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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 24, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 0-26114
TELTREND INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3476859
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
620 STETSON AVENUE
ST. CHARLES, ILLINOIS 60174
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 377-1700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of March 5, 1998, there were 6,440,921 shares of the Registrant's
Common Stock, $.01 par value per share (the "Common Stock"), outstanding.
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TELTREND INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1 -- Consolidated Financial Statements:
Consolidated Statements of Operations for the quarters and the
six month periods ended January 24, 1998 and January 25, 1997.................. 3
Consolidated Balance Sheets as of January 24, 1998 and July 26, 1997........... 4
Consolidated Statements of Cash Flows for the six month periods ended
January 24, 1998 and January 25, 1997.......................................... 5
Notes to Consolidated Financial Statements..................................... 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.................................. 9
Item 3 -- Quantitative and Qualitative Disclosure About Market Risk...................... 17
PART II. OTHER INFORMATION
- --------------------------
Item 1 -- Legal Proceedings.............................................................. 18
Item 2 -- Changes in Securities.......................................................... 18
Item 4 -- Submission of Matters to a Vote of Security Holders............................ 18
Item 6 -- Exhibits and Reports on Form 8-K............................................... 18
SIGNATURE.................................................................................. 20
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EXHIBIT INDEX.............................................................................. 21
OMITTED FINANCIAL STATEMENTS
- ----------------------------
None
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
- ------------------------------
TELTREND INC.
-------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(Unaudited)
(Dollars in thousands, except earnings per share data)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
--------------------- ------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.......................... $22,817 $18,825 $44,494 $41,416
Cost of sales...................... 12,448 10,639 24,739 22,866
--------- --------- --------- ---------
Gross profit....................... 10,369 8,186 19,755 18,550
--------- --------- --------- ---------
Operating expenses:
Sales and marketing............... 3,282 1,715 5,781 3,659
Research and development.......... 3,677 2,461 6,740 4,717
General and administrative........ 1,787 1,075 3,436 2,170
Purchased in-process research &
development....................... -- -- 3,995 --
--------- --------- --------- ---------
8,746 5,251 19,952 10,546
--------- --------- --------- ---------
Income (loss) from operations...... 1,623 2,935 (197) 8,004
--------- --------- --------- ---------
Other income (expense):
Interest income................... 308 346 697 663
Other-net......................... (429) (13) (490) (13)
--------- --------- --------- ---------
(121) 333 207 650
--------- --------- --------- ---------
Income before income taxes......... 1,502 3,268 10 8,654
Provision for income taxes......... 639 1,273 1,659 3,428
--------- --------- --------- ---------
Net income (loss).................. $863 $1,995 ($1,649) $5,226
========= ========= ========= =========
Net income (loss) per share of
common stock...................... $0.13 $0.31 ($0.26) $0.81
========= ========= ========= =========
Average common shares outstanding 6,438,071 6,428,594 6,437,201 6,426,292
========= ========= ========= =========
Net income (loss) per share of
common stock--assuming dilution... $0.13 $0.30 ($0.26) $0.78
========= ========= ========= =========
Average common shares outstanding--
assuming dilution................. 6,538,582 6,654,232 6,437,201 6,695,961
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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TELTREND INC.
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CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 24, JULY 26,
1998 1997
----------- --------
ASSETS
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<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $11,992 $11,837
Marketable securities............................... 9,028 20,930
Trade accounts receivable, net of allowance......... 11,173 7,834
Inventories......................................... 10,876 11,048
Deferred income taxes............................... 2,008 1,871
Prepaid expenses and other current assets........... 4,368 964
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49,445 54,484
Land and building..................................... 2,051 1,949
Machinery and equipment............................... 17,129 14,528
Leasehold improvements................................ 1,304 935
Accumulated depreciation.............................. (10,748) (9,372)
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9,736 8,040
Deferred income taxes................................. 44 135
Intangible assets, net................................ 5,696 --
Other assets, net..................................... 170 173
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$65,091 $62,832
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Accounts payable.................................... $4,621 $3,443
Accrued expenses.................................... 8,874 6,904
Income taxes payable................................ (276) 49
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13,219 10,396
Deferred income taxes................................. 527 --
Stockholders' Equity:
Common Stock, $0.01 par value, 15,000,000 shares
authorized and 6,440,921 and 6,436,321 issued and
outstanding, respectively........................... 64 64
Additional paid-in capital.......................... 99,401 99,328
Accumulated deficit................................. (48,605) (46,956)
Foreign currency translation adjustment............... 485 --
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51,345 52,436
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$65,091 $62,832
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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TELTREND INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
--------------------------
JANUARY 24, JANUARY 25,
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) for period.......................... $(1,649) $5,226
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Purchased in-process research and development........ 3,995 --
Depreciation and amortization........................ 1,608 1,013
Loss (gain) on sale of equipment..................... 14 (13)
Deferred income taxes................................ 481 287
Tax benefit from exercise of common stock options.... 5 92
Changes in certain assets and liabilities:
Accounts receivable and prepaid expenses............ (2,444) 2,910
Inventories......................................... 2,305 (1,332)
Income taxes payable................................ (330) 1,090
Accounts payable and accrued expenses............... (267) (3,451)
Other assets and liabilities........................ 363 (201)
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Net cash provided by operating activities............. 4,081 5,621
FINANCING ACTIVITIES:
Proceeds from exercise of common stock options........ 73 17
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Net cash provided by financing activities............. 73 17
INVESTING ACTIVITIES:
Capital expenditures.................................. (1,523) (1,332)
Acquisition of business net of cash acquired.......... (14,373) --
Purchase of marketable securities..................... -- (14,968)
Proceeds from sale of marketable securities........... 11,902 --
Proceeds from sale of equipment....................... 88 21
Other investing activities............................ (98) (80)
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Net cash used for investing activities................ (4,004) (16,359)
Effect of exchange rate changes on cash............... 5 --
Net increase (decrease) in cash....................... 155 (10,721)
Cash and cash equivalents, beginning of period........ 11,837 22,889
------- -------
Cash and cash equivalents, end of period.............. $11,992 $12,168
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
I. BASIS OF PRESENTATION
General
The unaudited consolidated financial statements included herein have been
prepared by Teltrend Inc. ("Teltrend") in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X, and should be read in conjunction with Teltrend's financial
statements (and notes thereto) included in the Teltrend Annual Report on Form
10-K for the year ended July 26, 1997. Accordingly, the accompanying
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of Teltrend's management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter and six months ended January 24,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending July 25, 1998. The fiscal year of Teltrend and each of its
consolidated subsidiaries (collectively, the "Company") ends on the last
Saturday of July each year. All references to "Fiscal" years in this report
refer to fiscal years ending in the calendar year indicated (e.g., "Fiscal
1997" refers to the fiscal year ended July 26, 1997 and "Fiscal 1998" refers to
the fiscal year ending July 25, 1998).
Acquisition of 3net
On September 18, 1997 (the "Acquisition Date"), Teltrend purchased the
outstanding shares of Securicor 3net Limited of Basingstoke, England and its
U.S. affiliate Securicor 3net Inc. (together "3net") for total acquisition
costs of approximately $14.5 million. 3net is a telecommunication equipment
and software company based in the United Kingdom with operations in New
Zealand, China and the United States having annualized revenues in excess of
$17 million. The transaction was accounted for as a purchase and therefore the
results of 3net since the Acquisition Date are included with the operations of
Teltrend. All references in this report to the "Company" refer to (i)
Teltrend, individually, for all periods or portions thereof ending on or before
the Acquisition Date, and (ii) Teltrend and 3net, collectively, from and after
the Acquisition Date.
II. MARKETABLE SECURITIES
At January 24, 1998 the Company had marketable securities of $9.0 million.
These securities consisted of debt instruments with maturities greater than
three months but less than one year and are classified as held-to-maturity, as
the Company has the positive intent and the ability to hold these securities
until maturity. These securities are carried at amortized cost, which at
January 24, 1998 approximates fair value. Temporary unrealized gains and
losses will not be recognized in the financial statements until realized.
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III. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 24, 1998 JULY 26, 1997
---------------- -------------
<S> <C> <C>
Raw materials....... $ 5,405 $ 6,238
Work-in-process..... 1,298 1,651
Finished goods...... 4,173 3,159
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$10,876 $11,048
======= =======
</TABLE>
IV. EARNINGS PER SHARE
In January 1998, the Company adopted FASB Statement No. 128, "Earnings Per
Share", requiring dual presentation of basic and diluted income (loss) per
share ("EPS") on the face of the income statement. Basic EPS is computed by
dividing net income (loss) 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
(loss) per share (in thousands of dollars, except per share data).
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
------------------------ ------------------------
JANUARY 24, JANUARY 25, JANUARY 24, JANUARY 25,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)..................... $863 $1,995 ($1,649) $5,226
========= ========= ========= =========
Denominator:
Weighted average shares outstanding... 6,438,071 6,428,594 6,437,201 6,426,292
Effect of dilutive stock options...... 100,511 225,638 -- 269,669
--------- --------- --------- ---------
Weighted average shares outstanding -
assuming dilution................... 6,538,582 6,654,232 6,437,201 6,695,961
========= ========= ========= =========
Net income (loss) per share........... $0.13 $0.31 ($0.26) $0.81
========= ========= ========= =========
Net income (loss) per share - assuming
dilution............................ $0.13 $0.30 ($0.26) $0.78
========= ========= ========= =========
</TABLE>
As the Company experienced a loss for the six months ended January 24,
1998 the computation of diluted EPS would exclude the effect of stock options,
as they are antidilutive.
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V. PRO-FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the Company
for the six months ended January 24, 1998 and January 25, 1997 gives effect to
the 3net acquisition as if it occurred on July 27, 1997 and July 28, 1996,
respectively. The following unaudited pro forma financial information for the
quarter ended January 25, 1997 gives effect to the 3net acquisition as if it
occurred on July 28,1996. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
the dates indicated, or which may result in the future. The pro forma results
(in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED QUARTER ENDED
------------------------ -------------
JANUARY 24, JANUARY 25, JANUARY 25,
1998 1997 1997
----------- ----------- -------------
<S> <C> <C> <C>
Net sales.................................................... $45,706 $50,173 $22,634
Net income (loss)............................................ ($8,184) ($2,060) $200.05
Net income (loss) per share of common stock.................. ($1.27) ($0.32) $0.03
Net income (loss) per share of common stock-assuming dilution ($1.27) ($0.32) $0.03
</TABLE>
These unaudited pro forma results include certain adjustments, principally
the write-off of approximately $4 million of purchased in-process research and
development costs.
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<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2 - FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
- ------------------------------------------------------------------------
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
- -------------------------------------------------
The following "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things, the Company's prospects, developments and business
strategies for its operations, including the development and sales of certain
new and established products. These forward-looking statements are identified
by their use of such terms and phrases as "believes" and "expects" and are
subject to risks and uncertainties and represent the Company's present
expectations or beliefs concerning future events. The Company cautions that
the forward-looking statements are qualified by important factors that could
cause actual results to differ materially from those in the forward-looking
statements, including the factors described below under "Factors That May
Affect Future Results." Results actually achieved thus may differ materially
from expected results included in these statements.
THE 3NET ACQUISITION
- --------------------
This Quarterly Report on Form 10-Q for the quarter ended January 24, 1998
represents the second quarterly report of Teltrend Inc. ("Teltrend") following
its acquisition of all of the outstanding shares of stock of Securicor 3net
Limited of Basingstoke, England and its U.S. affiliate Securicor 3net Inc.
(together, "3net"). The acquisition of 3net was consummated on September 18,
1997 (the "Acquisition Date") and 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 3net since the Acquisition Date. As used herein, the
term "Company" refers to (i) Teltrend, individually, for all periods (and
portions thereof) ending on or before the Acquisition Date, and (ii) Teltrend
and 3net, collectively, 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 3net, with
operations in the United Kingdom, New Zealand, China and the United States, has
expanded the Company's markets and product lines. With the addition of 3net,
the Company is now a leading developer of ISDN products for communications
equipment and service providers and also supplies LAN Internetworking, ISDN
Remote Access and secure Virtual Private Networking solutions for business
customers worldwide.
The Company's principal products are divided into three product line
categories as follows: (i) Digital Loop Carrier and Voice Frequency products
("DLC/VF"), which include small DLC systems and plug-in units for existing DLC
systems, CYBERBLOCK(R) (which is designed to solve various modem and voice
problems on long metallic loops), and traditional voice frequency products;
(ii) High Capacity Communications products ("T1/HDSL"), which include T1 line
and office repeaters and T1 network interface units, CELLPAK(TM) 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; and (iii) ISDN/DDS
products, which include Integrated Services Digital Network ("ISDN") and
Digital Data System ("DDS") line repeaters, ISDN and DDS D4 channel units, an
ISDN mini-bank, protocol conversion products and routing products, which
provide connections between LANs and WANs, and protocol conversion products.
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<PAGE> 10
RESULTS OF OPERATIONS
- ---------------------
NET SALES. Net sales for the second quarter of Fiscal 1998 increased
21.2%, or approximately $4.0 million, to approximately $22.8 million, from
approximately $18.8 million in the second quarter of Fiscal 1997. For the
first six months of Fiscal 1998, net sales totaled approximately $44.5 million
compared to approximately $41.4 million for the first six months of Fiscal
1997, representing an increase of approximately $3.1 million or 7.4%. The
increase in net sales for the second quarter of Fiscal 1998 over the second
quarter in 1997 was primarily due to an increase of approximately $4.4 million
and $0.7 million in unit volume sales of the Company's ISDN/DDS and T1/HDSL
products, respectively, which was partially offset by a decrease of $1.3
million in unit volume sales of the Company's DLC/VF products. The increase in
net sales for the first six months of Fiscal 1998 over the same period in 1997
was due primarily to an increase in the unit volume sales of the Company's
ISDN/DDS products of approximately $5.8 million, which was partially offset by
a decrease in the unit volume sales of DLC/VF products of $2.7 million. Unit
volume sales of the Company's T1/HDSL products for the first six months of
Fiscal 1998 were approximately equal to sales of those products for the same
period of Fiscal 1997.
The decrease in the unit volume sales of DLC/VF products for each
comparative period was primarily the result of generally declining sales of VF
products and the decline of sales in certain older technology DLC products.
The decline in sales of VF products was a continuation of a downward trend in
VF sales resulting from an ongoing decline in demand for analog services.
The increase in unit volume sales of the Company's T1/HDSL products for
the second quarter of Fiscal 1998 was the result of an increase in the unit
volume sales of T1 repeater, CELLPAK and broadband products. For the six month
period ending January 24, 1998 these three product families also registered
gains in unit volume sales, but these gains were offset by a decline in unit
volume sales of the Company's T1 CPE products.
The increase in unit volume sales of the Company's ISDN/DDS products for
each of the six months and the three months ended January 24, 1998 compared to
the same periods in the prior year was due primarily to the acquisition of 3net
(which had net sales of approximately $1.2 million from the Acquisition Date
through the first quarter of Fiscal 1988 and approximately $4.7 million in the
second quarter of Fiscal 1998, its first full quarter with Teltrend), and to a
lesser extent due to an increase in unit volume sales of Teltrend's other ISDN
products, which was partially offset by a decrease in unit volume sales of
certain DDS products.
GROSS PROFIT. Gross profit in the second quarter of Fiscal 1998 increased
26.7% or approximately $2.2 million, to approximately $10.4 million from
approximately $8.2 million for the second quarter of Fiscal 1997. For the
first six months of Fiscal 1998, gross profit totaled approximately $19.8
million compared to approximately $18.6 million for the first six months of
Fiscal 1997, representing an increase of approximately $1.2 million, or 6.5%.
Gross profit margins for the second quarter and the first six months of Fiscal
1998 were 45.4% and 44.4%, respectively, compared to 43.5% and 44.8%
respectively, for the corresponding Fiscal 1997 periods. The increase in gross
profit for the second quarter and first six months of Fiscal 1998 over the same
periods in Fiscal 1997 was primarily attributable to the inclusion of 3net's
operating results in both periods in Fiscal 1998. The increase in the second
quarter's gross profit margin was primarily attributable to spreading the
Company's fixed manufacturing and overhead costs over a larger revenue base.
The decrease in gross profit margin for the first six months of Fiscal 1998 was
primarily attributable to the comparatively smaller revenue base, when
excluding the 3net acquisition, over which the Company could spread its fixed
manufacturing costs, which offset an increase in gross profit margin due to the
inclusion of 3net's results for four and one-half months.
SALES AND MARKETING. Sales and marketing expenses in the second quarter
of Fiscal 1998 increased 91.4%, or approximately $1.6 million, to approximately
$3.3 million from approximately $1.7 million for the second quarter of Fiscal
1997. For the first six months of Fiscal 1998, sales and marketing expenses
totaled approximately $5.8 million, compared to approximately $3.7 million for
the first six months of Fiscal 1997, representing an increase of approximately
$2.1 million or 58.0%. As a percentage of net sales, sales and marketing
expenses increased to 14.4%
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<PAGE> 11
for the second quarter of Fiscal 1998 from 9.1% for the second quarter of
Fiscal 1997, and for the first six months of Fiscal 1998 increased to 13.0%
from 8.8% for the first six months of Fiscal 1997. The increase for each
comparative period was primarily due to the inclusion of 3net's sales and
marketing expense with the Company's results of operations since the
Acquisition Date. Historically, 3net's sales and marketing expenses as a
percentage of 3net's net sales have been higher than Teltrend's sales and
marketing expenses as a percentage of Teltrend's net sales.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
second quarter of Fiscal 1998 increased 49.4%, or approximately $1.2 million,
to approximately $3.7 million from approximately $2.5 million for the second
quarter of Fiscal 1997. For the first six months of Fiscal 1998, research and
development expenses totaled approximately $6.7 million, compared to
approximately $4.7 million for the first six months of Fiscal 1997,
representing an increase of approximately $2.0 million, or 42.9%. In addition
to this general increase in research and development expenses for the six month
period, the Company wrote-off approximately $4.0 million of in-process research
and development costs as a result of the acquisition of 3net in the first
quarter of Fiscal 1998. As a percentage of net sales, research and development
expenses increased to 16.1% for the second quarter of Fiscal 1998 from 13.1%
for the second quarter of Fiscal 1997, and for the first six months of Fiscal
1998 increased to 15.1% from 11.4% for the first six months of Fiscal 1997.
The increase for each comparative period was due primarily to the inclusion of
3net's research and development expenses since the Acquisition Date, increases
at Teltrend in salaries for newly hired personnel and the outsourcing of
certain testing services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
second quarter of Fiscal 1998 increased 66.2%, or approximately $0.7 million,
to approximately $1.8 million from approximately $1.1 million for the second
quarter of Fiscal 1997. For the first six months of Fiscal 1998, general and
administrative expenses totaled approximately $3.4 million compared to
approximately $2.2 million for the first six months of Fiscal 1997,
representing an increase of approximately $1.3 million, or 58.3%. As a
percentage of total net sales, general and administrative expenses increased to
7.8% for the second quarter of Fiscal 1998 from 5.7% for the second quarter of
Fiscal 1997, and for the first six months of Fiscal 1998 increased to 7.7% from
5.2% for the first six months of Fiscal 1997. The dollar increase for each
comparative period was primarily attributable to general and administrative
expenses incurred by 3net, and, to a lesser extent, to an increase in
professional services at Teltrend.
OTHER INCOME. Other income (expense) for the second quarter and first six
months of Fiscal 1998 were approximately ($0.1) million and $0.2 million,
respectively, compared to $0.3 million and $0.7 million for the comparable
prior-year periods. Other income (primarily derived from interest earned on
cash equivalents and marketable securities) declined in both periods due to the
use of cash equivalents and marketable securities for the purchase of 3net. In
addition, the Company suffered currency translation losses of approximately
$0.4 million during the second quarter of Fiscal 1998.
INCOME TAXES. A provision for income taxes of approximately $0.6 million
was recorded for the second quarter of Fiscal 1998 compared to approximately
$1.3 million for the comparable prior-year period. A provision for income
taxes of $1.7 million was recorded for the first six months of Fiscal 1998
compared to $3.4 million for the comparable prior-year period. Such provision
for the first six months of Fiscal 1998 recognize that the write-off of
purchased in-process research and development is not deductible for tax
purposes in the current year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At January 24, 1998, the Company had no long-term indebtedness and had
working capital of approximately $36.2 million, which included cash and cash
equivalents of approximately $12.0 million and marketable securities of
approximately $9.0 million. The decrease in working capital from approximately
$44.1 million at the end of Fiscal 1997 was due primarily to the acquisition of
3net. The total acquisition cost for 3net was approximately $14.5 million and
was funded with the Company's cash and cash equivalents on hand and the
proceeds from the sale of certain of the Company's investments in debt
securities.
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<PAGE> 12
Cash used for capital expenditures was approximately $1.5 million for the
first six months of Fiscal 1998 compared to approximately $1.3 million for the
first six months of Fiscal 1997. Most of the expenditures for both periods
were for the purchase of manufacturing test equipment and engineering
equipment.
As of January 24, 1998, the Company had net trade accounts receivable of
approximately $11.2 million, compared to approximately $7.8 million at the end
of Fiscal 1997. This increase was due primarily to the inclusion of 3net's
accounts receivable in the Company's total.
For the first six months of Fiscal 1998, inventories decreased by
approximately $0.1 million, from approximately $11.0 million at the end of
Fiscal 1997 to approximately $10.9 million at the end of the second quarter of
Fiscal 1998. The decrease in inventory was the net result of a successful
effort to reduce inventory, partially offset by the addition of approximately
$2.1 million of inventory acquired in conjunction with the 3net acquisition.
The Company maintains a credit facility (the "Bank Facility"), which
provides, subject to certain restrictions and based on the Company's accounts
receivable and inventory levels, up to $15.0 million on an unsecured basis for
working capital financing. Currently, there are no amounts outstanding under
the Bank Facility. Based on the Company's accounts receivable and inventory
levels as of January 24, 1998, the Company estimates that approximately $12.9
million is available to it under the Bank Facility as of the date hereof. Any
borrowings under the Bank Facility would mature on June 30, 1998 and bear
interest at a floating rate based on (i) LIBOR or the prime rate offered by the
lender from time to time, and (ii) the Company's debt-to-equity ratio,
determined quarterly by the Company. The terms of the Bank Facility prohibit
the Company from declaring and paying dividends in any fiscal year which
exceed, in the aggregate, 50% of the Company's net income for the immediately
preceding fiscal year.
On March 3, 1998, the Company announced a plan to purchase up to a maximum
of $8.0 million worth of the Company's Common Stock. Purchases will be made
from time to time in the open market, subject to the requirements of applicable
laws, and will be financed with existing cash and cash equivalents, marketable
securities and cash from operations.
The Company expects that existing cash and cash equivalents, marketable
securities, cash from operations, plus available borrowings under the Bank
Facility will be adequate to fund the Company's working capital needs for the
foreseeable future.
YEAR 2000 ISSUES.
- -----------------
The Company has reviewed its existing computer software programs and
operating systems to determine if it has software applications that contain
source codes that are unable to appropriately interpret the upcoming calendar
year 2000. As a consequence of such review, the Company believes that to the
extent that it will be required to make any modifications or adjustments to
address problems with software applications due to the upcoming calendar year
2000, the Company does not believe that such modifications or adjustments will
affect the Company in any material respect.
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.
-12-
<PAGE> 13
Also, in June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments for an Enterprise and Related Information" (SFAS No. 131). This
Statement will change the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued
to shareholders. It also requires entity-wide disclosures about the products
and services an entity provides, the material countries in which it holds
assets and reports revenues, and its major customers. The Statement is also
effective for fiscal years beginning after December 15, 1997. The Company has
not yet determined the effect, if any, that SFAS No. 131 will have on its
consolidated financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
DEPENDENCE ON T1/HDSL PRODUCT LINE. The Company's T1 products, which include
T1 line and office repeaters and T1 network units, have accounted for a very
significant part of the Company's total net sales in each of the last three
fiscal years. 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 its HDSL products or other existing or future product lines,
could have a material adverse effect on the Company.
The Company is facing increasing competition with respect to its
repeatered T1 products from suppliers of systems based on HDSL technology as an
alternate method of delivering repeatered T1 services in the Local Loop.
Because HDSL is easier to provide than traditional T1 service, the Company
expects that HDSL products will adversely affect the demand for its repeatered
T1 products as the cost of HDSL systems decline. If increasing competition
causes the Company to reduce selling prices for its repeatered T1 products,
there can be no assurance that the Company will be able to increase unit sales
volumes of such products, reduce its costs of sales of such products or
maintain or increase revenues or gross margins attributable to such products to
offset in full or in part the reduced revenue effects of such selling price
reductions.
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 this copper
wireline with fiber optic, coaxial cable, wireless and other technologies (each
of which uses a significantly different method of delivery). Furthermore, the
Company faces increasing competition with respect to its repeatered T1 products
from suppliers of HDSL systems as an alternate method of delivering
conventional T1 services. The Company believes that the continued installation
of new technologies in the Local Loop will adversely affect demand for certain
of its existing products and that its future success will largely depend upon
its ability, on a cost-effective and timely basis, to continue to enhance its
existing products and develop and achieve commercial acceptance of new
products. There can be no assurance that developments by others will not
render the Company's products or technologies obsolete or unmarketable or that
the Company will be able to successfully anticipate or adapt to changing
technology, industry standards or customer requirements on a timely basis. Any
failure by the Company to anticipate and respond to technological developments
or changes in industry standards or customer requirements could have a material
adverse effect on the Company.
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 as a result of the 3net acquisition has become less concentrated
in the RBOCs, 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 other customers will continue or that the Company's customer
base will become materially less concentrated. See "-- Factors That May Affect
-13-
<PAGE> 14
Future Results -- Potential Competition from RBOCs and Lucent." The loss of one
or more of the RBOCs as a customer, the reduction of orders for the Company's
products, or a failure or delay in the deployment of the Company's products by
the RBOCs could materially and adversely affect the Company. In addition,
recent contract negotiations with certain RBOCs have resulted in lower prices
for selected products. Also, the RBOCs and most of the Company's other
customers are significantly larger than, and are able to exert a high degree
of influence over, the Company.
HIGHLY COMPETITIVE INDUSTRY. The markets for the Company's products are highly
competitive, especially with respect to price, product features, quality and
conformance to industry standards. The Company's competitors in the United
States and elsewhere are numerous and the Company expects its competition to
increase in the future both from existing and new competitors, including
possibly the RBOCs and Lucent. See "--Factors that May Affect Future Results
- -- Potential Competition From RBOCs and Lucent." Increased competition could
reduce gross profit margins and may require increased spending by the Company
on product development and sales and marketing, or may otherwise adversely
affect the Company. The Company has generally been required to reduce the
selling prices of its products over time to meet increasing competition and
will likely be required to do so in the future. The Company's ability to
maintain or increase net sales will depend largely upon its ability to increase
unit sales volumes of its products to counter declines in the average sales
prices of its products. Declining average sales prices would also adversely
affect gross margins on the Company's products if not offset by reductions in
the Company's cost of sales. There can be no assurance that the Company will
be able to increase unit sales volumes of its products, reduce its costs of
sales of such products or maintain or increase revenues or gross margins
attributable to such products. Most of the Company's competitors and potential
competitors have significantly greater financial, technological, manufacturing,
marketing and personnel resources than the Company. In addition, certain of
the Company's competitors have long-standing relationships with certain Telcos
which may adversely affect the Company's ability to successfully compete for
business at these Telcos.
DEPENDENCE ON CERTAIN SUPPLIERS. Certain key components which are required to
manufacture the Company's products are available from only one source. Such
components include the Company's application specific integrated circuits,
which are built to Company specifications, and its proprietary design
integrated circuits, which are the design and property of the manufacturer from
which they are purchased. The Company generally obtains its components on a
purchase order basis. Accordingly, there can be no assurance that the Company
will be able to continue to obtain sufficient quantities of key components as
required or that such components, if obtained, will be available to the Company
on commercially favorable terms. Further, certain components require an order
lead time of up to six months. Failure by the Company to order sufficient
quantities of components in advance could prevent the Company from meeting
customer demand for its products.
The Company has been able to adjust its order lead times and/or promised
delivery dates to avoid material delivery delays of its products. However,
there can be no assurance that the Company will be able to continue to adjust
its order lead times and/or promised delivery dates to avoid material delivery
delays of its products in the future. Under certain of the Company's supply
contracts, a delay in the delivery of products would permit the customer to
cancel the purchase order or, in limited circumstances, assess a late delivery
charge. In addition, late deliveries could adversely affect the Company's
ability to obtain additional sales from a particular customer. The Company's
inability to obtain sufficient quantities of key components or products, or to
develop alternative sources of such components or alternative contract
manufacturing relationships on commercially favorable terms if and as required
in the future, could result in delays or reductions in product shipments or
could otherwise have a material adverse effect on the Company's customer
relationships and, consequently, on its business, results of operations and
financial condition. See "-- Factors That May Affect Future Results --
Reliance on Certain Customers."
-14-
<PAGE> 15
INCREASED INVENTORY LEVELS AND NEED TO MAKE ADVANCE PURCHASE COMMITMENTS. To
respond to anticipated customer demand, the Company maintains high inventory
levels. In addition, at the request of several of its customers, the Company
has entered into arrangements to maintain certain of its finished goods
inventory at the various locations of such customers. Although the Company
believes these arrangements facilitate sales to its customers, they result in
higher levels of inventory than are necessary in the absence of such
arrangements. Maintaining high inventory levels substantially increases the
risk that the Company's profitability and results of operations may from time
to time be materially and adversely affected by inventory obsolescence. To
procure adequate supplies of certain components, the Company must regularly
make advance commitments to purchase relatively large quantities of such
components. The inability of the Company to incorporate such components in its
products could have a material adverse effect on the Company.
POTENTIAL COMPETITION FROM RBOCS AND LUCENT. The Telecommunications Act of
1996 has generally eliminated the restrictions which had previously prohibited
the RBOCs from manufacturing telecommunications equipment (subject to first
satisfying certain conditions designed to facilitate local exchange competition
and receipt of prior approval by the Federal Communications Commission). These
restrictions had been imposed under the Modification of Final Judgment, which
governed the structure of the 1984 divestiture by AT&T of its local operating
telephone company subsidiaries. The passage of the Telecommunications Act may
have an adverse effect on the Company because the RBOCs, which are presently
the Company's principal customers, may become manufacturers of some or all of
the products currently manufactured and sold by the Company and, consequently,
may no longer purchase telecommunications equipment produced by the Company at
the levels historically experienced. In addition, the operations of Lucent
Technologies Inc. ("Lucent"), as a supplier to the Telcos, may have an adverse
effect on the Company's business because Lucent sells certain products that
directly compete with the Company's products.
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.
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. See Part 2, Item 1 -- Legal Proceedings. While the Company does not
believe that its present products and technology infringe the intellectual
property rights of others, there can be no assurance that third parties will
not assert infringement claims against the Company or that any such assertions
will not result in costly litigation. There can be no assurance that the
Company would prevail against any such claims or that licenses of any
third-party intellectual property would be available to the Company on
commercially reasonable terms. In addition, a substantial number of the
Company's products are intended to plug into telephone network equipment
designed and manufactured by third parties, some of which are competitors of
the Company. The design or modification of such equipment so that it is
incompatible with the Company's products could adversely affect the Company's
ability to maintain its current level of, or achieve additional, net sales.
The inability of the Company to develop products for such equipment which do
not infringe the intellectual property rights associated with such equipment,
or to obtain the right to use such intellectual property on commercially
reasonable terms, could have a material adverse effect on the Company. In
addition, any infringement claims or litigation against the Company could have
a material adverse effect on the Company.
-15-
<PAGE> 16
The Company was a party to agreements with certain of the RBOCs pursuant
to which it licensed certain telecommunications technology, including digital
channel banks and signal decoding systems, in connection with the manufacture
of its products. The terms of virtually all of these licensing agreements
expired at varying times during Fiscal 1995, subject to a right of continuation
at an increased royalty rate with respect to specified Company products. The
Company has been evaluating its continuing obligations under each of the
remaining agreements and is discussing the possibility of new agreements with
the RBOCs. However, there can be no assurance that the Company's evaluation of
past agreements and/or subsequent negotiations will not result in the Company's
payment of royalties at increased rates with respect to all or a substantial
number of the Company's products. Any substantial increase in royalty rates
could have a material adverse effect on the Company.
Prior to the Company's initial public offering (the "IPO"), the Company's
operating subsidiary also licensed certain technology from AT&T. This
technology has since been transferred to Lucent. The term of this license
continued through July 1995, subject to a right of continuation under certain
circumstances at substantially higher royalty rates. In connection with the
IPO and the Company's recapitalization in connection therewith, the Company
sought AT&T's consent to assignment of this license from the operating
subsidiary to the Company. At that time, AT&T indicated it would give such
consent after resolving certain issues with the Company with respect to the
license. After AT&T's spin-off of Lucent and the simultaneous transfer of
certain technology and patent rights to Lucent, the Company continued its
discussions with Lucent instead of AT&T. In the context of these discussions,
Lucent indicated that the Company's initial ISDN product may make use of
certain of Lucent's patented technology and has expressed a willingness to
include this technology in the context of a replacement license agreement. The
Company has reached a preliminary agreement with Lucent regarding the terms of
a replacement license agreement. If the Company and Lucent reach a final
agreement and if the terms of the final agreement coincide with those of the
preliminary agreement, such final agreement will not have a material adverse
effect on the Company.
POTENTIAL PRODUCT RECALLS AND WARRANTY EXPENSES. The Company's products are
required to meet rigorous standards imposed by its customers, including written
technical requirements and various mechanical, electrical performance,
environmental operating and storage conditions, and to interface in a complex
and changing environment with telecommunication network equipment produced by
numerous other suppliers. In the event there are material deficiencies or
defects in the design or manufacture of the Company's products or if such
products become incompatible with existing third-party network equipment, the
affected products could be subject to a recall. Although the Company has not
experienced any complete recall of a product from the field in the past, the
Company has from time to time agreed to upgrade certain of its products in
response to product design issues raised by certain of its customers. There
can be no assurance that the Company will not experience a material product
recall in the future. Any product recall and associated negative publicity
could have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company believes factors such as
announcements of new products or technological innovations by the Company or
third parties, as well as variations in the Company's results of operations,
the gain or loss of significant customers, legislative or regulatory changes,
general trends in the industry, market conditions, analysts' estimates, the
stock market and other events or factors may cause the market price of the
Company's Common Stock to fluctuate significantly. In addition, the stock
market has experienced extreme price and volume fluctuations which have
particularly affected the market price for many high technology companies and
which have little apparent correlation with the operating performance of these
companies. Such broad market fluctuations may adversely affect the market
price of Company's Common Stock.
RISKS RELATED TO 3NET. The Company completed its acquisition of 3net on
September 18, 1997. The Company expects the acquisition of 3net to increase
its sales and the markets for its existing and future product offerings.
However, there can be no assurance that 3net will provide the sales and market
opportunities that the Company expects. Furthermore, even if the acquisition
of 3net does provide such expected sales and market opportunities, there can be
no assurance that the Company will be able to successfully integrate 3net into
its business or take advantage of the synergies which the Company presently
believes will result from the integration of 3net 's business. Any failure by
the Company to quickly and successfully integrate the 3net business such that
it is able to derive the benefit from contemplated synergies could have a
-16-
<PAGE> 17
material adverse effect on the Company's results of operations.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
The disclosures required pursuant to Item 305 of Regulation S-K are not yet
effective for the Company. Such disclosures will be included in the Company's
filings commencing with its Annual Report on Form 10-K for the Fiscal Year
ending July 25, 1998.
-17-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On February 25, 1997, Wilcom, Inc. ("Wilcom") instituted a patent
infringement action against the Company in the United States District Court for
the Eastern District of New York (Wilcom, Inc. v. Teltrend Inc., Civil Action
No. 97-0918) seeking injunctive relief, damages, interest, costs and attorney's
fees. The Company successfully transferred the action to the United States
District Court for the Northern District of Illinois. Wilcom alleges that
certain of the Company's products infringe U.S. Patent Nos. 4,961,218 and
5,504,811, which relate to enhanced line powered amplifiers. The only Company
product specifically identified as allegedly infringing the patents is the
CYBERBLOCK(TM) model LCR4002. The case was recently dismissed with leave to
reinstate if the parties do not reach a settlement. The Company believes that
it will reach a settlement with Wilcom in the near future and that such a
settlement will not have a material adverse effect on the financial condition
or results of operations of the Company.
ITEM 2 - CHANGES IN SECURITIES
- ------------------------------
The terms of the Bank Facility prohibit the Company from declaring and
paying in any fiscal year dividends which exceed, in the aggregate, 50% of the
Company's net income for the immediately preceding fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
The Company's 1997 Annual Meeting of Stockholders was held on December 11,
1997 for the purpose of (i) electing directors, (ii) ratifying the action of
the Company's Board of Directors in appointing Ernst & Young LLP as the
Company's independent auditors for Fiscal 1998, (iii) approving the Teltrend
Inc. 1997 Non-Employee Director Stock Option Plan (the "Plan"), and (iv)
transacting such other business properly brought before the meeting. The
meeting proceeded and the holders of the Company's Common Stock elected the
following persons to the Company's Board of Directors: (a) Howard L. Kirby,
Jr., by a vote of 5,646,766 votes cast for and 30,163 votes withheld; (b) Susan
B. Major, by a vote of 5,646,766 votes cast for and 30,163 votes withheld; (c)
Frank T. Cary, by a vote of 5,643,860 votes cast for and 33,063 votes withheld;
(d) Harry Crutcher, III, by a vote of 5,644,466 votes cast for and 32,463 votes
withheld; (e) William R. Delk, by a vote of 5,646,466 votes cast for and 30,463
votes withheld; (f) Donald R. Hollis, by a vote of 5,646,766 votes cast for and
30,163 votes withheld; and (g) Bernard F. Sergesketter, by a vote of 5,646,666
votes cast for and 30,263 votes withheld. The holders of the Company's Common
Stock also ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for Fiscal 1998 by a vote of 5,662,291 votes cast for
ratification, 8,350 votes cast against ratification and 6,288 abstentions. The
holders of the Company's Common Stock also approved the Plan by a vote of
4,882,207 votes cast for, 748,274 votes cast against and 46,448 votes cast
abstain.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
The exhibits filed herewith are listed in the exhibit index which follows
the signature page of this Report on Form 10-Q.
-18-
<PAGE> 19
(b) Reports on Form 8-K.
On December 2, 1997, the Company filed with the Securities and Exchange
Commission a Current Report on Form 8-K/A (Amendment No. 1) dated
September 18, 1997 (the "Form 8-K/A"). The Form 8-K/A amended the
Company's Form 8-K dated September 18, 1997 to include, pursuant to Item
7 of Form 8-K, the following financial statements for 3net: (i) an
audited consolidated balance sheet as of September 30, 1996; (ii) audited
consolidated statements of operations, changes in shareholders' equity
(deficit) and cash flows for the year ended September 30, 1996; (iii) an
unaudited combined balance sheet as of June 30, 1997; and (iv) an
unaudited combined statement of operations and an unaudited combined
statement of cash flows for the nine-month periods ended June 30, 1996
and June 30, 1997. The Form 8-K/A also included an unaudited pro forma
condensed consolidated balance sheet and unaudited pro forma condensed
consolidated statement of operations for the Company and 3net as of and
for the Company's fiscal year ended July 25, 1997.
-19-
<PAGE> 20
SIGNATURE
Pursuant to the requirements 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.
Date: March 10, 1998 TELTREND INC.
By: /s/ Theodor A. Maxeiner
---------------------------------------
Theodor A. Maxeiner
Chief Accounting Officer
-20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2 None.
3.1 Restated Certificate of Incorporation of Registrant, as amended. (1)
3.2 Amended and Restated Bylaws of the Registrant.(3)
3.3 Certificate of Designation of Series A Junior Participating Preferred
Stock, filed January 23, 1997. (1)
4.1 Specimen form of Common Stock certificate.(3)
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.(2)
4.5 Rights Agreement between the Registrant and LaSalle National Bank, as
Rights Agent, dated January 16, 1997.(7)
4.6 Form of Rights Certificate (incorporated by reference to Exhibit B to
the Rights Agreement included in Exhibit 4.5 herewith).
10.1 Indemnification Agreement, dated June 8, 1995, between the Registrant
and Howard L. Kirby, Jr.(2)
10.2 Schedule of each of the directors and executive officers of the
Registrant with whom the Registrant has entered into an Indemnification
Agreement.(8)
10.3 Teltrend Inc. 1995 Stock Option Plan.(3)
10.4 Form of Nonqualified Stock Option Agreement under the Teltrend Inc.
1995 Stock Option Plan.(2)
10.5 Schedule of Nonqualified Stock Option Agreements which have been
entered into by directors or executive officers of the Registrant.(8)
10.6 TI Investors Inc. Stock Option Plan.(3)
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.(2)
</TABLE>
-21-
<PAGE> 22
10.8 Teltrend Inc. 1997 Non-Employee Director Stock Option Plan.(6)
10.9 Share Purchase Agreement among Security Services PLC, Securicor
Communications Limited, 3 Net Holdings Limited, Securicor 3 Net Limited
and Teltrend Inc. (4)
10.10 Amended and Restated Stock Option Agreements, dated May 13, 1994,
between the Registrant and Gilbert H. Hosie.(2)
10.11 Registration Rights and Lock-Up Agreement between the Registrant, The
Prudential Insurance Company of America, Pruco Life Insurance Company, AEA
Investors Inc. and Stockholders of the Registrant prior to consummation of
the Registrant's initial public offering.(2)
10.12 Lease, dated April 22, 1983, between CMD Corporation and the Registrant,
together with First Amendment to Lease, dated August 9, 1985, between
Morgan Guaranty Trust Company of New York and the Registrant and
Memorandum of Lease, First Amendment to Lease and Ratification of First
Amendment to Lease, dated August 29, 1988.(3)
10.13 Second Amendment to Lease, dated September, 1995, between Morgan Guaranty
Trust Company of New York and the Registrant.(5)
10.14 Real Estate Sale Agreement, dated August 20, 1996, between the Registrant
and Itasca Bank & Trust Co., as Trustee under Trust Agreement dated June
29, 1992 and known as Trust No. 11038 and The Kautz Road Business Park
Joint Venture.(8)
10.15 Teltrend 1996 Stock Option Plan.(10)
11 None.
15 None.
18 None.
19 None.
22 None.
23 None.
24 None.
27 Financial Data Schedule.
99 None.
_________________________________
(1) Incorporated by reference to the Registrant's Report on Form 10-K for
the Fiscal year ended July 26, 1997 (Commission File No. 0-26114).
-22-
<PAGE> 23
(2) 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).
(3) 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.
(4) Incorporated by reference to the Registrant's Current Report on ForM 8-K
dated September 18, 1997 (Commission File No. 0-26114).
(5) Incorporated by reference to Registrant's Report on Form 10-K for the fiscal
year ended July 29, 1995 (Commission File No. 0-26114).
(6) 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).
(7) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated January 16, 1997 (Commission File No. 0-26114).
(8) 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).
(9) 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).
(10) 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).
-23-
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-25-1998
<PERIOD-START> JUL-27-1997
<PERIOD-END> JAN-24-1998
<CASH> 11,992
<SECURITIES> 9,028
<RECEIVABLES> 11,502
<ALLOWANCES> 329
<INVENTORY> 10,876
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0
0
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<EPS-PRIMARY> (.26)
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</TABLE>
