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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(AMENDMENT NO. 1)
(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 30, 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
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As of March 10, 1999, there were 5,856,037 shares of the Registrant's
Common Stock, $.01 par value per share (the "Common Stock"), outstanding
(exclusive of 643,000 shares of treasury stock).
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Teltrend Inc. (the "Company" or the "Registrant") hereby amends Item 2 of its
Quarterly Report on Form 10-Q for the quarter ended January 30, 1999 as follows:
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.
THE TELTREND LIMITED ACQUISITION
On September 18, 1997 (the "Acquisition Date") the Company acquired all of the
outstanding shares of stock of Securicor 3net Limited of Basingstoke, England
(with operations in the United Kingdom, New Zealand and China) and its U.S.
affiliate, Securicor 3net Inc. (together, "Teltrend Limited"). The acquisition
of Teltrend Limited was accounted for as a purchase. Accordingly, the Company's
results as described in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" include the results of Teltrend Limited
since the Acquisition Date. As used herein, the term "Company" or "Teltrend"
refers to Teltrend Inc. and its wholly-owned subsidiaries, collectively, which
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 addition of
Teltrend Limited, the Company became a developer of Integrated Services Digital
Network ("ISDN") products for communications equipment and service providers and
also supplies local area network ("LAN") internetworking, ISDN remote access and
secure virtual private networking solutions for business customers worldwide.
The Company's principal products for the periods presented 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
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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); (iii) Circuit Switched products
(network interfacing and protocol conversion products); and (iv) Packet Switched
products (a line of routers). The Company's Circuit Switched and Packet Switched
product categories together constitute the Company's "Europe and Far East"
operating segment.
RESULTS OF OPERATIONS
Net Sales. Net sales for the second quarter of fiscal 1999 increased 7.1%, or
approximately $1.6 million, to approximately $24.4 million, from approximately
$22.8 million in the second quarter of fiscal 1998. For the first six months of
fiscal 1999, net sales totaled approximately $54.6 million compared to
approximately $44.5 million for the first six months of fiscal 1998,
representing an increase of approximately $10.1 million, or 22.8%. The increase
in net sales for the second quarter of fiscal 1999 over the prior year period
was the result of increases in the unit volume sales of all product categories
except Packet Switched products. Unit volume sales of High Capacity products,
Channelized products and Circuit Switched products in the second quarter of
fiscal 1999 increased by $1.7 million, $0.5 million and $0.4 million,
respectively, over the prior year quarter while unit volume sales of Packet
Switched products decreased by $1.0 million. The increase in net sales for the
first six months of fiscal 1999 over the prior year period was the result of
increases in the unit volume sales of all product categories except Packet
Switched products. Unit volume sales of Circuit Switched products, High Capacity
products and Channelized products in the first six months of fiscal 1999
increased by $4.5 million, $3.9 million and $2.2 million, respectively, over the
prior year period while unit volume sales of Packet Switched products decreased
by $0.4 million. The first six months of fiscal 1999 had 27 weeks compared with
the first six months of fiscal 1998 which had 26 weeks.
The increase in sales of the Company's High Capacity products for each
comparative period was caused primarily by an increase in unit volume sales of
the Company's T1 customer premises products and to a lesser extent by increases
in sales of CellPak(TM), HDSL and intelligent T1 repeater products. Strong
demand was exhibited for the T1 customer premises Network Interface Units
("NIUs") and associated mountings. For T1 repeaters, 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 each comparative period
increased primarily due to an increase in sales of DDS products and, to a lesser
extent, to an increase in sales of ISDN products. These increases were partially
offset by a decline in DLC product sales. The DDS sales gains were primarily the
result of shipments of a DDS NIU module introduced in the second half of fiscal
year 1998.
The increase in unit volume sales of the Circuit Switched products for each
comparative period was primarily due to an increase in the demand for Circuit
Switched products by current customers and to an expansion of the customer base.
The decrease in sales for the Packet Switched products for each comparative
period was the result of a slowdown of sales to the Pacific Rim in the second
quarter of fiscal 1999 coupled with strong shipments during the second quarter
of fiscal 1998. For the six-month period ended January 30, 1999, results for
both product categories were favorably affected by the inclusion in the
Company's total operating results of a full six months of Teltrend Limited sales
(27 weeks) this year compared to 18 weeks of Teltrend Limited sales for the
first six months of fiscal 1998.
Gross Profit. Gross profit in the second quarter of fiscal 1999 increased 8.0%
or approximately $0.8 million, to approximately $11.2 million, from
approximately $10.4 million for the second quarter of fiscal 1998. For the first
six months of fiscal 1999, gross profit totaled approximately $25.1 million
compared to approximately $19.8 million for the first six months of fiscal 1998,
representing an increase of approximately $5.4 million, or 27.2%. Gross profit
margins for the second quarter and first six months of fiscal 1999 were 5.8% and
46.0%, respectively, compared to 45.4% and 44.4%, respectively, for the
corresponding fiscal 1998 periods. The increase in gross profit and gross profit
margin for the second quarter of fiscal 1999 over the same period of fiscal 1998
was primarily attributable to the Company's ability to spread fixed
manufacturing and overhead costs over a larger revenue base. The increase in
gross profit and gross profit margin for the first six months of fiscal 1999
over the same period of fiscal 1998 was primarily attributable to the inclusion
of a full six months (27 weeks) of Teltrend Limited operating
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results in the Company's total operating results this year compared to 18 weeks
of Teltrend Limited operating results for the first six months of fiscal 1998.
Teltrend Limited's Circuit Switched products, on average, carry a higher gross
profit margin than the Company's other products. To a lesser extent, the
increase in gross profit and gross profit margin for the first six months of
fiscal 1999 over the same period of fiscal 1998 was also due to the company's
ability to spread fixed manufacturing and overhead costs over a larger revenue
base.
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 a material reduction in the Company's gross profit margin for the
remainder of fiscal 1999 from the level achieved in the first six months.
Sales and Marketing. Sales and marketing expenses in the second quarter of
fiscal 1999 increased 6.7%, or approximately $0.2 million, to approximately $3.5
million from approximately $3.3 million for the second quarter of fiscal 1998.
For the first six months of fiscal 1999, sales and marketing expenses increased
27.1%, or approximately $1.6 million, to approximately $7.3 million from
approximately $5.8 million for the first six months of fiscal 1998. As a
percentage of net sales, sales and marketing expenses decreased to 14.3% for the
second quarter of fiscal 1999, from 14.4% in the second quarter of fiscal 1998,
and for the first six months of fiscal 1999 increased to 13.4% from 13.0% for
the first six months of fiscal 1998. For the second quarter period, the increase
in sales and marketing expenses was due primarily to higher commissions in the
current year period than in the comparable period of fiscal 1998. The increase
for the six-month period was due primarily to the inclusion of a full six months
(27 weeks) of Teltrend Limited sales and marketing expenses this year compared
with 18 weeks of comparable expenses for the first six 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 second
quarter of fiscal 1999 increased 1.9%, or approximately $0.1 million, to
approximately $3.7. For the first six months of fiscal 1999, research and
development expenses increased 17.1%, or approximately $1.2 million, to
approximately $7.9 million from approximately $6.7 million for the first six
months of fiscal 1998. As a percentage of net sales, research and development
expenses decreased to 15.3% for the second quarter of fiscal 1999, from 16.1% in
the second quarter of fiscal 1998, and for the first six months of fiscal 1999
decreased to 14.5% from 15.2% for the first six months of fiscal 1998. For the
second quarter period, the increase in research and development expenses was due
primarily to higher salary expenses and increased professional service expenses
related to new independent testing requirements for products supplied to the
Company's principal customers. The increase for the six-month period was due
primarily to the aforementioned expenses and to the inclusion of a full six
months (27 weeks) of Teltrend Limited research and development expenses for the
first half of fiscal 1999 compared with 18 weeks of comparable expenses for the
first half 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 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 second
quarter of fiscal 1999 increased 22.4%, or approximately $0.4 million, to
approximately $2.2 million from approximately $1.8 million for the second
quarter of fiscal 1998. For the first six months of fiscal 1999, general and
administrative expenses increased 28.8%, or approximately $1.0 million, to
approximately $4.4 million from approximately $3.4 million for the first
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six months of fiscal 1998. As a percentage of net sales, general and
administrative expenses increased to 9.0% for the second quarter of fiscal 1999,
from 7.8% in the second quarter of fiscal 1998, and for the first six months of
fiscal 1999 increased to 8.1% from 7.7% for the first six months of fiscal 1998.
For the second quarter period, the increase in general and administrative
expenses was due primarily to higher licensing fees than in the comparable
period of fiscal 1998. The increase for the six-month period was due primarily
to the above-mentioned fees and to the inclusion of a full six months (27 weeks)
of Teltrend Limited general and administrative expenses this year compared with
18 weeks of comparable expenses for the first half of fiscal 1998.
Other Income. Other income, net for the second quarter and first six months of
fiscal 1999 was approximately $30,000 and $0.4 million, respectively, compared
to approximately $(0.1) million and $0.2 million for the comparable periods of
fiscal 1998. The increase in other income for both comparative periods was
primarily attributable to decreases in exchange rate losses partially offset by
losses on the sale of assets and a decrease 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 second quarter of fiscal 1999 compared to approximately $0.6
million for the comparable period of fiscal 1998. A provision for income taxes
of approximately $2.3 million was recorded for the first six months of fiscal
1999 compared to approximately $1.7 million for the comparable periods of fiscal
1998. The provision for the first six 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
increase in the income tax provision is principally a function of the change in
the level of the Company's net income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
At January 30, 1999, the Company had no long-term indebtedness and had working
capital of approximately $36.4 million, which included cash and cash equivalents
of approximately $19.3 million and marketable securities of approximately $3.9
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 $6.2
million of treasury stock.
Approximately $1.8 million of cash was used for capital expenditures during the
first six months of fiscal 1999 compared to approximately $1.5 million for the
first six 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 January 30, 1999, the Company had net trade accounts receivable of
approximately $10.4 million, compared to approximately $12.9 million as of the
end of fiscal 1998. Inventories as of the end of the second quarter of fiscal
1999 totaled approximately $11.9 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 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 March 12, 1999, the
Company had purchased 110,000 shares of Common Stock at a cost of approximately
$2.1 million pursuant to this authorization.
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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 upgrades 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. As of the end of the second
quarter of fiscal 1999, the Company believed that a portion of Teltrend
Limited's IT systems would need to be upgraded or replaced to address Year 2000
issues (including Teltrend Limited's financial accounting system and general
office software). It was anticipated that those replacements and upgrades would
be completed by June 30,1999 at a total estimated cost of $250,000 (of which
approximately $100,000 had already been incurred). Validation testing was being
conducted as systems were upgraded and replaced.
As of the end of the second quarter of fiscal 1999, the Company had completed
the assessment and analysis of its internal non-IT systems and equipment to
determine the potential costs and scope of any Year 2000 issues. Based on this
assessment and analysis, the Company had determined that certain of its test
equipment would need to be updated. It was expected that most of the required
upgrades would be covered by existing service contracts entered into by the
Company in the ordinary course of business. The total cost to the Company was
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
status of the Company'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.
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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."
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
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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
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 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 Infringment. 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
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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.
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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: July 28, 1999
TELTREND INC.
By: /s/ Theodor A. Maxeiner
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Theodor A. Maxeiner
Authorized Officer and
Chief Accounting Officer
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