EXHIBIT 13
Five-Year Summary of Selected Financial Data
(In thousands, except per-share data)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net sales $868,975 $635,229 $494,153 $320,463 $258,560
Gross profit $519,243 $363,835 $270,003 $164,255 $125,876
Earnings before income taxes $175,282 $162,825 $97,824 $35,801 $19,152
Net earnings before cumulative effect $117,965 $115,606 $72,389 $30,467 $16,854
Cumulative effect of accounting change ---- ---- ---- $1,500 ----
Net earnings $117,965 $115,606 $72,389 $31,967 $16,854
Earnings per share before cumulative
effect of accounting change $0.64 $0.63 $0.40 $0.17 $0.10
Cumulative effect on earnings per share ---- ---- ---- $0.01 ----
Earnings per share $0.64 $0.63 $0.40 $0.02 $0.10
Stockholders' equity $591,276 $433,233 $292,790 $207,006 $167,144
Total assets $743,823 $552,051 $390,067 $328,766 $210,748
Net working capital $343,840 $267,806 $138,317 $64,285 $109,201
Long-term debt $2,850 $2,850 $2,850 $2,850 $2,850
No cash dividends per common share were paid. Per-share amounts are restated
to reflect stock splits in 1996, 1995, 1994 and 1993.
COMMON STOCK MARKET DATA
(Restated for stock splits in 1996 and 1995)
1996 1995
High Low High Low
First Quarter 26 3/8 15 1/4 16 7/8 11 3/4
Second Quarter 34 3/4 23 5/8 24 1/8 14
Third Quarter 38 1/8 24 1/2 26 3/8 19 5/8
Fourth Quarter 45 1/4 34 1/8 21 3/8 14 7/8
The Company's common stock is traded over-the-counter under the symbol
TLAB. The shares are included in the NASDAQ National Market System, which
reports sales prices for actual transactions. At February 17, 1997, there
were approximately 3,035 stockholders of record.
Management Statement of Financial Responsibilities
The financial statements of Tellabs, Inc., and Subsidiaries have been
prepared under the direction of management in conformity with generally
accepted accounting principles. In the opinion of management, the
financial statements set forth a fair presentation of the consolidated
financial condition of Tellabs, Inc., and Subsidiaries at December 27,
1996, and December 29, 1995, and the consolidated results of its operations
for the years ended December 27, 1996, December 29, 1995, and December 30,
1994.
The Company maintains accounting systems and related internal controls
which, in the opinion of management, provide reasonable assurances that
transactions are executed in accordance with management's authorization,
that financial statements are prepared in accordance with generally
accepted accounting principles, and that assets are properly accounted for
and safeguarded.
Ethical decision-making is fundamental to the Company's management
philosophy. Management recognizes its responsibility for fostering a
strong ethical climate so that the Company's affairs are conducted to the
highest standards of personal and corporate conduct. Employee awareness of
these objectives is achieved through key written policy statements.
The Board of Directors has appointed two of its non-employee members as an
Audit Committee. This committee meets periodically with management and the
independent certified public accountants, who have free access to this
committee without management present, to discuss the results of their
audit work and their evaluation of the internal control structure and the
quality of financial reporting.
Michael J. Birck Peter A. Guglielmi
President and Executive Vice President,
Chief Executive Officer, Chief Financial Officer and Treasurer,
Tellabs, Inc. Tellabs, Inc.
January 15, 1997 January 15, 1997
Report of Independent Certified Public Accountants
We have audited the accompanying consolidated balance sheets of
Tellabs, Inc., and Subsidiaries as of December 27, 1996, and
December 29, 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for the years ended December 27, 1996,
December 29, 1995 and December 30, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tellabs,
Inc., and Subsidiaries at December 27, 1996, and December 29, 1995, and the
consolidated results of its operations and its consolidated cash flows for
the years ended December 27, 1996, December 29, 1995 and December 30,
1994, in conformity with generally accepted accounting principles.
Grant Thornton LLP
Chicago, Illinois
January 15, 1997
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per-share data)
Year Year Year
Ended Ended Ended
12/27/96 12/29/95 12/30/94
-------- -------- --------
Net sales $868,975 $635,229 $494,153
Cost of sales 349,732 271,394 224,150
------- ------- -------
Gross Profit 519,243 363,835 270,003
Operating expenses
Marketing 112,206 85,843 67,310
Research and development 107,258 81,893 64,765
Acquired in-process research and development 74,658 --- ---
General and administrative 52,495 36,878 35,857
Goodwill amortization 3,683 2,568 2,389
------- ------- -------
350,300 207,182 170,321
------- ------- -------
Operating Profit 168,943 156,653 99,682
Other income (expense)
Interest income 7,371 5,855 3,185
Interest expense (1,173) (124) (1,773)
Other 141 441 (3,270)
------- ------- -------
6,339 6,172 (1,858)
Earnings Before Income Taxes 175,282 162,825 97,824
Income taxes 57,317 47,219 25,435
------- ------- -------
Net Earnings $117,965 $115,606 $72,389
======= ======= =======
Average number of common and common
equivalent shares outstanding 184,674 183,420 181,328
Earnings per Share $0.64 $0.63 $0.40
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED BALANCE SHEETS
ASSETS (In thousands)
12/27/96 12/29/95
-------- --------
Current Assets
Cash and cash equivalents $90,446 $92,485
Investments in marketable securities 136,421 69,751
Accounts receivable -- primarily trade,
net of allowance for doubtful receivables
of $3,682,000 at December 27, 1996 and
$2,317,000 at December 29, 1995 167,928 127,565
Inventories
Raw materials 30,961 31,302
Work in process 12,046 11,694
Finished goods 35,512 24,719
------- -------
78,519 67,715
Other current assets 2,150 8,854
------- -------
Total Current Assets 475,464 366,370
Property, Plant and Equipment -- at Cost
Buildings and improvements 77,481 55,852
Equipment 180,758 139,117
------- -------
258,239 194,969
Less accumulated depreciation 104,254 84,419
------- -------
153,985 110,550
Land 8,775 6,472
------- -------
162,760 117,022
Goodwill, Net 64,785 44,958
Other Assets 40,814 23,701
------- -------
Total Assets $743,823 $552,051
======== ========
<FN>
LIABILITIES AND STOCKHOLDERS' EQUITY 12/27/96 12/29/95
(In thousands) -------- --------
Current Liabilities
Accounts payable-trade $36,931 $30,097
Accrued liabilities
Compensation 34,689 23,861
Payroll and other taxes 8,770 6,268
Other 17,918 12,054
------ ------
Total accrued liabilities 61,377 42,183
Deferred income taxes 9,881 ---
Income taxes 23,435 26,284
------ ------
Total Current Liabilities 131,624 98,564
Long-Term Debt 2,850 2,850
Other Long-Term Liabilities 10,964 6,179
Deferred Income Taxes 7,109 11,225
Commitments --- ---
Stockholders' Equity
Preferred stock: authorized 5,000,000 shares of
$.01 par value; no shares issued and
outstanding --- ---
Common stock: authorized 200,000,000 shares of
$.01 par value; issued 179,652,633 shares at
December 27, 1996, and 177,596,744 shares at
December 29, 1995 1,797 888
Additional paid-in capital 94,854 72,385
Cumulative translation adjustment 3,937 7,842
Unrealized net gains on
available-for-sale securities 21,551 48
Retained earnings 469,137 352,070
------- -------
Total Stockholders' Equity 591,276 433,233
------- -------
Total Liabilities and Stockholders' Equity $743,823 $552,051
<FN> The accompanying notes are an integral ======== ========
part of these statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Cumulative Unrealized
Common Paid-In Translation Net Gains Retained
(In thousands) Stock Capital Adjustment (Losses) Earnings Total
------- ------- ------- ------- ------- -------
Balance at
January 1, 1994 $215 $45,072 ($3,042) $28 $164,733 $207,006
Net earnings --- --- --- --- 72,389 72,389
Stock options exercised 4 8,883 --- --- --- 8,887
Employee stock awards --- 195 --- --- --- 195
Stock split 217 --- --- --- (217) ---
Unrealized net losses on
available-for-sale
marketable securities --- --- --- (831) --- (831)
Foreign currency
translation adjustment --- --- 5,144 --- --- 5,144
Balance at ------ ------ ------ ------ ------- -------
December 30, 1994 436 54,150 2,102 (803) 236,905 292,790
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 115,606 115,606
Stock options exercised 11 18,128 --- --- --- 18,139
Employee stock awards --- 107 --- --- --- 107
Stock split 441 --- --- --- (441) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 851 --- 851
Foreign currency
translation adjustment --- --- 5,740 --- --- 5,740
Balance at ------ ------ ------ ------ ------- -------
December 29, 1995 888 72,385 7,842 48 352,070 433,233
====== ======= ====== ====== ======== ========
Net earnings --- --- --- --- 117,965 117,965
Stock options exercised 11 22,393 --- --- --- 22,404
Employee stock awards --- 76 --- --- --- 76
Stock split 898 --- --- --- (898) ---
Unrealized net gains on
available-for-sale
marketable securities --- --- --- 21,503 --- 21,503
Foreign currency
translation adjustment --- --- (3,905) --- --- (3,905)
Balance at ------ ------ ------ ------ ------- -------
December 27, 1996 $1,797 $94,854 $3,937 $21,551 $469,137 $591,276
====== ======= ====== ====== ======== ========
<FN>
The accompanying notes are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Year Year
Ended Ended Ended
(In thousands) 12/27/96 12/29/95 12/30/94
-------- -------- --------
Operating Activities
Net earnings $117,965 $115,606 $72,389
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 32,648 23,682 19,502
Provision for doubtful receivables 2,157 1,396 254
Deferred income taxes (23,486) 9,214 (1,757)
Acquired in-process research
and development 74,658 --- ---
Gain on sale of long-term investment --- (929) ---
Net (increase) decrease in current assets,
net of effects from acquisitions:
Accounts receivable (43,535) (42,689) (7,660)
Inventories (7,434) (14,696) 92
Other current assets (1,206) 353 (724)
Net increase (decrease) in current liabilities,
net of effects from acquisitions:
Accounts payable 6,348 7,067 7,001
Accrued liabilities 14,801 2,807 9,991
Income taxes (2,221) 3,793 9,054
Net increase in other assets (10,272) (3,637) (665)
Net (decrease) increase in other liabilities (120) (4,312) 3,638
------ ------ ------
Net Cash Provided by Operating Activities 160,303 97,655 111,115
Investing Activities
Acquisition of property, plant and
equipment, net (64,831) (35,191) (22,956)
Proceeds from sales and maturities of 99,642 65,780 7,543
marketable securities
Payments for purchases of marketable
securities (122,679) (111,168) (15,602)
Payments for purchases of long-term
investments --- (1,215) (9,005)
Proceeds from sale of long-term
investment --- 3,429 ---
Payments for acquisitions,
net of cash acquired (91,732) --- ---
Origination of loan receivable (5,822)
------- ------- -------
Net Cash Used by Investing Activities (185,422) (78,365) (40,020)
Consolidated Statements of Cash Flows (continued)
(In thousands)
Year Year Year
Ended Ended Ended
12/29/95 12/29/95 12/30/94
-------- -------- --------
Financing Activities
Common stock sold through stock-option plans 22,480 18,246 9,082
Proceeds from notes payable 40,000 --- ---
Payments of notes payable (40,000) --- (60,000)
------ ------ ------
Net Cash Provided(Used) by Financing Activities 22,480 18,246 (50,918)
Effect of Exchange Rate Changes on Cash 600 3,489 1,694
Net (Decrease) Increase in Cash
And Cash Equivalents (2,039) 41,025 21,871
Cash and Cash Equivalents At Beginning of Year 92,485 51,460 29,589
------- ------- -------
Cash and Cash Equivalents At End of Year $90,446 $92,485 $51,460
======= ======= =======
Other Information
Interest paid $1,165 $111 $1,798
Income taxes paid $67,887 $28,646 $10,664
Supplemental Schedule of Non-cash Investing and Financing Activities:
In acquiring all of the outstanding shares of Steinbrecher Corporation
and TRANSYS Network's SONET product line during 1996, the Company paid
direct costs totaling $94,261,000. In conjunction with the acquisition,
liabilities were assumed as follows:
(In thousands)
Fair value of assets acquired $104,944
Costs in excess of fair value 22,977
Direct costs paid (94,261)
-------
Liabilities assumed $33,660
=======
<FN> The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A: Summary of Significant Accounting Policies
Nature of Business
Operating in one business segment, the Company and its Subsidiaries
design, assemble, market and service a diverse line of electronic
communications equipment used in public and private communications
networks worldwide.
Consolidation
The consolidated financial statements include the accounts of the
Company and its Subsidiaries. All significant intercompany balances and
transactions have been eliminated. The results of the Tellabs Wireless
Systems Division and the Tellabs Transport Group are included since
their respective purchase dates of April 17, 1996, and June 28, 1996.
(See Note K.)
Certain reclassifications have been made in the 1994 and 1995 consolidated
financial statements to conform to the 1996 presentation. The presentation
of the consolidated financial statements requires the use of estimates by
management.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
marketable securities, cost-basis investments, and long-term debt. The
carrying value of the cash and cash equivalents and long-term debt
approximates their estimated fair values based upon quoted market prices.
The fair value of investments in marketable securities is estimated based
on quotes from brokers or current rates offered for instruments with
similar characteristics.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, on
both the declining-balance and straight-line methods.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases at enacted tax rates when such amounts are expected to be
realized or settled.
Goodwill
On an ongoing basis, management reviews the valuation and amortization of
goodwill. As part of this review, the Company estimates the value and
future benefits of the net income generated by the related subsidiaries to
determine that no impairment has occurred. Goodwill is amortized over
both 20 and 10 years using the straight-line method. The accumulated
amortization of goodwill is approximately $9,775,000 and $6,092,000 as of
December 27, 1996 and December 29, 1995, respectively.
Note A: Summary of Significant Accounting Policies (continued)
Stock Awards
The Company has a program to award shares of the Company's common stock
to employees in recognition of their past service. Each full-time
employee who has worked for a continuous 5- or 20-year period is awarded
10 or 25 shares, respectively. When an employee stock award is granted,
compensation expense is charged for the fair market value of the shares
issued.
Revenue Recognition
The Company recognizes revenue at the date of shipment.
Earnings Per Share
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding during each period along with the
dilutive effect of outstanding stock options. On April 22, 1994, April 25,
1995, and October 24, 1996, the Company declared 2-for-1 stock splits
payable in the form of a 100 percent stock dividend. All references to the
number of common shares and per share amounts have been retroactively
restated to give effect to the stock dividends.
Foreign Currency Translation
The financial statements of the Company's subsidiaries are generally
measured using the local currency as the functional currency. Accordingly,
the effect of translating a subsidiary's financial statements into U.S.
dollars is recorded as a separate component of stockholders' equity.
Foreign Exchange
Gains and losses from changes in exchange rates are recognized in "Other
Income (Expense)". Net losses of $273,000, $302,000 and $1,555,000 were
recorded in 1996, 1995 and 1994, respectively.
Foreign Exchange Contracts
The Company enters into foreign exchange contracts as a hedge against
net foreign accounts receivable and payable. Market value gains and
losses on the contracts are recognized and are combined with offsetting
foreign exchange gains or losses on those accounts.
Note B: Investments
Available-for-sale marketable securities are accounted for at market with
the unrealized gain or loss net of deferred income taxes shown as a
separate component of stockholders' equity. At December 27, 1996, and
December 29, 1995, they consisted of the following:
Amortized Unrealized Market
(In thousands) Cost Gain (Loss) Value
1996 ------- ------- -------
State and municipal securities $7,345 ($25) $7,320
Preferred and common stocks 18,907 41,797 60,704
U.S. government and corporate
debt obligations 36,215 (126) 36,089
Foreign government debt obligations 32,389 (81) 32,308
------- ------- -------
$94,856 $41,565 $136,421
======= ======= =======
Amortized Unrealized Market
Cost Gain (Loss) Value
------- ------- -------
1995
State and municipal securities $39,938 $151 $40,089
Preferred and common stocks 12,423 (30) 12,393
U.S. government and corporate
debt obligations 16,022 (53) 15,969
------- ------- -------
$68,383 $68 $68,451
======= ======= =======
Held-to-maturity securities are carried at their amortized cost. During
1996, all such investments had matured. At December 29, 1995, the
balance of $1,300,000, consisting entirely of U.S. government and
corporate debt obligations, was included in "Investments in Marketable
Securities".
The Company has an investment in a company that had an initial public
offering (IPO) during 1996. The Company has marked this investment to
market subject to the constraints of the security sale limitations of the
IPO. Under these constraints, only those shares that can be traded within
the next year are included in "Investment in Marketable Securities" while
the remaining shares are included in "Other Assets" at their historical
cost.
During 1996, the Company committed to make a $8,500,000 contribution to the
Tellabs Foundation. The contribution will consist of stock from the
aforementioned investment. Investments in marketable securities have been
reduced accordingly.
In the ordinary course of managing its assets and liabilities, the Company
uses financial instruments, which are not reflected in the financial
statements, to reduce or eliminate its exposure to foreign exchange risks.
Foreign currency risk is managed through forward exchange contracts.
Note B: Investments (Continued)
The Company had forward exchange contracts, generally having maturities of
less than 120 days, in the amount of $57,409,000 and $41,914,000 at
December 27, 1996, and December 29, 1995, respectively. These contracts
are primarily denominated in Finnish markka, Irish punts and Canadian
dollars.
Note C: Long-Term Debt
The long-term debt of $2,850,000 comprises industrial revenue bonds that
were issued on December 20, 1991, with the principal payable in October
2014. Interest is payable quarterly based on a variable interest rate set
weekly based on market conditions for similar instruments. The effective
rates for 1996, 1995 and 1994 were 3.51 percent, 3.94 percent and 2.88
percent, respectively. The debt is unsecured. The provisions of the loan
agreement contain restrictive covenants, including a minimum net worth and
debt-to-equity ratio.
Note D: Stock Options
At December 27, 1996, the Company had seven stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and its
related interpretations in accounting for its plans. 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 of FASB Statement 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
Year Ended Year Ended
(In Thousands, Except Per-Share Data) 12/27/96 12/29/95
------- -------
Net Earnings As reported $117,965 $115,606
Pro forma $113,315 $114,691
Earnings per share As reported $0.64 $0.63
Pro forma $0.61 $0.63
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield
of zero percent for both years; expected volatility of 51.2 percent and
52.4 percent; risk-free interest rates of 5.26 percent to 6.65 percent and
5.25 to 7.88 percent; and expected lives of 2.53 years to 5.53 years and
2.6 years to 5.6 years.
The Company's 1981 Incentive Stock Option Plan is a tax-qualified plan that
provided for 4,320,000 shares of common stock to be reserved for options
issued under the plan. No grants have been made under the 1981 Plan since
its expiration on November 24, 1991. At December 29, 1995, all shares
that had been granted under the 1981 Plan had been exercised or cancelled.
Note D: Stock Options (continued)
The Company's 1984 Incentive Stock Option Plan is a tax-qualified plan that
provides for 4,800,000 shares of common stock to be reserved for options
that may be issued under the plan. The plan also provides that the option
price shall be the market value of the shares as of the date of grant,
except for options granted to holders of 10 percent or more of the
outstanding shares, in which case the option price shall be 110 percent of
the market value of the shares as of the date of grant.
The Company's 1986 Non-Qualified Stock Option Plan provides for 12,000,000
shares of common stock to be reserved for options that may be issued under
the plan. The plan provides that the option price shall be the market
value of the shares as of the date of grant.
The Company's 1987 Stock Option Plan for Non-Employee Corporate Directors
provides for the non-discretionary grant of options to non-employee
directors of the Company to purchase a combined maximum of 1,200,000
shares of common stock of the Company at a per-share price not less than
the market value per share of the common stock on the date of grant. The
plan provides that each non-employee director, on the date such person
becomes a non-employee director, will be granted options to purchase 10,000
shares of common stock and, provided such person is still serving as a
non-employee director, will automatically be granted options to purchase
6,000 additional shares of common stock each year thereafter on the
anniversary of the last day of the month in which the initial options were
granted. Options granted under the 1987 plan expire five years from the
grant date.
The Company's 1989 Stock Option Plan provides for 12,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
12,000,000 shares and up to 12,000,000 stock appreciation rights (SARs).
The SARs may be granted in conjunction with, or independently of, the
options under the plan. The plan provides that the option price and the
SAR price shall be the market value of the Company's shares as of the date
of grant. At December 27, 1996, 1,524,000 SARs with grant prices ranging
from $0.75 to $1.08 and 5-year terms and 786,220 SARs with a grant price
of $1.58 and $28.63 and 10-year terms had been granted. At that date, a
total of 2,094,000 SARs had been exercised and 15,400 had been cancelled,
leaving 200,820 outstanding.
The Company's 1991 Stock Option Plan provides for 6,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
6,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant.
The Company's 1994 Stock Option Plan provides for 8,000,000 shares of
common stock to be reserved for options under the plan. The plan allows
grants to employees of incentive or non-qualified options for up to
8,000,000 shares. The plan provides that the option price shall be the
market value of the Company's shares as of the date of grant.
In July 1996, the Company began a Global Option Program under which all
full-time employees below the director level as of July 8, 1996, were
granted non-qualified options or SARs to purchase 400 shares plus 20 shares
for each year of service. The grants were dated July 22, 1996, with a
price of $28.63. The options were granted from the 1994 Plan and the SARs
from the 1989 Plan.
Note D: Stock Options (continued)
Unless the option agreements provide otherwise, options or SARs granted
under the 1981, 1984, 1986, 1989, 1991, and 1994 plans become exercisable
on a cumulative basis at a rate of 25 percent on each of the second through
fifth anniversaries of the grant date. Unless the option agreements
provide otherwise, options under the 1981 and 1986 plans terminate at the
end of 5 years after the grant while options or SARs granted under the
1984, 1989, 1991, and 1994 plans terminate at the end of 10 years after the
grant.
A summary of the status of the Company's seven option plans as of
December 27, 1996, December 29, 1995, and December 30, 1994, and changes
during the years ending on these dates is presented below:
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------
Outstanding -
beginning of year 10,331,146 $4.53 12,745,348 $3.04 12,948,432 $2.26
Granted 3,266,420 28.61 889,000 16.94 2,576,404 6.77
Exercised (2,053,399) 3.18 (3,013,066) 1.92 (2,616,952) 1.42
Cancelled (258,420) 11.19 (290,136) 4.82 (162,536) 2.98
Outstanding - ---------- ---------- ----------
end of year 11,285,747 $11.59 10,331,146 $4.53 12,745,348 $3.04
========== ========== ==========
Exercisable at end of year 5,878,597 5,719,896 5,964,432
Available for grant 4,078,436 7,086,436 7,685,296
Weighted average fair
value of options
granted during the year $13.22 $7.84 N/A
Options Outstanding and Exercisable as of December 27, 1996, by Price Range:
Outstanding Exercisable
--------------------------------- ----------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Range of Contractual Exercise Exercise
Exercise Prices: Shares Life Price Shares Price
$0.77 - $1.53 3,821,512 4.52 $1.35 3,821,512 $1.35
$1.54 - $6.59 3,339,135 6.92 $5.68 1,771,735 $5.41
$6.84 - $27.63 1,004,100 7.76 $16.86 280,350 $16.82
$28.63 - $28.63 3,041,000 9.44 $28.63 5,000 $28.63
$29.88 - $39.50 80,000 8.70 $33.31 --- ---
----------- ---------
$0.77 - $39.50 11,285,747 6.87 $11.59 5,878,597 $3.33
=========== =========
Note E: Employee Benefit and Retirement Plans
The Company maintains a defined contribution 401(k) retirement plan for the
benefit of eligible employees. Under the plan, a participant may elect to
defer a portion of annual compensation. Matching contributions equal to
the first 3 percent of annual compensation were made by the Company for
all eligible participants. The Company may contribute additional amounts
at the discretion of the Board of Directors. Company contributions to the
plan were $6,035,000, $4,707,000, and $3,480,000 in 1996, 1995 and 1994,
respectively. Contributions to the plan are immediately vested in plan
participants' accounts.
The Company maintains a deferred compensation plan that permits officers
and certain management employees to defer portions of their compensation.
Unless the plan is amended by the Company, the deferred amounts earn an
annual interest rate of 12 percent during the term of the plan. The
liabilities for the deferred salaries plus interest are included in "Other
Long-Term Liabilities".
The Company maintains money purchase and profit sharing plans for the
benefit of eligible employees. Under the plans, 4 percent of eligible
annual compensation was contributed by the Company for each participant. No
part of the contribution is vested until after a service period of five
years, at which time the participant is fully vested. Company
contributions to the plan were $4,056,000, $3,451,000, and $3,134,000 for
1996, 1995 and 1994, respectively.
Note F: Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1996 and 1995 is as follows:
(In thousands, except per-share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
1996
Net sales $172,256 $189,473 $234,340 $272,906 $868,975
Gross profit 97,774 112,315 139,529 169,625 519,243
Net earnings (loss) 31,127 (18,678) 46,117 59,399 117,965
Earnings (loss) per share $0.17 ($0.10) $0.25 $0.32 $0.64
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
1995
Net sales $142,212 $159,939 $151,754 $181,324 $635,229
Gross profit 79,269 90,956 84,415 109,195 363,835
Net earnings 22,941 27,118 27,441 38,106 115,606
Earnings per share $0.13 $0.15 $0.15 $0.21 $0.63 *
<FN>
Per-share amounts are restated to reflect stock splits in 1996 and 1995.
* The earnings-per-share computation for the year is a separate, annual
calculation. Accordingly, the sum of the quarterly earnings-per-share
amounts do not necessarily equal the earnings per share for the year.
Note G: Income Taxes
(In thousands) Year Ended Year Ended Year Ended
12/27/96 12/29/95 12/30/94
Components of the Company's -------- -------- --------
earnings before income taxes are as follows:
Domestic source $70,835 $97,372 $50,962
Foreign source 104,447 65,453 46,862
------- ------- -------
Total $175,282 $162,825 $97,824
======= ======= =======
The provisions for income tax expense (benefit) consists of the following:
Current:
Federal $47,371 $24,111 $16,689
State 9,751 2,220 1312
Foreign 23,681 11,674 9,191
------ ------ ------
80,803 38,005 27,192
Deferred:
Federal (23,615) 7,435 (906)
Reduction of valuation allowance ---- ---- (1,544)
Foreign and State 129 1,779 693
------ ------ ------
(23,486) 9,214 (1,757)
------ ------ ------
Total $57,317 $47,219 $25,435
====== ====== ======
Deferred tax assets (liabilities) for 1996
and 1995 are comprised of the following:
Ending Ending
(In thousands) Balance Balance
12/27/96 12/29/95
Deferred tax assets -------- --------
Inventory reserves $3,050 $2,710
Deferred employee benefit expenses 4,294 2,933
Deferred compensation plan 2,563 1,607
Accrued liabilities 3,135 2,502
NOL and research and development
credit carryforwards 21,604 457
Other 476 61
------ ------
Gross deferred tax assets 35,122 10,270
Deferred tax liabilities
Depreciation (13,912) (12,625)
Unrealized gain on marketable securities (20,016) (20)
Other untaxed reserves - Martis Oy 246 (614)
Amortizable intangibles (4,290) ---
Other (840) (312)
------ ------
Gross deferred tax liabilities (38,812) (13,571)
------ ------
Valuation allowance (13,300) ---
------ ------
Net Deferred Tax (Liability) ($16,990) ($3,301)
====== ======
Note G: Income Taxes (continued)
Year Ended Year Ended Year Ended
12/27/96 12/29/95 12/30/94
--------- --------- ---------
Federal income taxes at the statutory rate are reconciled with the
Company's income tax provision as follows:
Statutory U.S. income tax rate 35.0% 35.0% 35.0%
Foreign income taxes (4.6) (5.1) (7.2)
Tax benefits associated with merger of
Finland subsidiaries (2.0) (1.7) --
Charitable contribution (1.7) -- --
Foreign tax credit and research and
development credit (1.2) (0.6) (2.9)
Benefits attributable to foreign
sales corporation (0.3) (0.3) (0.9)
State income tax, net of federal benefits 3.6 1 0.9
Acquired in-process research and
development charge 3.2 -- --
Reduction of valuation allowance -- --- (1.6)
Other - net 0.7 0.7 2.7
---- ---- ----
Effective Income Tax Rate 32.7% 29.0% 26.0%
==== ==== ====
Note G: Income Taxes (continued)
The net deferred income tax liability increased to $16,990,000 at
December 27, 1996, from $3,301,000 at December 29, 1995. The increase of
the deferred tax balance is attributable to deferred taxes provided on the
mark-to-market adjustment on investments in accordance with FASB 115 and
the intangibles associated with the acquisition of the Wireless Systems
Division offset by a net operating loss also attributable to the acquisition.
The Company recorded deferred tax assets for research and development
credits and net operating loss carryovers associated with the acquisition
in the amount of approximately $21,100,000. A valuation allowance is
provided when it is more likely than not that some portion of the
deferred tax asset will not be realized. The Company has established a
valuation allowance of $13,300,000 associated with the net operating
losses and research and credit carryovers of the acquisition. The net
operating loss carryforwards and research and development tax credits
will expire at various dates through the year 2010. If the Company
utilizes these carryforwards, they will be recognized as a reduction of
goodwill.
Deferred U.S. income taxes are not provided on the undistributed
cumulative earnings of foreign subsidiaries because such earnings are
considered to be permanently invested in those operations. The cumulative
earnings of foreign subsidiaries were approximately $173,549,000 at
December 27, 1996. The amount of unrecognized deferred tax liability for
undistributed cumulative earnings of foreign subsidiaries at December 27,
1996, was approximately $28,893,000.
Note H: Major Customers
No single customer accounted for more than 10 percent of consolidated net
sales in 1996 and 1995. A single customer accounted for approximately
15.3 percent of consolidated net sales in 1994.
Note I: Business Segment and Geographical Information
The Company operates in one business segment. Products include voice and
data communications and networking equipment used in public and private
communication networks worldwide.
The Company operates in two principal geographic areas: North America and
Europe. A summary of the Company's operations by area is presented
below.
Adjustments
(In thousands) North and Consolidated
America Europe Elimination Total
1996 ------- ------- ------- -------
Net Sales
Unaffiliated customers $628,679 $240,296 --- $868,975
Intergeographic 2,641 8,504 ($11,145) ---
------- ------- ------- -------
Total $631,320 $248,800 ($11,145) $868,975
Operating profit $67,008 $101,935 --- $168,943
Identifiable assets $491,298 $252,525 --- $743,823
1995
Net Sales
Unaffiliated customers $457,161 $178,068 --- $635,229
Intergeographic 2,751 7,156 ($9,907) ---
------- ------- ------- -------
Total $459,912 $185,224 ($9,907) $635,229
Operating profit $87,573 $69,080 --- $156,653
Identifiable assets $371,729 $180,322 --- $552,051
1994
Net Sales
Unaffiliated customers $377,554 $116,599 --- $494,153
Intergeographic 5,796 5,034 ($10,830) ---
------- ------- ------- -------
Total $383,350 $121,633 ($10,830) $494,153
Operating profit $53,277 $46,405 --- $99,682
Identifiable assets $249,224 $140,843 --- $390,067
Operating profit is net sales less all related costs of sales, marketing,
research and development, general and administrative and goodwill
amortization, excluding interest and income taxes. Identifiable assets
are those assets considered as necessary for the ongoing activities and
operations of each geographic area.
Intergeographic sales are accounted for as sales and as cost of sales
between the domestic parent and its subsidiaries. The sales price or cost
is dependent upon the product, consists of a discount from list price and
is sufficient to recover cost plus an appropriate markup for profit.
North American operating revenues include export sales to unaffiliated
customers of approximately $23,722,000, $33,105,000, and $31,018,000 in
1996, 1995, and 1994, respectively.
Note J: Commitments
The Company and its Subsidiaries have a number of operating lease agreements
primarily involving office space, buildings and office equipment. These
leases are non-cancellable and expire on various dates through 2009.
As of December 27, 1996, future minimum lease commitments under
non-cancellable operating leases are as follows:
(In thousands)
1997 $6,998
1998 5,397
1999 3,824
2000 1,929
2001 1,548
2002 and thereafter 2,626
------
Total Minimum Lease Payments $22,322
======
Rental expense for the years ended December 27, 1996, December 29, 1995,
and December 30, 1994, was approximately $5,734,000, $3,420,000 and
$2,782,000, respectively.
Note K: Business Acquisitions
In April 1996, the Company acquired all of the outstanding shares of
Steinbrecher Corporation for approximately $77,000,000, financed with bank
loans and cash. This acquisition has been accounted for through the use of
the purchase method of accounting, and, accordingly, the accompanying
financial statements include the results of its operations since the
acquisition date. Goodwill arising from this acquisition of approximately
$6,865,000 is being amortized over 10 years.
The following table summarizes on an unaudited pro forma basis the combined
results of operations of the Company as though the above acquisition were
made at December 31, 1994. The pro forma amounts give effect to
appropriate adjustments to amortize goodwill, intangible assets and
acquisition costs and to reflect the reduction of interest income
resulting from the use of cash for the acquisition; the increase in
interest expense on the acquired bank debt; and, the corresponding income
tax effects. In accordance with the Company's practice, in-process
research and development as well as its deferred income tax effects (a net
amount of approximately $54 million) was written of as reflected in the
1995 pro forma results presented below.
Year Ended Year Ended
(In Thousands, Except Per-Share Data) 12/27/96 12/29/95
Net Sales $869,171 $644,730
Net Earnings $165,713 $51,703
Earnings per common share $0.90 $0.28
The pro forma financial information presented above does not purport to be
indicative of either the results that would have occurred had the
acquisition taken place at the beginning of the period presented or of
future results of operation of the combined businesses.
In June 1996, the Company through the Tellabs Transport Group acquired
TRANSYS Network's SONET product line for approximately $17,000,000 in cash.
This acquisition has been accounted for through the use of the purchase
method of accounting, and, accordingly, the accompanying financial
statements include the results of its operations since the acquisition
date. Goodwill resulting from this acquisition, in the amount of
$15,799,000, is being amortized over 10 years. This acquisition did not
have a material impact on the Company's financial results.
Subsequent to year end, the Company acquired, for $6,000,000 in cash,
certain wavelength-division multiplexing and optical networking
technology, including the rights to or ownership of several patents and
patent applications, from IBM's Thomas J. Watson Research Center. Under
the terms of the agreement, the Research Center's optical network
development team joined the Company.
In conjunction with each of the above acquisitions, a stock bonus plan was
established under which certain acquired employees are entitled to a
specific number of shares of the Company's stock over a two-year vesting
period.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
1996 vs. 1995
Sales during 1996 reached an all-time high as they climbed to
$868,975,000, surpassing 1995's previous record sales of $635,229,000. The
1996 sales growth of 36.8 percent was driven by increased sales on both the
domestic and international fronts. Domestic sales grew by 46 percent,
primarily as the result of the continuing strong sales of the TITAN (a
registered trademark of Tellabs Operations, Inc.) 5500 digital
cross-connect system. International sales, which grew by 21 percent, were
driven by the Martis DXX (a trademark of Martis Oy, a subsidiary of
Tellabs, Inc.) managed access and transport system.
Digital cross-connect sales for 1996 of $479,174,000 represent an
increase of $179,041,000 over those of the previous year. Sales of the
Titan 5500 digital cross-connect system grew by 69 percent and continue to
drive this product group primarily through higher sales to existing local
exchange customers and the addition of a new major interexchange carrier.
These service providers seek to enhance their competitive advantage by
providing more robust networks to meet the needs of business customers, the
increasing demands of Internet traffic, and the desire for enhanced data
and video services. The digital cross-connect group accounted for
approximately 57 percent of total product sales as it continues to lead all
product groups.
The managed digital networks area exceeded last year's sales by almost 33
percent, reaching $231,602,000. The continued expansion of DXX system
sales outside the Scandinavian market in response to growth in
infrastructure helped drive its $70,979,000 increase in sales during 1996,
reaching a new annual record of $201,198,000. As was expected, the
remaining products in this group, such as the CROSSNET (a registered
trademark of Tellabs Operations, Inc.) data multiplexer and 33X packet
switch products, experienced decreases in their sales over those of the
previous year.
Sales of network access products, which include analog voice-frequency
products, digital echo cancellers and digital transcoders, fell short of
the previous year's sales for the first time since 1991, although sales of
digital echo cancellors reached an all-time high. This product group
continues to decrease as a percent of total product sales as the Company
concentrates its efforts on providing larger value-added system solutions
to its customers.
Net earnings for 1996 were a record $117,965,000, up 2.0 percent from 1995
earnings of $115,606,000. This slight increase in earnings was the net
effect of the significant increase in sales during 1996 being offset by
the one-time, net-of-tax charge of $54,100,000 for acquired in-process
research and development related to the acquisition of the Wireless
Systems Division (see Note K) and increased operating expenses and income
taxes. Earnings per share were 64 cents in 1996, compared with 63 cents in
1995. (The earnings-per-share amounts for both years are adjusted to
reflect the effect of the 2-for-1 stock splits that occurred in November
1996 and May 1995.)
Sales during the fourth quarter of 1996 were a record $272,906,000,
consistent with the Company's typically strong fourth-quarter sales
pattern. Sales of the TITAN 5500 system and DXX system led the 50.5
percent sales increase over the 1995 fourth quarter. Net earnings for the
quarter were $59,399,000, a 55.9 percent increase over 1995 earnings of
$38,106,000. Earnings per share were 32 cents for the fourth quarter of
1996 and 21 cents for the fourth quarter of 1995. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
stock splits that occurred in November 1996 and May 1995.)
The gross profit margin for 1996 improved again to a new record level of
59.8 percent versus the previous record 57.3 percent achieved in 1995.
This improvement reflects both the sales of higher-margin products,
including software sales and hardware expansions, and the benefits provided
by the Company's highly productive and efficient manufacturing operations.
It will once again be a challenge to sustain the gross profit margin at
this record-setting level.
Excluding the one-time charge to earnings for the acquired in-process
research and development, operating expenses increased 33.0 percent
during 1996. During the year, new items such as the expenses of the
Wireless Systems Division and the Transport Group and the cost of the
enterprise-wide business system conversion were included in operating
expenses. Headcount and related expenses grew to support and service
international and domestic products while additional expenses related to
employee compensation programs were incurred. As a percentage of sales,
total 1996 operating expenses (excluding the one-time charge) decreased to
31.7 percent as compared to 32.6 percent in 1995 while each expense
category as a percentage of sales decreased from the prior year as has
occurred since 1993.
Interest income increased to $7,371,000 in 1996, a 25.9 percent increase,
compared with $5,855,000 in 1995. This increase was due to higher
average cash balances throughout the year as well as a shift in
investment holdings from federally tax-free municipal bonds to fully
taxable investments. Interest expense for 1996 of $1,173,000 increased
by $1,049,000 from 1995 expense of $124,000. The expense incurred in 1996
was primarily related to the bank debt used to partially finance the
Wireless Systems Division acquisition. The debt was entirely repaid by the
fourth quarter of 1996.
The effective tax rate was approximately 32.7 percent for 1996 and 29
percent for 1995. The increase in the effective tax rate for 1996 is
primarily due to the tax effects of the in-process research and development
one-time charge taken in conjunction with the Wireless Systems Division
acquisition and the increase in domestic taxable income being partially
offset by the tax benefits received as a result of the $8,500,000
charitable contribution made to the Tellabs Foundation. The 1996 effective
rate reflects adjustments from the federal statutory rate attributable to
the benefits of foreign tax rates, the merger of Finnish subsidiaries, the
charitable contribution, and tax credits offset by state taxes and the
one-time charge.
1995 vs. 1994
Sales during 1995 hit a then-record high as they exceeded the
half-billion-dollar mark to reach $635,229,000 versus $494,153,000 in 1994.
The 1995 sales growth of 28.5 percent was representative of both the
continued strength and acceptance in the domestic marketplace of the TITAN
5500 digital cross-connect system and the growth of the Company's leading
international product, the DXX managed access and transport system. Each
of these products addresses a different geographic marketplace, which
provided for growth of 24 percent domestically and 38 percent
internationally. Additionally, all of the major product groups posted
gains over 1994 sales, as was the case in the prior two years.
Digital cross-connect sales for 1995 reached the $300,000,000 mark, with an
increase of almost $81,000,000 over those of the previous year. Sales of
the Titan 5500 digital cross-connect system grew by 46 percent and
continued to drive this product group. By the end of 1995, the Titan 5500
system was standard in all but one of the major local exchange carriers and
in most of the interexchange carriers in North America. The digital
cross-connect group accounted for approximately 49 percent of total product
sales as it continued to lead all product groups.
The managed digital networks area exceeded 1994's sales by 34 percent in
1995. The acceptance of the DXX system in the international marketplace
and agreements with Ericsson helped drive its $53,000,000 increase in sales
during 1995. As was expected, the remaining products in this group, such
as the CROSSNET data multiplexer and 33X packet switch products,
experienced decreases in their sales over those of the previous year.
Sales of network access products, which include analog voice-frequency
products, digital echo cancellers and digital transcoders, exceeded the
previous year's sales in each of the last five years, even though they
continued to decrease as a percent of total product sales. Sales of the
digital products within this group continued to grow as the products are
incorporated into cellular networks. However, sales of the analog
products continued to decline as customers migrate to digital technology.
Net earnings for 1995 were $115,606,000, up 59.7 percent from 1994
earnings of $72,389,000. Earnings per share were 63 cents in 1995,
compared with 40 cents in 1994. (The earnings-per-share amounts for both
years have been adjusted to reflect the effect of the 2-for-1 stock
splits that occurred in November 1996, May 1995 and May 1994.) This
significant increase in earnings was primarily due to the increase in sales
during 1995 and a corresponding 34.7 percent increase in gross profit
dollars. Although operating expenses exceeded 1994's total, they continued
to decrease as a percentage of sales.
Sales during the fourth quarter of 1995 were a then-record $181,324,000,
consistent with the Company's typically strong fourth-quarter sales
pattern. Sales of the TITAN 5500 system and DXX system led the 22
percent sales increase over the 1994 fourth quarter. Net earnings for the
quarter were $38,106,000, a 46.1 percent increase over 1994 earnings of
$26,075,000. Earnings per share were 21 cents for the fourth quarter of
1995 and 14 cents for the fourth quarter of 1994. (The earnings-per-share
amounts for both years are adjusted to reflect the effect of the 2-for-1
stock splits that occurred in November 1996 and May 1995.)
The gross profit margin for 1995 improved significantly to a then-record
level of 57.3 percent versus 54.6 percent in 1994. This improvement
reflects both the sales of higher-margin products, including a small amount
of higher-margin software sales, and the continuation of highly productive
and efficient manufacturing operations.
Total operating expenses increased 21.6 percent during 1995, an increase
that was evenly divided between marketing and research and development.
Marketing expenses increased 27.5 percent due to headcount-related
expenses, international marketing activities, and customer support and
service expenses. Research and development expenses increased 26.4 percent
due to increased headcount-related expenses in support of planned
enhancements to the Company's domestic and international product base. As
a percentage of sales, total 1995 operating expenses were 32.6 percent
compared to 34.5 percent in 1994. Each category as a percentage of sales
decreased from 1994.
Interest income increased to $5,855,000 in 1995, an 83.8 percent increase
compared with $3,185,000 in 1994. This was the result of
interest-bearing investments more than doubling during 1995. Interest
expense for 1995 of $124,000 decreased by $1,649,000 from 1994 expense of
$1,773,000. The expense incurred in 1994 was primarily related to the
bank debt used to finance the acquisition of Martis Oy. The debt was
entirely repaid by the fourth quarter of 1994.
Other income in 1995 was $441,000, of which foreign exchange losses of
$302,000 were the result of the strength of the Finnish markka and the
Irish punt versus the U.S. dollar. The significantly higher foreign
exchange losses of $1,555,000 in 1994 were primarily the result of the
strength of the Finnish markka versus the Swedish krona, U.S. dollar and
other European currencies to which the Company has exposure.
Other income also includes the write-down of the Company's investment in
Advanced Access Labs, a joint venture between Advanced Fibre
Communications, Inc. (AFC) and the Company by which the two companies
combined their efforts in the local loop transport area to develop the
CABLESPAN (a registered trademark of Tellabs Operations, Inc.) 2300 system.
The investment was written down to reflect the Company's share of the
losses of the joint venture in accordance with the equity method of
accounting. The equity in cumulative losses of the joint venture increased
to $2,000,000 by the end of 1995 from $1,012,000 at the end of 1994.
The effective tax rate was approximately 29 percent for 1995 and 26 percent
for 1994. The increase in the effective tax rate for 1995 was primarily
due to the reduction of research and development tax credits and reduced
foreign tax rate benefits. The 1995 effective rate reflected adjustments
from the federal statutory rate attributable to foreign tax rate benefits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has never paid a cash dividend, and current policy is to retain
earnings to provide funds for the operation and expansion of the business.
The Company does not anticipate paying cash dividends in the foreseeable
future.
Net working capital at December 27, 1996, was $343,840,000, compared with
working capital of $267,806,000 at December 29, 1995. The Company's
current ratio at December 27, 1996 was 3.6 to 1. The increase in net
working capital is primarily the result of the Company's record earnings
being offset by the use of cash and cash equivalents to partially finance
the Company's second-quarter acquisitions. Management believes this level
of working capital will be adequate to meet the Company's liquidity needs
related to normal operations both currently and in the foreseeable future.
Sufficient resources exist to support the Company's growth either through
currently available cash, through cash generated from future operations, or
through additional short-term or long-term financing.
Operating activities provided the Company with a significant amount of cash
due to net earnings of $117,965,000. Net trade accounts receivable
increased by $40,363,000 to a year-end balance of $167,928,000, due
primarily to the record-level sales volume in the fourth quarter of 1996.
Total inventory levels increased by $10,804,000 from 1995 levels due to
1997 sales forecast requirements for digital cross-connect systems and
the inventory purchased in the Wireless Systems Division acquisition. The
inventory turnover ratio increased to 4.8 times from 4.5 times in 1995.
Goodwill increased by $19,827,000 principally as a result of the Transport
Group and Wireless System Division acquisitions. Other assets increased by
$17,113,000 primarily due to $18,216,000 worth of developed research and
development acquired in the Wireless Systems Division acquisition. Accrued
liabilities increased from the 1995 balance by $19,194,000 primarily as a
result of the year-end obligations related to employee compensation
programs and the liabilities assumed as part of the acquisitions. The
increase in the Company's liability for deferred income taxes of $9,881,000
reflects the future obligations related to the unrealized gains on
marketable securities as of year end.
The Company's holdings in marketable securities increased by $66,670,000.
Approximately $43,648,000 is due to the mark-to-market adjustment of an
investment in a certain company that had an initial public offering during
1996. The Company also invested approximately $64,831,000 during 1996 in
property, plant and equipment (exclusive of acquisitions) as additions were
made primarily to increase manufacturing capacity and expand research and
development efforts worldwide.
The Company utilized $40,000,000 of bank debt to finance the acquisition
of the Wireless Systems Division. This debt was entirely repaid by the end
of year. Finally, an additional $22,480,000 of cash was provided to the
Company through the exercise of stock options under the Company's stock
option plans.
OUTLOOK
Driven by sales growth in both the international and domestic markets,
sales for 1997 are expected to reach $1 billion for the first time in the
Company's history. Domestic growth continues to be dependent upon the
continued strength of TITAN 5500 system sales. International growth will
be primarily driven by sales of the DXX system. In addition, late 1997
should see the introduction of several new products related to the 1996
acquisitions. At December 27, 1996, backlog increased to approximately
$118,000,000 from $84,000,000 at the end of the prior year. All of the
1996 backlog is expected to be shipped in 1997. The Company considers
backlog to be an indicator, but not the sole predictor, of future sales.
During 1997, the Company will continue to focus on providing the
resources to support revenue growth in the most cost-effective method
possible. To that end, total operating expenses for 1997 are expected to
average approximately 31 percent of planned revenues. Research and
development expenses are expected to maintain an average of approximately
13 percent of sales, consistent with 1996 and 1995 percentages. Marketing
and general and administrative expenses are expected to decrease by
almost 2 percent to approximately 17 percent of sales. Management believes
these levels can be attained while supporting the sales and product growth
slated for 1997 and beyond as the Company continues to invest in its
future.
The 1997 capital expenditure plan totals approximately $96,000,000. It is
anticipated that 1997 working capital requirements and capital expenditures
will be met with funds currently on hand and funds generated by future
earnings. Earnings for 1997 are expected to be taxed at a 34 percent rate.
The Company believes that the formation of business relationships with
compatible organizations is important to future growth in that it allows
the Company the opportunity to share in the development of new markets,
products and technologies. It is for this reason that the Company will
continue to pursue the establishment of such relationships.
Except for historical information, the matters discussed or incorporated by
reference in this report are forward-looking statements that involve risks
and uncertainties including, but not limited to, economic conditions,
product demand and industry capacity, competitive products and pricing,
manufacturing efficiencies, research and new product development,
protection of intellectual property, patents and technology, ability to
attract and retain highly qualified personnel, availability of components
and critical manufacturing equipment, facility construction and startups,
the regulatory and trade environment, and other factors indicated from time
to time in the Company's filings with the Securities and Exchange
Commission.