Perhaps the biggest challenge Liberty Lake-based Telect Inc. faces as it evolves from a family-owned business to a Nasdaq-traded public company is managing its phenomenal growth, which continues to gobble up manufacturing capacity as fast as its added and is causing concerns about growing backlogs and labor shortages.


Thats just one of many glimpses inside the private telecommunications-equipment maker provided in an Aug. 30 filing Telect made with the U.S. Securities and Exchange Commission in preparation for its planned initial public offering, which company officials hope to complete by the end of the year.


Also disclosed in the 500-page preliminary prospectus are intriguing figures about the success the Williams family has had with Telect and how the family and other Telect executives are being rewarded for that success; Telect managements predictions for the industry they serve; and a more comprehensive look at the nearly 18-year-old private company than has been available before.


Telect, which makes connectivity and power-distribution products for the telecommunications industry, saw its sales jump 47 percent last year to about $168.3 million, following 38 percent growth the previous year. As heady as those figures are, they pale when compared with possible sales this year. During the first six months of 2000, Telects sales already had reached $126.8 milliona 69 percent jump from the year-earlier periodeven though the first quarter of the year typically is the slowest for Telect. At that pace, sales could top $280 million for the year.


Meanwhile, in the 12 months ended June 30, Telect has added more than 680 employees companywide, giving it more than 1,700. By mid-August, just before the filing, that figure had grown further, to 1,940, about 1,280 of whom work in the U.S., mostly at Liberty Lake.


Despite aggressive measures to keep up with fast-growing orders, Telects management is concerned about how well its handling such growth.


Telect says in its filing that during the first half of this year, the amount of time it took to fill customer orders increased to eight to 12 weeks, from one to two weeks in the past. By June 30, unshipped customers orders totaled about $42 million, compared to $14 million on Dec. 31, 1999.


If we do not increase our manufacturing capacity to meet the increasing demand for telecommunications network equipment and the delivery schedules of our customers, our business and operating results may suffer, Telect said in its filing. It added, We are currently unable to increase our manufacturing capacity, internal or outsourced, at a rate that allows us to keep up with customer orders.


Still, Telect has been aggressive in that effort, and says in its filing that it will continue to expand our operations rapidly and to significantly add to our infrastructure. Including the about 96,000 square feet of office and manufacturing space currently being built for Telect at its Liberty Lake campus, the company now occupies roughly 520,000 square feet of space at facilities in four countries, including 343,000 square feet here, 100,000 square feet in Mexico, 58,000 square feet in Poland, and 20,000 square feet in Brazil. The company predicts in its filing that its current facilities will meet its needs for just 12 more months.


Finding enough workers also has been a challenge for Telect. At the time of its filing, Telect had about 260 unfilled positions. Like other large employers here, Telect has said publicly that the pool of qualified employees in the Spokane area is limited, and that recruiting such employees here from other regions is difficult. It repeats that concern in its filing, but says it now is having similar problems at its plant in Guadalajara, due to an increase in the opening of other manufacturing plants there.


Though challenged by its fast growth, Telect has enjoyed increased profits and a strong balance sheet, its SEC filing discloses. In the document, the company says that its net income nearly tripled last year to $41.6 millionabout 25 percent of salesfrom $14.4 million in 1998. For the first six months of this year, Telect posted $31.7 million in net income, up about 78 percent from the year-earlier period.


The companys assets, meanwhile, had grown to about $108 million as of June 30, compared with $83 million six months earlier and about $70 million at the end of 1998. Telects long-term debt currently totals about $27 million.


Because Telect currently is registered as a subchapter S corporation, its profits have been taxed at the shareholder level, rather than at the corporate level as the profits of a regular C corporation would be. Therefore, its net-income figures would be significantly lower$27 million, rather than $41.6 million in 1999if it were a C corporation, which is how it would be compared with other public companies.


Telect will end its S corporation status the day before completing its public offering, which also will set in motion the distribution of some $63 million in undistributed retained earnings to the companys current shareholders, almost all of whom are Williams family members.


Bill and Judi Williams, who co-founded Telect in 1982 and remain the chairman and vice chairwoman, respectively, together own 40 percent of the about 119,000 shares of common stock currently outstanding. Therefore, they would receive about $25 million of those undistributed earnings. Company President and CEO Wayne Williams, who is the founders son, owns 35 percent of the outstanding shares and thus would receive about $22 million. His sisters, Donna Zier and Karen Williams, who arent active in the company and own fewer shares, would receive $11.7 million and $3.6 million respectively. A small number of shares are owned by Telect executives Timothy Szymanowski, William McMillian, Stanley Hilbert, and Susan Meyer.


Telects success has filtered to its executives in other ways as well. According to the companys SEC filing, Wayne Williams, 36, received total compensation of about $494,000 in 1999. Bill Williams, 61, received about $478,000, and Judi Williams, 61, received about $426,100. The next highest-paid executive, Szyman-owski, vice president for sales and marketing, was paid $226,850 last year.


Bill and Judi Williams also own a limited liability company called Jubilation Enterprises LLC, which owns Telects Liberty Lake headquarters and main manufacturing plant. Telect leases its space there from Jubilation, and has paid that company nearly $1.4 million in each of the last two years. When Jubilation finishes the current expansion project there, that annual lease amount will increase to more than $2 million, the filing says.


Telect has been positioning itself as a public company for several years, increasingly bringing on the executives and managers it believed were necessary for the company to act like a public company, Wayne Williams has said. Most recently, it brought on two outside directors, Spokane venture capitalist Thomas Simpson, who is managing partner of Northwest Venture Associates Inc., and Samuel L. Hayes III, a longtime investment banking professor at the Harvard University Business School. They now serve with Bill, Judi, and Wayne Williams. A sixth spot on the board currently is open.


High demand could subside


Telect competes with substantially larger companies, including ADC Telecommunications Inc., Lucent Technologies Inc., and Corning Inc., but has built a name for itself in the telecommunications industry. Its largest customers include such companies as AT&T, Nortel, Sprint, WorldCom, and Time Warner. It says its objective is to become the leading provider of telecommunications network connectivity and power products and services, and it expects to accomplish that by developing additional products, boosting manufacturing capacity, and expanding its global presence.


Still, the company warns that while demand for its products has grown at an exceptionally high rate in recent periods, it expects that rate of growth to subside. We do not know how long the current cycle of network infrastructure build-out might last, or how long the current collocation trend in the United States might continue. Our sales may not continue to grow at the current rate, or they may decline, it says, though such pessimistic language is typical in IPO prospectuses.


Telect also expects its gross margin, which currently is running about 51 percent, to decline. The company currently derives most of its sales from higher-margin products, but expects in the future to expand its lower-margin product offerings.


International sales accounted for about 14 percent of Telects revenue last year, roughly the same as in 1998, but far larger than in 1997, when only 1 percent of the companys sales were done abroad. Telect says it expects its international sales to increase as a percentage of its overall revenue. Its Mexican plant was expanded greatly last year, and it acquired its operation in Poland earlier this year. Telect expects soon to start production at its new facility in Brazil, and continues to study a possible manufacturing plant in China.


Funding operations


Though Telects preliminary filing doesnt include information on the number of common shares it plans to offer for sale or the initial offering price, the filing puts a maximum limit of $150 million that can be raised through the IPO. It says that Telect plans to use the net proceeds of its proposed IPO to fund the $63 million distribution to current shareholders, to pay for operations and possible acquisitions, develop new products, and for such general corporate as expansion of its manufacturing facilities. The company might also use some of the net proceeds to repay some or all of its $27 million in outstanding debt.


Telect expects to have its common shares listed on the Nasdaq quotation system under the ticker TLEC.


Telects recent acquisitions include the $3.14 million purchase of Zaklady Elektroniczne S.A., of Wroclaw, Poland, in February, which gave Telect its Polish operations, and the $11 million purchase of the Telzon product line from Thomas & Betts Corp. in March.


Telect also invests heavily in research and development and engineering. During the first six months of 2000, it spent $4.3 million on such expenditures, compared with $2.4 million in the year-earlier period. As of June 30, it employed about 110 people in that area. The company holds 25 U.S. patents and has 10 others pending.


The company spent $6.1 million on capital improvements last year, and expects to spend about $13 million this year, mostly on new equipment.