-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sjzs5PqzLziRgijZz9I+SighVJXYpQB8LL5tu/puhQAmyhvr/MMLfp9ZSncfvkY8 MTD+ReXIcdvKYPisO7ILNQ== 0000317771-97-000083.txt : 19971021 0000317771-97-000083.hdr.sgml : 19971021 ACCESSION NUMBER: 0000317771-97-000083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970926 FILED AS OF DATE: 19971020 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELLABS INC CENTRAL INDEX KEY: 0000317771 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 363831568 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09692 FILM NUMBER: 97697740 BUSINESS ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 BUSINESS PHONE: 6303788800 MAIL ADDRESS: STREET 1: 4951 INDIANA AVE CITY: LISLE STATE: IL ZIP: 60532 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 26, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-9692 ---------- TELLABS, INC. --------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-3831568 ------------------------- ---------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 4951 Indiana Avenue, Lisle, Illinois 60532 -------------------------------------- ------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (630) 378-8800 ------------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None N/A ------------------------- --------- Securities registered pursuant to Section 12 (g) of the Act: Common shares, with $ .01 par value --------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[ ] On September 26, 1997, 181,474,547 common shares of Tellabs, Inc. were outstanding. -1- TELLABS, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Comparative Balance Sheets 3 Condensed Consolidated Comparative Statements of Earnings 4 Condensed Consolidated Comparative Statements of Cash Flow 5 Notes to Condensed Consolidated Comparative Financial Statements 7 Item 2. Management's Discussion and Analysis 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 13 -2- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE BALANCE SHEETS (Unaudited) Sept. 26, Dec. 27 1997 1996 Assets ----------- --------- Current assets (In thousands) Cash and cash equivalents $127,853 $90,446 Investments in marketable securities 375,701 136,421 Accounts receivable, less allowance 202,776 167,928 Inventories Raw materials 33,856 30,961 Work in process 16,969 12,046 Finished goods 33,824 35,512 ----------- --------- 84,649 78,519 Other current assets 1,757 2,150 ----------- --------- Total Current Assets 792,736 475,464 Property, plant, and equipment 319,972 267,014 Less accumulated depreciation 120,475 104,254 ----------- --------- 199,497 162,760 Goodwill, net 63,007 64,785 Intangibles and other assets, net 46,734 40,814 ----------- --------- $1,101,974 $743,823 =========== ========= Liabilities Current Liabilities Accounts payable 40,039 36,931 Accrued liabilities 120,228 71,258 Income taxes 40,955 23,435 ----------- --------- Total Current Liabilities 201,222 131,624 Long-term debt 3,949 2,850 Other long-term liabilities 13,840 10,964 Deferred income taxes 5,329 7,109 Stockholders' Equity Preferred stock, with $.01 par value- 5,000,000 shares authorized, no shares issued - - Common stock, with $.01 par value - 500,000,000 shares authorized 181,474,547 shares issued and outstanding at September 26, 1997 and 179,652,633 at December 27, 1996 1,815 1,797 Additional paid-in capital 125,765 94,854 Cumulative foreign currency translation adjustment (26,338) 3,937 Unrealized net holding gains on available-for-sale securities 121,101 21,551 Retained earnings 655,291 469,137 ----------- --------- Total Stockholders' Equity 877,634 591,276 ----------- --------- $1,101,974 $743,823 =========== ========= The accompanying notes are an integral part of these statements. -3- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF EARNINGS (Unaudited) Three Months Ended Nine Months Ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1997 1996 1997 1996 --------- --------- ----------- --------- (In thousands, except per share data) Net sales $309,408 $234,340 $849,232 $596,069 Cost of sales 115,829 94,811 322,694 246,451 --------- --------- ----------- --------- Gross Profit 193,579 139,529 526,538 349,618 Marketing, general & admin expense 58,734 42,479 160,158 115,356 Research and development expense 40,039 28,137 110,807 74,629 Acquired in-process research and development - - - 74,658 Goodwill amortization 1,493 1,196 4,516 2,513 --------- --------- ----------- --------- Total Operating Expense 100,266 71,812 275,481 267,156 Operating Profit 93,313 67,717 251,057 82,462 Interest income 3,031 1,746 8,446 5,608 Interest expense (14) (488) (312) (1,017) Other (expense) income, net 1,104 (451) 22,862 (31) --------- --------- ----------- --------- Earnings before income taxes 97,434 68,524 282,053 87,022 Income taxes 33,127 22,407 95,898 28,456 --------- --------- ----------- --------- Net Earnings $64,307 $46,117 $186,155 $58,566 ========= ========= =========== ========= Earnings per share * $0.34 $0.25 $1.00 $0.32 ========= ========= =========== ========= Average number of shares of common stock and common stock equivalents outstanding * 186,532 184,876 186,181 184,400 * 1996 share amounts are restated to give effect to the two-for-one stock split effective November 15, 1996. The accompanying notes are an integral part of these statements. -4- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (Unaudited) For The Nine Months Ended Sept. 26, Sept. 27, 1997 1996 --------- --------- (In thousands) Cash Flows from Operating Activities: Net earnings $186,155 $58,566 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 32,224 23,375 Provision for doubtful receivables 2,419 1,937 Deferred income taxes (3,844) (20,004) Gain on sale of stock held as an investment (20,803) - Acquired in-process research and development - 74,658 Net (increase) decrease in current assets, net of effects from acquisitions: Accounts receivable (45,704) (32,423) Inventories (9,128) (13,657) Other current assets 446 (764) Net increase (decrease) in current liabilities, net of effects from acquisitions: Accounts payable 4,093 9,273 Accrued liabilities (7,061) 8,181 Income taxes 19,572 (8,302) Net increase in other assets (17,444) (3,778) Net (decrease) increase in other liabilities 3,062 (433) ----------- --------- Net Cash Provided in Operating Activities 143,987 96,629 Cash Flows from Investing Activities: Acquisition of property, plant and equipment, net (65,262) (45,060) Payments for purchases of marketable securities (191,237) (72,929) Proceeds from sales of marketable securities 133,194 81,792 Payments for acquisitions, net of cash acquired (7,821) (91,732) Origination of loan receivable - (5,822) ----------- --------- Net Cash Used by Investing Activities (131,126) (133,751) Cash Flows from Financing Activities: Proceeds from notes payable - 40,000 Payments of notes payable - (30,000) Common stock sold through stock-option plans 30,928 16,263 ----------- --------- Net Cash Provided by Financing Activities 30,928 26,263 Effect of exchange rate changes on cash (6,382) 547 ----------- --------- Net (decrease) increase in cash and cash equivalents 37,407 (10,312) Beginning of period cash and cash equivalents 90,446 92,485 ----------- --------- End of period cash and cash equivalents $127,853 $82,173 =========== ========= -5- TELLABS, INC. CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW (continued) (Unaudited - In thousands) For The Nine Months Ended Sept. 26, Sept. 27, 1997 1996 --------- --------- Supplemental Disclosures: Interest paid $236 $1,004 Income taxes paid $57,089 $46,540 Supplemental Schedule of Non-Cash Investing and Financing Activities: During 1997, in acquiring all of the outstanding shares of Trelcom Oy and certain wavelength division multiplexing and optical networking technology and related assets from IBM, the Company paid direct costs totaling $8,434,000. During 1996, in acquiring all of the outstanding shares of Steinbrecher Corporation and TRANSYS Network's SONET product line, the Company paid direct costs totaling $94,261,000. In conjunction with the acquisitions, the purchase prices are currently allocated as follows: (in thousands) 1997 1996 --------- --------- Fair value of assets acquired $1,777 $104,944 Cost in excess of fair value 8,098 22,977 Liabilities assumed (1,441) (33,660) --------- --------- Cash paid for acquisitions $8,434 $94,261 ========= ========= The accompanying notes are an integral part of these statements. -6- TELLABS, INC. NOTES TO CONDENSED CONSOLIDATED COMPARATIVE FINANCIAL STATEMENTS 1. Financial Information: The unaudited financial information reflects all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the statements contained herein. Certain reclassifications have been made in the 1996 financial statements to conform to the 1997 presentation. 2. Basis of Presentation: These financial statements are presented in accordance with the requirements of Form 10-Q and consequently may not include all disclosures normally required by generally accepted accounting principles or those normally reflected in the Company's Annual Report on Form 10-K. Accordingly, the financial statements and notes herein should be read in conjunction with the financial statements and related notes in the Company's Form 10-K for the year ended December 27, 1996. -7- MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 1997, the Company's cash, cash equivalents and marketable securities portfolio increased by $276,687,000 to $503,554,000. The increase was primarily due to the mark-to-market adjustment of $163,718,000 for a single investment and additions to the remainder of the Company's marketable securities portfolio of $75,562,000. The Company's earnings, combined with the $21,396,000 received from the sale of stock held as an investment, produced the increase in cash during the period, offset by payments for the two first-quarter 1997 acquisitions. Third-quarter sales contributed to an increase of $34,848,000 in accounts receivable, net of allowance, when compared to the balance at the end of 1996. The inventory increase of $6,130,000 from the year-end balance reflects levels necessary to support expected fourth quarter domestic and international sales. Goodwill, despite the addition of the goodwill created as part of the first-quarter acquisitions, decreased $1,778,000 during the first nine months of 1997 as the result of amortization of the goodwill balances and the effects of exchange rate fluctuations. Intangibles and other assets increased $5,920,000 from the year-end balance reflecting additional capitalization of the Company's costs to configure a globally-integrated information system, which was implemented at the Shannon, Ireland facility during the third quarter and is being implemented at the Illinois and Texas facilities at the beginning of the fourth quarter. This was partially offset by the reclassification of the remaining portion of an investment to short-term. Accrued liabilities increased $48,970,000 from the balance at December 27, 1996 due to a $57,913,000 increase in deferred taxes, most of which was related to the mark-to-market adjustment of marketable securities, offset by payments for normal year-end obligations. The Company invested approximately $65,262,000 in property, plant and equipment during the first nine months of the year (exclusive of the acquisitions). These expenditures included the Company's on-going expansion of the manufacturing and research and development capacity at the Espoo, Finland facility, the initial phase of construction of the Shannon, Ireland expansion and completion of the expansion at the Bolingbrook, Illinois facility. The Company expects net capital additions for 1997 to approximate $95,000,000, the majority of which is planned for the aforementioned expansions and the purchase of equipment and other tangible assets to be installed in the newly-expanded facilities. Net working capital at September 26, 1997 was $591,514,000, compared with net working capital of $343,840,000 at December 27, 1996. The Company's current ratio at the end of the third quarter was 3.9 to 1. The increase in net working capital was primarily due to the increase in the value of the Company's marketable securities portfolio and the cash generated by operating activities. Management believes that this level of working capital will be adequate for the Company's liquidity needs related to normal operations, both currently and in the foreseeable future. Sufficient financial resources exist to support the Company's -8- growth either through currently available cash, through cash generated from future operations, or through additional short-term or long-term financing. RESULTS OF OPERATIONS Sales for the third quarter of 1997 were a record $309,408,000, up 32 percent from the previous third quarter record of $234,340,000 set in 1996. The growth in sales was primarily the result of the combined sales of the Company's SONET-based TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital cross-connect systems (the TITAN 5500 system) and the MartisDXX (a trademark of Tellabs Oy) integrated access and transport systems (the MartisDXX system). The continued strength of domestic sales was led by sales of the TITAN 5500 system, which increased 41 percent over the same period last year. The increase in sales of the TITAN 5500 system has been driven by the continued demand for transportation of increasing quantities of voice, data and multimedia information across telecommunications networks worldwide. International sales, which grew 33 percent compared to the same quarter last year, were led by a 27 percent increase in sales of the MartisDXX system as sales of the system continue to expand outside the Scandinavian markets. Echo cancellation products contributed to the third quarter performance with a 6 percent increase over the third quarter 1996. CABLESPAN (a registered trademark of Tellabs Operations Inc.) cable transport systems also contributed to third quarter sales by a more than doubling the prior year's third quarter sales. Earnings for the third quarter of 1997 were $64,307,000, up 39 percent from the 1996 third quarter earnings of $46,117,000. Earnings per share were 34 cents in the third quarter of 1997, compared with 25 cents per share for the third quarter of 1996. The 1996 earnings per share amounts have been restated to reflect the effect of the two-for-one stock split effective November 15, 1996. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share" (FAS No. 128), which is required to be adopted for the 1997 fiscal year-end. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase of one cent to basic earnings per share for both the third quarter of 1997 and the third quarter of 1996. Basic earnings per share for the nine months ended September 26, 1997 are expected to increase by three cents per share, while basic earnings per share for the nine months ended September 27, 1996 are expected to increase by one cent per share. The gross profit margin percentage for the third quarter of 1997 increased to 62.6 percent from 59.5 percent in the third quarter of 1996. This increase reflects continuing productive and highly efficient manufacturing operations, a more profitable product mix, and increased service revenues related to new TITAN installations. Operating expenses for the third quarter of 1997 increased by 40 percent over the third quarter of 1996. This increase in expenses reflects the Company's commitment to expand its service and support -9- capabilities and to augment its product research and development efforts worldwide in order to meet the needs of the Company's customers. Interest income increased to $3,031,000 in the third quarter of 1997, up 74 percent from $1,746,000 in the third quarter of 1996. This increase was due to significantly higher cash balances, offset by lower market interest rates. Interest expense decreased to only $14,000 for the third quarter of 1997, from $488,000 in the third quarter of 1996. The higher interest expense during the third quarter of 1996 was the result of interest expenses related to the short-term borrowings used to help finance the Tellabs Wireless Systems Division acquisition. Other income of $1,104,000 for the third quarter of 1997 was primarily related to foreign exchange gains of $737,000. These gains were the result of a strengthened U.S. dollar and Swedish krona versus the Finnish markka, and the U.S. dollar versus the Irish punt. Other expense of $451,000 for the third quarter of 1996 was primarily related to foreign exchange losses of $489,000. These losses were the result of a weakened U.S. dollar against the Finnish markka and Irish punt, as well as the strength of the Finnish markka versus other European currencies. The effective tax rate was approximately 34.0 percent for the third quarter of 1997 and 32.7 percent for the third quarter of 1996. The increase in the effective tax rate for 1997 is primarily due to the increase in domestic taxable income. The 1997 and 1996 effective tax rates reflect adjustments from the Federal statutory rate primarily attributable to foreign tax rate benefits. Sales for the first nine months of 1997 were $849,232,000, which was an increase of 42 percent from sales of $596,069,000 for the same period in 1996. Domestic sales increased 41 percent for the first nine months of 1997, compared to 1996, primarily due to a 59 percent increase in TITAN 5500 system sales. International sales for the first nine months of 1997 increased by 45 percent from the same period in 1996. This increase was driven by a 50 percent increase in MartisDXX system sales reflecting continued expansion outside of the Scandinavian markets. Echo cancellation products contributed to the increase with a 39 percent increase over the same period in 1996. Net earnings for the first nine months of 1997, which included a pre-tax gain of $20,803,000 ($13,855,000 net of tax) for the sale of stock held as an investment, were $186,155,000 compared to $112,666,000 in 1996, which excludes the one-time charge of $74,658,000 ($54,100,000 net of tax) for acquired in-process research and development relating to the Tellabs Wireless acquisition. Earnings per share were $1.00 for the first nine months of the year (93 cents excluding the effect of the stock sale) compared to 32 cents for the same time period in 1996 (61 cents per share excluding the one-time research and development charge). The 1996 earnings per share amounts have been restated to reflect the effect of the two-for-one stock split effective November 15, 1996. The gross profit margin for the first nine months of 1997 improved to 62.0 percent versus 58.7 percent for the first nine months of 1996. This increase reflects continuing productive and highly efficient -10- manufacturing operations, a more profitable product mix, and increased service revenues related to new TITAN installations. Operating expenses for the first nine months of 1997 increased 43 percent over the same period in 1996, excluding the one-time charge to earnings for the acquired in-process research and development. Contributing to the overall increase are the expenses of Tellabs Wireless, Tellabs Transport Group, and Tellabs Optical Networking Group, the continuing international and domestic research and development of products and the expansion of service and support capabilities and the expenses incurred as part of the implementation of the Company's new globally-integrated information system. Interest income contributed $8,446,000 to pretax income during the first nine months of 1997, an increase of 51 percent from $5,608,000 in 1996. This increase was due to significantly higher average cash balances throughout the year, partially offset by lower market interest rates. Interest expense was $312,000 during the first nine months of 1997 compared to $1,017,000 during the same period in 1996. The significantly higher 1996 interest expense was related to the bank debt that was used to finance the Tellabs Wireless Systems Division acquisition. Other income was $22,862,000 for the first nine months of 1997, compared to other expense of $31,000 during the same period of 1996. The majority of the increase represents the gain on the sale of stock held as an investment of $20,803,000. In addition, foreign exchange gains of $1,612,000 were recorded for the first nine months of 1997, versus losses of $252,000 during the same period in 1996. The foreign exchange gains experienced in 1997 were the result of the strengthened U.S. dollar and Swedish krona versus the Finnish markka, and the strength of the U.S. dollar versus the Irish punt. The losses in 1996 were the result of the weakened U.S. dollar against the Finnish markka and Irish punt. The effective tax rate was approximately 34.0 percent for the first nine months of 1997 compared to 32.7 percent for the same period in 1996. The increase in the effective tax rate for 1997 is primarily due to the increase in domestic taxable income and the gain on the stock sale, offset by the tax effects of the in-process research and development one-time charge taken in conjunction with the Tellabs Wireless acquisition during 1996. The Company's 1997 and 1996 effective tax rates reflect the benefits of lower foreign tax rates as compared to the U.S. Federal statutory rate. The Company cautions that except for historical information, the matters discussed or incorporated by reference in this Quarterly Report on Form 10-Q are forward-looking statements that involve risks and uncertainties that may affect the Company's actual results and cause results to differ materially from such forward-looking statements. Such risks and uncertainties include but are not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, research and new product development, protection of intellectual property, patents and technology, ability to attract and retain highly qualified personnel, availability of components and critical manufacturing equipment, facility construction and startups, the regulatory and trade environment, and other factors -11- indicated from time to time in the Company's filings with the Securities and Exchange Commission. Such forward-looking statements reflect only information available at the time of the filing of this report. As a result, the Company undertakes no obligation to update the statements to reflect subsequent circumstances or events. -12- PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (A) Exhibits: Exhibit 10.17 - Trust Document Amendment Exhibit 10.18 - 401 (k) Deferred Income Plan Amendment Exhibit 19.1 - Letter to Stockholders for Third Quarter (including graphs depicting comparisons of the Company's gross profit margin, book value per share, and return on equity for fiscal years 1993 - 1996 and year-to-date results for 1997 which have been omitted from this filing.) The Company issued this letter to stockholders through the Company's website at www.tellabs.com. Exhibit 19.2 - 1997 Third Quarter News Release (incorporated into Exhibit 19.1) Exhibit 27 - Financial Data Schedule -13- TELLABS, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELLABS, INC. ---------------- (Registrant) s\ J. Peter Johnson -------------------- J. Peter Johnson Vice President/Controller & Chief Accounting Officer October 17, 1997 - ----------------- (Date) -14- EX-10.17 2 Exhibit 10.17 AMENDMENT NO. 1 TO TRUST DOCUMENT This Amendment No. 1 to the Trust Agreement made as of the 31st day of January, 1995 by and between Tellabs Operations, Inc., a Delaware corporation and Harris Trust and Savings Bank ("Trust Agreement") is made retroactively to have effect as of the 31st day of January 1995 ("Amendment No. 1") to amend Section 2(b) of the Trust Agreement (to correct a drafting error in the original document), as follows: "(b) The Company shall contribute to the Trust with respect to any applicable calendar year an amount equal to the amounts credited to the Accounts (as such term is defined in the Plan and as hereinafter referred to the "Accounts") of the Participants due to the deferrals made by the Participants during a calendar year; provided, such contributions shall not be required if the assets of the Trust are sufficient to pay each Participant or beneficiary the benefits to which Participants or beneficiaries would be entitled pursuant to the terms of the Plan as of the end of such calendar year. In addition to the above contributions and any contributions required by Sections 2(c) or 2(d) below, the Company, in its sole discretion, may at any time, or from time to time, make contributions of cash or other property in trust with the Trustee to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Neither the Trustee nor any Participant or beneficiary shall have any right to compel the Company to make any contributions, except as otherwise provided in this Trust Agreement. At the time of each contribution, the Company shall certify to the Trustee the amount of the contribution being made with respect to the Accounts of each Participant and the Trustee shall allocate the amounts accordingly." Except as amended by this Amendment No. 1, the terms and conditions of the Trust Agreement shall remain in full force and effect. Any capitalized terms used herein that are not otherwise defined shall have the meaning set forth in the Trust Agreement. IN WITNESS WHEREOF, the Company and the Trustee have executed this Amendment No. 1 as of the date first above written. TELLABS OPERATIONS, INC. HARRIS TRUST AND SAVINGS BANK By: /s/ Brian J. Jackman By: /s/ Thaddeus S. Plis Name: Brian J. Jackman Name: Thaddeus S. Plis Title: President Title: Vice President EX-10.18 3 1 Exhibit 10.18 TELLABS OPERATIONS, INC. Deferred Income Plan Amendment Effective January 1, 1997 and pursuant to Article XII, Paragraph 35 of the Tellabs Operations, Inc. Deferred Income Plan dated April 1, 1992, as previously amended, the Plan is hereby further amended as follows: Article II, Paragraph 2: Paragraph 2 is changed to read as follows: "An employee of the Company in pay grade 26 or higher shall be eligible to participate in the Plan and shall become eligible on the date upon which he or she becomes in pay grade 26 or higher and shall remain eligible as long as such employee remains in pay grade 26 or higher or as otherwise permitted by the Committee. For purposes of this Plan, such employees shall be referred to as 'eligible employees' and eligible employees participating in the Plan shall be referred to as 'participants.' The Committee shall have the discretion to allow other selected management or highly-compensated employees to participate in the Plan, it being intended that this Plan be an unfunded plan of deferred compensation as described in Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Except as otherwise determined by the Committee, if a participant no longer meets the eligibility criteria then such participant's ability to continue to defer Compensation under the Plan will cease as of the end of the pay period corresponding with the date such eligibility status changes, provided that, the amounts previously credited to such participant's Account shall continue to receive the annual credits described in Article IV until payment is made as provided in Article V." Article III, Paragraph 3: Paragraph 3 is changed to read as follows: "Except as otherwise determined by the Committee, each eligible employee may elect in writing to defer a maximum of 15% of his or her gross salary for such year and/or a maximum of 25% of any payment to be received from Stock Appreciation Rights during such year and/or a maximum of: (i) in the case of any eligible employee in pay grade level 28 or higher, 100% of any bonus or incentive pay payable with respect to such year; (ii) in the case of any eligible employee in pay grade level 27, 50% of any bonus or incentive pay payable in 1998 with respect to 1997 which such employee elected to defer in 1997 and 50% of any bonus or incentive pay payable with respect to 1998 or any year thereafter; and (iii) in the case of all other eligible employees, 25% of any bonus or incentive pay payable with respect to such year. Each of the above elections are subject to such limits as the Company may establish from year to year and to 2 the following Plan provisions. Any of the provisions hereof with respect to 1998 and subsequent years are expressly subject to the condition that the Company maintains this Plan during such year, as provided in Article XII, Paragraph 36." Article III, Paragraph 4: Paragraph 4 is changed to read as follows: "Elections to defer Compensation shall be irrevocable and shall be made prior to the first day of each calendar year. Deferrals shall relate only to compensation for services to be performed during such period, except as provided in paragraph 3 above, and except that, employees becoming newly eligible, and eligible employees who have a change in their pay grade level occur during the year (provided such grade level change occurs on or before September 30th of such year), may elect within thirty (30) days after becoming eligible or receiving such change to defer into the Plan, Compensation (in the case of eligible employees receiving a pay grade change, Compensation shall be limited to bonus or incentive pay payable with respect to such year) to be earned in the balance of the year remaining after the date the deferral election is made consistent with the limitations on deferral amounts applicable under paragraph 3 above. Such eligible employees shall be deemed, for all other Plan purposes, to have made the deferral election on the immediately preceding December 31. If such eligible employee fails to make such election within thirty (30) days after becoming eligible or such change in status, such eligible employee must wait until the election period for the next calendar year." Article V, Paragraph 14: Paragraph 14 is changed to read as follows: "Payment of the Termination Benefit shall be in a lump sum provided, however, that the Committee shall have the discretion to pay the Termination Benefit as a Retirement Benefit (commencing on the date that the participant ceases to be an employee of the Company), in situations involving early retirement and other severance arrangements with participants." Article XII, Paragraph 34: Paragraph 34 is changed to read as follows: "Each determination provided for in the Plan shall be made in the absolute discretion of the Committee (which, for purposes of the Plan, may be substituted by a Committee of the Company's Board of Directors, as appropriate)." Article XII, Paragraph 35: Paragraph 35 is changed to read as follows: "The Company, through the Board of Directors or a Committee thereof, may in its sole discretion amend the Plan from time to time. No such amendment shall adversely affect the rights of any participant or beneficiary with respect to benefits under the Plan related to amounts previously deferred." 3 Article XII, Paragraph 36: Paragraph 36 is changed to read as follows: "The Company hereby ratifies and confirms that the Plan was duly adopted for years 1993, 1994, 1995, 1996 and 1997. To the extent provided by the Company by resolution of its Board of Directors or a Committee thereof, this Plan shall be effective for 1998 and each year thereafter until the Company by resolution of the Board of Directors or a Committee thereof provides otherwise." Article XIII, Paragraph 41: Paragraph 41 is changed to read as follows: "41. Benefits in Excess of Applicable Tax Law Limitations: Section 401(a)(17) of the Internal Revenue Code of 1986, as amended from time to time, limits the contributions ("Excess Benefit Limitation") the Company may make to the Tellabs Advantage Program, as amended and restated as of January 2, 1995 and as otherwise amended (the "Advantage Program"). The Company shall contribute amounts to the Plan for the benefit of those participants to which the Excess Benefit Limitation applies ("Restoration Contributions"). The Restoration Contribution for each qualifying participant shall equal, during each year, the difference between the amount contributed on behalf of such participant under the Advantage Program and the amount that would have been contributed under the Advantage Program without regard to the Excess Benefit Limitation. Restoration Contributions shall be made for each qualifying participant in subsequent years subject to the condition that the Company maintains this Plan during such year, as provided in Article XII, Paragraph 36. Except as otherwise determined by the Committee, Participants that are otherwise eligible to receive a Restoration Contribution in any year, but who terminate employment with the Company prior to the end of such year (other than due to retirement, disability or death), shall not receive a Restoration Contribution for such year." 4 Except as amended herein, the terms and conditions of the Plan, as previously amended, shall remain in full force and effect. Effective as of January 1, 1997 and signed this 18th day of July 1997, with the approval and authorization of the Board of Directors. TELLABS OPERATIONS, INC. By: /s/Peter A. Guglielmi --------------------- Peter A. Guglielmi Title: Executive Vice President and Chief Financial Officer EX-19.1 4 Exhibit 19.1 Fellow Stockholders: Tellabs' third quarter results continued a trend that has been in place for some time now -- increasing revenue and earnings. Revenue for the quarter amounted to $309.4 million, an increase of 32 percent over revenue last year of $234.3 million in the third quarter. Net income for the quarter was $64.3 million, up 39.4 percent over income of $46.1 million last year. Earnings per share were 34 cents for this year's third quarter and 25 cents in the third quarter of last year. The story is similar for the first nine months of the year, but because there were some unusual events during the past two years, more explanation is needed. Sales through the first nine months of this year amount to $849.2 million, a robust 42.5 percent over sales of $596.1 million through nine months last year. Net income through the nine-month period amounted to $186.2 million, a figure that includes an after-tax gain of $13.9 million on sale earlier in the year of stock held as an investment. Through the first three quarters of last year, net income amounted to $58.6 million. That figure, however, also includes a write-off of in-process R&D resulting from an acquisition amounting to $54.1 million after taxes. Earnings per share thus far this year are $1.00 (93 cents excluding the after-tax gain), compared to 32 cents last year (61 cents if the effects of the write-off are excluded). Third quarter revenue, like that for most reporting periods of late, was driven by sales of the TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital cross-connect system in North America and the MartisDXX (a trademark of Tellabs Oy) digital multiplexer in the rest of the world. Both systems generated sales well in excess of those for the comparable period last year. Echo canceller sales were also above those of a year ago, and, happily, sales of the CABLESPAN (a registered trademark of Tellabs Operations, Inc.) cable transport system were appreciable and well above those of last year. During the quarter we began shipping Feature Package 5.0 for the TITAN 5500 system, a hardware and software release that enables the TITAN system to manage high-speed traffic on multiple fiber-optic rings. This release simplifies management of multiple network elements and greatly expands the attractiveness of the TITAN system in network applications involving protected optical ring architectures. The third quarter was noteworthy for reasons other than financial results and technology, too. During the late summer we began occupying the 300,000-square-foot addition to our Bolingbrook facility, which will soon house more than 1,000 Tellabs people. The new space provides badly needed manufacturing space, attractive office and laboratory areas, and expanded conference and meeting accommodations. It also will very soon be home to our customer training activities and to most of our employee 1 training as well. We are also now well along in expansion projects in Finland and Ireland. A new manufacturing facility is scheduled to come on line next February in Helsinki, with office and laboratory facilities to follow about a year later. Construction of manufacturing, office and laboratory space is also under way in Shannon, Ireland, with occupancy expected about a year from now. All of these facilities, and the recent expansion of our Texas facility, are funded from operating cash flow. The company continues to focus on customer satisfaction and globalization as its primary objectives. We believe our prospects for continuing success are good, but only if these two objectives continue to guide our efforts and activities. We are, I believe, making progress in both areas. Competition in all aspects of telecommunications is increasing, and with it comes change, often with unanticipated consequences. An example of this is the consolidation of already large players into very large organizations with global aspirations that cross some traditional industry boundaries. That makes for some exciting times, but it also complicates both the planning and the execution for all concerned, including those only indirectly involved. Complications notwithstanding, such things provide opportunity for the prepared, which is, I suggest, a call to action. Tellabs people are working on it! Sincerely, s\ Michael J. Birck - ----------------------- Michael J. Birck Chief Executive Officer Third Quarter Earnings Release (website link to this information which is attached hereto as Exhibit 19.2) Results of Operations Condensed Consolidated Balance Sheet Common Stock Market Data Tellabs' common stock is listed on The Nasdaq Stock Market under the symbol TLAB and appears in most daily newspaper stock tables as Telabs. At February 17, 1997, there were approximately 3,035 stockholders of record. Tellabs is a component of the Nasdaq-100 Index and the Standard & Poor's 500 Index. 2 10-K Report Stockholders may obtain without charge a copy of the Tellabs 1996 Form 10-K as filed with the Securities and Exchange Commission upon request to: Secretary Tellabs, Inc. 4951 Indiana Avenue Lisle, Illinois 60532 U.S.A. Edgar Archives For Tellabs investor relations contact: Tom Scottino 1.630.378.7504 Tom_Scottino@pcmail.tellabs.com Except for historical information, the matters discussed or incorporated by reference in this letter are forward-looking statements that involve risks and uncertainties associated with competition, market growth, customer acceptance and timely availability of products and features, as well as other risks that may be detailed from time to time in the company's filings with the Securities and Exchange Commission. Tellabs' actual future results could differ materially from those discussed here. The company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances or to reflect the occurrence of unanticipated events. 3 EX-19 5 NEWS RELEASE EXHIBIT 19.2 FOR IMMEDIATE RELEASE CONTACT: Peter A. Guglielmi 10/06/97 (630) 378-6111 TELLABS REPORTS BEST QUARTER IN COMPANY HISTORY Third-Quarter Sales and Earnings Set Record Levels Lisle, Ill. -- Telecommunications equipment manufacturer Tellabs, Inc., announced Monday record sales and earnings for the third quarter of 1997. Sales for the third quarter, ended September 26, were $309,408,000, the highest for any quarter in the company's history and up 32 percent over sales of $234,340,000 in the third quarter of 1996. Sales for the first nine months of the year were $849,232,000, up 45.2 percent compared with sales of $596,069,000 a year earlier. This marks the 25th consecutive quarter in which Tellabs' sales surpassed prior-year levels. Net income for the third quarter was a record $64,307,000, up 39.4 percent over net income of $46,117,000 a year earlier. Net income for the first nine months of 1997, which included a pre-tax gain of $20,803,000 ($13,855,000 or 7 cents per share, after tax) on the sale of stock held as an investment, was $186,155,000, up 217.9 percent from $58,566,000 a year earlier. The previous year included a write-off of in-process R&D, amounting to $54,100,000, net of tax, taken in connection with an acquisition.) Earnings per share of common stock for the third quarter of 1997 were 34 cents, compared with 25 cents a year earlier. For the first nine months of 1997, earnings per share were $1.00 cents (or 93 cents excluding the effect of the stock sale), compared with 32 cents (or 61 cents excluding the write-off) a year earlier. (All per-share amounts have been adjusted to reflect the effect of the two-for-one stock split that occurred on November 15, 1996.) "Third quarter results, again driven primarily by robust performance from Tellabs' flagship products, were relatively strong," said Tellabs President Michael J. Birck. "Sales of the SONET-based TITAN (a registered trademark of Tellabs Operations, Inc.) 5500 digital cross-connect system were up 41 percent compared with the year-earlier quarter. MartisDXX (a trademark of Tellabs Oy) sales were up about 27 percent, taking into account the continuing effects of foreign currency translation. When measured in Finnish maarka, MartisDXX sales for the third quarter were up 53 percent, compared with the third quarter of 1996." 1 Also during the quarter, the company made generally available the latest enhancement to its TITAN 5500 digital cross-connect system: the optical ring manager feature. The SONET ring manager refers to the ability of the Tellabs 5500 system to be directly connected to multiple fiber optic rings. This feature simplifies surveillance and provisioning of transport elements connected to the fiber ring, thus allowing service providers to more efficiently manage transport equipment from multiple vendors. Tellabs designs, manufactures, markets and services voice and data transport and access systems. The company's products are used worldwide by the providers of communications services. Tellabs, Inc., stock is listed on the NASDAQ stock market (TLAB). 2 TELLABS, INC. RESULTS OF OPERATIONS (Dollars in thousands, except per-share data) (Unaudited) Three Months Ended Nine Months Ended 09/26/97 09/27/96 09/26/97 09/27/96 --------- ----------- --------- -------- Net Sales $309,408 $234,340 $849,232 $596,069 Cost of Goods Sold 115,829 94,811 322,694 246,451 --------- ----------- --------- -------- Gross Profit 193,579 139,529 526,538 349,618 Operating Exp. Mktg. & G.A. 58,734 42,479 160,158 115,356 Research & Dev. 40,039 28,137 110,807 74,629 Acquired R&D Write-off --- --- --- 74,658 Goodwill Amort. 1,493 1,196 4,516 2,513 --------- ----------- --------- -------- Total Oper. Exp. 100,266 71,812 275,481 267,156 Oper. Profit 93,313 67,717 251,057 82,462 Interest/Other-Net 4,121 807 30,996 4,560 --------- ----------- --------- -------- Profit Before Tax 97,434 68,524 282,053 87,022 Income Taxes (Benefit) 33,127 22,407 95,898 28,456 --------- ----------- --------- -------- Net Profit $64,307 $46,117 $186,155 $58,566 ========= =========== ========= ======== Earnings per Share $0.34 $0.25 $1.00 $0.32 ========= =========== ========= ======== Average Number of Shares of Common Stock Outstanding 186,532 184,876 186,181 184,400 3 TELLABS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in thousands) (Unaudited) 1997 1997 1996 3rd Qtr. 2nd Qtr. Year End Assets ----------- --------- -------- Current Assets Cash and investments $503,554 $427,295 $226,867 Accounts receivable, less allowance 202,776 171,126 167,928 Inventories 84,649 85,665 78,519 Other current assets 1,757 2,246 2,150 ----------- --------- -------- Total Current Assets 792,736 686,332 475,464 Property, Plant, and Equipment 319,972 294,840 267,014 Less accumulated depreciation (120,475) (114,278) (104,254 ----------- --------- -------- 199,497 180,562 162,760 Goodwill 63,007 65,749 64,785 Other Assets 46,734 41,398 40,814 ----------- --------- -------- Total Assets $1,101,974 $974,041 $743,823 =========== ========= ======== Liabilities Current Liabilities Accounts payable $40,039 $44,479 $36,931 Accrued liabilities 120,228 98,912 71,258 Income taxes 40,955 24,646 23,435 ----------- --------- -------- Total Current Liabilities 201,222 168,037 131,624 Long-Term Debt 3,949 4,083 2,850 Other Long-Term Liabilities 13,840 12,741 10,964 Deferred Income Taxes 5,329 5,869 7,109 ----------- --------- -------- Total Liabilities 224,340 190,730 152,547 Stockholders' Equity Common Stock, $.01 Par Value 1,815 1,810 1,797 Additional Paid-In Capital 125,765 114,689 94,854 Cumulative Translation Adjustment (26,338) (18,000) 3,937 Unrealized Holding Gains on Securities 121,101 93,827 21,551 Retained Earnings 655,291 590,985 469,137 ----------- --------- -------- Total Stockholders' Equity 877,634 783,311 591,276 ----------- --------- -------- Total Liabilities & Stockholders' Equity $1,101,974 $974,041 $743,823 =========== ========= ======== 4 EX-27 6
5 This schedule contains summary financial information extracted from the September 26, 1997 Income Statement and Balance Sheet and is qualified in its entirety by reference to such 10-Q. 9-MOS JAN-02-1998 SEP-26-1997 127853000 375701000 208644000 5868000 84649000 792736000 319972000 120475000 1101974000 201222000 3949000 0 0 1815000 875819000 1101974000 849232000 849232000 322694000 322694000 275481000 2419000 8134000 282053000 95898000 186155000 0 0 0 186155000 1.00 1.00
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