its entirety.
1.7 The Credit Agreement is hereby amended by restating Section 2.2(a)
thereof in its entirety to read as follows:
"(a) Lender agrees, subject to the terms and conditions hereinafter set
forth, to incur, from time to time on written request of Borrower, Letter
of Credit Obligations in respect of Letters of Credit; provided, however,
that the amount of all Letter of Credit Obligations incurred by Lender
pursuant to this Section 2.2(a) outstanding at any one time (whether or
not then due and payable) shall not exceed $3,000,000; and provided
further, however, that (A) no such Letter of Credit shall have an expiry
date which is more than one year following the date of issuance thereof,
(B) no such Letter of Credit shall have an expiry date which
2
<PAGE> 3
is later than 250 days following the Revolving Credit Termination Date,
and (C) the amount of such Letter of Credit shall not exceed the Revolving
Credit Availability at the time of the requested issuance of such Letter
of Credit. At the time of each request by Borrower that a Letter of Credit
be issued, Borrower shall execute and deliver to Lender an application for
such Letter of Credit in the form customarily prescribed by Lender to
issue Letters of Credit (the "Applications"). This Agreement supersedes
any terms of the Applications which are irrevocably inconsistent with the
terms hereof."
1.8 The Credit Agreement is hereby amended by restating Section 2.2(d) in
its entirety to read as follows:
"(d) In the event that Lender shall incur any Letter of Credit
Obligations pursuant hereto at the request or on behalf of Borrower
hereunder, Borrower agrees to pay to Lender, as compensation to Lender for
such Letter of Credit Obligation, (i) all costs and expenses incurred by
Lender on account of such Letter of Credit Obligation, (ii) commencing
with the date on which any Letter of Credit Obligation is incurred by
Lender with respect to a standby Letter of Credit and quarterly thereafter
for each period during which such Letter of Credit Obligation shall remain
outstanding, a fee in the amount equal to 1% per annum of the maximum
amount available from time to time to be drawn under each standby Letter
of Credit, calculated on the basis of a 360-day year and the actual number
of days elapsed and (iii) with respect to each commercial Letter of
Credit, fees in the amounts and payable on the dates from time to time
announced by Lender as being applicable thereto. In addition, Borrower
agrees to pay to Lender, on demand and for its own account, such other
customary administrative fees, charges and expenses of Lender in respect
of the issuance, negotiation, acceptance, amendment, transfer and payment
of any such Letters of Credit or otherwise payable pursuant to the
application and related documentation under which any such Letter of
Credit is issued."
l.9 The Credit Agreement is hereby amended by restating Section 2.3
thereof in its entirety to read as follows:
"2.3 MANDATORY PREPAYMENTS. In the event that the sum of the
outstanding balance of the Revolving Credit Loan plus the outstanding
Letter of Credit Obligations, shall, at any time, exceed the Maximum
Revolving Credit Loan, as determined from time to time by Lender in
accordance with the provisions of this Agreement, Borrower shall, upon
demand, after notice of such determination by Lender, repay the Revolving
Credit Loan in the amount of such excess."
1.10 The Credit Agreement is hereby amended by restating the last sentence
of Section 2.6(a) in its entirety to read as follows:
3
<PAGE> 4
"Borrower shall select LIBOR Rate Interest Periods with respect to LIBOR
Rate Advances so that the last day of each LIBOR Rate Interest Period is
prior to July 31, 2001."
1.11 The Credit Agreement is hereby amended by restating Section 3.7(c)
thereof in its entirety to read as follows:
"(c) The sum of the aggregate unpaid principal amount of the
Revolving Credit Loan plus the outstanding Letter of Credit Obligations,
after giving effect to such Revolving Credit Advance or the issuance of
such Letter of Credit, shall not exceed the Maximum Revolving Credit
Loan."
1.12 The Credit Agreement is hereby amended by deleting Section 5.1(d)
thereof and inserting the following in its stead:
"(d) Within 55 days after the end of each Fiscal Quarter, a copy of
Borrower's Form 10-Q as filed with the Commission and within 100 days
after the close of each Fiscal Year, a copy of Borrower's Form 10-K as
filed with the Commission."
1.13 The Credit Agreement is hereby amended by deleting Section 6.3(b)
thereof and inserting the following in its stead:
"(b) Intentionally Omitted."
1.14 The Credit Agreement is hereby amended by restating Sections 6.3(c)
and 6.3(d) thereof in their entirety to read as follows:
"(c) at all times, a Consolidated Leverage Ratio equal to or less
than 1.25 to 1.0.
"(d) at all times, a Consolidated Current Ratio equal to or greater
than 2.0 to 1.0."
1.15 Section 6 of the Credit Agreement is hereby amended by adding the
following as Section 6.16 thereof:
"6.16 YEAR 2000. Borrower and its Subsidiaries have reviewed the
areas within their business and operations which could be adversely
affected by, and have developed or are developing a program to address on
a timely basis, the "Year 2000 Problem" (that is, the risk that computer
applications used by Borrower and its Subsidiaries may be unable to
recognize and perform properly date-sensitive functions involving certain
dates prior to and any date on or after December 31, 1999), and have made
related appropriate inquiry of material
4
<PAGE> 5
suppliers and vendors. Based on such review and program, Borrower believes
that the "Year 2000 Problem" will not have a Material Adverse Effect on
Borrower. From time to time, at the request of Lender, Borrower and its
Subsidiaries shall provide to Lender such updated information or
documentation as is requested regarding the status of their efforts to
address the Year 2000 Problem."
1.16 The Credit Agreement is hereby amended, effective as of the beginning
of Borrower's 1999 Fiscal Year, by restating Section 7.1 thereof in its
entirety to read as follows:
"7.1 MERGERS, ETC. Neither Borrower nor any Subsidiary of Borrower
shall directly or indirectly, by operation of law or otherwise, merge or
consolidate with or into, acquire all or substantially all of the assets
or capital stock of, or otherwise combine with, any Person nor form any
Subsidiary; provided that, Borrower may acquire all or substantially all
of the assets or capital stock of any Person if (i) no Default or Event of
Default exists or would occur as a result of such acquisition, and (ii)
the total consideration paid by Borrower in connection with any such
acquisition (including the assumption of liabilities) does not exceed (x)
$15,000,000 in the aggregate in any one Fiscal Year and, (y) $20,000,000
in the aggregate in any period of two successive Fiscal Years with the
first such measurement under this clause (y) made at the end of the 2000
Fiscal Year."
1.17 The Credit Agreement is hereby amended, effective as of the beginning
of Borrower's 1999 Fiscal Year, by adding the following proviso at the end of
Section 7.2 thereof:
"; provided further, however, that, so long as no Default shall have
occurred and be continuing, Borrower may make investments in, and/or loans
or advances of money to, wholly-owned Subsidiaries of Borrower in an
amount not to exceed at any time $7,000,000 in the aggregate of total
investments and outstanding loans and advances made during Fiscal Year
1999 and thereafter, plus any amount permitted under Section 7.1 in
connection with any acquisition permitted under such Section and
effectuated by a Subsidiary of Borrower."
1.18 The Credit Agreement is hereby amended, effective as of the beginning
of Borrower's 1999 Fiscal Year, to restate Section 7.10 thereof in its entirety
to read as follows:
"7.10 CAPITAL EXPENDITURES. Borrower shall not and shall not permit
any of its Subsidiaries to make Capital Expenditures (exclusive of
Building Expenditures) that, in the aggregate, exceed $8,000,000 in any
Fiscal Year (the "Capital Expenditure Limit"); provided, however, that not
more than 50% of the Capital Expenditure Limit not expended in one Fiscal
Year may be expended in the immediately succeeding Fiscal Year after
expending the permitted amount specified above for such succeeding Fiscal
Year. Borrower shall not and shall
5
<PAGE> 6
not permit any of its Subsidiaries to make Building Expenditures (as
defined below) provided, however, that if no Default or Event of Default
exists or would occur as a result thereof Borrower may make Building
Expenditures that, taken together with all other Building Expenditures
made during the period beginning with the 1999 Fiscal Year, do not exceed
$35,000,000 in the aggregate. For purposes of this Section 7.10, the term
"Building Expenditures" shall mean Capital Expenditures incurred for the
purpose of purchasing real estate or for the purpose of purchasing or
constructing buildings or improvements (exclusive of fixtures and
equipment therefor) for use by Borrower in the ordinary course of its
business."
1.19 The Credit Agreement is hereby amended, effective as of the beginning
of Borrower's 1999 Fiscal Year to restate Section 7.14 thereof in its entirety
to read as follows:
"7.14 RESTRICTED PAYMENTS. Borrower shall not make any Restricted
Payments nor shall it permit any Subsidiary to make a Restricted Payment;
provided, however, that so long as no Default or Event of Default has
occurred (which has not been waived) or would occur as a result of the
payment thereof, (i) Borrower may in any Fiscal Year declare and pay
dividends on its Stock in an aggregate amount not to exceed 50% of
Borrower's Consolidated Net Income for the immediately preceding Fiscal
Year, and (ii) Borrower may purchase shares of its common stock beginning
with the 1999 Fiscal Year and thereafter, provided that the aggregate
consideration paid for such purchases during such period does not exceed
$10,000,000."
1.20 The Credit Agreement is hereby amended by restating paragraph (a) of
Section 10.11 thereof in its entirety to read as follows:
"(a) If to Lender, at
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Attention: Betty T. Latson
Telecopier No. (312) 904-6546"
1.21 The Credit Agreement is hereby amended by deleting Exhibit C thereto
and labelling Exhibit C as "Intentionally Omitted".
1.22 Schedule 4.3 of the Credit Agreement is hereby restated in its
entirety to read as provided in Schedule 4.3 attached hereto.
1.23 Schedules 4.7(a) and 4.7(b) of the Credit Agreement are hereby
restated in their entirety to read as provided in Schedules 4.7(a) and 4.7(b)
attached hereto.
6
<PAGE> 7
1.24 Exhibit E of the Credit Agreement is hereby restated in its entirety,
effective as of the beginning of Borrower's 1999 Fiscal Year, to read as
provided in Exhibit E attached hereto.
2. CONDITIONS PRECEDENT
This Amendment shall become effective upon the satisfaction of the
following conditions precedent:
2.1 This Amendment or counterparts thereof shall have been executed by and
delivered to, Borrower and Lender; and
2.2 Lender shall have received each of the following, each in form and
substance satisfactory to Lender:
(a) A replacement Revolving Credit Note in the form of Exhibit A
attached hereto;
(b) A Certificate of the Secretary of Borrower, together with true and
correct copies of the Certificate of Incorporation and By-Laws of
Borrower, and all amendments thereto, true and correct copies of the
resolutions of the Board of Directors of Borrower authorizing or ratifying
the execution, delivery and performance of this Amendment, and the names
of the officer or officers of Borrower authorized to sign this Amendment,
together with a sample of the true signature of each such officer; and
(c) Good Standing Certificates for Borrower from the Secretaries of
State of Delaware and Illinois;
3. MISCELLANEOUS
3.1 LIMITED NATURE OF AMENDMENTS. The parties hereto acknowledge and agree
that the terms and provisions of this Amendment amend, add to and constitute a
part of the Credit Agreement. Except as expressly modified and amended by the
terms of this Amendment, all of the other terms and conditions of the Credit
Agreement and all documents executed in connection therewith or referred to or
incorporated therein remain in full force and effect and are hereby ratified,
reaffirmed, confirmed and approved.
3.2 CONFLICT. If there is an express conflict between the terms of this
Amendment and the terms of the Credit Agreement, or any of the other agreements
or documents executed in connection therewith or referred to or incorporated
therein, the terms of this Amendment shall govern and control.
7
<PAGE> 8
3.3 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed to be an original.
3.4 REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender as follows: (A) Borrower has all necessary power and authority to
execute and deliver this Amendment and perform its obligations hereunder; (B)
this Amendment and the Credit Agreement, as amended hereby, constitute the
legal, valid and binding obligations of Borrower and are enforceable against
Borrower in accordance with their terms; and (C) all representations and
warranties of Borrower contained in the Credit Agreement and all other
agreements, instruments and other writings relating thereto are true and
complete as of the date hereof.
3.5 GOVERNING LAW. This Amendment shall be construed in accordance with
and governed by and the internal laws of the State of Illinois, without giving
effect to choice of law principles.
IN WITNESS WHEREOF, Borrower and Lender have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
TELTREND INC.
By: /s/ Douglas P. Hoffmeyer
-----------------------------
Name: Douglas P. Hoffmeyer
Title: Vice President Finance
LASALLE NATIONAL BANK
By: /s/ Betty T. Latson
-----------------------------
Name: Betty T. Latson
Title: Senior Vice President
8
<PAGE> 9
SCHEDULE 4.3
TO
CREDIT AGREEMENT
SUBSIDIARIES
<TABLE>
<S> <C>
ENTITY JURISDICTION OF INCORPORATION
Teltrend 3net, Inc. Delaware
Teltrend Limited England and Wales
</TABLE>
<PAGE> 10
SCHEDULE 4.7(a)
TO
CREDIT AGREEMENT
OWNED REAL ESTATE
Property located at the corner of
Kautz Road and Averill Avenue,
Geneva, Illinois 60134
3740 Stern Avenue
St. Charles, Illinois 60174
<PAGE> 11
SCHEDULE 4.7(b)
TO
CREDIT AGREEMENT
LEASED REAL PROPERTY
620 Stetson Avenue
St. Charles, Illinois 60174
1652 Main Street
St. Charles, Illinois 60174
50 California Avenue
Suite 1500
San Francisco, California 94111
<PAGE> 12
EXHIBIT A
REVOLVING CREDIT NOTE
$15,000,000 Chicago, Illinois
June 30, 1998
FOR VALUE RECEIVED, the undersigned, TELTREND INC., a Delaware corporation
(hereinafter referred to as "Borrower"), hereby PROMISES TO PAY to the order of
LASALLE NATIONAL BANK, a national banking association ("Lender"), or its
assigns, at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other
place as the holder of this Note may designate from time to time in writing, in
lawful money of the United States of America and in immediately available
funds, the principal amount of FIFTEEN MILLION DOLLARS ($15,000,000), or such
lesser principal amount as may be outstanding pursuant to the Credit Agreement
(as hereinafter defined) with respect to the Revolving Credit Loan, together
with interest on the unpaid principal amount of this Note outstanding from time
to time
This Note is the Revolving Credit Note issued pursuant to Section 2.1 of
that certain Credit Agreement dated as of June 14, 1995, as amended, between
Borrower and Lender (the "Credit Agreement"), to which reference is hereby made
for a statement of all of the terms and conditions under which the loan
evidenced hereby is made. All capitalized terms herein. unless otherwise
defined, shall have the meanings ascribed to them in the Credit Agreement.
The principal amount of the indebtedness evidenced hereby shall be payable
in the amounts and on the dates specified in the Credit Agreement and, if not
sooner paid in full, on July 31, 2001. Interest thereon, less any taxes payable
by withholding, shall be paid until such principal amount is paid in full at
such interest rates and at such times as are specified in the Credit Agreement.
If any payment on this Note becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
Upon and after the occurrence of an Event of Default, this Note shall or
may, as provided in the Credit Agreement, and without demand, notice or legal
process of any kind, become or be declared immediately due and payable.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by Borrower.
<PAGE> 13
This Note shall be interpreted, governed by, and construed in accordance
with, the laws of the State of Illinois.
This Note is issued in substitution for, and in replacement of that
certain Revolving Credit Note, dated June 14, 1995, and made payable to Lender
in the stated principal amount of Fifteen Million Dollars ($15,000,000) (the
"Original Note"). The replacement of the Original Note with this Note shall not
be construed to deem paid or forgiven the unpaid principal amount of, or unpaid
accrued interest on, the Original Note outstanding at the time of replacement.
TELTREND INC.
By
--------------------------------
Name:
---------------------------
Title:
--------------------------
2
<PAGE> 14
EXHIBIT E
COMPLIANCE CERTIFICATE TO ACCOMPANY MONTHLY
AND ANNUAL FINANCIAL STATEMENTS
Certificate of _____________
of Teltrend Inc.
For the Period Ended _________
The undersigned,_________ , hereby certifies to LaSalle National Bank
("Lender") in connection with that certain Credit Agreement dated as of June
14, 1995, as amended ("Credit Agreement") by and between Lender and Teltrend
Inc. ("Borrower"), as follows (all capitalized terms used herein and not
otherwise defined shall have the meanings set forth in the Credit Agreement):
(i) that the undersigned is the [_______] of Borrower;
(ii) that the accompanying [monthly] [annual] financial statements of
Borrower dated as of _______,_______ , delivered pursuant to Subsection 5.1
[(a) or (b)] of the Credit Agreement, are true and complete copies of such
financial statements, which present fairly in accordance with generally
accepted accounting principles the consolidated financial condition and
results of operations and the consolidated statement of cash flows of
Borrower and its Subsidiaries as of the respective dates and for the
respective periods indicated and that, as of the date hereof, there exist
no facts or circumstances which would materially adversely affect or vary
the information contained therein;
(iii) that no Default or Event of Default has occurred, except:
[describe the nature of each Default and/or Event of Default, the period
of existence thereof and the action taken or proposed to be taken with
respect thereto];
(iv) that all of the representations and warranties contained in the
Credit Agreement are true, correct and accurate in all material respects
as of the date hereof as if made on the date hereof;
(v) that the aggregate amount of Indebtedness of the Borrower and its
Subsidiaries in respect of Capital Lease Obligations and purchase money
indebtedness was $__________ ;
the aggregate amount of the aforementioned Indebtedness permitted
pursuant to Section 7.3(a)(ii) and 7.9(c) was $3,000,000 and, accordingly,
the aforementioned requirement has been satisfied;
(vi) that Consolidated Net Income was $________________;
<PAGE> 15
the minimum Consolidated Net Income of Borrower at the end of each
Fiscal Quarter required pursuant to clause (a) of Section 6.3 is $1.00
and accordingly, the aforementioned requirement has been satisfied;
(vii) that the Consolidated Leverage Ratio was ______, as computed on
Attachment A hereto;
the maximum Consolidated Leverage Ratio permitted pursuant to clause
(c) of Section 6.3 was 1.25:1, and, accordingly, the aforementioned
Consolidated Leverage Ratio requirement has been satisfied.
(viii) that the Consolidated Current Ratio was ______, as computed on
Attachment B hereto.
the minimum Consolidated Current Ratio permitted pursuant to clause
(d) of Section 6.3 was 2.0:1 and, accordingly, the aforementioned
Consolidated Current Ratio requirement has been satisfied;
(ix) that the aggregate amount of permitted acquisitions made
pursuant to Section 7.1 was $_______ during the current Fiscal Year and
(with the first such measurement to be made at the end of the 2000 Fiscal
Year) $_________ during the two immediately preceding Fiscal Years;
the aggregate amount of the aforementioned permitted acquisitions
permitted pursuant to Section 7.1 is $15,000,000 in the aggregate in any
one Fiscal Year and, $20,000,000 in the aggregate in any period of two
successive Fiscal Years, and, accordingly, the aforementioned requirement
has been satisfied with the first such measurement to be made at the end
of the 2000 Fiscal Year;
(x) that the aggregate amount of Restricted Payments consisting of
the declaration and payment of dividends on Borrower's stock made pursuant
to Section 7.14 was $_______ during the Fiscal Year;
the maximum aggregate amount of the aforementioned dividend payments
on Borrower's Stock permitted pursuant to Section 7.14 is $ _______ which
is not to exceed 50% of Borrower's Consolidated Net Income for the
immediately preceding Fiscal Year, and, accordingly, the aforementioned
requirement has been satisfied;
(xi) that the aggregate amount of Restricted Payments consisting of
the purchase by Borrower of shares of its common stock was $__________
during the portion of the three consecutive Fiscal Years beginning with
the 1999 Fiscal Year;
<PAGE> 16
the maximum aggregate consideration for purchases by Borrower of its
common stock during the three consecutive Fiscal Year period beginning
with the 1999 Fiscal Year is $10,000,000, and, accordingly, the
aforementioned requirement has been satisfied;
(xii) that the aggregate amount of Capital Expenditures during the
current Fiscal Year was $_________ , and the aggregate Building
Expenditures to date for the period beginning in the 1999 Fiscal Year was
$_______, each as computed on Attachment C hereto;
the aggregate amount of Capital Expenditures permitted during the
current Fiscal Year pursuant to Section 7.10 was $_______ , as computed on
Attachment D hereto and, the aggregate Building Expenditures for the
period beginning in the 1999 Fiscal Year is $35,000,000, and, accordingly,
the aforementioned requirement has been satisfied;
(xiii) that the aggregate amount of employee loans are $_______
pursuant to Section 7.4;
the maximum aggregate outstanding principal amount of employee loans
at any time is not to exceed $250,000 pursuant to Section 7.4, and,
accordingly, the aforementioned requirement has been satisfied.
(xiv) that the aggregate amount of total investments in and
outstanding loans and advances to wholly-owned Subsidiaries of Borrower is
$__________ ;
the maximum aggregate amount of total investments in and outstanding
loans and advances to wholly-owned Subsidiaries of Borrower is not to
exceed $7,000,000 during Fiscal Year 1999 and thereafter, plus any amount
permitted under Section 7.1 of the Credit Agreement in connection with any
acquisition permitted under such Section and effectuated by a Subsidiary
of Borrower, and, accordingly, the aforementioned requirement has been
satisfied.
IN WITNESS WHEREOF, the Borrower has caused this Certificate to be duly
executed and delivered by its duly Authorized Officer this ___ day
of_________,____.
_______________________________
[Signature]
_______________________________
[Title]
Date:__________________________
<PAGE> 17
ATTACHMENT A
CONSOLIDATED LEVERAGE RATIO
1. Consolidated Assets (as set forth on
Borrower's most recent Financial Statement) $__________
2. Consolidated Liabilities of Borrower (as set
forth on Borrower's most recent Financial
Statement) $__________
3. Net Worth of Borrower: Item 1 less Item 2 $__________
4. Intangibles (as defined in the Loan Agreement) $__________
5. Loans to Employees and Affiliates $__________
6. Tangible Net Worth of Borrower: Item 3 less
Items 4 and 5 $__________
7. Consolidated Liabilities of Borrower $__________
8. Leverage Ratio: Item 7 divided by Item 6
(expressed as ratio) __________
Maximum Consolidated Leverage Ratio: 1.25 to 1.0
<PAGE> 18
ATTACHMENT B
CONSOLIDATED CURRENT RATIO
(IN THOUSANDS)
1. Current Assets: All amounts which, in $__________
accordance with GAAP, would be included as
current assets on a consolidated balance sheet
of the Borrower and its Subsidiaries excluding
deferred taxes
2. Current Liabilities: All amounts which, in
accordance with GAAP, would be included as $__________
current liabilities on a consolidated balance
sheet of the Borrower, excluding Revolving
Credit Advances and Letter of Credit
Obligations
3. Current Ratio: The ratio of Item 1 to Item 2 __________
Minimum Consolidated Current Ratio: 2.0 to 1.0
<PAGE> 19
ATTACHMENT C
MAXIMUM AMOUNT OF CONSOLIDATED CAPITAL
EXPENDITURES ALLOWABLE PER COVENANT
(IN THOUSANDS)
1. Base Amount of Capital Expenditures for Fiscal $__________
Year [______](not to exceed Permitted Capital
Expenditures listed below)
2. Permitted Capital Expenditure for prior Fiscal
Year [______] $__________
3. Actual Capital Expenditure for prior Fiscal Year
[_______] $__________
4. Carry-Forward Amount for Fiscal Year _____:
50% of the positive difference between Line 2 $__________
and Line 3
5. Maximum Capital Expenditure:
Line 1 plus Line 4 $__________
Permitted Capital Expenditures for the
1999 Fiscal Year and thereafter: $8,000,000
Permitted Capital Expenditures for the
1998 Fiscal Year $4,500,000
6. Aggregate Building Expenditures during the
period beginning in the 1999 Fiscal Year $__________
Permitted Aggregate Building Expenditures: $35,000,000
<PAGE> 1
EXHIBIT 10.16
THIRD AMENDMENT TO LEASE
This Agreement, made this ___ day of _______, 1997, by and between MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, a New York corporation, (hereinafter called
"Lessor") and TELTREND, INC., a Delaware corporation, (hereinafter called
"Lessee");
WITNESSETH:
WHEREAS, Lessee entered into that certain Lease ("Lease") dated April 22,
1983 with CMD Corporation ("CMD") for premises commonly known as 620 Stetson
Avenue, St. Charles, Illinois and more particularly described therein
("Original Premises"); and
WHEREAS, CMD assigned its interest in the Lease to Lessor pursuant to an
Assignment of Lease dated September 19, 1984; and
WHEREAS, Lessee and Lessor entered into that certain First Amendment to
Lease ("First Amendment") dated August 9, 1985, which provided, inter alia, for
the acquisition of additional land for the construction thereon of a building
addition, both additional land and building addition in the aggregate being
thereafter referred to as the "Additional Premises"; and
WHEREAS, Lessee and Lessor entered into that certain Second Amendment to
Lease dated September 4, 1995 ("Second Amendment") which inter alia extended
the term of the Lease for both the Original Premises and the Additional
Premises, both in the aggregate thereafter described as the "Combined Premises"
for certain rents and upon other terms and conditions set forth therein; and
WHEREAS, said Lease, as amended, is scheduled to expire by lapse of time
on September 30, 1998; and
WHEREAS, Lessor and Lessee desire to again amend said Lease so as to
extend the term thereof and to establish the rents payable thereunder during
such period;
NOW, THEREFORE, in consideration of the Combined Premises, and of the
covenants and agreements herein undertaken to be kept and performed, it is
agreed as follows:
Page 1 of 4
<PAGE> 2
1. The term of the Lease is hereby extended for a period of one year only,
commencing on the last day of the present term and expiring on the 30th day of
September, 1999, unless the Lease shall sooner terminate as provided therein.
2. The Annual Net Basic Rent over and above the other and additional
payments to be made by Lessee for the Combined Premises for the period from and
after October 1, 1998 through and including September 30, 1999 will be
determined by multiplying the "CPI Factor" (as defined in the First Amendment)
by the Annual Net Basic Rent in effect for the period from and after October 1,
1997 through and including September 30, 1998, payable monthly in advance on
the first day of each and every calendar month in twelve (12) equal
installments, all at the place and in the manner in the Lease provided.
3. Lessee's security deposit of FORTY FIVE THOUSAND FOUR HUNDRED
EIGHTY SEVEN DOLLARS AND 50/100 ($45,487.50) is hereby acknowledged for the
purposes as set forth in the Lease as amended.
4. All consents for alterations and modifications to the Combined Premises
by Lessee remain in full force and effect strictly in accordance with the terms
and conditions of the Lease as amended and as set forth in that certain letter
dated December 28, 1995 from Talisen Management Company on behalf of Lessor to
Ms. Carolyn Dowdell at Lessee.
5. Lessee shall comply with all Laws (hereinafter defined)relating to the
storage, use and disposal of Hazardous Materials (hereinafter defined). No
Hazardous Materials shall be disposed of on, in under, upon, or about the
Premises. For purposes of this Section, "Hazardous Materials" means and
includes any hazardous, toxic or dangerous waste, substance or material defined
as such in (or for purposes of) the Comprehensive Environmental Response,
Compensation, and Liability Act, any so-called "Superfund" or "Superlien" law,
or any federal, state or local statute, law, ordinance, code, rule, regulation,
order or decree (collectively "Laws") regulating, relating to, or imposing
liability or standards of conduct concerning any hazardous, toxic or dangerous
waste, substance or material, as now or at any time hereafter in effect.
To the extent Lessor does not contribute to same, Lessee shall be solely
responsible for and shall indemnify, defend and hold Lessor and its
subsidiaries, directors, officers, employees, servants and agents (collectively
"Agents") harmless from any and all claims, liabilities, judgments, losses,
demands, causes of action, proceedings or hearings relating to the storage,
placement or use of Hazardous Materials (hereinafter collectively referred to
as "Claims") by Lessee, its Agents or invitees on or about the Premises
including, without limitation, Claims resulting from the contamination of
subterranean water beneath, adjoining or in the vicinity of the Premises losses
Page 2 of 4
<PAGE> 3
in or reductions to rental income resulting from Lessee's use, storage or
disposal of Hazardous Materials; all costs of refitting or other alterations to
the Leased Premises necessitated by Lessee's use, storage, or disposal of
Hazardous Materials including, without limitation, alterations required to
accommodate an alternate use of the Premises; and any diminution in the fair
market value of the Premises caused by Lessee's use, storage or disposal of
Hazardous Materials. Lessee agrees to defend all such Claims on behalf of
Lessor with counsel acceptable to Lessor, and to pay all fees, costs, damages
or expenses relating to or arising out of any such Claim including attorney's
fees and costs. Lessee shall further agree to be solely responsible for and
shall indemnify, defend and hold Lessor and its Agents harmless from and
against all Claims, including reasonable attorney's fees and costs arising out
of or in connection with any testing, removal clean-up or restoration work
which is required by any government agency and which arises in whole or in part
because of Lessee's use or occupancy of the Premises.
Lessor may, at any time in its sole discretion conduct tests of the Premises to
determine the presence of Hazardous Materials. Results of said tests will be
provided to Lessee at Lessee's request. In the event such tests indicate the
presence of Hazardous Materials due to the activities of Lessee, and Lessee's
confirming tests reach the same conclusion, Lessee shall, in addition to its
other obligations hereunder, reimburse Lessor for the cost of such test or
tests and shall immediately commence procedures to remove such Hazardous
Materials from the Premises. Lessee's reimbursement to Lessor of its tests
shall not constitute a final acceptance of the tests by Lessee or a waiver by
Lessee to contest the results of the tests.
Lessee shall promptly notify Lessor of, and shall promptly provide Lessor with
true, correct, complete and legible copies of, all of the following
environmental items relating to the Premises which may be filed or prepared by
or on behalf of, or delivered to or served upon Lessee: all orders, reports,
notices, listings and correspondence (even those which may be considered
confidential) of or concerning the release, investigation of, compliance, clean
up, remedial and corrective actions, and abatement of Hazardous Materials
whether or not required by any applicable laws, including, but not limited to,
reports and notices required by or given pursuant to any Lessee's use, handling
storage or disposal of Hazardous Materials. In the event of a release of any
Hazardous Materials in, on or about the Premises, Lessee shall promptly provide
Lessor with copies of all reports and correspondence with or from all
governmental agencies, authorities or any other persons relating to such
release.
Notwithstanding the foregoing, Lessee shall not, without Lessor's prior written
consent, take any remedial action in response to the presence of any Hazardous
Materials, in, on, under or about the Premises or enter into any settlement
agreement, consent decree or other compromise with any governmental agency with
respect to any Hazardous Materials claims; provided, however,
Page 3 of 4
<PAGE> 4
Lessor's prior written consent shall not be necessary in the event that the
presence of Hazardous Materials in, or, under or about the Premises (i) poses
an immediate threat to the health, safety or welfare of any individual or (ii)
is of such a nature that an immediate remedial response is necessary or Lessee
is required to take immediate action by governmental authority and it is not
possible to obtain Lessor's consent before taking such action. Lessee shall
nevertheless promptly notify Lessor of all such action and all circumstances
pertaining thereto.
Upon the expiration or sooner termination of this Lease, Lessee covenants to
remove from the Premises, at its sole cost and expense, any and all Hazardous
Materials including any equipment or systems containing Hazardous Materials,
which are brought upon, stored, used, generated or released into the
environment by Lessee, its agents, employees, contractors or invitees.
6. Each party hereto represents and warrants to the other that it has not
hired any broker with respect to procuring this Third Amendment to Lease. In
the event either party has hired a broker, such party shall indemnify, defend
and hold forever harmless the other party from and against any loss, cost,
expense, liability and/or damages including claims for commissions arising
directly or indirectly out of such hiring.
7. Except as herein specifically amended, all other terms, covenants, and
conditions of the Lease the First Amendment and the Second Amendment shall
remain in full force and effect, and the same are hereby ratified and
confirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed the within Agreement
as of the day and year first above written.
<TABLE>
<S> <C>
LESSEE: LESSOR:
TELTREND, INC. MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: [SIGNATURE] By: [SIGNATURE]
----------------------- -------------------------
Its: Vice President of Operations Its: Vice President
</TABLE>
Page 4 of 4
<PAGE> 1
EXHIBIT 10.17
FOURTH AMENDMENT TO LEASE
This Agreement, made this 2nd day of July, 1998, by and between MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, a New York corporation, (hereinafter called
"Lessor") and TELTREND, INC., a Delaware corporation, (hereinafter called
"Lessee");
WITNESSETH:
WHEREAS, Lessee entered into that certain Lease ("Lease") dated April 22,
1983 with CMD Corporation ("CMD") for premises commonly known as 620 Stetson
Avenue, St. Charles, Illinois and more particularly described therein("Original
Premises"); and
WHEREAS, CMD assigned its interest in the Lease to Lessor pursuant to an
Assignment of Lease dated September 19, 1984; and
WHEREAS, Lessee and Lessor entered into that certain First Amendment to
Lease ("First Amendment") dated August 9, 1985, which provided, inter alia, for
the acquisition of additional land for the construction thereon of a building
addition, both additional land and building addition in the aggregate being
thereafter referred to as the "Additional Premises"; and
WHEREAS, Lessee and Lessor entered into that certain Second Amendment to
Lease dated September 4, 1995 ("Second Amendment") which inter alia extended
the term of the Lease for both the Original Premises and the Additional
Premises, both in the aggregate thereafter described as the "Combined Premises"
for a term expiring September 30, 1998 for certain rents and upon other terms
and conditions set forth therein; and
WHEREAS, Lessee and Lessor entered into that certain Third Amendment to
Lease, undated ("Third Amendment") which inter alia extended the term of the
Lease for both the Original Premises and the Additional Premises, both in the
aggregate thereafter described as the "Combined Premises" for a term expiring
September 30, 1999, for certain rents and upon other terms and conditions set
forth therein; and
WHEREAS, said Lease, as amended, is scheduled to expire by lapse of time
on September 30, 1999; and
WHEREAS, Lessor and Lessee desire to again amend said Lease so as to
extend the term thereof and to establish the rents payable thereunder during
such period;
Page 1 of 2
<PAGE> 2
NOW, THEREFORE, in consideration of the Combined Premises, and of the
covenants and agreements herein undertaken to be kept and performed, it is
agreed as follows:
1. The term of the Lease is hereby extended for a period of one year only,
commencing on the last day of the present term and expiring on the 30th day of
September, 2000, unless the Lease shall sooner terminate as provided therein.
2. The Annual Net Basic Rent over and above the other and additional
payments to be made by Lessee for the Combined Premises for the period from and
after October 1, 1999 through and including September 30, 2000 will be
determined by multiplying the "CPI Factor" (as defined in the First Amendment)
by the Annual Net Basic Rent in effect for the period from and after October 1,
1998 through and including September 30, 1999, payable monthly in advance on
the first day of each and every calendar month in twelve (12) equal
installments, all at the place and in the manner in the Lease provided.
3. Each party hereto represents and warrants to the other that it has not
hired any broker with respect to procuring this Fourth Amendment to Lease. In
the event either party has hired a broker, such party shall indemnify, defend
and hold forever harmless the other party from and against any loss, cost,
expense, liability and/or damages including claims for commissions arising
directly or indirectly out of such hiring.
4. Except as herein specifically amended, all other terms, covenants, and
conditions of the Lease, the First Amendment, the Second Amendment and the
Third Amendment shall remain in full force and effect, and the same are hereby
ratified and confirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed the within Agreement
as of the day and year first above written.
<TABLE>
<S> <C>
LESSEE: LESSOR:
TELTREND, INC. MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By: [SIGNATURE] By: [SIGNATURE]
----------------------- -------------------------
Its: Vice President of Operons Its: Vice President
----------------------- -------------------------
</TABLE>
Page 2 of 2
<PAGE> 1
TECHNOLOGIES FOR AN EVOLVING NETWORK
--------------------------------------------------------------------------
TELTREND 1998 ANNUAL REPORT
<PAGE> 2
HIGH CAPACITY PRODUCTS
--------------------------------------------------------------------------
ANSWERING THE DEMAND FOR BANDWIDTH
CHANNELIZED PRODUCTS
--------------------------------------------------------------------------
ANSWERING THE DEMAND FOR VOICE AND DATA LINES
CIRCUIT SWITCHED PRODUCTS
--------------------------------------------------------------------------
ANSWERING THE NEED TO JOIN THE WORLD'S NETWORKS
PACKET SWITCHED PRODUCTS
--------------------------------------------------------------------------
PROVIDING A PATH TO THE NEW NETWORK
<PAGE> 3
[CHART] FINANCIAL HIGHLIGHTS
<PAGE> 4
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 49,454 $62,052 $85,913 $81,243 $96,762
- ------------------------------------------------------------------------------
Gross profit $ 18,324 $26,061 $39,269 $35,947 $44,637
- ------------------------------------------------------------------------------
Income from operations $ 6,009 $11,391 $19,852 $14,433 $ 5,916*
- ------------------------------------------------------------------------------
Net income $ 8 $ 4,330 $12,164 $ 9,628 $ 2,239*
- ------------------------------------------------------------------------------
Working capital $ 3,292 $10,188 $35,901 $44,088 $38,358
- ------------------------------------------------------------------------------
Stockholders' equity
(deficit) ($43,069) $15,417 $42,645 $52,435 $53,304
- ------------------------------------------------------------------------------
(dollars in thousands)
</TABLE>
* Inclusive of a $4.0 million charge taken by Teltrend
immediately after its acquisition of Teltrend Limited
(formerly Securicor 3net Limited) in the first quarter of
fiscal 1998 to write off the portion of the purchase price
allocated to in-process research and development.
<PAGE> 5
[PHOTO] THE YEAR IN REVIEW
A message from
HOWARD L. KIRBY, JR.
President, Chief Executive Officer
and Chairman of the Board
<PAGE> 6
DEAR FELLOW SHAREHOLDERS,
Fiscal 1998 was a year of significant accomplishment for Teltrend. We ended the
year with a strong fourth quarter, up 46 percent in sales and 10 percent in
earnings per share compared to the fourth quarter of fiscal 1997. Excluding the
results of Teltrend Limited, our UK-based operation acquired in the first
quarter of fiscal 1998, fourth quarter sales and net income were up 27 percent
and 73 percent respectively compared to the fourth quarter of fiscal 1997.
Demand for our products continues strong. Most importantly, because of
the new products we developed or acquired in fiscal 1998, we entered fiscal
1999 in a much improved strategic position.
Full year sales at $96.8 million were up 19 percent from fiscal 1997. Full
year net income was $6.2 million (exclusive of an in-process research and
development charge of $4.0 million). Fiscal year 1998 cash performance was very
good; after paying $14.5 million for Teltrend Limited and $1.7 million to
repurchase Teltrend shares in the open market, we ended the year with cash and
marketable securities of nearly $25.0 million.
Looked at by strategic market units, fiscal year 1998 contained some
notable successes as shown in the table below:
<TABLE>
<CAPTION>
Fiscal Year Increase [decrease]
1998 Sales from Fiscal Year
Teltrend Strategic Market Units (dollars in millions) 1997 Sales
- -------------------------------------------------------------------------------
<S> <C> <C>
High Capacity Products -
T1/HDSL/CellPak(TM) $50.0 +9%
- -------------------------------------------------------------------------------
Channelized Products - ISDN/DDS 19.9 +18%
- -------------------------------------------------------------------------------
Channelized Products - DLC/VF 14.1 (24%)
- -------------------------------------------------------------------------------
Circuit Switched Products 7.3 N/A*
- -------------------------------------------------------------------------------
Packet Switched Products 5.6 N/A*
- -------------------------------------------------------------------------------
TOTAL $96.8 +19%
- -------------------------------------------------------------------------------
</TABLE>
* Acquired in connection with the purchase of Teltrend Limited in the first
quarter of fiscal 1998.
We believe the 9 percent increase in High Capacity Products represents the
success of our strategy to move this business into the higher growth areas of
the high capacity communications market, notably:
- - Performance-monitoring network interface unit elements (Teltrend's PM NIU)
- - Self-contained weather-proof systems for cellular and personal
communications systems (PCS) antenna installations (Teltrend's CellPak(TM)
systems)
- - Fiber-optic extensions (Teltrend's high-density intelligent office
repeaters)
- - High-Density Subscriber Line (HDSL) products (Teltrend's NetZap Plus(TM))
This year, we are taking the migration of High Capacity Products one step
further with a new intelligent system which we plan to introduce in the third
quarter of fiscal 1999.
Results in fiscal 1998 for our Channelized Products were a mixed bag. On
the positive side, ISDN and DDS sales increased 18 percent year-to-year. With
our planned introduction in early fiscal 1999 of new DDS provisioning products
like UniPort(TM) and FastPort(TM), we believe that DDS growth will accelerate.
We also believe the ISDN market is alive and well. In the digital loop carrier
(DLC) area, we also see several positive developments: the start of production
deliveries to NextLevel Communications, the recent introduction of new
proprietary channel units for the Lucent D4 and SLC(R)-5 systems, and the
rollout of TLC(TM)-48, our new small digital loop carrier (DLC) system. In
summary, we expect a rebound in the sales of Channelized Products in fiscal
1999. With the acquisition of Teltrend Limited (formerly Securicor 3net) in
September 1997, Teltrend acquired two exciting new strategic market units. We
now call these two units Circuit Switched Products and Packet Switched Products.
We believe these two strategic market units give Teltrend a leap forward toward
the "Network of the Future." That is, we believe they have furnished us the
technology to migrate toward the packet-switched solutions that will
characterize future networks. This packet-switched architecture is with us today
in the form of the Internet,
<TABLE>
<CAPTION>
Teltrend Fiscal 1998 At-A-Glance
- --------------------------------------------------------------------------------
<S> <C> <C>
JULY 27, 1997 SEPTEMBER 2, 1997 SEPTEMBER 15, 1997
First day of fiscal 1998 Teltrend's NetZap Plus(TM) NextLevel
4-wire HDSL system Communications selects
selected by Puerto Rico Teltrend to supply the
Telephone Company special services channel
units for its new Digit
Loop Carrier system
- --------------------------------------------------------------------------------
SEPTEMBER 18, 1997 OCTOBER 25, 1997 JANUARY 24, 1998
Acquisition of Teltrend First quarter ends with Second quarter ends with
Limited (formerly sales of $21.7 million and sales of $22.8 million
Securicor 3net Limited), EPS of $0.23, exclusive and EPS of $0.13
a British-based ISDN of $4.0 million write-off
solutions business, of purchased in-process
completed R&D in conjunction with the
acquisition of Teltrend
Limited
</TABLE>
PAGE 5
<PAGE> 7
With the acquisition of Teltrend and in the ATM and Frame Relay services
Limited, Teltrend acquired two offered by many common carriers, and in
exciting new strategic market units. the obscure, esoteric Internet Protocol
We now call these two units Circuit (IP) voice services that are springing
Switched Products and Packet up across the country. In my letter
Switched Products. We believe last year, I talked about the need to
these two strategic market units expand our Teltrend market focus beyond
give Teltrend a leap forward toward the Regional Bell Operating Companies
the "Network of the Future." (RBOCs). We made good progress toward
this goal in fiscal 1998. In fiscal
1997, the RBOCs accounted for 96 percent
of Teltrend's sales. In fiscal 1998,
this number was reduced to 82 percent.
Also in my letter to you last year,
I talked about the impact on Teltrend
of mergers among our large customers,
particularly the RBOCs. These mergers
and their impacts continue, but we
believe we have adjusted our Teltrend
strategies and resource allocations
to address this new environment - and
to prosper in it.
Teltrend continues to place primary
emphasis on technology. We have four
top design facilities: two in St. Charles,
Illinois (High Capacity Products and
Channelized Products), one in Basingstoke,
England (Circuit Switched Products),
and one in Christchurch, New Zealand
(Packet Switched Products). These
design facilities are first rate and
getting better. They are developing
new proprietary, patentable products,
and we are giving increased priority
to obtaining and enforcing patents.
I hope you will read the very short
summaries on each of our four strategic
market units, which follow. Perhaps they
will help you share my belief that
Teltrend is developing the technologies
we need to meet the exciting challenge
of a rapidly evolving world telephone
network.
Thanks for your interest and support.
/s/ Howard L. Kirby, Jr.
--------------------------
Howard L. Kirby, Jr.
President, Chief Executive Officer,
and Chairman of the Board
<TABLE>
<CAPTION>
Teltrend Fiscal 1998 At-A-Glance
- --------------------------------------------------------------------------------
<S> <C> <C>
FEBRUARY 13, 1998 MARCH 3, 1998 March 10, 1998
ADC Telecommunications Teltrend announces board Teltrend and Hekimian
selects Teltrend to authorization to buy Laboratories announce
supply next-generation back up to $8 million cooperative arrangement
T1 office repeaters for in common stock to provide comprehensive
its Soneplex(R) system. and economical
Teltrend T1 line end-to-end T1 solutions
components provide
Soneplex(R) "end-to-end"
T1 provisioning and
monitoring
- --------------------------------------------------------------------------------
APRIL 25, 1998 JULY 25, 1998 AUGUST 4, 1998
Third quarter ends with Fiscal 1998 ends with fourth Teltrend announces
sales of $25.3 million quarter sales of $27.0 approval of its
and EPS of $0.27. Also, million, up 46 percent from NiQ(TM)800 router by the
Teltrend announces a fourth quarter fiscal 1997. Chinese DGT, making
new small digital loop Teltrend ends fiscal 1998 Teltrend the first
carrier system (DLC) with sales of $96.8 million approved ISDN equipment
called TLC(TM)-48 and and EPS of $0.96, exclusive supplier in China
two new ways to of $4.0 million write-off
provision DDS: the of purchased in-process R&D
UniPort(TM)2-wire in conjunction with
system and the acquisition of Teltrend
FastPort(TM) 4-wire Limited in the first quarter
extended-range system
</TABLE>
NiQ(TM) is a trademark of Teltrend Inc.
PAGE 6
<PAGE> 8
(PICTURED LEFT TO RIGHT)
TELTREND INC. MANAGEMENT TEAM
LARRY SHEETS
Vice President and Chief Technical Officer
JACK PARKER
Senior Vice President and General Manager
of High Capacity Communications Products
JAN LOLLINI
Assistant Vice President Human Resources
TED MAXEINER
Assistant Vice President of Finance and Controller
MIKE SAMOCKI
Assistant Vice President Quality Assurance
CRAIG ECKERT
Senior Vice President of Sales
and Business Development
MIKE GRZESKOWIAK
Vice President of Operations
GIL HOSIE
Vice President of RBOC Sales
DOUG HOFFMEYER
Senior Vice President of Finance
<PAGE> 9
HIGH CAPACITY PRODUCTS
- --------------------------------------------------------------------------------
ANSWERING THE DEMAND FOR BANDWIDTH
Teltrend's fiscal 1998 sales of High Capacity Products totaled $50.0 million, up
9 percent from $45.7 million in fiscal 1997. These sales reflect strong
year-to-year increases in the sales of certain Teltrend T1 products,
particularly those used for the termination and extension of fiber-optic lines.
Increases in the sales of Teltrend's CellPak(TM) and HDSL products were also
experienced. These sales increases were partially offset by declines in the
sales of conventional T1 repeatered units.
Teltrend believes that the 9 percent sales growth in this product area
reflects the success of our strategy to migrate our High Capacity Products
towards higher growth segments of its addressed market.
The number of new T1 access lines installed each year continues to grow
very rapidly. The market is becoming more sophisticated, shifting toward more
intelligent equipment that can be remotely monitored and provisioned. One result
of this shift is that Teltrend saw increased demand for the
performance-monitoring version of its T1 network interface unit (the PM NIU) in
fiscal 1998. This Teltrend PM NIU stores circuit-monitoring data for up to 12
days and thereby allows a telephone company to determine the source of a network
problem either immediately, or up to 12 days after the fault has occurred. In a
world where telephone companies are increasingly subject to financial penalties
if their high-capacity lines fail to perform, this kind of capability can be
invaluable.
Teltrend's CellPak(TM) products are a line of self-contained weather-proof
systems for extending high-capacity service to cellular and PCS antenna sites.
CellPak(TM) sales showed good growth in fiscal 1998. CellPak(TM) systems are
available for repeatered lines, HDSL, and fiber-optic links. The system shown at
the right is the CellPak(TM) Model 524 equipped with four Teltrend T1 links.
CellPak(TM) systems are available with Teltrend transmission units, as well as
with HDSL, fiber-optic, and repeatered line equipment manufactured by others.
In February, Teltrend received a contract from ADC Telecommunications to
supply intelligent office repeaters for their widely deployed Soneplex(R)
system. Deliveries to ADC are just starting at this writing. These Teltrend
intelligent office repeaters allow ADC to provide its Soneplex(R) customers
with state-of-the-art office repeaters, as well as remote access to Teltrend's
PM NIU's and other Teltrend intelligent T1 line units installed throughout the
U.S. public network.
In March, Teltrend announced a cooperative arrangement with Hekimian
Laboratories to provide state-of-the-art, intelligent, high capacity
communications systems to world markets. These new systems are designed to be
the latest and best solutions for T1 provisioning, maintenance, and performance
monitoring. These systems, along with Teltrend's continued leadership in T1, and
particularly its leadership in T1 Performance Monitoring, point to a solid year
for High Capacity Products in fiscal 1999.
PAGE 8
<PAGE> 10
TELTREND
CELLPAK(TM) MODEL 524
[PHOTO]
[DIAGRAM]
THE CELLPAK(TM) 524 SYSTEM
HAS A TWO-DOOR DESIGN
PROVIDING SEPARATE SECURE
ACCESS FOR THE TELEPHONE
COMPANY AND THE WIRELESS
OPERATOR, GREATLY REDUCING
COORDINATION PROBLEMS.
<PAGE> 11
CHANNELIZED PRODUCTS
- --------------------------------------------------------------------------------
ANSWERING THE DEMAND FOR VOICE AND DATA LINES
Teltrend's fiscal 1998 sales of Channelized Products were $34.0 million compared
to $35.5 million in fiscal 1997. ISDN sales increased 32 percent to $7.3
million, compared to $5.5 million in fiscal 1997. DDS sales increased 11 percent
to $12.6 million, compared to $11.4 million in fiscal 1997. These increases in
ISDN and DDS sales were offset by declines in digital loop carrier and
voice-frequency product sales.
Teltrend has considerable design experience and expertise in the
channelized products area, both in the design of individual channel units and
small systems. Teltrend has, for some time, been a leading producer of data and
voice channel units for various legacy Lucent channel banks and digital loop
carrier systems. In September 1997 the Company announced that it had been
selected to design and produce the special service channel units for the new
NextLevel Communications digital loop carrier system. The Company has also
recently introduced some exciting new channel units for the installed base of
Lucent carrier systems.
Perhaps most importantly, in April Teltrend announced four additional new
channelized products. The first of these products was a new network interface
unit for DDS service. DDS lines are dedicated digital lines, most of which
operate at 64,000 bits per second. They are used where full-time digital
communications is required, such as with lottery networks, automatic teller
machine networks and reservation networks. These links are extremely crucial,
and the telephone companies have been under increasing pressure to improve their
quality. The Teltrend DDS NIU, which can be powered locally or via the telephone
line, gives telephone companies a quick, easy way to test and verify the
integrity of their DDS lines.
The second new DDS product announced last April was UniPort(TM).
Traditionally, DDS service is provided with four wires, i.e., two twisted-pair
telephone lines. The Teltrend UniPort(TM) allows the telephone company to
provide this service out to 18,000 feet using only two wires, i.e., one
telephone line. We expect this to be attractive to our telephone company
customers because in many locations they are running short of copper lines. Also
UniPort(TM) uses standard ISDN channel units to deliver DDS service, so
telephone companies can now use their ISDN channel units to provide either ISDN
or DDS.
The third new DDS product announced in April was FastPort(TM).
FastPort(TM), like UniPort(TM), is an improved method to provision DDS. While
UniPort(TM) is aimed at saving cable pairs for loops of less than 18,000 feet,
FastPort(TM) is aimed at saving provisioning costs on longer loops. These longer
loops often have inductors, called load coils, installed periodically along
their length. Load coils improve voice quality in ordinary telephone service but
prohibit conventional DDS service. That is, if DDS is to be provisioned over one
of these "loaded" loops, technicians must be sent out to laboriously locate and
remove all load coils on the line. This is very expensive. Teltrend's
FastPort(TM) system avoids the necessity of this costly process by using a
Teltrend proprietary modulation technique that allows DDS to be supplied over
lines with load coils.
The fourth new product in this business area is the TLC(TM)-48, a small
digital loop carrier system. This system, shown in the photo at right, delivers
up to 48 channels over one or two T1 lines. The system provides a small,
economical, weather-proof, standards-compliant digital loop carrier solution. It
helps telephone companies overcome the problem of a shortage of telephone lines
in rural or other low-density areas. The TLC(TM)-48 system accepts all types of
SLC(TM)-5 channel units. There is a large logistics base of these channel units
in the telephone companies, and they are available from a number of suppliers,
including Teltrend.
Of all the new products described in this section, only one, the DDS NIU,
contributed significant sales in fiscal 1998. But Teltrend believes that all of
these new channelized products have the potential to significantly contribute to
fiscal 1999 sales. At the time of this writing, initial deliveries of the new
channel units for embedded Lucent systems are starting, as are deliveries of the
new channel units for the NextLevel digital loop carrier system. The UniPort(TM)
and TLC(TM)-48 are in field trial, and the FastPort(TM) is in final stages of
development.
PAGE 10
<PAGE> 12
TELTREND TLC(TM)-48 DIGITAL
LOOP CARRIER SYSTEM
[PHOTO]
[DIAGRAM]
THE TLC(TM)-48 IS A SMALL,
ECONOMICAL, STANDARDS-
COMPLIANT DIGITAL LOOP
CARRIER SYSTEM. IT PROVIDES
48 TELEPHONE LINES OVER
ONE OR TWO T1 LINKS.
<PAGE> 13
CIRCUIT SWITCHED PRODUCTS
- --------------------------------------------------------------------------------
ANSWERING THE NEED TO JOIN THE WORLD'S NETWORKS
Circuit Switched Products was a new strategic market unit for Teltrend in fiscal
1998. Teltrend acquired these products on September 18, 1997, as part of its
acquisition of Securicor 3net Limited, since renamed Teltrend Limited, from
Securicor Communications Limited. This Teltrend Circuit Switched Products
business is headquartered in Basingstoke (suburban London), England, and
develops and manufactures network interfacing and conversion products. These
products allow switch manufacturers to interface their various private branch
exchanges (PBXs) and central office switches to the myriad of different public
and private network protocols encountered throughout the world.
Teltrend's circuit switched products come in both custom and standard
configurations. Some customers demand custom mechanics that plug directly into
their systems. Other customers use standard Teltrend product configurations,
like the Teltrend IiQ 8000 and IiQ 5000 products. Whether in a custom or
standard package, these Teltrend circuit switched products offer a broad range
of conversion and grooming capabilities. For example, they can be configured to
convert to and from a broad range of protocols, including: DASS UK public
network protocol, SS7 Signaling System 7 protocol, DPNSS UK private network
protocol, Q.931 public network protocol, DECT wireless handset protocol, USA T1
high-capacity protocol, and European E1 high-capacity protocol. Teltrend IiQ
circuit-switched products are also capable of providing grooming and other
value-added features.
Teltrend circuit-switched products provide a means to join the myriad of
switched service formats resident throughout the world with those capabilities
resident in newer switch designs.
The IiQ 5000 unit, shown at right, is a central office solution that
provides protocol conversion and grooming. The IiQ 5000 is modular and can
accommodate up to 32 primary rate ISDN inputs. The grooming function of the IiQ
8000 allows the telephone company to fully utilize ISDN primary rate inputs to
its switch; that is, it allows each high-speed input to the switch to be packed
with a full 30 basic rate ISDN channels.
These circuit-switched IiQ products are designed by an expert design group
located in Basingstoke, England, near the European headquarters of leading
telecommunications switch manufacturers. This group has been working for ten
years on provisioning and interworking network protocols and has pioneered
several ISDN signaling conversion breakthroughs. Teltrend's circuit-switched
equipment can be found in major networks all over the world.
PAGE 12
<PAGE> 14
TELTREND IIQ(TM) 5000
PROTOCOL CONVERSION UNIT
[PHOTO]
[DIAGRAM]
THE IIQ(TM) 5000 PROVIDES
PROTOCOL CONVERSION
AND GROOMING FOR
CENTRAL OFFICE SWITCHES.
<PAGE> 15
PACKET SWITCHED PRODUCTS
- -------------------------------------------------------------------------------
PROVIDING A PATH TO THE NEW NETWORK
Packet Switched Products, like Circuit Switched Products, came to Teltrend with
the September 1997 acquisition of UK-based Teltrend Limited (formerly Securicor
3net Limited). Total Teltrend sales of packet switched products in fiscal 1998
were $5.6 million. These sales were divided among Europe, New Zealand,
Australia, and China.
The present Teltrend packet-switched product line consists of a line of
routers, which are supplied in standard and custom mechanics. Teltrend routers
provide a broad feature set across three router series: a small 800 series, a
medium-sized 1100 series, and a large 3100 series. All Teltrend routers
provision the same way, which reduces the customer's training time and costs.
All Teltrend routers offer efficient hardware-based encryption that allows the
use of shared facilities, like the Internet, as a virtual private network (VPN).
All Teltrend routers have a flexible management interface that allows them to be
easily configured for custom applications.
Teltrend was among the first to offer ISDN as a vehicle to provide
connectivity between a local area network (LAN) and the outside world. The
flexible data and voice capability of ISDN is taken to full advantage in
Teltrend's NiQ 865 router, shown at right. This router, available at a very
competitive price, has a local area network drop as well as a mini-PBX with four
voice line drops. With a single ISDN line from the central office, this router
provides a small office with full voice and data connectivity both within the
office and to the outside world.
We believe that the "Network of the Future" will be a packet-switched
network, that is, a network where voice and data travel from sender to receiver
as digital packages of information called "packets." Packets from one source
will share transmission facilities with packets from numerous other sources. The
Internet is such a network today. Sprint is the first major telecommunications
carrier publicly to commit itself to the construction of a nationwide packet
switched network for both voice and data. Other major carriers seem to agree
that this is the wave of the future, and new carriers like Level 3 are weighing
in as packet-switched players.
One notable event for Teltrend with respect to its packet switched products
occurred on August 4, 1998, when it was announced that Teltrend had become the
first approved ISDN router supplier in China. Another notable event was the
recent award to Teltrend of a contract to provide ISDN routers for the
Educational Authority of Northern Ireland.
Teltrend's packet-switched design team is based in New Zealand. The
Teltrend engineering group in New Zealand got its start designing the National
Data Network for the New Zealand Ministry of Agriculture. Based on the success
of this network, this design group was able to develop advanced router
technology and to promote its use successfully throughout the Asia-Pacific
region and, more recently, in the United Kingdom and elsewhere in Europe.
Teltrend sees packet-switched networks as the wave of the future, and we
are dedicated to moving this packet-switched technology into our traditional
products and markets.
PAGE 14
<PAGE> 16
TELTREND
NiQ(TM) 865 ROUTER
[PHOTO]
[DIAGRAM]
THE TELTREND NIQ(TM) 865
PROVIDES A SMALL OFFICE
WITH FULL VOICE AND DATA
CONNECTIVITY, BOTH WITHIN
THE OFFICE AND TO THE
OUTSIDE WORLD.
<PAGE> 17
TELTREND LIMITED
Along with operations in the U.S. Teltrend maintains
operations in the United Kingdom, New Zealand,
and China. These additional facilities are
collectively referred to as Teltrend Limited.
TELTREND U.K. [PHOTO]
TONY MARTIN
EMEA Sales and Telco Products Director
PAUL
International Sales and Networks Products Director
MIKE BURGESS
Managing Director
NIGEL
Finance Director
- --------------------------------------------------------------------------------
[PHOTO]
TELTREND N.Z.
KEITH MACFARLANE
EMEA Sales and Telco Products Director
GEOFF PECK
International Sales and Networks Products Director
- --------------------------------------------------------------------------------
[PHOTO]
TELTREND CHINA
JASON WANG
Marketing Manager
YIHONG HU
General Manager
GANG LI
National Sales Manager
ROBIN DU
Customer Support Manager
- --------------------------------------------------------------------------------
<PAGE> 18
[TELTREND LOGO] Teltrend Inc. - 620 Stetson Avenue - St. Charles, Illinois 60174
<PAGE> 19
<TABLE>
<S> <C>
18 Selected Historical Financial Data
19 Management's Discussion and Analysis of Financial Condition and Results
of Operations
26 Report of Management/Report of Independent Auditors
27 Consolidated Balance Sheets
28 Consolidated Statements of Income
29 Consolidated Statements of Stockholders' Equity
30 Consolidated Statements of Cash Flows
31 Notes to Financial Statements
</TABLE>
FINANCIALS
- --------------------------------------------------------------------------------
The following statement of operations data with respect to fiscal 1998, 1997
and 1996, and the following balance sheet data at July 25, 1998 and July 26,
1997, are derived from, and are qualified by reference to, the Company's
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" included elsewhere herein. The following statement of operations
data with respect to fiscal 1995 and 1994 and the following balance sheet data
at July 27, 1996, July 29, 1995 and July 30, 1994 are derived from the
Company's audited financial statements not included in this Annual Report.
Unless the context otherwise requires, references to "Teltrend" or the
"Company" herein refer to Teltrend Inc. and its wholly owned subsidiaries. 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 1998 refers to the year ended July 25, 1998).
<PAGE> 20
SELECTED HISTORICAL FINANCIAL DATA(1)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY(1)
(Dollars in thousands, except per share data)
--------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1998(2) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. $96,762 $81,243 $85,913 $62,052 $49,454
Cost of sales.............................. 52,125 45,296 46,644 35,991 31,130
--------------------------------------------------------------------------
Gross profit............................... 44,637 35,947 39,269 26,061 18,324
--------------------------------------------------------------------------
Operating expenses:
Sales and marketing..................... 13,166 7,333 7,309 5,908 4,914
Research and development................ 14,307 9,686 7,944 5,337 4,862
Purchased in-process research
and development......................... 3,995 - - - -
General and administrative.............. 7,253 4,495 4,164 3,425 2,539
--------------------------------------------------------------------------
Total operating expenses................ 38,721 21,514 19,417 14,670 12,315
--------------------------------------------------------------------------
Income from operations..................... 5,916 14,433 19,852 11,391 6,009
Other income (expense):
Interest................................ 1,339 1,468 827 (8,484)(3) (5,978)
Other - net............................. (737) (31) (62) (204) 27
--------------------------------------------------------------------------
Income before income tax provision
(benefit) and extraordinary items....... 6,518 15,870 20,617 2,703 58
Income tax provision (benefit)............. 4,279 6,242 8,453 (2,038)(4) 50
--------------------------------------------------------------------------
Income before extraordinary items.......... 2,239 9,628 12,164 4,741 8
Extraordinary items........................ - - - 411(5) -
--------------------------------------------------------------------------
Net income................................. $ 2,239 $ 9,628 $12,164 $ 4,330 $ 8
Net income per common share -
assuming dilution....................... $ 0.34 $ 1.45 $ 1.86
Average common shares outstanding -
assuming dilution....................... 6,502,692 6,654,488 6,552,339
Pro forma earnings per share
(unaudited)(6).......................... $ 1.19 $ 0.63
Pro forma average common
shares outstanding (unaudited)(6)....... 5,951,485 5,943,395
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------------
Working capital............................ $38,358 $44,088 $35,901 $10,188 $ 3,292
Total assets............................... 71,770 62,831 57,284 28,699 19,109
Long-term debt, net of current portion..... - - - - 50,105(3)
Stockholders' equity (deficit)............. 53,304 52,435 42,645 15,417 (43,069)
--------------------------------------------------------------------------
</TABLE>
(1) The Company's fiscal year normally 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) On September 18, 1997, the Company purchased the outstanding shares of
Securicor 3net Limited (since renamed Teltrend Limited). The transaction
was accounted for as a purchase and therefore the results of Teltrend
Limited are included with the operations of the Company since the above
date. As required by generally accepted accounting principles, the Company
recorded a $4.0 million charge immediately after the acquisition to write
off the portion of the purchase price allocated to in-process research and
development.
(3) Substantially all of the Company's long-term indebtedness was repaid in
full upon consummation of the Company's initial public offering (the
"IPO") which occurred in fiscal 1995 in conjunction with a
recapitalization of the Company (the "Recapitalization").
(4) In fiscal 1995, the Company eliminated its valuation allowance for net
deferred tax assets of approximately $3.4 million.
(5) Reflects a prepayment penalty (the "Prepayment Penalty") of $500,000
associated with prepayment of the Company's former credit agreement in
connection with the Recapitalization 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 and
the other components of the Recapitalization, net of an income tax benefit
of $251,750 related to the Prepayment Penalty and write-off.
(6) Pro forma earnings per share and average number of shares for fiscal 1994
and fiscal 1995 give effect to the IPO and the other components of the
Recapitalization, as if they occurred as of August 1, 1993.
PAGE 18
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 21
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
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations", as well as other portions of this Annual Report,
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 concerning, among other things, (i)
the Company's prospects, developments and business strategies for its
operations, including the development and sale of certain new and established
products, (ii) the Company's expectations regarding product pricing and the
impact of product pricing on gross profit margins, and (iii) the Company's
expectations regarding the upcoming year 2000. These forward-looking statements
are identified by their use of such terms and phrases as "believes",
"anticipates", "planned", "will" and "expects", 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,
without limitation, (i) risks of general market conditions, including demand
for the Company's products, product mix, competition and the Company's
historical dependence on relatively few customers, (ii) risks related to the
Company's historical dependence on relatively few product lines (such as the
Company's T1 product line, which faces competition from suppliers of alternate
methods of delivering repeatered T1 services), (iii) the extent to which the
Company's principal customers continue to exert pricing pressures on the
Company, (iv) risks inherent in the telecommunications industry, including
rapidly changing technology, evolving industry standards, changes in customer
requirements, frequent product introduction and changing government regulation,
and (v) the timing and occurrence (or non-occurrence) of transactions and
events which may be subject to circumstances beyond the Company's control. A
reader of this Annual Report should understand that it is not possible to
predict or identify all such risk factors. Consequently, the reader should not
consider such a list to be a complete statement of all potential risks or
uncertainties. The Company does not assume the obligation to update any
forward-looking statements. Results actually achieved may differ materially
from expected results included in these statements. See also "Factors That May
Affect Future Results" in the Company's fiscal 1998 Annual Report on Form 10-K
as filed with the Securities and Exchange Commission.
THE TELTREND LIMITED ACQUISITION
- -------------------------------------------------------------------------------
On September 18, 1997 (the "Acquisition Date"), the Company acquired all of the
outstanding shares of stock of Securicor 3net Limited of Basingstoke, England
(with operations in the United Kingdom, New Zealand and China) and its U.S.
affiliate Securicor 3net Inc. (together, "Teltrend Limited"). The acquisition of
Teltrend Limited was accounted for as a purchase. Accordingly, the Company's
results as described in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" include the results of Teltrend Limited
since the Acquisition Date. As used herein, the term "Company" or "Teltrend"
refers to Teltrend Inc. and its wholly owned subsidiaries, collectively, which
includes Teltrend Limited (and its wholly-owned subsidiaries) from and after the
Acquisition Date.
GENERAL
- -------------------------------------------------------------------------------
Teltrend 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 service over the
telephone network. Historically, substantially all of Teltrend's products have
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 strong
reliance on the RBOCs continues, but the Company's purchase of Teltrend Limited
has expanded the Company's markets and product lines. With the addition of
Teltrend Limited, the Company is now a leading developer of Integrated Services
Digital Network ("ISDN") products for communications equipment and service
providers and also supplies local area network ("LAN") internetworking, ISDN
remote access and secure virtual private networking solutions for business
customers worldwide.
PAGE 19
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
The Company's principal products are as follows: (i) high capacity
communications products ("T1/HDSL"), which include T1 line and office repeaters
and T1 network interface units, CELLPAKa units for cellular and wireless base
station sites, and High Density Subscriber Line ("HDSL") systems, which help
Telcos reduce the number of costly digital cross connect system ports required
for frame relay services; (ii) Digital Loop Carrier and Voice Frequency
products ("DLC/VF"), which includes a small DLC system, plug-in units for
existing DLC systems and traditional voice frequency products; and (iii)
ISDN/DDS products, which include ISDN and Digital Data System ("DDS") line
repeaters, ISDN and DDS D4 channel units, an ISDN mini-bank, circuit switched
products (network interfacing and conversion products) and packet switched
products (a line of routers).
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
The following table sets forth certain statements of operations data as a
percentage of net sales for fiscal 1998, 1997 and 1996. The Company's fiscal
year ends on the last Saturday of July each year and references herein to
fiscal years are to the fiscal years ending in the calendar year indicated
(e.g., fiscal 1998 refers to the fiscal year ended July 25, 1998). The
Company's fiscal year typically consists of 52 weeks (four 13 week quarters).
Each of fiscal 1998, 1997 and 1996 consisted of 52 weeks. Fiscal 1999 will
consist of 53 weeks, with the first quarter of fiscal 1999 consisting of 14
weeks rather than 13 weeks.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
----------------------------
1998 1997 1996
----------------------------
<S> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0%
Cost of sales................................... 53.9 55.7 54.3
----------------------------
Gross profits................................... 46.1 44.3 45.7
----------------------------
Operating expenses:
Sales and marketing........................... 13.6 9.0 8.5
Research and development...................... 14.8 11.9 9.3
Purchased in-process research
and development.............................. 4.1 - -
General and administrative.................... 7.5 5.5 4.8
----------------------------
Total operating expenses...................... 40.0 26.4 22.6
----------------------------
Income from operations.......................... 6.1 17.9 23.1
Other income.................................... 0.6 1.7 0.9
----------------------------
Income before income taxes...................... 6.7 19.6 24.0
Income tax provision............................ 4.4 7.7 9.8
----------------------------
Net income...................................... 2.3% 11.9% 14.2%
============================
</TABLE>
PAGE 20
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
FISCAL 1998 COMPARED TO FISCAL 1997
- --------------------------------------------------------------------------------
NET SALES. Net sales in fiscal 1998 increased 19.1%, or approximately $15.5
million, to approximately $96.8 million, from approximately $81.2 million in
fiscal 1997. The increase in net sales was primarily due to an increase in unit
volume sales of the Company's ISDN/DDS and T1/HDSL products of approximately
$15.8 million and $4.2 million, respectively. The increase was partially offset
by a decrease of approximately $4.5 million in unit volume sales of DLC/VF
products.
The decrease in unit volume sales of DLC/VF products was the result of
generally declining sales of VF products throughout the market and a decrease
in sales of DLC products to one large customer. 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 continues to
decrease. Sales of VF products accounted for 11.0%, 15.2% and 21.0% of the
Company's total net sales for fiscal 1998, 1997 and 1996, respectively. Sales
of DLC products are expected to rebound somewhat in fiscal 1999.
The increase in unit volume sales of ISDN/DDS products was due primarily
to the acquisition of Teltrend Limited and, to a lesser extent, due to an
increase in unit volume sales of Teltrend's other ISDN/DDS products.
The increase in sales of the Company's T1/HDSL products was caused by an
increase in unit volume sales of the Company's intelligent T1 repeater, HDSL and
CellPak(TM) products, partially offset by an decrease in T1 CPE unit volume
sales. Unit volume sales of the Company's T1 intelligent repeater products
increased largely on the sales strength of the intelligent high density
repeaters ("IHRs"), which are deployed in conjunction with fiber optic
installations. Both HDSL and CellPak(TM) unit volume sales increased as a result
of qualifying these products for use at more customers during fiscal 1998. Sales
of the Company's T1 CPE products decreased primarily due to loss of market
share. Sales of T1 products accounted for 48.7%, 55.2% and 53.9% of the
Company's total net sales for fiscal 1998, 1997 and 1996, respectively.
The Company has recently been experiencing increasing price pressure
across its product lines and has offered price concessions to certain
customers. The Company therefore believes that the average selling price of its
products will suffer a greater decline in fiscal 1999 than in fiscal 1998. See
" -- Fiscal 1998 Compared to Fiscal 1997 -- Gross Profit".
GROSS PROFIT. Gross profit in fiscal 1998 increased 24.2%, or approximately
$8.7 million, to approximately $44.6 million from approximately $35.9 million
in fiscal 1997. Gross profit margin in fiscal 1998 increased to 46.1% from
44.3% in fiscal 1997. The increase in gross profit and gross profit margin was
primarily attributable to the inclusion of Teltrend Limited's operating results
in the Company's overall operating results from the Acquisition Date through
the end of fiscal 1998. Teltrend Limited products, on average, carry a higher
gross profit margin than the Company's other products. To a lesser extent, the
increase in gross profit and gross profit margin was also due to the Company's
ability to spread fixed manufacturing and overhead costs over a larger revenue
base.
The Company has recently experienced increased pressure from customers to
reduce product prices. While the Company does not expect this to have a material
effect on gross profit margin for the first quarter in fiscal 1999, the Company
believes that price concessions offered to certain customers, along with the
likelihood of the need to grant further price concessions to customers during
fiscal 1999, should result in a material reduction in fiscal 1999 in the
Company's gross profit margin from the 46.1% level achieved in fiscal 1998.
See " -- Fiscal 1998 Compared to Fiscal 1997 -- Net Sales."
SALES AND MARKETING. Sales and marketing expenses in fiscal 1998 increased
79.5%, or approximately $5.8 million, to approximately $13.2 million from
approximately $7.3 million in fiscal 1997, and, as a percentage of net sales,
increased to 13.6% in fiscal 1998 from 9.0% in fiscal 1997. These increases were
due primarily to the inclusion of Teltrend Limited's sales and marketing
expenses since the Acquisition Date.
PAGE 21
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
RESEARCH AND DEVELOPMENT. Research and development expenses in fiscal 1998
increased 47.7%, or approximately $4.6 million, to approximately $14.3 million
from approximately $9.7 million in fiscal 1997. In addition to this general
increase in research and development expenses, the Company recorded a charge of
$4.0 million immediately after the acquisition of Teltrend Limited to write off
the portion of the purchase price allocated to in-process research and
development. As a percentage of total net sales, research and development
expenses increased to 14.8% in fiscal 1998 from 11.9% in fiscal 1997. These
increases were due primarily to the inclusion of Teltrend Limited's research and
development expenses since the Acquisition Date, increases in Teltrend's
salaries for newly hired personnel and the outsourcing of certain testing
services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in fiscal 1998
increased 64.1%, or approximately $2.8 million, to approximately $7.3 million
from approximately $4.5 million in fiscal 1997. As a percentage of total net
sales, general and administrative expenses increased to 7.5% in fiscal 1998
from 5.5% in fiscal 1997. These increases were primarily attributable to
general and administrative expenses incurred by Teltrend Limited, and, to a
lesser extent, to an increase in Teltrend's professional services expense. The
Company expects that a replacement patent license entered into by the Company
in the fourth quarter of fiscal 1998 (which applies various royalty rates to
various of the Company's products) will cause an incremental increase in the
Company's general and administrative expenses during fiscal 1999 of
approximately $400,000.
OTHER INCOME. Other income in fiscal 1998 was approximately $0.6 million
compared to approximately $1.4 million in fiscal 1997. The interest income
component of other income (primarily derived from interest earned on cash
equivalents and marketable securities) declined slightly due to the cash
expended for the purchase of Teltrend Limited. In addition, the Company suffered
currency translation losses during fiscal 1998 (reflected in the "Other - net"
component of "Other income") of approximately $0.7 million on market risk
sensitive instruments related to Teltrend Limited. While the Company believes
that it has taken steps to substantially reduce the likelihood that its results
of operations will continue to be impacted by currency exchange rate
fluctuations, there can be no assurance that currency exchange rate fluctuations
will not have an adverse effect on the Company's results of operations during
fiscal 1999. See "Quantitative and Qualitative Disclosures About Market Risk."
INCOME TAXES. A provision for income taxes of approximately $4.3 million was
recorded in fiscal 1998 compared to approximately $6.2 million in fiscal 1997.
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 1998 compared
to fiscal 1997. The fiscal 1998 provision reflects the foreign losses which are
not currently deductible for tax purposes.
FISCAL 1997 COMPARED TO FISCAL 1996
- --------------------------------------------------------------------------------
NET SALES. Net sales in 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 decrease in the sales of the Company's TI/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 CellPak(TM) unit volume
sales. Sales of the Company's T1 intelligent line repeaters were negatively
affected by the increased installation of HDSL equipment at certain RBOCs.
However, another intelligent T1 repeater product, the IHR, increased in unit
volume sales primarily due to the deployment of this product 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.
PAGE 22
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
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 in
fiscal 1996. Gross profit margin in fiscal 1997 decreased to 44.3% from 45.7%
in 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
9.3% 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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At July 25, 1998, the Company had no long-term indebtedness and had working
capital of approximately $38.4 million, which included cash and cash
equivalents of approximately $23.0 million and marketable securities of
approximately $2.0 million. The decrease in working capital from approximately
$44.1 million at the end of fiscal 1997 was due primarily to the acquisition of
Teltrend Limited. The total acquisition cost of Teltrend Limited was
approximately $14.5 million and was funded with the Company's cash on hand.
Cash used for capital expenditures was approximately $4.0 million in
fiscal 1998 compared to approximately $4.2 million in fiscal 1997. Most of the
capital expenditures in fiscal 1998 were for the purchase of manufacturing test
equipment and engineering equipment, and for the purchase of a research and
development facility in St. Charles, Illinois.
As of July 25, 1998, the Company had net trade accounts receivable of
approximately $12.9 million, compared to approximately $7.8 million as of the
end of fiscal 1997. This increase was due to the increase in sales and the
inclusion of Teltrend Limited's accounts receivable in the Company's total. For
fiscal 1998, inventories decreased by approximately $0.3 million, from
approximately $11.0 million at the end of fiscal 1997 to approximately $10.7
million at the end of fiscal 1998. The decrease in inventory was the net result
of a successful effort to reduce inventory levels and the addition of inventory
related to the Company's purchase of Teltrend Limited.
PAGE 23
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 26
MANAGEMENT'S DISCUSSION AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company maintains a credit facility (the "Bank Facility"), which
provides up to $15.0 million on an unsecured basis for working capital
financing. There are no amounts presently outstanding under the Bank Facility.
Borrowings under the Bank Facility will mature on July 31, 2001 and bear
interest at a floating rate based on LIBOR or the prime rate offered by the
lender from time to time. 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.
On March 3, 1998, the Company's Board of Directors authorized the purchase
of up to a maximum of $8.0 million worth of the Company's Common Stock.
Purchases may be made form time to time in the open market, subject to the
requirements of applicable laws, and if made will be financed with existing
cash and cash equivalents, marketable securities and cash from operations. As
of July 25, 1998, the Company had purchased 101,000 shares of Common Stock at a
cost of approximately $1.7 million. As of September 25, 1998, the Company had
purchased an additional 432,000 shares of Common Stock at a cost of
approximately $6.2 million.
The Company expects that existing cash and cash equivalents, marketable
securities, and 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.
YEAR 2000 ISSUES
- --------------------------------------------------------------------------------
Many currently installed computer systems, software and date-sensitive equipment
at companies around the world are coded to record years in a two-digit format.
Without modification, these systems and software will be unable to appropriately
interpret or recognize dates beyond the calendar year 1999 (the "Year 2000
issue"). The Year 2000 issue could result in system failures or miscalculations
causing disruptions in business operations worldwide (including, without
limitation, disruptions in order processing, invoicing, manufacturing and
similar functions).
The Company has reviewed its current product offerings and has determined
that all such products which are date sensitive are Year 2000 compliant.
The Company's ongoing project to address internal Year 2000 issues
consists essentially of three phases: assessment of the Company's systems and
equipment in order to determine which need to be updated or replaced and
analysis of how to accomplish this; remediation or replacement of the Company's
non-compliant systems and equipment; and validation testing. The Company's
assessment of its internal systems and equipment has included its information
technology ("IT") systems, as well as its non-IT systems and equipment (e.g.,
its facilities, manufacturing and test equipment containing microprocessors or
other similar circuitry, etc.).
The Company has substantially completed the assessment and analysis of its
internal IT systems to determine the potential costs and scope of any Year 2000
issues. Based on this review, the Company has determined that certain of its IT
systems need to be upgraded or replaced to address Year 2000 issues. With
respect to the Company's U.S. operations, the Company believes that all
necessary upgrades of its IT systems have been completed or will be completed
by December 31, 1998. Such upgrades are generally covered by service contracts
previously entered into by the Company in the ordinary course of business and
thus have been or are expected to be accomplished without material cost to the
Company. The Company also believes that a portion of Teltrend Limited's IT
systems will need to be upgraded or replaced to address Year 2000 issues
(including Teltrend Limited's financial accounting system and general office
software). It is presently anticipated that these replacements and upgrades
will be completed by June 30, 1999 at a total estimated cost of $250,000 (of
which approximately $35,000 has already been incurred). Validation testing is
being conducted as systems are upgraded and replaced.
The Company has completed the majority of the assessment and analysis of
its internal non-IT systems and equipment to determine the potential costs and
scope of any Year 2000 issues. Based on this assessment and analysis to date,
the Company is not aware of any Year 2000 issues which are expected to have a
material adverse effect on the Company's non-IT systems and equipment. Because,
however, the Company is still in the process of analyzing whether any Year 2000
issues exist with respect to certain key manufacturing and test equipment,
there can be no assurance that the Company will not experience a material
adverse effect due to Year 2000 issues affecting this equipment. The Company
anticipates completing its assessment and analysis of this equipment by
December 31, 1998. Remediation and validation testing will be planned and
scheduled as necessary based on the outcome of this review.
PAGE 24
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (continued)
In addition, the Company is in the process of making inquiries of third
parties with whom it has material business relationships (such as customers,
suppliers and financial institutions) to determine if they have any Year 2000
issues that will materially and adversely impact the Company. In the course of
these inquiries, which to date have focused on the Company's key U.S. customers
and suppliers, the Company has not been made aware of any material Year 2000
issues which would adversely affect the Company. The Company expects to complete
a survey of all such third parties by December 31, 1998.
Based upon the Company's review of its internal systems and equipment and
the current status of the Company's survey of third parties with whom it has
material business relationships, the Company has not identified any material
risks related to or, except as set forth above, costs to address Year 2000
issues. There can be no assurance, however, that Year 2000 issues will not have
a material adverse effect on the Company if the Company and/or those with whom
it conducts business are unsuccessful in identifying or implementing timely
solutions to any Year 2000 problems.
The Company intends to continue the review, remediation and testing of its
Year 2000 status and, to the extent necessary, it will develop Year 2000
contingency plans for critical business processes.
NEW ACCOUNTING RULES
- --------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income" (SFAS
No. 130). SFAS No. 130 becomes effective for all fiscal years that begin after
December 15, 1997. The new standard requires reclassifications of earlier
financial statements for comparative purposes. SFAS No. 130 requires that
amounts of certain items, including foreign currency translation adjustments and
unrealized gains and losses on certain securities, be included in comprehensive
income in the financial statements. SFAS No. 130 does not require a specific
format for the financial statement in which comprehensive income is reported,
but does require that an amount representing total comprehensive income be
reported in that statement. Management has not yet determined what effects, if
any, SFAS No. 130 will have on the Company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, through its foreign subsidiaries, manufactures and sells its
products in a number of countries. As a result, the Company is from time to time
exposed to market risk relating to the impact of movements in foreign currency
exchange rates on certain instruments. The principal foreign currency exposures
involve intercompany receivable and debt balances regarding the United Kingdom,
New Zealand and China. At July 25, 1998, the net fair value liability of
financial instruments with exposure to foreign currency risk was approximately
$3.0 million. The potential reduction in the Company's pre-tax net income from a
hypothetical 10% adverse change in quoted foreign exchange rates against the
currencies in which these instruments are denominated would have been $300,000
at July 25, 1998. Since July 25, 1998, the Company has taken steps to eliminate
approximately $1 million of the net fair value liability of financial
instruments with exposure to foreign currency risk.
In addition, a general 10% strengthening of the U.S. dollar relative to
each of the currencies in which the Company's foreign subsidiaries reports
during fiscal 1998 (beyond any such strengthening actually experienced) would
have resulted in a decrease in gross profit of approximately $450,000, but an
increase in net income of approximately $200,000, for fiscal 1998. In the
future, if the Company's foreign subsidiaries are profitable, a strengthening of
the U.S. dollar relative to the foreign currencies in which these subsidiaries
report could result in a decrease in both gross profit and net income.
PAGE 25
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 28
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 accounting systems 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 are 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, Chief Executive Officer, Sr. Vice President, Finance
and Chairman of the Board
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF TELTREND INC.,
We have audited the accompanying consolidated balance sheets of Teltrend Inc.
as of July 25, 1998 and July 26, 1997, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the years ended
July 25, 1998, July 26, 1997, and July 27, 1996. 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 consolidated financial position of Teltrend Inc.
as of July 25, 1998, and July 26, 1997, and the results of its operations and
its cash flows for each of the years ended July 25, 1998, July 26, 1997, and
July 27, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Chicago, Illinois
August 28, 1998
PAGE 26
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 29
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
----------------------
July 25, July 26,
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $22,994 $11,837
Marketable securities............................................. 1,951 20,930
Trade accounts receivable, net of allowance for
doubtful accounts of $287 and $100............................... 12,899 7,834
Inventories....................................................... 10,656 11,048
Deferred income taxes............................................. 1,474 1,871
Prepaid expenses and other current assets......................... 4,367 964
----------------------
54,341 54,484
Land and buildings................................................... 3,422 1,949
Machinery and equipment.............................................. 18,076 14,528
Leasehold improvements............................................... 1,310 935
Accumulated depreciation............................................. (12,080) (9,372)
----------------------
10,728 8,040
Deferred income taxes................................................ 1,705 134
Intangible assets, less accumulated amortization of $380............. 4,830 -
Other assets, less accumulated amortization of $138 and $124......... 166 173
----------------------
$71,770 $62,831
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable.................................................. $ 6,194 $ 3,443
Accrued expenses.................................................. 9,099 6,904
Income taxes payable.............................................. 690 49
----------------------
15,983 10,396
Deferred income taxes................................................ 2,483 -
Commitments and contingencies........................................ - -
Stockholders' equity:
Common stock, $0.01 par value, 15,000,000 shares
authorized and 6,462,046 and 6,436,321 issued and
6,361,046 and 6,436,321 outstanding, respectively................. 64 64
Additional paid-in capital........................................... 99,520 99,328
Treasury stock....................................................... (1,733) -
Accumulated deficit.................................................. (44,718) (46,957)
Foreign currency translation adjustment.............................. 171 -
----------------------
53,304 52,435
----------------------
$71,770 $62,831
======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 27
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 30
CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share
data)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------
July 25, 1998 July 26, 1997 July 27, 1996
---------------------------------------------
<S> <C> <C> <C>
Net sales................................................ $ 96,762 $81,243 $85,913
Cost of sales............................................ 52,125 45,296 46,644
---------------------------------------------
Gross profit............................................. 44,637 35,947 39,269
Operating expenses:
Sales and marketing.................................... 13,166 7,333 7,309
Research and development............................... 14,307 9,686 7,944
Purchased in-process research and development.......... 3,995 - -
General and administrative............................. 7,253 4,495 4,164
---------------------------------------------
38,721 21,514 19,417
---------------------------------------------
Income from operations................................... 5,916 14,433 19,852
Other income (expense):
Interest income........................................ 1,339 1,468 827
Other - net............................................ (737) (31) (62)
---------------------------------------------
602 1,437 765
---------------------------------------------
Income before income tax provision....................... 6,518 15,870 20,617
Provision for income taxes............................... 4,279 6,242 8,453
---------------------------------------------
Net income............................................... $ 2,239 $ 9,628 $12,164
=============================================
Net income per share of common stock..................... $ 0.35 $ 1.50 $ 1.94
=============================================
Average common shares outstanding........................ 6,434 6,430 6,261
=============================================
Net income per share of common stock -
assuming dilution...................................... $ 0.34 $ 1.45 $1.86
=============================================
Average common shares outstanding -
assuming dilution...................................... 6,503 6,654 6,552
=============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 28
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except
per share data)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
COMMON ADDITIONAL TREASURY ACCUMULATED CUMULATIVE TOTAL
STOCK PAID-IN STOCK DEFICIT TRANSLATION STOCKHOLDERS'
PAR $.01 CAPITAL ADJUSTMENT EQUITY
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 29, 1995............. $58 $84,108 $ - ($68,749) $ - $15,417
Public offering.................. 6 14,750 - - - 14,756
Options exercised................ - 4 - - - 4
Tax benefit from exercise of
stock options.................. - 304 - - - 304
Net income....................... - - - 12,164 - 12,164
---------------------------------------------------------------------------
Balance, July 27, 1996............. 64 99,166 - (56,585) - 42,645
Options exercised................ - 18 - - - 18
Tax benefit from exercise of
stock options.................. - 144 - - - 144
Net income....................... - - - 9,628 - 9,628
---------------------------------------------------------------------------
Balance, July 26, 1997............. 64 99,328 - (46,957) - 52,435
Options exercised................ - 77 - - - 77
Tax benefit from exercise of
stock options.................. - 115 - - - 115
Change in cumulative translation
adjustment..................... - - - - 171 171
Purchase of 101,000 shares....... - - (1,733) - - (1,733)
Net income....................... - - - 2,239 - 2,239
---------------------------------------------------------------------------
Balance, July 25, 1998............. $64 $99,520 ($ 1,733) ($44,718) $171 $53,304
---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 29
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
OPERATING ACTIVITIES JULY 25, 1998 JULY 26, 1997 JULY 27, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income........................................... $2,239 $9,628 $12,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Purchased in-process research and
Development....................................... 3,995 - -
Depreciation...................................... 2,899 2,028 1,742
Amortization...................................... 394 - -
Loss (gain) on sale of equipment.................. 6 (14) 7
Deferred income taxes............................. 1,309 989 6
Changes in certain assets and liabilities:
Accounts receivable.......................... (2,926) 4,107 (3,841)
Inventories.................................. 2,589 1,301 (4,420)
Prepaid expenses and other current assets.... (610) 170 (437)
Accounts payable............................. 1,115 (2,574) 603
Income taxes payable......................... 641 49 (721)
Accrued expenses............................. 325 (1,718) 1,712
Other assets and liabilities................. 54 - -
====================================
Net cash provided by operating activities............ 12,030 13,966 6,815
FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------
Exercise of common stock options
(including tax benefit)............................ 192 162 308
Proceeds from public stock offering.................. - - 14,756
Payment of long-term debt............................ - - (238)
Purchase of treasury stock........................... (1,733) - -
====================================
Net cash provided by (used for) financing
activities.......................................... (1,541) 162 14,826
INVESTING ACTIVITIES
- --------------------------------------------------------------------------------------------
Capital expenditures................................. (4,049) (4,192) (3,204)
Acquisition of business, net of cash acquired........ (14,394) - -
Purchase of marketable securities.................... (1,951) (40,745) -
Proceeds from sale of marketable securities.......... 20,930 19,815 -
Proceeds from sale of equipment...................... 143 32 19
Other investing activities........................... (7) (90) 17
====================================
Net cash provided (used for) investing activities.... 672 (25,180) (3,168)
Effect of exchange rate changes on cash.............. (4) - -
====================================
Net increase (decrease) in cash and
cash equivalents.................................. 11,157 (11,052) 18,473
Cash and cash equivalents, beginning of period....... 11,837 22,889 4,416
====================================
Cash and cash equivalents, end of period............. $22,994 $11,837 $22,889
====================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE 30
TELETREND INC. 1998 ANNUAL REPORT
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
1 BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
PUBLIC OFFERING
During the second quarter of fiscal 1996, the Company sold 575,000 shares
of its Common Stock pursuant to a registered public offering ("Public
Offering") of shares of Common Stock. The net proceeds of the Public
Offering received by the Company totaled approximately $14.7 million (after
deducting underwriting discounts, commissions and expenses).
ACQUISITION OF TELTREND LIMITED
On September 18, 1997 (the "Acquisition Date"), Teltrend purchased the
outstanding shares of Securicor 3net Limited of Basingstoke, England (with
operations in the United Kingdom, New Zealand and China) and its U.S.
affiliate Securicor 3net Inc. (together "Teltrend Limited") for total
acquisition costs of approximately $14.5 million. Teltrend Limited is a
telecommunication equipment and software company having annualized revenues
in excess of $15 million. The transaction was accounted for as a purchase
and therefore the results of Teltrend Limited since the Acquisition Date
are included with the results of Teltrend. The purchase price was allocated
to identifiable tangible and intangible assets, including purchased
in-process research and development, on the basis of fair values as
determined by an independent appraisal. The value of purchased in-process
research and development was determined by estimating the projected net
cash flows relating to products under development and discounting such cash
flows to their net present values. All references in these notes to
"Teltrend" or the "Company" refer to Teltrend Inc. and its wholly owned
subsidiaries, collectively, which includes Teltrend Limited (and its
wholly-owned subsidiaries) from and after the Acquisition Date.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations as if the above described acquisition had
taken place on July 28, 1996. Purchased in-process research and development
assets of approximately $4 million were written off in the fiscal 1998
Consolidated Statement of Income, and this is reflected in the fiscal 1997
pro forma results presented below.
PRO FORMA INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------
JULY 25, 1998 JULY 26, 1997
----------------------------
<S> <C> <C>
Net sales............................................... $97,975 $ 99,444
Net income (loss)....................................... $ 1,797 $ (1,593)
Net income (loss) per share - assuming dilution......... $ 0.28 $ (0.24)
----------------------------
</TABLE>
2 DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
The Company designs, manufactures and markets a broad range of products,
such as channel units, repeaters and termination units, that are used by
telephone companies to provide voice and data services over the existing
telephone network, primarily in the Local Loop, as well as a wide range of
remote local area network internetworking, ISDN remote access and virtual
private networking products. The Company's fiscal year-end is the last
Saturday in July.
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and transactions
of the Company and its wholly-owned subsidiaries. Intercompany amounts and
transactions have been eliminated in consolidation. Exchange rate
fluctuations from translating the financial statements of subsidiaries
located outside the United States into U.S. dollars are recorded in a
separate component of stockholders' equity. All other foreign exchange
gains and losses (approximately a $0.7 million loss in fiscal 1998) are
included on the income statement under the caption "Other-net."
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.
PAGE 31
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS (Continued)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT)
- --------------------------------------------------------------------------------
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.
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 ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes".
PROPERTY, PLANT, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Land, buildings, equipment and leasehold improvements are recorded at cost.
The Company uses the straight-line method of computing provisions for
depreciation and amortization of property, equipment and leasehold
improvements. Service lives for principal assets are 35 to 39 years for
buildings and three to ten years for equipment and leasehold improvements.
INTANGIBLE ASSETS
At each balance sheet date, the Company evaluates for recognition of
potential impairment its recorded intangible assets against its projected
discounted cash flows. Intangible assets are principally being amortized
over 15 years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these estimates.
EARNINGS PER SHARE
In January 1998, the Company adopted SFAS No. 128, "Earnings Per Share",
requiring dual presentation of basic and diluted income per share ("EPS")
on the face of the income statement. Basic EPS is computed by dividing net
income by the weighted average number of common shares outstanding during
the period. Diluted EPS reflects the potential dilution from the exercise
or conversion of securities into common stock, such as stock options. EPS
amounts for all periods have been presented, and where necessary, restated
to conform to FASB Statement 128 requirements.
The following table sets forth the computation of basic and diluted
income per share (in thousands of dollars, except per share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------------
JULY 25, 1998 JULY 26, 1997 JULY 27, 1996
-------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income.................................... $2,239 $9,628 $12,164
-------------------------------------------------
Denominator:
Weighted average shares outstanding........... 6,434,025 6,430,286 6,260,989
Effect of dilutive stock options.............. 68,667 224,202 291,350
-------------------------------------------------
Weighted average shares outstanding -
assuming dilution............................. 6,502,692 6,654,488 6,552,339
-------------------------------------------------
Net income per share.......................... $ 0.35 $ 1.50 $ 1.94
-------------------------------------------------
Net income per share - assuming dilution...... $ 0.34 $ 1.45 $ 1.86
-------------------------------------------------
</TABLE>
PAGE 32
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS (Continued)
3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT)
- --------------------------------------------------------------------------------
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.
NEW PRONOUNCEMENTS
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which the Company will be required to adopt in fiscal 1999. This statement
requires the components of comprehensive income to be disclosed in the
financial statements. The Company does not expect the adoption of the SFAS
to have a material impact on the Company's financial position, results of
operations or cash flow.
RECLASSIFICATION
Certain amounts in the fiscal 1997 and 1996 consolidated financial
statements have been reclassified to conform to fiscal 1998 presentations.
4 RETIREMENT INVESTMENT PLAN
- --------------------------------------------------------------------------------
The Company has a defined-contribution plan covering full and part-time
personnel in the United States, who have a minimum of one-half year of
service and have attained the age of 21. Participants may contribute
between 1% and 15% of their annual compensation. From January 1, 1994 until
July 31, 1996, the Company contributed $0.40 for each $1.00 contributed to
the plan by the participant up to a maximum of 5% of the participant's
annual compensation. On August 1, 1996, the Company began contributing a
discretionary amount on its employees' behalf based on a formula and the
Company's financial results for the year. Since the amount of the
contribution depends upon the Company's performance, the amount of
contribution may vary from year to year. The Company also has a
defined-contribution plan covering all permanent employees in the United
Kingdom who have completed three months of service and are under the age of
65. Participants contribute 4% of their annual compensation and the Company
contribution is determined on a scale basis, which is dependent on the age
of the participant. Company contributions to its defined-contribution plans
were $620,000, $349,000 and $184,000 for the years ended July 25, 1998,
July 26, 1997 and July 27, 1996, respectively.
5 INVENTORIES
- --------------------------------------------------------------------------------
Inventories at July 25, 1998 and July 26, 1997 were as follows:
<TABLE>
<S> <C> <C>
-----------------
(Dollars in thousands) 1998 1997
-----------------
Raw materials................................................ $ 6,052 $ 6,238
Work-in-process.............................................. 1,795 1,651
Finished goods............................................... 2,809 3,159
-----------------
$10,656 $11,048
-----------------
</TABLE>
6 ACCRUED EXPENSES
- --------------------------------------------------------------------------------
Accrued expenses at July 25, 1998 and July 26, 1997 consisted of:
<TABLE>
<S> <C> <C>
--------------------
(Dollars in thousands) 1998 1997
--------------------
Salaries, wages, and bonuses................................. $3,258 $2,432
Warranty..................................................... 1,404 1,426
Other........................................................ 4,437 3,046
--------------------
$9,099 $6,904
--------------------
</TABLE>
PAGE 33
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS (Continued)
7 CREDIT FACILITY
- --------------------------------------------------------------------------------
In 1995, the Company entered into a credit facility (the "Bank Facility")
which provides, subject to certain restrictions, up to $15 million on an
unsecured basis for working capital financing. As amended, the Bank
Facility will expire on July 31, 2001 and, as of July 25, 1998, no amounts
were outstanding. Under the Bank Facility agreement, dividends on the
Company's Common Stock are restricted so as not to exceed 50% of the
Company's net income for the immediately preceding fiscal year.
8 COMMON STOCK OPTIONS
- --------------------------------------------------------------------------------
The Company has 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 class of Class A Common Stock of the Company
existing prior to the recapitalization of the Company in fiscal 1995 (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 to the
then-estimated value of $.1643 per share from $4.1077 per share. All
options outstanding under the Plan to purchase Old Class A Stock 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 25, 1998, there were
58,796 options 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 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 25, 1998, there were 324,400
options outstanding under the 1995 Stock Option Plan, all with an exercise
price of $16 per share.
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 25, 1998, there were 474,600
options outstanding under the 1996 Stock Option Plan with a range of
exercise prices of $13.25 to $21.13 per share.
During October 1997, the Company adopted the Teltrend Inc. 1997
Non-Employee Director Stock Option Plan (the "1997 Director Option Plan"),
which provides for the grant of nonqualified stock options. A maximum of
250,000 shares of Common Stock may be issued to non-employee directors of
the Company. The 1997 Director Option Plan was approved by the stockholders
at the Annual Meeting held on December 11, 1997.
Each individual elected as a director of the Company at the December
11, 1997 Annual Meeting who qualified as a non-employee director was
granted an option (an "Initial Option") to purchase up to 6,000 shares of
Common Stock on the date of the Annual Meeting. Thereafter, each
non-employee director who has not previously been granted an option under
the 1997 Director Option Plan will receive an Initial Option to purchase up
to 6,000 shares of Common Stock on the date of his or her initial election
to the Board. Additionally, each
PAGE 34
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS (Continued)
8 COMMON STOCK OPTIONS (CONT)
- -------------------------------------------------------------------------------
continuing non-employee director will be granted an additional option (an
"Annual Option") to purchase up to 1,500 shares of Common Stock on each
anniversary of the date his or her Initial Option was granted. Initial
Options will generally vest and become exercisable as to 25% of the shares
of Common Stock subject thereto on the first anniversary of the date of
grant and as to an additional 25% of such Common Stock subject thereto on
each of the next three anniversaries of the date of grant. All Annual
Options granted under the 1997 Director Option Plan will generally vest and
become exercisable on the first anniversary of the date of grant thereof.
As of July 25, 1998, 36,000 options were outstanding under the 1997
Director Option Plan, all at an excercise price of $17.63 per share.
Transactions involving stock options granted under the Plan, the 1995
Stock Option Plan, the 1996 Stock Option Plan and the 1997 Director Option
Plan are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------
NUMBER OF OPTIONS EXERCISE PRICE
--------------------------------------
<S> <C> <C>
Outstanding, July 29, 1995......................... 450,548 $11.76
Granted............................................ 129,000 28.75 to 47.00
Exercised.......................................... (23,794) .16
Canceled........................................... - -
--------------------------------------
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
Granted............................................ 417,500 13.25 to 21.125
Exercised.......................................... (25,725) .16 to 16.00
Canceled........................................... (151,500) 16.00 to 20.00
--------------------------------------
Outstanding, July 25, 1998......................... 893,796 $15.89
--------------------------------------
</TABLE>
The weighted average remaining contractual life of the options
outstanding is 8.1 years. Of the 893,796 stock options outstanding at July
25, 1998, 329,643 are currently exercisable with a weighted average
exercise price of $14.04.
Pro forma information regarding net income and earnings per share is
required by SFAS 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 1998, 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 0.34, 0.25 and 0.25,
respectively; 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 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
stock options.
PAGE 35
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS (continued)
5 COMMON STOCK OPTIONS (CONT)
- --------------------------------------------------------------------------------
The weighted-average fair value of options was $5.06 for options
granted in fiscal 1998, $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
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Net earnings - as reported......................... $2,239 $9,628 $12,164
Net earnings - pro forma........................... $ 836 $8,723 $11,769
Earnings per share - as reported................... $ 0.34 $ 1.45 $ 1.86
Earnings per share - pro forma..................... $ 0.13 $ 1.31 $ 1.80
----------------------------------
</TABLE>
The pro forma effect on net income for fiscal 1998, 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 and fiscal 1998.
9 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
The Company has operating leases in effect for vehicles, equipment and
facilities. Lease expense for the fiscal years ended July 25, 1998, July
26, 1997, and July 27, 1996 totaled $1,072,000, $540,000, and $697,000,
respectively.
Future minimum annual rental payments required under the leases are as
follows:
<TABLE>
<S> <C>
(Dollars in thousands)
Fiscal Year 1999............................................... $1,065
Fiscal Year 2000............................................... 896
Fiscal Year 2001............................................... 167
--------
$2,128
--------
</TABLE>
PAGE 36
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 39
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>
----------------------------
(Dollars in thousands) JULY 25, 1998 JULY 26, 1997
----------------------------
<S> <C> <C>
Deferred tax assets (liabilities):
Net operating loss carryforwards $ - $ 293
Product warranty accruals 496 570
Inventory reserves 316 522
Vacation accrual 437 401
Medical reserve 240 220
Unicap adjustment 132 102
Purchased in-process research and development 1,473 -
Other 44 100
----------------------------
Total deferred tax assets 3,138 2,208
Prepaid asset (royalty) (191) -
Tax over book depreciation (397) (203)
Valuation allowance (1,854) -
----------------------------
Net recorded deferred tax assets $ 696 $2,005
----------------------------
Recognized in balance sheet:
Net deferred tax assets - current $1,474 $1,871
Net deferred tax assets - noncurrent 1,705 134
Net deferred tax liabilities - noncurrent (2,483) -
----------------------------
Net deferred tax assets $ 696 $2,005
----------------------------
</TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
-----------------------------------
(Dollars in thousands) 1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Current provision
Federal....................................... $2,369 $4,103 $7,407
State......................................... 601 1,150 1,040
-----------------------------------
2,970 5,253 8,447
-----------------------------------
Deferred tax provision
Federal....................................... 1,044 772 5
State......................................... 265 217 1
-----------------------------------
1,309 989 6
-----------------------------------
Provision for income taxes...................... $4,279 $6,242 $8,453
-----------------------------------
</TABLE>
PAGE 37
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS (continued)
10 INCOME TAXES (CONT)
- --------------------------------------------------------------------------------
Income taxes paid in fiscal years 1998, 1997 and 1996 totaled $3,874,000,
$4,826,000 and $9,080,000, respectively.
Total income tax provision for each year varied from the amount
computed by applying the statutory U.S. federal income tax rate to income
before taxes for the reasons set forth in the following reconciliation.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Income tax provision at the statutory rate................... $2,281 $5,555 $7,216
Increase (reduction) resulting from:
State income taxes, net of federal tax benefit............ 362 794 1,040
Valuation allowance for non-United States
net operating losses................................... 1,980 - -
Research and development tax credits...................... (533) - -
Other, net................................................ 189 (107) 197
----------------------------------
Actual income tax provision.................................. $4,279 $6,242 $8,453
----------------------------------
</TABLE>
In fiscal 1998, foreign losses before income taxes of $8.1 million reduced
consolidated income before income taxes to $6.5 million.
11 COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
The Company has commitments to purchase raw materials under purchase
contracts with various vendors totaling approximately $8,986,000 at July
25, 1998 and $6,321,000 at July 26, 1997.
12 SIGNIFICANT CUSTOMERS
- --------------------------------------------------------------------------------
Five customers represented: 30.1%, 16.8%, 13.8%, 10.8% and 10.3% of net
sales in fiscal 1998; 30.5%, 26.0%, 15.1%, 13.4% and 10.8% in fiscal 1997;
and 25.6%, 20.6%, 18.4%, 15.4% and 15.2% in fiscal 1996.
At July 25, 1998, five customers represented 21.8%, 18.6%, 8.9%, 8.1%
and 6.7% of accounts receivable, and at July 26, 1997, five customers
represented 33.8%, 19.9%, 16.1%, 10.9% and 8.5% of accounts receivable.
During fiscal 1998 there were two mergers involving significant
customers of the Company. Pacific Telesis Group merged with SBC
Communications, Inc. and NYNEX merged with Bell Atlantic Corp. The above
percentages relating to the Company's net sales and accounts receivable
were computed, for consistency, as if these mergers had been in effect for
each of the years specified.
PAGE 38
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS (continued)
13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FISCAL 1998 - QUARTER ENDED
--------------------------------------------------------------------
(Dollars in thousands, except earnings per share data) OCTOBER 25, 1997 JANUARY 24, 1998 APRIL 25, 1998 JULY 25, 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales............................................... $ 21,677 $22,817 $25,271 $26,998
Gross profit............................................ 9,386 10,369 11,860 13,022
Net income (loss)(1)................................ ($ 2,511) $ 863 $ 1,737 $ 2,149
--------------------------------------------------------------------
Net income (loss) per common share -
assuming dilution................................... ($ 0.38) $ 0.13 $ 0.27 $ 0.33
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1997 - QUARTER ENDED
--------------------------------------------------------------------
(Dollars in thousands, except earnings per share data) OCTOBER 26, 1996 JANUARY 25, 1997 APRIL 26, 1997 JULY 26, 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales............................................... $22,591 $18,825 $21,303 $18,524
Gross profit............................................ 10,364 8,186 9,384 8,013
Net income.......................................... $ 3,232 $ 1,995 $ 2,438 $ 1,964
--------------------------------------------------------------------
Net income per common share -
assuming dilution................................... $ 0.48 $ 0.29 $ 0.37 $ 0.30
--------------------------------------------------------------------
</TABLE>
(1) As required by generally accepted accounting principles, the Company
recorded a $4.0 million charge immediately after the acquisition of
Teltrend Limited to write off the portion of the purchase price
allocated to in-process research and development.
14 SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The Company has adopted SFAS No. 131, "Disclosures about Segments and
Related Information." The Company is managed in two operating segments: the
United States; and Europe and the Far East. Operations in Europe and the
Far East were acquired in the first quarter of fiscal 1998 as disclosed
more fully in Note 1, "Basis of Presentation," above. Therefore, segment
disclosures are not applicable for fiscal years 1997 and 1996.
The accounting policies of the operating segments are the same as
those described in Note 3, "Summary of Significant Accounting Policies."
Intersegment sales are not significant. Revenues are attributed to
geographic areas based on the location of the areas producing the revenues.
<TABLE>
<CAPTION>
FISCAL 1998
-----------------------------------------------------------------------------------
(Dollars in thousands) Net Sales Income (loss) Net Income Identifiable Capital Depreciation
Before Taxes (loss) Assets Expenditures and Amortization
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States......... $83,984 $14,636 $9,268 $63,520 $3,781 $2,198
Europe, Far East...... 12,778 (8,118) (7,029) 8,250 268 5,090
-----------------------------------------------------------------------------------
Total................. $96,762 $6,518 $2,239 $71,770 $4,049 $7,288
-----------------------------------------------------------------------------------
</TABLE>
Operations listed in Europe and the Far East are comprised of
operations in the United Kingdom, New Zealand and China.
15 RIGHTS PLAN
- --------------------------------------------------------------------------------
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 of the Company. 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 20% 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 January 16, 1997,
as amended on June 1, 1998, and as the same may be further amended from
time to time, between the Company and LaSalle National Bank, as Rights
Agent.
PAGE 39
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 42
MARKET FOR COMPANY'S SECURITIES AND RELATED MATTERS
The Common Stock, $.01 par value per share (the "Common Stock"), of the
Company is quoted on the Nasdaq National Market under the symbol "TLTN."
There are no shares of the Company's Class A Common Stock, $.01 par value
per share, outstanding (and hence no established public trading market
therefor). The following table sets forth the high and low closing sale
prices for the Common Stock for the periods indicated as reported on the
Nasdaq National Market:
<TABLE>
<CAPTION>
PRICE RANGE OF COMMON STOCK
----------------------------
FISCAL 1997 High Low
- ------------------------------------------------------------------------------------------
<S> <C> <C>
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 October 25, 1997) $ 21 1/4 $14 7/8
Second Quarter
(from October 26, 1997 through January 24, 1998) $18 13/16 $14 1/8
Third Quarter
(from January 25, 1998 through April 25, 1998) $ 16 7/8 $12 1/4
Fourth Quarter
(from April 26, 1998 through July 25, 1998) $ 18 5/8 $14 3/4
FISCAL 1999
- ------------------------------------------------------------------------------------------
First Quarter
(from July 26, 1998 through September 25, 1998) $ 16 1/2 $12 1/8
----------------------------
</TABLE>
On September 25, 1998, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $13 7/8 per share. On that same
date, there were 116 registered holders of record of the Common Stock.
The Company has not paid any cash dividends since 1988. 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. Otherwise, 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 does not anticipate paying any cash dividends in the
foreseeable future.
PAGE 40
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 43
<TABLE>
<S> <C> <C>
OFFICERS
- -----------------------------------------------------------------------------------------------------------------
HOWARD L. KIRBY, JR. LAURENCE L. SHEETS
Chairman of the Board, Vice President and Chief
President and Chief Technical Officer
Executive Officer
Janice Lollini
CRAIG D. ECKERT ASSISTANT VICE PRESIDENT,
Sr. Vice President, Sales Human Resources
and Business Development
THEODOR A. MAXEINER
DOUGLAS P. HOFFMEYER Chief Accounting Officer;
Sr. Vice President, Finance; Assistant Vice President, Finance;
Chief Financial Officer; Controller; Assistant Secretary
Secretary and Treasurer and Assistant Treasurer
JACK C. PARKER MICHAEL A. SAMOCKI
Sr. Vice President/General Assistant Vice President,
Manager, High Capacity Quality Assurance
Communications Products
MICHAEL BURGESS
MICHAEL S. GRZESKOWIAK Managing Director of
Vice President, Operations Teltrend Limited
GILBERT H. HOSIE
Vice President, RBOC Sales
BOARD OF DIRECTORS
- -----------------------------------------------------------------------------------------------------------------
HOWARD L. KIRBY, JR. (3), (5) HARRY CRUTCHER, III (3), (4)
Chairman of the Board, President and President, Resorts Financial Services Co.
Chief Executive Officer of the Company (consulting firm); Managing Partner,
Grouse Mountain Associates, Ltd.
FRANK T. CARY (1), (4) (hotel owner and operator); and
Former Chairman and Chief Executive President, Crutcher Enterprises, Inc.
Officer of International Business (financial strategic planning firm)
Machines Corporation and current
director of Celgene Corporation, Cygnus DONALD R. HOLLIS (4)
Therapeutic Systems, ICOS Corporation, President, DRH Strategic Consulting Inc.;
and Lincare, Inc. former Executive Vice President, First
Chicago Corporation; also a director
WILLIAM R. DELK (1), (2) of Deluxe Corporation, Information
Retired Vice President, BellSouth Advantage, Open Port Technology and
Corporation, Inc. Edify Corporation
BERNARD F. SERGESKETTER (2) SUSAN B. MAJOR (1), (2)
Former Vice President of AT&T; Vice President and Managing Director,
President of Sergesketter & Associates, A.T. Kearney, Inc.; former Director of
Inc., a private consulting firm; also Paging and Wireless Data for Ameritech
a director of the Illinois Institute of Cellular Services, Inc.
Technology, the Cradle and the
Mather foundation (1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
(4) Member of Executive Committee
(5) Ex-officio Member of Executive Committee
</TABLE>
PAGE 41
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 44
<TABLE>
<S> <C> <C>
CORPORATE INFORMATION
- ------------------------------------------------------------------------------------------------------------
Corporate Offices ANNUAL MEETING
The Annual Meeting of Stockholders
Principal Executive Offices of Teltrend Inc. will be held at 9:00 a.m.
Teltrend Inc. on Thursday, December 10, 1998 at
620 Stetson Avenue the Company's principal executive offices
St. Charles, Illinois 60174 in St. Charles, Illinois.
630-377-1700
ANNUAL REPORT ON FORM 10-K
United Kingdom Single copies of the Company's Annual
Teltrend Limited Report on Securities and Exchange
Ringway House, Bell Road Commission Form 10-K (without exhibits)
Daneshill, Basingstoke will be provided without charge to
Hants, RG24 8FB, stockholders upon written request directed
United Kingdom to Douglas P. Hoffmeyer, Secretary, at
the principal executive offices.
New Zealand
Teltrend (NZ) Limited COMMON STOCK
Unit 2, 242 Ferry Road The Common Stock of Teltrend Inc. is
P.O. Box 10-290 Phillipstown traded on the Nasdaq National Market
Christchurch 8030, under the symbol "TLTN."
New Zealand
COUNSEL
China Jenner & Block
Teltrend (Beijing) Networking Co. Ltd. Chicago, Illinois
Room 1115-6, Beijing Kelun Building
12A Guang Hua Road AUDITORS
Chaoyang District Ernst & Young LLP
PR China Chicago, Illinois
TRANSFER AGENT AND REGISTRAR
LaSalle National Bank
Chicago, Illinois
</TABLE>
PAGE 42
TELTREND INC. 1998 ANNUAL REPORT
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
LIST OF TELTREND INC.'S SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
ENTITY INCORPORATION
- ----- -------------
<S> <C>
Teltrend 3net, Inc. Delaware
Teltrend Limited England and Wales
Teltrend (NZ) Limited New Zealand
Teltrend (Australia) Pty. Limited Australia
Teltrend (Beijing) Networking Co. Ltd. People's Republic of China
</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 28, 1998, included in the fiscal
year 1998 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 333-47275)
pertaining to stock option plans of Teltrend Inc. of our report dated August
28, 1998, with respect to the financial statements incorporated herein by
reference.
/s/ Ernst & Young LLP
---------------------
Chicago, Illinois
October 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-27-1997
<PERIOD-END> JUL-25-1998
<CASH> 22,994
<SECURITIES> 1,951
<RECEIVABLES> 13,186
<ALLOWANCES> 287
<INVENTORY> 10,656
<CURRENT-ASSETS> 54,341
<PP&E> 22,808
<DEPRECIATION> (12,080)
<TOTAL-ASSETS> 71,770
<CURRENT-LIABILITIES> 15,983
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 53,240
<TOTAL-LIABILITY-AND-EQUITY> 71,770
<SALES> 96,762
<TOTAL-REVENUES> 96,762
<CGS> 52,125
<TOTAL-COSTS> 52,125
<OTHER-EXPENSES> (737)
<LOSS-PROVISION> (17)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,518
<INCOME-TAX> 4,279
<INCOME-CONTINUING> 2,239
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,239
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.34
</TABLE>
