10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2003

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____________________to_____________

Commission file Number: 0-9692

TELLABS, INC.

(Exact name of registrant as specified in its charter)

Delaware	36-3831568
(State of Incorporation)	(I.R.S. Employer
	Identification No.)
One Tellabs Center, 1415 W. Diehl Road,
Naperville, Illinois	60563
(Address of Principal Executive Offices)	(Zip Code)

               Registrant’s telephone number, including area code: (630) 378-8800

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X]   NO [  ]

Common Shares, $.01 Par Value - 417,230,204 shares outstanding on September 26, 2003.

TELLABS, INC.
INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Comparative Statements of Operations
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Comparative Statements of Cash Flow
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURE

TELLABS, INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended						Nine Months Ended
(In millions, except per-share data)		9/26/03			9/27/02			9/26/03			9/27/02
Net Sales
	Product and other	$	205.9		$	251.8		$	587.7		$	872.1
	Services		38.6			36.3			113.4			132.1
			244.5			288.1			701.1			1,004.2
Cost of Sales
	Product and other		121.8			138.3			381.4			561.7
	Services		29.5			30.8			88.5			99.1
			151.3			169.1			469.9			660.8
Gross Profit			93.2			119.0			231.2			343.4
Operating Expenses
	Selling, general and administrative		58.9			70.1			182.3			226.1
	Research and development		68.4			80.4			219.9			257.3
	Purchased in-process research and development		—			—			—			5.4
	Intangible asset amortization		3.8			2.4			8.7			6.4
	Restructuring & other charges		28.5			68.0			54.6			175.9
			159.6			220.9			465.5			671.1
Operating Loss			(66.4	)		(101.9	)		(234.3	)		(327.7	)
Other Income (Expense)
	Interest income		8.4			9.0			26.3			25.0
	Interest expense and other		(6.4	)		(30.3	)		(10.1	)		(30.2	)
			2.0			(21.3	)		16.2			(5.2	)
Loss Before Income Tax			(64.4	)		(123.2	)		(218.1	)		(332.9	)
	Income tax expense (benefit)		0.4			(32.1	)		0.3			(104.3	)
Net Loss		($	64.8	)	($	91.1	)	($	218.4	)	($	228.6	)
Loss per Share		($	0.16	)	($	0.22	)	($	0.53	)	($	0.56	)
Average number of common shares outstanding			413.3			411.8			412.7			411.2

The accompanying notes are an integral part of these statements.

TELLABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

				9/26/03			12/27/02
(In millions, except share amounts)				(Unaudited)
Assets
Current Assets
	Cash and cash equivalents			$	241.8		$	453.6
	Investments in marketable securities				824.0			565.6
					1,065.8			1,019.2
	Accounts receivable, net				178.6			216.8
	Inventories
		Raw materials			33.6			92.4
		Work in process			12.3			15.5
		Finished goods			28.7			66.6
					74.6			174.5
	Income taxes receivable				16.1			174.8
	Miscellaneous receivables and other current assets				85.8			31.2
Total Current Assets					1,420.9			1,616.5
Property, plant and equipment					744.2			770.2
Less: accumulated depreciation					392.4			349.3
					351.8			420.9
Goodwill					552.2			455.7
Intangible assets, net					105.9			70.1
Other Assets					119.1			142.5
Total Assets				$	2,549.9		$	2,705.7
Liabilities
Current Liabilities
	Accounts payable			$	59.7		$	77.4
	Accrued liabilities				85.1			94.5
	Accrued restructuring and other charges				56.9			85.4
Total Current Liabilities					201.7			257.3
Accrued long-term restructuring charges					53.3			45.5
Income Taxes					89.0			82.9
Other long-term liabilities					34.5			29.7
Stockholders’ Equity
	Preferred stock: authorized 5,000,000 shares of $.01 par value; no shares issued and outstanding				—			—
	Common stock: 1,000,000,000 shares of $.01 par value; 417,230,204 and 415,440,414 shares issued and outstanding				4.2			4.1
	Additional paid-in capital				552.5			543.6
	Treasury stock, at cost: 3,250,000 shares				(129.6	)		(129.6	)
	Deferred compensation expense				(12.4	)		(19.3	)
	Accumulated other comprehensive income (loss)
			Cumulative translation adjustment		28.7			(57.4	)
			Unrealized net gains on available-for-sale securities		2.9			5.4
	Total accumulated other comprehensive income (loss)				31.6			(52.0	)
	Retained earnings				1,725.1			1,943.5
Total Stockholders’ Equity					2,171.4			2,290.3
Total Liabilities and Stockholders’ Equity				$	2,549.9		$	2,705.7

The accompanying notes are an integral part of these statements.

TELLABS INC.
CONDENSED CONSOLIDATED COMPARATIVE STATEMENTS OF CASH FLOW
(Unaudited)

			Nine Months Ended
(In millions)			9/26/03			9/27/02
Operating Activities
	Net Loss		($	218.4	)	($	228.6	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Restructuring and other charges		128.3			286.9
		Depreciation and amortization		85.0			107.8
		(Gain)/loss on investments and other		(4.9	)		24.9
	Net change in assets and liabilities, net of effects from acquisitions:
		Accounts receivable		46.8			176.5
		Inventories		51.7			86.6
		Other current assets		(43.6	)		0.0
		Long-term assets		2.5			(36.2	)
		Accounts payable		(22.4	)		2.2
		Accrued liabilities		(48.5	)		(38.7	)
		Restructuring liabilities		(20.8	)		(143.6	)
		Income taxes		158.7			(46.6	)
		Other, net		11.7			3.7
Net Cash Provided by Operating Activities				126.1			194.9
Investing Activities
	Acquisition of property, plant and equipment			(10.5	)		(44.3	)
	Proceeds from sales and maturities of investments			1,036.3			578.1
	Payments for purchases of investments			(1,274.3	)		(657.2	)
	Payments for acquisitions, net of cash acquired			(123.4	)		(289.8	)
Net Cash Used for Investing Activities				(371.9	)		(413.2	)
Financing Activities
	Payments of notes payable and capital leases			—			(8.2	)
	Proceeds from issuance of common stock			3.7			2.5
Net Cash Provided by (Used for) Financing Activities				3.7			(5.7	)
Effect of Exchange Rate Changes on Cash				30.4			45.1
Net Decrease in Cash and Cash Equivalents				(211.7	)		(178.9	)
Cash and Cash Equivalents at Beginning of Year				453.5			701.9
Cash and Cash Equivalents at End of Quarter			$	241.8		$	523.0
Other Information
	Interest paid		$	0.0		$	1.0
	Income taxes paid		$	3.6		$	21.9

               The accompanying notes are an integral part of these statements.

TELLABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial statements and the requirements of Form 10-Q and applicable rules of Regulation S-X and accordingly do not include all disclosures normally required by generally accepted accounting principles for complete financial statements. Accordingly, the financial statements and notes herein should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 27, 2002.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for a fair presentation. Operating results for interim periods are not necessarily indicative of operating results for the full year. Certain amounts from prior periods have been reclassified to conform to the current period presentation.

2.     New Accounting Pronouncements

In June 2003, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 149, an Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for hedging activities and derivative instruments, including certain derivative instruments embedded in other contracts.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.

SFAS 149 and 150 were adopted during the Company’s third quarter and did not have a material impact on the Company’s financial position, results of operations or cash flows.

In addition, in January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires a variable interest entity to be consolidated by an equity investor if that investor is subject to a majority of the risk of loss from the variable interest entity’s activities, is entitled to receive a majority of the entity’s residual returns, or both. In October 2003, FASB delayed the required implementation of this interpretation until the Company’s fourth quarter of 2003 to allow FASB to address certain implementation issues. The Company, pending any material change in guidance from FASB, does not believe that this interpretation will have a material impact on its financial position, results of operations or cash flows.

3.     Restructuring and Other Charges

In both the second and third quarters of 2003, the Company’s management approved plans to further restructure its operations due to the continuing difficult market conditions in the telecommunications industry. The major components of the restructuring include the outsourcing of the Company’s North American manufacturing operations, workforce reductions and the closure and consolidation of excess facilities. The major charges included in the restructuring were for workforce reductions, accelerated depreciation of plant and equipment, the revaluation and write-off of inventories, an accrual for excess inventory purchase commitments, and the write-off of fixed assets. The outsourcing of the Company’s North American manufacturing operations will result in the layoff of approximately 300 employees, the above-mentioned accelerated depreciation on related plant and equipment, and the sale of the Company’s Bolingbrook, Illinois manufacturing facility. The remaining employees will be relocated to the Company’s headquarters in Naperville Illinois. The manufacturing operations ceased at the end of October, 2003. For further discussion of the Company’s April 2003 restructuring plan, refer to the Form 10-Q of Tellabs for the period ended June 27, 2003, as filed with the Securities and Exchange Commission.

In both the second and third quarters of 2002, the Company’s management approved plans to restructure its operations due to the sustained impact the industry-wide recalibration in capital spending by the major telecommunication carriers was having on the Company. Major components of the restructuring included 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; a write-down of equity investments; and a review of the sufficiency of the reserves for excess leased facilities from the Company’s 2001 restructuring programs in light of current economic conditions. For further discussion of the Company’s second and third quarter 2002 restructuring plan, refer to the Form 10-Q of Tellabs for the period ended June 28, 2002 and September 27, 2002, respectively, as filed with the S.E.C..

The total amount estimated to be incurred under 2003 restructuring charges range from $172.0 million to $209.0 million. These amounts include between $37.0 million and $40.0 million for inventory adjustments, approximately $22.0 million for excess purchase commitments, approximately $49.0 million for accelerated depreciation on buildings and equipment, $35.0 million to $42.0 million for severance and related expenses, $25.0 million to $50.0 million for the disposal of property, plant and equipment, $3.0 million to $5.0 for the consolidation of excess leased facilities and approximately $1.0 million for other obligations.

Below is an analysis of the restructuring and other charges expensed during the third quarter of 2003 and 2002 by major income statement classifications:

(in millions)
Income Statement Classification	Description		9/26/03		9/27/02
Product Cost of Sales	Inventory adjustments		$	2.7	$	—
	Excess purchase commitments			.9		—
	Accelerated depreciation on buildings and equipment			15.8		—
		Total Cost of Sales		19.4		—
Restructuring and other charges	Severance and related expenses			6.6		22.6
	Consolidation of excess leased facilities			0.4		10.5
	Disposal of property, plant and equipment			4.7		25.4
	Accelerated depreciation on buildings and equipment			16.5		—
	Other obligations			0.3		9.5
		Total operating expenses		28.5		68.0
Net restructuring and other charges			$	47.9	$	68.0

Below is an analysis of the restructuring and other charges expensed year-to-date through the third quarter of 2003 and 2002 by major income statement classifications:

(in millions)
Income Statement Classification	Description		9/26/03			9/27/02
Product Cost of Sales	Inventory adjustments		$	36.1		$	53.2
	Excess purchase commitments			21.8			58.0
	Accelerated depreciation on buildings and equipment			15.8			—
		Total Cost of Sales		73.7			111.2
Restructuring and other charges	Severance and related expenses			21.6			51.3
	Consolidation of excess leased facilities			1.0			44.7
	Disposal of property, plant and equipment			19.4			67.3
	Accelerated depreciation on buildings and equipment			16.5			—
	Other obligations			2.4			12.6
		Sub-total		60.9			175.9
Adjustments to prior Restructuring Reserves:	Reversal of excess severance			(1.3	)		—
	Proceeds from fixed asset disposals			(5.0	)		—
		Total operating expenses		54.6			175.9
Net restructuring charge and other charges			$	128.3		$	287.1

The following table displays the Company’s restructuring and other charges activity during the first nine months of 2003 and the status of the reserves at September 26, 2003:

							Severance			Consol. of			Disposal of
				Excess			and			Excess			Property,
(in	Inventory			Purchase			Related			Leased			Plant and			Accelerated
millions)	Write-Offs			Commitments			Expenses			Facilities			Equipment			Depreciation			Other			Total
Balance at 12/27/02	$	—		$	30.0		$	9.5		$	81.8		$	—		$	—		$	9.6		$	130.9
Cash activity		—			(0.2	)		(6.4	)		(10.7	)		—			—			(7.5	)		(24.8	)
Non-Cash Activity		—			0.8			0.7			0.3			—			—			0.3			2.1
Balance at 3/28/03		—			30.6			3.8			71.4			—			—			2.4			108.2
Additional reserves		33.4			20.9			15.0			0.5			14.7			—			2.2			86.7
Cash activity		—			(2.0	)		(9.8	)		(6.7	)		—			—			(2.2	)		(20.7	)
Non-Cash Activity		(33.4	)		0.8			(1.6	)		0.4			(14.7	)		—			0.3			(48.2	)
Balance at 6/27/03		—			50.3			7.4			65.6			—			—			2.7			126.0
Additional reserves		2.7			0.9			6.6			0.4			4.7			32.3			0.3			47.9
Cash activity		—			(11.1	)		(5.0	)		(7.4	)		—			—			—			(23.5	)
Non-Cash Activity		(2.7	)		(0.4	)		0.1			—			(4.7	)		(32.3	)		(0.2	)		(40.2	)
Balance at 9/26/03	$	—		$	39.7		$	9.1		$	58.6		$	—		$	—		$	2.8		$	110.2

Inventory adjustments and excess purchase commitment accrual

Included in product cost of sales during the third quarter of 2003 were charges of approximately $3.7 million related to the write-down of inventories and an accrual for non-cancelable inventory purchase commitments deemed to be excess, due to the outsourcing of North American manufacturing operations. The inventory adjustments were recorded as a reduction to inventory, while the reserve for excess non-cancelable purchase commitments was recorded to accrued restructuring and other charges. The Company is working towards negotiating the settlement of all purchase commitments within the next twelve months.

Severance and related expenses

During the third quarter of 2003, the Company recorded charges of $6.6 million for severance pay and related fringe benefits for the reduction of employees worldwide resulting from its restructuring initiatives.

Consolidation of excess leased facilities

During the third quarter of 2003, the Company recorded $0.4 million in charges related to the consolidation of excess facilities. This charge was attributable to the closure or downsizing of certain locations.

Accelerated depreciation on building and equipment

During the third quarter of 2003, the Company recorded $32.3 in accelerated depreciation on the building and equipment related to the outsourcing of its North American manufacturing operations. Of this amount, $15.8 million was charged to cost of sales during the quarter with the remaining $16.5 million charged to operating expenses. The net impact on depreciation expense during the third quarter due to this change in estimate was $32.3 million, with an additional $17.0 million to be recorded in the fourth quarter of 2003.

Disposal of property, plant and equipment

The Company recorded a total of $4.7 million related to the disposal of property, plant and equipment as part of its restructuring activities. The property, plant and equipment consisted primarily of manufacturing equipment, lab and data equipment, and computer software. This equipment is disposed of primarily by conducting periodic open bid auctions with items sold to the highest bidders.

Of the remaining $110.2 million reserves as of September 26, 2003, $56.9 million is classified as short-term as it is expected to be paid in the next 12 months. The long-term balance of $53.3 million will be paid over the remaining terms of the facility leases which expire at various times through 2011.

4.     Business Combinations

In June 2003, the Company acquired 100% of the outstanding preferred and common stock of Vivace Networks, Inc. (renamed Tellabs San Jose post-acquisition) for $129.7 million in cash and options assumed, plus acquisition costs. The acquisition was financed with cash on hand and is accounted for under the purchase method of accounting. The operating results of the business have been included in the accompanying consolidated results of operations from its date of acquisition. Goodwill and intangible assets from this acquisition were $94.0 million and $37.5 million, respectively, based on an independent appraisal. The intangible assets are being amortized over a seven year useful life. Amortization of intangible assets during the third quarter and year-to-date period from this acquisition was $1.3 million.

The Company has entered into an employee retention incentive program which will award approximately 1.3 million shares of the Company’s stock to eligible employees if certain employment and revenue targets are achieved over a two-year timeframe. The estimated cost of this program is approximately $10.0 million and will be recognized ratably over the two-year timeframe. Pro forma combined results of operations are not being presented since they would not differ materially from reported results.

The components of the purchase price were as follows:

Component		(in millions)
Cash paid to equity holders		$	124.6
Fair value of stock options assumed			5.1
Acquisition costs to date			0.6
	Total	$	130.3

The allocation of the purchase price was as follows:

		(in millions)
Goodwill		$	94.0
Intangible assets subject to amortization-developed technology			37.5
Other assets			16.2
	Total assets	$	147.7
Total liabilities		$	17.4
Purchase price		$	130.3

5.     Stock Options

The Company accounts for its stock-based compensation plans under Accounting Principles Board (“APB”) Opinion No. 25. Accordingly, no compensation cost has been recognized for its fixed stock option plan grants. Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value at the grant dates for awards under those plans consistent with the method required by SFAS No. 123, the Company’s net loss and loss per share would have been increased to the pro forma amounts indicated in the following chart:

		Three Months Ended						Nine Months Ended
(In millions, except per-share amounts)		9/26/03			9/27/02			9/26/03			9/27/02
Net Loss, as reported			($64.8	)		(91.1	)		($218.4	)		($228.6	)
Plus: stock-based employee compensation expense included in reported net earnings, net of related tax effects			2.9			2.7			8.3			7.2
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(11.3	)		(26.5	)		(47.8	)		(95.0	)
Pro forma net loss			($73.2	)		($114.9	)		($257.9	)		($316.4	)
Loss per common share:
	As reported		($0.16	)		($0.22	)		($0.53	)		($0.56	)
	Pro forma		($0.18	)		($0.28	)		($0.63	)		($0.77	)

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for grants in 2003 and 2002:

	2003			2002
Expected volatility		74.2	%		70.4	%
Risk-free interest rate		2.46	%		2.74	%
Expected life	5.25 years			5.72 years
Expected dividend yield		0.0	%		0.0	%

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 Company’s options have significantly different characteristics from traded options, and since the changes in the subjective input assumptions can result in materially different fair value estimates, in management’s opinion, the existing option pricing models do not necessarily provide a reliable single measure of the fair value of the options and do not give a meaningful comparison of companies in a given industry.

6.     Comprehensive Loss

Comprehensive income (loss) is an expression of the Company’s net income (loss) adjusted for foreign currency translation adjustments and net unrealized gains or losses on available-for-sale securities. The comprehensive losses were as follows:

		Three months ended						Nine months ended
(In millions)		9/26/03			9/27/02			9/26/03			9/27/02
Net loss			($64.8	)		($91.1	)		($218.4	)		($228.6	)
Other comprehensive income (loss):
	Net unrealized gain (loss) on securities		(2.4	)		2.2			(2.5	)		1.2
	Cumulative translation adjustment		(4.2	)		1.0			86.1			71.0
Comprehensive loss			($71.4	)		($87.9	)		($134.8	)		($156.4	)

7.     Loss per Share

The following table sets forth the computation of the Company’s loss per share:

	Three Months Ended						Nine Months Ended
(In millions, except per-share amounts)	9/26/03			9/27/02			9/26/03			9/27/02
Numerator:
Net loss		($64.8	)		($91.1	)		($218.4	)		($228.6	)
Denominator:
Denominator for basic earnings per share-Weighted-average shares outstanding		413.3			411.8			412.7			411.2
Effect of dilutive securities:
Employee stock options and awards		0.0			0.0			0.0			0.0
Denominator for diluted earnings (loss) per share-adjusted weighted-average shares outstanding And assumed conversions		413.3			411.8			412.7			411.2
Loss per share		($0.16	)		($0.22	)		($0.53	)		($0.56	)

8.     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 up to five years. Factors that enter into the Company’s estimate of its warranty reserve include the number of units shipped, historical and anticipated rates of warranty claims, and cost per claim. The following table presents the changes in the Company’s product warranty reserve:

	Three months			Nine months
	ended			ended
(In millions)	9/26/03			9/26/03
Total product warranty reserve at the beginning of the period	$	16.6		$	13.9
Accruals for product warranties issued		4.9			14.5
Settlements made during the period		(1.9	)		(8.8	)
Total product warranty reserve at the end of the period	$	19.6		$	19.6

9.     Income Taxes

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. This valuation allowance, which totaled $272.0 million at the end of the third quarter 2003, offsets the value of tax assets related to the carry-forward of tax deductions, operating losses and tax credits. While the Company expects to realize these assets, it also 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Environment

Beginning in the first half of 2001, telecommunications service providers, particularly in the United States, began to significantly reduce their capital spending. This began a period of significant change in the market conditions within the telecommunications industry. Throughout this period the Company has responded by undertaking actions to realign its business with the changes taking place in the industry and its expectations for the future. Those actions have included reducing headcount approximately 40% and outsourcing its North American manufacturing operations. Although the Company has seen some recent stability in customer demand, the Company will continue to identify and implement actions to cut fixed costs through facility consolidation; increase returns from manufacturing operations; and implement further cost reductions across the business including work force reductions, as needed. These efforts may result in additional restructuring charges.

Restructuring

During the quarter, the Company continued to take actions to align its spending with revenue to facilitate a return to profitable growth. In particular, the Company announced it would outsource the majority of its manufacturing operations in North America to Sanmina-SCI, an effort that is scheduled to be completed by the end of 2003. As a result of this action, the Company recorded the following charges during the third quarter: $3.7 million for the sale of inventory to Sanmina-SCI; $32.3 million for accelerated depreciation on its main facility in Bolingbrook, Illinois, and associated machinery and equipment; and severance costs of $2.3 million. Of the total charges, $19.4 million was included in cost of sales, and the balance was included in operating expenses as restructuring charges. In conjunction with the outsourcing of the manufacturing operations, the Company transferred inventory to Sanmina-SCI and has a $44.1 million receivable from them for this transfer as of September 26, 2003. This amount is classified as a current miscellaneous receivable on the condensed consolidated balance sheet.

The Company also announced plans to reduce its worldwide workforce and close its development facility in St. Laurent, Quebec, Canada. As a result, the Company recorded $3.5 million of restructuring charges for severance costs.

Restructuring and other charges for the third quarter also includes $6.1 million for additional severance and fixed-asset costs related to restructuring plans announced in prior quarters.

Under applicable accounting rules that took effect in 2003, certain severance, facilities, and other costs associated with restructuring activities are to be recorded in the period when a liability has been incurred, rather than the period in which the restructuring plan is initiated. As a result, the Company will record additional restructuring and other charges over the next few quarters related to the third-quarter actions and restructurings implemented in prior quarters. Although the amount of the additional charges has not been determined, the Company estimates that $30 million to $50 million will be recorded in the fourth quarter and an aggregate of $15 million to $30 million in later quarters.

Results of Operations

Quarter Ended September 26, 2003 Compared with the Quarter Ended September 27, 2002

For the quarter just ended, the Company recorded a net loss of $64.8 million, or $0.16 per share, compared with a net loss of $91.1 million, or $0.22 per share in the year-ago quarter. Contributing to the improvement were lower restructuring charges ($28.5 million in 2003 versus $68.0 million in 2002), lower overall operating expenses (excluding restructuring charges), and lower charges for losses on strategic technology investments. Offsetting these improvements were lower overall revenue, and an increase in inventory-related charges ($19.4 million in 2003 versus none in 2002).

Revenue

Total revenue for the current quarter was $244.5 million compared with $288.1 million in the third quarter of 2002. The majority of the decline occurred in North America as a result of sharply lower orders for Tellabs’ cable telephony products by the Company’s largest customer. Revenue within North America for the third quarter of 2003 amounted to $143.3 million, or 59% of total revenue, compared with $198.8 million, or 69% of total revenue, in the third quarter of 2002. International revenue amounted to $101.2 million, or 41% of total revenue, compared with $89.2 million, or 31% of total revenue, in the third quarter of 2002.

Revenue from optical networking products, the primary strategic products the Company offers to its customers in North America, was $105.4 million in the third quarter of 2003, compared with $114.7 million in the third quarter of 2002. Revenue from new products

(Tellabs® 5500 NGX, Tellabs® 6500 and Tellabs® 7100® systems) declined to $6.7 million from $13.8 million in the third quarter of 2002 primarily due to lower revenue from Tellabs 6500 systems.

Revenue from Next-Gen SDH transport products and Tellabs® 8000 managed access systems, the primary strategic products the Company offers to its international customers, was $69.7 million, or relatively flat with the same period in 2002. Revenue from new international products (Tellabs® 6340, Tellabs® 6350 and Tellabs 7200® systems) declined $1.4 million from $12.6 million in 2002 to $11.2 million in 2003.

Revenue from other products was $30.8 million in the quarter, which represented a decline of $36.4 million from 2002. The decline was primarily attributable to lower revenue from the Company’s cable telephony products as previously mentioned.

Revenue from professional services increased slightly to $38.6 million from $36.3 million in the year-ago quarter. Within this category, revenue from installation-related services declined slightly due to lower product sales, but the decline was more than offset by an increase in other value-added services.

Gross Profit

Total gross profit for the quarter was $93.2 million or 38.1% of revenue, compared with $119.0 million or 41.3% of revenue for the third quarter of 2002. The decline was due primarily to the inventory charges of approximately $19.4 million, or 7.9% of revenue, relating to the outsourcing of the Company’s North American manufacturing operations, partially offset by better margins on products and services, and by manufacturing efficiencies.

Operating Expenses

Operating expenses for the quarter of $159.6 million represented a decline of $61.3 million from $220.9 million in 2002. Approximately $39.5 million of the decline was due to a reduction in restructuring and other charges ($28.5 million in 2003 vs. $68.0 million in 2002). The remainder of the decline—$21.8 million—was due to the impact of workforce reductions on headcount-related expenses; lower depreciation, amortization, and facilities expense due to prior restructuring actions; and implementation of additional expense control initiatives across the Company.

Other Income/Expense

Other expenses decreased from $30.3 million in 2002 to $6.4 million in 2003, primarily due to the write-down of strategic technology investments in the third quarter of 2002.

Effective Tax Rate

The tax rate for the quarter ended September 26, 2003, was an expense of 0.6% compared with a benefit of 26.1% in the third quarter of 2002. The tax rate for the third quarter of 2003 reflects the absence of a tax benefit for operating losses incurred primarily in the United States and a small tax provision from international operations.

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. This valuation allowance, which totaled $272.0 million at the end of the third quarter 2003, offsets the value of tax assets related to the carry-forward of tax deductions, operating losses and tax credits. While the Company expects to realize these assets, it also 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.

Nine Months Ended September 26, 2003 Compared with the Nine Months Ended September 27, 2002

For the nine months just ended, the Company recorded a net loss of $218.4 million, or $0.53 per share, compared with a net loss of $228.6 million, or $0.56 per share, for the same period in 2002. The negative impact on earnings from a 30-percent decline in revenue, and the absence of a tax benefit on pre-tax losses, were offset by lower charges related to excess and obsolete inventory, excess inventory purchase commitments and accelerated depreciation ($73.7 million in 2003 versus $111.3 million in 2002), lower overall operating expenses (excluding restructuring charges) and lower restructuring and other charges ($54.6 million in 2003 versus $175.9 million in 2002), and lower write-downs related to strategic technology investments.

Revenue

Total revenue was $701.1 million compared with $1,004.2 million in 2002. The decline in revenue, which occurred across all product families and in both the international and North American businesses, reflects the overall condition of the industry and its impact on customer spending. Revenue within North America, which decreased approximately 40%, amounted to $428.4 million or 61% of total revenue, compared with $714.4 million, or 71% of total revenue, in the first nine months of 2002. International revenue, which decreased approximately 6%, was $272.7 million, or 39% of total revenue, compared with $289.8 million, or 29% of total revenue, in 2002.

Revenue from optical networking products was $302.6 million in the first nine months of 2003, compared with $457.2 million in the first nine months of 2002. Revenue from new optical networking products (Tellabs® 5500 NGX, Tellabs® 6500 and Tellabs® 7100 systems) for the first nine months of 2003 was $29.0 million versus $57.3 million for the first nine months of 2002. An increase in sale of the Tellabs® 7100 units were more than offset by a decrease in sales of the Tellabs® 6500 units.

Next-Gen SDH transport products and managed access systems accounted for $201.8 million in revenue compared with $207.5 million in 2002. The decrease was the result of lower revenue from the Tellabs® 7200 system partially offset by higher revenue from Tellabs® 8000 managed access systems. New international products (Tellabs® 6340, Tellabs® 6350 and Tellabs® 7200 systems) accounted for $40.2 million of revenue in 2003 compared with $42.2 million in the first nine months of 2002.

Revenue from other products was $83.3 million for the first nine months of 2003 compared with $207.4 million for the same period last year. The decline in revenue is primarily the result of lower sales of our Tellabs® 2000 cable telephony products.

Professional services revenue for the first nine months was $113.4 million, compared with $132.1 million for the same period in 2002. The decline in services revenue is attributable to a decrease in installation-related services due to the lower level of overall product revenue, offset slightly by an increase in other value added services including customer technical assistance, network performance review and maintenance services.

Gross Profit

For the first nine months of 2003, total gross profit was $231.2 million, or 33.0% of revenue, compared with $343.4 million, or 34.2% of revenue in the first nine months of 2002. Margins were benefited by approximately 0.6 percentage points due to a reduction in charges for excess and obsolete inventories and excess purchase commitments ($73.7 million in 2003 vs. $111.3 million in 2002), offset by the effect of a lower absorption of fixed manufacturing cost due to lower volume.

Operating Expenses

Operating expenses declined by $205.6 million from $671.1 million in the first nine months of 2002 to $465.5 million in the first nine months of 2003. Of the decline, $126.7 million was due to a reduction in restructuring and other charges ($54.6 million in 2003 vs. $181.3 million in 2002), and $78.9 million was due to lower headcount related expenses that were a direct result of workforce reductions; lower depreciation, amortization, and facilities expense due to prior restructuring actions; and implementation of expense control initiatives across the Company.

Other Income/Expense

Other expenses decreased from $30.2 million in 2002 to $10.1 million in 2003, primarily due to the write-down of strategic technology investments in the third quarter of 2002.

Effective Tax Rate

The tax rate for the first nine months of 2003 was nominal, compared with an effective tax rate for the nine months ended September 27, 2002 of 31.3%. The change in the tax rate reflects the absence of a tax benefit for operating losses incurred primarily in the United States and a small tax provision from international operations.

Financial Condition, Liquidity and Capital Resources

The Company’s principal source of liquidity remained its cash and equivalents and short-term investments, which increased by $46.6 million during the first nine months of 2003. The increase was due primarily to the receipt of a $158 million U.S. tax refund and the positive impact of the strengthening Euro vs. the U.S. dollar, offset by the cash paid to acquire Tellabs San Jose. Cash and equivalents decreased by $211.8 million while the short-term investment balance increased by $258.4 million. The changes reflect management’s decision to modify the investment portfolio mix for its European operations, moving away from highly-liquid cash equivalents and into higher-yielding short-term investments.

Overall, management believes its September 26, 2003 working capital level and , in particular, its total cash and short-term investments will be sufficient to meet the Company’s normal operating needs, both now and in the foreseeable future, and to fund the remaining unpaid amounts from the Company’s previous restructuring efforts. Sufficient resources exist to support the Company’s operations for the foreseeable future, either through currently available cash, cash generated from future operations, short-term or long-term financing, or equity offerings.

Critical Accounting Policies

There were no changes in critical accounting policies during the quarter.

Outlook

The Company’s ability to achieve increased revenue is dependent on revenue growth from both existing and new products. However, the Company believes that industry conditions will continue to be marked by constrained customer spending, making it difficult to predict with an acceptable level of confidence what its customers’ capital spending will be for products Tellabs currently offers. The Company also believes its customers will continue to be reluctant to purchase new products for their networks. Therefore, the Company cannot predict the level of market acceptance of new products. As a result of these market conditions, the Company expects to continue to experience difficulty in achieving revenue growth in a highly-competitive pricing environment and related margin pressure across some product lines.

The Company will continue to pursue a strategy for profitable growth that includes getting increased earnings power in an uncertain revenue environment, reducing costs to improve financial performance to breakeven and beyond, and channeling investments, including potential acquisitions, toward promising growth opportunities. This strategy could lead the Company to take any or all of the following actions:

• Reduce its workforce;

• Close, consolidate, or outsource manufacturing plants and other facilities;

• Dispose of machinery and equipment and other fixed assets;

• Reduce general operating expenses;

• Form strategic business relationships, including acquisitions; and

• Terminate unprofitable product lines or scale back development of new product features for existing products.

In the event any of these actions are taken, it is possible the Company would be required to record restructuring or other charges of a currently undeterminable amount.

Forward-Looking Statements

This Management’s Discussion and Analysis and other sections of this Form 10-Q contain 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 management’s 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,” “target,” “expect,” “predict”, “plan,” “possible”, “intend,” “likely,” “will,” “should”, “could” 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 cause 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 telecommunication service providers and equipment vendors, including any impact of bankruptcies; the impact of customer and vendor consolidation; new product acceptance; product demand and industry capacity; competitive products and pricing; competitive pressures from new entrants to the telecommunications industry; 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 and capacity; foreign economic conditions, including currency rate fluctuations; the regulatory and trade environment; availability and terms of future acquisitions; uncertainties relating to synergies, charges, and expenses associated with business combinations and other transactions; and other risks and future factors that may be detailed from time to time in the Company’s filings with the SEC. For a further description of such risks and future factors, see Exhibit 99.3 to Form 10-Q for the quarterly period ended March 28, 2003 filed with the SEC on May 9, 2003. The Company’s 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 Company’s 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There were no material changes to the disclosures on this matter made in the Company’s Annual Report on Form 10-K for the year ended December 27, 2002.

Item 4. Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 26, 2003. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective. There have been no significant changes during the period covered by this Form 10-Q in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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. 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 Company’s current or former officers and/or directors. The consolidated amended complaint alleged that during the class period (December 11, 2000-June 19, 2001) the defendants violated the federal securities laws by making materially false and misleading statements, including, among other things, allegedly: providing revenue forecasts that were false and misleading, misrepresenting demand for its products, and reporting overstated revenues for the fourth quarter of the year 2000 in the Company’s financial statements. Further, certain of the individual defendants were 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. 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. On May 19, 2003, the Court granted defendants’ motion and dismissed all counts of the consolidated amended complaint, while affording plaintiffs an opportunity to replead. On July 11, 2003 plaintiffs filed a second consolidated amended class action complaint against the Company, Mssrs. Birck and Notebaert, and many (although not all) of the other previously named individual defendants, realleging claims similar to those contained in the previously dismissed consolidated amended class action complaint. The Company filed a second motion to dismiss on August 22, 2003 seeking the dismissal with prejudice of all claims alleged in the second consolidated amended class action complaint. The Company intends to defend this action vigorously.

Item 6. Exhibits and Reports on Form 8-K

(A) Exhibits

10.1 – Form of Executive Agreement for Senior Executives

10.2 – Form of Executive Agreement for Corporate Officers

31.1- CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 - CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 - CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 - CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(B)  Reports on Form 8-K:

• The Registrant furnished a press release dated July 22, 2003, announcing its earnings for the quarter ended June 27, 2003.

• The Registrant furnished a press release dated August 1, 2003, announcing that Tellabs will outsource its North American manufacturing operations to Sanmina-SCI.

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/ JAMES A. DITE

James A. Dite
Vice President and Controller
(Principal Accounting Officer)

November 6, 2003
(Date)

EX-10.1

Exhibit 10.1

EXECUTIVE AGREEMENT

This Agreement is made as of this xx of xxx, 200x, by and between Tellabs, Inc., a Delaware corporation (the “Corporation”) and [       ] (the “Executive”).

WITNESSETH:

WHEREAS, the Corporation wishes to attract and retain well-qualified executive and key personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened Change in Control (as defined in Paragraph 2) or Change in Management (as defined in Paragraph 3) of the Corporation; and

WHEREAS, to achieve this purpose, the Board of Directors of the Corporation considered and approved this agreement to be entered into with the Executive as being in the best interests of the Corporation and its shareholders;

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereto agree as follows:

1.	Operation of Agreement
	The “effective date of this Agreement” shall be the date on which the first to occur of a Change in Control or Change in Management occurs, and this Agreement shall not have any force or effect whatsoever prior to that date. This Agreement shall supersede, in its entirety, any previously existing Change in Control Employment Agreement between Executive and the Corporation.
2.	Change in Control

For the purposes of this Agreement, a “Change in Control” means the first of the following events to occur:

(a)	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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Corporation representing 20% or more of the combined voting power of the Corporation’s 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 Corporation; 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%;
(b)	During any two consecutive years, 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 Corporation to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Corporation’s 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;
(c)	Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (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 Corporation 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 corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or more subsidiaries) (the “Resulting Corporation”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Corporation;

(ii)

no person (as defined in Section 13(d) and 14(d) of the Exchange Act)(other than the Corporation, the Resulting Corporation or any employee benefit plan (or related trust) of the Corporation or such Resulting Corporation) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of the Resulting Corporation, except to the extent that such ownership resulted solely from ownership of securities of the Corporation prior to the Business Combination; and

(iii)

at least a majority of the members of the board of directors of the Resulting Corporation 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;

(d)	Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; or
(e)	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 Corporation, and then the first to occur of:

(i)	Any time during the offer when the person making the offer owns or has accepted for payment stock of the Corporation with 25% or more of the total voting power of the Corporation’s securities, or
(ii)	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 the person, stock with 50% or more of total voting power of the Corporation’s securities when the offer terminates.

3. Change in Management

For purposes of this Agreement, a “Change in Management” shall occur in the event that (a) Michael J. Birck is not for any reason the Chief Executive Officer of the Corporation, or (b) if a Business Combination which is not a Change in Control shall occur, Michael J. Birck is not for any reason the Chief Executive Officer of the Resulting Corporation.

4. Employment

The Corporation hereby agrees to continue the Executive in its employ and/or the employ of one or more of its subsidiaries and the Executive hereby agrees to remain in the employ of the Corporation and/or such subsidiaries, for the period commencing on the effective date of this Agreement and ending on the second anniversary of such date (the “employment period”), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at a location within the metropolitan area in which the Executive was employed immediately prior to the effective date of this Agreement or such other location as the Corporation may reasonably request. The Executive agrees that during the employment period he/she shall devote his/her full business time exclusively to his/her executive duties and shall perform such duties faithfully and efficiently.

5.	Compensation, Compensation Plans, Benefits and Perquisites
	During the employment period, the Executive shall be compensated as follows:

(a)

He/she shall receive an annual salary at a rate which is not less than his/her rate of annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases from time to time thereafter which are in accordance with the Corporation’s regular practices; provided, however, that such annual salary shall be subject to reduction to the extent there is a general reduction in the base salaries of executives with comparable duties.

(b)

He/she shall be eligible to participate on a reasonable basis in the Corporation’s stock option plans, the annual incentive bonus program and any other bonus and incentive compensation plans (whether now or hereinafter in effect) in which executives with comparable duties are eligible to participate, which plans must provide

opportunities to receive compensation which are at least as great as the opportunities under the plans in which the Executive was participating immediately prior to the effective date of this Agreement.

(c)

He/she shall be entitled to receive employee benefits and perquisites which are the greater of the employee benefits and perquisites provided by the Corporation to executives with comparable duties or the employee benefits and perquisites to which he/she was entitled immediately prior to the effective date of this Agreement. Such benefits and perquisites shall include, but not be limited to, the benefits and perquisites included under the Tellabs Advantage Program, and the Tellabs, Inc. Employee Welfare Benefits Plan.

6. Termination Following Change in Control or Change in Management

(a)	For purposes of this Agreement, the term “termination” shall mean (i) termination by the Corporation of the employment of the Executive with the Corporation and all of its subsidiaries for any reason other than death, disability or “cause” (as defined below), or (ii) resignation of the Executive for “good reason” (as defined below).
(b)	The term “good reason” shall mean:

(i) the material reduction or material adverse modification of Executive’s authority or duties, such as a substantial diminution or adverse modification in Executive’s title, status, or responsibilities;

(ii) any reduction in Executive’s Base Salary (other than as may be permitted under Paragraph 5(a));

(iii) any failure to provide to Executive the opportunities to receive compensation as required to be provided under Paragraph 5(b);

(iv) any failure to pay or provide the benefits and perquisites required to be provided under Paragraph 5(c);

(v) any requirement that Executive relocate his principal place of employment by more than a 50-mile radius from its location immediately prior to the effective date of this Agreement, excluding, if a Change in Control has not occurred, a move to the Corporation’s headquarters, or if the Executive’s position is that of a functional head for a region or a division, the headquarters of such region or division;

(vi) any material breach of this Agreement by the Corporation; or

(vii) if a Change in Control has occurred, a reasonable determination by the Executive that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting his/her position, he/she is unable to exercise the authorities, powers, function or duties attached to his/her position and contemplated by Paragraph 4 of the Agreement.

Notwithstanding the foregoing, any of the circumstances described in this Paragraph 6(b) may not serve as a basis for resignation for “good reason” by Executive unless the Executive has provided written notice to the Corporation that such circumstance exists and the Corporation has failed to cure such circumstance within 15 days following such notice.

(c) The term “cause” means (i) the willful and continued failure by the Executive to substantially perform his/her duties with the Corporation and/or, if applicable, one or more of its subsidiaries (other than any such failure resulting from his/her incapacity due to physical or mental illness) after a demand for substantial performance is delivered to him/her by the Board of Directors of the Corporation which specifically identifies the manner in which the Board believes the Executive has not substantially performed his/her duties, (ii) the willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the property or business of the Corporation or any of its subsidiaries, or (iii) fraud, misappropriation or commission of a felony. For purposes of this paragraph, no act or failure to act on the Executive’s part will be considered “willful” unless done, or omitted to be done, by him/her in bad faith and without reasonable belief that his/her action or omission was in the interests of the Corporation or not opposed to the interests of the Corporation.

7.	Confidentiality
	The Executive agrees that during and after the employment period, he/she shall retain in confidence any confidential information known to him/her concerning the Corporation and its subsidiaries and their respective businesses for as long as such information is not publicly disclosed.

8.	No Obligation to Mitigate Damages
	The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Corporation’s obligations under this Agreement.
9.	Severance Allowance

(a) In the event of termination of the Executive during the employment period, the Executive shall be entitled to receive a lump sum severance allowance within five days of such termination, in an amount which is equal to the sum of the following:

(i)

The amount equivalent to salary payments for 24 (12, if a Change in Control has not occurred) calendar months, at the rate required by Paragraph 5(a) and in effect immediately prior to termination (or, if greater, at the highest rate in effect under Paragraph 5(a) at any time during the period commencing on the effective date of this Agreement and ending on the termination date), plus a pro rata share of the estimated amount of any bonus which would have been payable for the bonus period which includes the termination date; and

(ii)

In the event of a Change in Control the amount equivalent to 24 calendar months of bonus at the target rate for the year which includes his/her termination date.

(b)

In addition to such amount under Paragraph 9(a) above, the Executive shall also receive in cash the value of the incentive compensation (including, but not limited to, employer contributions to the Tellabs Advantage Program and the right to receive stock awards and to exercise stock options and other bonus and similar incentive compensation benefits) to which he/she would have been entitled under all incentive compensation plans maintained by the Corporation if he/she had remained in the employ of the Corporation for 24 (12, if a Change in Control has not occurred) months after such termination. The amount of such payment shall be determined as of the date of termination and shall be paid as promptly as practicable and in no event later than 30 days after such termination.

(c)

The Corporation shall maintain in full force and effect for the Executive’s continued benefit (and, to the extent applicable, the continued benefit of his dependents) all of the employee benefits (including, but not limited to, coverage under any medical and insurance plans, programs or arrangements) to which he/she would have been entitled under all employee benefit plans, programs or arrangements maintained by the Corporation if he/she had remained in the employ of the Corporation for 24 (12, if a Change in Control has not occurred) calendar months after his/her termination, or if such continuation is not possible under the terms and provisions of such plans, programs or arrangements, the Corporation shall arrange to provide benefits substantially similar to those which the Executive (and, to the extent applicable, his/her dependents) would have been entitled to receive if the Executive had remained a participant in such plans, programs or arrangements for such 24-month (or, if applicable, 12-month) period, as the case may be.

10.

Adjustments in Case of “Excess Parachute Payments”

If any payments or benefits received or to be received by the Executive in connection with the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, or any person affiliated with the Corporation) (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 Corporation 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 Executive’s 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 Executive’s highest marginal rate of taxation in the state and locality of the Executive’s 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 not then regularly retained by the Corporation, in consultation with tax counsel selected by them and acceptable to the Executive. The Corporation shall provide the Executive with sufficient tax and compensation data to enable the Executive or his/her 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 Corporation 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 Corporation 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 Executive’s receipt of the Payments resulting in such Excise Tax.

11.

Interest; Indemnification

(a)	In the event any payment to Executive under this Agreement is not paid within five business days after it is due, such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.
(b)	The Corporation hereby indemnifies the Executive for all legal fees and expenses incurred by Executive in contesting any action of the Corporation with respect to this Agreement, including the termination of Executive’s employment hereunder, or incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement.

12. Notices

Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he/she has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices.

13.	Arbitration of Disputes and Reimbursements of Legal Costs
	Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) 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 Corporation, 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 executives of major corporations. Any award entered by the arbitrators shall be final, binding and non-appealable 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 Corporation 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 Corporation’s 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.
14.	Non-Alienation
	The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution.
15.	Governing Law
	The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois.
16.	Amendment
	This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, 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.
17.	Successor to the Corporation
	This Agreement shall be binding upon and inure to the benefit of the Corporation and the Executive and their respective successors, heirs (in the case of the Executive) and assigns (subject, in the case of the Executive, to Paragraph 14 above) and any successor of the Corporation. The Corporation shall require any successor to expressly assume the liabilities, obligations and duties of the Corporation hereunder.
18.	Severability
In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written.

Executive
TELLABS, INC., a Delaware corporation
By:
	Chief Executive Officer

ATTEST:

Secretary

(Seal)

EX-10.2 4 c80476exv10w2.htm FORM OF EXECUTIVE AGREEMENT

Exhibit 10.2

EXECUTIVE AGREEMENT

This Agreement is made as of this xx of xxx, 200x, by and between Tellabs, Inc., a Delaware corporation (the “Corporation”) and (the “Executive”).

WITNESSETH:

WHEREAS, the Corporation wishes to attract and retain well-qualified executive and key personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened Change in Control (as defined in Paragraph 2) or Change in Management (as defined in Paragraph 3) of the Corporation; and

WHEREAS, to achieve this purpose, the Board of Directors of the Corporation considered and approved this agreement to be entered into with the Executive as being in the best interests of the Corporation and its shareholders;

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties hereto agree as follows:

1.	Operation of Agreement
	The “effective date of this Agreement” shall be the date on which the first to occur of a Change in Control or Change in Management occurs, and this Agreement shall not have any force or effect whatsoever prior to that date. This Agreement shall supersede, in its entirety, any previously existing Change in Control Employment Agreement between Executive and the Corporation.
2.	Change in Control
For the purposes of this Agreement, a “Change in Control” means the first of the following events to occur:

(d)	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 Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of any such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Corporation representing 20% or more of the combined voting power of the Corporation’s 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 Corporation; 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%;
(b)	During any two consecutive years, 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 Corporation to effect a transaction described elsewhere in this definition of Change in Control) whose election by the Board or nomination for election by the Corporation’s 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;
(c)	Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (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 Corporation 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 corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s assets either directly or through one or

	more subsidiaries) (the “Resulting Corporation”) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding voting securities of the Corporation;
(ii)	no person (as defined in Section 13(d) and 14(d) of the Exchange Act)(other than the Corporation, the Resulting Corporation or any employee benefit plan (or related trust) of the Corporation or such Resulting Corporation) beneficially owns, directly or indirectly, 20% or more of, respectively, the then combined voting power of the then outstanding voting securities of the Resulting Corporation, except to the extent that such ownership resulted solely from ownership of securities of the Corporation prior to the Business Combination; and
(iii)	at least a majority of the members of the board of directors of the Resulting Corporation 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;

(d)	Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; or
(e)	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 Corporation, and then the first to occur of:

(i)	Any time during the offer when the person making the offer owns or has accepted for payment stock of the Corporation with 25% or more of the total voting power of the Corporation’s securities, or
(ii)	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 the person, stock with 50% or more of total voting power of the Corporation’s securities when the offer terminates.

3. Change in Management

For purposes of this Agreement, a “Change in Management” shall occur in the event that (a) Michael J. Birck is not for any reason the Chief Executive Officer of the Corporation, or (b) if a Business Combination which is not a Change in Control shall occur, Michael J. Birck is not for any reason the Chief Executive Officer of the Resulting Corporation.

4. Employment

The Corporation hereby agrees to continue the Executive in its employ and/or the employ of one or more of its subsidiaries and the Executive hereby agrees to remain in the employ of the Corporation and/or such subsidiaries, for the period commencing on the effective date of this Agreement and ending on the third anniversary of such date (the “employment period”), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at a location within the metropolitan area in which the Executive was employed immediately prior to the effective date of this Agreement or such other location as the Corporation may reasonably request. The Executive agrees that during the employment period he/she shall devote his/her full business time exclusively to his/her executive duties and shall perform such duties faithfully and efficiently.

5.	Compensation, Compensation Plans, Benefits and Perquisites
	During the employment period, the Executive shall be compensated as follows:

(a)

He/she shall receive an annual salary at a rate which is not less than his/her rate of annual salary immediately prior to the effective date of this Agreement, with the opportunity for increases from time to time thereafter which are in accordance with the Corporation’s regular practices; provided, however, that such annual salary shall be subject to reduction to the extent there is a general reduction in the base salaries of executives with comparable duties.

(b)

He/she shall be eligible to participate on a reasonable basis in the Corporation’s stock option plans, the annual incentive bonus program and any other bonus and incentive compensation plans (whether now or hereinafter in

effect) in which executives with comparable duties are eligible to participate, which plans must provide opportunities to receive compensation which are at least as great as the opportunities under the plans in which the Executive was participating immediately prior to the effective date of this Agreement.

(c)

He/she shall be entitled to receive employee benefits and perquisites which are the greater of the employee benefits and perquisites provided by the Corporation to executives with comparable duties or the employee benefits and perquisites to which he/she was entitled immediately prior to the effective date of this Agreement. Such benefits and perquisites shall include, but not be limited to, the benefits and perquisites included under the Tellabs Advantage Program, and the Tellabs, Inc. Employee Welfare Benefits Plan.

6. Termination Following Change in Control or Change in Management

(a)	For purposes of this Agreement, the term “termination” shall mean (i) termination by the Corporation of the employment of the Executive with the Corporation and all of its subsidiaries for any reason other than death, disability or “cause” (as defined below), or (ii) resignation of the Executive for “good reason” (as defined below).
(b)	The term “good reason” shall mean:

(i) the material reduction or material adverse modification of Executive’s authority or duties, such as a substantial diminution or adverse modification in Executive’s title, status, or responsibilities;

(ii) any reduction in Executive’s Base Salary (other than as may be permitted under Paragraph 5(a));

(iii) any failure to provide to Executive the opportunities to receive compensation as required to be provided under Paragraph 5(b);

(iv) any failure to pay or provide the benefits and perquisites required to be provided under Paragraph 5(c);

(v) any requirement that Executive relocate his principal place of employment by more than a 50-mile radius from its location immediately prior to the effective date of this Agreement, excluding, if a Change in Control has not occurred, a move to the Corporation’s headquarters, or if the Executive’s position is that of a functional head for a region or a division, the headquarters of such region or division;

(vi) any material breach of this Agreement by the Corporation; or

(vii) if a Change in Control has occurred, a reasonable determination by the Executive that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting his/her position, he/she is unable to exercise the authorities, powers, function or duties attached to his/her position and contemplated by Paragraph 4 of the Agreement.

Notwithstanding the foregoing, any of the circumstances described in this Paragraph 6(b) may not serve as a basis for resignation for “good reason” by Executive unless the Executive has provided written notice to the Corporation that such circumstance exists and the Corporation has failed to cure such circumstance within 15 days following such notice.

(c) The term “cause” means (i) the willful and continued failure by the Executive to substantially perform his/her duties with the Corporation and/or, if applicable, one or more of its subsidiaries (other than any such failure resulting from his/her incapacity due to physical or mental illness) after a demand for substantial performance is delivered to him/her by the Board of Directors of the Corporation which specifically identifies the manner in which the Board believes the Executive has not substantially performed his/her duties, (ii) the willful engaging by the Executive in gross misconduct materially and demonstrably injurious to the property or business of the Corporation or any of its subsidiaries, or (iii) fraud, misappropriation or commission of a felony. For purposes of this paragraph, no act or failure to act on the Executive’s part will be considered “willful” unless done, or omitted to be done, by him/her in bad faith and without reasonable belief that his/her action or omission was in the interests of the Corporation or not opposed to the interests of the Corporation.

7.	Confidentiality
	The Executive agrees that during and after the employment period, he/she shall retain in confidence any confidential information known to him/her concerning the Corporation and its subsidiaries and their respective businesses for as long as such information is not publicly disclosed.

8.	No Obligation to Mitigate Damages
	The Executive shall not be obligated to seek other employment in mitigation of amounts payable or arrangements made under the provisions of this Agreement and the obtaining of any such other employment shall in no event effect any reduction of the Corporation’s obligations under this Agreement.
9.	Severance Allowance

(a) In the event of termination of the Executive during the employment period, the Executive shall be entitled to receive a lump sum severance allowance within five days of such termination, in an amount which is equal to the sum of the following:

(i)

The amount equivalent to salary payments for 36 (24, if a Change in Control has not occurred) calendar months, at the rate required by Paragraph 5(a) and in effect immediately prior to termination (or, if greater, at the highest rate in effect under Paragraph 5(a) at any time during the period commencing on the effective date of this Agreement and ending on the termination date), plus a pro rata share of the estimated amount of any bonus which would have been payable for the bonus period which includes the termination date; and

(ii)

In the event of a Change in Control the amount equivalent to 36 calendar months of bonus at the target rate for the year which includes his/her termination date.

(e)

In addition to such amount under Paragraph 9(a) above, the Executive shall also receive in cash the value of the incentive compensation (including, but not limited to, employer contributions to the Tellabs Advantage Program and the right to receive stock awards and to exercise stock options and other bonus and similar incentive compensation benefits) to which he/she would have been entitled under all incentive compensation plans maintained by the Corporation if he/she had remained in the employ of the Corporation for 36 (24, if a Change in Control has not occurred) months after such termination. The amount of such payment shall be determined as of the date of termination and shall be paid as promptly as practicable and in no event later than 30 days after such termination.

(f)

The Corporation shall maintain in full force and effect for the Executive’s continued benefit (and, to the extent applicable, the continued benefit of his dependents) all of the employee benefits (including, but not limited to, coverage under any medical and insurance plans, programs or arrangements) to which he/she would have been entitled under all employee benefit plans, programs or arrangements maintained by the Corporation if he/she had remained in the employ of the Corporation for 36 (24, if a Change in Control has not occurred) calendar months after his/her termination, or if such continuation is not possible under the terms and provisions of such plans, programs or arrangements, the Corporation shall arrange to provide benefits substantially similar to those which the Executive (and, to the extent applicable, his/her dependents) would have been entitled to receive if the Executive had remained a participant in such plans, programs or arrangements for such 36-month (or, if applicable, 24-month) period, as the case may be.

10.

Adjustments in Case of “Excess Parachute Payments”

If any payments or benefits received or to be received by the Executive in connection with the Executive’s employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Corporation, or any person affiliated with the Corporation) (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 Corporation 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 Executive’s 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 Executive’s highest marginal rate of taxation in the state and locality of the Executive’s 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 not then regularly retained by the Corporation, in consultation with tax counsel selected by them and acceptable to the Executive. The Corporation shall provide the Executive with sufficient tax and compensation data to enable the Executive or his/her 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 Corporation 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 Corporation 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 Executive’s receipt of the Payments resulting in such Excise Tax.

11.

Interest; Indemnification

(c)	In the event any payment to Executive under this Agreement is not paid within five business days after it is due, such payment shall thereafter bear interest at the prime rate from time to time as published in The Wall Street Journal, Midwest Edition.
(d)	The Corporation hereby indemnifies the Executive for all legal fees and expenses incurred by Executive in contesting any action of the Corporation with respect to this Agreement, including the termination of Executive’s employment hereunder, or incurred by Executive in seeking to obtain or enforce any right or benefit provided by this Agreement.

12. Notices

Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he/she has filed in writing with the Corporation or, in the case of the Corporation, at its principal executive offices.

13.	Arbitration of Disputes and Reimbursements of Legal Costs
	Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) 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 Corporation, 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 executives of major corporations. Any award entered by the arbitrators shall be final, binding and non-appealable 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 Corporation 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 Corporation’s 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.
14.	Non-Alienation
	The Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law, except by will or the laws of descent and distribution.
15.	Governing Law
	The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois.
16.	Amendment
	This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, 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.
17.	Successor to the Corporation
	This Agreement shall be binding upon and inure to the benefit of the Corporation and the Executive and their respective successors, heirs (in the case of the Executive) and assigns (subject, in the case of the Executive, to Paragraph 14 above) and any successor of the Corporation. The Corporation shall require any successor to expressly assume the liabilities, obligations and duties of the Corporation hereunder.
18.	Severability

In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the day and year first above written.

Executive

TELLABS, INC.,
a Delaware corporation

By:

Chief Executive Officer

ATTEST:

Secretary

(Seal)

EX-31.1 5 c80476exv31w1.htm CEO CERTIFICATION

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael J. Birck, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 6, 2003	/s/ Michael J. Birck
	Michael J. Birck Chief Executive Officer

EX-31.2 6 c80476exv31w2.htm CFO CERTIFICATION

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy J. Wiggins, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Tellabs, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

d)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
e)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
f)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

c)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
d)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: November 6, 2003	/s/ Timothy J. Wiggins
	Timothy J. Wiggins Chief Financial Officer

EX-32.1 7 c80476exv32w1.htm CEO CERTIFICATION

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended September 26, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael J. Birck, the Chief Executive Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael J. Birck

Michael J. Birck
Chief Executive Officer
Date: November 6, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The certification in this Report is being furnished in accordance with SEC Release No. 33-8212. The certification is being “furnished” and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The certification shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

EX-32.2 8 c80476exv32w2.htm CFO CERTIFICATION

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Tellabs, Inc. (the “Company”) on Form 10-Q for the quarter ended September 26, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Timothy J. Wiggins, the Chief Financial Officer of the Company, certify, pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Timothy J. Wiggins

Timothy J. Wiggins
Chief Financial Officer
Date: November 6, 2003

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The certification in this Report is being furnished in accordance with SEC Release No. 33-8212. The certification is being “furnished” and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. The certification shall not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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