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Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
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UNITED STATES
FORM 10-K (Mark One) For the fiscal year ended December 27, 2002 For the transition period from
to
Commission file Number: 0-9692 TELLABS, INC. Registrants telephone number, including area code: (630) 378-8800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: 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[ ] Indicate by check mark if disclosure of delinquent files 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 is an acelerated filer (as defined in Rule 12b-2 of the Act). YES [ X ]
NO[ ] On February 21, 2003, 298,100,768 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 $1,770,719,000. Documents incorporated by reference: Portions of the Registrants Annual Report to Stockholders for
the fiscal year ended December 27, 2002, are incorporated by reference into Parts I and II, and portions of the
registrants Proxy Statement dated March 20, 2003, are incorporated by reference into Part III. PART I PART I ITEM I. BUSINESS Tellabs, Inc. (the Company) and its subsidiaries design, manufacture, and market communications equipment to telecommunications service providers worldwide. The Company also provides installation and professional services that support its product offerings. Industry and technical terms used in this Form 10-K are described in the Glossary, which appears at the end of this Item I. Products provided by Tellabs include optical networking systems, broadband access systems and voice-quality enhancement systems. The Companys optical networking systems are designed to help service providers reduce operating costs, generate greater revenues and efficiently manage bandwidth. The Companys optical networking systems consist of digital cross-connect, transport switching and optical transport systems. The Companys broadband access systems consist of managed access and transport systems used to deliver wireless and business services, as well as an access product designed to deliver telephone and data services over cable television networks. The Companys voice-quality enhancement systems consist primarily of the Tellabs® 3000 family of broadband and narrowband echo cancellers and Tellabs voice-quality enhancement (VQE) solutions, which enable wireless and wireline providers to improve voice quality in long-distance, wireless and private networks. The VQE solutions consist of application-specific software that operates with the Tellabs 3000 family of echo cancellers to optimize voice clarity. The Companys products are sold in the domestic and international marketplaces (under both the Tellabs name and trademarks and under private labels) through the Companys field sales force and selected distributors. The Companys customer base includes Incumbent Local Exchange Carriers (ILECs), independent telephone companies (ITCs), interexchange carriers (IXCs), local telephone administrations (PTTs), other local exchange carriers (LECs), original equipment manufacturers (OEMs), cellular and other wireless service companies, cable operators, alternate service providers, competitive local exchange carriers (CLECs), Internet service providers and system integrators. During the year, in response to the continued downturn in capital spending by telecommunications carriers, the Companys management and Board of Directors approved plans to restructure its business operations in April and again in September. These restructuring efforts included the reduction of excess inventories and related purchase commitments, workforce reductions, and the closure and consolidation of excess facilities, including manufacturing facilities in Ronkonkoma, New York, and Shannon, Ireland, along with the write-off of related fixed assets. As a result, the Company recorded net pre-tax restructuring and other charges of $268.7 million. For more information on the Companys 2002 restructuring activities, please refer to Note 3, "Restructuring and Other Charges" from the Tellabs 2002 Annual Report, incorporated herein by reference in Item 8, Financial Statements and Supplementary Data. OPTICAL NETWORKING SYSTEMS Optical networking increases the capacity of the fiber in a network, enabling service providers to carry more of their customers voice, data and video signals over the same infrastructure. Optical networking relies on wavelengths and fibers to move massive amounts of voice and data. A wavelength can carry voice, video or data traffic from an optical carrier (OC)-3 or synchronous transfer mode (STM)-1 (up to two thousand simultaneous phone conversations or Internet connections) up to OC-768 or STM-256. A fiber can carry anywhere from one to 160 wavelengths, depending on the type of equipment used to terminate the fiber. Tellabs optical networking systems are designed to help service providers lower costs, generate more revenues and efficiently manage bandwidth as the end-user demand for communication services grows. The Companys optical networking systems consist of technologically sophisticated digital cross-connect, transport switching and optical transport systems. These transmission systems are designed to meet or exceed domestic and international industry standards. Product offerings include the Tellabs 5000 series of digital-cross connect systems, the Tellabs 6400 series of transport products, the Tellabs 6500 transport switch and the Tellabs 7100 series of optical transport systems. A digital cross-connect system is a high-speed data channel switch, which connects transmission paths based on network needs, rather than call-by-call. Digital cross-connect systems manage and route network traffic and combine, consolidate and segregate signals to maximize efficiency. The Tellabs 5000 series of digital cross-connect systems operate under software control and are typically used to build and control the narrowband and wideband transmission infrastructure of telecommunication service providers. These products augment the ability of service providers to provide current, emerging and future services to business and residential customers. Telecommunication managers utilize the digital cross-connect systems to generate revenue and 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 Companys systems include a feature for monitoring facility performance, which reduces troubleshooting time in a complex network. The user can detect the early warnings of facility degradation rather than reacting to a network outage. These systems also convert international to domestic transmission and signaling standards. The Tellabs 5000 series digital cross-connect systems vary in switching rate and facility interface speed. The Tellabs 5300 line of narrowband cross-connect systems is the highest density narrowband system on the market with the ability to satisfy small cross-connect application requirements. More than 1,000 Tellabs 5300 systems have been implemented in wireless/mobile networks The Company's flagship Tellabs 5500 digital cross-connect system is one of the industrys highest capacity wideband digital cross-connects. The system efficiently grooms voice and data traffic over a SONET-based network. More than 4,000 Tellabs 5500 systems have been deployed in a variety of networks including local telephone service, long distance, wireless, private and emerging networks across the United States. With its scalability and carrier-class architecture, the Tellabs 5500 system helps service providers reduce equipment and maintenance costs while maximizing network profitability. The Tellabs 6400 product line, obtained in the acquisition of Ocular Networks, Inc., in January 2002, is also designed for use in the metro optical networking market. The Tellabs 6400 transport switch increases network utilization efficiency in Tier 2 and Tier 3 offices by integrating cross-connect technology, add-drop multiplexing and highly efficient data switching for Internet protocol (IP) and Ethernet traffic. The Tellabs 6410 transport edge node is a compact, low-cost full SONET add/drop multiplexer system for time division multiplex (TDM) access and data services. By combining TDM and Ethernet interfaces with high-speed optical or electrical transport, carriers can achieve a cost-effective solution to link the new edge of the metro network with the dense metro core. The Tellabs 6500 transport switch is a broadband transport platform that performs bandwidth grooming, add-drop multiplexing (ADM) and cross-connections at higher speeds than the 5500 series products. The new Tellabs MetroVantage solution extends this capability to remote locations via metro aggregation/backhaul and virtual cross-connections. The Tellabs 6500 systems redundant, carrier-class architecture ensures reliability during operation and service continuity during system expansion. The Tellabs 6500 system is fully bi-directional and non-blocking/non-stranding, enabling addition of port complexes up to the switch core capacity in any combination of port bandwidths. This system supports hitless scalability from 20 gigabits per second to 1.2 terabits per second, and is expandable from the smallest system to the largest. The Tellabs 7100 optical transport system is designed for use in the metropolitan (metro) optical networking market, to enable service providers to deliver high-speed broadband services to Internet service providers and Fortune 500 companies, helping to alleviate the bandwidth bottlenecks of the Internet on ramps. The system accomplishes this by utilizing densewavelength-division multiplexing (DWDM) technology to increase the capacity of a network. DWDM is the process of increasing the amount of traffic a single fiber can carry. The Tellabs 7100 system utilizes DWDM to increase an individual fibers capacity up to 32 times and when used in conjunction with other Tellabs solutions, enables end-to-end fiber and lightpath management. Optical networking system products accounted for approximately 44%, 55% and 64% of sales for 2002, 2001 and 2000, respectively. BROADBAND ACCESS The Companys broadband access systems consist primarily of the Tellabs 8100 and Tellabs 6300 series of managed access and transport systems, the Tellabs 7200 optical transport system and the Tellabs 2000 family of cable telephony distribution systems. The Companys broadband access solutions consist of managed access and transport systems used to deliver wireless and business services as well as an access product designed to deliver telephone and data services over cable television networks. The Tellabs 8000 series of managed access systems is designed for the connectivity services segment of the overall Europe, Middle East, Africa, Asia Pacific and Latin America business services market, which includes business-class Internet connectivity and managed data networks. The Tellabs 8100 managed access system is a leading mobile transmission system. It is currently deployed in more than 250 networks around the world, providing intelligent transport for mobile services and multi-service platforms for a broad range of business services. For mobile operators moving to 3G service provision, the Tellabs 8100 managed access system offers a highly effective way to integrate new packet and cell based technologies in the radio access network and a smooth evolution path to IP and ATM core networking. The Tellabs 7200 optical transport system is an international-oriented wavelength-division multiplexing platform, which enables operators to reduce the operational costs and simplify network planning. It provides multi-wavelength optical add/drop, integrated SDH interfaces, and open transponder interfaces that support Gigabit Ethernet, ESCON, ATM and IP applications. The system features plug-and-play installation (SmartStart) which reduces installation time and eases procedures. The Tellabs 6300 series includes edge nodes (the Tellabs 6310 and the Tellabs 6320 product lines); the Tellabs 6330 core node; the Tellabs 6340 switch node, a next-generation multi-service provisioning platform (MSPP) that meets carriers needs for new high-speed data solutions; and the Tellabs 6350 transport switch, a multipurpose platform offering faster services, including high-capacity 4/4/1 cross-connection suited for various data, voice and leased line applications, and offers interfaces such as Gigabit Ethernet and integrated DWDM. The Tellabs 2300 telephony distribution system is a multiple services delivery system that enables cable television providers, alternate access carriers and competitive access providers to build flexible communication networks that support the integrated delivery of video, voice, data and information services. The latest domestic upgrade to the Tellabs 2300 telephony distribution system enables multi-line radio frequency (MRF) sharing to maximize network reliability and decrease the probability of a blocked call. Broadband Access products accounted for approximately 35%, 24% and 22% of sales in 2002, 2001 and 2000. VOICE-QUALITY ENHANCEMENT The Companys voice-quality enhancement systems consist primarily of the Tellabs 3000 family of broadband and narrowband echo cancellers and Tellabs voice-quality enhancement (VQE) solutions that enable wireless and wireline providers to improve voice quality in long distance, wireless and private networks. The Tellabs 3000 series of echo cancellers operate in a variety of network environments to ensure that a subscribers phone call is echo-free. The VQE solutions are application-specific software that operate seamlessly with the Tellabs 3000 family of echo cancellers to optimize voice clarity for improved customer satisfaction. Tellabs VQE products primarily address the needs of cellular companies, ILECs and IXCs, both domestically and internationally. Over 300 customers in 70 countries rely on Tellabs echo canceller and VQE solutions. In the case of wireline customers, the ability to control the clarity of speech quality is becoming more and more difficult, because of the deregulation of networks and the move from circuit-based to cell- and packet-based networks. These networks introduce delays and other issues that are not present in circuit-based calls, such as inconsistent speech-level control during calls. In the case of wireless operators, to compete with wireline operators for call revenues, the clarity of a mobile call must be as good as a wireline call. These changes have resulted in a move away from pure echo cancellation, to providing echo cancellation as a platform for voice-quality enhancing software, such as level control and noise reduction. This development in the market has opened up opportunities, not just to provide solutions to the wireline and wireless operators worldwide, but also to the manufacturers of telecommunications products worldwide, who integrate these voice-quality enhancing solutions into their products
. Competition is driving many wireline and wireless customers to re-evaluate and upgrade their existing infrastructure, based on the voice-enhancing technology solutions now available. Tellabs VQE solutions include Tellabs Noise Reduction (TNR), which reduces background noise in mobile calls; Tellabs Level Control (TLC), which addresses voice level variations by automatically compensating for high or low audio levels on a cell-by-cell basis; and Tellabs Acoustic Control (TAC), which eliminates acoustic echo originating from digital mobile handsets and hands-free kits. The Tellabs 3100S VQE system combines an echo canceller and a fully functional digital cross-connect, along with optional voice-quality enhancements, to offer digital wireless and long distance service providers improved voice quality and enhanced network performance. In 2002, the Company introduced the Tellabs 3600 OC-3 broadband echo control solution, which improves voice quality and enhances network performance for digital wireless and long-distance service providers. Voice-quality enhancement products accounted for approximately 5% of sales in 2002 and 6% of sales in both 2001 and 2000. SERVICES AND OTHER The Company generates services and other revenues primarily from its services and solutions area. The Companys worldwide service organization provides customers with high quality technical and administrative product support focusing on meeting the expanding needs of the global customer base. The Company supports its customers with a wide range of services, such as network deployment, traffic management, support services, professional services and training. Tellabs network deployment services enable the Companys specialists to be a single point of contact for the customers, focusing on program management, engineering, material procurement, installation labor and supervision, and acceptance testing. Traffic management services include Tellabs Network Modernization Program, software tools and processes designed to support network upgrades and the transfer of live telecommunications traffic; and Tellabs Element Provisioning Program, which gives service providers the ability to accelerate their time-to-market by 50 percent. Support services offer network service providers a wide range of options for technical assistance, system maintenance, system performance improvement and skills enhancement. Professional services offers a variety of tailored programs to meet all phases of a network life cycle including Operations Integration Services, highly customizable solutions designed for specific customer needs that enhance the overall effectiveness of operations; and Management Systems Integration Services, which help network service providers improve their operations by extending the capability and performance of the Companys network management systems. The Company provides product warranties for periods ranging from one to five years for the repair or replacement of modules and systems found to be faulty due to defective material and as may otherwise be required under a specific customer contract. The Company has an expedited replacement service that is used to provide the customer with needed module replacements in response to a time-critical service outage. The Companys services group offers a variety of professional and consultative services, including program management, network planning and enhanced product support. These innovative service offerings are designed to augment the Companys basic services and provide value-added benefits to our customers. Services and other revenues accounted for approximately 16%, 15% and 8% of sales in 2002, 2001 and 2000, respectively. COMPETITION The Companys products are sold in global markets and compete on the following key factors: responsiveness to customer needs, product features, customer-oriented planning, price, performance, reliability, breadth of product line, technical documentation and prompt delivery. The optical networking product systems compete principally with Alcatel, Ciena, Lucent Technologies, Marconi, NEC, Nortel Networks and Polaris. The major competitors of the broadband access products are ADC, Alcatel, Arris, Ciena, Cisco, ECI, Huawei, Lucent, Marconi, NEC, Nortel Networks, Siemens and ZTE. Competitors for voice-quality enhancement products are Ditech and NMS Communications. GLOBAL SALES The North American sales group consists of 69 direct sales personnel and an additional 54 sales support personnel located throughout the United States and Canada, conducting activities from the Companys corporate headquarters and five regional offices. The regional sales offices are generally staffed by a regional sales manager, direct sales resources, system sales engineers and additional personnel as required. The North American sales organization is structured by market and customer type and size. The international sales group consists of approximately 80 direct sales personnel, and an additional 80 sales support personnel located in Latin America, South America, Europe, the Middle East, Africa and Asia Pacific. The international sales organization conducts its activities from the Companys corporate headquarters, three regional headquarters, and 25 regional sales offices. The regional sale offices are generally staffed by a regional sales manager or country manager, direct sales resources, system sales engineers and additional personnel as required. The international sales organization is structured to support activities on a regional basis, with solution centers located strategically throughout the world. Sales are generated through the Companys direct sales organization and selected distributors. The Company has arrangements with a number of distributors of telecommunications equipment, both in North America and internationally, some of whom maintain inventories of the Companys products to facilitate prompt delivery. These distributors provide information on the Company's products through their catalogs and through trade show demonstrations. The Companys field sales force also assists the distributors with regular calls to them and their customers. In 2002, sales generated through the Companys direct sales organizations and selected distributors are as follows: Direct sales Distributors North America 85% 15% International 65% 35% Consolidated 78% 22%
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ]
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(Exact name of registrant as specified in its charter)
Delaware
36-3831568
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
One Tellabs Center, 1415 West Diehl Road, Naperville, Illinois
60563
(Address of Principal Executive Offices)
(Zip Code)
Common stock, $0.01 par value
(Title of Class)
CUSTOMERS
Sales to customers within the United States accounted for approximately 69%, 76% and 78% of overall sales, in 2002, 2001 and 2000, respectively. Sales to international customers accounted for approximately 31%, 24% and 22% of consolidated sales in 2002, 2001 and 2000, respectively. The largest single group of customers the Company has is Incumbent Local Exchange Carriers (ILECs), which includes BellSouth, Verizon, SBC and Qwest Communications. Sales to ILECs accounted for approximately 36%, 42% and 41% of consolidated net sales in 2002, 2001 and 2000, respectively. The Company believes that a significant reduction in purchases by ILECs as a group, or as a result of the loss (including bankruptcy) of a customer, could have a material adverse effect on the Companys results.
In 2002, sales to Verizon (including Verizon Wireless) and AT&T (including AT&T Wireless and AT&T Broadband) accounted for approximately 17.4% and 11.2% of consolidated net sales, respectively. In 2001, sales to Verizon (including Verizon Wireless) and Sprint Corporation (including Sprint PCS) accounted for 18.4% and 10.1% of consolidated net sales, respectively. In 2000, sales to Verizon (including Verizon Wireless) accounted for approximately 19.1% of consolidated net sales. No other customer in 2002, 2001 or 2000 accounted for more than 10% of consolidated net sales.
BACKLOG
At December 27, 2002, and December 28, 2001, backlogs were approximately $96 million and $172 million, respectively. All of the December 27, 2002, backlog is expected to be shipped in 2003. The Company considers backlog to be an indicator, but not the sole predictor, of future sales.
RESEARCH AND DEVELOPMENT
Tellabs believes that the enhancement of existing products and the development of new products are vital to the Companys long-term success. Research and development expenses were $340.6 million in 2002, $422.7 million in 2001 and $412.4 million in 2000. As of December 27, 2002, research and development headcount totaled 1,957 representing approximately 41% of the Companys total workforce. The Company conducts research and development at its laboratories in Lisle, Bolingbrook and Naperville, Illinois; Cambridge, Massachusetts; Ashburn, Virginia; Quebec, Canada; Ballerup, Denmark; Espoo, Oulu, Varkaus and Tampere, Finland. In addition to the Companys internal efforts to develop new technologies, Tellabs also undertakes research and development-oriented acquisitions and product-oriented alliances in order to allow the Company access to technology that is important to the future of its customers.
MANUFACTURING
The Company generally manufactures and assembles the products it sells. These products are primarily assembled from standard components and from fabricated parts that are manufactured by others to the Companys specifications. The Company also uses third party manufacturers to supplement its manufacturing processes.
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.
The Companys manufacturing facilities are located in Bolingbrook, Illinois, and Espoo, Finland. Each of the Companys manufacturing operations is registered under the ISO 9000 standard. As a result of the Companys restructuring efforts initiated during 2002, the Shannon, Ireland, and Ronkonkoma, New York, manufacturing facilities were closed.
As part of the manufacturing process, hazardous waste materials 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 Companys production process or its earnings or capital expenditures.
EMPLOYEES
At December 27, 2002, the Company had 4,828 employees. Approximately 1,467 people were employed in the sales, sales support and marketing area, 1,957 in product development, 908 in manufacturing, and 496 in administration. The Company considers its employee relations to be good. It is not a party to any collective bargaining agreement.
INTELLECTUAL PROPERTY
The Company has various trade and service marks, both registered and unregistered, in the U.S. and in numerous foreign countries (collectively, Marks). All of these Marks are important because they differentiate the Companys products and services within the industry through brand name recognition. The Company is not aware of any factor which would affect its ability to utilize any of its major Marks.
The Company currently holds numerous United States and foreign patents. The Company has also developed certain proprietary hardware designs, software programs and other works in which the Company owns various intellectual property rights, including rights under copyright and trade secret laws. The Company believes that its patents and other intellectual property rights are important to its business.
Through various licensing arrangements the Company grants certain rights to its intellectual property and receives certain rights to intellectual property of others. The Company expects to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and marketing of the Company's products. Some of these licensing arrangements require or may require the payment of royalties, and the amount of these payments may depend upon various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology in any products of the Company or otherwise.
BUSINESS SEGMENT AND GEOGRAPHICAL INFORMATION
The Company manages its business in one business segment. Information with respect to the Companys net sales by product group, net sales by country and net long-lived assets by country for the fiscal years ended December 27, 2002, December 28, 2001, and December 29, 2000, is set forth in Note 14 on page 47 of the registrants 2002 Annual Report to Stockholders and is incorporated herein by reference.
ACCESS TO SEC REPORTS
The Company files annual, quarterly and special reports, proxy statements and other information with the SEC. These filings are available to the public at the SECs website at
www.sec.gov. No information from this web page is incorporated by reference herein.The Companys website is located at
www.tellabs.com. Copies of the Companys most recent annual shareholder report and proxy statement are available directly on this website free of charge as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Companys website includes automatic links to the SECs website for the Companys annual and quarterly filings.Copies of the Companys annual, quarterly and current reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto, are provided either electronically or in paper form free of charge upon request.
GLOSSARY OF COMMUNICATIONS TERMS
Access -- The process by which users or devices interact with a communications network.
Add/drop -- In a multichannel transmission system, a process that diverts (drops) a portion of the multiplexed aggregate signal at an intermediate point, and introduces (adds) a different signal for subsequent transmission in the same time slot.
Asynchronous transfer mode (ATM) -- A high-speed multiplexing and switching method utilizing fixed-length cells of 53 octects to support multiple types of traffic.
Bandwidth -- The width or carrying capacity of a communications channel expressed in bits per second or hertz.
Branch -- A direct path joining two nodes of a network or graph.
Broadband -- A high bandwidth fiber optic, coaxial or hybrid line with much more capacity than a standard voice-grade phone line, capable of carrying numerous voice, data and video channels simultaneously at DS3 or greater.
Carrier -- In a telecommunications context, a telecommunications company that holds itself out to the public for hire to provide communications transmission services.
Channel -- A connection between initiating and terminating nodes of a circuit.
Circuit -- The complete path between two terminals over which one-way or two-way communications may be provided.
Connection -- A provision for a signal to propagate from one point to another, such as from one circuit, line, subassembly, or component to another.
Dense wavelength division multiplexing (DWDM) -- Technology that splits single white-light optical signals on fiber optic cables into several independent wavelengths, or colors, thus expanding the carrying capacity of fiber optic networks.
Digital -- An alternative to traditional analog communications, digital systems transport information in binary 1s and 0s format, like computer code, to improve clarity and quality.
Digital cross-connect -- A specialized high-speed data channel switch, which connects transmission paths based on network needs (rather than call by call). Digital cross-connects manage and route network traffic, and combine, consolidate and segregate signals to maximize efficiency.
Digital signal -- A signal in which discrete steps are used to represent information.
Digital signal 3 (DS3) -- A digital signal of 44.736 Mb/s, corresponding to the North American T3 designator.
Enterprise Systems Connectivity (ESCON) -- High-speed fiber optic channel for linking mainframes.
Ethernet -- A data network that connects computers, printers, workstations, terminals and servers within the same building, campus or metropolitan area.
Exchange -- In the telephone industry, a geographic area (such as a city and its environs) established by a regulated telephone company for the provision of local telephone services.
Fiber optic -- High-capacity cable that uses a laser beam of light traveling along a glass fiber to transmit communication signals.
Frequency -- For a periodic function, the number of cycles or events per unit time.
Interexchange carrier (IXC) -- A communications common carrier that provides telecommunications services between local exchange and transport areas (LATAs) or between exchanges within the same LATA.
Internet -- The worlds largest decentralized network of computers and network servers.
Internet protocol (IP) -- Common name given to a set of protocols developed to allow cooperating computers to share resources across a network.
Multiplexing -- The combining of two or more information channels onto a common transmission medium.
Multiservice -- The capability of simultaneously transporting a variety of signal types.
Narrowband -- A network element providing capacity from DS0 to DS1.
Network -- A system of equipment and connections for the transmission of signals that carry voice, data and video. Networks can be local, such as those maintained by providers of local telephone services, or long-distance, such as those maintained by providers of connections and transport between local networks.
Node -- In a switched network, one of the switches forming the high-traffic-density connectivity portion of any communications network.
OC -- Optical Carrier.
Optical -- A technology that transmits signals as light over fiber optic cable.
Packet -- In data communications, a sequence of binary units, including data and control signals, that is transmitted and switched on a composite whole.
Signal -- Detectable transmitted energy that can be used to carry information.
Switch -- A device that establishes and routes communications paths.
Switching -- The controlling or routing of signals in circuits to execute logical or arithmetic operations or to transit data between specific points in a network.
Switched network -- A communications network in which any user may be connected to any other user through the use of message, circuit or packet switching and control devices.
Synchronous digital hierarchy (SDH) -- Transport format for transmitting digital information over fiber optic facilities outside of North America, comparable to SONET.
Synchronous optical network (SONET) -- Transport format for sending high-speed signals over fiber optics in North America.
Traffic -- The information moved over a communications channel.
Transponder -- An automatic device that receives, amplifies and retransmits a signal on a different frequency.
Transmission -- The dispatching, for reception elsewhere, of a signal, message or other form of information.
Terminal -- A device capable of sending, receiving or sending and receiving information over a communications channel.
Transport -- Refers to networks that use cables rather than radio.
Voice-quality enhancement -- A technique that isolates and filters our unwanted signals such as echo and background noise.
Wideband -- A network element providing capacity at DS1 or greater.
Wireline -- Refers to networks that use cables rather than radio.
ITEM 2. PROPERTIES
The Company owns an 850,000 square foot corporate headquarters building on 55 acres of land in Naperville, Illinois, approximately 35 miles west of Chicago; 50 acres of land in Bolingbrook, Illinois (near Lisle), where a 545,000-square foot manufacturing, engineering and office building is located; 182,000-square foot building in Bolingbrook used for manufacturing; 5.2 acres of vacant land in Ashburn, Virginia adjoining their existing leased facility; 222,000-square foot facility on 28 acres of land in Ballerup, Denmark, which houses administrative and research and development functions; a 154,000-square foot production and engineering facility, located on approximately 12 acres of Company-owned land in Espoo, Finland. Also on this land is a 90,000-square foot building manufacturing facility. The Company also owns three office buildings in Espoo, totaling 132,000 square feet, which contain production, research and development and administrative functions.
Additionally, the Company has two locations that are classified as held for sale as of December 27, 2002. These locations include 19.1 acres of land with three buildings totaling 220,000 square feet in Lisle, Illinois, and a 124,000-square foot building on approximately 76 acres of land in Round Rock, Texas.
In Shannon, Ireland, the Company owns a 135,000-square foot manufacturing facility, which is built on land obtained through a long-term lease entered into during 1997. The Company is currently in the process of finding a buyer for this building.
Significant facilities leased by the Company include: a facility in Ashburn, Virginia (72,000 square feet) for research and development; two locations in Espoo, Finland (60,000 square feet, total) housing administrative and engineering functions; and locations in Oulu, Tampere, and Verkaus, Finland (94,000 square feet, total) for research and development.
In addition to these facilities, the Company leases four sales offices and one research and development facility in the United States. In Canada, the Company leases one sales office and one research and development facility. Internationally, the Company leases various small sales offices in twenty-four countries.
The Company consolidated certain facilities as part of its restructuring efforts in both 2001 and 2002. As a result, the Company currently has certain locations available for sublease. These locations include: Roswell, Georgia (25,500 square feet); Bolingbrook, Illinois (54,000 square feet); Lisle, Illinois (93,000 square feet); Warrenville, Illinois (137,000 square feet); Schaumburg, Illinois (12,700 square feet); Germantown, Maryland (94,000 square feet); Burlington, Massachusetts (60,000 square feet) Chelmsford, Massachusetts (260,000 square feet); Drogheda, Ireland (122,000 square feet); Wilmington, Massachusetts (77,000 square feet); Burlington, Massachusetts (60,000 square feet); Ronkonkoma, New York (130,000 square feet); and Reston, Virginia (41,200 square feet).
The Company owns substantially all of the equipment used in its business. The Company believes that its facilities are adequate for the level of production anticipated in 2003, and that suitable additional space and equipment will be available to accommodate expansion as needed.
ITEM 3. LEGAL PROCEEDINGS
On June 18, 2002, a class action complaint was filed in the United States District Court of the Northern District of Illinois against the Company, Michael Birck, and Richard Notebaert (former CEO, Director, and President of the Company). Thereafter, eight similar complaints were also filed in the United States District Court of the Northern District of Illinois against the same defendants. All nine of these actions were subsequently consolidated, and on December 3, 2002, a consolidated amended class action complaint was filed against the Company, Mr. Birck, Mr. Notebaert, and certain other of the Companys current or former officers and/or directors. The consolidated amended complaint alleges that during the class period (December 11, 2000-June 19, 2001) the defendants allegedly violated the federal securities laws by allegedly making materially false and misleading statements, including, among other things, providing revenue forecasts that plaintiffs allege were false and misleading and allegedly reporting overstated revenues for the fourth quarter of the year 2000 in the Companys financial statements. Further, certain of the individual defendants are alleged to have violated the federal securities laws by trading Company securities while allegedly in possession of material, non-public information about the Company pertaining to these matters. No specific amount of damages has been claimed. On January 17, 2003, the Company and the other named defendants filed a motion to dismiss the consolidated amended class action complaint in its entirety. The Company intends to defend this action vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
FORWARD-LOOKING STATEMENTS
Except for historical information, the matters discussed or incorporated by reference in Part I of this report may include forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect managements expectations, estimates and assumptions, based on the information available at the time the document was prepared. These forward-looking statements include, but are not limited to, statements regarding future events, plans, goals, objectives and expectations. The words anticipate, believe, estimate, expect, plan, intend," likely, will, should and similar expressions are intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors that may cau se our actual performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements. Important factors that could cause our actual results to differ materially from those in forward-looking statements include, but are not limited to: economic changes impacting the telecommunications industry; financial condition of telecommunications service providers, including impact of any bankruptcies; new product acceptance; product demand and industry capacity including consolidation; competitive products and pricing; manufacturing efficiencies; research and new product development; protection and access to intellectual property, patents and technology; ability to attract and retain highly qualified personnel; availability of components and critical manufacturing equipment; facility construction and start-ups; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, an d expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Companys filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.1 to Form 10-Q for the quarterly period ended June 29, 2001, filed with SEC on August 9, 2001. The Companys actual future results could differ materially from those predicted in such forward-looking statements. In light of the foregoing risks, uncertainties and other factors, investors should not place undue reliance on the forward looking statements in determining whether to buy, sell or hold any of the Companys securities. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. The foregoing discussion should be read in conjunction with the financial statements and re lated notes and managements discussion and analysis included in the Companys Annual Report and incorporated in this report by reference in Part II, Items 7 and 8 herein.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Business Experience |
Year of Birth |
Current Position |
Michael J. Birck |
1938 |
Chairman, Chief Executive Officer and Director |
Thomas F. Cooke |
1959 |
Senior Vice President, Human Resources. |
James A. Dite |
1946 |
Vice President and Controller. |
Anders Gustafsson |
1960 |
Executive Vice President. |
John C. Kohler |
1952 |
Senior Vice President, Global Business Operations. |
Joan E. Ryan |
1956 |
Executive Vice President and Chief Financial Officer (resigned on Feb. 7, 2003) |
|
||
James M. Sheehan |
1963 |
Senior Vice President, General Counsel and Secretary |
Michael C. Smiley |
1959 |
Interim Chief Financial Officer, Vice President International Finance and Treasurer |
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Tellabs common stock is listed on the Nasdaq stock market under the symbol TLAB. As of February 21, 2003, there were approximately 6,397 stockholders of record and 415,564,779 outstanding shares. Tellabs is a component of the Nasdaq 100 Index and the Standard & Poors 500 Index.
The section entitled Common Stock Market Data on the inside back cover of the Companys Annual Report to Stockholders for the year ended December 27, 2002, is incorporated herein by reference. It is also included in Exhibit 13, as filed with the SEC. See discussion referred to in Item 7 below for dividend information.
The following table summarizes information as of December 27, 2002, relating to equity compensation plans of the Company pursuant to which common stock is authorized for issuance:
Equity Compensation Plan Information |
|||
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
Equity compensation plans approved by security holders |
40,357,184 |
$22.35 |
25,688,260 |
Equity compensation plans not approved by security holders * |
1,976,684 |
0.14 |
0 |
Total |
42,333,868 |
$22.49 |
25,688,260 |
* All of these options were issued pursuant to option plans that were assumed in merger transactions. The Company has not made, and will not make, any future grants or awards of equity securities under these plans.
The Company has adopted a bonus stock program as described in the Companys 1999 Stock Bonus Plan. Under the Stock Bonus Plan, the Board of Directors, in their discretion, can grant awards to attract and retain key employees and other individuals performing services for the Company. The Plan has not been approved by the Companys stockholders and does not have a specific number of shares allocated for issuance under the Plan. As of the end of the Companys fiscal year ending December 27, 2002, no grants were outstanding under the Plan.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Financial Data
(In millions, except per-share amounts) |
2002 * |
2001** |
2000 |
1999 |
1998 |
Net Sales |
$1,317.0 |
$2,199.7 |
$3,387.4 |
$2,322.4 |
$1,706.1 |
Gross Profit |
$486.5 |
$763.2 |
$1,835.4 |
$1,382.3 |
$1,000.0 |
Operating Profit (Loss) |
$(329.7) |
$(279.4) |
$995.0 |
$731.8 |
$484.4 |
Earnings (Loss) Before Income Taxes and |
$(327.8) |
|
|
|
|
Earnings (Loss) Before Cumulative Effect of |
$(313.1) |
|
|
|
|
Net Earnings (Loss) |
$(313.1) |
$(182.0) |
$730.8 |
$549.7 |
$391.5 |
Earnings (Loss) per Share Before Cumulative |
$(0.76) |
|
|
|
|
Earnings (Loss) per Share Before Cumulative |
$(0.76) |
|
|
|
|
Earnings (Loss) per Share |
$(0.76) |
$(0.44) |
$1.79 |
$1.36 |
$0.98 |
Earnings (Loss) per Share, Assuming Dilution |
$(0.76) |
$(0.44) |
$1.75 |
$1.32 |
$0.96 |
Total Assets |
$2,622.8 |
$2,865.8 |
$3,073.1 |
$2,354.6 |
$1,651.9 |
Total Liabilities |
$332.5 |
$400.2 |
$445.5 |
$307.1 |
$247.4 |
Stockholders' Equity |
$2,290.3 |
$2,465.6 |
$2,627.6 |
$2,047.5 |
$1,404.5 |
Long-Term Debt |
- |
$3.4 |
$2.9 |
$9.4 |
$3.3 |
Net Working Capital |
$1,276.3 |
$1,625.1 |
$1,190.1 |
$1,511.4 |
$1,054.9 |
No cash dividends per common share were paid. Per-share amounts are restated for stock split in 1999.
* Includes restructuring and other charges of $268.7 million.
** Includes restructuring and other charges of $448.6 million.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Managements Discussion and Analysis of Financial Condition and Results of Operations on pages 20 through 27 of the Annual Report are incorporated herein by reference. This information is also included in Exhibit 13, as filed with the SEC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investments in marketable securities
During the normal course of business, the Company invests a portion of its cash and cash equivalents in marketable securities. The Company accounts for these investments using the guidance in Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and its related interpretive guidance. All securities in the Companys short-term marketable securities portfolio are considered available-for-sale securities and are marked-to-market on a monthly basis with the resulting unrealized gains and losses, net of deferred taxes, reported as a separate component of stockholders equity.
In accordance with SFAS No. 115, when the Company determines that a decline in the fair value of a security is other than temporary, the Company will record an impairment loss to adjust the security to its new, lower market value. In assessing whether a decline in market value for a security is considered other than temporary, the Company examines a variety of factors, including: current and anticipated macro-economic conditions, the outlook for the particular industry, the long-term business outlook for the investee, the amount of time the investments fair value has been below cost and the Company's liquidation strategy with respect to the particular investment.
At December 27, 2002, and December 28, 2001, the Companys short-term marketable securities consisted of the following:
(In millions) |
Amortized |
Unrealized |
Market |
2002 |
|||
State and municipal securities |
$149.9 |
$1.6 |
$151.5 |
Preferred and common stocks |
47.9 |
1.5 |
49.4 |
U.S. government and agency debt obligations |
212.5 |
4.9 |
217.4 |
Corporate debt obligations |
57.4 |
2.4 |
59.8 |
Foreign government obligations |
15.9 |
0.1 |
16.0 |
Foreign bank obligations |
71.5 |
|
71.5 |
$555.1 |
$10.5 |
$565.6 |
|
2001 |
|||
State and municipal securities |
$135.9 |
$1.8 |
$137.7 |
Preferred and common stocks |
93.7 |
2.6 |
96.3 |
U.S. government and agency debt obligations |
|
|
|
Corporate debt obligations |
55.8 |
0.7 |
56.5 |
Foreign bank obligations |
41.3 |
(0.1) |
41.2 |
$392.6 |
$7.1 |
$399.7 |
The Companys preferred and common stock portfolio consists of investments in preferred securities of various public companies and governmental agencies, investments in mutual funds that invested in preferred stock holdings and investments in common shares of publicly traded technology companies.
The Company also maintains investments in start-up technology companies and partnerships that invest in start-up technology companies. These investments are recorded in Other Assets at cost, which approximates fair market value. At December 27, 2002, and December 28, 2001, these investments totaled $9.0 million and $36.0 million, respectively. During 2001, the Company recorded a $12.8 million pre-tax gain on the sale of a certain equity investment.
Management conducts a quarterly review of each investment in its portfolio, including historical and projected financial performance, expected cash needs and recent funding events. Other-than-temporary impairments are recognized if the market value of the investment is below its cost basis for an extended period of time or the issuer has experienced significant financial declines or difficulties in raising capital to continue operations. Other-than-temporary impairments were $29.6 million in 2002 and $25.9 million in 2001.
Financial Instruments
The Company conducts business on a global basis in several major currencies and is subject to the risks associated with fluctuating foreign exchange rates. In response to this, the Company developed a foreign currency exposure management policy with the objective of mitigating financial exposure to changing foreign exchange rates resulting from nonfunctional currency receivables and payables that are expected to be settled in one year or less. The Company utilizes derivatives, primarily foreign currency forward contracts, to manage its foreign currency exposure. The Company does not engage in hedging specific individual transactions, but rather uses derivatives to manage overall exposure levels for a specific currency. Gains and losses related to these derivatives are recorded to the Consolidated Statement of Operations each period.
The Companys policy is to hedge 90% of the calculated exposure. Foreign currency forward contracts are executed weekly with the final contracts for each period executed one week before the end of the period. As a result of this timing, additional nonfunctional foreign currency transactions can occur during the last week of the period that could cause the Companys hedge percentage at the end of the period to be greater or less than the 90% target. The Company enters into forward exchange contracts only to the extent necessary to meet its overall goal of minimizing nonfunctional foreign currency exposures. The Company does not enter into hedging transactions for speculative purposes. The Companys foreign currency exposure management policy and program remained unchanged during 2000, 2001 and 2002, and no significant changes are currently planned.
In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activity, all forward exchange contracts are recorded on the balance sheet at fair value. Forward exchange contracts receivable are included in other current assets, while forward exchange contracts payable are included as part of accrued liabilities in the Consolidated Balance Sheet. Changes in the fair value of these instruments are included in earnings, as part of other income and expense, in the current period. The Company had a net gain of $5.5 million on forward exchange contracts in 2002. Net losses on forward exchange contracts were $4.7 million and $1.8 million 2001and 2000, respectively. The Company's current hedging practices do not qualify for special hedge accounting treatment as prescribed in SFAS No. 133 since hedges of existing assets or liabilities that will be remeasured with changes in fair value reported currently in earnings are specifically excluded.
Derivative financial instruments involve elements of market and credit risk not recognized in the financial statements. The market risk that results from these instruments relates to changes in the foreign currency exchange rates, which is generally offset by movements in the value of the underlying assets or liabilities being held. Credit risk relates to the risk of nonperformance by a counterparty to one of the Company's derivative contracts. The Company does not believe there is a significant credit risk associated with its hedging activities because counterparties are all large international financial institutions with high credit ratings. In addition, the Company also limits the aggregate notional amount of agreements entered into with any one financial institution in order to mitigate credit risk.
The table that follows presents a summary of the notional value and the fair value of forward exchange rate contracts for each currency in which the Company had hedged exposure at December 27, 2002, and December 28, 2001. The principal currencies currently being hedged by the Company are the British pound, Danish krone, Euro, Mexican peso and U.S. dollar. The notional amounts shown are the U.S. dollar values of the agreed-upon amounts in each foreign currency that will be delivered to a third-party on the agreed-upon date.
(Dollars in millions) |
Underlying |
Notional Value of |
|
Fair Value of |
Forward contracts at 12/27/02: |
||||
Forward Contracts to Sell Foreign Currencies for Euro: |
||||
United States dollar |
$96.5 |
$82.2 |
1.0248 |
$82.2 |
Danish krone |
2.4 |
0.4 |
7.4064 |
0.4 |
Norwegian krone |
3.8 |
2.9 |
7.3205 |
2.9 |
British pound |
0.9 |
1.3 |
1.5483 |
1.3 |
Swedish krone |
0.7 |
0.3 |
9.1510 |
0.3 |
Thai baht |
1.3 |
1.2 |
44.3730 |
1.2 |
$105.6 |
$88.3 |
$88.3 |
||
Forward Contracts to Sell Foreign Currencies for Danish krone: |
||||
United States dollar |
$4.7 |
$5.4 |
7.2195 |
$5.4 |
$4.7 |
$5.4 |
$5.4 |
||
Forward Contracts to Sell Foreign Currencies for British pound: |
||||
Euro |
$7.0 |
$5.6 |
1.5489 |
$5.6 |
$7.0 |
$5.6 |
$5.6 |
||
Forward Contracts to Buy Foreign Currencies for British pound: |
||||
United States dollar |
$1.1 |
$0.9 |
1.5913 |
$0.9 |
$1.1 |
$0.9 |
$0.9 |
||
Forward Contracts to Buy Foreign Currencies for U.S. dollar: |
||||
Singapore dollar |
$1.3 |
$1.2 |
1.7384 |
$1.2 |
Japanese yen |
0.8 |
0.2 |
119.8300 |
0.2 |
$2.1 |
$1.4 |
$1.4 |
||
Forward Contracts to Sell Foreign Currencies for U.S. dollar: |
||||
Canadian dollar |
$3.3 |
$4.0 |
1.5537 |
$4.0 |
Mexican peso |
10.9 |
8.7 |
10.2550 |
8.6 |
$14.2 |
$12.7 |
$12.6 |
||
Total Contracts Outstanding at December 27, 2002: |
|
|
|
|
(Dollars in millions) |
Underlying |
Notional Value of |
|
Fair Value of |
Forward contracts at 12/28/01: |
||||
Forward Contracts to Sell Foreign Currencies for Euro: |
||||
United States dollar |
$73.8 |
$68.2 |
0.8877 |
$68.3 |
Danish krone |
8.0 |
7.3 |
7.4385 |
7.2 |
Norwegian krone |
2.7 |
2.3 |
8.0145 |
2.3 |
British pound |
2.4 |
2.0 |
1.5798 |
1.9 |
Swedish krone |
0.3 |
0.3 |
8.8765 |
0.3 |
Thai baht |
6.2 |
5.4 |
40.2600 |
5.5 |
$93.4 |
$85.5 |
$85.5 |
||
Forward Contracts to Buy Foreign Currencies for Euro: |
||||
Japanese yen |
$0.9 |
$0.5 |
114.4635 |
$0.5 |
$0.9 |
$0.5 |
$0.5 |
||
Forward Contracts to Sell Foreign Currencies for Danish krone: |
||||
United States dollar |
$7.4 |
$6.9 |
8.3262 |
$6.9 |
$7.4 |
$6.9 |
$6.9 |
||
Forward Contracts to Sell Foreign Currencies for British Pound: |
||||
Euro |
$14.6 |
$10.0 |
0.6078 |
$9.8 |
$14.6 |
$10.0 |
$9.8 |
||
Forward Contracts to Buy Foreign Currencies for US dollar: |
||||
British Pound |
$0.4 |
$0.2 |
1.4458 |
$0.2 |
$0.4 |
$0.2 |
$0.2 |
||
Forward Contracts to Sell Foreign Currencies for US dollar: |
||||
Canadian dollar |
$5.6 |
$5.9 |
0.6337 |
$5.8 |
Euro |
1.5 |
1.3 |
0.8801 |
1.3 |
$7.1 |
$7.2 |
$7.1 |
||
Total Contracts Outstanding at December 28, 2001: |
|
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes and the Report of Independent Auditors on pages 29 through 49 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 registrants Proxy Statement (the Proxy Statement) dated March 20, 2003.
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 Election of Directors in the Proxy Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specific in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Companys internal controls or in other factors that could significantly affect the disclosure controls.
ITEM 15. 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 the registrants Annual Report to Stockholders for the year ended December 27, 2002, were previously incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets: December 27, 2002, and December 28, 2001
Consolidated Statements of Operations: Years ended December 27, 2002, December 28, 2001, and December 29, 2000
Consolidated Statements of Stockholders' Equity: Years ended December 27, 2002, December 28, 2001, and December 29, 2000
Consolidated Statements of Cash Flows: Years ended December 27, 2002, December 28, 2001, and December 29, 2000
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 15(d):
Report of Independent Auditors on Financial Statement 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) Reports on Form 8-K:
The Registrant filed a press release on October 11, 2002, announcing the resignation of John J. Goossens from the Tellabs board of directors.
The Registrant filed a press release on October 18, 2002, announcing earnings for the quarter and nine months ended September 27, 2002.
The Registrant filed a press release on January 23, 2003, announcing earnings for the quarter and year ended December 27, 2002.
The Registrant filed a press release on February 4, 2003, announcing the resignation of Joan Ryan as Tellabs executive vice president and chief financial officer.
The Registrant filed a press release on March 10, 2003, announcing the reorganization of its North American business and naming Edward Kennedy President-Tellabs Operations, Inc.
(c) Exhibits:
Exhibit Number |
Description |
2.1 |
Agreement and Plan of Merger Among Tellabs, Inc., Blackhawk Merger Co. and NetCore Systems, Inc. 12/ |
2.2 |
Agreement and Plan of Merger Among Tellabs, Inc., Oriole Merger Corp. and SALIX Technologies, Inc. 13/ |
2.3 |
Agreement and Plan of Merger Among Tellabs, Inc., Omaha Merger Corp. and Future Networks, Inc. 20/ |
2.4 |
Agreement and Plan of Merger Among Tellabs, Inc., Orbit Merger Sub, Inc. and Ocular Networks, Inc. 24/ |
3.1 |
Restated Certificate of Incorporation 5/ |
3.2 |
Amended and Restated By-Laws, as amended 19/ |
3.3 |
Certificate of Amendment to Restated Certificate of Incorporation 8/ |
3.4 |
Certificate of Amendment to Restated Certificate of Incorporation 17/ |
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, as amended and its related trust, as amended 6/ |
10.2 |
Tellabs Operations, Inc. Deferred Income Plan, as amended 25/ |
10.3 |
1984 Incentive Stock Option Plan, as amended and restated 1/ |
10.4 |
Amendment to Tellabs, Inc. 1984 Incentive Stock Option Plan (As Amended and Restated June 26, 1992) 17/ |
10.5 |
Amendment to the Coherent Communications Systems Corporation Amended and Restated Stock Option Plan 17/ |
10.6 |
1986 Non-Qualified Stock Option Plan, as amended and restated 1/ |
10.7 |
Amendment to Tellabs, Inc. 1986 Non-Qualified Stock Option Plan (As Amended and Restated June 26, 1992) 17/ |
10.8 |
1987 Stock Option Plan for Non-Employee Corporate Directors, as amended and restated 1/ |
10.9 |
Amendment to Tellabs, Inc. 1987 Stock Option Plan for Non-Employee Corporate Directors (As Amended and Restated June 26, 1992) 17/ |
10.10 |
1989 Stock Option Plan, as amended and restated 1/ |
10.11 |
Amendment to Tellabs, Inc. 1989 Stock Option Plan (As Amended and Restated June 26, 1992) 17/ |
10.12 |
Employee Quality Stock Award Program 2/ |
10.13 |
1991 Stock Option Plan, as amended and restated 1/ |
10.14 |
Amendment to Tellabs, Inc. 1991 Stock Option Plan (As Amended and Restated June 26, 1992) 17/ |
10.15 |
Description of Split-Dollar Insurance Arrangement with the Michael J. Birck Irrevocable Trust 3/ |
10.16 |
Amendment to the Coherent Communications Systems Corporation Amended and Restated 1993 Equity Compensation Plan 17/ |
10.17 |
1994 Stock Option Plan 4/ |
10.18 |
Amendment to the Tellabs, Inc. 1994 Stock Option Plan 17/ |
10.19 |
Tellabs, Inc. Stock Bonus Plan for Former Employees of Steinbrecher Corporation 7/ |
10.20 |
Tellabs, Inc. Stock Bonus Plan for Former Employees of TRANSYS Networks Inc. 9/ |
10.21 |
Tellabs, Inc. Stock Bonus Plan for Former Employees of International Business Machines Corporation 9/ |
10.22 |
Amendment to the Tellabs, Inc. 1997 Stock Option Plan 17/ |
10.23 |
1998 Stock Option Plan 10/ |
10.24 |
Amendment to the Tellabs, Inc. 1998 Stock Option Plan 17/ |
10.25 |
Tellabs, Inc. Stock Bonus Plan for Former Employees of Switched Network Technologies, Inc. 11/ |
10.26 |
NetCore Systems, Inc. 1997 Stock Option Plan 14/ |
10.27 |
Tellabs Advantage Plan 16/ |
10.28 |
1999 Tellabs, Inc., Stock Bonus Plan 16/ |
10.29 |
SALIX Technologies, Inc. 1998 Omnibus Stock Plan and Option Agreement Dated as of December 1, 1997 15/ |
10.30 |
Amendment to the SALIX Technologies, Inc. Omnibus Stock Plan 17/ |
10.31 |
Employment Agreement - Chairman of the Board and Chief Executive Officer |
10.32 |
Employment Agreement - President and Chief Executive Officer 18/ |
10.33 |
Future Networks, Inc. Stock Incentive Plan 19/ |
10.34 |
Amendment to the Coherent Communications Systems Corporation 1993 Equity Compensation Plan 21/ |
10.35 |
Tellabs, Inc. 2001 Stock Option Plan 21/ |
10.36 |
Change in Control Agreement for Corporate Officers 22/ |
10.37 |
Change in Control Agreement for Senior Executives 22/ |
10.38 |
Ocular Networks, Inc. Amended and Restated 2000 Stock Incentive Plan 23/ |
10.39 |
Tellabs Advantage Plan, as amended and restated 24/ |
10.40 |
First Amendment to the Tellabs Advantage Plan |
10.41 |
Second Amendment to the Tellabs Advantage Plan |
13 |
Annual Report to Stockholders |
21 |
Subsidiaries of Tellabs, Inc. |
23 |
Consent of Ernst & Young LLP |
99.1 |
Forward-Looking Statements and Risks and Future Factors Impacting Tellabs 22/ |
99.2 |
CEO Certification of Periodic Financial Reports |
99.3 |
CFO Certification of Periodic Financial Reports |
Exhibits 10.1 through 10.42 are management contracts or compensatory plans or arrangements required to be filed as an Exhibit to this Form 10-K pursuant to Item 15(c) hereof.
(d) Schedules: See Item 15(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).
5/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 1995 (File No. 0-9692).
6/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 1995 and Form 10-Q Quarterly Report for the quarter ended September 26, 1997. The Deferred Income Plan Amendment is incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1999 (File No. 0-9692).
7/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 28, 1996 (File No. 0-9692).
8/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 27, 1997 (File No 0-9692).
9/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 27, 1996 (File No. 0-9692).
10/ Incorporated by reference from Tellabs, Inc. Definitive Proxy Statement filed on or about March 16, 1998 (File No. 0-9692).
11/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended January 1, 1999 (File No. 0-9692).
12/ Incorporated by reference from Tellabs, Inc. Pre-Effective Amendment No. 1 to Form S-4, filed on August 5, 1999 (File No. 33-83509).
13/ Incorporated by reference from Tellabs, Inc. Pre-Effective Amendment No. 1 to Form S-4, filed on February 7, 2000 (File No. 33-95135).
14/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No. 1on Form S-8 to Form S-4, filed on September 17, 1999 (File No. 33-83509).
15/ Incorporated by reference from Tellabs, Inc. Post-Effective Amendment No. 1 on Form S-8 to Form S-4, filed on March 13, 2000 (File No. 33-95135).
16/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 31, 1999 (File No. 0-9692).
17/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 30, 2000 (File No. 0-9692).
18/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended September 29, 2000 (File No. 0-9692).
19/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on March 5, 2001 (File No. 333-56546).
20/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 29, 2000 (File No. 0-9692).
21/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 30, 2001 (File No. 0-9692).
22/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 29, 2001 (File No. 0-9692).
23/ Incorporated by reference from Tellabs, Inc. Form S-8 filed on January 25, 2002 (File No. 333-81360).
24/ Incorporated by reference from Tellabs, Inc. Form 10-K Annual Report for the year ended December 28, 2001 (File No. 0-9692).
25/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended March 29, 2002 (File No. 0-9692).
26/ Incorporated by reference from Tellabs, Inc. Form 10-Q Quarterly Report for the quarter ended June 28, 2002 (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 24, 2003 |
By /s Michael J. Birck |
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.
/s Michael J. Birck Chairman, Chief Executive Officer and Director (Principal Executive Officer) |
March 24, 2003 |
/s Michael C. Smiley Interim Chief Financial Officer, Vice President International Finance and Treasurer (Principal Financial Officer) |
March 24, 2003 |
/s James A. Dite Vice President and Controller (Principal Accounting Officer) |
March 24, 2003 |
/s Peter A. Guglielmi Director |
March 24, 2003 |
/s Mellody L Hobson Director |
March 24, 2003 |
/s Frederick A. Krehbiel Director |
March 24, 2003 |
/s Stephanie Pace Marshall Director |
March 24, 2003 |
/s William F. Souders Director |
March 24, 2003 |
/s Jan H. Suwinski Director |
March 24, 2003 |
CERTIFICATION
I, Michael. J. Birck, certify that:
Date: March 24, 2003
/s Michael J. Birck
Michael J. Birck
Chief Executive Officer
CERTIFICATION
I, Michael C. Smiley, certify that:
Date: March 24, 2003
/s Michael C. Smiley
Michael C. Smiley
Interim Chief Financial Officer,
Vice President International Finance & Treasurer
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Tellabs, Inc.
We have audited the consolidated financial statements of Tellabs, Inc. and Subsidiaries as of December 27, 2002, and December 28, 2001, and for each of the three years in the period ended December 27, 2002, and have issued our report thereon dated January 21, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). This schedule is the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s Ernst & Young LLP
Chicago, Illinois
January 21, 2003
TELLABS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Three Years Ended December 27, 2002, December 28, 2001, and December 29, 2000
|
Balance at beginning of year |
Additions charged to costs and expenses |
|
Balance at end of year |
2002 Allowance for doubtful receivables |
$57.3 |
$(23.9) |
$14.4 |
$19.0 (B) |
2001 |
|
|
|
|
2000 |
|
|
|
|
NOTE:
------------------------------------------------------------------------------------------------------------------------------------------------
Exhibit Index
10.31 Employment Agreement Chairman of the Board and Chief Executive Officer
10.40 First Amendment to the Tellabs Advantage Plan
10.41 Second Amendment to the Tellabs Advantage Plan
13 Annual Report to Stockholders
21 Subsidiaries of Tellabs, Inc.
23 Consent of Ernst & Young LLP
99.2 Certification of Chief Executive Officer
99.3 Certification of Interim Chief Financial Officer
THIS AGREEMENT, made and entered into as of June 16,2002, by and between Michael J. Birck (the Executive) and Tellabs, Inc., a Delaware corporation (the Company);
WHEREAS, the parties desire to enter into this Agreement pertaining to the continuing employment of the Executive by the Company as the Chairman of the Board and resumption of his employment as Chief Executive Officer;
NOW. THEREFORE. in consideration of the mutual covenants and agreementset forth below. it is hereby covenanted and agreed by the Executive and the Company as follows:
1. Employment. Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive as its Chairman of the Board of Directors and as its Chief Executive Officer during the Agreement Term (as defined below), with such additions or modifications thereto which are consistent with his authority, responsibilities and duties hereunder, as the Board of Directors of the Company (the Board) may, from time to time, in its discretion and after consultation with the Executive, adopt. The Agreement Term shall be the period beginning on June 16, 2002 (the Effective Date) and ending on the second anniversary of the Effective Date, subject to earlier termination as provided herein; provided, however, that the Agreement Term will be automatically extended by twelve months on the rust anniversary of the Effective Date and on each anniversary thereof, unless one party to this Agreement provides written notice of non-renewal to the other party at least 30 days prior to the date of such automatic extension.
2. Performance of Duties. The Executive agrees that during his employment with the Company, he shall devote his full business time, energies and talents to serving as its Chairman of the Board of Directors and as its Chief Executive Officer and that he shall perform his duties faithfully and efficiently subject to the directions of the Board. Notwithstanding the foregoing provisions of this Section 2, the Executive may (i) serve as a director, trustee or officer or otherwise participate in not-for-profit educational, welfare, social, religious and civic organizations; (ii) after consultation with, and approval by, the Board, serve as a director of any for-profit business which does not compete with the Company or any of its subsidiaries or affiliates, and (iii) acquire passive investment interests in one or more entities; provided, that such activities described in clauses (i), (ii) and (iii) are not prohibited under the Companys Integrity Policy and do not inhibit or interfere with the performance of the Executives duties under this Agreement.
3. Compensation. Subject to the terms of this Agreement, during the Agreement Term, while the Executive is employed by the Company, the Company shall compensate him for his services as follows:
a. Base Salary. The Executive shall receive a Base Salary of $750,000 per annum payable in 26 bi-weekly installments. The Executives Base Salary shall be reviewed and subject to increase or decrease annually by the Board pursuanto its normal performance review policies for senior executives, with the first such review occurring in 2003. Such Base Salary shall be payable beginning on July 1,2002.
b. Annual Bonus. For each calendar year, the Executive shall be eligible to receive an Annual Bonus payment in accordance with the Companys annual bonus plans as in effect from time to time. The target level for each Annual Bonus shall not be less than 50% of the Executives Base Salary for the year, provided that the Company achieves the applicable financial and strategic objectives established for the year. Commencing with calendar year 2003, such objectives will be established by the Compensation Committee of the Board, in consultation with the Executive and other senior officers. The Executive shall be eligible to receive a bonus for calendar year 2002, based on the Companys achievement of financial and strategic goals established for the year 2002.
c. Annual Equity Awards. The Executive shall be entitled to receive stock option grants or other stock based compensation as may from time to time be awarded by the Compensation Committee.
d. Emplovee Benefits. Fringe Benefits and Perquisites. The Executive shall be provided with employee benefits. fringe benefits and perquisites on a basis no less favorable than such benefits and perquisites are provided by the Company from time to time to the Companys other senior executives. In the event of the Executives termination of employment with the Company for any reason other than termination by the Company for Cause. the Executive shall be entitled to reimbursement of tax and financial planning costs and an office and secretarial assistance on the same basis as provided during the Agreement Term through the tenth anniversary of the date of termination of employment. the Companys policies applicable to senior executives.
e. Expense Reimbursement. The Company will reimburse the Executive for all reasonable expenses incurred by him in the performance of his duties in accordance with f. Change in Control Benefits. Following the Effective Date, the Executive and the Company shall continue to be a party to the change of control agreement which the Company has entered into with Executive, it being understood that the Executive shall only receive whatever incremental payments or benefits are provided under such change of control agreement and that there shall be no duplication of payments or benefits under this Agreement and such change of control agreement.
f.Change in Control Benefits. Following the Effective Date, the Executive and the Company shall continue to be a party to the change of control agreement which the Company has entered into with Executive, it being understood that the Executive shall only receive whatever incremental payments or benefits are provided under such change of control agreement and that there shall be no duplication of payments or benefits under this Agreement and such change of control agreement.
g. Additional Payments. If any payments or benefits received or to be received by the Executive in connection with the Executives employment (whether pursuanto the terms of this Agreement or any other plan, arrangement or agreement with the Company, or any person affiliated with the Company) (the Payments), will be subject to the tax (the Excise Tax) imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the Code) (or any similar tax that may hereafter be imposed), the Company shall pay at the time specified below, an additional amount (the Gross-Up Payment) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Payments and any federal, state and local income or other applicable tax and Excise Tax upon the payment provided for by this paragraph, shall be equal to the Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the Executives highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the Executives highest marginal rate of taxation in the state and locality of the Executives residence on the date on which the Excise Tax is determined, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The computations required by this paragraph shall be made by the independent public accountants then regularly retained by the Company, in consultation with tax counsel selected by them and acceptable to the Executive. The Company shall provide the Executive with sufficient tax and compensation data to enable the Executive or his tax advisor to verify such computations and shall reimburse the Executive for reasonable fees and expenses incurred with respect thereto. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder, the Executive shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal and state and local income tax imposed on the Gross-Up Payment being repaid by the Executive) plus interest on the amount of such repayment from the date the Gross-Up Payment was initially made to the date of repayment at the rate provided in Section 1274(b)(2)(B) of the Code (the Applicable Rate). In the event that the Excise Tax is determined by the Internal Revenue Service or by such independent public accountants to exceed the amount taken into account hereunder (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties, fines or additions to tax payable with respect to such excess) at the time that the amount of such excess if finally determined. Any payment to be made under this paragraph shall be payable within five (5) days of the determination of the accountants that such a payment is required hereunder and, if applicable, within five (5) days of such determination that the Excise Tax is greater or less than initially calculated but, in no event, later than thirty (30) days after the Executives receipt of the Payments resulting in such Excise Tax.
4. Indemnification. The Company agrees that if the Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a Proceeding), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executives alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Executive shall be indemnified and held harmless by the Company to the fullest extent legally permitted or authorized by the Companys certificate of incorporation or bylaws or resolutions of the Companys Board of Directors or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or other liabilities or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive even if he has ceased to be a director, member, employee or agent of the Company or other entity, with respect to acts or omissions which occurred prior to his cessation of employment with the Company, and shall inure to the benefit of the Executives heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 calendar days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses.
5. Termination of Employment. Upon termination of the Executives employment for any reason, the Executive or, in the event of death, the Executives estate shall be entitled to the Executives Base Salary prorated through the date of termination. Any Annual Bonus awarded to the Executive for a prior award period, but not yet paid to the Executive, and any employee benefits to which the Executive is entitled by reason of his employment shall be paid to the Executive or his estate at such time as is provided by the terms of the applicable Company plan or policy. If the Executives employment is terminated during the Agreement Term, the Executives right to additional payments and benefits under this Agreement for periods after his date of termination shall be determined in accordance with the following provisions of this Section 5.
a. Death or Disability. If the Executives employment is terminated by reason of death or by reason of the Executives Disability, the Executive, or, in the event of his death, his estate, shall be entitled to a prompt cash payment of a prorated Annual Bonus for the year in which such termination occurs, based on the target Annual Bonus for such year. The Executive or the Company shall be entitled to terminate the Executives employment because of the Executives Disability during the Agreement Term. Disability means that the Executive is disabled within the meaning of the Companys long-term disability policy or, if there is no such policy in effect, that (i) the Executive has been substantially unable, for 120 business days within a period of 180 consecutive business days, to perform the Executives duties under this Agreement, as a result of physical or mental illness or injury, and (ii) a physician selected by the Company or its insurers, and reasonably acceptable to the Executive or the Executives legal representative, has determined that the executive is disabled. A termination of the Executives employment by the Company for disability shall be communicated to the Executive by written notice, and shall be effective on the 30th day after receipt of such notice by the Executive (the Disability Effective Time), unless the Executive returns to full-time performance of the Executives duties be ore the Disability Effective Time.
b. Termination for cause or Voluntary Resignation. If the Executives employment is terminated by the Company for Cause or if the Executive voluntarily resigns from the employ of the Compony, other than pursuant to a Constructive Discharge, all payments and benefits to whic the Executive would otherwise be entitled under this Agreement shall immediately cease, except as otherwise specifically provided above in this Section 5 with respect to his prorated Base Salary through the date of termination, his Annual Bonus, if any, awarded for a prior award period but not yet paid and his previously earned employee benefits. For purposes of this Agreement, the term Cause shall mean:
The Executive is convicted of a felony or any crime involving moral turpitude or
ii. A reasonable determination by a vote of directors comprising two-thirds of the entire Board, after giving the Executive notice and an opportunity to be heard, that, (A) Executive has willfully and continuously failed to perform substantially his duties as contemplated by Section 2 above (other than such failure resu ing from incapacity due to physical or mental illness), after a written de nd for corrected performance is delivered to Executive by the Board whic specifically identifies the manners in which the Board believes the Executive has not substantially performed his duties or (B) the Executive has engaged in gross neglect ,or gross misconduct, unless the Executive had a good faith belief at such conduct was in, or not opposed to, the best interests of the Company.
c.Termination With just Cause. If the Company terminates the Executive without Cause, the Executive shall be entitled to a prompt lump sum cash payment equal to the Base Salary and Annual Bonus to which he would otherwise would have been entitled if he had remained in the employ of the Company through the last day of the Term of this Agreement. For purposes of the preceding sentence, the Annual Bonus component shall be based upon the get bonus for the year of termination and shall include a prorated bonus for the partial ear ending on the last day of the Agreement Term.
d. Resignation for Constructive Discharge. The Executives voluntary resignation for Constructive Dischage shall be treated for all purposes of this Agreement as a termination by the Company without Cause. For purposes of this Agreement, Constructive Discharge shall mean the occurrence of any of the following circumstances:
i. A reduction by the Company in the Executives Base Salary or Annual Bonus target to an 4mount that is less than required under Section 3 above;,/p>
ii. The removal of the Executive from the position of Chairman of the Board of Directors or the failure of the Executive to be nominated or reelected to the Companys Board of Directors;
iii. Any action by the Company which results in significant diminution in the Executives authority, power, responsibilities or duties from those contemplated by Sections 1 and 2 above, or the assignment to Executive without his written consent of any duties inconsistent with the Executives position and status as Chairman of the Board of Directors, Chief Executive Officer of the Company as contemplated by Sections 1 and 2 above, which action or assignment continues after written notice thereof and a reasonable opportunity to cure of not less than fifteen (15) days has been given by Executive to the Company; or
iv. Any other breach by the Company of any of its material obligations to the Executive under this Agreement, which breach continues after written notice thereof and a reasonable opportunity to cure of not less than thirty (30) days has been given by Executive to the Company.
e. Change in Control. The term Change in Control of the Company means the first to occur of:
i. Any person (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)), excluding for this purpose, the Company or any subsidiary of the Company, or any employee benefit plan of the Company or any subsidiary of the Company, or any person or entity organized, appointed or established by the Company for or pursuanto the terms of any such plan which acquires beneficial ownership of voting securities of the Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20% or more of the combined voting power of the Companys then outstanding securities; provided, however, that no Change in Control will be deemed to have occurred as a result of a change in ownership percentage resulting solely from an acquisition of securities by the Company; and provided further that no Change in Control will be deemed to have occurred if a person inadvertently acquires an ownership interest of 20% or more but then promptly reduces that ownership interest below 20%;
ii. During any two consecutive years (not including any period beginning prior to June 30, 2002), individuals who at the beginning of such two-year period constitute the Board and any new director (except for a director designated by a person who has entered into an agreement with the Company to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Companys stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved (such individuals and any such new director, the Incumbent Board) cease for any reason to constitute at least a majority of the Board;
iii. Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners of outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the company resulting from such Business Combination (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Company; (ii) no person (excluding any company resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such company resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of such company except to the extent that such ownership existed prior to the Business Combination; and (iii) at least a majority of the members of the board of directors of the company resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination;
iv. Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company; or
v. A tender offer (for which a filing has been made with the Securities and Exchange Commission SEC) which purports to comply with the requirements of Section 14(d) of the Securities Exchange Act of 1934 and the corresponding SEC rules) is made for the stock of the Company, then the first to occur of:
(A) Any time during the offer when the person making the offer owns or has accepted for payment stock of the Company with 25% or more of the total voting power of the Companys securities, or
(B) Three business days before the offer is to terminate unless the offer is withdrawn first if the person making the offer could own, by the terms of the offer plus any shares owned by this person, stock with 50% or more of total voting power of the Company's securities when the offer terminates.
6. No Mitigation: No Offset. In the event of any termination of employment, the Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due the Executive under this Agreement on account of any remuneration attributable to any subsequent employment that he may obtain.
7.Confidential Information. The Executive agrees that, during his employment by the Company and at all times thereafter, he shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries or affiliates, and their respective businesses, which shall have been obtained by the Executive during the Executives employment by the Company or during his consultation with the Company after his termination of employment, and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). Except in the good faith performance of his duties for the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it.
8.Protective Covenants. For a period of two years following the termination of Executive's employment for any reason, the Executive shall not, without the written consent of the Board, directly or indirectly,
a. engage or be interested in (as owner, partner, stockholder, employee, director, officer, agent, consultant or otherwise), with or without compensation, any business which is in direct competition with the Company or of any of its subsidiaries in providing data, voice or video transport, switching/routing, network access system and/or voice quality enhancement solutions to service providers or end users;
b. hire any person who was employed by the Company or any of its subsidiaries or affiliates (other than persons employed in a clerical or other non-professional position) within the six-month period preceding the date of such hiring; or
c. solicit, entice, persuade or induce any person or entity doing business with the Company and its subsidiaries or affiliates, to terminate such relationship or to refrain from extending or renewing the same.
Nothing in subparagraph (a) above, will prohibit the Executive from acquiring or holding not more than one percent of any class of publicly traded securities of any such business; provided that such securities entitle the Executive to no more than one percent of the total outstanding votes entitled to be cast by security holders of such business in matters on which such security holders are entitled to vote.
9.Remedies. The Executive agrees that the restrictions set forth in Sections 7 and 8 hereof are reasonably and necessary to protect the legal interests of the Company. The Executive further agrees that the Company shall be entitled to injunctive relief in the event of any actual or threatened breach of such restrictions.
10.Assignability. Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law.
11.Amendment. This Agreement may be amended or canceled only by mutual agreement of the parties in writing without the consent of any other person. So long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof except that in the event of the Executives Disability so as to render him incapable of such action, his legal representative may be substituted for purposes of such amendment.
12.Applicable Law. The provisions of this Agreement shall be construed in accordance with the internal laws of the State of Illinois, without regard to the conflict of law provisions of any state.
13.Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).
14.Waiver of Breach. No waiver by any party hereto of a breach of any provision of this Agreement by any other party, or of compliance with any condition or provision of this Agreement to be performed by such other party, will operate or be construed as a waiver of any subsequent breach by such other party of any similar or dissimilar provisions and conditions at the same or any prior or subsequent time. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.
15.Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):
to the Company:
Tellabs, Inc.
One Tellabs Center
1415 W. Diehl Road
Naperville, Illinois 60563
Attention: Senior Vice President Human Resources
or to the Executive:
Michael J. Birck
One Tellabs Center
1415 W. Diehl Road
Naperville, Illinois 60563
Each party, by written notice furnished to the other party, may modify the applicable delivery address, except that notice of change of address shall be effective only upon receipt. Such notices, demands, claims and other communications shall be deemed given in the case of delivery by overnight service with guaranteed next day delivery, the next day or the day designated for delivery; or in the case of certified or registered U.S. mail, five days after deposit in the U.S. mail; provided, however, that in no event shall any such communications be deemed to be given later than the date they are actually received.
16.Arbitration of Disputes and Reimbursement of Legal Costs. Any controversy or claim arising out of or relating to this Agreement (or the breach thereot) shall be settled by final, binding and non-appealable arbitration in Chicago, Illinois by three arbitrators. Subject to the following provisions, the arbitration shall be conducted in accordance with the rules of the American Arbitration Association (the Association) then in effect. One of the arbitrators shall be appointed by the Company, one shall be appointed by the Executive, and the third shall be appointed by the fIrst two arbitrators. If the fIrst two arbitrators cannot agree on the third arbitrator within 30 days of the appointment of the second arbitrator, then the third arbitrator shall be appointed by the Association and shall be experienced in the resolution of disputes under employment agreements for CEOs of major corporations. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by either party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The arbitrators shall have no authority to modify any provision of this Agreement or to award a remedy for a dispute involving this Agreement other than a benefit specifically provided under or by virtue of the Agreement. If the Executive prevails on any material issue which is the subject of such arbitration or lawsuit, the Company shall be responsible for all of the fees of the American Arbitration Association and the arbitrators and any expenses relating to the conduct of the arbitration (including the Companys and the Executives reasonable attorneys fees and expenses). Otherwise, each party shall be responsible for its own expenses relating to the conduct of the arbitration (including reasonable attorneys fees and expenses) and shall share the fees of the American Arbitration Association equally.
17.Survivorship. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.
18.Entire Agreement. Except as otherwise noted herein, this Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the parties relating to the subject matter hereof.
19.Counterparts. This Agreement may be executed in separate counterparts, each of which is
deemed to be an original and all of which taken together constitute one and the same agreement.
EXECUTIVE:
MICHAEL J. BIRCK
/s Michael J. Birck
COMPANY:
TELLABS, INC., a Delaware corporation
by /s Thomas A. Cook
Thomas A. Cook II
Its: Senior Vice President Human Resources
ATTEST:
/s James M. Sheehan
James M. Sheehan
Secretary
FIRST AMENDMENT
TO THE
TELLABS ADVANTAGE PROGRAM
This Amendment to the Tellabs Advantage Program dated January 1, 1997 ("Plan") is adopted effective June 5, 2002 or as otherwise set forth below, by Tellabs Operations, Inc. (the Company), a Delaware corporation;
WHEREAS, the Company executed the Tellabs Operations, Inc. Written Consent of Directors (the Consent) dated June 5, 2002, in order to merge the Ocular 401(k) Plan (defined below) into the Tellabs Plan effective as of June 28, 2002;
WHEREAS, the Company executed the First Amendment to the Ocular 401(k) Plan dated June 5, 2002 to eliminate all optional forms of distribution of benefits under the Ocular Plan by September 5, 2002;
WHEREAS, the Company desires to amend the Tellabs Plan to comply with Section 411(d)(6) of the Code by allowing former Participants of the Ocular Plan to choose among the optional forms of benefits currently available to them until September 5, 2002; and
WHEREAS, the Company desires to amend the Tellabs Advantage Program Savings Plan and the Tellabs Advantage Program Retirement Plan pursuant to Article Eleven to reflect the inclusion of employees of Ocular Networks, Inc., and to change the Before-Tax Contribution percentage.
NOW, THEREFORE, the sections of the Plan set forth below are amended as follows, but all other sections of the Tellabs Plan shall remain in full force and effect. Capitalized terms not defined herein shall have the meaning set forth in the Plan document.
1. Section 1.4 (Definitions) is hereby amended to add the following terms:
Ocular Acquisition Date means the date of the acquisition of Ocular Networks, Inc. by Tellabs, Inc., January 15, 2002.
Ocular Participant means employees of Ocular Networks, Inc. or any subsidiary thereof who were participants in the Ocular Plan on January 14, 2002 and (a) became Participants in the Plan on April 1, 2002, or (b) whose Ocular accounts were subsequently transferred from the Ocular Plan to the Trust Fund as a result of the merger of the Ocular Plan into the Plan effective June 28, 2002.
"Ocular Plan" means the Ocular Networks, Inc. 401(k) Plan as in effect on the Ocular Acquisition Date, and as amended from time to time thereafter up to and including its merger into the Plan effective June 28, 2002.
2. Section 1.4 (Definitions) the definition of Election Period is hereby deleted and replaced with the following:
Election Period means the period defined in Section 7.2 (Qualified Joint and Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account) relating to the period during which a Participant may elect to have the Participants Retirement Account distributed in a form other than a Qualified Joint and Survivor Annuity.
3. Section 1.4 (Definitions) the definition of Eligible Employee is hereby deleted and replaced with the following:
Eligible Employee means any employee of the Employer but excluding any employee who is (1) a Member of a Collective Bargaining Unit; (2) an individual providing services to the Employer in the capacity of, or who is or was designated by the Employer as, a Leased Employee, an independent contractor, intern or a Limited Term Employee; or (3) are non-resident aliens who receive no earned income from the Employer which constitutes income from services within the United States. Notwithstanding the foregoing, any employee of Salix Technologies, Inc. or any subsidiary thereof who was eligible to participate in the Salix Plan as of May 19, 2000 will be considered an Eligible Employee as of May 19, 2000. Notwithstanding the foregoing, any individual employed by Coherent Communications Systems Corporation or any subsidiary thereof as of the Coherent Acquisition Date, or thereafter until December 31, 1998, shall not become an Eligible Employee until January 1, 1999. Notwithstand ing the foregoing, any individual employed by Ocular Networks, Inc. or any subsidiary thereof who was eligible to participate in the Ocular Plan as of the Ocular Acquisition Date shall not become an Eligible Employee until April 1, 2002.
4. Section 1.4 (Definitions) the definition of "Intern Employee" is hereby deleted.
5. Section 1.4 (Definitions) the definition of "Pre-Retirement Survivor Annuity" is hereby deleted and replaced with the following:
Pre-Retirement Survivor Annuity means the surviving spouse survivor annuity defined in Section 7.3 (Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account).
6. Section 1.4 (Definitions) subsection (e) of the definition of Service is hereby deleted and replaced with the following:
(e) Recognition of Services under Salix Plan, Coherent Plan and Ocular Plan. Solely with respect to former Salix Participants, Coherent Participants and Ocular Participants, each such Participants period of service shall include such period or periods of employment previously credited to that Participant under the Salix Plan, Coherent Plan or Ocular Plan, as applicable; provided, however, that in no event shall any service prior to January 6, 1975 be deemed Service hereunder.
7. Section 2.1 (Eligibility Requirements) the following subsection (h) is hereby added:
8. Section 3.4 (Before-Tax Contributions Under the Savings Program) subsection (a) is hereby deleted and replaced with the following:
8. Section 3.4 (Before-Tax Contributions Under the Savings Program) subsection (b) is hereby deleted and replaced with the following:
9. Section 5.1 (Participant Accounts), subsection (a) is hereby deleted and replaced with the following:
(a) For each Participant there shall be maintained as appropriate a separate Retirement Account, a separate Profit Sharing Account (which shall, if applicable, consist of separate pre-1993 and post-1992 sub-accounts as prescribed by the Administrative Committee), a separate Matching Account, a separate After-Tax Account (which shall, if applicable, consist of a separate pre-1987 After-Tax sub-account and a separate post-1986 After-Tax sub-account as prescribed by the Administrative Committee), a separate Before-Tax Account (which shall, if applicable, consist of separate basic and supplemental sub-accounts as prescribed by the Administrative Committee), and a separate Rollover Account. Effective April 1, 1999, for each Coherent Participant, there shall also be maintained as appropriate a separate Coherent Before-Tax Account (which shall consist of a balance of the Coherent Participants pre-tax contribution account under the Coherent Plan), a separate Coherent Employer Account (which shall consist of the balance of the Coherent Participants matching and profit sharing accounts under the Coherent Plan) and a separate Coherent Rollover Account (such separate Accounts of the Coherent Participant sometimes referred to collectively as Coherent Accounts). Effective May 19, 2000, for each Salix Participant, there shall also be maintained as appropriate a separate Salix Before-Tax Account (which shall consist of a balance of the Salix Participants pre-tax contribution account under the Salix Plan), a separate Salix Employer Account (which shall consist of the balance of the Salix Participants matching and profit sharing accounts under the Salix Plan) and a separate Salix Rollover Account (such separate Accounts of the Salix Participant sometimes referred to collectively as Salix Accounts). Effective June 28, 2002, for each Ocular Participant, there shall also be maintained as appropriate a separate Ocular Account (which shall consist of the balance of an Ocular Participants funds which were transferred from the Ocular Plan to the Trust Fund as a result of the merger of the Ocular Plan into the Plan). Each Account (including any sub-accounts) shall be credited with the amount of contributions, interest and earnings of the Trust Fund allocated to such Account and shall be charged with all distributions, withdrawals and losses of the Trust Fund allocated to such Account.
10.Section 5.2 (Participant Accounts), subsection (c)(i) is hereby deleted and replaced with the following:
(i) Subject to subsection (iii) below, the Investment Committee shall direct the Trustee to invest each Participants Accounts from time to time among the Funds as the Participant may elect. A Participant may elect to have a uniform percentage of his Retirement Account, Profit Sharing Account, After-Tax Account, Matching Account, Before-Tax Account, Rollover Account, effective as of April 1, 1999, each of his Coherent Accounts (excluding the value of any loan credited to any such Account), effective as of May 19, 2000, each of his Salix Accounts (excluding the value of any loan credited to any such Account) , and effective as of June 28, 2002, his Ocular Account (excluding the value of any loan credited to such Account) credited in increments of 1% to one or more of the Funds. All contributions to his Retirement Account, Profit Sharing Account, After-Tax Account, Before-Tax Account, and Rollover Account shall be credited to such Funds in accord with such election.
11. Section 5.2 (Participant Accounts), subsection (c)(ii) is hereby deleted and replaced with the following:
(ii) Subject to subsection (iii) and (vi) below and to any restriction on transfer which result from the investment medium chosen for a Fund, a Participant may elect to transfer in multiples of 1% a uniform percentage of his Retirement Account, Profit Sharing Account, Matching Account, After-Tax Account, Before-Tax Account, Rollover Account, effective as of April 1, 1999, each of his Coherent Accounts (excluding the value of any loan credited to any such Account), effective as of May 19, 2000, each of his Salix Accounts (excluding the value of any loan credited to any such Account) and effective as of June 28, 2002, his Ocular Account (excluding the value of any loan credited to any such Account) held in any Fund to one or more different Funds. Any such election shall not affect any prior election under subsection (i) above. Loans made pursuant to Section 7.11 (Loans) shall be treated as segregated investments from the Participants ap plicable Accounts, transferred to and from various Funds in accord with uniform rules established by the Administrative Committee.
12. Section 6.1 (General Rule) subsection (a) is hereby deleted and replaced with the following:
(a) an amount equal to the value of the Units credited to the Participants Profit Sharing Account attributable to pre-1993 contributions, Before-Tax Account, Matching Account, After-Tax Account, Rollover Account, Coherent Before-Tax Account, Coherent Rollover Account, Salix Before-Tax Account, Salix Employer Account, Salix Rollover Account, and Ocular Account plus any of the Participants Before-Tax Contributions and After-Tax Contributions made to the Trust Fund but not included in the Participants Units as of such Valuation Date; and
13. Section 7.1 (Commencement and Form of Distributions) subsection (d) is hereby amended by adding the following new paragraph (iii) immediately following the last paragraph in subsection (d):
(iii) Notwithstanding the above provisions, all Tellabs Plan Participants who had been Ocular Participants immediately prior to the merger of such Ocular Plan into the Tellabs Plan on June 28, 2002 and their Beneficiaries shall be allowed to choose an alternate distribution option for their Ocular Account in accordance with the terms of the Ocular Plan until September 5, 2002. After close of business on September 5, 2002, all Ocular Participants will no longer be entitled to choose optional forms of distributions in accordance with the Ocular Plan and will be entitled to choose either a rollover or lump sum distribution as provided for in (i) above.
14. Section 7.1 (Commencement and Form of Distributions) subsection (e) is hereby deleted and replaced with the following:
15. Section 7.2 (Qualified Joint and Survivor Annuity Retirement Account, Salix Accounts, and Coherent Accounts) the Section heading is hereby deleted and replaced with the following:
(Qualified Joint and Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account).
16. Section 7.2 (Qualified Joint and Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (a) is hereby deleted and replaced with the following:
(b) Benefits payable in the form of a Qualified Joint and Survivor Annuity shall be paid by distributing to the Participant an annuity contract purchased by the Trustee at the direction of the Administrative Committee with the nonforfeitable balance of the Participants Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account determined on the Valuation Date preceding the date of purchase. Any such annuity contract shall be nonassignable and noncommutable and shall be subject to the election, consent, written explanation and Survivor Annuity requirements of this Article 7 (Distributions). Delivery of such contract shall be in full satisfaction of the rights of the Participant hereunder with respect to such Account, and upon delivery of any such contract, the Participant shall not have any interest in the Trust Fund but shall look solely to the insurer issuing such contract for the payment of benefits.
18. Section 7.2 (Qualified Joint and Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (e) is hereby deleted and replaced with the following:
(Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account).
20. Section 7.3 (Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (a) is hereby deleted and replaced with the following:
(a) The Retirement Account; and prior to February 1, 2002, the Coherent Accounts and Salix Accounts; and prior to September 5, 2002, the Ocular Account; in the Trust Fund distributable to a Participant who dies prior to his Annuity Starting Date and who is married on the date of his death shall be distributed in the form of an annuity for the life of his surviving spouse Pre-Retirement Survivor Annuity) unless such Participant has elected not to have benefits paid in the form of a Pre-Retirement Survivor Annuity pursuant to subsection (e) below or the surviving spouse elects otherwise pursuant to subsection (d) below. For distributions made from a Participants Coherent Accounts or his Salix Accounts on or after February 1, 2002, only a lump sum distribution will be offered. For distributions made from a Participants Ocular Account on or after September 5, 2002, only a rollover or lump sum distribution will be offered.
21. Section 7.3 (Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (b) is hereby deleted and replaced with the following:
22. Section 7.3 (Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (d) is hereby deleted and replaced with the following:
23. Section 7.3 (Pre-Retirement Survivor Annuity Retirement Account, Salix Accounts, Coherent Accounts, and Ocular Account) subsection (g)(ii) is hereby deleted and replaced with the following:
(ii) If a Participant separates from service prior to attaining age 35 and has a nonforfeitable right to any portion of his Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account, the information described above shall be provided to him no later than one year after his separation from service.
24. Section 7.4 (Distributions to Beneficiaries) subsection (a) is hereby deleted and replaced with the following:
25. Section 7.10 (Distribution of Participants After-Tax Account, Rollover Account, Salix Rollover Account and Coherent Rollover Accounts Prior to Termination of Employment.) the Section heading is hereby deleted and replaced with the following:
(Distribution of Participants After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account and Ocular Account Prior to Termination of Employment).
26. Section 7.10 (Distribution of Participants After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account and Ocular Account Prior to Termination of Employment) subsection (c) is hereby deleted and replaced with the following:
(c) An amount not to exceed the balance in the Participants Rollover Contribution Account, Salix Rollover Account, Coherent Rollover Account, and Ocular Account provided that no such distribution shall reduce the Participants Accounts to an amount equal to the amount of any unpaid loan made pursuant to Section 7.11 (Loans).
(g) Withdrawals made pursuant to this Section 7.10 from a Coherent Participants Coherent Rollover Account, a Salix Participants Salix Rollover Account or an Ocular Participant's Ocular Account shall be subject to the provisions of Section 7.2 (Qualified Joint and Survivor Annuity - Retirement Account, Salix Accounts, Coherent Accounts and Ocular Account.)
28. Section 7.10 (Distribution of Participants After-Tax Account, Rollover Account, Salix Rollover Account, Coherent Rollover Account and Ocular Account Prior to Termination of Employment) subsection (h) is hereby deleted and replaced with the following:
29. Section 7.12 (Withdrawals Prior to Termination of Employment and After Age 59-1/2) is hereby deleted and replaced with the following:
and made from the separate Funds in which such Accounts are invested pursuant to procedures established by the Administrative Committee, subject to the limitations or restrictions thereon imposed by the sponsor(s) of the respective Funds or by Section 5.2 (Common Fund).
30. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (a) is hereby deleted and replaced with the following:
31. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (b) is hereby deleted and replaced with the following:
32. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (c) is hereby deleted and replaced with the following:
33. Section 7.13 (Pre-59-1/2 Coherent Account Withdrawals; Hardship Withdrawals) subsection (g) is hereby deleted and replaced with the following:
If there is a conflict between the terms as stated in the Tellabs Plan and the terms as stated in this Amendment, the terms stated in this Amendment shall prevail.
SECOND AMENDMENT
TO THE
TELLABS ADVANTAGE PROGRAM SAVINGS PLAN
Effective as set forth below, this Amendment is made as of the 1st day of January, 2002, by Tellabs Operations, Inc. (the "Corporation"), a Delaware corporation:
WHEREAS, an error was made by the third party administrator ("TPA") in the administration of the Section 7.11 of the Tellabs Advantage Program (the "Plan") relating to loans; and
WHEREAS, the Company desires to amend the Plan pursuant to Article Eleven to reflect the temporary administrative process used by the TPA of the Tellabs Plan to calculate the loan amount available to Participants for the period of January 1, 2002 through March 26, 2002;
NOW, THEREFORE, Section 7.11(c) of the Plan is amended as follows, but all other sections of the Plan shall remain in full force and effect:
1. Effective January 1, 2002 and continuing through March 26, 2002 the first paragraph of subsection 7.11(c) of the Plan is hereby deleted and replaced with the following:
"The amount of any loan: (1) shall not be less than $1,000: and (2) shall not exceed 50% of the amount which the Participant would be entitled to receive from the vested balance of all of a Participant's Accounts; and (3) may not, even if (1) and (2) above are met, exceed the vested balance of all of a Participant's Accounts less the vested balance of a Participant's Retirement Account and his Profit Sharing Account attributable to post-1992 Profit Sharing Contributions, if he had resigned from the service of the Employer and all Affiliates on the Valuation Date immediately preceding the date of such authorization; provided, however, that the Administrative Committee may, in its sole discretion, approve a loan in an amount less than $1,000 in the event that a Participant demonstrates financial hardship; provided further, however, that the amount of such loan shall not exceed $50,000 reduced by the greater of:.".
2. Effective March 27, 2002, the first paragraph of subsection 7.11(c), as set forth above, is deleted and replaced with the following language which appeared prior to the amendment set forth above:
"The amount of any loan shall not be less than $1,000 and shall not exceed 50% of the amount which the Participant would be entitled to receive from his Accounts other than his Retirement Account and his Profit Sharing Account attributable to post-1992 Profit Sharing Contributions, if he had resigned from the service of the Employer and all Affiliates on the Valuation Date immediately preceding the date of such authorization; provided, however, that the Administrative Committee may, in its sole discretion, approve a loan in an amount less than $1,000 in the event that a Participant demonstrates financial hardship; provided further, however, that the amount of such loan shall not exceed $50,000 reduced by the greater of:"
(In millions, except per share data) |
2002 Reported |
One-Time Items1 |
Restructuring and Other Charges |
2002 Pro Forma |
2001 Reported |
One-Time Items2 |
Restructuring and Other Charges |
2001 Pro Forma |
Net sales | $1.317.0 | | | $1,317.0 | $2,199.7 | | $ (6.2) | $2,205.9 |
Cost of goods sold | 830.5 | | $99.7 | 730.8 | 1,436.5 | | 250.2 | 1,186.3 |
Gross margin | 486.5 | | (99.7) | 586.2 | 763.2 | | (256.4) | 1,019.6 |
Operating expenses | 816.2 | $ 5.4 | 169.0 | 641.8 | 1,042.6 | | 192.2 | 850.4 |
Operating loss | (329.7) | (5.4) | (268.7) | (55.6) | (279.4) | | (448.6) | 169.2 |
Other income | 1.9 | 29.6 | | 31.5 | 34.6 | $(13.1) | | 47.7 |
Earnings (loss) before taxes |
(327.8) | (35.0) | (268.7) | (24.1) | (244.8) | (13.1) | (448.6) | 216.9 |
Net earnings | $(313.1) | $(111.7) | $(184.9) | $ (16.5) | $(182.0) | $ (9.0) | $(321.6) | $ 148.6 |
Diluted EPS | $ (0.76) | $ (0.27) | $ (0.45) | $ (0.04) | $ (0.44) | $ (0.02) | $ (0.79) | $ 0.36 |
Diluted shares | 411.4 | 411.4 | 411.4 | 411.4 | 409.6 | 409.6 | 413.8 | 413.8 |
12002 operating expenses included acquired in-process research and development expenditures of $5.4 million. 2002 other income included a pre-tax loss of $29.6 million related to the impairment write-down of certain equity investments. Additionally, an $87.7 million valuation allowance against U.S. deferred taxes was established during 2002.
22001 other income included a pre-tax loss of $25.9 million related to the impairment write-down and subsequent sale of certain preferred and common stock investments and a pre-tax gain of $12.8 million from the sale of stock held as an investment.
Sales within the United States for 2002 decreased 46.2% compared with 2001 and accounted for approximately 68.7% of total sales. Sales outside the United States decreased 20.7% compared with 2001 and accounted for approximately 31.3% of total sales. In 2001, sales outside the United States accounted for approximately 23.7% of total sales. The international market continues to play an increasingly important role for Tellabs as the Asia Pacific region now accounts for roughly 30% of global capital spending for the industry. In 2002, for the first time in the Companys history, one half of the Companys top 20 customers worldwide came from countries outside North America.
Total gross profit in 2002 was $586.2 million or 44.5% of sales, compared with $1,019.6 million or 46.2% of sales in 2001. Margin on product revenues for 2002 totaled 46.1% of sales compared with 51.2% of sales for 2001. The decrease in gross product margin was a result of the change in revenue mix toward new products, whose margins are typically lower until economies of scale are realized and cost reduction efforts performed.
Margin for services and other revenues during 2002 totaled 36.5% of sales compared with 17.7% of sales for 2001. The increase was a result of customer service efficiency gains.
Operating expenses for 2002 were $641.8 million compared with $850.4 million in 2001. Research and development expenditures for 2002 totaled $335.2 million compared with $422.7 million in 2001. The reduction in research and development spending was primarily a result of employee layoffs as well as reprioritization of certain development projects. Research and development spending as a percentage of sales was 25.5% in 2002 and 19.2% in 2001. This increase as a percentage of sales was a function of lower sales volume in 2002 and spending related to new product offerings.
Selling, general and administrative expenditures for 2002 totaled $297.8 million compared with $400.3 million in 2001. The reduction in selling, general and administrative spending was a direct result of the Companys restructuring efforts, coupled with the positive impact of continued cost savings strategies, most notably the focus on reducing controllable spending. As a percentage of sales, selling, general and administrative spending for 2002 increased to 22.6% compared with 18.1% in 2001, due primarily to lower sales volume in 2002.
Total other income for 2002 amounted to $31.5 million compared with $47.7 million in 2001. The reduction in total other income was mainly the result of lower interest income in 2002 due to lower prevailing interest rates and lower average invested balances.
The Companys effective tax rate was 31.4% at December 27, 2002, and 31.5% at December 28, 2001.
2001 Overview
2001 was a challenging year in the industry, and Tellabs responded by undertaking a series of restructurings intended to both realign its cost structure and reinvent its business to meet the new outlook for the industry. Major components of the Companys restructuring efforts included: exiting the SALIX®and NetCore next-generation switching program; discontinuing the development of the TITAN® 6700 optical switch; strategic realignment of worldwide manufacturing capacity; workforce reductions; a reduction of excess inventories and related purchase commitments and a consolidation of facilities. Overall, the Company incurred pre-tax restructuring and other charges of $448.6 million. For a detailed discussion of the Companys 2001 restructuring efforts, see Note 3, Restructuring and Other Charges.
Additionally, the Company recognized a one-time charge for the impairment write-down and subsequent sale of ce
rtain investments in 2001, totaling $25.9 million. This was partially offset by the pre-tax gain of $12.8 million from the sale of a single stock investment. Both of these one-time items resulted in net pre-tax charges of $13.1 million to other income.
Tellabs acquired Future Networks, Inc. (FNI), a standards-based voice and cable modem technology intended to augment the Companys broadband access business, for approximately $141.9 million (for more information, see Note 5, Business Combinations).
2001 vs. 2000 Pro Forma Comparison
Due to the number of one-time items in both 2001 and 2000, the Company believes exclusion of these items from the comparison of operations for 2000 and 2001 provides a more accurate understanding of the Companys core business. As a result, all 2001 vs. 2000 comparisons are derived from the pro forma results of operations from the chart below. Investors are advised to read the following comparisons in c
onjunction with the Companys audited financial statements and notes thereto appearing elsewhere in this annual report.
(In millions, except per share data) |
2001 Reported |
One-Time Items1 |
Restructuring and Other Charges |
2001 Pro Forma |
2000 Reported |
One-Time Items2 |
2000 Pro Forma |
Net sales | $2,199.7 | | $ (6.2) | $2,205.9 | $3,387.4 | | $3,387.4 |
Cost of goods sold | 1,436.5 | | 250.2 | 1,186.3 | 1,552.0 | | 1,552.0 |
Gross margin | 763.2 | | (256.4) | 1,019.6 | 1,835.4 | | 1,835.4 |
Operating expenses | 1,042.6 | | 192.2 | 850.4 | 840.4 | $ 5.8 | 834.6 |
Operating margin | (279.4) | | (448.6) | 169.2 | 995.0 | (5.8) | 1,000.8 |
Other income | 34.6 | $ (13.1) | | 47.7 | 114.4 | 53.0 | 61.4 |
Earnings (loss) before taxes |
(244.8) | (13.1) | (448.6) | 216.9 | 1,109.4 | 47.2 | 1,062.2 |
Net earnings (loss) before cumulative effect |
(182.0) | (9.0) | (321.6) | 148.6 | 760.0 | 31.9 | 728.1 |
Cumulative effect, net | | | | | (29.2) | | (29.2) |
Net earnings | $(182.0) | $ (9.0) | $(321.6) | $ 148.6 | $ 730.8 | $ 31.9 | $ 698.9 |
Diluted EPS | $ (0.44) | $ (0.02) | $ (0.79) | $ 0.36 | $ 1.75 | $ 0.08 | $ 1.67 |
Diluted shares | 409.6 | 409.6 | 413.8 | 413.8 | 418.4 | 418.4 | 418.4 |
We have audited the accompanying consolidated
balance sheets of Tellabs, Inc., and Subsidiaries as of December 27, 2002, and December 28, 2001, and the related consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 27, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tellabs, Inc., and Subsidiaries at December 27, 2002, and December 28, 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 27, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Notes 2 and 4 to the financial statements, the Company changed its method of accounting for goodwill and other intangibles and revenue recognition in 2002 and 2000, respectively.
/s Ernst&Young, LLP
Ernst&Young, LLP
Chicago, Illinois
January 21, 2003
Consolidated Statements of Operations
(In millions, except per-share data) | Year Ended 12/27/02 |
Year Ended 12/28/01 |
Year Ended 12/29/00 | |||
Net Sales | ||||||
Product | $ | 1,103.3 | $ | 1,872.2 | $ | 3,110.7 |
Services and Other | 213.7 | 327.5 | 276.7 | |||
1,317.0 | 2,199.7 | 3,387.4 | ||||
Cost of Sales | ||||||
Product | 694.8 | 1,167.1 | 1,288.6 | |||
Services and Other | 135.7 | 269.4 | 263.4 | |||
830.5 | 1,436.5 | 1,552.0 | ||||
Gross Profit | 486.5 | 763.2 | 1,835.4 | |||
Operating expenses | ||||||
Marketing | 168.8 | 249.0 | 244.9 | |||
Research and development | 335.2 | 422.7 | 412.4 | |||
General and administrative | 129.0 | 151.3 | 162.9 | |||
Merger costs | | | 5.7 | |||
Restructuring and other expenses | 169.0 | 192.2 | | |||
Acquired in-process R&D | 5.4 | | | |||
Goodwill amortization | | 24.6 | 11.7 | |||
Intangible asset amortization | 8.8 | 2.8 | 2.8 | |||
816.2 | 1,042.6 | 840.4 | ||||
Operating Profit (Loss) |
(329.7) | (279.4) | 995.0 | |||
Other income (expense) | ||||||
Interest income | 33.3 | 46.8 | 56.1 | |||
Interest expense | (0.9) | (0.5) | (0.6) | |||
Other | (30.5) | (11.7) | 58.9 | |||
1.9 | 34.6 | 114.4 | ||||
Earnings (Loss) Before Income Taxes and Cumulative Effect of Change in Accounting Principle |
(327.8) | (244.8) | 1,109.4 | |||
Income tax | (14.7) | (62.8) | 349.4 | |||
Earnings (Loss) Before Cumulative Effect of Change in Accounting Principle |
(313.1) | (182.0) | 760.0 | |||
Cumulative effect of change in accounting principle (net of tax of $13.4) |
| | (29.2) | |||
Net Earnings (Loss) | $ | (313.1) | $ | (182.0) | $ | 730.8 |
Earnings (Loss) per Share Before Cumulative Effect of Change in Accounting Principle |
||||||
Basic | $ | (0.76) | $ | (0.44) | $ | 1.86 |
Diluted | $ | (0.76) | $ | (0.44) | $ | 1.82 |
Cumulative Effect of Change in Accounting Principle per Share |
||||||
Basic | $ | | $ | | $ | (0.07) |
Diluted | $ | | $ | | $ | (0.07) |
Earnings (Loss) per Share |
||||||
Basic | $ | (0.76) | $ | (0.44) | $ | 1.79 |
Diluted | $ | (0.76) | $ | (0.44) | $ | 1.75 |
Average number of common shares outstanding |
411.4 | 409.6 | 409.4 | |||
Average number of common shares outstanding, assuming dilution |
411.4 | 409.6 | 418.4 |
Consolidated Balance Sheets
(In millions, except share amounts) | 12/27/02 | 12/28/01 | ||
ASSETS | ||||
Current Assets | ||||
Cash and cash equivalents | $ | 453.6 | $ | 701.9 |
Investments in marketable securities | 565.6 | 399.7 | ||
Accounts receivable, net of allowance of $12.2
and $57.3 |
216.8 | 330.9 | ||
Inventories | ||||
Raw materials | 92.4 | 145.5 | ||
Work in process | 15.5 | 33.7 | ||
Finished goods | 66.6 | 149.9 | ||
174.5 | 329.1 | |||
Deferred taxes | | 138.2 | ||
Income taxes | 91.9 | 26.5 | ||
Miscellaneous receivables and other current assets | 31.2 | 18.3 | ||
Total Current Assets | 1,533.6 | 1,944.6 | ||
Property, Plant and Equipment | ||||
Buildings and improvements | 289.3 | 315.6 | ||
Equipment | 454.1 | 516.2 | ||
743.4 | 831.8 | |||
Accumulated depreciation | (349.3) | (342.2) | ||
394.1 | 489.6 | |||
Land | 26.8 | 30.9 | ||
420.9 | 520.5 | |||
Goodwill, Net | 455.7 | 188.6 | ||
Other Assets | 212.6 | 212.1 | ||
Total Assets | $ | 2,622.8 | $ | 2,865.8 |
LIABILITIES AND STOCKHOLDERS EQUITY |
||||
Current Liabilities | ||||
Accounts payable | $ | 77.4 | $ | 63.5 |
Accrued liabilities | ||||
Compensation | 50.9 | 43.4 | ||
Payroll and other taxes | 7.2 | 8.9 | ||
Accrued restructuring and other charges | 85.4 | 155.1 | ||
Other | 36.4 | 48.6 | ||
Total accrued liabilities | 179.9 | 256.0 | ||
Total Current Liabilities | 257.3 | 319.5 | ||
Accrued Long-Term Restructuring Charges | 45.5 | 24.9 | ||
Other Long-Term Liabilities | 29.7 | 34.4 | ||
Deferred Income Taxes | | 21.4 | ||
Stockholders Equity | ||||
Preferred stock: authorized 5,000,000 shares of $.01 par value; no shares issued and outstanding |
| | ||
Common stock: authorized 1,000,000,000 shares
of $.01 par value; 415,440,414 and 413,497,100 shares issued and outstanding, including treasury stock |
4.1 | 4.1 | ||
Additional paid-in capital | 543.6 | 496.0 | ||
Deferred compensation expense | (19.3) | (1.4) | ||
Treasury stock, at cost: 3,250,000 shares and 3,250,000 shares |
(129.6) | (129.6) | ||
Total accumulated other comprehensive loss | (52.0) | (160.1) | ||
Retained earnings | 1,943.5 | 2,256.6 | ||
Total Stockholders Equity | 2,290.3 | 2,465.6 | ||
Total Liabilities and Stockholders Equity | $ | 2,622.8 | $ | 2,865.8 |
Consolidated Statements of Stockholders Equity
(In millions) | 12/27/02 | 12/28/01 | 12/29/00 | ||||
Common Stock | Shares | Amount | Shares | Amount | Shares | Amount | |
Balance at beginning of year |
413.5 |
4.1 |
411.2 |
4.1 |
408.0 |
4.1 |
|
Stock options exercised | 1.9 | | 2.3 | | 3.2 | | |
Balance at end of year | 415.4 | 4.1 | 413.5 | 4.1 | 411.2 | 4.1 | |
Additional Paid-In Capital | |||||||
Balance at beginning of year | 496.0 | 441.9 | 376.6 | ||||
Stock options exercised | 4.8 | 41.0 | 58.1 | ||||
Stock retention programs | 0.3 | 2.7 | 1.0 | ||||
Employee stock awards | 0.1 | 0.3 | 1.0 | ||||
Stock compensation from acquired company |
| | 5.2 | ||||
Fair value of options issued in acquisition |
42.9 | 7.1 | | ||||
Other | (1.0) | | | ||||
Stock compensation from restructuring activities |
0.5 | 3.0 | | ||||
Balance at end of year | 543.6 | 496.0 | 441.9 | ||||
Deferred Compensation | |||||||
Balance at beginning of year | (1.4) | | | ||||
Unearned compensation from options issued in acquisitions |
(29.3) | (1.4) | | ||||
Amortization | 10.5 | | | ||||
Other | (0.9) | | | ||||
Balance at end of year | (19.3) | (1.4) | | ||||
Treasury Stock | |||||||
Balance at beginning of year | 3.3 | (129.6) | 3.0 | (126.5) | | | |
Shares purchased | | | 0.3 | (3.1) | 3.0 | (126.5) | |
Balance at end of year | 3.3 | (129.6) | 3.3 | (129.6) | 3.0 | (126.5) | |
Accumulated Other Comprehensive Income (Loss) | |||||||
Balance at beginning of year | (160.1) | (130.5) | (41.0) | ||||
Unrealized holding gains (losses) on marketable securities arising during period, |
8.9 | 5.8 | (39.5) | ||||
Less: reclassification adjustment for (gains) losses included in net earnings |
(7.1) | 7.6 | (36.5 | ||||
Net unrealized holding gains (losses) on marketable securities |
1.8 | 13.4 | (76.0) | ||||
Foreign currency translation adjustment |
107.0 | (37.4) | (44.1) | ||||
Deferred income tax related to items of other comprehensive income (loss) |
(0.7) | (5.6) | 30.6 | ||||
Balance at end of year | (52.0) | (160.1) | (130.5) | ||||
Retained Earnings | |||||||
Balance at beginning of year | 2,256.6 | 2,438.6 | 1,707.8 | ||||
Net earnings (loss) | (313.1) | (182.0) | 730.8 | ||||
Balance at end of year | $ 1,943.5 | $ 2,256.6 | $ 2,438.6 | ||||
Total Stockholders Equity | $ 2,290.3 | $ 2,465.6 | $ 2,627.6 | ||||
The accompanying notes are an integral part of these statements. | |||||||
Consolidated Statements of Cash Flow | ||||||
(In millions) |
Year Ended 12/27/02 |
Year Ended 12/28/01 |
Year Ended 12/29/00 | |||
Operating Activities | ||||||
Net Earnings (Loss) | $ | (313.1) | $ | (182.0) | $ | 730.8 |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
||||||
Restructuring and other charges | 268.4 | 448.6 | | |||
Depreciation and amortization | 142.6 | 157.5 | 116.2 | |||
Tax benefit associated with stock option exercises |
2.0 | 20.1 | 27.2 | |||
Purchased in-process research & development |
5.4 | | | |||
Provision for doubtful accounts | (25.4) | 42.0 | 19.2 | |||
Deferred income taxes | 110.0 | (94.9) | 1.3 | |||
Loss (gain) on investments | 30.0 | 13.1 | (58.8) | |||
Deferred compensation | 10.5 | | | |||
Merger costs | | | 5.8 | |||
Net changes in assets and liabilities, net of effects from acquisitions: |
||||||
Accounts receivable | 162.0 | 424.7 | (225.2) | |||
Inventories | 113.2 | (27.3) | (246.3) | |||
Miscellaneous receivables and other current assets |
(12.1) | 8.0 | (18.9) | |||
Long-term assets | (32.3) | (65.6) | (80.7) | |||
Accounts payable | 9.2 | (91.1) | 45.2 | |||
Accrued restructuring and other charges |
(191.6) | (64.4) | | |||
Accrued liabilities | (29.6) | (56.2) | 61.0 | |||
Income taxes | (66.0) | (120.0) | 45.5 | |||
Long-term liabilities | (5.4) | 6.8 | 3.8 | |||
Net Cash Provided by Operating Activities | 177.8 | 419.3 | 426.1 | |||
Investing Activities | ||||||
Acquisition of property, plant and equipment, net |
(34.1) | (208.2) | (207.6) | |||
Payments for purchases of investments | (697.0) | (424.0) | (643.6) | |||
Proceeds from sales and maturities of investments |
543.5 | 714.0 | 560.5 | |||
Payments for acquisitions, net of cash acquired |
(291.7) | (130.8) | (0.5) | |||
Net Cash Used for Investing Activities | (479.3) | (49.0) | (291.2) | |||
Financing Activities | ||||||
Proceeds from issuance of common stock | 2.8 | 20.9 | 30.9 | |||
Purchase of treasury stock | | (3.1) | (126.5) | |||
Proceeds from notes payable | | 0.5 | | |||
Payments of notes payable | (8.8) | | (6.5) | |||
Net Cash Provided by (Used for) Financing Activities |
(6.0) | 18.3 | (102.1) | |||
Effect of Exchange Rate Changes on Cash | 59.2 | (16.0) | (14.1) | |||
Net Increase (Decrease) in Cash and Cash Equivalents |
(248.3) | 372.6 | 18.7 | |||
Cash and Cash Equivalents at Beginning of Year |
701.9 | 329.3 | 310.6 | |||
Cash and Cash Equivalents at End of Year | $ | 453.6 | $ | 701.9 | $ | 329.3 |
Other Information | ||||||
Interest paid | $ | 1.4 | $ | 0.7 | $ | 0.3 |
Income taxes paid | $ | 23.9 | $ | 151.0 | $ | 274.8 |
(In millions, except per-share data) |
2002 | 2001 | 2000 |
Net earnings (loss) | |||
As reported | $ (313.1) | $ (182.0) | $ 730.8 |
Plus: stock-based employee compensation expense included in reported net earnings* | 10.5 | | |
Less: Total stock-based employee compensation expense determined under fair value based method for all awards* | (129.6) | (121.4) | (63.8) |
Pro forma net earnings (loss) | $ (432.2) | $ (303.4) | $ 667.0 |
Earnings (loss) per common share As reported |
$(0.76) | $(0.44) | $1.79 |
Pro forma | $(1.05) | $(0.74) | 1.63 |
Earnings (loss) per common share, assuming dilution> |
|||
As reported | $(0.76) | $(0.44) | $1.75 |
Pro forma | $(1.05) | $(0.74) | $1.59 |
*Net of related tax effects | |||
(See Note 11, Stock Options). | |||
3. Restructuring and Other Charges
During April, August and November 2001, the Companys management and Board of Directors approved plans to restructure its business operations. The restructuring activities included termination of the SALIX and NetCore development efforts, discontinuation of the development of the TITAN 6700 optical switch, strategic realignment of worldwide manufacturing capacity and related workforce reductions, reduction of excess inventories and related purchase commitments, and a consolidation of the Companys facilities. These steps were undertaken to both realign the Companys cost structure with the lower anticipated business and industry outlook and to focus the Companys resources on the metro optical networking and business services markets. Total charges associated with these plans were $448.6 million.
In April and September 2002, the Companys management and Board of Directors approved additional plans to further restructure its operations including a realignment of worldwide inventory levels to match customer demand, which resulted in the write-off of excess inventories and the accrual for excess inventory purchase commitments; workforce reductions; the closure and consolidation of excess facilities, including manufacturing facilities in Ronkonkoma, New York, and Shannon, Ireland, along with the write-off of related fixed assets; and an adjustment of the reserves for excess leased facilities from the Companys 2001 restructuring programs in light of current economic conditions. Total charges associated with the April and September 2002 plans were $219.1 million and $68.0 million, respectively.
Below is an analysis of the restructuring and other charges recorded during 2002 and 2001 by major income statement classification:
(in millions) |
|||
Income Statement Classification |
Description |
12/27/02 |
12/28/01 |
Net product sales |
Reversal of SALIX revenue |
$ |
$ 6.2 |
Product cost of sales |
Inventory write-offs |
53.2 |
120.3 |
Excess purchase commitments |
58.0 |
127.0 |
|
Other asset write-offs |
|
2.9 |
|
Restructuring and other expenses |
Severance and related expenses |
51.3 |
46.9 |
Consolidation of excess leased facilities |
44.7 |
59.5 |
|
Disposal of property, plant and equipment |
67.3 |
55.6 |
|
Other obligations |
12.6 |
30.2 |
|
$287.1 |
$448.6 |
||
The following table displays the Companys restructuring activity during 2002 and the status of the reserves at December 27, 2002:
Description of reserve (in millions) |
Balance |
April |
Sept. |
Non-Cash |
Cash |
Balance |
Inventory write-offs |
$- |
$53.2 |
$- |
$(53.2) |
$- |
$- |
Excess purchase commitments |
|
|
|
|
|
|
Severance and related expenses |
|
|
|
|
|
|
Consolidation of excess leased facilities |
|
|
|
|
|
|
Disposal of property, plant and equipment |
|
|
|
|
|
|
Other obligations |
2.2 |
3.1 |
9.5 |
(5.0) |
(0.2) |
9.6 |
$180.0 |
$219.1 |
$68.0 |
$(144.6) |
$(191.6) |
$130.9 |
Reversal of SALIX revenue
During 2001, the Company reversed previously recognized sales totaling $6.2 million related to the SALIX 7750 product. The Company had refunded customers $6.0 million related to SALIX product returns.
Inventory write-offs and excess
purchase commitments
Included in product cost of goods sold during 2002 were charges
of $111.2 million related to the write-off of inventories and
accruals for non-cancelable inventory purchase commitments deemed
to be excess as a result of the continued slowdown in customer
spending levels. These charges related primarily to a build-up
in common components and piece parts that were a direct result
of the lower forecasted overall product demand. The inventory
write-offs were recorded as a reduction to inventory, while
the reserve for excess non-cancelable purchase commitments was
recorded to accrued restructuring and other charges.
During the fourth quarter of 2002,
the Company recorded a reversal of restructuring charges of
$11.6 million relating to costs originally recorded as part
of the Companys 2001 restructuring programs. This reversal
was a result of the Company incurring lower purchase commitment
obligations than originally anticipated. The Company believes
that the remaining purchase commitment reserve of $30.0 million
is adequate to cover future contract settlements.
Included in product cost of goods
sold during 2001 were charges of $247.3 million related to the
write-off of inventories and accruals for purchase commitments.
These charges arose from a build-up in Tellabs 2300 remote service
units that will be superseded by new, upgraded units; the termination
of the SALIX and
NetCore next-generation switching effort; the discontinuance
of the TITAN 6700 switch; and the identification of various
components and common piece parts that would no longer be utilized
due to lower forecasted product demand.
Severance and related expenses
Resulting from its 2002 restructuring initiatives, the Company
recorded charges totaling $51.3 million for severance pay and
related fringe benefits for the reduction of approximately 2,000
employees worldwide. Approximately 130 current employees were
affected by the September 2002 restructuring plans during the
first quarter of 2003. Tellabs expects to pay the remainder
of the September 2002 severance costs by the end of the first
quarter of 2003.
In the fourth quarter of 2002,
the Company reversed $6.2 million due to changes in the estimated
severance and related costs from prior restructuring programs.
During 2001, the Company recorded
charges of $46.9 million for severance pay, fringe benefits
and early retirement benefits.
Consolidation of excess leased facilities
During 2002, the Company recorded $44.7 million in charges related
to the consolidation of excess facilities. These charges consist
mainly of $20.4 million for additional reserves for facilities
vacated under the 2001 restructuring programs, $13.6 million
for lease cancellation and non-cancelable lease costs associated
with the closure of the Ronkonkoma, New York, manufacturing
facility and the consolidation of a number of smaller locations
under the April 2002 restructuring, and $10.5 million for lease
cancellation and non-cancelable lease costs primarily associated
with the consolidation of Reston, Virginia, operations with
Ashburn, Virginia, operations.
The $20.4 million adjustment of
the 2001 restructuring reserves resulted from management revising
its estimates and assumptions concerning its overall exposure
under certain lease agreements. Based upon the effects the current
state of the real estate market and the economy, as a whole,
the Companys ability to sublease properties in certain
geographic areas was impacted. Approximately $0.7 million of
the 2002 charges were reversed in the fourth quarter of 2002
as they related to originally estimated equipment lease payments
that will no longer be paid. The Company anticipates utilizing
the remaining reserve for excess leased facility charges.
During 2001 the Company recorded
charges totaling $59.5 million related to the consolidation
of excess facilities. These charges related primarily to the
lease cancellation and non-cancelable lease costs to be incurred
with the closure of the SALIX and NetCore facilities; the closure
of a manufacturing facility in Drogheda, Ireland; the Companys
decision not to open its research and development facility in
Chelmsford, Massachusetts; the closure of certain small sales
offices around the world and the consolidation of a variety
of leased buildings that would no longer be needed.
Disposal of property, plant and equipment
The Company recorded a total of $67.3 million related to the
disposal of property, plant and equipment as part of its 2002
restructuring programs. Property, plant and equipment consisted
of leasehold improvements, manufacturing equipment, lab and
data equipment, and furniture associated with the closure of
the Ronkonkoma, New York, and Shannon, Ireland, plants, and
the consolidation of a number of smaller locations. The total
charges were determined by writing down fixed assets to be sold
to the lower of their carrying amount or fair value less costs
to sell, while writing down fixed assets that were abandoned
to salvage value in accordance with SFAS No. 144.
During 2001 the Company recorded
a total of $55.6 million related to the disposal of property,
plant and equipment, consisting primarily of leasehold improvements,
production equipment, lab and data equipment, and furniture
associated with the unopened facility in Chelmsford, Massachusetts,
the closure of the manufacturing facility in Drogheda, Ireland,
and an additional manufacturing facility closure in Round Rock,
Texas.
Other obligations
The Company recorded $12.6 million in charges for other obligations
that arose as a direct result of its 2002 restructuring activities.
These charges include $4.7 million for the write-down of the
Shannon, Ireland, facility, $4.3 million for the expected repayment
of incentive grants and $3.6 million of other miscellaneous
fees. The Company expects these incentive grants and miscellaneous
fees will be substantially paid in 2003.
During 2001, $2.9 million of other
asset write-offs was charged to product cost of goods sold,
while $30.2 million was charged to restructuring and other expenses.
These amounts consisted of capitalized TITAN 6700 optical switch
prototypes, prototypes related to the next-generation switching
production effort, write-offs of prepaid royalties and licenses related to the SALIX product line, and government grants to be repaid during 2002.
4. Change in Accounting Principles
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, during the first quarter of 2001. SFAS No. 133 establishes accounting and reporting standards that require companies to record all derivative instruments on the balance sheet at their fair value. Changes in the derivatives fair value are to be reported in earnings or other comprehensive income, as appropriate. Adoption of SFAS No. 133 had no significant impact on Tellabs consolidated financial statements. For more information, see Note 8, Financial Instruments.
In the fourth quarter of 2000,
the Company changed its method of accounting for revenue recognition
in accordance with SAB 101, Revenue Recognition in Financial
Statements, retroactive to January 1, 2000. This change
aligns the revenue recognition policy with certain customer-specific
contractual provisions.
Adoption of SAB 101 was recorded
as a change in accounting method by reporting the cumulative
effect of the change to prior periods in the first period of
2000. The cumulative effect of the change resulted in a charge
to earnings of $29.2 million (net of income taxes of $13.4 million),
for the year ended December 29, 2000. The total revenue included
in the change was $58.8 million. The effect on 2000 was to increase
earnings, before the cumulative effect of the change in accounting
principle, by $20.9 million ($0.05 per share).
5. Business Combinations
In January 2002, the Company acquired 100%
of the outstanding voting stock of Ocular Networks, Inc. (Ocular),
a developer of optical solutions for the metropolitan (metro)
optical networking market, for $323.0 million. As part of the
acquisition, the Company obtained Oculars Optical Network
Xchange (OSX) products, the Tellabs 6400 transport
switch (formerly Ocular OSX 6000), the Tellabs 6410 transport
edge node (formerly Ocular OSX 1000) and the Tellabs 6490
element manager (formerly Ocular Metro Watch).
The acquisition was accounted
for as a purchase in accordance with the guidance in SFAS No.
141, Business Combinations, with the results of operations
and cash flows for Ocular included in the Companys consolidated
results from the date of the acquisition. Pro forma combined
results of operations are not being presented since they would
not differ materially from reported results.
Components of the purchase price
were as follows:
(in millions) |
|
Cash paid to Ocular shareholders |
$278.5 |
Fair value of Ocular stock options assumed |
42.9 |
Payable to former Ocular restricted stockholders |
28.5 |
Acquisition costs |
2.4 |
352.3 |
|
Deferred compensation expense |
(29.3) |
Total |
$323.0 |
The Black-Scholes
option valuation model was used to determine the fair value
of the Ocular stock options assumed. The deferred compensation
expense represents the intrinsic value of the unvested Ocular
stock options on the acquisition date, which will be recognized
over the remaining service period of the options. Also included
in the purchase price was a payable of $28.5 million to former
holders of restricted Ocular stock awards that were given to
certain key employees. On the acquisition date, the restricted
stock award holders exchanged these awards for the right to
receive $28.5 million in cash, which Tellabs has agreed to pay
out either immediately, if certain pre-defined conditions are
met, or over the original vesting period of the awards. As of
December 27, 2002, the Company had paid approximately $15.3
million of this payable.
The allocation of the purchase
price is as follows:
(in millions) |
|
Goodwill |
$267.1 |
Intangible assets subject to amortization-developed |
|
Purchased in-process research and development costs |
5.4 |
Other assets |
8.2 |
Total assets |
$345.1 |
Total liabilities |
$22.1 |
Purchase price |
$323.0 |
The developed
technology intangible asset of $64.4 million represents the
value of the underlying technology for the Tellabs 6400 transport
switch and the Tellabs 6490 element manager. This intangible
asset is being fully amortized over its estimated useful life
of 10 years using the straight-line method. The $5.4 million
of in-process research and development costs was expensed during
the first quarter of 2002. These costs related to the development
of the Tellabs 6410 transport edge node.
The Company also recorded goodwill
of $267.1 million. The Company believes that by acquiring Ocular
it extended the addressable market for its products within the
metro optical network. Oculars product offerings complement
Tellabs by focusing on small to mid-size tier 2 and 3
central offices, a market opportunity that has previously not
been addressed by Tellabs. Tellabs 5000 series of digital cross-connect
systems are optimized for larger, or tier 1, central offices.
The Company estimates that no goodwill will be deductible for
tax purposes.
In February 2001, the Company
acquired Future Networks, Inc. (FNI), a leader in
standards-based voice and cable modem technology, for approximately
$143.3 million.
Components of the purchase price
were as follows:
(in millions) |
|
Cash paid to former FNI shareholders at acquisition |
|
Cash paid to former FNI shareholders in 2001 upon |
|
Cash paid to former FNI shareholders in 2002 upon |
|
Value of FNI employee stock options exchanged for |
|
Acquisition costs |
0.2 |
Total |
$143.3 |
The acquisition
was accounted for as a purchase, and accordingly, the results
of operations of the acquired business were included in the
consolidated operating results of Tellabs from the date of acquisition.
The final allocation of the purchase
price is as follows:
(in millions) |
|
Goodwill |
$142.4 |
Fair value of assets acquired |
11.3 |
Total assets |
$153.7 |
Total liabilities |
$10.4 |
Purchase price |
$143.3 |
Pro forma
combined operating results prepared assuming the acquisition
had occurred at the beginning of the year are not being presented
since they would not differ materially from reported results.
During 2001, $13.0 million of
amortization expense was recorded against the FNI goodwill.
The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, in January 2002; accordingly, no additional goodwill
amortization was subsequently recorded (please see Note 6, Goodwill and Intangible Assets).
In February 2000, the Company
acquired SALIX Technologies, Inc. (SALIX), a developer
of next-generation switching solutions that enabled service
providers to offer next-generation, converged services, over
any network infrastructure, in a transaction accounted for as
a pooling of interests. The Company issued approximately 3.8
million shares of its common stock in exchange for all of the
outstanding common and preferred shares of SALIX. During the
first quarter of 2000, the Company recognized a pre-tax charge
of $5.8 million for costs related to the SALIX acquisition.
6. Goodwill and Intangible Assets
During the first quarter of 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 eliminates the amortization of goodwill and intangible
assets with indefinite useful lives. SFAS No. 142 requires that
these assets be reviewed for impairment at least annually. Intangible
assets with finite lives will continue to be amortized over
their estimated useful lives.
In its initial application of
SFAS No. 142, the Company determined that it operated in one
reporting unit for purposes of completing the impairment review
of goodwill. The Company utilizes the comparison of its market
capitalization and book value as an indicator of potential impairment.
Upon adoption of SFAS No. 142, the Company tested for impairment
at the consolidated entity level and determined that a potential
impairment did not exist. As a result, no further actions were
required.
As a result of adopting SFAS No.
142, the Company performed its annual impairment review in the
fourth quarter of 2002. The Company did not find any indication
that impairment existed and, therefore, no impairment was recorded.
However, there can be no assurance that future goodwill impairment
tests will not result in a charge to earnings.
Below is a comparison of the results
of operations for the last three years, with the pro-forma results
of operations adjusted to exclude goodwill amortization expense.
Year Ended | |||
(in millions, except per-share amounts) |
12/27/02 |
12/28/01 |
12/29/01 |
Net Earnings (Loss) |
$(313.1) |
$(182.0) |
$730.8 |
Add back: After-tax goodwill amortization |
- |
21.5 |
8.7 |
Pro-forma Earnings (Loss) |
$(313.1) |
$(160.5) |
$722.1 |
Earnings (Loss) per Share Basic |
$(0.76) |
$(0.44) |
$1.79 |
Add back: Goodwill amortization |
- |
0.05 |
0.02 |
Pro-forma Earnings (Loss) per Share Basic |
$(0.76) |
$(0.39) |
$1.81 |
Earnings (Loss) per Share Diluted |
$(0.76) |
$(0.39) |
$1.77 |
Add back: Goodwill amortization |
- |
0.05 |
0.02 |
Pro-forma Earnings (Loss) per Share Diluted |
$(0.76) |
$(0.39) |
$1.77 |
Average number of common shares outstanding |
411.4 |
409.6 |
409.4 |
Average number of common shares outstanding, |
411.4 |
409.6 |
418.4 |
Goodwill increased
$267.1 million during 2002, to $455.7 million, resulting primarily
from the Ocular acquisition.
At December 27, 2002, the Company
had finite-lived intangible assets with an original carrying
value of $87.4 million and accumulated amortization and foreign
currency translation adjustments totaling $17.3 million. These
assets consisted of developed technology acquired in both the
Tellabs Denmark acquisition, totaling $23.0 million, and the
Ocular acquisition, totaling $64.4 million. At December 27,
2002, the net carrying value of the Tellabs Denmark-developed
technology was $11.6 million, while the net carrying value of
the Ocular developed technology was $58.5 million. These intangible
assets are being amortized using the straight-line method over
periods ranging from 7 to 10 years. The overall weighted-average
amortization period is 9.3 years. Total amortization expense
was $8.8 million, $2.8 million and $2.8 million in 2002, 2001
and 2000, respectively.
The estimated amortization expense
for the next five years is as follows:
(in millions) |
|
|
|
2003 |
$9.2 |
2004 |
$9.2 |
2005 |
$9.2 |
2006 |
$8.0 |
2007 |
$6.4 |
7. Investments
Available-for-sale marketable securities
are accounted for at market prices, with the unrealized gain
or loss, less deferred income taxes, shown as a separate component
of stockholders equity. At December 27, 2002, and December
28, 2001, they consisted of the following:
(In millions) | Amortized Cost |
Unrealized Gain/(Loss) |
Market Value | |||
2002 | ||||||
State and municipal securities | $ | 149.9 | $ | 1.6 | $ | 151.5 |
Preferred and common stocks | 47.9 | 1.5 | 49.4 | |||
U.S. government and agency debt obligations | 212.5 | 4.9 | 217.4 | |||
Corporate debt obligations | 57.4 | 2.4 | 59.8 | |||
Foreign government obligations | 15.9 | 0.1 | 16.0 | |||
Foreign bank obligations | 71.5 | | 71.5 | |||
$ | 555.1 | $ | 10.5 | $ | 565.6 | |
(In millions) | Amortized Cost |
Unrealized Gain/(Loss) |
Market Value | |||
2001 | ||||||
State and municipal securities | $ | 135.8 | $ | 1.9 | $ | 137.7 |
Preferred and common stocks | 93.7 | 2.6 | 96.3 | |||
U.S. government and agency debt obligations | 65.9 | 2.1 | 68.0 | |||
Corporate debt obligations | 55.8 | 0.7 | 56.5 | |||
Foreign bank obligations | 41.3 | (0.1) | 41.2 | |||
$ | 392.5 | $ | 7.2 | $ | 399.7 | |
The Company
also maintains investments in start-up technology companies
and partnerships that invest in start-up technology companies.
These investments are recorded in Other Assets at cost, which
approximates fair market value. At December 27, 2002, and December
28, 2001, these investments totaled $9.0 million and $36.0 million,
respectively. During 2001, the Company recorded a $12.8 million
pre-tax gain on the sale of a certain equity investment.
Management conducts a quarterly
review of each investment in its portfolio, including historical
and projected financial performance, expected cash needs and
recent funding events. Other-than-temporary impairments are
recognized if the market value of the investment is below its
cost basis for an extended period of time or the issuer has
experienced significant financial declines or difficulties in
raising capital to continue operations. Other-than-temporary
impairments were $29.6 million for the year ended December 27,
2002, and $25.9 million for the year ended December 28, 2001.
8. Derivative Financial Instruments
The Company conducts business on a global
basis in several major currencies and is subject to risks associated
with fluctuating foreign exchange rates. In response to this,
the Company developed a foreign currency exposure management
policy with the objective of mitigating financial exposure to
changing foreign exchange rates resulting from nonfunctional
currency receivables and payables that are expected to be settled
in one year or less. The Company utilizes derivatives, primarily
foreign currency forward contracts, to manage its foreign currency
exposure. The Company does not engage in hedging specific individual
transactions, but rather uses derivatives to manage overall
exposure levels for a specific currency. Gains and losses related
to these derivatives are recorded to the Consolidated Statement
of Operations each period.
The Companys policy is to
hedge 90% of the calculated exposure. Foreign currency forward
contracts are executed weekly with the final contracts for each
period executed one week before the end of the period. As a
result of this timing, additional nonfunctional foreign currency
transactions can occur during the last week of the period that
could cause the Companys hedge percentage at the end of
the period to be greater or less than the 90% target. The Company
enters into forward exchange contracts only to the extent necessary
to meet its overall goal of minimizing nonfunctional foreign
currency exposures. The Company does not enter into hedging
transactions for speculative purposes. The Companys foreign
currency exposure management policy and program remained unchanged
during 2000, 2001 and 2002,
and no significant changes are currently planned.
In accordance with SFAS No. 133,
all forward exchange contracts are recorded on the balance sheet
at fair value. Forward foreign exchange contracts receivable
are included in other current assets, while forward foreign
exchange contracts payable are included as part of accrued liabilities
in the consolidated balance sheet. Changes in the fair value
of these instruments are included in earnings, as part of other
income and expense, in the current period. The Company had a
net gain of $5.5 million on forward exchange contracts in 2002.
Net losses on forward exchange contracts were $4.7 million and
$1.8 million for 2001 and 2000, respectively. The Companys
current hedging practices do not qualify for special hedge accounting
treatment as prescribed in SFAS No. 133 since hedges of existing
assets or liabilities that will be remeasured with changes in
fair value reported currently in earnings are specifically excluded.
Derivative financial instruments
involve elements of market and credit risk not recognized in
the financial statements. The market risk that results from
these instruments relates to changes in the foreign currency
exchange rates, which is generally offset by movements in the
value of the underlying assets or liabilities being held. Credit
risk relates to the risk of nonperformance by a counterparty
to one of the Companys derivative contracts. The Company
does not believe there is a significant credit risk associated
with its hedging activities because counterparties are all large
international financial institutions with high credit ratings.
In addition, the Company also limits the aggregate notional
amount of agreements entered into with any one financial institution
in order to mitigate credit risk.
The table that follows presents
a summary of the notional value and the fair value of forward
exchange rate contracts for each currency in which the Company
had hedged exposure at December 27, 2002, and December 28, 2001.
The principal currencies currently being hedged by the Company
are the British pound, Danish krone, Euro, Mexican peso and
U.S. dollar. The notional amounts shown are the U.S. dollar
values of the agreed-upon amounts in each foreign currency that
will be delivered to a third party on the agreed-upon date.
(In millions) | Notional Value of Exposure at 12/28/01 | Notional Value Maturing in 2003 | Fair Value at 12/27/02 | |||
Forward contracts at December 27, 2002: |
||||||
Related forward contracts to sell foreign currencies for Euro |
$ 105.6 | $ 88.3 | $ 88.3 | |||
Related forward contracts to sell foreign currencies for Danish krone |
4.7 | 5.4 | 5.4 | |||
Related forward contracts to sell foreign currencies for British pound |
7.0 | 5.6 | 5.6 | |||
Related forward contracts to buy foreign currencies for British pound |
1.1 | 0.9 | 0.9 | |||
Related forward contracts to buy foreign currencies for U.S. dollar |
2.1 | 1.4 | 1.4 | |||
Related forward contracts to sell foreign currencies for U.S. dollar |
14.2 | 12.7 | 12.6 | |||
Total | $134.7 | $114.3 | $114.2 | |||
(In millions) | Notional Value of Exposure | Notional Value Maturing in 2002 | Fair Value at 12/28/01 | |||
Forward contracts at December 28, 2001: |
||||||
Related forward contracts to sell foreign currencies for Euro |
$ 93.4 | $ 85.5 | $ 85.5 | |||
Related forward contracts to buy foreign currencies for Euro |
0.9 | 0.5 | 0.5 | |||
Related forward contracts to sell foreign currencies for Danish krone |
7.4 | 6.9 | 6.9 | |||
Related forward contracts to sell foreign currencies for British pound |
14.6 | 10.0 | 9.8 | |||
Related forward contracts to buy foreign currencies for U.S. dollar |
0.4 | 0.2 | 0.2 | |||
Related forward contracts to sell foreign currencies for U.S. dollar |
7.1 | 7.2 | 7.1 | |||
Total | $123.8 | $110.3 | $110.0 | |||
9. Assets Held for Sale
As a result of its restructuring efforts,
the Company committed to sell certain land, buildings and improvements
in Lisle, Illinois, and Round Rock, Texas, with carrying amounts
of $8.5 million and $4.6 million, respectively. The Company
believes these properties will be sold no later than the end
of 2003. During the fourth quarter of 2002, the Company determined
that the plan of sale criteria in SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, had
been met for these two properties. The carrying value of the
land, buildings and leasehold improvements approximated their
fair value less costs to sell, which was determined based on
the quoted market prices of similar assets; therefore, no impairment
losses have been recorded in 2002. The $13.1 million total carrying
value of the properties held for sale is included in Miscellaneous
Receivables and Other Current Assets in the 2002 Consolidated
Balance Sheet.
10. Product Warranties
The Company adopted FASB Interpretation
No. (FIN) 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Others, in the fourth quarter of 2002. Under this interpretation,
product warranties are not subject to the initial recognition
and measurement provisions of FIN 45, thus the Company has not
modified its current practice of accounting for product warranties.
The Company offers warranties
for all of its products. The specific terms and conditions of
those warranties vary depending upon the product sold. The Company
provides a basic limited warranty, including parts and labor,
for all products for a period ranging from 1 to 5 years. Factors
that enter into the Companys estimate of its warranty
liability include the number of units shipped, historical and
anticipated rates of warranty claims, and cost per claim. The
Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. On the consolidated
balance sheet, the short-term portion of the warranty reserve
is included in Other Current Liabilities, while the long-term
portion is included in Other Long-Term Liabilities.
The Companys product warranty
liabilities are as follows:
(In millions) | 12/27/02 | 12/28/01 | 12/29/00 | |||
Balance at beginning of year | $ 14.4 | $ 11.4 | $ 12.2 | |||
Net changes to product warranty liabilities based on historical and anticipated rates of warranty claims |
(0.5) | 3.0 | (0.8) | |||
Balance at end of year | $13.9 | $14.4 | $11.4 | |||
Balance sheet classification at end of year | ||||||
Other Current Liabilities | $ 6.2 | $ 6.7 | $ 4.7 | |||
Other Long-Term Liabilities | 7.7 | 7.7 | 6.7 | |||
Total product warranty liabilities | $13.9 | $14.4 | $11.4 | |||
11. Stock Options
At
December 27, 2002, the Company had 13 stock-based compensation
plans. Under these plans, the Company typically grants options
to purchase the Companys common stock at no less than
100% of the market price on the date the option is granted.
Options generally become exercisable on a cumulative basis at
a rate of 25% on each of the first through fourth anniversaries
of the grant date and have a maximum term of 5, 7 or 10 years.
A total of 155,067,693 shares were authorized for issuance at
December 27, 2002. Certain plans also provide for the granting
of stock appreciation rights (SARs) in conjunction with, or
independent of, the options under the plans. The SARs are typically
assigned 5- or 10-year terms. At December 27, 2002, there were
100,148 SARs outstanding under the plans. At December 27, 2002,
the exercise prices of the Companys outstanding SARs ranged
from $4.07 to $70.06.
As indicated in Note
1, Summary of Significant Accounting Policies, the Company
applies APB Opinion No. 25 and its related interpretations in
accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plan grants.
The pro forma amounts disclosed
in Note 1, Summary
of Significant Accounting Policies, may not be representative
of future disclosures because the estimated fair value of stock
options is amortized to expense over the vesting period, and
additional options may be granted in future years.
The fair value of each option
is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions
for grants in 2002, 2001 and 2000:
2002 |
2001 |
2000 |
|
Expected volatility | 72.2% | 64.8% | 62.6% |
Risk-free interest rate | 2.8% | 4.9% | 4.9% |
Expected life | 5.9 years | 7.0 years | 5.1 years |
Expected dividend yield | 0.0% | 0.0% | 0.0% |
A summary of the status of the Companys options plans as of December 27, 2002, December 28, 2001, and December 29, 2000, and of changes during the years ending on these dates is presented in the following chart:
2002 | 2001 | 2000 | ||||||||||
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
Shares | Weighted Average Exercise Price |
|||||||
Outstanding beginning of year |
37,926,204 | $ 30.95 | 26,203,871 | $ 34.31 | 22,434,661 | $ 21.44 | ||||||
Granted | 16,781,435 | $ 5.23 | 17,890,236 | $ 25.81 | 9,208,639 | $ 58.66 | ||||||
Exercised | (2,144,053) | $ 1.35 | (2,265,958) | $ 9.24 | (3,185,008) | $ 9.71 | ||||||
Forfeited | (10,229,718) | $ 29.98 | (3,907,945) | $ 42.61 | (2,254,421) | $ 40.40 | ||||||
  | ||||||||||||
Outstanding end of year |
42,333,868 | $ 22.49 | 37,926,204 | $ 30.95 | 26,203,871 | $ 34.31 | ||||||
  | ||||||||||||
Exercisable at end of year |
17,278,637 | 14,307,655 | 12,325,391 | |||||||||
Available for grant | 25,688,260 | 29,780,548 | 5,761,240 | |||||||||
Weighted-average fair value of options granted during the year |
$ 4.31 | $ 16.85 | $ 33.88 |
Options outstanding and exercisable as of December 27, 2002, by price range:
Outstanding | Exercisable | |||||||||
Range of Excercise Prices | Shares | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||
$0.14$7.06 | 15,309,506 | 8.2 | $5.01 | 2,509,716 | $2.35 | |||||
$7.06$14.13 | 1,363,087 | 6.4 | $8.75 | 541,014 | $8.57 | |||||
$14.13$21.19 | 13,366,591 | 6.7 | $16.43 | 7,136,938 | $16.25 | |||||
$21.19$28.25 | 1,482,269 | 4.1 | $25.32 | 1,482,095 | $25.32 | |||||
$28.25$35.31 | 259,878 | 6.5 | $32.89 | 149,053 | $33.23 | |||||
$35.31$42.38 | 320,303 | 7.4 | $38.93 | 124,742 | $37.92 | |||||
$42.38$49.44 | 499,309 | 6.6 | $47.05 | 298,169 | $47.13 | |||||
$49.44$56.50 | 3,810,334 | 7.2 | $50.97 | 1,438,021 | $51.60 | |||||
$56.50$63.56 | 5,658,416 | 6.8 | $61.70 | 3,444,987 | $61.66 | |||||
$63.56$70.63 | 264,175 | 6.7 | $69.51 | 153,902 | $69.46 | |||||
$0.14$70.63 | 42,333,868 | 7.2 | $22.49 | 17,278,637 | $28.07 | |||||
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. It requires the use of assumptions that are subjective, such as the expected volatility of the exercise price and the expected remaining life of the option. Since the Companys options have significantly different characteristics than traded options, and since the changes in the subjective input assumptions can result in materially different fair value estimates, in managements opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value of the options and does not give a meaningful comparison of companies in a given industry.
12. Employee Benefit and Retirement Plans
The Companys employees may voluntarily
participate in the 401(k) Savings Plan and upon meeting eligibility
requirements, the Company will match (dollar-for-dollar) up
to the first 3% of the employees contribution. Both employee
and employer contributions are immediately vested. The investment
election for the employees contribution is employee-driven
and the companys 3% match follows this election. In addition,
the employee may elect to change this investment election and
reallocate assets on a daily basis. Although the Tellabs Stock
Fund is one of several funds offered to participants, at no
time does Tellabs direct the investment of an employees
401(k) contribution or the Companys 3% match into any
one fund offered under the Plan. The Company maintains similar
plans for the benefit of eligible employees at its Finland and
Denmark subsidiaries.
In addition to offering a 401(k)
Savings Plan, the Company also has a Retirement Plan that, upon
meeting eligibility requirements, all employees become eligible
participants. The Company contributes an amount up to 5% of
a participants salary, subject to the terms set forth
in the Retirement Plan. This is a quarterly contribution entirely
funded by the Company of which 41/2% may be directed by the
participant into the funds offered under the 401(k) Savings
Plan with the exception of the Tellabs Stock Fund. The participant
may not direct any portion of this 41/2% into the Tellabs Stock
Fund. Like the 401(k) Savings Plan, participants may change
their Retirement Plan investment elections at any time and may
reallocate the investments among the same funds available under
the 401(k) Savings Plan (with the exception of the Tellabs Stock
Fund) on a daily basis.
The investment of the remaining
1/2% of this quarterly 5% contribution (10% of the Company retirement
contribution) is directed by the Company into the Tellabs Stock
Fund and cannot be reallocated unless the participant is age
55 or older. While the performance of the Companys stock
over the past two years has been disappointing, Tellabs believes
that it is valuable to the Company and its stockholders for
all employees to have a stake in Tellabs financial future.
Company contributions to the 401(k)
savings and profit-sharing plans were $16.2 million, $17.2 million
and $15.4 million for 2002, 2001 and 2000, respectively. Company
contributions to the Retirement Plan were $6.7 million, $14.4
million and $9.4 million for 2002, 2001 and 2000, respectively.
The Company maintains a defined-benefit
retiree medical plan. Under the plan, which was implemented
in 1999, the Company provides qualified retirees with a subsidy
to offset their medical costs and allows the retirees to participate
in the Company-sponsored healthcare plan. The Company records,
as part of operating expenses, the estimated current costs of
the plan. In 2002, 2001 and 2000, those costs were $2.4 million,
$2.2 million and $1.9 million, respectively.
The Company provides a deferred
income plan that permits certain officers and management employees
to defer portions of their compensation. All deferrals prior
to September 2, 2001, are guaranteed a fixed return. In September
2001, the Plan was amended to offer multiple investment funds
whose investment returns are based on market performance; therefore,
all deferrals after September 2, 2001, are invested in the new
fund options. The deferred income obligation is included in
Other Long-Term Liabilities and adjusted, with a corresponding
charge (or credit) to compensation expense, to reflect changes
in the fair value of the amount owed to the employee. The Company
funds any payments from the deferred income plan from its investment
in corporate-owned life insurance policies. The cash surrender
value of such policies is recorded in Other Assets.
The Company maintains an employee
stock purchase plan. Under the plan, employees elect to withhold
a portion of their compensation to purchase the Companys
common stock at fair market value. The Company matches 15% of
each employees withholdings. Compensation expense is recognized
for the amount that the Company contributes to the plan through
its matching of participant withholdings.
The Company has a program to award
shares of the Companys common stock to employees in recognition
of their past service. Each full-time employee who has worked
for a continuous 5-, 10-, 15-, 20- or 25-year period is awarded
10, 15, 25, 50 or 75 shares, respectively. When an employee
stock award is granted, compensation expense is charged for
the fair market value of the shares issued.
The Company has a number of employee
retention programs under which certain employees are entitled
to a specific number of shares of the Companys stock over
a 1- or 2-year vesting period.
13. Income Taxes
Components of the Companys
earnings before income taxes are as follows:
(In millions) | Year Ended 12/27/02 |
Year Ended 12/28/01 |
Year Ended 12/29/00 |
|||
Domestic source | $ | (330.2) | $ | (263.5) | $ | 919.0 |
Foreign source | 2.4 | 18.7 | 190.4 | |||
Total | $ | (327.8) | $ | (244.8) | $ | 1,109.4 |
|
|
|
|
|
|
|
The provision for income tax expense (benefit) consisted of the following:
Current: Federal |
$ | (132.3) | $ | 3.9 | $ | 258.7 |
State | (1.4) | (1.8) | 34.2 | |||
Foreign | 26.2 | 33.6 | 41.9 | |||
|
|
|
|
|
|
|
(107.5) | 35.7 | 334.8 | ||||
|
|
|
|
|
|
|
Deferred: Federal |
89.1 | (95.1) | (13.8) | |||
State and foreign | 3.7 | (3.4) | 0.8 | |||
|
|
|
|
|
|
|
92.8 | (98.5) | 14.6 | ||||
|
|
|
|
|
|
|
Total Provision | $ | (14.7) | $ | (62.8) | $ | 349.4 |
|
|
|
|
|
|
|
Federal income taxes at the statutory rate are reconciled with the Companys income tax provision as follows:
(In percentages) | 12/27/02 | Year
Ended 12/28/01 |
12/29/00 | |||
Statutory U.S. income tax (benefit) rate | (35.0)% | (35.0)% | (35.0)% | |||
State income tax, net of federal benefits | 1.7 | (2.4) | 1.9 | |||
Research and development credit | (0.7) | (5.1) | (2.2) | |||
Foreign earnings taxed at different rates | 9.0 | 15.2 | (1.6) | |||
Charitable contribution | | | (0.4) | |||
Benefit attributable to foreign sales corporation |
| (0.8) | (0.3) | |||
Loss on investment in subsidiary | (5.1) | | | |||
Valuation on U.S. net deferred tax assets | 25.4 | | | |||
OtherNet | 0.2 | 2.5 | (0.9) | |||
Effective income tax (benefit) rate | (4.5)% | (25.6)% | 31.5% | |||
|
|
|
|
|
|
|
(In millions) | Balance at 12/27/02 | Balance at 12/28/01 | ||
|
|
|
|
|
Deferred Tax Assets | ||||
NOL and
research and development credit carryforwards |
$ | 57.0 | $ | 37.8 |
Inventory reserves | 24.5 | 46.8 | ||
Accrued liabilities | 15.1 | 19.4 | ||
Deferred compensation plan | 7.6 | 4.1 | ||
Deferred employee benefit expenses | 5.7 | 4.4 | ||
Fixed assets and depreciation | 0.5 | 10.7 | ||
Restructuring accruals | 44.3 | 41.8 | ||
Other | 18.2 | 9.8 | ||
|
|
|
|
|
Gross deferred tax assets | $ | 172.9 | $ | 174.8 |
|
|
|
|
|
Deferred Tax Liabilities |
||||
Amortizable intangibles | $ | (17.9) | $ | (3.7) |
Unrealized gain on marketable securities | (3.6) | 2.8 | ||
Other | | (0.7) | ||
|
|
|
|
|
Gross deferred tax liabilities | (21.5) | (7.2) | ||
|
|
|
|
|
Valuation allowance | (152.5) | (50.8) | ||
Net deferred tax asset/(liability) | $ | (1.1) | $ | 116.8 |
|
|
|
|
|
The net deferred income tax asset decreased
from an asset of $116.8 million at December 28, 2001, to a liability
of $1.1 million at December 27, 2002. The $117.9 million change
in the net deferred tax balance is primarily attributable to
the establishment of a valuation allowance on the U.S. net deferred
tax asset.
Deferred Tax Valuation Allowance
SFAS No. 109, Accounting for Income Taxes, requires that
a valuation allowance be established when it is more likely
than not that all or a portion of a deferred tax asset will
not be realized. The Company has previously established valuation
allowances only for future tax benefits from state net operating
losses and credits with relatively short carryforward periods,
and for certain foreign net operating losses; however, losses
incurred in the most recent two years represent sufficient negative
evidence under the provisions of SFAS No. 109 for the Company
to determine that the establishment of a full valuation allowance
against U.S. deferred tax assets is appropriate. This valuation
allowance will offset assets associated with future tax deductions
as well as carryforward items. Although the Company does expect
to realize these benefits, it expects to continue to record
a full valuation allowance on future U.S. and certain non-U.S.
tax benefits until an appropriate level of profitability is attained.
Summary of Carryforwards
The Company has carryforward U.S. federal and state net operating
losses and research and development credits. These carryforwards
increased from $9.0 million as of December 28, 2001, to $37.7
million as of December 27, 2002. Of this increase, $15.7 million
was attributable to the 2002 acquisition of Ocular Networks,
Inc., and $16.4 million was related to state net operating loss
carryforwards and research and development credits earned in
2002, offset by a reduction due to expiring losses. The Company
increased the valuation allowance related to net operating losses
and credits during the year from $5.9 million at December 28,
2001, to a full valuation allowance of $37.7 million at December
27, 2002. The state net operating loss carryforwards and credits
will expire at various dates between 2003 and 2022, a majority
of which will expire between 2011 and 2022. The federal net
operating loss and R&D tax credit carryforwards will expire
at various dates between 2019 and 2022.
The Company has net operating
loss carryforwards relating to its non-U.S. subsidiaries for
which a full valuation allowance has been previously established.
The value of these assets was $19.3 million at December 27,
2002, compared with $28.8 million at the end of 2001. This decrease
was driven primarily by the utilization of certain foreign losses
as well as the closure of the manufacturing facility in Ireland,
resulting in the expiration of Irish net operating losses. The
non-U.S. net operating loss carryforwards will expire at various
dates between 2003 and 2006.
In general, the reversal of a
valuation allowance results in an income tax benefit; however,
at December 27, 2002, $14.3 million of the valuation allowance
is attributable primarily to non-U.S. deferred tax assets that
when realized, will first reduce unamortized goodwill, other
intangible assets of acquired subsidiaries and then income tax
expense.
Investment in Foreign Operations
Deferred U.S. income taxes and foreign withholding 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 undistributed cumulative earnings
of foreign subsidiaries that are considered permanently invested
were $769.4 million at December 27, 2002.
14. Product Group &
Geographical Information
The Company manages its business in one
operating
segment.
Consolidated net
sales by product group are as follows:
(In millions) | 2002 | 2001 | 2000 | |||
|
|
|
|
|
|
|
Metro Optical Networking | $ | 579.0 | $ | 1,196.6 | $ | 2,160.3 |
Broadband Access | 455.0 | 538.0 | 763.2 | |||
Voice-Quality Enhancements |
69.3 | 137.6 | 187.2 | |||
Services and Other | 213.7 | 327.5 | 276.7 | |||
|
|
|
|
|
|
|
Total | $ | 1,317.0 | $ | 2,199.7 | $ | 3,387.4 |
|
|
|
|
|
|
|
During
2002, revenues from a single customer accounted for 17.4% of
consolidated net sales, and a second customer accounted for
11.2% of consolidated net sales. In 2001, revenues from a
single customer accounted for 18.4% of net consolidated sales,
and a second customer accounted for 10.1% of consolidated net
sales. In 2000, a single customer accounted for 19.1% of
consolidated net
sales.
Consolidated net sales
by country, based on the location of the customers, are as
follows:
(In millions) | 2002 | 2001 | 2000 | |||
|
|
|
|
|
|
|
United States | $ | 904.3 | $ | 1,679.2 | $ | 2,632.4 |
Other Geographic Areas | $ | 412.7 | $ | 520.5 | $ | 755.0 |
|
|
|
|
|
|
|
Total | $ | 1,317.0 | $ | 2,199.7 | $ | 3,387.4 |
|
|
|
|
|
|
|
(In millions) | 2002 | 2001 | ||||
|
|
|
|
|
|
|
United States | $ | 922.0 | $ | 727.4 | ||
Finland | 99.0 | 86.7 | ||||
Denmark | 45.1 | 58.7 | ||||
Other Geographic Areas | 23.1 | 48.4 | ||||
|
|
|
|
|
|
|
Total | $ | 1,089.2 | $ | 921.2 | ||
|
|
|
|
|
|
|
15. 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-cancelable and expire on various dates
through 2012.
As of December 27, 2002, future
minimum lease commitments under non-cancelable operating leases
are as follows:
(In millions) | ||
|
|
|
2003 | 9.4 | |
2004 | 6.1 | |
2005 | 5.0 | |
2006 | 4.1 | |
2007 | 3.0 | |
2008 and Thereafter | 6.9 | |
|
|
|
Total Minimum Lease Payments | $ | 34.5 |
|
|
|
Rental expense for the years ended December 27, 2002, December 28, 2001, and December 29, 2000, was approximately $16.5 million, $26.5 million and $30.8 million, respectively.
16. Earnings Per Share
(In millions, except per-share data) | 2002 | 2001 | 2000 | |||
|
|
|
|
|
|
|
The following chart sets forth the computation of earnings (loss) per share: |
||||||
Numerator: | ||||||
Net
earnings (loss) before cumulative effect of change in accounting principle |
$ | (313.1) | $ | (182.0) | $ | 760.0 |
Cumulative
effect of change in accounting principle |
| | (29.2) | |||
|
|
|
|
|
|
|
Net earnings (loss) | $ | (313.1) | $ | (182.0) | $ | 730.8 |
Denominator: | ||||||
Denominator
for basic earnings (loss) per share — weighted-average shares outstanding |
411.4 | 409.6 | 409.4 | |||
Effect
of dilutive securities: Employee stock options and awards |
| | 9.0 | |||
|
|
|
|
|
|
|
Denominator
for diluted earnings (loss) per share — adjusted weighted-average shares outstanding and assumed conversions |
411.4 | 409.6 | 418.4 | |||
Earnings (loss) per share before
cumulative effect of change in accounting principle |
$ | (0.76) | $ | (0.44) | $ | 1.86 |
Earnings (loss) per share before
cumulative effect of change in accounting principle, assuming dilution |
$ | (0.76) | $ | (0.44) | $ | 1.82 |
Cumulative effect of change in
accounting principle per share |
| | $ | (0.07) | ||
Cumulative effect of change in
accounting principle per share, assuming dilution |
| | $ | (0.07) | ||
Earnings (loss) per share | $ | (0.76) | $ | (0.44) | $ | 1.79 |
Earnings (loss) per share, assuming dilution | $ | (0.76) | $ | (0.44) | $ | 1.75 |
17. Quarterly Financial Data (unaudited)
Selected quarterly financial data for 2002 and 2001 are as follows:
(In millions,except per-share data) |
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
Total |
||||||
2002 | |||||||||||
Net sales | $371.5 | $344.6 | $288.1 | $312.8 | $1,317.0 | ||||||
Gross profit | $175.0 | $49.4 | $119.0 | $143.1 | $486.5 | ||||||
Net earnings (loss) | $5.31 | $(142.8)2 | $(91.1)3 | $(84.5)4 | $(313.1) | ||||||
Earnings (loss) per share | $0.01 | $(0.35) | $(0.22) | $(0.21) | $(0.76)* | ||||||
Earnings (loss) per share, assuming dilution |
$0.011 | $(0.35)2 | $(0.22)3 | $(0.21)4 | $(0.76)* | ||||||
2001 | |||||||||||
Net sales | $772.1 | $509.4 | $448.2 | $470.0 | $2,199.7 | ||||||
Gross profit | $405.9 | $46.6 | $189.7 | $121.0 | $763.2 | ||||||
Net earnings (loss) | $122.5 | $(174.7)5 | $(49.5)6 | $(80.3)7 | $(182.0) | ||||||
Earnings (loss) per share | $0.30 | $(0.43) | $(0.12) | $(0.20) | $(0.44)* | ||||||
Earnings (loss) per share, assuming dilution |
$0.29 | $(0.43)5 | $(0.12)6 | $(0.20)7 | $(0.44)* | ||||||
* The earnings-per-share computation for the year is a separate, annual
calculation. Accordingly, the sum of the quarterly earnings-per-share amounts does not
necessarily equal the earnings per share for the year.
1 Net earnings and earnings per share include $5.4 million pre-tax acquired in-process research and development costs. Pro forma net earnings and earnings per share, assuming dilution,
excluding these items, net of tax, would have been $8.9 million and $0.02, respectively.
2 Net earnings and earnings per share include $219.1 million pre-tax restructuring and other charges. Pro forma net earnings and earnings per share, assuming dilution,
excluding these items, net of tax, would have been $0.7 million and $0.00, respectively.
3 Net earnings and earnings per share include $68.0 million pre-tax restructuring and other charges and a $29.6 million pre-tax loss for the impairment of certain equity investments. Pro forma net loss and loss per share, assuming dilution, excluding
these items, net of tax, would have been $(16.6 million) and $(0.04), respectively.
4 Net earnings and earnings per share include $18.5 million reversal of pre-tax restructuring and other charges and $87.7 million deferred tax valuation allowance. Pro forma net loss and loss per share, assuming
dilution, excluding these items, net of tax, would have been $(10.2 million) and $(0.02),
respectively.
5 Net earnings and earnings per share include $261.6 million pre-tax restructuring and other charges. Pro forma net earnings and earnings per share, assuming
dilution, excluding these items, net of tax, would have been $10.2 million and $0.02,
respectively.
6 Net earnings and earnings per share include $50.3 million pre-tax restructuring and other charges, a $19.4 million pre-tax loss for the impairment write-down of certain preferred and equity investments and a $6.4 million pre-tax gain on the sale of an equity investment. Pro forma net earnings and earnings per share, assuming dilution,
excluding these items, net of tax, would have been $2.4 million and $0.01, respectively.
7 Net earnings and earnings per share include $136.7 million pre-tax restructuring and other charges, a $6.4 million pre-tax gain on the sale of an equity investment and a $6.2 million pre-tax loss on the sale of certain preferred and equity investments. Pro forma net earnings and earnings per share, assuming dilution, excluding
these items, net of tax, would have been $13.6 million and $0.03, respectively.