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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 May 1, 1999
[ ] 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 June 11, 1999, there were 5,821,037 shares of the Registrant's
Common Stock, $.01 par value per share (the "Common Stock"), outstanding
(exclusive of 680,000 shares of treasury stock).
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TELTREND INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
-------
Item 1 -- Consolidated Financial Statements:
<S> <C>
Consolidated Statements of Operations for the quarters and
the nine-month periods ended May 1, 1999 and April 25, 1998............................3
Consolidated Balance Sheets as of May 1, 1999 and
July 25, 1998..........................................................................4
Consolidated Statements of Cash Flows for the nine-month periods
ended May 1, 1999 and April 25, 1998...................................................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 ............................19
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings.....................................................................20
Item 2 -- Changes in Securities and Use of Proceeds ............................................20
Item 3 -- Defaults Upon Senior Securities ..................................................... 20
Item 4 -- Submission of Matters to a Vote of Security Holders...................................20
Item 5 -- Other Information.................................................................... 20
Item 6 -- Exhibits and Reports on Form 8-K......................................................20
SIGNATURE...............................................................................................21
EXHIBIT INDEX...........................................................................................22
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TELTREND INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except earnings per share data)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
-------------------------------- ----------------------------------
MAY 1, 1999 APRIL 25, 1998 MAY 1, 1999 APRIL 25, 1998
----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 26,403 $ 25,271 $ 81,037 $ 69,765
Cost of sales ................................. 14,804 13,411 44,309 38,150
-------- -------- -------- --------
Gross profit .................................. 11,599 11,860 36,728 31,615
-------- -------- -------- --------
Operating expenses:
Sales and marketing ........................ 3,090 3,461 10,435 9,242
Research and development ................... 3,694 3,680 11,587 10,419
General and administrative ................. 1,982 1,960 6,409 5,397
-------- -------- -------- --------
8,766 9,101 28,431 25,058
-------- -------- -------- --------
Purchased in-process research and
development ................................ -- -- -- 3,995
Provision for loss on disposal of product
line ....................................... 1,300 -- 1,300 --
-------- -------- -------- --------
Income from operations ........................ 1,533 2,759 6,997 2,562
-------- -------- -------- --------
Other income (expense):
Interest income ............................ 249 312 875 1,009
Other-net .................................. (73) (137) (272) (627)
-------- -------- -------- --------
176 175 603 382
-------- -------- -------- --------
Income before income taxes .................... 1,709 2,934 7,600 2,944
Provision for income taxes .................... 709 1,197 2,960 2,856
-------- -------- -------- --------
Net income .................................... $ 1,000 $ 1,737 $ 4,640 $ 88
======== ======== ======== ========
Net income per share of
common stock ............................... $ 0.17 $ 0.27 $ 0.77 $ 0.01
======== ======== ======== ========
Average common shares outstanding ............. 5,895 6,445 6,009 6,440
======== ======== ======== ========
Net income per share of
common stock--assuming dilution ........... $ 0.17 $ 0.27 $ 0.76 $ 0.01
======== ======== ======== ========
Average common shares outstanding--
assuming dilution ......................... 6,022 6,504 6,100 6,500
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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TELTREND INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
MAY 1, 1999 JULY 25, 1998
----------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 14,164 $ 22,994
Marketable securities ................................... 8,799 1,951
Trade accounts receivable, net of allowance ............. 13,447 12,899
Inventories ............................................. 11,383 10,656
Deferred income taxes ................................... 1,636 1,474
Prepaid expenses and other current assets ............... 4,545 4,367
-------- --------
53,974 54,341
Land and building ....................................... 3,537 3,422
Machinery and equipment ................................. 19,827 18,076
Leasehold improvements .................................. 1,324 1,310
Accumulated depreciation ................................ (14,062) (12,080)
-------- --------
10,626 10,728
Deferred income taxes ................................... 1,653 1,705
Intangible assets, net .................................. 4,489 4,830
Other assets, net ....................................... 217 166
-------- --------
$ 70,959 $ 71,770
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 5,962 $ 6,194
Accrued expenses ........................................ 11,367 9,099
Income taxes payable .................................... 955 690
-------- --------
18,284 15,983
Deferred income taxes ................................... 2,270 2,483
Commitments and contingencies ........................... -- --
Stockholders' Equity:
Common Stock, $0.01 par value, 15,000,000 shares
authorized and 6,499,037 and 6,462,046 issued and
5,856,037 and 6,361,046 outstanding, respectively ... 65 64
Additional paid-in capital .............................. 99,879 99,520
Treasury stock .......................................... (9,948) (1,733)
Accumulated deficit ..................................... (40,078) (44,718)
Accumulated other comprehensive income .................. 487 171
-------- --------
50,405 53,304
-------- --------
$ 70,959 $ 71,770
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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TELTREND INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
---------------------------------
MAY 1, 1999 APRIL 25, 1998
----------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income for period ............................................................... $ 4,640 $ 88
Adjustments to reconcile net income to net cash provided by operating activities
Purchased in-process research and development ..................................... -- 3,995
Provision for loss on disposal of product line .................................... 1,300 --
Depreciation and amortization ..................................................... 2,861 2,436
Loss on sale of equipment ......................................................... 112 9
Deferred income taxes ............................................................. (103) 481
Changes in certain assets and liabilities:
Accounts receivable and prepaid expenses .......................................... (744) (1,779)
Inventories ....................................................................... (756) 2,472
Accounts payable and accrued expenses ............................................. 799 1,627
Income taxes payable .............................................................. 265 928
Other assets and liabilities ...................................................... (132) (154)
-------- --------
Net cash provided by operating activities ........................................... 8,242 10,103
FINANCING ACTIVITIES:
Exercise of common stock options .................................................... 360 193
Purchase of treasury stock .......................................................... (8,215) (147)
-------- --------
Net cash provided by (used for) financing activities ................................ (7,855) 46
INVESTING ACTIVITIES:
Capital expenditures ................................................................ (2,491) (2,819)
Acquisition of business net of cash acquired ........................................ -- (14,394)
Purchase of marketable securities ................................................... (10,750) --
Proceeds from sale of marketable securities ......................................... 3,902 16,919
Proceeds from sale of equipment ..................................................... 116 109
-------- --------
Net cash used for investing activities .............................................. (9,223) (185)
Effect of exchange rate changes on cash ............................................. 6 3
Net increase (decrease) in cash and cash equivalents ................................ (8,830) 9,967
Cash and cash equivalents, beginning of period ...................................... 22,994 11,837
-------- --------
Cash and cash equivalents, end of period ............................................ $ 14,164 $ 21,804
-------- --------
</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
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 25, 1998. 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 nine months ended May 1, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending July
31, 1999. 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 1998" refers to the fiscal year ended
July 25, 1998 and "fiscal 1999" refers to the fiscal year ending July 31, 1999).
Fiscal 1998 had 52 weeks and fiscal 1999 has 53 weeks.
II. MARKETABLE SECURITIES
At May 1, 1999, the Company had marketable securities of $8.8 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 May 1,
1999 approximates fair value. Temporary unrealized gains and losses will not be
recognized in the financial statements until realized.
III. INVENTORIES (IN THOUSANDS)
<TABLE>
<CAPTION>
May 1, 1999 July 25, 1998
----------- -------------
<S> <C> <C>
Raw materials ........ $ 6,057 $ 6,052
Work-in-process ...... 1,297 1,795
Finished goods ....... 4,029 2,809
------- -------
$11,383 $10,656
======= =======
</TABLE>
IV. EARNINGS PER SHARE
In January 1998, the Company adopted FASB Statement of Financial
Accounting Standards (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 SFAS 128 requirements.
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The following table sets forth the computation of basic and diluted
income per share (dollars in thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR NINE MONTHS ENDED
----------------------- -----------------------
MAY 1, APRIL 25, MAY 1, APRIL 25,
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income ............................. $ 1,000 $ 1,737 $ 4,640 $ 88
Denominator:
Weighted average shares outstanding .... 5,895,234 6,445,226 6,008,807 6,439,862
Effect of dilutive stock options ....... 127,183 58,310 91,417 59,901
---------- ---------- ---------- ----------
Weighted average shares outstanding
-assuming dilution .................... 6,022,417 6,503,536 6,100,224 6,499,763
Net income per share ................... $ 0.17 $ 0.27 $ 0.77 $ 0.01
Net income per share
- - assuming dilution .................... $ 0.17 $ 0.27 $ 0.76 $ 0.01
</TABLE>
V. COMPREHENSIVE INCOME
As of July 26, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes new rules for reporting
and displaying comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires foreign currency translation adjustments to be
included in other comprehensive income, which, prior to adoption, were reported
separately in stockholders' equity.
Total comprehensive income and its components, net of related tax, for
the third quarter of fiscal 1999, the third quarter of fiscal 1998 and the
nine-month periods ended May 1, 1999 and April 25, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------- --------------------------------
MAY 1, 1999 APRIL 25, 1998 MAY 1, 1999 APRIL 25, 1998
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Net income .................................. $1,000 $1,737 $4,640 $ 88
Foreign currency translation adjustment ..... 60 29 316 514
------ ------ ------ ------
Comprehensive income ........................ $1,060 $1,766 $4,956 $ 602
====== ====== ====== ======
</TABLE>
Foreign currency translation adjustment is the only component of
accumulated other comprehensive income at May 1, 1999 and April 25, 1998,
respectively.
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VI. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments and
Related Information." The Company is managed in two operating segments: (i) the
United States; and (ii) Europe and the Far East. Operations in Europe and the
Far East were acquired in the first quarter of fiscal 1998 in the acquisition of
Teltrend Limited.
<TABLE>
<CAPTION>
QUARTER ENDED MAY 1, 1999 QUARTER ENDED APRIL 25, 1998
------------------------- ----------------------------
NET NET
INCOME (LOSS) INCOME INCOME (LOSS) INCOME
(Dollars in thousands) NET SALES BEFORE TAXES (LOSS) NET SALES BEFORE TAXES (LOSS)
--------- ------------ ----- --------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
United States............... $22,372 $ 3,320 $ 2,192 $21,900 $ 4,292 $ 2,746
Europe, Far East............ 4,031 (1,611) (1,192) 3,371 (1,358) (1,009)
------- ------- ------- ------- ------- ------
Total...................... $26,403 $ 1,709 $ 1,000 $25,271 $ 2,934 $1,737
======= ======= ======= ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 1, 1999 Nine Months Ended April 25, 1998
----------------------------- -------------------------------
NET NET
INCOME (LOSS) INCOME INCOME (LOSS) INCOME
(Dollars in thousands) NET SALES BEFORE TAXES (LOSS) NET SALES BEFORE TAXES (LOSS)
--------- ------------ -------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
United States............... $67,068 $ 9,217 $ 5,857 $60,481 $9,714 $ 6,117
Europe, Far East............ 13,969 (1,617) (1,217) 9,284 (6,770) (6,029)
------- ------- ------- ------- ------- --------
Total...................... $81,037 $ 7,600 $ 4,640 $69,765 $2,944 $ 88
======= ======= ======= ======= ======= ========
</TABLE>
Operations listed in Europe and the Far East are comprised of
operations in the United Kingdom, New Zealand and China. Interest income is
earned within the United States segment. Included in income (loss) before taxes
in the Europe and the Far East segment for the quarter and nine months ended May
1, 1999 is a $1.3 million provision for the loss on the disposition of the
Company's Packet Switched product line. See Note VII. Provision for Loss on
Disposition of Product Line. Included in income (loss) before income taxes in
the Europe and the Far East segment for the nine months ended April 25, 1998 is
a $4 million write-off for purchased in-process research and development costs
acquired in the Teltrend Limited acquisition.
VII. PROVISION FOR LOSS ON DISPOSITION OF PRODUCT LINE
On May 28, 1999, the Company sold substantially all of the assets of
its Packet Switched products business to Centrecom Systems Limited of England.
The Company provided a $1.3 million reserve for loss on the sale. The provision
has been recorded as a component of accrued expenses at May 1, 1999 and is
composed largely of the expected loss on the write-off of intangible assets
associated with the Packet Switched product line.
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ITEM 2 -- 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
Quarterly Report on Form 10-Q, contain "forward- looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 concerning,
among other things: (i) the Company's expectations regarding product pricing and
the impact of product pricing on gross profit margins; and (ii) 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
Quarterly 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" below.
TELTREND LIMITED
On September 18, 1997 (the "Acquisition Date") the Company acquired all
of the outstanding shares of stock of Securicor 3net Limited of Basingstoke,
England ("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 include 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
9
<PAGE> 10
addition of Teltrend Limited, the Company is a developer of Integrated Services
Digital Network ("ISDN") products for communications equipment and service
providers.
The Company's principal products are as follows: (i) High Capacity
products, 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 ("HSDL") systems, which help Telcos reduce the number of
costly digital cross connect system ports required for frame relay services;
(ii) Channelized products, which include Digital Loop Carrier and Voice
Frequency products ("DLC/VF") (including a small DLC system, plug-in units for
existing DLC systems and traditional voice frequency products) and ISDN/DDS
products (including ISDN and Digital Data System ("DDS") line repeaters, and
ISDN and DDS D4 channel units); and (iii) Circuit Switched products (network
interfacing and protocol conversion products). During the periods covered by
this report, Teltrend also offered Packet Switched products (a line of routers).
On May 28, 1999, Teltrend sold substantially all of the assets of its Packet
Switched products business to Centrecom Systems Limited of England. The
Company's Circuit Switched and Packet Switched product categories together
constitute the Company's "Europe and the Far East" operating segment.
RESULTS OF OPERATIONS
NET SALES. Net sales for the third quarter of fiscal 1999 increased
4.5%, or approximately $1.1 million, to approximately $26.4 million, from
approximately $25.3 million in the third quarter of fiscal 1998 due to increases
in the unit volume sales of both the United States and the Europe and the Far
East segments. For the first nine months of fiscal 1999, net sales totaled
approximately $81.0 million, compared to approximately $69.8 million for the
first nine months of fiscal 1998, representing an increase of approximately
$11.3 million, or 16.2%. The unit volume sales of both of the Company's segments
contributed to the increase.
Net Sales -- United States Segment. Net sales for the third quarter of
fiscal 1999 increased 2.1%, or approximately $0.5 million, to approximately
$22.4 million, from approximately $21.9 million in the third quarter of fiscal
1998. For the first nine months of fiscal 1999, net sales totaled approximately
$67.0 million compared to approximately $60.5 million for the first nine months
of fiscal 1998, representing an increase of approximately $6.5 million, or
10.9%. The increase in net sales for the third quarter of fiscal 1999 over the
prior year period was the result of an increase in the unit volume sales of High
Capacity products of $0.9 million, partially offset by a decrease in the unit
volume sales of Channelized products of $0.4 million, over the prior year
quarter. The increase in net sales for the first nine months of fiscal 1999 over
the prior year period was the result of increases in the unit volume sales of
High Capacity products and Channelized products of $4.7 million and $1.8
million, respectively, over the prior year period. The first nine months of
fiscal 1999 had 40 weeks compared with the first nine months of fiscal 1998,
which had 39 weeks. The increase in sales of the Company's High Capacity
products for each comparative period was primarily due to an increase in unit
volume sales of the Company's T1 customer premises products and, to a lesser
extent, by increases in sales of HDSL and intelligent T1 repeater products.
Within T1 customer premises products, there was strong demand for the Company's
Network Interface Units ("NIUs") (particularly new Performance Monitoring NIUs)
and associated mountings. Within intelligent T1 repeater products, a
decrease in the sales of intelligent line repeaters was more than offset by
strong demand for office repeaters (which are primarily deployed in conjunction
with fiber-optic installations). Sales of the Company's Channelized products for
the nine month period increased primarily due to an increase in sales of DDS
products and, to a lesser extent, to an increase in sales of DLC products. The
decrease in sales of Channelized Products for the third quarter of fiscal 1999
compared to the prior year period was primarily the result of lower DDS and ISDN
sales, partially offset by an increase in DLC product sales.
10
<PAGE> 11
Net Sales -- Europe and the Far East Segment. Net sales for the third
quarter of fiscal 1999 increased 19.6%, or approximately $0.7 million, to
approximately $4.0 million, from approximately $3.4 million in the third quarter
of fiscal 1998. For the first nine months of fiscal 1999, net sales totaled
approximately $14.0 million compared to approximately $9.3 million for the first
nine months of fiscal 1998, representing an increase of approximately $4.7
million, or 50.5%. The increase in net sales for the third quarter of fiscal
1999 over the prior year quarter was primarily the result of increases in the
unit volume sales of Circuit Switched products of $0.7 million over the prior
year quarter. Packet Switched products sales were essentially the same as the
third quarter of fiscal 1998. The increase in net sales for the first nine
months of fiscal 1999 over the prior year period was the result of an increase
in the unit volume sales of Circuit Switched products of $5.1 million, partially
offset by a decrease in the unit volume sales of Packet Switched products of
$0.4 million, over the prior year period. The increase in unit volume sales of
Circuit Switched products for each comparative period was due to an increase
in the demand for Circuit Switched products by current customers and to an
expansion of the customer base. For the nine-month period ended May 1, 1999,
results for both product categories were favorably affected by the inclusion in
the Company's total operating results of a full nine months of Teltrend Limited
sales (40 weeks) this year, compared to 31 weeks of Teltrend Limited sales for
the first nine months of fiscal 1998. The sales for the Packet Switched products
for the third quarter and the first nine months of fiscal 1999 over the prior
year periods were negatively affected by a slowdown of sales to the Pacific Rim
and intense international competition for router business. On May 28, 1999,
Teltrend sold substantially all of the assets of its Packet Switched business to
Centrecom Systems Limited of England.
GROSS PROFIT. Gross profit in the third quarter of fiscal 1999
decreased 2.2% or approximately $0.3 million, to approximately $11.6 million,
from approximately $11.9 million for the third quarter of fiscal 1998. For the
first nine months of fiscal 1999, gross profit totaled approximately $36.7
million compared to approximately $31.6 million for the first nine months of
fiscal 1998, representing an increase of approximately $5.1 million, or 16.2%.
Gross profit margins for the third quarter and first nine months of fiscal 1999
were 43.9% and 45.3%, respectively, compared to 46.9% and 45.3%, respectively,
for the corresponding fiscal 1998 periods. The decrease in gross profit and
gross profit margin for the third quarter of fiscal 1999 over the same period of
fiscal 1998 was primarily attributable to the combined impact of increases in
the cost of certain components and price decreases granted by the Company on
certain products. The increase in gross profit for the first nine months of
fiscal 1999 over the same period of fiscal 1998 was primarily attributable to
the inclusion of a full nine months (40 weeks) of Teltrend Limited operating
results in the Company's total operating results this year compared to 31 weeks
of Teltrend Limited operating results for the first nine months of fiscal 1998.
The Company has experienced pressure from certain customers to reduce
product prices. 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 the remainder of fiscal 1999, is likely to
result in the continued reduction in the Company's gross profit margin for the
remainder of fiscal 1999 from the level achieved in the first nine months of
fiscal 1999.
SALES AND MARKETING. Sales and marketing expenses in the third quarter
of fiscal 1999 decreased 10.7%, or approximately $0.4 million, to approximately
$3.1 million from approximately $3.5 million for the third quarter of fiscal
1998. For the first nine months of fiscal 1999, sales and marketing expenses
increased 12.9%, or approximately $1.2 million, to approximately $10.4 million
from approximately $9.2 million for the first nine months of fiscal 1998. As a
percentage of net sales, sales and marketing expenses decreased to 11.7% for the
third quarter of fiscal 1999, from 13.7% in the third quarter of fiscal 1998,
and for the first nine months of fiscal 1999, decreased to 12.9% from 13.2% for
the first nine months of fiscal 1998. For the third quarter period, the decrease
in sales and
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<PAGE> 12
marketing expenses was due to lower sales commissions and marketing salaries in
the current year period than in the comparable period of fiscal 1998. The
increase for the nine-month period was due primarily to higher sales salaries
and the inclusion of a full nine months (40 weeks) of Teltrend Limited sales and
marketing expenses this year compared with 31 weeks of comparable expenses for
the first nine months of fiscal 1998. Historically, Teltrend Limited's sales and
marketing expenses as a percentage of Teltrend Limited's net sales have been
higher than Teltrend Inc.'s sales and marketing expenses as a percentage of
Teltrend Inc.'s net sales.
RESEARCH AND DEVELOPMENT. Research and development expenses in the
third quarter of fiscal 1999 were approximately $3.7 million, approximately
equivalent to those for the third quarter of fiscal 1998. For the first nine
months of fiscal 1999, research and development expenses increased 11.2%, or
approximately $1.2 million, to approximately $11.6 million from approximately
$10.4 million for the first nine months of fiscal 1998. As a percentage of net
sales, research and development expenses decreased to 14.0% for the third
quarter of fiscal 1999, from 14.6% in the third quarter of fiscal 1998, and for
the first nine months of fiscal 1999, decreased to 14.3% from 14.9% for the
first nine months of fiscal 1998. For the third quarter period, research and
development expenses included increased professional service expenses related to
new independent testing requirements for products supplied to the Company's
principal customers, largely offset by lower prototype expenses. The increase
for the nine-month period was due primarily to the inclusion of a full nine
months (40 weeks) of Teltrend Limited research and development expenses in
fiscal 1999 compared with 31 weeks of comparable expenses for the first nine
months of fiscal 1998.
In addition, the Company wrote off approximately $4.0 million of
purchased in-process research and development costs as a result of the
acquisition of Teltrend Limited in the first quarter of fiscal 1998. As of the
end of calendar year 1998, all significant projects that were acquired in
connection with the purchase of Teltrend Limited were completed and charged to
research and development expense. While substantially all projects were
completed as expected, due to an unexpected downturn in demand associated with
the deterioration in Asian economies, anticipated economic benefits have not
been realized from the acquired projects relating to Teltrend Limited's Packet
Switched products business, including the PAC+DPM API project (the Application
Programming Interface (API) for the NiQ router software that enables third
parties (OEMs) to develop and integrate within the NiQ router their own special
or custom communications software). Management evaluated alternatives for the
rationalization of its Packet Switched product line assets and on May 28, 1999
completed the sale of that business. The fair value of the PAC+DPM API project
represents approximately 11% of the total purchased research and development
fair value. All other research and development projects related to the Packet
Switched products business represented less than 1% of the total purchased
research and development fair value. All remaining significant research and
development projects were completed on schedule and no material deviations from
original estimates have resulted.
GENERAL AND ADMINISTRATIVE. General and administrative expenses in the
third quarter of fiscal 1999 were approximately $2.0 million, approximately
equivalent to those for the third quarter of fiscal 1998. For the first nine
months of fiscal 1999, general and administrative expenses increased 18.8%, or
approximately $1.0 million, to approximately $6.4 million from approximately
$5.4 million for the first nine months of fiscal 1998. As a percentage of net
sales, general and administrative expenses decreased to 7.5% for the third
quarter of fiscal 1999, from 7.8% in the third quarter of fiscal 1998, and for
the first nine months of fiscal 1999, increased to 7.9% from 7.7% for the first
nine months of fiscal 1998. The increase for the nine-month period was due
primarily to higher licensing fees and the inclusion of a full nine months (40
weeks) of Teltrend Limited general and administrative expenses in fiscal 1999
compared with 31 weeks of comparable expenses for the first nine months of
fiscal 1998.
12
<PAGE> 13
PROVISION FOR LOSS ON DISPOSITION OF PRODUCT LINE. The Company provided
a $1.3 million reserve for loss on the sale of the Packet Switched product
business to Centrecom Systems Limited of England. The sale was completed on May
28, 1999.
OTHER INCOME. Other income, net for the third quarter and the first
nine months of fiscal 1999, was approximately $0.2 million and $0.6 million,
respectively, compared to approximately $0.2 million and $0.4 million for the
comparable periods of fiscal 1998. Any changes in other income for both
comparative periods was primarily attributable to decreases in exchange rate
losses partially offset by decreases in interest income. The interest income
component of other income (primarily derived from interest earned on cash
equivalents and marketable securities) declined primarily due to cash expended
for the purchase of treasury shares and Teltrend Limited.
INCOME TAXES. A provision for income taxes of approximately $0.7
million was recorded for the third quarter of fiscal 1999 compared to
approximately $1.2 million for the comparable period of fiscal 1998. A provision
for income taxes of approximately $3.0 million was recorded for the first nine
months of fiscal 1999 compared to approximately $2.9 million for the comparable
period of fiscal 1998. The provision for the first nine months of fiscal 1998
recognized that a write-off of purchased in-process research and development
made during that period would, for the most part, not be deductible in that
fiscal year. The decrease in the income tax provision for the third quarter of
fiscal 1999 is principally a function of the change in the level of the
Company's net income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
At May 1, 1999, the Company had no long-term indebtedness and had
working capital of approximately $35.7 million, which included cash and cash
equivalents of approximately $14.2 million and marketable securities of
approximately $8.8 million. The decrease in working capital from approximately
$38.4 million at the end of fiscal 1998 was due primarily to the purchase of
approximately $8.2 million of treasury stock during the period, partially offset
by a positive cash flow from operations.
Approximately $2.5 million of cash was used for capital expenditures
during the first nine months of fiscal 1999 compared to approximately $2.8
million for the first nine months of fiscal 1998. Most of the capital
expenditures for both periods were for the purchase of manufacturing test
equipment and engineering equipment.
As of May 1, 1999, the Company had net trade accounts receivable of
approximately $13.4 million, compared to approximately $12.9 million as of the
end of fiscal 1998. Inventories as of the end of the third quarter of fiscal
1999 totaled approximately $11.4 million compared to approximately $10.7 million
at the end of fiscal 1998. Inventory levels increased primarily as a result of
the purchase of components in anticipation of new product sales.
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 $8.0 million of the Company's Common Stock. As of October 31,
1998, the Company had purchased
13
<PAGE> 14
533,000 shares of Common Stock at a cost of approximately $7.9 million pursuant
to this authorization. The Company does not intend to make any additional
purchases pursuant to this authorization.
On October 26, 1998, the Company's Board of Directors authorized the
purchase of up to an additional $8.0 million of Common Stock. Purchases may be
made from 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 June 11,
1999, the Company had purchased 147,000 shares of Common Stock at a cost of
approximately $2.8 million pursuant to this authorization.
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 will correctly
recognize dates beyond the calendar year 1999 (and are therefore "Year 2000
compliant").
The Company's ongoing project to address internal Year 2000 issues
consists essentially of three phases: (i) 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; (ii) remediation or replacement of the
Company's non-compliant systems and equipment; and (iii) 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 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 upgraded or replaced certain of its IT
systems to address Year 2000 issues. With respect to the Company's U.S.
operations, the Company completed all necessary remediation and replacement of
its IT systems by December 31, 1998. Such upgrades were generally covered by
service contracts previously entered into by the Company in the ordinary course
of business and thus have been 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 October 1999 at a total estimated cost of $250,000 (of which
approximately $130,000 has already been incurred). Validation testing is being
conducted as systems are upgraded and replaced. Validation testing in the U.S.
will be completed by June 30, 1999.
The Company has completed the assessment and analysis of its internal
non-IT systems and
14
<PAGE> 15
equipment to determine the potential costs and scope of any Year 2000 issues.
Based on this assessment and analysis, the Company has determined that certain
of its test equipment will need to be updated. The test equipment will function
correctly through December 31, 2000. The Company is replacing the equipment as
it becomes obsolete and plans to replace all equipment by October 2000. It is
expected that most of the required upgrades will be covered by existing service
contracts entered into by the Company in the ordinary course of business. The
total cost to the Company is expected to be less than $10,000. Based on the
foregoing, 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.
In addition, the Company has made 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 have focused on the Company's key customers and suppliers, the Company has
not been made aware of any material Year 2000 issues which would adversely
affect the Company.
Based upon the Company's review of its internal systems and equipment
and the completion of the Company's U.S. survey of third parties with whom it
has material business relationships, the Company has not identified any material
risks or costs related to Year 2000 issues, except as set forth above. 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. Although the Company does not presently have any Year 2000
contingency plans, it intends to develop contingency plans for critical business
processes as determined to be necessary based on the results of its ongoing
testing for Year 2000 issues.
FACTORS THAT MAY AFFECT FUTURE RESULTS
DEPENDENCE ON T1 PRODUCTS
The Company's T1 products, which include T1 line and office repeaters
and T1 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 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."
15
<PAGE> 16
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.
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 Limited 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.
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. Many of the
16
<PAGE> 17
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.
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 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 Limited) 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."
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.
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
17
<PAGE> 18
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. 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.
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, 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.
18
<PAGE> 19
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information regarding market
risk included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 25, 1998.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1 -- 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
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Results -- Proprietary
Rights and Risks of Third-Party Claims of Infringement."
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
The terms of the Bank Facility prohibit the Company from declaring and
paying any fiscal year dividends which exceed, in the aggregate, 50% of the
Company's net income for the immediately preceding fiscal year. See "Item 2 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 -- OTHER INFORMATION
None.
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 Quarterly Report on Form 10-Q.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
20
<PAGE> 21
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: June 15, 1999
TELTREND INC.
By /s/ Theodor A. Maxeiner
-------------------------------------------
Theodor A. Maxeiner
Authorized Officer and
Chief Accounting Officer
21
<PAGE> 22
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.(12)
4.9 Third Amendment to Credit Agreement, dated as of December 1, 1998,
between the Registrant and LaSalle National Bank.(13)
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)
22
<PAGE> 23
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 Teltrend Inc. 1997 Non-Employee Director Stock Option Plan.(5)
10.8 Amended and Restated Stock Option Agreements, dated May 13, 1994,
between the Registrant and Gilbert H. Hosie.(1)
10.9 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)
10.10 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)
10.11 Third Amendment to Lease, dated September, 1995, between Morgan
Guaranty Trust Company of New York and the Registrant.(4)
10.12 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)
10.13 Teltrend Inc. 1996 Stock Option Plan.(9)
10.14 Share Purchase Agreement among Security Services PLC, Securicor
Communications Limited, 3 Net Holdings Limited, Securicor 3 Net
Limited and Teltrend Inc.(3)
10.15 Third Amendment to Lease between Morgan Guaranty Trust Company of
New York and the Registrant.(12)
10.16 Fourth Amendment to Lease, dated July 2, 1998, between Morgan
Guaranty Trust Company of New York and the Registrant.(12)
11 None.
18 None.
23 None.
24 None.
23
<PAGE> 24
27 Financial Data Schedule.
99 None.
- ---------------------------------
(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).
(12) Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the fiscal year ended July 25, 1998 (Commission File No. 0-26114).
(13) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended October 31, 1998 (Commission File No.
0-26114).
24
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<NAME> COMMERCIAL AND INDUSTRIAL COMPANIES
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0
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