NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
The following description of the Tellabs 401(k) Plan (the Plan) provides only general information. Tellabs Operations, Inc., a wholly owned subsidiary of Tellabs, Inc., sponsors the Plan. Participants
should refer to the Plan document for a more complete description of the Plans provisions.
The Plan
is a defined-contribution plan covering all United States employees of Tellabs Operations, Inc. and adopting affiliates (the Company or Employer) who are age 18 or older and are otherwise eligible under the Plan. Effective July 1, 2003,
eligible employees of the Company can participate in the Plan as soon as administratively possible after completing one hour of service. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Plan
administrator maintains all necessary records and determines participant eligibility. Plan assets are held in a trust and are managed by a Trustee appointed by the Company.
The Plan participated in the Tellabs Advantage Program trust (the Master Trust) along with the Tellabs Retirement Plan until April 3, 2006. Effective April 3, 2006, the Master Trust was
dissolved and the Tellabs 401(k) Plan Trust and the Tellabs Retirement Plan Trust were established as successor trusts to the Master Trust. Effective April 3, 2006, the name of the Plan was changed from the Tellabs Profit Sharing and Savings
Plan to the Tellabs 401(k) Plan. Effective April 3, 2006, all Money Purchase Pension Plan assets of the Retirement Plan were transferred to and made a part of the Tellabs 401(k) Plan.
Participants may elect to contribute, on a pre-tax basis, between 1% and 50% of their eligible annual compensation, subject to certain
Internal Revenue Service limitations. For 2012 and 2011, the Company contributed to the Plan an amount equal to each eligible participants before-tax contribution, limited to 4% of the participants eligible compensation for the year (the
Matching Contribution). Participants can direct their pre-tax and Matching Contributions into any of the investment funds.
5
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
1.
|
Description of Plan (Continued)
:
|
|
b.
|
Contributions (Continued)
|
Effective July 1, 2003, a Discretionary Company Contribution (defined below) was
instituted. This contribution is declared by the Board of Directors and is funded entirely by the Company (Discretionary Company Contribution). The amount of the contribution is based on a percent of eligible pay for a specific period of time as
declared by the Board of Directors. All regular active employees employed on the last day of the declared period of time are immediately eligible to receive this contribution and the investment of these funds follows the participants elections
on file for the Program. This contribution is 100% vested. In 2012 and 2011, the Board of Directors declared a 2% Discretionary Company Contribution for each year.
|
c.
|
Participants Accounts
|
The Plan administrator maintains a recordkeeping account in the name of each participant, which reflects the participants share of the Employer contributions (Matching Contributions and
Discretionary Company Contributions), participant contributions, and the participants share of earnings or losses of the respective investment funds.
Participants are immediately vested in their contributions, Matching Contributions and Discretionary Company Contributions, plus actual
earnings thereon.
Participants may generally borrow from their Plan accounts a minimum of $1,000 (or less if the participant demonstrates financial
hardship) up to a maximum of $50,000, subject to provisions as outlined in the Plan document. Interest rates are commensurate with local prevailing rates, as determined by the Administrative Committee. Loan terms range from 1 to 5 years or up to 15
years for the purchase of a primary residence. The loans are secured by the participants account.
6
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
1.
|
Description of Plan (Continued)
:
|
If the participants vested account balance does not exceed $1,000, the participants vested account balance will be distributed
in a lump-sum payment. Upon termination of service, retirement, disability, or death, participants may receive a lump-sum amount equal to the vested value of their accounts. Participants who have accounts that contain amounts transferred from the
Tellabs Retirement Plan will have such portion of their accounts distributed in an annuity purchased from an insurance company, unless another form of benefit is elected in accordance with the Plan. Benefits are recorded by the Plan when paid.
Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time
and to terminate the Plan subject to the provisions of ERISA. In the event of a termination of the Plan, participants are 100% vested in their accounts; therefore the assets of the Plan will be liquidated and promptly distributed to each participant
or beneficiary.
2.
|
Summary of Significant Accounting Policies
:
|
The financial statements of the Plan have been prepared under the accrual method of accounting and in conformity with accounting
principles generally accepted in the United States of America.
The Plans beneficial interest in the Trust represents the Plans share of the Trusts investments stated at fair value. The shares of securities in registered investment companies are
valued at quoted market prices, which represent the net asset values of shares held by the Trust at year-end. The Tellabs, Inc. common stock is valued at the closing price reported by the NASDAQ Stock Market. The investment contract held in the
Gibraltar Guaranteed Fund is stated at the contract value.
7
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
2.
|
Summary of Significant Accounting Policies (Continued)
:
|
|
b.
|
Investment Valuation (Continued)
|
Management fees and operating expenses for securities in registered investment companies
are deducted from income earned and are not separately reported. Consequently, such expenses are reflected as a reduction of investment return for such investments.
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
|
c.
|
Guaranteed Investment Contracts
|
As described in the
Defined Contribution Pension Plans
topic of the Financial Accounting Standards Board Accounting Standards Codification, investment contracts held by a defined
contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits attributable to fully benefit-responsive investment contracts.
Contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. As required by the topic, the statement of net assets available for benefits presents the fair value of the
investment contracts in Gibraltar Guaranteed Fund as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The statement of changes in net assets available for benefits is prepared on a
contract value basis.
Under the provision of the group annuity contract, participants may ordinarily direct the withdrawals or
transfers of all or a portion of their account balance at contract value. Contract value represents contributions made under the contract, plus earnings, less participant withdrawals and fees. Contract value is also often referred to as Book
Value. Given these provisions, the contract is considered to be benefit responsive. The following table presents the fair value of the investment contract and the adjustment required to report at contract value:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Gibraltar Guaranteed Fund, at fair value
|
|
$
|
89,708,301
|
|
|
$
|
90,477,227
|
|
Adjustment from fair value to contract value
|
|
|
(8,016,597
|
)
|
|
|
(7,831,187
|
)
|
|
|
|
|
|
|
|
|
|
Gibraltar Guaranteed Fund, at contract value
|
|
$
|
81,691,704
|
|
|
$
|
82,646,040
|
|
|
|
|
|
|
|
|
|
|
8
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
2.
|
Summary of Significant Accounting Policies (Continued)
:
|
|
c.
|
Guaranteed Investment Contracts (Continued)
|
Interest is credited on contract balances using a single portfolio rate
approach. Under this method, a single interest crediting rate is applied to all contributions made to the contract regardless of the timing of those contributions. Interest crediting rates are reviewed on a periodic basis for resetting. Interest
crediting rates are determined using an explicit formula specified in Part II of the Gibraltar Guaranteed Fund addendum. The frequency of determining interest crediting rates and the minimum interest crediting rate are also specified in the
addendum.
The average yield information is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2012
|
|
|
December 31,
2011
|
|
Average Earnings Yield
|
|
|
1.52
|
%
|
|
|
1.94
|
%
|
Average Crediting Rate Yield
|
|
|
3.72
|
%
|
|
|
4.13
|
%
|
The average earnings yield is the market value yield to worst of the assets within the underlying
collateral portfolio as of the plan year end. The average crediting rate yield is calculated by dividing the earnings credited to the participants on the last day of the plan year by the end of plan year fair value and then annualizing the result.
This yield differs from the average earnings yield as a result of product construction which utilizes contract value crediting rates that are intended to smooth out and blend in earnings yields over time. Due to calculation methodology and the
impact of cash flows, these yields may differ from the actual crediting rates paid under the contract during the year.
No
events limit the ability of the Plan to transact at contract value so long as the fund addendum remains in force. Except for events which may result in termination for cause, as outlined in the Investment Agreement and the fund addendum, the issuing
company may not cause the contract to be terminated at an amount other than contract value.
|
d.
|
Loans Receivable from Participants
|
Participant loans receivable are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are reclassified as distributions based on the terms of the
Plan document.
9
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
2.
|
Summary of Significant Accounting Policies (Continued)
:
|
Benefit payments to participants are recorded upon distribution. There were no amounts allocated to accounts of participants who elected
to withdraw from the Plan, but not yet been paid at December 31, 2012 and 2011.
|
i)
|
Investment Fees:
The funds offered by the Plan have investment fees associated with each fund which are determined by the fund manager. The expense ratio for
each fund is reflected in the prospectus information available to participants.
|
|
ii)
|
Recordkeeping Fees
: The Company has contracted with Prudential to provide recordkeeping services for the Plan for a fee of 8 basis points (was 10 basis points
prior to July 1, 2012) of the Plan assets (Plan Recordkeeping Fee). Currently, the Plans Recordkeeping Fee is being paid through the 12(b)1 revenue (fee charged by mutual funds for activity in connection with distribution of
funds shares) and other revenue credited back to the Plan by the various funds (Fund Credits). Currently, the Fund Credits are sufficient to cover the Plan Recordkeeping Fee. In the event Fund Credits are not sufficient to cover
Plan Recordkeeping Fees, the Plan allows (1) the Company to pay such fee or (2) the charge to participants for such fee. The Company does not currently anticipate a recordkeeping charge to participants to cover the Plans
Recordkeeping Fee. Fund Credits in excess of the recordkeeping fees are kept in a Plan account for ERISA eligible expenses such as education and communications. In addition to the Fund Credits, the Company negotiated a fixed amount which increases
in accordance with a formula based on Plan assets that Prudential agreed to contribute to the ERISA eligible account. Near the end of the Plan Year, the Plan administrator will evaluate the amount in the ERISA eligible account and determine whether
such funds should be credited to Participant accounts. In addition to the Plan Recordkeeping Fees, participants will be charged a $50.00 loan origination fee for new loans and a $0.033 trading fee for each share of Tellabs, Inc. Common Stock that a
participant buys or sells in the Plan.
|
|
iii)
|
Other Administrative Fees:
Certain expenses including audit fees, investment advisory fees and material costs are charged to the Plan. All other administrative
costs not paid by the Plan are absorbed by the Company.
|
10
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
2.
|
Summary of Significant Accounting Policies (Continued)
:
|
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
|
h.
|
Risks and Uncertainties
|
The Trust that holds the Plans assets invests in various securities including Company stock, equity and fixed income mutual funds, short-term investment funds, and a guaranteed investment contract.
Investment securities are exposed to various risks, such as interest rate, market and credit risk. Due to the level of risk associated with certain investment securities and the level of uncertainty related to changes in the value of investment
securities, it is at least reasonably possible that changes in risks in the near term could materially affect participants account balances and the amounts reported in the Statements of Net Assets Available for Benefits.
|
i.
|
Recent Accounting Pronouncements
|
In May 2011, the FASB issued authoritative guidance amending existing guidance for measuring fair value and for disclosing information about fair value measurements. The FASB indicated that for many of
the requirements it does not intend for the amendments to result in a change to current accounting. Required disclosures are expanded under the new guidance, especially for fair value measurements that are categorized within Level 3 of the fair
value hierarchy, for which quantitative information about the unobservable inputs, the valuation processes used by the entity, and the sensitivity of the measurement to the unobservable inputs will be required. In addition, entities will be required
to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The guidance is effective for periods
beginning after December 15, 2011 and is required to be applied prospectively. As this guidance provided only disclosure requirements, the adoption of this standard did not impact the Plans financial statements.
Subsequent events have been evaluated through June 21, 2013, the date the financial statements were issued.
11
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
Effective April 3, 2006, the Plans investments are held in The Tellabs 401(k) Plan Trust administered by Prudential Bank and
Trust. Participants have the option of investing all or a portion of their accounts, other than their Money Purchase assets, in any of the investment fund options offered by the Plan. Money Purchase assets may be invested in any of the investment
fund options except the Tellabs, Inc. common stock. On a daily basis, participants have the option of changing the allocation of future contributions or transferring all or a portion of their existing account balances among the investment funds,
subject to any trading restrictions imposed by the investment funds.
The following table presents the investments held at
December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Investments at fair value as determined by quoted market price
|
|
|
|
|
|
|
|
|
Registered investment company funds:
|
|
|
|
|
|
|
|
|
Fidelity Contra Fund
|
|
$
|
84,329,658
|
*
|
|
$
|
80,994,914
|
*
|
American Funds Group EuroPacific Growth Fund
|
|
|
59,967,065
|
*
|
|
|
55,779,547
|
*
|
PIMCO Total Return Fund
|
|
|
58,757,892
|
*
|
|
|
51,247,721
|
*
|
Vanguard Windsor II
|
|
|
47,260,402
|
*
|
|
|
45,382,247
|
*
|
Vanguard Institutional Index Fund
|
|
|
35,711,875
|
*
|
|
|
33,481,954
|
*
|
T Rowe Price New Horizons Fund
|
|
|
31,557,078
|
*
|
|
|
27,983,646
|
*
|
Artisan Small Cap Value Fund
|
|
|
28,653,710
|
*
|
|
|
31,062,052
|
*
|
Lazard Emerging Markets Fund
|
|
|
15,074,090
|
|
|
|
14,454,901
|
|
DFA Real Estate Securities
|
|
|
7,354,420
|
|
|
|
5,740,792
|
|
Equity:
|
|
|
|
|
|
|
|
|
Tellabs, Inc. Common Stock
|
|
|
12,200,004
|
|
|
|
14,346,908
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
380,866,194
|
|
|
|
360,474,682
|
|
Investments at contract value
|
|
|
|
|
|
|
|
|
Gibraltar Guaranteed Fund
|
|
|
81,691,704
|
*
|
|
|
82,646,040
|
*
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
462,557,898
|
|
|
$
|
443,120,722
|
|
|
|
|
|
|
|
|
|
|
*
|
Individual investment that represents 5% or more of the Plans assets.
|
During 2012 and 2011, the Plans investments (including investments bought, sold and held during the year) appreciated/(depreciated)
in value by $42,113,733 and $(17,903,167), respectively, as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Registered Investment Companies (mutual funds)
|
|
$
|
49,142,588
|
|
|
$
|
(8,684,210
|
)
|
Equity (Tellabs, Inc. common stock)
|
|
|
(7,028,855
|
)
|
|
|
(9,218,957
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,113,733
|
|
|
$
|
(17,903,167
|
)
|
|
|
|
|
|
|
|
|
|
12
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
4.
|
Fair Value Measurements
:
|
The Plan follows the guidance issued under the Fair Value Measurements and Disclosures topic of FASB Accounting Standards Codification, which defines fair value, establishes a framework for
measuring fair value, and enhances disclosures about fair value measurements required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. This standard establishes
a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace.
Observable inputs
reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entitys own assumptions about how market participants would value an asset or liability based on the best information available.
Financial instruments are categorized based on the lowest level input that is significant to their valuation.
The Plans
investments that are measured at fair value on a recurring basis, such as mutual funds and equity securities, are classified within Level 1 of the fair value hierarchy. The fair value of these investments is valued based on quoted market prices in
active markets. The Plan also invests in a guaranteed fund that is classified within Level 2, for which the valuation is based on the fair value, with an adjustment to reflect its contract value. The fair value is based on the market value of
underlying collateral portfolio and contract value is determined by the asset custodian.
There were no transfers between Level
1 and Level 2 assets during the years ended December 31, 2012 and 2011. The following table presents by level, within the fair value hierarchy, the value of assets of the Plan at December 31, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance at
December 31,
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
368,666,190
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
368,666,190
|
|
Common Stock
|
|
|
12,200,004
|
|
|
|
|
|
|
|
|
|
|
|
12,200,004
|
|
Guaranteed Fund
|
|
|
|
|
|
|
89,708,301
|
|
|
|
|
|
|
|
89,708,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at Fair Value
|
|
$
|
380,866,194
|
|
|
$
|
89,708,301
|
|
|
$
|
|
|
|
$
|
470,574,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
TELLABS 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
4.
|
Fair Value Measurements (Continued)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level
3)
|
|
|
Balance at
December 31,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds
|
|
$
|
346,127,774
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
346,127,774
|
|
Common Stock
|
|
|
14,346,908
|
|
|
|
|
|
|
|
|
|
|
|
14,346,908
|
|
Guaranteed Fund
|
|
|
|
|
|
|
90,477,227
|
|
|
|
|
|
|
|
90,477,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets at Fair Value
|
|
$
|
360,474,682
|
|
|
$
|
90,477,227
|
|
|
$
|
|
|
|
$
|
450,951,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Reconciliation to Schedule H of Form 5500
:
|
The following is a reconciliation of net assets available for benefits per the financial statements to Form 5500:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Net assets available for benefits per the financial statements
|
|
$
|
469,723,800
|
|
|
|
$452,769,822
|
|
Amounts allocated to withdrawing participants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets available for benefits per Form 5500
|
|
$
|
469,723,800
|
|
|
|
$452,769,822
|
|
|
|
|
|
|
|
|
|
|
The Plan has received a determination letter from the Internal Revenue Service dated July 8, 2010, stating that the Plan is qualified under Section 401(a) of the Internal Revenue Service Code
(the Code), and, therefore, the 401(k) Trust is exempt from taxation. The Plan administrator believes the Plan is currently designed and being operated in compliance with the applicable requirements of the Code. Therefore, it believes that the Plan
was qualified and the related trust was tax-exempt as of the financial statement date.
7.
|
Party-in-interest Transactions
:
|
Investment options in the Plan include guaranteed investment contract managed by the Prudential Bank and Trust, the Plans custodian. Also, the Plan holds shares of Tellabs, Inc. common stock. These
transactions qualify as exempt party-in-interest transactions, in accordance with ERISA. There have been no known prohibited transactions with a party-in-interest.
14