10-K
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 0-9692
TELLABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3831568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4951 Indiana Avenue, Lisle, Illinois 60532
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (708)969-8800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common shares, with $.01 par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
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 [ ]
On March 3, 1995, 43,834,867 common shares of Tellabs, Inc., were
outstanding, and the aggregate market value (based upon the closing sale
price of the National Market System) of such shares held by nonaffiliates
was approximately $1,998,021,000.
Documents incorporated by reference: Portions of the registrant's Annual
Report to Stockholders for the fiscal year ended December 30, 1994, are
incorporated by reference into Parts I and II, and portions of the
registrant's Proxy Statement dated March 21, 1995 are incorporated by
reference into Part III.
PART I
ITEM I. BUSINESS
Tellabs, Inc., an Illinois corporation, began operations in 1975 and became
publicly owned in 1980. During 1992, the Illinois corporation merged with
and into Tellabs Operations, Inc., a wholly owned subsidiary. As a result
of the merger, Tellabs Operations, Inc., became a subsidiary of Tellabs,
Inc., a Delaware corporation (with its subsidiaries, unless the context
indicates otherwise, "Tellabs" or the "Company"). The Company designs,
manufactures, markets and services voice and data transport and network
access systems that are used worldwide by public telephone companies,
long-distance carriers, alternate service providers, cellular and other
wireless service providers, cable operators, government agencies, and
business end-users.
Products provided by the Company include digital cross-connect systems,
managed digital networks and network access products. Digital
cross-connect systems include the Company's TITAN (a registered trademark
of Tellabs Operations, Inc.) 5500 series of digital cross-connect systems.
Managed digital networks include the Martis (a trademark of Martis Oy) DXX
multiplexer, statistical multiplexers, packet switches, T1 multiplexers,
and network management systems. Network access products include digital
signal processing (DSP) products such as echo cancellers and T-coders;
special service products (SSP) such as voice frequency products; and local
access products such as high bit rate digital subscriber line (HDSL)
products. New products for 1995 include the CABLESPAN (a trademark of
Tellabs Operations, Inc.) product which allows customers to use existing
hybrid fiber coax for telephone and other services and the ALTA (a
registered trademark of Tellabs Operations, Inc.) 2600 asynchronous
transfer mode (ATM) switch which is designed to provide superior traffic
management capabilities to service providers.
These products are sold in both the domestic and international marketplaces
(under the Tellabs name and trademarks and under private labels) through
the Company's field sales force and selected distributors to a major
customer base. This base includes Regional Bell Operating Companies
(RBOCs), independent telephone companies (ITCs), interexchange carriers
(IXCs), local telephone administrations (PTTs), local exchange carriers
(LECs), original equipment manufacturers (OEMs), cellular and other
wireless service companies, cable operators, alternate service providers,
system integrators, government agencies, and business end-users ranging
from small businesses to Fortune 500 companies.
The availability of digital technology along with the use of
microprocessors and other custom and standard very large scale integrated
(VLSI) circuitry continues to make it economically possible for the Company
to expand its product lines to meet the changing customer demands and
industry trends inherent in today's dynamic telecommunications
environment. This expansion primarily involves the development of broad
lines of service-provider-oriented networking systems that meet the ever
increasing demands for efficient, multipurpose data, video, and voice
communications services.
This same availability of technology in capital equipment makes it possible
for the Company to efficiently and competitively continue to produce its
own products in its world class manufacturing facilities throughout the
world.
During the first quarter of 1995, the Company achieved ISO 9001
registration for its Illinois-based operations, including the corporate
headquarters. ISO 9000 is an international set of standards developed to
provide quality assurance for companies seeking to improve their quality
standards and customer service. The Company's Texas operations achieved
ISO 9002 registration in 1993. Tellabs Ltd. in Ireland and Tellabs Canada
have been ISO registered for several years, to ISO 9001 and ISO 9003,
respectively.
Digital Cross-Connect Systems
The TITAN product family consists of software intensive digital
cross-connect systems and network management platforms. These flagship
products address the needs of RBOCs, PTTs, IXCs, alternate local exchange,
cellular, cable, government and Fortune 500 companies. These complex
transmission systems are designed to exceed domestic and international
telephone industry standards.
Digital cross-connect systems operate under software control and are
typically used to build and control the broadband transmission
infrastructure of the telecommunication service provider.
Telecommunication managers utilize the digital cross-connect systems to
reduce cycle time while minimizing capital and operating expense. Key
applications include centralized and remote testing of transmission
facilities, grooming of voice, data, and video signals, automated
provisioning of new services, and restoration of failed facilities. All of
the TITAN systems include a feature for monitoring facility performance
which enhances "process of elimination troubleshooting" in a complex
network. The user can determine the early warnings of facility degradation
rather than reacting to a network outage. The digital cross-connect system
also converts international to domestic transmission and signaling
standards. These products augment the ability of users to provide current,
emerging, and future service to business and residential customers.
Advanced survivable business services also utilize the TITAN products for
interconnecting fiber transmission.
The TITAN systems vary in switching rate and facility interface speed.
Tellabs offers the SONET (synchronous optical network) TITAN 5300 series of
cross-connect systems that can interface facilities at DS3, DS1, E1, DS0,
and subrate levels, and can switch them at DS0 levels and below. The
systems in the series have maximum respective capacities ranging from 8 to
4,000 ports.
Tellabs offers the Company's flagship SONET TITAN 5500 system which
interfaces facilities at the DS1, DS3, STS-1 and/or fiber optic OC-N
levels, and cross-connects them at levels of DS1/VT1.5 and above. The high
speed optical transmission facilities are designed to meet the growing
SONET standard. A single TITAN 5500 system can carry the equivalent of
700,000 simultaneous phone conversations.
It is expected that the transmission market will continue to demonstrate
significant growth through the end of the 90s. New technologies in this
market include fiber optics and the integration of network management and
ATM switching.
Digital systems products accounted for approximately 46 percent, 42
percent, and 29 percent of 1994, 1993, and 1992 sales, respectively.
Managed Digital Networks
Since Tellabs' entry into the data communications marketplace in 1983,
the Company has developed a comprehensive family of networking products to
address the requirements and flexibility demanded by the users of
communications services. Products within this group include the Martis
DXX system, the 300 Series line of high performance packet switches and
statistical multiplexers, the CROSSNET (a registered trademark of Tellabs
Operations, Inc.) family of network-compatible T1/E1 time division
multiplexers and the PORTSPAN (a trademark of Tellabs Operations, Inc.)
4000 system, a new network element which adds access to new switched data
services.
The acquisition of Martis Oy in October 1993 provided the Company with a
software-based digital networking multiplexer product, the Martis DXX
system. Designed specifically for public network applications, the Martis
DXX system is an integrated network of access devices, intelligent
multiplexers, digital cross-connects and network management that enables
the rapid deployment and expansion of access and transport networks of any
size. It employs high-quality, modular components with standards-based
interfaces, bit rates and protocols. The system strictly adheres to the
relevant ETSI and ITU-T (CCITT) standards. The DXX is currently being
upgraded to support new technologies such as the synchronous digital
hierarchy (SDH) for synchronous transmission networking and packet
switching technologies such as frame relay and ATM, as well as the T-1
digital format used in North America. The networks supplied by Martis Oy
are used by the telecommunications service provider to interconnect their
business customers for both voice and data communications and also to
provide the equipment infrastructure to interconnect cellular wireless
networks.
Key to the success within the 300 Series line, the 330 and 340 Dataplexer
(a registered trademark of Tellabs Operations, Inc.) high performance
statistical multiplexers provide cost-effective data transmission by
concentrating multiple synchronous or asynchronous channels over owned or
leased lines. The 330 and 340 Dataplexer multiplexers support up to 32
channels with composite link speeds of up to 76.8Kbps (kilobits per
second). In distributed networking applications, the 331 Xplexer (a
registered trademark of Tellabs Operations, Inc.) product, an X.25-based
packet switching multiplexer, can be used effectively as a stand-alone port
concentrator or as a building block for large switching applications in
both local and wide-area networks. The CROSSNET 441, 442, and 440 network
multiplexing nodes allow cost effective multiplexing and concentrating for
up to 16, 32, or 128 channels (data, voice or image) for
protocol-independent transmission over T1 or E1 facilities, respectively.
In distributed, multi-node environments, the CROSSNET 445 network switching
node, a 16 link T1 switch, fulfills the backbone networking requirements
for wide-area networks. The CROSSNET products maintain strict adherence to
public network standards to ensure compatibility with current and future
service offerings.
These products compete in the Wide Area Network (WAN) access market. End-
users buy these products through value added re-sellers, service providers
and direct from Tellabs. The products are used to combine voice, data and
video applications for transmission over T1, FT1, E1, ISDN, and NX56
facilities. They provide for more efficient utilization of the bandwidth,
access to dedicated services and the ability to control switched digital
services. Key applications include video conferencing and dynamic
bandwidth allocation (LAN to LAN).
Although the CROSSNET product line is considered to be mature and the
market focus is to shift to new technologies such as frame relay and ATM,
there continues to be significant opportunities for the traditional
CROSSNET multiplexers in both the domestic and international markets. The
addition of inverse multiplexing capabilities in this area should well suit
the Company's products for ISDN application.
A key element in providing flexible and strategic solutions to customers'
networking needs is the ability to provide a single point of control for
the management of hybrid networks. The NMCS 2500 (a trademark of Tellabs
Operations, Inc.) and Vantage Point (a trademark of Tellabs Operations,
Inc.) network management systems allow provisioning and management of
networks composed of Tellabs' products. These network management systems
respond to customers' needs to control, manage, and monitor complex
networks.
Managed digital networks accounted for approximately 27 percent, 21
percent, and 26 percent, of 1994, 1993, and 1992 sales, respectively.
Network Access Systems
Network access products are primarily modular in design and can be used
either individually or in complex systems and assemblies. The three areas
making up network access products are DSP products, SSP products, and local
access products. The products are designed to meet telephone industry
standards, and, in many applications, they directly interface with customer
premises equipment. These products enhance the ability of LECs, cellular
companies, and end-users to provide current, emerging, and future services
to their business customers through innovative products and systems that
provide more cost-effective provisioning of existing basic services. These
products are deployed worldwide by LECs, PTTs, IXCs, wireless, private
networks, alternate service providers and cable providers. In order to
continue to grow this product area, state-of-the-art technology will be
deployed and value-added content will be provided.
DSP products primarily address the needs of cellular companies, LECs, and
IXCs, both domestically and internationally. Such products include the
Company's echo cancellation (or control) and voice compression products.
All are based on a common technology--digital signal processing. The echo
control products remove irritating feedback (from one's own voice) that
occurs on virtually all long distance connections and many wireless
connections. The voice compression product (T-Coder) doubles the capacity
of digital transmission facilities used for voice and data services. This
product has great economic appeal to cellular companies, IXCs, and
end-users who want to double T1 or E1 capacity without incurring the cost
of a new facility.
SSP products provide transmission and signaling conversion between the
central office and the customers' terminal equipment. These products
include: line amplifiers that compensate for loss and distortion in voice
and analog data transmission applications; terminating devices that provide
conversion between 4 wire transmission facilities and 2 wire local lines;
signaling equipment and systems that convert station on-hook/off-hook,
dialing and ringing information to signaling formats compatible with
transmission over metallic voice channels; and loop treatment equipment
typically used to extend the distance from a central office at which a
telephone functions satisfactorily. The Company also designs, manufactures
and sells a line of voice conferencing and alerting systems and a series of
products with remote alignment and diagnostic maintenance capabilities.
The RA Series (a registered trademark of Tellabs Operations, Inc.) of
intelligent network access products allow for gain and equalization levels
to be set remotely or automatically, eliminating the need for costly
on-site assistance of installation and maintenance personnel.
The ongoing strategic focus of all of these products is enhanced business
and information services. This is accomplished by providing local loop
intelligence in transmission products and systems. The Company works
closely with certain customers in this area (such as the RBOCs) as a means
of reducing risk and providing necessary product direction and strategy.
The local access product area includes both the CABLESPAN and EXPRESSPAN (a
registered trademark of Tellabs Operations, Inc.) products. The CABLESPAN
2300 system is a product developed during 1994 by Advanced Access Labs (a
joint venture between the Company and Advanced Fibre Communications) to
address the emerging cable and alternate service provider markets. With
the CABLESPAN system, cable companies can offer a variety of two-way
services which include telephone, facsimile, telecommuting, video
conferencing and access to information services to residential and business
customers using their existing hybrid fiber coaxial networks. The
EXPRESSPAN high bit rate digital subscriber line (HDSL) transmission
products allow LECs and large customer premise networks to install T1
facilities quickly without the expense of engineering, installation, and
maintenance of T1 line repeaters.
Network access products accounted for approximately 26 percent, 35 percent,
and 42 percent of 1994, 1993, and 1992 sales, respectively.
MARKETING
Sales are generated through the Company's direct sales organization and
selected distributors. The Domestic sales group consists of approximately
51 direct sales personnel, and additional sales agents and sales support
personnel located throughout the United States. The International sales
group consists of approximately 34 direct sales personnel, and additional
sales agents and sales support personnel in Canada and Latin America (the
"Americas"), Europe, the Middle East, and Africa ("EMEA"), and in Asia and
Australia ("Asia/Pacific").
The Domestic sales organization conducts its activities from the corporate
headquarters, nine regional offices, and various district offices. The
International sales organization conducts its activities from the corporate
headquarters and ten regional offices. The regional offices are generally
staffed by a regional sales director, system sales engineers, and
additional personnel as required.
Direct orders through the Company's field sales organization accounted for
approximately 88 percent of 1994 sales.
The Company has national account managers to coordinate sales activities
for its major customer groups, and product managers to coordinate the
marketing activities for each major product area.
During 1994, the Domestic sales organization fully implemented the
transition to a vertical markets approach for the sales of its products.
As a result, large accounts such as RBOCs, IXCs, wireless, alternate
service providers, and emerging market customers are serviced by teams to
better represent both product and service offerings. The International
sales organization is structured to support activities on a
country-by-country basis. The Company has arrangements with a number of
distributors of telecommunications equipment, both in the United States and
internationally, some of whom maintain inventories of the Company's
products to facilitate prompt delivery. These distributors provide
information on the Company's products through their catalogs and through
trade show demonstrations. The Company's field sales force also assists
these distributors with regular calls to them and their customers. In
addition, the Company utilizes other channels of distribution, including
approximately 12 value added resellers for its CROSSNET line of networking
multiplexers. The Company also initiated a non-exclusive OEM agreement in
1994 whereby Ericsson Radio Access markets the Martis DXX systems as part
of a turn-key cellular system. Distributors, as a group, accounted for
approximately 12 percent of 1994 sales. No single distributor accounted
for more than 10 percent of 1994 sales.
CUSTOMER SERVICE
Tellabs maintains a worldwide customer service organization focused on
providing its customers with high quality technical and administrative
product support. Tellabs' customer service organization supports its
customers with a wide range of services that include application
engineering and support, installation, post-sale support, service
contracts, on-site training, product repair (warranty support), on-site
maintenance, and 24-hour customer support.
The customer service organization consists of highly-trained teams focused
on product and customer service requirements. These technical resources,
in response to customer requirements, are deployed from one of five
worldwide logistic centers (Lisle, Illinois; Shannon, Ireland; Mississauga,
Canada; Espoo, Finland; and Hong Kong).
Tellabs provides product warranties for periods ranging from one to five
years for the repair or replacement of customer premises-located modules,
central office-located equipment, and customer premises-located systems
found to be faulty due to defective material or workmanship.
CUSTOMERS
Sales to customer groups as a percentage of total sales were approximately
as follows:
1994 1993 1992
Regional Bell Operating Companies 26% 23% 19%
Independent Telephone Companies 7% 10% 9%
Interexchange Carriers 16% 12% 7%
Corporate America, OEMs, Governmental
Agencies, Cellular Companies, Utility
and Railroad Companies, Alternate Service
Providers, and System Integrators 17% 25% 33%
Foreign Sales
North America (primarily Canada) 4% 9% 13%
International 30% 21% 19%
---- ---- ----
TOTAL 100% 100% 100%
==== ==== ====
At December 30, 1994, and December 31, 1993, backlogs were approximately
$80 million and $54 million, respectively. All of the December 30, 1994,
backlog is expected to be shipped in 1995. The Company does not believe
that backlog at any date is a meaningful indicator of the Company's future
performance.
COMPETITION
The Company's products are sold in global markets and compete on the
following key factors: responsiveness to customer needs,
customer-oriented planning, price, product features, performance,
reliability, breadth of product line, technical documentation, and prompt
delivery.
The digital cross-connect systems compete principally with AT&T, Alcatel
and DSC Communications Corporation (DSC).
The managed digital network products compete in two areas. The principal
competition for the multiplexers are Newbridge Networks Corporation,
General DataComm Industries Inc., Timeplex, Inc. and Ascend. The major
competitors of the Martis DXX type networks are Newbridge Networks
Corporation, Nokia Telecommunications, and DSC .
The network access products currently compete in four product areas: SSP,
echo cancellers, transcoders and HDSL. The principal competitors in the SSP
market are Teltrend and Westell. The leading competitors in the echo
canceller market are Coherent Communications, DSC and Ditech. The major
competitors in the transcoder market are DSC, Aydin, Tadiran and OKI. In
the HDSL arena, PairGain and Adtran are the principal competitors. The
expected competitors for the CABLESPAN system which will begin in 1995 are
AT&T, Motorola and ADC Telecommunications, Inc.
RESEARCH AND DEVELOPMENT
The telecommunications industry continues to be characterized by rapid
technological change. Historically, the technology of this industry had
been mainly analog, characterized by signals continuous in time with
information contained in the frequency and amplitude of the signals. The
industry has rapidly shifted toward digital technology in which information
is coded in discrete pulses. The Company's current product development
effort is directed almost entirely toward designing new products utilizing
digital technology and fiber optic technology. The Company has also
focused much of its research and development efforts on large system
software development and associated processes.
Many analog-based products used in network access system applications are
well-suited to the use of digital implementation techniques, including
utilization of microprocessors and other VLSI devices. The Company's
ability to combine analog and digital technologies has been an important
ingredient in its product development. The Company currently manufactures a
number of products using microprocessor control circuitry which make
extensive use of microprocessors and complex system software. The Company
is also actively developing products which utilize high speed fiber optic
technologies to provide higher performance transmission characteristics in
today's telecommunication networks. The Company is continually updating
its research and development capabilities through the addition of new
computer-aided design (CAD) and computer-aided software engineering (CASE)
tools, which assist in electronic, mechanical, and software design. Use of
such tools is imperative as the Company seeks to respond to industry and
customer demands for intelligent digital systems and networking products
with capabilities for automated remote maintenance and provisioning.
The Company is involved in several product-oriented alliances. In April
1994, the Company entered into a joint venture agreement with Advanced
Fibre Communications (AFC), a Petaluma, California-based provider of
next-generation digital loop carrier equipment. Under the agreement, the
Company and AFC formed a 50/50 joint venture partnership (Advanced Access
Labs) for the development and manufacture of a telephony-over-cable
transport system which is being marketed by the Company under the tradename
CABLESPAN. The CABLESPAN system, which is currently in field trial, allows
customers to use existing hybrid fiber-coax for telephone and other new
services such as telecommuting, video conferencing and access to
information services. The Company made an equity investment in AFC in late
1993 and made a further equity investment in the fourth quarter of 1994.
In August 1994, the Company entered into an OEM agreement and a technology
licensing agreement with LightStream Corporation (LightStream), based in
Billerica, Massachusetts. Under the terms of the agreements, the Company
obtained the right to market LightStream's existing ATM product as well as
to develop new features and functions for the product. Effective January
11, 1995, LightStream was acquired by Cisco Systems, Inc, which assumed
all obligations under this agreement. Internet Communications Corporation
continues to serve as a development partner for the Tellabs 300 Series
packet switches and statistical multiplexers. The Company's cooperative
agreement with TRW High Performance Network Products expired in 1994. In
early 1995, the Company sold its equity investment in Promptus
Communications for approximatley $3,400,000. The Company had invested
$2,500,000 in March 1993. The Company continues to have the right to
manufacture the Promptus OASIS 1000 (a registered trademark of Promptus
Communications, Inc.) bandwidth manager, an inverse multiplexing and
switched digital services access product.
Martis Oy in Espoo, Finland, and Tellabs Holdings Ltd. in Shannon, Ireland,
are the focal points for the Company's research and development efforts
for the European Economic Community. The Company's Canadian subsidiary
began research and development efforts during 1992.
These agreements, relationships and international development efforts
allow the Company access to technology that is important to the future of
its products. In addition, to ensure that the technologies Tellabs uses are
in keeping with industry developments and to increase the Company's ability
to develop new technologies, the Company conducts research at its
laboratory in Mishawaka, Indiana, and also utilizes its research facilities
at its Espoo, Finland-based subsidiary along with a separate facility in
Oulu, Finland, and its Shannon, Ireland-based subsidiary for the European
market place and its Toronto, Canada-based subsidiary for the Canadian
marketplace.
Research and development expenses were $64.8 million in 1994, $51.0 million
in 1993, and $42.5 million in 1992. The Company plans to spend
approximately $80.0 million on research and development in 1995. These
expenditures reflect the Company's commitment to the enhancement of
existing products and development of new products designed to satisfy the
needs of communications service providers worldwide.
MANUFACTURING AND EMPLOYEES
The Company assembles its products from standard components and from
fabricated parts which are manufactured by others to the Company's
specifications. Such purchased items represented approximately 70 percent
of cost of sales in 1994.
Most purchased items are standard commercial components available from a
number of suppliers with only a few items procured from a single-source
vendor. Management believes that alternate sources could be developed for
those parts and components of proprietary design and those available only
from single or limited sources. However, future shortages could result in
production delays that could adversely affect the Company's business.
As part of the manufacturing process, hazardous waste materials that are
present are handled and disposed of in compliance with all Federal, State
and local provisions. These waste materials and their disposal have no
significant impact on either the Company's production process or its
earnings or capital expenditures.
At December 30, 1994, the Company had 2,585 employees, of which 521 were
employed in the sales, sales support and marketing area, 684 in product
development, 1,144 in manufacturing, and 236 in administration. The
Company considers its employee relations to be good. It is not a party to
any collective bargaining agreement.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company has registered and unregistered trademarks for many of its
products in the U.S. and in numerous foreign countries. These trademarks
are important in that they differentiate the Company's products within the
industry through brand name recognition. Significant trademarks of the
Company include TELLABS, TELEMARK, TITAN, ALTA, CABLESPAN, PORTSPAN,
CROSSNET, DATAPLEXER, FLASHROAD, RADAR, SONET TO THE CORE, MARTIS, 331
XPLEXER, RA SERIES, YOUR NETWORKING PARTNER, NMCS 2500, ExpresSPAN, DYNAMIC
SIGNAL TRANSFER, TURNING YOUR COPPER INTO GOLD, T-CODER, VANTAGE POINT, and
the Company's logo. The Company is not aware of any factor which would
affect its ability to utilize any of its major trademarks.
The Company has developed certain proprietary, confidential software
programs which are important to its business. The Company owns various
rights, which are protectable under copyright and trade secret laws, in
such software programs.
The Company currently holds 14 U.S. and 3 Canadian patents. Although
patents may be important to certain of the Company's products, the Company
believes generally that patents are of substantially less significance to
its business than are the design, engineering, and development capabilities
of its personnel.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
Information with respect to the Company's operations by business segment
and geographical areas for the fiscal years ended December 30, 1994,
December 31, 1993 and January 1, 1993, is on page 40 of the registrant's
Annual Report to Stockholders and is incorporated herein by reference. It
is also included in Exhibit 13, Note I, as filed with the Securities and
Exchange Commission (SEC).
ITEM 2. PROPERTIES
Tellabs' corporate headquarters is located on 18-1/2 acres of Company-owned
land approximately 30 miles west of Chicago in Lisle, Illinois. A 65,000
square foot building at this location houses the Company's headquarters
and administrative operations. A 103,000 square foot building at this
location, which formerly housed a substantial portion of its manufacturing
operations, was renovated for use by the Company's Customer Services
and other departments. In addition, a 54,000 square foot building houses
the Digital Systems division marketing and engineering operations.
The Company also owns 50 acres of land in Bolingbrook, Illinois (near
Lisle) where a new 230,000 square foot manufacturing, engineering and
office building was completed and occupied in July 1993. All of the
manufacturing operations previously conducted in Lisle were moved to the
Bolingbrook facility in addition to the International division, Network
Access product's marketing and engineering operations and other
administrative operations.
The Company also owns approximately 75 acres of land in Round Rock, Texas,
and approximately 2.6 acres of land in Mississauga, Ontario, Canada. The
Texas property includes an 84,000-square foot manufacturing facility. The
Canadian property includes a 20,000-square foot office/warehousing
building. The Company also owns three office/manufacturing facilities in
Espoo, Finland. A 62,000-square foot building is used for engineering,
marketing, and administrative offices. The second building of
approximately 150,000 square feet is used for production and was renovated
and expanded during 1994 to its current size. The third is a 35,000 square
foot office building which is currently used for engineering offices.
The Company leases additional facilities at the following locations:
Mishawaka, Indiana (research); Atlanta, Georgia (sales); White Plains, New
York (customer service); Naperville, Illinois (sales); Santa Ana,
California (sales); Denver, Colorado (sales); Pulallup, Washington (customer
service); Casselberry, Florida (sales); Irving, Texas (sales); Bethesda,
Maryland (sales); and Lisle, Illinois (training). Some of the Company's
international subsidiaries also lease space for their operations, including
a 56,000 square foot sales and production facility in County Clare, Ireland
and additional engineering space in Oulu, Finland.
The Company owns substantially all the equipment used in its business. The
Company believes that its facilities are adequate for the level of
production anticipated in 1995, and that suitable additional space and
equipment will be available to accommodate expansion as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAMES AND BUSINESS EXPERIENCE YEAR OF CURRENT
BIRTH POSITION
Michael J. Birck 1938 President, Chief
President, Chief Executive Officer Executive Officer and
and Director since 1975. Director
Peter A. Guglielmi
President, Tellabs International, 1942 President, Tellabs
Inc. and Director since 1993; International, Inc.,
Executive Vice President, Chief Executive Vice President,
Financial Officer and Treasurer Chief Financial Officer,
since 1990; Secretary 1988 to 1993. Treasurer and Director
Brian J. Jackman 1941 President, Tellabs
President, Tellabs Operations, Inc. Operations, Inc,
and Director since 1993; Executive Executive Vice President
Vice President, since 1990. and Director
Charles C. Cooney 1941 Vice President, Sales and
Vice President, Sales and Service, Service, Tellabs Operations,
Tellabs Operations, Inc. since 1993; Inc.
Vice President, Sales, 1979 to 1993.
Carol Coghlan Gavin 1956 Vice President, General
Vice President and General Counsel, Counsel and Secretary,
Tellabs Operations, Inc. since Tellabs Operations, Inc.,
1992; Secretary since 1993; Secretary
Assistant Secretary 1989 to 1993;
General Counsel, 1988 to 1992.
Jon C. Grimes 1947 Vice President and General
Vice President and General Manager, Manager, Network Access
Network Access Systems Division, Systems Division,
Tellabs Operations, Inc. since 1993; Tellabs Operations, Inc.
Vice President and General Manager,
Network Products Division 1989 to 1993.
J. Peter Johnson 1949 Vice President, Finance and
Vice President, Finance and Treasury, Treasury, Assistant Secretary
Assistant Secretary and Controller, and Controller, Tellabs
Tellabs Operations, Inc. since 1992; Operations, Inc.
Vice President, Finance and Treasury,
Assistant Secretary and Controller,
1990 to 1992; Controller, 1988 to 1990.
John C. Kohler 1952 Vice President, Manufacturing,
Vice President, Manufacturing, Tellabs Operations, Inc.
Tellabs Operations, Inc. since
1993; Vice President, Product
Support Services, 1989 to 1993.
James L. Melsa, Ph.D. 1938 Vice President, Strategic
Vice President, Strategic Quality Quality and Process
and Process Management, Tellabs Management, Tellabs
Operations, Inc. since 1993; Operations, Inc.
Vice President and General Manager,
Data Communications Division,
1990 to 1993.
Harvey R. Scull 1949 Vice President, Advanced
Vice President, Advanced Technology, Technology, Tellabs
Tellabs Operations, Inc. since 1993; Operations, Inc.
Director, New Business Development,
1989 to 1993.
Richard T. Taylor 1948 Vice President and General
Vice President and General Manager, Manager, Digital Systems
Digital Systems Division, Tellabs Division, Tellabs
Operations, Inc. since 1993; Director Operations, Inc.
of Marketing and Product Development,
Digital Systems Division, 1989 to 1993.
Jeffrey J. Wake 1949 Vice President and General
Vice President and General Manager, Europe, Middle East
Manager, Europe, Middle East and Africa, Tellabs
and Africa, Tellabs International, International, Inc.
Inc. since 1993; Director of
International Sales, 1992; Sales
Director, Tellabs Pty. Ltd, 1990
to 1992; General Manager, AWA
Communications, 1988 to 1990.
Nicholas J. Williams 1947 Vice President and General
Vice President and General Manager, The Americas,
Manager, The Americas, Tellabs Tellabs International, Inc.
International, Inc. since 1993;
Vice President and General Manager,
Advanced Technology Products, AT&T
Paradyne Corporation, 1992 to 1993;
Vice President, North American Sales,
AT&T Paradyne Corporation, 1989 to
1991.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The sections entitled "Common Stock Market Data" on pages 1 and 46 of the
Company's Annual Report to Stockholders for the year ended December 30,
1994 (the "Annual Report") are incorporated herein by reference. They are
also included in Exhibit 13, as filed with the SEC. See discussion
referred to in Item 7 below for dividend information.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Five-Year Summary of Selected Financial Data" on page
1 of the Annual Report is incorporated herein by reference. It is also
included in Exhibit 13, as filed with the SEC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis" on Pages 42 to
44 of the Annual Report is incorporated herein by reference. It is also
included in Exhibit 13, as filed with the SEC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Certified Public Accountants and the Consolidated
Financial Statements and Notes thereto on pages 25 through 41 of the Annual
Report are incorporated herein by reference. They are also included in
Exhibit 13, as filed with the SEC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required, except for information relating to the executive
officers of the registrant which appears at the end of Part I above, is
incorporated herein by reference to the section entitled "Election of
Directors" in the registrant's Proxy Statement (the "Proxy Statement")
dated March 21, 1995.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Management and Certain Other
Beneficial Owners" in the Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of Tellabs, Inc., and
Subsidiaries, included in registrant's Annual Report to Stockholders for
the year ended December 30, 1994, are incorporated by reference in Item 8:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets: December 30, 1994 and December 31, 1993
Consolidated Statements of Earnings: Years ended December 30, 1994,
December 31, 1993 and January 1, 1993
Consolidated Statements of Stockholders' Equity: Years ended
December 30, 1994, December 31, 1993, and January 1, 1993
Consolidated Statements of Cash Flows: Years ended December 30,
1994, December 31, 1993 and January 1, 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following Consolidated Financial Statement Schedules of Tellabs, Inc.,
and Subsidiaries are included herein pursuant to Item 14(d):
Report of Independent Certified Public Accountants on Schedule
Schedule II Valuation and Qualifying Accounts and Reserves
Schedules not included have been omitted because they are not
applicable or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
(b) The Registrant filed one report on Form 8-K on or about April 26,
1994, as disclosed in the second quarter 10-Q.
(c) Exhibits:
3.1 Restated Certificate of Incorporation 3/
3.2 Amended and Restated By-Laws, as amended 3/
4. Upon request of the Securities and Exchange Commission,
registrant hereby agrees to furnish to the Commission
copies of instruments (not filed) defining the rights
of holders of long-term debt of the Company. (This
undertaking is in lieu of a separate exhibit.)
10.1 Tellabs, Inc. Deferred Compensation Plan 4/
10.2 1981 Incentive Stock Option Plan, as amended and restated 1/
10.3 1984 Incentive Stock Option Plan, as amended and restated 1/
10.4 1986 Non-Qualified Stock Option Plan, as amended and
restated 1/
10.5 1987 Stock Option Plan for Non-Employee Corporate Directors,
as amended and restated 1/
10.6 1989 Stock Option Plan, as amended and restated 1/
10.7 Employee Quality Stock Award Program 2/
10.8 Form of Employment Agreement 3/
10.9 1991 Stock Option Plan, as amended and restated 1/
10.10 Description of Split-Dollar Insurance Arrangement with
the Michael J. Birck Irrevocable Trust 3/
10.11 1994 Stock Option Plan 4/
11. Computation of Per Share Earnings
13. Annual Report to Stockholders
21. Subsidiaries of the Registrant
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
Exhibits 10.1 through 10.11 are management contracts or compensatory plans
or arrangements required to be filed as an Exhibit to this Form 10-K
pursuant to Item 14(c) hereof.
(d) Schedules: See Item 14(a)2 above.
1/ Incorporated by reference from Tellabs, Inc. Post-effective
Amendment No. 1 on Form S-8 to Form S-4 filed on or about
June 29, 1992 (File No. 33-45788).
2/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly
Report for the quarter ended April 1, 1988 (File No. 0-9692).
3/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual
Report for the year ended January 1, 1993 (File No. 0-9692).
4/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report
for the year ended December 31, 1993 (File No. 0-9692).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TELLABS, INC.
March 27, 1995 By /s Michael J. Birck
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s Michael J. Birck President and Director March 27, 1995
(Principal Executive
Officer)
/s Peter A. Guglielmi Executive Vice President March 27, 1995
(Principal Financial
Officer) and Director
/s J. Peter Johnson Controller (Principal March 27, 1995
Accounting Officer)
/s Brian J. Jackman Director March 27, 1995
/s John D. Foulkes Director March 27, 1995
/s Frederick A. Krehbiel Director March 27, 1995
/s Robert P. Reuss Director March 27, 1995
/s William F. Souders Director March 27, 1995
/s Thomas H. Thompson Director March 27, 1995
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Board of Directors
Tellabs, Inc.
In connection with our audit of the consolidated financial statements of
Tellabs, Inc., and Subsidiaries, referred to in our report dated January
23, 1995, which is included in the annual report to shareholders and
incorporated by reference in Part II of this form, we have also audited
Schedule II for each of the three years in the period ended December 30,
1994. In our opinion, this schedule presents fairly the information
required to be set forth therein.
Grant Thornton LLP
Chicago, Illinois
January 23, 1995
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended December 30, 1994, December 31, 1993 and January 1, 1993
($ in thousands)
Additions
Balance at charged to Balance
beginning costs and Deduc- at end
of year expenses tions (A) of year
--------- --------- --------- -------
1994
Allowance for
doubtful receivables $844 $259 $111 $992
====== ======
1993
Allowance for
doubtful receivables $1,498 $83 $737 $844
====== ======
1992
Allowance for
doubtful receivables $1,525 $1,032 $1,059 $1,498
====== ======
NOTE:
(A) - Uncollectible accounts charged off, net of recoveries.
EX-11
2
EXHIBIT 11
TELLABS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
PRIMARY EARNINGS PER SHARE 1994 1993 1992
---- ---- ----
Weighted average number of common
shares outstanding during the period 43,406 42,308 41,127
Net additional shares assuming dilutive
stock options exercised and proceeds
used to purchase treasury shares at
average fair market value 1,883 1,796 1,056
------ ------ ------
Weighted average number of common shares
and common equivalent shares outstanding 45,289 44,104 42,183
======= ======= =======
Net earnings $72,389 $31,967 $16,854
======= ======= =======
Primary earnings per share $1.60 $0.72 $0.40
===== ===== =====
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of common
shares outstanding during the period 43,406 42,308 41,127
Net additional shares assuming dilutive
stock options exercised and proceeds
used to purchase treasury shares at
fair market value 1,935 1,926 1,150
----- ----- -----
Weighted average number of common shares
and common equivalent shares outstanding 45,341 44,234 42,277
======= ======= =======
Net earnings $72,389 $31,967 $16,854
======= ======= =======
Fully diluted earnings per share $1.60 $0.72 $0.40
===== ===== =====
[FN]
NOTE:
Restated to reflect the stock splits in 1993 and 1994.
EX-13
3
EXHIBIT 13
Five-Year Summary of Selected Financial Data
(In thousands, except per-share data)
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Net sales $494,153 $320,463 $258,560 $212,751 $211,046
Gross profit $270,003 $164,255 $125,876 $100,154 $94,698
Earnings before income taxes $97,824 $35,801 $19,152 $7,025 $10,731
Net earnings before cumulative effect $72,389 $30,467 $16,854 $6,631 $8,102
Cumulative effect of accounting change ---- $1,500 ---- ---- ----
Net earnings $72,389 $31,967 $16,854 $6,631 $8,102
Earnings per share before cumulative effect $1.60 $0.69 $0.40 $0.17 $0.21
Cumulative effect on earnings per common share ---- $0.03 ---- ---- ----
Earnings per common share $1.60 $0.72 $0.40 $0.17 $0.21
Stockholders' equity $292,790 $207,006 $167,144 $145,043 $130,411
Total assets $390,067 $328,766 $210,748 $185,964 $171,538
Net working capital $138,317 $64,285 $109,201 $96,753 $78,256
Long-term debt $2,850 $2,850 $2,850 $3,992 $4,184
No cash dividends per common share were paid. Per-share amounts are restated
to reflect stock splits in 1994 and 1993.
COMMON STOCK MARKET DATA
(Restated for stock splits in 1994 and 1993)
1994 1993
High Low High Low
First Quarter 30 3/4 21 7/8 9 1/6 6 5/6
Second Quarter 37 1/4 25 1/4 12 5/6 6 1/3
Third Quarter 45 3/4 28 1/4 21 7/12 11 1/6
Fourth Quarter 56 42 27 1/6 18 7/8
The Company's common stock is traded over-the-counter under the symbol
TLAB. The shares are included in the NASDAQ National Market System, which
reports sales prices for actual transactions. At February 27, 1995, there
were approximately 1,832 stockholders of record.
Management Statement of Financial Responsibilities
The financial statements of Tellabs, Inc., and Subsidiaries have been
prepared under the direction of management in conformity with generally
accepted accounting principles. In the opinion of management, the
financial statements set forth a fair presentation of the consolidated
financial condition of Tellabs, Inc., and Subsidiaries at December 30,
1994, and December 31, 1993, and the consolidated results of its operations
for the years ended December 30, 1994, December 31, 1993, and January 1,
1993.
The Company maintains accounting systems and related internal controls
which, in the opinion of management, provide reasonable assurances that
transactions are executed in accordance with management's authorization,
that financial statements are prepared in accordance with generally
accepted accounting principles, and that assets are properly accounted for
and safeguarded.
Ethical decision-making is fundamental to the Company's management
philosophy. Management recognizes its responsibility for fostering a
strong ethical climate so that the Company's affairs are conducted to the
highest standards of personal and corporate conduct. Employee awareness of
these objectives is achieved through key written policy statements.
The Board of Directors has appointed two of its non-employee members as an
Audit Committee. This committee meets periodically with management and the
independent certified public accountants, who have free access to this
committee without management present, to discuss the results of their
audit work and their evaluation of the internal control structure and the
quality of financial reporting.
Michael J. Birck Peter A. Guglielmi
President and Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer,
Tellabs, Inc. Tellabs, Inc.
January 23, 1995 January 23, 1995
Report of Independent Certified Public Accountants
We have audited the accompanying consolidated balance sheets of
Tellabs, Inc., and Subsidiaries as of December 30, 1994, and
December 31, 1993, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended December 30, 1994,
December 31, 1993 and January 1, 1993. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Tellabs, Inc., and Subsidiaries at December 30, 1994, and December 31,
1993, and the consolidated results of its operations and its consolidated
cash flows for the years ended December 30, 1994, December 31, 1993 and
January 1, 1993, in conformity with generally accepted accounting
principles.
As discussed in Note G to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes.
Grant Thornton LLP
Chicago, Illinois
January 23, 1995
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share data)
Year Year Year
Ended Ended Ended
12/30/94 12/31/93 01/01/93
-------- -------- --------
Net sales $494,153 $320,463 $258,560
Cost of sales 224,150 156,208 132,684
------- ------- -------
Gross Profit 270,003 164,255 125,876
Operating expenses
Marketing 67,310 55,611 47,443
Research and development 64,765 50,987 42,465
General and administrative 35,857 24,926 19,752
Goodwill amortization 2,389 685 117
------- ------- -------
170,321 132,209 109,777
------- ------- -------
Operating Profit 99,682 32,046 16,099
Other income (expense)
Interest income 3,185 2,935 2,561
Interest expense (1,773) (487) (130)
Equity in losses of joint venture (1,012) --- ---
Foreign exchange (loss) gain, net (1,555) 1,118 (978)
Gain on sale of long-term investment --- --- 1,059
Other (703) 189 541
------- ------- -------
(1,858) 3,755 3,053
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 97,824 35,801 19,152
Income taxes 25,435 5,334 2,298
Earnings Before Cumulative Effect on Prior
Years of Changing to a Different Method of ------- ------- -------
Accounting for Income Taxes 72,389 30,467 16,854
Cumulative effect on prior years of changing
to a different method of accounting for
income taxes --- 1,500 ---
------- ------- -------
Net Earnings $72,389 $31,967 $16,854
======= ======= =======
Average number of common and common
equivalent shares outstanding 45,341 44,234 42,276
Earnings per Share Before Cumulative Effect on
Prior Years of Changing to a Different
Method of Accounting for Income Taxes $1.60 $0.69 $0.40
Cumulative effect on prior years of changing
to a different method of accounting for
income taxes --- 0.03 ---
----- ----- -----
Earnings per Share $1.60 $0.72 $0.40
===== ===== =====
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
ASSETS (In thousands)
12/30/94 12/31/93
-------- --------
Current Assets
Cash and cash equivalents $51,460 $29,589
Investments in marketable securities --
available for sale 23,209 15,982
Accounts receivable -- primarily trade,
net of allowance for doubtful receivables
of $992,000 at December 30, 1994 and
$844,000 at December 31, 1993 84,397 74,473
Inventories
Raw materials 20,898 26,130
Work in process 12,396 9,533
Finished goods 18,587 14,218
------- -------
51,881 49,881
Other current assets 9,609 6,475
------- -------
Total Current Assets 220,556 176,400
Property, Plant and Equipment -- at Cost
Buildings and improvements 46,516 40,711
Equipment 114,853 98,296
------- -------
161,369 139,007
Less accumulated depreciation 69,300 59,326
------- -------
92,069 79,681
Land 5,562 5,199
------- -------
97,631 84,880
Goodwill 44,252 46,641
Other Assets 27,628 20,845
------- -------
Total Assets $390,067 $328,766
======== ========
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY 12/30/94 12/31/93
(In thousands) -------- --------
Current Liabilities
Notes payable - bank $ ---- $60,000
Accounts payable-trade 22,606 15,054
Accrued liabilities
Compensation 23,200 17,019
Payroll and other taxes 5,146 4,030
Other 10,470 6,790
------ ------
Total accrued liabilities 38,816 27,839
Income taxes 20,817 9,222
------ ------
Total Current Liabilities 82,239 112,115
Long-Term Debt 2,850 2,850
Long-Term Income Taxes 6,572 3,531
Other Long-Term Liabilities 3,844 2,773
Commitments --- ---
Deferred Income Taxes 1,772 491
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and
outstanding --- ---
Common stock: authorized 100,000,000 shares of
$.01 par value; issued 43,644,346 shares at
December 30, 1994, and 42,982,978 shares at
December 31, 1993 436 215
Additional paid-in capital 54,150 45,072
Cumulative foreign currency translation 2,102 (3,042)
adjustment
Unrealized net (losses) gains on
available-for-sale securities (803) 28
Retained earnings 236,905 164,733
------- -------
Total Stockholders' Equity 292,790 207,006
------- -------
Total Liabilities and Stockholders' Equity $390,067 $328,766
The accompanying notes are an integral ======== ========
part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Additional Cumulative (Losses)
Common Paid-In Translation Gains, Retained
(In thousands) Stock Capital Adjustment Net Earnings Total
------- ------- ------- ------- ------- -------
Balance at
December 28, 1991 $67 $28,263 $729 $ --- $115,984 $145,043
Net earnings --- --- --- --- 16,854 16,854
Stock options exercised 2 6,443 --- --- --- 6,445
Employee stock awards --- 26 --- --- --- 26
Change in corporate 69 (359) --- --- --- (290)
structure
Foreign currency
translation adjustment --- --- (934) --- --- (934)
Balance at ------ ------ ------ ------ ------- -------
January 1, 1993 138 34,373 (205) --- 132,838 167,144
====== ====== ====== ====== ======= =======
Net earnings --- --- --- --- 31,967 31,967
Stock options exercised 5 10,591 --- --- --- 10,596
Employee stock awards --- 108 --- --- --- 108
Stock split 72 --- --- --- (72) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 28 --- 28
Foreign currency
translation adjustment --- --- (2,837) --- --- (2,837)
Balance at ------ ------ ------ ------ ------- -------
December 31, 1993 215 45,072 (3,042) 28 164,733 207,006
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 72,389 72,389
Stock options exercised 4 8,883 --- --- --- 8,887
Employee stock awards --- 195 --- --- --- 195
Stock split 217 --- --- --- (217) ---
Unrealized net losses on
available-for-sale
marketable securities --- --- --- (831) --- (831)
Foreign currency
translation adjustment --- --- 5,144 --- --- 5,144
Balance at ------ ------ ------ ------ ------- -------
December 30, 1994 $436 $54,150 $2,102 ($803)$236,905 $292,790
====== ======= ====== ====== ======== ========
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Year Year
Ended Ended Ended
(In thousands) 12/30/94 12/31/93 01/01/93
-------- -------- --------
Operating Activities
Net earnings $72,389 $31,967 $16,854
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 19,502 14,511 11,370
Provision for doubtful receivables 254 83 1,032
Deferred income taxes (1,758) (1,902) (2,523)
Gain on sale of long-term investment --- --- (1,059)
Cumulative effect of change
in accounting principle --- (1,500) ---
Net (increase) decrease in current assets,
net of effects from purchase of subsidiary:
Accounts receivable (7,660) (16,868) (9,284)
Inventories 92 (8,446) (4,479)
Other current assets (724) (410) 34
Net increase (decrease) in current liabilities,
net of effects from purchase of subsidiary:
Accounts payable 7,001 (4,060) 3,834
Accrued liabilities 9,991 9,315 109
Income taxes 9,054 2,777 1,245
Net increase in other assets (664) (9,537) (1,637)
Net increase in other liabilities 3,638 675 633
------ ------ ------
Net Cash Provided by Operating Activities 111,115 16,605 16,129
Investing Activities
Acquisition of property, plant and
equipment, net (22,956) (28,671) (18,629)
Proceeds from sales and maturities of 7,543 60,271 71,759
marketable securities
Payments for purchases of marketable
securities (15,602) (37,112) (87,327)
Payments for purchases of long-term
investments (9,005) (5,102) ---
Payment for purchase of subsidiary,
net of cash acquired --- (56,866) ---
Cash proceeds from sale of long-term
investment --- --- 1,801
------- ------- -------
Net Cash Used by Investing Activities (40,020) (67,480) (32,396)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Year Year
Ended Ended Ended
12/30/94 12/31/93 01/01/93
-------- -------- --------
Financing Activities
Common stock sold through stock-option plans 9,081 10,704 6,471
Proceeds from notes payable --- 60,000 ---
Payments of notes payable (60,000) --- ---
Payments for change in corporate structure --- --- (290)
Net payments of maturities of long-term debt --- --- (533)
------ ------ ------
Net Cash Provided(Used) by Financing Activities (50,919) 70,704 5,648
Effect of Exchange Rate Changes on Cash 1,695 (477) 149
Net Increase (Decrease) in Cash And
Cash Equivalents 21,871 19,352 (10,470)
Cash and Cash Equivalents At Beginning of Year 29,589 10,237 20,707
------- ------- -------
Cash and Cash Equivalents At End of Year $51,460 $29,589 $10,237
======= ======= =======
Other Information
Interest paid $1,798 $507 $113
Income taxes paid $10,664 $3,333 $4,189
Supplemental Schedule of Non-cash Investing and Financing Activities:
In acquiring all of the outstanding shares of Martis Oy during 1993, the
Company paid direct costs totaling $71,263,000. In conjunction with the
acquisition, liabilities were assumed as follows:
(In thousands)
Fair value of assets acquired $40,070
Costs in excess of fair value 45,429
Direct costs paid (71,263)
-------
Liabilities assumed $14,236
=======
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Summary of Significant Accounting Policies
Nature of Business
Operating in one business segment, the Company and its Subsidiaries
design, assemble, market and service a diverse line of electronic
communication equipment used in public and private communication
networks worldwide.
Consolidation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's investment in a joint
venture is accounted for under the equity method. The results of Martis Oy
are included since the purchase date of October 7, 1993, as described in
Note K.
Certain reclassifications have been made in the 1992 and 1993 consolidated
financial statements to conform to the 1994 presentation.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The fair values of investments in marketable securities are estimated
based on quotes from brokers or current rates offered for instruments
with similar characteristics. The carrying amounts of all other financial
instruments approximate their fair values.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on
both the declining-balance and straight-line methods.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases at enacted tax rates when such amounts are supposed to
be realized or settled.
Goodwill
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net income generated by the related subsidiaries to
determine that no impairment has occurred. Goodwill is amortized over 20
years by the straight-line method. The accumulated amortization of
goodwill is approximately $3,524,000 and $1,135,000 for December 30, 1994,
and December 31, 1993, respectively.
Note A: Summary of Significant Accounting Policies (continued)
Fiscal Year
The Company operates on a 52-53 week fiscal year. The year ended January
1, 1993, contains 53 weeks, while all other years presented contain 52
weeks. The financial statement effect is not significant.
Stock Awards
When an employee stock award is granted (see Note D), compensation
expense is charged for the fair market value of the shares issued.
Revenue Recognition
The Company recognizes revenue at the date of shipment.
Earnings Per Share
Primary and fully diluted earnings per share are based on the weighted
average number of common and common equivalent shares outstanding during
each period along with the dilutive effect of outstanding stock options.
On October 21, 1993, the Company declared a 3-for-2 stock split, payable in
the form of a 50 percent stock dividend. On April 22, 1994, the Company
declared a 2-for-1 stock split, payable in the form of a 100 percent stock
dividend. All references to the number of common shares and per share
amounts have been retroactively restated to give effect to the stock
dividends.
Foreign Currency Translation
The financial statements of the Company's subsidiaries are generally
measured using the local currency as the functional currency. Accordingly,
the effect of translating a subsidiary's financial statements into U.S.
dollars is recorded as a separate component of stockholders' equity.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts as a hedge against
net foreign accounts receivable and payable. Market value gains and
losses on the contracts are recognized and are combined with offsetting
foreign exchange gains or losses on those accounts.
Note B: Investments
Available-for-sale securities are accounted for at market with the
unrealized gain or loss net of deferred income taxes shown as a separate
component of stockholders' equity. At December 30, 1994, and December 31,
1993, they consisted of the following:
Amortized Unrealized Market
(In thousands) Cost Gain (Loss) Value
1994 ------- ------- -------
State and municipal securities $7,748 ($262) $7,486
Preferred and common stocks 5,496 (305) 5,191
U.S. government and corporate
debt obligations 11,051 (519) 10,532
------- ------- -------
$24,295 ($1,086) $23,209
======= ======= =======
Amortized Unrealized Market
Cost Gain (Loss) Value
------- ------- -------
1993
State and municipal securities $8,073 ($6) $8,067
Preferred and common stocks 3,049 151 3,200
U.S. government and corporate
debt obligations 4,832 (117) 4,715
------- ------- -------
$15,954 $28 $15,982
======= ======= =======
Held-to-maturity securities are carried at their amortized cost. At
December 30, 1994, and December 31, 1993, the balances were $1,300,000 and
$2,300,000, respectively, which consists entirely of U.S. government and
corporate debt obligations. These amounts are included in "Other Assets".
In the ordinary course of managing its assets and liabilities, the Company
uses financial instruments, which are not reflected in the financial
statements, to reduce or eliminate its exposure to foreign exchange risks.
Foreign currency risk is managed through forward exchange contracts.
At December 30, 1994, the Company had forward exchange contracts,
generally having maturities of less than 30 days, in the amount of
$18,579,000. These contracts are primarily denominated in Finnish markka,
but also include contracts for Irish punts and Canadian dollars.
Note C: Short- and Long-Term Debt
Two demand notes payable for $30,000,000 each were issued on October 5,
1993, to assist in financing the purchase of Martis Oy. The notes were
repaid in full during 1994. The effective interest rates on the notes for
1994 were 4.24 percent and 4.38 percent, respectively. The effective rates
on the notes for the three months of 1993 were 3.51 percent and 3.63
percent, respectively.
The long-term debt of $2,850,000 comprises industrial revenue bonds that
were issued on December 20, 1991, with the principal payable in October
2014. Interest is payable quarterly based on a variable interest rate set
weekly based on market conditions for similar instruments. The effective
rates for 1994 and 1993 were 2.88 percent and 2.43 percent, respectively.
The debt is unsecured. The provisions of the loan agreement contain
restrictive covenants, including a minimum net worth and debt-to-equity
ratio.
Note D: Stock Options and Awards
The Company's 1981 and 1984 Incentive Stock Option Plans are tax-qualified
plans and provide for 2,280,000 shares of common stock to be reserved for
options that may be issued under the plans. The plans also provide that
the option price shall be the market value of the shares as of the date of
grant, except for options granted to holders of 10 percent or more of the
outstanding shares, in which case the option price shall be 110 percent of
the market value of the shares as of the date of grant. Unless the option
agreement provides otherwise, options granted under the plans become
exercisable on a cumulative basis at the rate of 25 percent during each of
the second through fifth years after grant. Unless the option agreement
provides otherwise, options granted under the 1981 plan terminate at the
end of five years after grant, and options granted under the 1984 plan
terminate at the end of 10 years after grant.
The Company's 1986 Non-Qualified Stock Option Plan provides for 3,000,000
shares of common stock to be reserved for options that may be issued under
the plan. The plan provides that the option price shall be the market
value of the shares as of the date of grant. Unless the option agreement
provides otherwise, options granted under this plan become exercisable on a
cumulative basis at the rate of 25 percent during each of the second
through fifth years after grant. Unless the option agreement provides
otherwise, options granted under the plan terminate at the end of five
years.
The Company's 1987 Stock Option Plan for Non-Employee Corporate Directors
provides for the non-discretionary grant of options to non-employee
directors of the Company to purchase a combined maximum of 300,000 shares
of common stock of the Company at a per-share price not less than the fair
market value per share of the common stock on the date of grant. The plan
provides that each non-employee director, on the date such person becomes a
non-employee director, will be granted options to purchase 15,000 shares of
common stock and, provided such person is still serving as a non-employee
director, will automatically be granted options to purchase 3,000
additional shares of common stock each year thereafter on the anniversary
of the last day of the month in which the initial options were granted.
Note D: Stock Options and Awards (continued)
The Company's 1989 Stock Option Plan provides for 3,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
3,000,000 shares and up to 3,000,000 stock appreciation rights (SARs). The
SARs may be granted in conjunction with, or independently of, the options
under the plan. The plan provides that the option price and the SAR price
shall be the market value of the Company's shares as of the date of grant.
Unless the option or SAR agreement expressly provides otherwise, options
and SARs granted under this plan become exercisable on a cumulative basis
at the rate of 25 percent during each of the second through fifth years
after grant. Unless the option agreement provides otherwise, options and
SARs granted under the plan terminate at the end of 10 years. At December
30, 1994, 381,000 SARs with grant prices ranging from $3 to $4.33 and
5-year terms and 195,000 SARs with grant prices of $6.33 and 10-year terms
had been granted. At that date, a total of 437,000 SARs had been
exercised, leaving a total of 139,000 outstanding.
The Company's 1991 Stock Option Plan provides for 1,500,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
1,500,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant. Unless the
option agreement provides otherwise, options granted under this plan become
exercisable on a cumulative basis at the rate of 25 percent during each of
the second through fifth years after grant. Unless the option agreement
provides otherwise, options granted under the plan terminate at the end of
10 years.
The Company's 1994 Stock Option Plan provides for 2,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
2,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant. Unless the
option agreement expressly provides otherwise, options granted under this
plan become exercisable on a cumulative basis at the rate of 25 percent
during each of the second through fifth years after grant. Unless the
option agreement provides otherwise, options granted under the plan
terminate at the end of 10 years.
The Company has a program to award shares of the Company's common stock to
employees in recognition of their past service. Each full-time employee
who has worked for a continuous 5- or 20-year period is awarded 10 or 25
shares, respectively, of the Company's common stock as of the first
business day of the month in which the employee's 5- or 20-year anniversary
occurs. Common shares totaling 3,070 were awarded in 1994; totaling 3,140
in 1993; and totaling 1,340 in 1992.
Note D: Stock Options and Awards (continued)
The following table summarizes the changes in the number of common
shares under stock options granted pursuant to the preceding plans.
1981 and 1984 1986 Non-Qualified
Incentive Stock Stock Option
Option Plans Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
Options outstanding at
December 27, 1991 920,028 $4.39 951,228 $4.52
Option changes - 1992
Granted 36,000 6.01 --- ---
Exercised (340,646) 4.46 (488,286) 4.34
Cancelled (38,212) 3.82 (750) 4.63
Options outstanding at ------- -------
January 1, 1993 577,170 $4.49 462,192 $4.70
======= =======
Option changes - 1993
Granted 21,000 20.92 430,000 $20.00
Exercised (337,514) 4.56 (217,092) 4.78
Cancelled (11,250) 4.16 --- ---
Options outstanding at ------- -------
December 31, 1993 249,406 $5.43 675,100 $14.42
======= =======
Option changes - 1994
Granted --- --- 7,000 26.38
Exercised (79,400) 4.97 (82,349) 6.01
Cancelled (376) 3.17 (6,000) 20.00
Options outstanding at ------- -------
December 30, 1994 169,630 $5.05 593,751 $15.67
======= =======
Exercisable:
January 1, 1993 417,420 457,692
December 31, 1993 158,266 245,100
December 30, 1994 137,381 268,251
Available for grant:
January 1, 1993 52,954 437,620
December 31, 1993 37,204 7,619
December 30, 1994 --- 6,619
Note D: Stock Options and Awards (continued)
1987 Stock
Option Plan
For Non-Employee 1989 Stock
Corporate Directors Option Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
Options outstanding at
December 27, 1991 90,000 $4.24 1,879,622 $4.06
Option changes - 1992
Granted 15,000 6.88 192,000 6.13
Exercised (42,000) 4.10 (455,504) 4.04
Cancelled --- --- (61,014) 4.03
Options outstanding at ------- -------
January 1, 1993 63,000 $4.97 1,555,104 $4.32
======= =======
Option changes - 1993
Granted 15,000 12.57 166,000 17.27
Exercised (36,000) 4.44 (695,226) 4.07
Cancelled --- --- (20,632) 4.81
Options outstanding at ------- -------
December 31, 1993 42,000 $8.13 1,005,246 $6.62
======= =======
Option changes - 1994
Granted 15,000 33.10 342,000 27.35
Exercised (27,000) 10.61 (268,513) 5.15
Cancelled --- --- (16,753) 10.79
Options outstanding at ------- -------
December 30, 1994 30,000 $18.39 1,061,980 $13.60
======= =======
Exercisable:
January 1, 1993 54,000 716,022
December 31, 1993 33,000 606,730
December 30, 1994 21,000 485,853
Available for grant:
January 1, 1993 162,200 474,192
December 31, 1993 147,000 328,824
December 30, 1994 132,000 3,577
Note D: Stock Options and Awards (continued)
1991 Stock 1994 Stock
Option Plan Option Plan
Average Average
Option Option
Price Price
Shares per share Shares per share
------- --------- ------- ---------
Options outstanding at
December 27, 1991 900,300 $5.66 --- ---
Option changes - 1992
Granted 577,500 6.13 --- ---
Exercised (20,926) 5.56 --- ---
Cancelled (3,300) 5.92 --- ---
Options outstanding at ------- -------
January 1, 1993 1,453,574 $5.85 --- ---
======= =======
Option changes - 1993
Granted 11,000 20.00 --- ---
Exercised (171,994) 5.71 --- ---
Cancelled (27,224) 5.72 --- ---
Options outstanding at ------- -------
December 31, 1993 1,265,356 $8.77 --- ---
======= =======
Option changes - 1994
Granted 45,501 26.69 234,600 $26.38
Exercised (196,976) 5.80 --- ---
Cancelled (15,505) 8.31 (2,000) 26.38
Options outstanding at ------- -------
December 30, 1994 1,098,376 $6.80 232,600 $26.38
======= =======
Exercisable:
January 1, 1993 247,425 N/A
December 31, 1993 437,198 N/A
December 30, 1994 578,623 ---
Available for grant:
January 1, 1993 25,500 N/A
December 31, 1993 41,724 N/A
December 30, 1994 11,728 1,767,400
Note E: Employee Benefit and Retirement Plans
The Company maintains a defined contribution 401(k) retirement plan for the
benefit of eligible employees. Under the plan, a participant may elect to
defer a portion of annual compensation. During 1994 and 1993, matching
contributions equal to the first 3 percent of eligible annual compensation
were made by the Company for all eligible participants. During 1992,
participants with three years of service or greater received a 3 percent
matching contribution, while other participants received 2 percent. The
Company may contribute additional amounts at the discretion of the Board of
Directors. Company contributions to the plan were $3,480,000, $2,419,000
and $1,603,000 in 1994, 1993 and 1992, respectively. Contributions to the
plan are immediately vested in plan participants.
The Company maintains a deferred compensation plan that permits officers
and certain management employees to defer portions of their compensation.
Unless the plan is amended by the Company, the deferred amounts earn an
annual interest rate of 12 percent during the term of the plan. The
liabilities for the deferred salaries plus interest are included in "Other
Long-Term Liabilities".
The Company began money purchase and profit sharing plans for the benefit
of eligible employees during 1993. Under the plans, 4 percent of eligible
annual compensation was contributed by the Company for each participant in
1994 and 3 percent in 1993. No part of the contribution is vested until
after a service period of five years, at which time the participant is
fully vested. Company contributions to the plan were $3,134,000 and
$2,111,000 for 1994 and 1993,respectively.
Note F: Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1994 and 1993 is as follows:
(In thousands, except per-share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
1994
Net sales $99,538 $123,029 $123,015 $148,571 $494,153
Gross profit 53,411 66,632 66,665 83,295 270,003
Net earnings 11,198 17,018 18,098 26,075 72,389
Earnings per common share $0.25 $0.38 $0.40 $0.57 $1.60
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
1993
Net sales $64,689 $71,533 $77,054 $107,187 $320,463
Gross profit 31,572 36,299 40,081 56,303 164,255
Net earnings before
cumulative effect 4,145 4,793 6,374 15,155 30,467
Cumulative effect of
accounting change 1,500 --- --- --- 1,500
------ ------ ------ ------ ------
Net earnings 5,645 4,793 6,374 15,155 31,967
====== ====== ====== ====== ======
Earnings per
common share before
cumulative effect $0.10 $0.11 $0.14 $0.34 $0.69
Cumulative effect of
accounting change 0.03 --- --- --- 0.03
------ ------ ------ ------ ------
Earnings per
common share $0.13 $0.11 $0.14 $0.34 $0.72
====== ====== ====== ====== ======
Per-share amounts are restated to reflect stock splits in 1994 and 1993.
Note G: Income Taxes
(In thousands) Year Ended Year Ended Year Ended
12/30/94 12/31/93 01/01/93
Components of the Company's -------- -------- --------
earnings before income taxes are as follows:
Domestic source $50,962 $15,593 $10,180
Foreign source 46,862 20,208 8,972
------- ------- -------
Total $97,824 $35,801 $19,152
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $16,689 $4,237 $1,583
State 1,312 301 274
Foreign 9,191 2,698 957
------ ------ ------
27,192 7,236 2,814
Deferred:
Federal and state (906) (2,054) (342)
Reduction of valuation allowance (1,544) ---- ----
Foreign 693 152 (174)
------ ------ ------
(1,757) (1,902) (516)
------ ------ ------
Total $25,435 $5,334 $2,298
====== ====== ======
Deferred tax assets (liabilities) under FASB 109
for 1994 and 1993 are comprised of the following:
Ending Ending
(In thousands) Balance Balance
12/30/94 12/31/93
Deferred tax assets -------- --------
Inventory reserves $3,069 $2,829
Deferred employee benefit expenses 3,627 2,123
Accrued liabilities 2,530 1,078
Alternative minimum tax carryforwards 5,135 5,003
Research and development credit carryforwards 1,890 3,567
Unrealized loss on marketable securities 284 ---
Foreign tax credit carryforwards --- 147
Other 107 379
------ ------
Gross deferred tax assets 16,642 15,126
Deferred tax liabilities
Depreciation (9,203) (6,875)
Deferred taxes on undistributed earnings of
Hong Kong subsidiary (51) (586)
Other untaxed reserves - Martis Oy (566) (770)
Self-insurance reserves --- (164)
Other (363) (253)
------ ------
Gross deferred tax liabilities (10,183) (8,648)
Deferred tax assets, net of deferred liability 6,459 6,478
Valuation allowance --- (1,544)
------ ------
Net Deferred Tax Asset $6,459 $4,934
====== ======
Note G: Income Taxes (continued)
(In thousands) Year Ended
01/01/93
---------
The deferred income tax benefit under
APB 11 relates to the factors listed below:
Excess book depreciation ($93)
Adjustment in transfer price from Puerto Rico
subsidiary (240)
Puerto Rico tollgate tax 565
Intercompany profit in inventory (853)
Alternative minimum tax (104)
Foreign sales corporation transactions (34)
Decrease in expenses capitalized to inventory (190)
Accrued expenses 280
Deferred employee benefit expenses 315
Other - net (162)
-----
Total ($516)
=====
Year Ended Year Ended Year Ended
12/30/94 12/31/93 01/01/93
--------- --------- ---------
Federal income taxes at the statutory rate are reconciled with the
Company's income tax provision as follows:
Statutory U.S. income tax rate 35.0% 35.0% 34.0%
Foreign income taxes (7.2) (11.7) (11.5)
Foreign tax credit and research and
development credit (2.9) (17.1) ---
Reduction of valuation allowance (1.6) --- ---
Benefits attributable to foreign (0.9) (1.2) (4.9)
sales corporation
Dividends received from foreign subsidiaries --- 11.8 ---
Resolution of certain income tax contingencies --- (3.0) (2.7)
Capital loss --- --- (2.2)
Other - net 3.6 1.1 (0.7)
---- ---- ----
Effective Income Tax Rate 26.0% 14.9% 12.0%
==== ==== ====
Note G: Income Taxes (continued)
In January 1993, the Company changed its method of accounting for income
taxes from Accounting Principles Board Opinion No. 11 (APB 11) and adopted
Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes." The adoption of SFAS 109 changed the
Company's method of accounting for income taxes from the deferred method to
an asset-and-liability approach. Previously, the Company deferred the past
tax effects of timing differences between financial reporting and taxable
income. The asset-and-liability approach requires the recognition of
deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. According to the provisions of SFAS
109, prior years' financial statements have not been restated, and amounts
shown for 1992 reflect accounting for income taxes under APB 11.
Deferred income tax assets increased to $6,459,000 at December 30, 1994,
from $4,934,000 at December 31, 1993, reflecting the balance of tax
benefits of alternative minimum tax credit carryforwards, research and
development tax credit carryforwards and net future tax deductions at the
end of 1994. The Company reduced the valuation reserve required by SFAS
109 from $1,544,000 at the end of 1993 to zero at the end of 1994. This
reduction resulted from the Company's re-evaluation of the realization of
tax benefits from the future utilization of research and development tax
credit carryforwards and alternative minimum tax credit carryforwards. The
projections for domestic income made the realization of these carryforwards
more likely than not.
The Company has research and development tax credit carryforwards for
federal and state income tax purposes of approximately $1,800,000 (that
expire at various dates through 2009),training tax credits for state
purposes of $90,000 (that expire at various dates through 1999), and
alternative minimum tax credits of approximately $5,135,000 with no
expiration dates.
Long-term income taxes are those taxes due to the Finnish government in
1996 on 1994 income of Martis Oy.
Deferred U.S. income taxes are not provided on the undistributed
cumulative earnings of foreign subsidiaries because such earnings are
considered to be permanently invested in those operations. The cumulative
earnings of foreign subsidiaries were approximately $65,154,000 at December
30, 1994. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at December 30,
1994, was approximately $11,952,000.
Note H: Major Customers
Single customers accounted for approximately 15.3 percent, 12.3 percent,
and 10.8 percent of consolidated net sales in 1994, 1993 and 1992,
respectively.
Note I: Business Segment and Geographical Information
The Company operates in one business segment. Products include voice and
data communication and networking equipment used in public and private
communication networks worldwide.
The Company operates in three principal geographic areas: the United
States, Canada and Europe. A summary of the Company's operations by
area is presented below.
Adjustments
(In thousands) United and Consolidated
States Canada Europe Eliminations Total
1994 ------- ------- ------- ------- -------
Revenues
Unaffiliated customers $355,406 $22,148 $116,599 --- $494,153
Intergeographic 23,899 --- 5,034 ($28,933) ---
------- ------- ------- ------- -------
Total $379,305 $22,148 $121,633 ($28,933)$494,153
Operating profit (loss) $59,042 ($5,765) $46,405 --- $99,682
Identifiable assets $240,585 $8,639 $140,843 --- $390,067
1993
Revenues
Unaffiliated customers $242,513 $29,982 $47,968 --- $320,463
Intergeographic 28,965 --- 4,671 ($33,636) ---
------- ------- ------- ------- -------
Total $271,478 $29,982 $52,639 ($33,636)$320,463
Operating profit (loss) $17,613 ($2,116) $16,549 --- $32,046
Identifiable assets $196,473 $12,121 $120,172 --- $328,766
1992
Revenues
Unaffiliated customers $192,770 $33,149 $32,641 --- $258,560
Intergeographic 32,742 --- 4,498 ($37,240) ---
------- ------- ------- ------- -------
Total $225,512 $33,149 $37,139 ($37,240)$258,560
Operating profit $8,499 $279 $7,321 --- $16,099
Identifiable assets $169,874 $14,749 $26,125 --- $210,748
Intergeographic sales are accounted for as sales and as cost of sales
between the domestic parent and its subsidiaries. The sales price or cost
is dependent upon the product, consists of a discount from list price and
is sufficient to recover cost plus an appropriate markup for profit.
Operating profit is revenue less all related costs of sales, marketing,
development, general and administrative and goodwill expenses, excluding
interest and income taxes. Identifiable assets are those assets considered
as necessary for the ongoing activities and operations of each geographic
area.
Domestic operating revenues include export sales to unaffiliated customers
of approximately $31,018,000, $18,645,000 and $17,760,000 in 1994, 1993,
and 1992, respectively.
Note J: Commitments
The Company and its subsidiaries have a number of operating lease agreements
primarily involving office space, buildings and office equipment. These
leases are non-cancellable and expire on various dates through 2009.
As of December 30, 1994, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In thousands)
1995 $2,317
1996 1,678
1997 1,123
1998 619
1999 223
2000 and thereafter 2,107
------
Total Minimum Lease Payments $8,067
======
Rental expense for the years ended December 30, 1994, December 31, 1993,
and January 1, 1993, was approximately $2,782,000, $3,314,000 and
$3,594,000, respectively.
Note K: Business Acquisition
On October 7, 1993, the Company acquired all of the outstanding shares of
Martis Oy, located in Espoo, Finland, for approximately $71,263,000,
financed with bank loans and cash.
The acquisition has been accounted for through use of the purchase method
of accounting, and, accordingly, the accompanying financial statements
include the results of its operations since the date of acquisition.
Goodwill arising from the transaction amounted to approximately
$45,429,000, which is being amortized over 20 years.
The following table summarizes on an unaudited pro forma basis the
combined results of operations of the Company as though the above
acquisition was made at December 28, 1991. The pro forma amounts give
effect to appropriate adjustments to amortize goodwill and acquisition
costs, to reflect the reduction of interest and dividend income resulting
from the use of cash for the acquisition, to reflect the increase in
interest expense on the acquisition bank debt, and to reflect the
corresponding income tax effects.
Years ended
(In thousands, except per-share data) 12/31/93 01/01/93
-------- --------
Net sales $352,927 $284,503
Net earnings before cumulative
effect of accounting change $42,049 $18,952
Cumulative effect of accounting change 1,500 ----
------- -------
Net earnings $43,549 $18,952
======= =======
Earnings per common share before
cumulative effect of accounting change $0.95 $0.45
Cumulative effect of accounting change 0.03 ----
----- -----
Earnings per common share $0.98 $0.45
===== =====
Note K: Business Acquisition (continued)
The pro forma financial information presented above does not purport to
be indicative of either the results of operations that would have occurred
had the acquisition taken place at the beginning of the periods presented or
of future results of operations of the combined businesses.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales during 1994 approached the half-billion-dollar mark by totaling
$494,153,000 versus $320,463,000 in 1993. This growth of 54.2 percent was
representative of both the continued strength and acceptance in the
domestic marketplace of the TITAN (a registered trademark of Tellabs
Operations, Inc.) 5500 digital cross-connect system and the inclusion of a
full year of sales of the Company's leading international product, the
Martis DXX (a trademark of Martis Oy, a subsidiary of Tellabs, Inc.)
multiplexer. Each of these products addresses a different geographic
marketplace, which provided for growth in both the domestic and
international sales channels. Additionally, all of the major product
groups posted gains over 1993 sales, as was the case in the prior year.
Total sales of network access products, which include analog voice
frequency products, digital echo cancellers and digital transcoders,
exceeded the previous year's sales in each of the last four years, even
though they decreased as a percent of total product sales. Cellular
operators have become the frequent purchasers of these digital products.
However, the increasing need for digital network access products has had
the opposite effect on the Company's sales of analog voice-frequency
products.
The digital cross-connect area surpassed the $200,000,000 mark during 1994
after just surpassing the $100,000,000 mark in the previous year. As was
mentioned previously, the leader in this area is the TITAN 5500 digital
cross-connect system, whose sales doubled in 1994. The customers of this
product include five of the RBOCs and most of the interexchange carriers
in the United States. The digital cross-connect group continues to lead
all product groups in percent of total product sales.
The managed digital networks area saw a resurgence in the percentage of
total Tellabs sales with the inclusion of the Martis DXX multiplexer,
beginning in the last quarter of 1993. This group also includes data
products such as the CROSSNET (a registered trademark of Tellabs
Operations, Inc.) data multiplexer and 33X packet switch products, whose
growth had slowed in the last few years.
Net earnings for 1994 were $72,389,000, up 126.4 percent from 1993
earnings of $31,967,000. Primary and fully diluted earnings per share were
$1.60 in 1994, compared with 72 cents in 1993. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
and 3-for-2 stock splits that occurred in May 1994 and November 1993,
respectively.) This significant increase in earnings was again primarily
due to the increase in sales during 1994 and a corresponding 64.4 percent
increase in gross profit dollars. Operating expenses exceeded 1993's
total but decreased by almost 7 percent as a percentage of sales.
Sales during the fourth quarter of 1994 were a record $148,571,000,
reflecting the Company's typically strong fourth quarter finish. Sales of
the TITAN 5500 system and Martis DXX system led the 38.6 percent increase
over the 1993 fourth quarter. Net earnings for the quarter were
$26,075,000, a 72.1 percent increase over 1993 earnings of $15,155,000.
Primary and fully diluted earnings per share were 57 cents for the fourth
quarter of 1994 and 34 cents for the fourth quarter of 1993.
The gross profit margin for 1994 improved significantly to a record level
of 54.6 percent versus 51.3 percent in 1993. This improvement reflects
both the sales of higher-margin products and the continuation of highly
productive and efficient manufacturing operations. As sales increase for
1995, the gross profit margin level is expected to remain relatively
constant.
Total operating expenses increased 28.8 percent during 1994, an increase
that was spread throughout all expense categories. Included in each
category discussed below for 1994 are 12 months of Martis' operating
expenses versus only three months for 1993. Marketing expenses increased
21 percent in total due to increases in customer support and service
expenses, headcount-related expenses and increased international marketing
activities. Research and development expenses increased 27 percent in
total due to increased headcount-related expenses in support of planned
enhancements to the Company's products. General and administrative
expenses increased 43.9 percent in total due to both the expense associated
with compensation tied to the market price of the Company's stock and
additional headcount-related expenses. As a percentage of sales, total
1994 operating expenses were 34.5 percent compared to 41.3 percent in 1993.
Each category except general and administrative has shown a constant
decrease as a percentage of sales since 1991.
Interest income increased to $3,185,000 in 1994, an 8.5 percent increase
compared to $2,935,000 in 1993. Interest-bearing investments increased as
additional cash balances became available to invest. The $1,286,000
increase in interest expense resulted from the interest paid on the demand
notes payable that were outstanding throughout most of 1994.
In April 1994, the Company and Advanced Fibre Communications began a joint
venture. In this venture, the two companies combined their efforts in the
local loop transport area to develop the CABLESPAN (a trademark of Tellabs
Operations, Inc.) 2300 system, which will serve the cable industry. The
equity in losses of the joint venture totaled $1,012,000 in 1994.
Foreign exchange losses of 1994 were the result of the strength of the
Finnish markka versus the U.S. dollar and other European currencies with
which the Company has exposure. The foreign exchange gains of 1993 were
primarily the result of the devaluation of the Irish punt in the first
quarter of 1993, which accounted for $882,000 of the total amount.
The effective tax rate was approximately 26 percent for 1994 and 14.9
percent for 1993. The 1994 effective rate primarily reflects adjustments
from the federal statutory rate attributable to foreign tax rate
benefits, benefits attributable to foreign tax credits and research and
development credits, and reduction in the valuation allowance. The 1993
effective rate reflected greater benefits attributable to foreign tax
rates, foreign tax credits and research and development credits.
Sales during 1993 of $320,463,000 established a then record level by
increasing 23.9 percent over the previous record of $258,560,000 in 1992.
Sales of digital cross-connect systems accounted for over 85 percent of the
increase. For the second consecutive year, the SONET-based TITAN 5500
digital cross-connect system led the way, more than doubling its sales to a
level exceeding $80 million. Sales in 1993 of network access products
showed some slight growth over the previous year. Sales of managed digital
networks benefited during the fourth quarter of 1993 from the influx of
sales of Martis Oy's flexible multiplexer, which offset weak demand for
CROSSNET multiplexers. Geographically, sales in the United States
increased due to TITAN 5500 sales, while international sales increased due
to growth from both TITAN 532E sales and the acquisition of Martis Oy in
October 1993. Sales in Canada decreased as a result of the lower CROSSNET
sales.
Net earnings for 1993 were $31,967,000, up 89.7 percent from 1992 earnings
of $16,854,000. Primary and fully diluted earnings per share were 72 cents
in 1993, compared to 40 cents in 1992. (Earnings per share amounts for
both years have been adjusted to reflect the effect of the 2-for-1 and
3-for-2 stock splits that occurred in May 1994 and November 1993,
respectively.) This significant increase was due primarily to the increase
in sales during 1993 and a corresponding 30 percent increase in gross
profit dollars. Operating expenses exceeded 1992's total but decreased as
a percentage of sales.
Sales during the fourth quarter of 1993 surpassed the $100 million mark,
reaching $107,187,000, reflecting the continued strength in sales of
TITAN 5500 systems and the positive impact of the addition of Martis Oy.
This was a 22.4 percent increase over 1992 fourth quarter sales of
$87,588,000. Net earnings for the 1993 fourth quarter were $15,155,000, a
55.6 percent increase over 1992 earnings of $9,740,000. Primary and fully
diluted earnings per share were 34 cents for the fourth quarter of 1993
and 23 cents for the fourth quarter of 1992.
Gross profit margin for 1993 improved to a then record level of 51.3
percent versus 48.7 percent in 1992. This improvement reflected both the
continuation of highly productive and efficient manufacturing operations
and the sales of higher-margin products.
Total operating expenses increased 20.4 percent during 1993, an increase
that was spread throughout all expense categories. Marketing expenses
increased 17.2 percent due to increases in headcount-related expenses,
customer support expenses and increased international marketing activities.
Research and development expenses increased 20.1 percent due to increased
headcount-related expenses in support of the Company's products and also
due to the addition of the expenses of Martis Oy. General and
administrative expenses increased 26.2 percent primarily due to the
expense associated with compensation tied to the market price of the
Company's stock and additional expenses related to Martis Oy.
Interest income increased to $2,935,000 in 1993, a 14.6 percent increase
compared to $2,561,000 in 1992. Interest-bearing investments increased at
international locations that had higher interest rates during 1993. The
foreign exchange gains of 1993 were primarily the result of the devaluation
of the Irish punt in the first quarter of 1993, which accounted for
$882,000 of the total amount.
The effective tax rate was approximately 14.9 percent for 1993 and 12
percent for 1992. The 1993 effective rate primarily reflected adjustments
from the federal statutory rate attributable to foreign tax-rate benefits,
the benefits attributable to foreign tax credits and research and
development credits, offset by dividends received from foreign
subsidiaries. The 1992 effective rate primarily reflected foreign tax-rate
benefits and greater foreign sales corporation activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has never paid a cash dividend, and current policy is to retain
earnings to provide funds for the operation and expansion of the business.
The Company does not anticipate paying cash dividends in the foreseeable
future.
Net working capital at December 30, 1994, was $138,317,000, compared with
working capital of $64,285,000 at December 31, 1993. The Company's
current ratio at December 30 was 2.7 to 1. The increase in net working
capital is primarily due to the repayment of $60,000,000 in short-term bank
debt used to finance the October 1993 purchase of Martis Oy (Note K).
Management believes this level of working capital will be adequate for
the Company's liquidity needs related to normal operations both currently
and in the foreseeable future. Sufficient resources exist to support the
Company's growth either through currently available cash, through cash
generated from future operations, or through additional short-term or
long-term financing.
Operating activities provided the Company with a significant amount of cash
due to net earnings of $72,389,000. Net trade accounts receivable
increased by $9,924,000 to a year-end balance of $84,397,000, due primarily
to the record level of sales volume in the fourth quarter of 1994. Total
inventory levels increased by $2,000,000 from 1993 levels, while raw
materials inventory decreased due primarily to an initiative by the Company
to reduce the levels of inventory. The increase in finished-goods and
work-in-process inventory reflects both products held at international
locations and digital cross-connect inventory. The finished-goods
increase is consistent with the significant increase in current sales
levels versus 1993 and with 1995 sales forecasts. The inventory turnover
ratio increased to 4.4 times from 3.6 times in 1993 due to the decrease in
raw material combined with the more significant increase in sales. The
increase in income taxes payable of $11,595,000 represents an increase in
both the effective tax rate and taxable income applicable to 1994 versus
1993. Long-term income taxes are those taxes due to the Finnish government
in 1996 on 1994 income of Martis Oy.
The Company increased its holdings in marketable securities as additional
cash balances became available for investment. The Company also invested
approximately $23,000,000 during 1994 in property, plant and equipment.
Additions were made to increase capacity at international locations along
with general improvements at several facilities. Equity investments
totaling $9,005,000 were made during 1994 in two telecommunication-related
companies and a joint venture. These investments allowed the Company to
gain access to technologies that offer opportunities for future sales
growth in the ATM and cable markets.
Financing activities in 1994 were dominated by the payment of the
$60,000,000 of short-term bank debt incurred in October 1993 in connection
with the Martis Oy acquisition. Finally, an additional $9,081,000 of cash
was provided to the Company through the exercise of stock options under the
Company's stock option plans.
OUTLOOK
The outlook for 1995 focuses both on increased international and domestic
revenues. International growth will be primarily driven by the Martis DXX
system. Domestic growth is dependent upon another record year for the
TITAN 5500 system, along with the emergence of new products such as the
ALTA (a trademark of Tellabs Operations, Inc.) 2600 product in the ATM
arena and the CABLESPAN system in the cable market. At December 30, 1994,
backlog increased to approximately $80,000,000 from $54,000,000 at the end
of the prior year. All of the 1994 backlog is expected to be shipped in
1995. The Company believes that backlog is not a meaningful indicator of
its future performance.
In addition to a focus on enhanced revenues, 1995 will also be marked by a
focus upon providing the resources to support revenue growth, but on a
cost-effective level. To that end, total operating expenses for 1995 are
expected to average approximately 33 percent of planned revenues. Research
and development expenses are expected to average approximately 14 percent
of sales. Marketing and general and administrative expenses are expected
to average approximately 19 percent of sales. Management believes these
levels, which are relatively consistent with 1994, can be attained while
supporting the sales and product growth slated for 1995 and beyond as the
Company continues to invest in its future growth.
The 1995 capital expenditure plan totals $25,000,000. It is anticipated
that 1995 working capital requirements and capital expenditures will be met
with funds currently on hand and funds generated by future earnings.
Earnings for 1995 are expected to be taxed at a 30 percent rate.
The Company believes that forming relationships with other companies
through the creation of joint ventures is an important part of its future
growth. These joint ventures offer the Company the opportunity to share in
the development of new markets, products and technologies. Therefore, now
and into the future, the Company will continue to participate in those
joint ventures it considers beneficial.
EX-21
4
EXHIBIT 21
TELLABS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
AS OF MARCH 27, 1995
State or Other
Jurisdiction of
Name Incorporation
Tellabs Operations, Inc. Delaware
Tellabs Export, Inc. Delaware
Tellabs Caribe, Inc. Delaware
Telecommunications Laboratories, Inc. Illinois
Tellabs International, Inc. Illinois
Tellabs Communications Canada Ltd. Ontario, Canada
Tellabs (V.I.), Inc. U.S. Virgin Islands
Tellabs H.K. Ltd. Hong Kong
Tellabs NZ Limited New Zealand
Tellabs Korea, Inc. Korea
Tellabs PTY. Ltd. Australia
Tellabs Holdings Ltd. Ireland
Tellabs Ltd. Ireland
Tellabs (Ireland) Ltd. Ireland
Tellabs Research Ltd. Ireland
Tellabs SA Belgium
Tellabs U.K. Ltd. United Kingdom
Tellabs GmbH Germany
Tellabs Mexico, Inc. Delaware
Tellabs de Mexico, S.A. de C.V. Mexico
Martis Oy Finland
EX-23
5
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACOUNTANTS
We have issued our reports dated January 23, 1995, accompanying the
consolidated financial statements and schedules incorporated by reference
or included in the Annual Report of Tellabs, Inc. and Subsidiaries on Form
10-K (Exhibit 13) for the year ended December 30, 1994. We hereby consent
to the incorporation by reference of said reports in the Registration
Statements of Tellabs, Inc. on Form S-8 (File Nos. 33-48972, 33-45788 and
33-55487).
GRANT THORNTON LLP
Chicago, Illinois
March 27, 1995
EX-27
6
5
YEAR
DEC-30-1994
DEC-30-1994
51460000
23209000
84397000
992000
51881000
220556000
161369000
69300000
390067000
82239000
0
436000
0
0
292354000
390067000
494153000
494153000
224150000
224150000
0
0
(1412000)
97824000
25435000
72389000
0
0
0
72389000
1.60
1.60