<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1995
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TEKELEC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 95-2746131
(STATE OF OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
26580 WEST AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-5656
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PHILIP J. ALFORD
PRESIDENT
TEKELEC
26580 WEST AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-5656
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
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RONALD W. BUCKLY, ESQ. JEFFREY D. SAPER, ESQ.
KATHERINE F. ASHTON, ESQ. HARRY K. PLANT, ESQ.
COUDERT BROTHERS RANA B. DIORIO, ESQ.
1055 WEST SEVENTH STREET, 20TH FLOOR WILSON, SONSINI, GOODRICH & ROSATI
LOS ANGELES, CALIFORNIA 90017 PROFESSIONAL CORPORATION
(213) 688-9088 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(415) 493-9300
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective
and the Underwriting Agreement is executed.
------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
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Common Stock, without
par value.............. 2,012,500 $19.375 $38,992,188 $13,446
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</TABLE>
(1) Includes 262,500 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the amount of the
registration fee based on the average of the high and low reported sale
prices of a share of Registrant's Common Stock as reported by the Nasdaq
National Market on April 7, 1995 in accordance with Rule 457 of the
Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD
NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE
ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
APRIL 12, 1995
1,750,000 SHARES
[LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by Tekelec
("Tekelec" or the "Company"). The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "TKLC." On April 10, 1995, the last sale price
for the Common Stock as reported was $21.75 per share. See "Price Range of
Common Stock."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share.............................. $ $ $
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Total(3)............................... $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering estimated at $400,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
262,500 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May ,
1995.
ALEX. BROWN & SONS
INCORPORATED
VOLPE, WELTY & COMPANY
CRUTTENDEN ROTH
INCORPORATED
THE DATE OF THIS PROSPECTUS IS MAY , 1995.
<PAGE> 3
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files periodic reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the regional offices of the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at Seven World Trade Center, 13th Floor, New York, New York
10048. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Company's Common Stock is traded on the Nasdaq National
Market. Reports, proxy statements and other information concerning the Company
may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3, including amendments thereto, under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus regarding the contents
of any contract or any other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission, each such statement being qualified in all respects by such
reference. The Registration Statement may be inspected without charge at the
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained from such office upon the
payment of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (1) the Company's Annual Report on Form 10-K
for the year ended December 31, 1994; (2) the Company's Amendment No. 1 on Form
10-K/A filed April 12, 1995, amending the Company's Annual Report on Form 10-K
for the year ended December 31, 1994; (3) the Company's Report by Issuer of
Securities Quoted on the Nasdaq National Market on Form 10-C filed March 23,
1995; and (4) the Company's Registration Statement on Form 8-A filed November
12, 1986, registering the Company's Common Stock under Section 12(g) of the
Exchange Act. Reference is also made to the "Description of Capital Stock" in
this Prospectus for a current description of the Company's Common Stock.
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the termination of the offering of the Common Stock registered hereby
shall be deemed to be incorporated by reference into this Prospectus and to be a
part hereof from the date of filing such documents. Any statement contained in a
document incorporated or deemed to be incorporated herein by reference shall be
deemed modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents incorporated by reference into this Prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests for such copies should
be directed to the Vice President, Finance and Chief Financial Officer, Tekelec,
26580 West Agoura Road, Calabasas, California 91302. Telephone: (818) 880-5656.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE
"UNDERWRITING."
2
<PAGE> 4
TEKELEC'S ADVANCED DIAGNOSTIC AND SWITCHING SYSTEMS
ENHANCE THE QUALITY AND PERFORMANCE OF
COMMUNICATIONS NETWORKS
(PRODUCT ILLUSTRATIONS -- SEE EDGAR APPENDIX)
The EAGLE STP is designed to enable operators of wireline and wireless
networks to offer enhanced services such as caller ID, personal number
calling and wireless calling services. The MGTS/GSMT System is used to
simulate and monitor SS7, AIN and PCS networks and services. EAGLE and
MGTS/GSMT are key elements to enable the SS7-based Advanced Intelligent
Network Architecture.
Equipment manufacturers and network operators use the Chameleon Open's
powerful real-time analysis and simulation tools to reduce the time and
expense to develop and monitor new communication products and services.
The Chameleon Opens support simultaneous testing of LAN, WAN and
broadbased network and protocols, including AIM, Frame Relay, ISDN and
Ethernet.
Chameleon, EAGLE and the Tekelec logo are registered trademarks of Tekelec.
This Prospectus also includes the trademarks of other companies.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in this Prospectus or incorporated herein by reference. A
glossary describing terms that appear in this Prospectus can be found on pages
40 and 41.
THE COMPANY
Tekelec designs, manufactures and markets advanced diagnostic systems and
innovative network switching solutions for the global communications
marketplace. The Company is a leading supplier of diagnostic systems used in the
design, installation and maintenance of a broad range of communications
equipment and networks. Tekelec's EAGLE STP switching platform enables operators
of wireline and wireless networks to deliver Advanced Intelligent Network (AIN)
services such as Caller ID and personal number calling as well as digital
wireless services such as PCS and GSM. The Company has established relationships
with AT&T and Stratus Computer, Inc. (Stratus) to complement its marketing of
the EAGLE STP and believes that these relationships demonstrate recognition of
the EAGLE STP's technical advantages.
The Company's core competitive strength is the breadth of its expertise in
communications technologies, gained over 15 years primarily as a supplier of
high-end multiprotocol diagnostic systems. The Company has leveraged this
expertise to target emerging, high-growth communications markets for services
such as SS7-based AIN, digital wireless and ATM-based broadband multimedia.
These services are being deployed by network operators seeking to differentiate
themselves in response to increasing competition. The Company has developed
products that utilize open distributed architectures to facilitate the
development of new applications and to support emerging protocols and services.
The Company's diagnostic products address the proliferation of standards
and protocols and the increasing complexity of communications equipment and
networks. The Chameleon Open enables simultaneous full bandwidth testing of
broadband, LAN and WAN equipment and networks and supports a wide range of
protocols. The MGTS/GSMT system is used to test equipment and networks for SS7,
AIN, GSM and emerging PCS services. The Company sells its diagnostic products
worldwide through a direct sales force and a network of international
distributors to long distance carriers, telephone operating companies,
communications equipment manufacturers, wireless and cellular network operators
and government agencies. Major customers include Nippon Telegraph & Telephone,
AT&T, GTE Corporation, Motorola, Inc., MCI Telecommunications Corporation,
BellSouth Corporation, NEC America, Inc., Siemens AG and Sprint Corporation.
Tekelec has become a leading supplier of STP switching systems to U.S.
independent telephone companies and cellular carriers since introducing the
EAGLE STP in 1992. Tekelec's EAGLE STP is a high-capacity, fault-tolerant
packet-switching platform designed to meet the complex requirements of SS7
switching. The EAGLE STP is sold worldwide by a direct sales force and through
distribution and marketing relationships with AT&T and Stratus. As of December
31, 1994, 38 pairs of EAGLE STPs had been sold to customers including McCaw
Cellular Communications, Inc., SBC Communications, Inc., Ameritech Corporation,
Telstra and GTE Intelligent Network Services, Inc.
The Company experienced significant losses in 1992 and 1993, but returned
to profitability in 1994 as a result of actions taken in connection with its
December 1993 restructuring and increased market acceptance of its products,
particularly the EAGLE STP and the Chameleon Open.
The Company was incorporated in California in 1971 and entered the
communications diagnostic business in 1979 and the network switching business in
1992. Unless the context otherwise requires, the terms "Tekelec" and the
"Company" are used herein to refer to Tekelec and its wholly owned subsidiaries.
The Company's executive offices are located at 26580 West Agoura Road,
Calabasas, California 91302, and its telephone number is (818) 880-5656.
3
<PAGE> 6
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
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Common Stock offered hereby...................... 1,750,000 shares
Common Stock to be outstanding after the
offering....................................... 11,072,682 shares(1)
Use of proceeds.................................. For general corporate purposes, including
working capital.
Nasdaq National Market symbol.................... TKLC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- --------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 42,148 $ 52,449 $ 58,090 $ 46,856 $ 61,189
Income (Loss) before provision
for income taxes............. 8,228 6,740 (6,693) (17,101) 5,711
Net income (loss)............... 5,040 4,581 (8,296) (18,543) 4,460
Earnings (Loss) per share(2).... $ 0.61 $ 0.53 $ (1.01) $ (2.23) $ 0.47
Weighted average number of
shares outstanding(2)........ 8,244 8,576 8,178 8,314 9,550
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
(THOUSANDS)
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BALANCE SHEET DATA:
Cash, cash equivalents and restricted cash.................... $ 7,653 $ 43,127
Working capital............................................... 13,466 48,940
Total assets.................................................. 34,409 69,883
Long-term obligations......................................... 654 654
Total shareholders' equity.................................... 18,720 54,194
</TABLE>
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(1) Based on shares outstanding as of March 31, 1995. Excludes (i) 2,370,280
shares subject to options outstanding under the Company's Amended and
Restated 1984 Stock Option Plan, 1994 Stock Option Plan and Amended and
Restated Non-Employee Director Equity Incentive Plan as of March 31, 1995
and (ii) 50,000 shares issuable upon exercise of warrants outstanding as of
such date.
(2) Primary and fully diluted per share amounts and primary and fully diluted
weighted average shares outstanding are the same for all periods presented,
except that in the year ended December 31, 1994, fully diluted net income
per share and fully diluted weighted average number of shares outstanding
were $0.43 and 10,360,000, respectively.
(3) Adjusted to give effect to the estimated net proceeds of this offering based
upon an assumed public offering price of $21.75 per share. See "Use of
Proceeds."
------------------------
Except as otherwise specified, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. All share and per share
data in this Prospectus have been adjusted to reflect a two-for-one stock split
of the Company's Common Stock effected in March 1995.
4
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.
Recent History of Losses. The Company experienced declining revenues in
1993 and incurred substantial losses in 1992 and 1993 of $8.3 million and $18.5
million, respectively. Such losses were primarily as a result of delayed product
introductions which adversely affected revenues and significant research and
development expenditures, particularly for the development of its EAGLE STP.
Although the Company returned to profitability in 1994 as a result of actions
taken in connection with its December 1993 restructuring and increased market
acceptance of its products, there can be no assurance that the Company's
profitability will continue on a quarterly or annual basis in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Fluctuations in Quarterly Results; Seasonality; Lengthy Sales Cycle. The
Company has experienced and may in the future experience significant
fluctuations in revenues and operating results from quarter to quarter as a
result of a number of factors, including the timing of significant orders and
shipments, product mix, delays in shipment, capital spending patterns of
customers, competition and pricing, new product introductions by the Company or
its competitors, carrier deployment of intelligent network services, the timing
of research and development expenditures, expansion of marketing and support
operations, changes in material costs, production or quality problems, currency
fluctuations, disruptions in sources of supply, regulatory changes and general
economic conditions. The Company expects that sales of its EAGLE STP, which has
a significantly higher average selling price and generally lower gross margin
than the Company's diagnostic products, will account for an increasing
percentage of the Company's revenues. Consequently, the addition or cancellation
of EAGLE STP sales may exacerbate quarterly fluctuations in revenues and
operating results. In addition, a large portion of the Company's product
shipments in each quarter occurs at or near the end of each quarter. Due to the
relatively fixed nature of many of the Company's costs, including personnel and
facilities costs, a shortfall in the net revenues in any quarter would have a
proportionately greater impact on the Company's results of operations for that
quarter.
The Company typically experiences lower sales and order levels in the first
quarter when compared with the preceding fourth quarter due primarily to the
capital spending patterns of its customers, and the Company believes that this
pattern will continue in the first quarter of 1995. To a lesser extent, the
Company's international sales are also subject to seasonal fluctuations. The
Company expects these seasonal patterns to continue. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results" and Note O to Consolidated Financial
Statements.
Orders for the EAGLE STP have generally involved lengthy sales cycles,
making it difficult to predict the precise quarter in which sales will occur.
The EAGLE STP sales cycle typically varies in length based on a number of
factors including customer network engineering and installation requirements and
the relative size of the customer's network. The Company's product shipments to
a single customer can represent a significant portion of a quarter's revenues,
and delays in the timing of such shipments could have a material adverse effect
on the Company's business and operating results.
Competition. The Company's primary markets are intensely competitive and
are subject to rapid technological change, evolving industry standards and
regulatory developments. The Company's existing and potential competitors
include many large domestic and international companies that have substantially
greater financial, manufacturing, technical, marketing, distribution and other
resources, larger installed customer bases and longer-standing relationships
with customers than the Company. The Company's principal competitor in the
network diagnostic products market is Hewlett-Packard Company (Hewlett-Packard).
The Company's principal competitors in the network
5
<PAGE> 8
switching products market include major communications equipment suppliers such
as Northern Telecom Limited, DSC Communications Corporation (DSC), Ericsson S.A.
and Alcatel. The Company expects competition to increase in the future from
existing competitors and from other companies that may enter the Company's
existing or future markets with solutions which may be less costly or provide
higher performance or additional features. Certain of the Company's customers in
the network diagnostic market also manufacture switches that compete with the
EAGLE STP. Increasing competition in the switching market may cause these
customers to reduce their purchases of the Company's diagnostic products. The
Company believes that its ability to compete successfully depends on several
factors, both within and outside of its control, including the price, quality,
reliability and performance of the Company's and its competitors' products, the
timing and success of new product introductions or product enhancements by the
Company and its competitors, quality of customer service and support, the
emergence of new industry standards, the development of technical innovations,
the attraction and retention of qualified personnel, regulatory changes and
general market and economic conditions. Increasing competition could materially
and adversely affect the Company's results of operations through price
reductions and loss of market share. There can be no assurance that the Company
will be able to compete successfully in the future. See
"Business -- Competition."
Rapid Technological Change; New Product Development. The markets for the
Company's diagnostic and switching products are characterized by rapidly
changing technology, evolving industry standards and frequent new product
introductions and enhancements. Sales of diagnostic products such as those
offered by the Company depend in part on the continuing development and
deployment of emerging standards and new services based on such standards. The
Company's success will depend to a significant extent upon its ability to
enhance its existing products and to develop and introduce innovative new
products that gain market acceptance. In recent years, sales of the Company's
diagnostic products were adversely affected in part by the Company's failure to
introduce new products or enhancements in a timely manner, particularly
enhancements for its MGTS signalling product and a Frame Relay application for
its Chameleon product. In order to respond to evolving standards and to remain
competitive, the Company intends to continue to make substantial investments in
new product and technology development. There can be no assurance that the
Company will be successful in selecting, developing, manufacturing and marketing
new products or enhancing its existing products on a timely or cost-effective
basis, or that products or technologies developed by others will not render the
Company's products noncompetitive or obsolete. Moreover, the Company may
encounter technical problems in connection with its product development that
could result in the delayed introduction of new products or product
enhancements. Failure to develop or introduce on a timely basis new products or
product enhancements that achieve market acceptance would materially and
adversely affect the Company's business, operating results and financial
condition.
Products as complex as those offered by the Company may contain undetected
errors when first introduced or as new versions are released. Such errors have
occurred in the past. While the Company's products have not experienced any
significant errors, such errors, particularly those that result in a failure of
the Company's switching products, could have a material adverse effect on the
Company's customer relationships, business and operating results. There can be
no assurance that, despite thorough testing by the Company and by its customers,
errors will not be found in the Company's products. See "Business -- Product
Development."
Relationship with AT&T. The Company believes that its ability to compete
successfully in the switching market depends in part on distribution and
marketing relationships with leading communications equipment suppliers. In
September 1994, the Company entered into a non-exclusive distribution agreement
with AT&T for the EAGLE STP. The Company believes its relationship with AT&T
enhances its market presence and its ability to access leading telephone
companies. The Company expects that AT&T's purchases under the distribution
agreement will represent a significant percentage of the Company's switching
product revenues in 1995. In addition, the Company
6
<PAGE> 9
has sold EAGLE STPs to purchasers affiliated with AT&T. The Company's agreement
with AT&T can be terminated by either party at any time for any reason and does
not impose any minimum purchase requirements on AT&T. Consequently, there can be
no assurance that AT&T or its affiliates will continue to place orders with the
Company or that the Company's relationship with AT&T will continue for an
extended period of time or will be of continuing value to the Company. Under the
distribution agreement, AT&T is not precluded from developing or selling
products that are competitive with the Company's products, and such competition
could materially and adversely affect the Company's business and operating
results. If the relationship with AT&T were to terminate, there can be no
assurance that the Company could establish a similar relationship with another
company. See "Business -- Sales, Marketing and Support."
Evolving Market for Advanced Intelligence Network (AIN) Services. A
substantial portion of the Company's revenues are derived from the sale of
diagnostic systems and switching systems that enable network operators to offer
AIN services. Although several network operators offer or have announced plans
to offer AIN services, there can be no assurance that network operators will be
able to introduce these services successfully, that such services will gain
widespread market acceptance or that network operators will use the Company's
products in the deployment of these services. In addition, the timing of the
implementation of AIN services by network operators may be affected by the need
to obtain necessary regulatory approvals and other factors. Delays in the
introduction of AIN services, failure of these services to gain widespread
market acceptance or the decision of network operators not to use the Company's
products in the deployment of these services would materially and adversely
affect the Company's business, operating results and financial condition.
Compliance with Regulations and Evolving Industry Standards. In order to
gain broader market acceptance, the Company's products must meet a significant
number of regulations and standards. In the United States, the Company's
products must comply with various regulations defined by the Federal
Communications Commission and Underwriters Laboratories as well as standards
established by Bell Communications Research ("Bellcore"). Internationally, the
Company's products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
International Telephone and Telegraph Consultative Committee (CCITT). In
addition, standards for new services such as ATM and PCS are still evolving. As
these standards evolve, the Company will be required to modify its products or
develop and support new versions of its products. The failure of the Company's
products to comply, or delays in compliance, with the various existing and
evolving industry standards could delay introduction of the Company's products,
which could have a material adverse effect on the Company's business and
operating results.
In order to penetrate the portion of the public carrier market dominated by
the Regional Bell Operating Companies (RBOCs), it is important that ongoing
technical audits of the EAGLE STP be conducted by Bellcore to help the Company
ensure interoperability with the operations, administration, maintenance and
provisioning systems used by the RBOCs to manage their networks. Bellcore is
currently in the process of conducting its initial technical audit of the EAGLE
STP. See "Business -- Sales, Marketing and Support." Failure or delay in
obtaining favorable technical audit results could have a material adverse effect
on the Company's ability to sell products to this large segment of the
communications market.
Government regulatory policies are likely to continue to have a major
impact on the pricing of existing as well as new public network services and
therefore are expected to affect demand for such services and the communications
products that support such services. Tariff rates, whether determined
autonomously by carriers or in response to regulatory directives, may affect
cost effectiveness of deploying public network services. Tariff policies are
under continuous review and are subject to change. User uncertainty regarding
future policies may also affect demand for communications products, including
the Company's products.
7
<PAGE> 10
Risks Associated with International Business. The Company sells its
products worldwide through its direct sales force, distributors and wholly owned
subsidiaries in Japan and Canada. International sales accounted for 43%, 51% and
43% of the Company's revenues in 1992, 1993 and 1994, respectively. The
Company's sales through its Japanese and Canadian subsidiaries are denominated
in local currencies while other international sales are U.S. dollar-denominated.
The Company expects that international sales will continue to account for a
significant portion of its revenues in future periods. International sales are
subject to inherent risks, including unexpected changes in regulatory
requirements and tariffs, difficulties in staffing and managing foreign
operations and distributors, longer payment cycles, greater difficulty in
accounts receivable collection and potentially adverse tax consequences.
Additionally, exchange rate fluctuations on foreign currency transactions and
translations arising from international operations may contribute to
fluctuations in the Company's business and operating results. Fluctuations in
exchange rates could also affect demand for the Company's products. If, for any
reason, exchange or price controls or other restrictions in foreign countries
are imposed, the Company's business and operating results could be materially
adversely affected. In addition, any inability to obtain local regulatory
approvals in foreign markets on a timely basis could have a material adverse
effect on the Company's business or operating results.
Foreign communications networks are in most cases owned or strictly
regulated by government. Access to such markets is often difficult due to the
established relationships between a government owned or controlled
communications operating company and its traditional indigenous suppliers of
communications equipment. There can be no assurance that the Company will be
able to successfully penetrate these markets, particularly for its switching
products.
Dependence on Key Suppliers. Certain key components used in the Company's
products, such as certain microprocessors, video displays and power supplies,
are currently being purchased from sole sources, and the Company does not have
any long-term supply agreements to ensure uninterrupted supply of these
components. The inability to obtain sufficient sole or limited source components
as required, or to develop alternative sources if and as required, could result
in delays or reductions in product shipments which could materially and
adversely affect the Company's operating results and damage customer
relationships. See "Business -- Manufacturing."
Dependence on Key Personnel. The Company's success depends to a significant
extent upon the continuing contributions of its key management, technical, sales
and marketing and other key personnel. The Company does not have employment
agreements or other arrangements with such individuals which would prevent them
from leaving the Company. The Company's future success also depends upon its
ability to attract and retain highly skilled personnel. Competition for such
employees is intense. The loss of any current key employees or the inability to
attract and retain additional key personnel could have a material adverse effect
on the Company's business and operating results.
Limited Protection of Proprietary Technology. The Company depends in part
upon its proprietary technology and know-how to differentiate its products from
those of its competitors. The Company does not have any patents and relies upon
a combination of trade secret, copyright and trademark laws and contractual
restrictions to establish and protect proprietary rights in its products. The
Company generally enters into confidentiality and invention assignment
agreements with its employees and non-disclosure and confidentiality agreements
with its suppliers, distributors and appropriate customers, among others, and
limits access to and disclosure of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's proprietary technology without authorization. Accordingly,
there can be no assurance that such laws and contractual agreements will prove
sufficient to deter misappropriation of the Company's technology or independent
third-party development of similar technologies. The laws of certain foreign
countries in which the Company's products are or may be developed, manufactured
or sold may not protect the Company's products or intellectual property rights
to the
8
<PAGE> 11
same extent as do the laws of the United States and thus make the possibility of
misappropriation of the Company's technology and products more likely.
Risk of Third Party Claims of Infringement. The communications industry is
characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. From time to time, third
parties may assert exclusive patent, copyright, trademark and other intellectual
property rights to technologies that are important to the Company. There are no
currently pending material claims that the Company's products, trademarks or
other proprietary rights infringe the proprietary rights of third parties.
However, there can be no assurance that third parties will not assert
infringement claims against the Company, that any such assertion of infringement
will not result in litigation, or that the Company would prevail in such
litigation or be able to license any valid and infringed patents of third
parties on commercially reasonable terms. Furthermore, litigation, regardless of
its outcome, could result in substantial cost to and diversion of effort by the
Company. Any infringement claims or litigation against the Company could
materially and adversely affect the Company's business, results of operations
and financial condition.
Control by Tekelec-Airtronic and Its Affiliates. Upon completion of this
offering, Tekelec-Airtronic, S.A. (Tekelec-Airtronic) and Jean-Claude Asscher, a
director of the Company, will own an aggregate of 9.9% of the Company's
outstanding shares. Mr. Asscher is the President and controlling shareholder of
Tekelec-Airtronic, a France-based electronics company which, together with
certain of its subsidiaries, acts as European distributors for the Company. In
addition, upon completion of this offering, Edouard Givel, through Natinco, S.A.
(Natinco), a Luxembourg investment company which he controls and which is a
minority shareholder of Tekelec-Airtronic, will own 25.0% of the Company's
outstanding shares. Due to Mr. Asscher's relationship with Mr. Givel and his
role as an advisor to Natinco, Mr. Asscher may be deemed to share with Mr. Givel
the beneficial ownership of the shares of the Company's Common Stock held by
Natinco. Sales of the Company's products and services to Tekelec-Airtronic and
its subsidiaries accounted for approximately 6.7%, 8.5% and 6.2% of the
Company's net revenues for 1992, 1993 and 1994, respectively. The Company
expects that Tekelec-Airtronic and its subsidiaries will continue to act as
European distributors for the Company. In the past, the Company has purchased
certain components from Tekelec-Airtronic and its subsidiaries and expects that
it will continue to do so in the future. Mr. Asscher, Tekelec-Airtronic and Mr.
Givel may be subject to potential conflicts of interest with respect to future
transactions with Tekelec. There can be no assurance that such conflicts will be
resolved in the best interests of the Company. Although Tekelec-Airtronic, Mr.
Asscher and Mr. Givel will not have majority control of the Company, if they act
together they will constitute the largest shareholder of the Company,
controlling approximately 34.9% of the outstanding shares upon completion of
this offering, and continue to have the power to elect a significant number of
the Company's Board of Directors and to exert significant influence over the
Company's business and affairs and over the outcome of actions requiring
shareholder approval. See "Common Stock Ownership of Principal Shareholders and
Management."
Volatility of Stock Price. The Common Stock is currently trading at or near
its record high, and has experienced significant price and volume fluctuations.
The market price of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, changes in earnings estimates by analysts, announcements of
technological innovations or new products or enhancements by the Company or its
competitors, delays in new product introductions or enhancements, developments
in the Company's relationships with its customers, strategic partners or
suppliers, general conditions in the communications industries, changes in
investment strategy by significant shareholders and other events or factors,
which may be unrelated to the Company. There can be no assurance that the market
price of the Company's Common Stock will not experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
operating performance.
9
<PAGE> 12
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after this offering could adversely affect prevailing
market prices for the Company's Common Stock. The executive officers and certain
directors of the Company owning an aggregate of 416,146 shares (including
options and warrants to purchase an aggregate of 268,318 shares, which are
exercisable or become exercisable within 60 days after March 31, 1995) and
certain shareholders of the Company owning an aggregate of 3,868,520 shares
(including options to purchase an aggregate of 20,000 shares which are
exercisable or become exercisable within 60 days after March 31, 1995) have
agreed not to sell or transfer any shares owned by them for a period of 90 and
180 days, respectively, after the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated. Subject to such restrictions
and the resale limitations of Rule 144 under the Securities Act, all of the
outstanding shares of the Company's Common Stock will be eligible for sale.
Securities and Exchange Commission Inquiry. The Commission has issued a
formal order for an investigation relating to certain trading in the securities
of the Company. The formal order states that the Commission staff has
information tending to show that certain individuals and entities may have
traded stock of the Company while in possession of material non-public
information and/or may have disclosed material non-public information to others
in breach of their fiduciary duties or other relationships of trust and
confidence, which allegations, if true, would result in possible violation of
Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. In
connection with this investigation, the Commission has stated that its inquiry
should not be construed as an indication by the Commission or its staff that any
violations of law have occurred and should not be considered as an adverse
reflection upon any person, entity, security or transaction. Although the
Company does not believe that the investigation will uncover violations of law
by the Company or any of its current officers and directors, or that the
investigation will result in a material adverse effect on the business,
operating results or financial condition of the Company, the ultimate outcome of
the investigation cannot be predicted as of the date of this Prospectus.
10
<PAGE> 13
USE OF PROCEEDS
The net proceeds from the sale of the shares of Common Stock offered hereby
are estimated to be $35,474,000 ($40,855,000 if the Underwriters' over-allotment
option is exercised in full), assuming a public offering price of $21.75 per
share and after deducting estimated underwriting discounts and commissions and
offering expenses. The net proceeds will be used primarily for general corporate
purposes, including working capital, product development and acquisition of
capital equipment. The Company expects to spend approximately $3.5 million
during the last three quarters of 1995 for the purchase of such equipment.
Although the Company may use a portion of the proceeds to acquire products,
technologies or businesses that are complementary to the Company's business, it
currently has no understandings or agreements with respect to any such specific
acquisitions. Until the net proceeds of the offering are used, they will be
invested in short-term, interest- and dividend-bearing obligations or
securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq National Market under
the symbol "TKLC." The following table sets forth, for the periods indicated,
the high and low last reported sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1993
First Quarter.......................................... $ 5.25 $ 3.38
Second Quarter......................................... 3.75 2.56
Third Quarter.......................................... 6.00 2.44
Fourth Quarter......................................... 6.13 2.88
1994
First Quarter.......................................... 4.38 3.00
Second Quarter......................................... 5.00 2.88
Third Quarter.......................................... 6.75 3.75
Fourth Quarter......................................... 17.00 6.00
1995
First Quarter.......................................... 23.13 15.50
Second Quarter (through April 10, 1995)................ 21.75 18.25
</TABLE>
On April 10, 1995, the last reported sale price of the Company's Common
Stock was $21.75 per share. As of March 31, 1995, there were approximately 202
record holders of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid a cash dividend. It is the present policy of the
Company to retain earnings to finance the future growth and development of its
business and, therefore, the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. In addition, certain restrictions
in one of the Company's line of credit agreements restrict the Company's ability
to pay dividends.
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1994, and as adjusted to reflect the receipt of net proceeds from
the sale of the shares of Common Stock pursuant to this offering at an assumed
offering price of $21.75 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(THOUSANDS)
<S> <C> <C>
Long-term obligations................................................ $ 654 $ 654
Shareholders' equity:
Common Stock, 50,000,000 shares authorized, without par value;
9,022,612 shares issued and outstanding; 10,772,612 shares
outstanding as adjusted(1)...................................... 15,940 51,414
Retained earnings.................................................. 79 79
Cumulative translation adjustments................................. 2,701 2,701
------- -----------
Total shareholders' equity...................................... 18,720 54,194
------- -----------
Total capitalization....................................... $19,374 $54,848
======== ==========
</TABLE>
- ---------------
(1) Excludes (i) 2,247,772 shares subject to options outstanding as of December
31, 1994 under the Company's Amended and Restated 1984 Stock Option Plan,
1994 Stock Option Plan and Amended and Restated Non-Employee Director Equity
Incentive Plan at a weighted average exercise price of $4.42 per share and
(ii) 80,000 shares issuable upon exercise of warrants outstanding as of
December 31, 1994 at a weighted average exercise price of $3.26 per share.
Since December 31, 1994, 300,070 shares have been issued upon exercise of
options and warrants.
12
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 1990, 1991, 1992, 1993 and 1994 have been derived from
the Consolidated Financial Statements of the Company audited by Coopers &
Lybrand L.L.P. This selected consolidated financial information should be read
in conjunction with, and is qualified in its entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's audited Consolidated Financial Statements and Notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1990 1991 1992 1993 1994
------- ------- ------- -------- -------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $42,148 $52,449 $58,090 $ 46,856 $61,189
Cost of goods sold................ 13,782 16,364 18,864 16,836 20,388
------- ------- ------- -------- -------
Gross profit........................ 28,366 36,085 39,226 30,020 40,801
Research and development.......... 6,931 10,867 16,181 17,570 11,962
Selling, general and
administrative................. 14,168 19,353 27,413 23,756 22,466
Restructuring..................... -- -- 2,767 5,988 --
------- ------- ------- -------- -------
Income (Loss) from operations....... 7,267 5,865 (7,135) (17,294) 6,373
Interest and other income
(expense), net................. 961 875 442 193 (662)
------- ------- ------- -------- -------
Income (Loss) before provision for
income taxes...................... 8,228 6,740 (6,693) (17,101) 5,711
Provision for income taxes........ 3,188 2,159 1,603 1,442 1,251
------- ------- ------- -------- -------
Net income (loss)......... $ 5,040 $ 4,581 $(8,296) $(18,543) $ 4,460
======== ======== ======== ========= ========
Earnings (Loss) per share(1):
Primary........................... $ 0.61 $ 0.53 $ (1.01) $ (2.23) $ 0.47
Fully diluted..................... 0.61 0.53 (1.01) (2.23) 0.43
Weighted average number of shares
outstanding(1):
Primary........................... 8,244 8,576 8,178 8,314 9,550
Fully diluted..................... 8,244 8,576 8,178 8,314 10,360
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1990 1991 1992 1993 1994
------- ------- ------- -------- -------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
restricted cash................... $16,397 $17,282 $10,067 $ 3,669 $ 7,653
Working capital..................... 22,418 26,443 15,471 3,215 13,466
Total assets........................ 37,455 43,893 38,403 28,139 34,409
Long-term obligations............... 680 437 204 323 654
Total shareholders' equity.......... 30,316 36,345 28,751 11,693 18,720
</TABLE>
- ---------------
(1) Weighted average number of shares outstanding and earnings (loss) per share
have been retroactively adjusted to reflect the two-for-one stock split of
the Company's Common Stock effected in March 1995.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. Historical results and
percentage relationships among any amounts in the financial statements are not
necessarily indicative of trends in operating results for any future periods.
CORPORATE ORGANIZATION
The Company is organized into two divisions: Network Diagnostic and Network
Switching.
The Network Diagnostic Division develops and supplies diagnostic systems
for the communications marketplace. Its products are the foundation of the
Company's business and the source of the technology and expertise that has
facilitated the Company's entry into other markets.
The Network Switching Division capitalized on the Company's expertise in
SS7 to develop the EAGLE STP, a high-capacity, fault-tolerant packet-switching
platform first introduced in 1992.
As more fully described below, the Company experienced significant losses
in 1992 and 1993, but returned to profitability in 1994 as a result of actions
taken in connection with its December 1993 restructuring and increased market
acceptance of its products, particularly the EAGLE STP and the Chameleon Open.
The cost savings realized in connection with such restructuring were consistent
with those anticipated. See Note E to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
that statement of operations items bear to total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1992 1993 1994
----- ----- -----
<S> <C> <C> <C>
Revenues....................................................... 100.0% 100.0% 100.0%
Cost of goods sold........................................... 32.5 35.9 33.3
----- ----- -----
Gross profit................................................... 67.5 64.1 66.7
Research and development..................................... 27.9 37.5 19.6
Selling, general and administrative.......................... 47.2 50.7 36.7
Restructuring................................................ 4.8 12.8 --
----- ----- -----
Income (Loss) from operations.................................. (12.4) (36.9) 10.4
Interest and other income (expense), net..................... 0.8 0.4 (1.1)
----- ----- -----
Income (Loss) before provision for income taxes................ (11.6) (36.5) 9.3
Provision for income taxes................................... 2.8 3.1 2.0
----- ----- -----
Net income (loss)......................................... (14.4)% (39.6)% 7.3%
===== ===== =====
</TABLE>
The following table sets forth, for the periods indicated, the revenues by
principal product line as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Network diagnostic products............................................ 93% 82% 72%
Network switching products............................................. 7 18 28
---- ---- ----
Total........................................................ 100% 100% 100%
==== ==== ====
</TABLE>
14
<PAGE> 17
The following table sets forth, for the periods indicated, the revenues by
geographic territory as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
North America.......................................................... 59% 54% 59%
Japan.................................................................. 22 25 20
Europe................................................................. 10 11 9
Rest of the World...................................................... 9 10 12
---- ---- ----
Total........................................................ 100% 100% 100%
==== ==== ====
</TABLE>
1994 COMPARED WITH 1993
Revenues. The Company's revenues increased by $14.3 million or 31% during
1994 due to higher sales of both switching and diagnostic products.
Revenues from switching products doubled in 1994 to $16.8 million due to
growing market acceptance of the Company's EAGLE STP product, particularly in
the cellular market. In 1994, 23 pairs of EAGLE STPs were sold (including one
pair sold under the Company's September 1994 distribution agreement with AT&T)
compared with 13 in 1993. The Company expects that 1995 sales of its network
switching products will continue to grow both in dollars and as a percentage of
total revenues although at a reduced percentage rate of growth compared with
1994.
Revenues from diagnostic products increased by 15%, or $5.8 million, to
$44.3 million. This increase was primarily driven by an $8.8 million increase in
worldwide sales of the Chameleon Open (which was first shipped in the second
quarter of 1993) and the September 1994 introduction of the Company's ATM
Application Module for this product. Sales of the Chameleon Open represented 26%
of 1994 total diagnostic product sales compared with 7% in 1993. These increases
were partially offset by lower worldwide sales of certain older diagnostic
products as the Company continued its product evolution to the Chameleon Open
platform supporting multiple protocol diagnostics. The Company expects that 1995
sales of its Chameleon Open will continue to grow both in dollars and as a
percentage of diagnostic product revenues although at a reduced percentage rate
of growth compared with 1994.
Revenues in North America increased by $10.8 million or 43% as a result of
higher switching and diagnostic product sales. Despite slightly lower sales of
diagnostic products, revenues in Japan increased by $520,000 or 4% due to the
impact of favorable exchange rates in 1994. Other international revenues grew
$3.0 million or 31% primarily due to higher switching product sales.
The impact of exchange rate fluctuations on currency translations increased
revenues by approximately $1.0 million or 2% and increased net income by $86,000
or 2%.
Gross Profit. Gross profit as a percentage of revenues improved from 64% in
1993 to 67% in 1994 principally due to lower per unit manufacturing overhead
costs and higher margins on EAGLE STP sales due to shipments of larger systems
and reduced sales discounts. The gross profit percentage on switching products
is generally lower than on diagnostic products. Changes in the following
factors, among others, may affect gross profit: product and distribution channel
mix, competition, customer discounts, supply and demand conditions in the
electronic components industry, internal manufacturing capabilities and
efficiencies, foreign currency fluctuations and general economic conditions.
Research and Development. Research and development expenses in 1994
decreased by $5.6 million or 32% and from 38% to 20% as a percentage of
revenues. These decreases were
15
<PAGE> 18
attributable primarily to reduced headcount in research and development and
termination of certain projects following the December 1993 restructuring in
which certain product lines were discontinued. Expenses related to EAGLE also
declined due to completion of its initial development.
The Company believes that its future success depends in large part upon its
ability to continue to enhance existing products and develop new products that
maintain its technological competitiveness. The Company intends to continue to
make substantial investments in product and technology development and believes
that total research and development expenses will not change significantly as a
percentage of revenues in 1995.
Selling, General and Administrative. Selling, general and administrative
expenses in 1994 decreased by $1.3 million or 5% primarily as a result of the
December 1993 restructuring. The decline due to the restructuring was partially
offset by employee bonuses and increased sales commissions based upon the
achievement in 1994 of certain business performance targets.
Income Taxes. In 1994, the Company had an effective tax rate of 22%,
compared to 8% in 1993. The provisions for both years were principally foreign
taxes on the income of the Company's Japanese subsidiary. In 1994, the Company
was able to utilize a portion of its prior years' U.S. loss carryforwards, and
consequently provided for taxes on its U.S. taxable income at the federal
alternative minimum tax rate and applicable state tax rates.
The 1993 provision was impacted by the Company's inability to recognize a
benefit for its U.S. loss and credits carryforwards, which remain available to
reduce future U.S. taxes.
The Company anticipates that it has sufficient loss and credits
carryforwards available in 1995 to offset its expected U.S. taxes, and therefore
its federal and state effective tax rates should be similar in 1995 to those in
1994. However, the Company's overall tax rate is significantly influenced by the
level of income derived from its Japanese subsidiary.
1993 COMPARED WITH 1992
Revenues. The Company's revenues declined by $11.2 million or 19% during
1993 primarily due to lower sales of diagnostic products, partially offset by
increased sales of switching products.
The decrease in revenues was primarily due to delayed product introductions
and difficult economic conditions worldwide. As part of its restructuring, the
Company further rationalized its business lines to enhance its ability to be
successful within its resource constraints for 1994 and thereafter. See
"Restructurings."
Revenues from diagnostic products decreased by $15.7 million or 29%. Of
this amount, sales of the signalling/wireless diagnostic products decreased by
$9.3 million or 43% primarily due to lower sales in the U.S. following an
unusually high level of sales during the first nine months of 1992, which was
primarily related to the significant SS7 deployment by the RBOCs. In addition,
sales of diagnostic products for LAN and WAN applications decreased by $5.8
million or 20% due primarily to lower worldwide sales of LAN and field service
protocol analyzers. This decrease was partially offset by sales of the Chameleon
Open which first shipped in the second quarter of 1993. Sales of LAN protocol
analyzers declined due to a slowed market for FDDI research and development, the
emergence of competing technologies such as ATM and increased competition.
Revenues from switching products increased by $4.5 million or 115%
primarily due to higher sales of EAGLE STPs products in the U.S., higher sales
of other switching products in Canada and the first international EAGLE STP sale
in New Zealand.
Revenues in North America decreased by $9.1 million or 27% primarily as a
result of lower sales of diagnostic products partially offset by higher
switching product sales. Sales in Japan decreased by $782,000 or 6% due to lower
field service diagnostic product sales. Other international sales decreased by
$1.3 million or 12% primarily due to lower sales of LAN/WAN and field service
diagnostic products, partially offset by the first international EAGLE STP sale.
16
<PAGE> 19
The impact of exchange rates fluctuations on currency translations
increased revenues by $1.4 million or 3% and decreased net loss by $100,000 or
1%.
Gross Profit. Gross profit as a percentage of revenues decreased from 68%
in 1992 to 64% in 1993 principally due to changes in the product mix of the
Company's sales and a higher percentage of fixed overhead costs due to lower
revenues. The changes in the product mix reflected a shift in the Company's
sales to a lower proportion of sales of higher margin signalling/wireless
diagnostic products and a higher proportion of EAGLE products which carried
lower margins than the Company's traditional diagnostic business due in part to
marketing strategies to gain market position.
Research and Development. Research and development expenses increased by
$1.4 million or 9% in 1993. This increase was due primarily to the hiring of
additional engineering personnel and increased third-party contractor costs
incurred in connection with the ongoing development of EAGLE, which was in the
early stages of its product life cycle.
Research and development expenses increased as a percentage of revenues
primarily due to lower than anticipated overall revenues and increased expenses
as described above. Research and development expenses for EAGLE accounted for
approximately 36% of the total research and development expenses for 1993.
The Company also capitalized software development costs totaling $165,000
in 1993 related principally to SMDS, the Company's new broadband WAN
application, as compared to $2.6 million in 1992.
Selling, General and Administrative. Selling, general and administrative
expenses decreased by 13% in 1993. Selling expenses decreased by $2.3 million
and general and administrative expenses decreased by $1.3 million, primarily as
a result of the expense reduction measures implemented as part of the December
1992 restructuring and lower legal expenses, partially offset by a currency
translation effect of approximately $450,000 on the Company's foreign
operations.
Restructurings. During 1992 and 1993 the Company recorded restructuring
charges of $2.8 million and $6.0 million, respectively. See Note E to
Consolidated Financial Statements.
Income Taxes. Although the Company's pre-tax results showed a loss for the
years ended December 31, 1992 and 1993, the effective tax rates were 24% and 8%,
respectively. The provisions principally consisted of foreign taxes on the
income of the Company's Japanese subsidiary and reflected the Company's
inability to recognize any benefit for its U.S. loss and credits carryforwards,
which remain available to reduce future U.S. taxes.
17
<PAGE> 20
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated
statement of operations items and the percentages such items bear to total
revenues. In the opinion of the Company, this information has been prepared on
the same basis as the audited consolidated financial statements appearing
elsewhere in this Prospectus and all necessary adjustments (consisting only of
normal recurring adjustments) have been included to present fairly the results
of operations for such periods. Results of any one or more quarters are not
necessarily indicative of annual results or continuing trends. See "Risk
Factors -- Fluctuations in Quarterly Results; Seasonality; Lengthy Sales Cycle."
<TABLE>
<CAPTION>
QUARTERS ENDED(1)
--------------------------------------------------------------------------------------------
MARCH SEPT. MARCH SEPT.
31, JUNE 30, 30, DEC. 31, 31, JUNE 30, 30, DEC. 31,
1993 1993 1993 1993 1994 1994 1994 1994
-------- -------- -------- -------- -------- -------- -------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $ 11,157 $ 11,425 $ 12,658 $ 11,616 $ 12,986 $ 13,810 $ 15,638 $ 18,755
Cost of goods sold.............. 3,848 3,927 5,036 4,025 4,740 4,316 5,032 6,300
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit...................... 7,309 7,498 7,622 7,591 8,246 9,494 10,606 12,455
Research and development........ 4,283 4,430 4,460 4,397 2,772 2,742 3,066 3,382
Selling, general and
administrative................ 6,043 6,237 5,738 5,738 4,943 5,336 5,568 6,619
Restructuring................... -- 400 -- 5,588 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) from operations..... (3,017) (3,569) (2,576) (8,132) 531 1,416 1,972 2,454
Interest and other income
(expense), net................ 2 66 15 110 (288) (200) (92) (82)
-------- -------- -------- -------- -------- -------- -------- --------
Income (Loss) before provision for
income taxes.................... (3,015) (3,503) (2,561) (8,022) 243 1,216 1,880 2,372
Provision for income taxes...... 319 320 243 560 117 339 523 272
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)......... $ (3,334) $ (3,823) $ (2,804) $ (8,582) $ 126 $ 877 $ 1,357 $ 2,100
======== ======== ======== ======== ======== ======== ======== ========
Earnings (Loss) per share(2):
Primary......................... $ (0.40) $ (0.46) $ (0.34) $ (1.02) $ 0.01 $ 0.10 $ 0.15 $ 0.20
Fully diluted................... (0.40) (0.46) (0.34) (1.02) 0.01 0.10 0.14 0.20
Weighted average number of shares
outstanding(2):
Primary......................... 8,272 8,274 8,328 8,380 8,558 9,064 9,262 10,436
Fully diluted................... 8,272 8,274 8,328 8,380 8,558 9,064 9,740 10,644
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............ 34.5 34.4 39.8 34.7 36.5 31.3 32.2 33.6
--------- -------- -------- -------- --------- -------- -------- --------
Gross profit.................... 65.5 65.6 60.2 65.3 63.5 68.7 67.8 66.4
Research and development...... 38.3 38.8 35.2 37.8 21.3 19.9 19.6 18.0
Selling, general and
administrative.............. 54.2 54.6 45.3 49.4 38.1 38.6 35.6 35.3
Restructuring................. -- 3.5 -- 48.1 -- -- -- --
--------- -------- -------- -------- --------- -------- -------- --------
Income (Loss) from operations... (27.0) (31.3) (20.3) (70.0) 4.1 10.2 12.6 13.1
Interest and other income
(expense), net.............. -- 0.6 0.1 0.9 (2.2) (1.4) (0.6) (0.4)
--------- -------- -------- -------- --------- -------- -------- --------
Income (Loss) before provision
for income taxes.............. (27.0) (30.7) (20.2) (69.1) 1.9 8.8 12.0 12.7
Provision for income taxes.... 2.9 2.8 1.9 4.8 0.9 2.5 3.3 1.5
--------- -------- -------- -------- --------- -------- -------- --------
Net income (loss)....... (29.9)% (33.5)% (22.1)% (73.9)% 1.0% 6.3% 8.7% 11.2%
========= ======== ======== ======== ========= ======== ======== ========
</TABLE>
- ---------------
(1) The Company operates under a thirteen-week calendar quarter, however, for
financial statement presentation purposes, the reporting periods are
referred to as ended on the last calendar day of the quarter. During 1993
and 1994, the quarters ended on: April 2, 1993; July 2, 1993; October 1,
1993; December 31, 1993; April 1, 1994; July 1, 1994; September 30, 1994;
and December 31, 1994.
(2) Weighted average number of shares outstanding and earnings (loss) per share
have been retroactively adjusted to reflect the two-for-one stock split of
the Company's Common Stock effected in March 1995.
Tekelec typically operates with a limited backlog, and most of its revenues
in each quarter result from orders received in that quarter. Further, Tekelec
typically generates a significant portion of its revenues for each quarter at or
near the end of the quarter. Tekelec establishes its expenditure levels based on
its expectations as to future revenues, and if revenue levels in any quarter
were to fall below expectations this would cause expenses to be
disproportionately high. Therefore, a drop in near term demand would
significantly affect revenues, causing a disproportionate reduction in
18
<PAGE> 21
profits or even losses in any quarter. Tekelec's operating results may fluctuate
for this reason or as a result of a number of other factors, including general
economic and political conditions (such as recessions in the U.S. and Japan),
capital spending patterns of Tekelec's customers, increased competition,
variations in the mix of sales, fluctuation in proportion of foreign sales, and
announcements of new products by Tekelec or its competitors. The Company
typically experiences lower sales and order levels in the first quarter when
compared with the preceding fourth quarter due primarily to the capital spending
patterns of its customers, and the Company believes that this pattern will
continue in the first quarter of 1995.
In 1994, Tekelec's quarterly revenues increased by up to 61% as compared to
prior year's quarters. The Company believes these increases resulted from
increased market acceptance of its products. The Company's results for 1993
include pre-tax restructuring charges amounting to $400,000 in the second
quarter and $5.6 million in the fourth quarter and the effect of the Company's
inability throughout the year to currently recognize benefits amounting to $8.0
million for its tax loss and credits carryforwards. The Company's results for
1994 include the effect of the Company's ability to recognize benefits amounting
to $1.6 million for its tax loss carryforwards.
The significant increase in the weighted average number of shares
outstanding in the fourth quarter of 1994 is primarily attributable to the
exercise of options during the period and the dilutive effect of outstanding
options under the treasury stock method following the increase in the price of
the Company's Common Stock. In light of subsequent increases in the price of the
Company's Common Stock and the issuance of shares contemplated hereby, the
weighted average number of shares outstanding in the second quarter of 1995 and
in subsequent periods will be significantly higher than in prior periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its net working capital and capital expenditure
requirements principally from operations, available cash and utilization from
time to time of its U.S. credit facilities. At December 31, 1994, the Company
had $6.7 million of cash and cash equivalents, representing an increase of $3.0
million from December 31, 1993 primarily attributable to net cash provided by
operating activities.
Accounts receivable, including amounts due from related parties, increased
by 63% during 1994 due primarily to a 61% increase in sales for the fourth
quarter of 1994 over 1993 fourth quarter sales. A significant portion of the
Company's quarterly sales are concentrated in the last month of each quarter.
Inventories decreased by 7% during 1994 primarily due to continued efforts to
maximize inventory efficiency.
Capital expenditures were reduced to $1.5 million during 1994 in connection
with steps taken to improve the Company's liquidity following the December 1993
restructuring. Although there are currently no significant commitments for
capital expenditures, the Company expects that its capital expenditures will
increase significantly in 1995, primarily in connection with the planned
acquisition of equipment for research and development and sales demonstration.
The net cash provided by financing activities in 1994 was $338,000 which
represented $1.6 million in proceeds from the issuance of Common Stock resulting
from the exercise of options and warrants, and $860,000 in net proceeds from the
issuance of long-term debt, offset primarily by repayments of short-term
borrowings.
The Company has a $7.5 million line of credit and a $2.0 million line of
credit with U.S. banks and lines of credit aggregating $3.5 million available to
the Company's Japanese subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit with a U.S. bank is
collateralized by substantially all of the Company's assets, bears interest at
the U.S. prime rate (8.5% at December 31, 1994) plus 2.5% per annum and expires
September 30, 1995, if not renewed. Maximum borrowings available under
19
<PAGE> 22
the line of credit are based on eligible accounts receivable and amounted to
$6.6 million at December 31, 1994, of which $126,000 was then outstanding. This
line of credit includes a $1.0 million long-term credit facility payable in
monthly installments through May 1998 or upon the expiration of the underlying
$7.5 million line of credit, if not renewed. At December 31, 1994, $860,000 was
outstanding under this long-term facility, of which $620,000 was included under
long-term debt.
In February 1994, the Company established a $2.0 million line of credit
with a U.S. bank collateralized by restricted cash deposits in Japan, with
interest at the U.S. prime rate plus 0.375% per annum. This line of credit
expires May 31, 1995, if not renewed. Borrowings at any time may not exceed the
cash amount on deposit. At December 31, 1994, $1.0 million was outstanding under
this line of credit.
The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.5 million with interest at the Japanese prime
rate (3% at December 31, 1994) plus 0.125% per annum which expire between May
29, 1995 and March 31, 1996, if not renewed. There have been no borrowings under
these lines of credit.
Upon the expiration of the above-described credit facilities, the Company
believes that, if necessary, it would be able to arrange for credit facilities
on terms generally no less favorable than those described above.
The Company believes that proceeds from this offering together with funds
generated from operations, existing working capital and current bank lines of
credit should be sufficient to satisfy anticipated operating requirements at
least through 1995.
FOREIGN EXCHANGE
International operations are subject to certain opportunities and risks,
including currency fluctuations. In 1992, 1993, and 1994, weighted average
exchange rates for certain key currencies strengthened (weakened) against the
U.S. dollar as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1992 1993 1994
----- ----- -----
<S> <C> <C> <C>
Japanese yen............................. 6% 13% 9%
Canadian dollar(1)....................... NA (4%) (9%)
</TABLE>
- ---------------
(1) 1992 change versus 1991 not applicable as the Company's Canadian operations
did not begin operations until 1992.
The change in cumulative translation adjustment in 1994 was due primarily
to the strengthening of the Japanese yen against the U.S. dollar. Exchange gains
(losses) are recorded in interest and other income (expense), net and amounted
to $(132,000), $253,000 and $(235,000) in 1992, 1993 and 1994, respectively.
Exchange gains and losses include the remeasurement of certain currencies into
functional currencies and the settlement of intercompany balances.
20
<PAGE> 23
BUSINESS
Tekelec designs, manufactures and markets advanced diagnostic systems and
innovative network switching solutions for the global communications
marketplace. The Company is a leading supplier of diagnostic systems used in the
design, installation and maintenance of a broad range of communications
equipment and networks. Tekelec's EAGLE STP switching platform enables operators
of wireline and wireless networks to deliver Advanced Intelligent Network (AIN)
services such as Caller ID, personal number calling and digital wireless
services such as Personal Communications Systems (PCS) and Global Systems for
Mobile (GSM). The Company sells its diagnostic systems worldwide to long
distance carriers, telephone operating companies, communications equipment
manufacturers, wireless and cellular network operators and government agencies.
The Company's switching products have been sold primarily to U.S. independent
telephone companies (ITCs) and cellular providers through the Company's direct
sales force and distribution and marketing relationships with AT&T Corp. (AT&T)
and Stratus Computer, Inc. (Stratus).
INDUSTRY BACKGROUND
Deregulation and privatization worldwide have intensified competition among
existing operators of public communications networks and encouraged the entrance
of new service providers. At the same time, the convergence of telephony and
computing is resulting in end-users demanding new and enhanced high quality
communications services at lower cost. As a result, network operators are
increasingly pressured to reduce the time and expense required to introduce such
services. Together, these forces are creating the need for new equipment and
infrastructure for both wireline and wireless networks.
Public Networks: Increased Competition and Complexity
In the U.S., long distance carriers and Regional Bell Operating Companies
(RBOCs) are increasingly competing with one another and with new competitive
service providers that have entered the local and long distance markets. The
rapid growth of cellular and wireless networks has also further increased the
number of communications alternatives offered to end users. In response to this
environment, operators of public networks are seeking to lower their costs and
differentiate themselves by rapidly introducing new services. These include
high-speed data services such as Asynchronous Transfer Mode (ATM) and Frame
Relay, Advanced Intelligent Network (AIN) services such as Caller ID, voice
messaging, personal number calling which assigns a number to a user not a
location and customized routing and billing as well as digital wireless services
such as PCS and GSM.
While communications markets are becoming increasingly competitive, a
proliferation of standards and protocols is making the design and operation of
communications networks more complex. Demand for high speed communications
integrating voice, data and video is growing rapidly. Services based on emerging
technologies, such as ATM, Frame Relay and SMDS, are being deployed while
Integrated Services Digital Network (ISDN) is increasingly available to provide
end-user access to combined voice and data services. In addition, network
operators must also support protocols such as FDDI and Ethernet as an increasing
number of Local Area Networks (LANs) are being interconnected across their Wide
Area Networks (WANs).
As a result, network operators have become more demanding of communications
equipment suppliers to provide solutions that enable them to increase the
overall functionality and flexibility of their networks at a lower cost.
21
<PAGE> 24
Diagnostic Tools
The proliferation of standards and protocols and the increasing complexity
of communications equipment is creating a need for new, more sophisticated
diagnostic systems capable of simultaneously testing multiple existing and
emerging technologies. Network operators use diagnostic tools to efficiently
monitor network performance, simulate network services and test interoperability
of equipment. In an increasingly competitive environment, network operators need
diagnostic systems that can reduce time to market by shortening the testing
cycles necessary to model and implement new services. In addition, network
operators require advanced diagnostic solutions that verify reliability of
network elements, offer flexibility to support new standards and protocols as
they emerge and enable them to centralize the testing expertise within their
organizations.
Equipment manufacturers use diagnostic tools to design and test their
products, such as switches, hubs and routers, for conformance to new and
existing standards and to simulate network operating conditions. Manufacturers
seek diagnostic tools that enable them to reduce their product development
cycles and testing costs that are principal contributors to product development
time and expense. Furthermore, diagnostic tools with a flexible architecture are
necessary to accommodate the rapid changes in technology.
Advanced Intelligent Network (AIN) Switching
In response to competition, network operators are seeking to differentiate
themselves by offering advanced voice and data communications services. The AIN
is a network architecture and a set of standards designed to allow network
operators to create, deploy and modify these services quickly and economically.
AIN services represent the merging of telephony with database information
through signalling. Such services include Caller ID, voice messaging, personal
number calling and customized routing and billing as well as digital wireless
services such as PCS and GSM.
The enabler of AIN is a highly complex protocol called the Common Channel
Signalling System No. 7 (SS7). The AIN architecture uses two separate but
parallel paths: one to handle the voice or data traffic and a second to carry
the signalling information for call set-up and routing (out-of-band signalling).
Network operators utilize the AIN architecture to increase the efficiency of
their network by offloading signalling traffic onto the SS7 network. This frees
up trunk line capacity needed for revenue generating traffic. Network operators
are increasingly using SS7 networks as a source of competitive advantage to
introduce new services through software changes in AIN network elements rather
than in central office switches. The key network elements in the AIN
architecture are as follows and depicted on the following page.
Signal Transfer Point (STP) -- An STP is a switch that handles the
signalling messages used to set up telephone calls, queries external
databases for routing and processing information and dispatches call
handling instructions.
Service Switching Point (SSP) -- An SSP is a component of the central
office switch that sets up trunk connections. When an SSP identifies an AIN
call, it routes a signalling message to the STP and awaits further
instructions for call processing.
Service Control Point (SCP) -- An SCP is a computer database that is
accessed by STPs for customer call routing and other special information
required for AIN services.
22
<PAGE> 25
(CHART -- SEE EDGAR APPENDIX)
Additional components of the AIN architecture include Service Creation
Environments (SCE) used to create new software-based services and Service
Management Systems (SMS) used for billing and administration.
While SS7 has been available since the 1980s, to date it has been used
principally to support intelligent services such as call set-up, 800 number
calling and calling card verification. AIN standards and services have only
recently emerged and the number and complexity of these services continues to
grow. Services such as Caller ID, voice messaging, personal number calling and
customized routing and billing as well as digital wireless services such as PCS
and GSM, all require SS7 networking technology. ISDN, driven by the growth of
the Internet and telecommuting, is also increasing the need for SS7 to provide
the signalling connectivity for ISDN applications.
The accelerating rate of introduction of these new enhanced services
enabled by SS7 has placed increasing demand for functionality and capacity on
the installed base of older generation STPs. These devices are, in most cases,
modified central office digital switches that fundamentally were not optimized
for AIN purposes. In addition, the telecommunications industry is evolving
towards an architecture of more intelligent distributed switching in which the
software will allow for third party developers to be involved in creating
applications.
With competition among network operators accelerating the deployment of AIN
services, the strategic and economic value of sophisticated switching equipment
optimized for SS7 applications is rapidly increasing. In addition, the
importance of SS7 networks to network operators mandates extremely high
reliability and fault tolerance from the equipment as well as higher throughput
and scalability to support the rapid but unpredictable growth in enhanced AIN
services. Companies that offer SS7-based products that are built on scalable,
open distributed architectures and enable AIN applications can benefit from this
industry shift.
23
<PAGE> 26
THE TEKELEC SOLUTION
The Company has leveraged its expertise in a broad range of communications
technologies and network protocols to provide equipment manufacturers and
network operators products that meet their advanced diagnostic and AIN switching
needs.
Network Diagnostic. Tekelec is a leading supplier of highly-integrated
powerful diagnostic systems for the proliferation of increasingly complex and
high speed communications standards and protocols. The Company believes that the
distributed, standards-based architecture of its Chameleon Open and MGTS/GSMT
products enable it to offer performance features and diagnostic solutions that
are superior to those offered by its competitors. These systems are networkable
and incorporate software-based solutions to enable the Company to develop new
applications to support emerging technologies. These products can be deployed in
a variety of configurations to address customers' specific diagnostic needs in
both research and development and network operations environments.
Network Switching. Tekelec's EAGLE STP is designed to meet the demands of
SS7 switching to enable network operators to deliver AIN services for wireline
and wireless communications networks. Tekelec's EAGLE platform features a
fully-distributed, standards-based, open architecture. It offers scalability and
performance advantages which provide for flexibility in the design and
implementation of SS7 networks. The system's reliability, ease of management and
maintenance, and the ability to support evolving services are critical features
to customers. Tekelec's EAGLE STP can be configured to meet customers' specific
needs for capacity, functionality and cost effectiveness.
STRATEGY
The Company's objective is to be the premier developer and supplier of
advanced diagnostic systems and innovative network switching devices to existing
and emerging communications markets. The Company positions its products to
capitalize on the evolution of advanced intelligent network services and
internetworking worldwide. Key elements of the Company's strategy include:
Leverage Expertise in Communications Technologies. The Company believes its
core competitive strength is the breadth and depth of its knowledge and
expertise in communications technologies, particularly in signalling, wireless
and broadband. The Company has developed this expertise over a period of 15
years and continues to augment its capabilities. The Company seeks to expand the
applications for its technology and to capitalize on the breadth of its broad
range of communications expertise to develop new products, as it has done with
the EAGLE STP.
Target Key Emerging Markets. The Company's new products and ongoing
research and development efforts are targeted at emerging, high growth
communications markets including:
- Signalling, such as SS7, to provide network-based distributed
intelligence and access for AIN services;
- Digital wireless services based upon GSM and emerging PCS standards to
provide universal mobile access for AIN-based voice and data services;
and
- Broadband multimedia services based upon ATM to provide video, image,
voice and data transmissions over a single network connection.
Emphasize High Performance, Software-Based Products. The Company's key
products utilize open distributed architectures that facilitate the development
of new applications, expansion of capacity and implementation of technical
advances. The Company's modular product platforms are designed to enable the
Company to (i) maximize product features, (ii) reduce the time required to bring
new products and applications to market and (iii) modify the features of its
products as standards evolve. Because the intelligence of the Company's products
is largely implemented through software which it has developed over a number of
years, the Company believes that the technical features and flexibility of its
products cannot easily be matched by competition.
24
<PAGE> 27
Increase Market Penetration through Strategic Relationships. In order to
gain increased acceptance and market penetration for its EAGLE STP product, the
Company has focused on forming strategic relationships with leading
communications equipment providers. The Company has formed relationships with
AT&T and Stratus and intends to form additional alliances to continue to
strengthen its competitive position and address new markets. The Company
believes that the relationships with AT&T and Stratus demonstrate the
recognition of the technical advantages of the EAGLE STP.
Provide Responsive Technical Support and Service. In order to maintain its
competitive position, promote customer satisfaction and enhance the market for
its products, the Company is committed to providing rapid, high level support
and service to its customers. The Company believes that direct contact with its
customers allows it to anticipate future product requirements and promotes
customer satisfaction.
PRODUCTS
Network Diagnostic Systems
Equipment manufacturers and network operators use the Company's diagnostic
systems to perform a wide variety of simulation and analysis to detect, diagnose
and isolate communications problems. The Company's proprietary simulation
language enables the controlled imitation of communications devices, traffic
loads, and networks. Its analysis software helps monitor, selectively capture
and interpret digitized pulses transmitted through a network. Uses of the
Company's products include the following:
- Designing Communications Equipment. By simulating existing and emerging
communications devices (e.g., digital switches, STPs, SCPs, routers and
hubs) and protocols (e.g., ATM, SS7, ISDN, FDDI and Ethernet), the
Company's products assist engineers in designing communications devices
that will be compatible with, and minimize potential breakdowns of, the
networks in which the devices will be deployed.
- Ensuring Product Reliability. By simulating a wide range of operating
situations, including protocol errors and other network failures, the
Company's products can help ensure that communications equipment
manufacturers produce devices that will operate error-free, thereby
reducing costly failures after installation.
- Verifying Certification. By executing certain standard tests, network
operators and manufacturers use the Company's products to verify that
communications devices meet specified standards (e.g., X.25, ISDN and
SS7).
- Monitoring Networks. By collecting and analyzing traffic, the Company's
products can monitor networks on a continuous basis and provide notice of
system failures.
- Troubleshooting. By identifying the specific location and type of
communication error, the Company's products can isolate which network
device has failed (e.g., channel bank or PBX). The Company's products
help technicians and engineers repair devices and networks promptly and
minimize expensive downtime.
The Company's principal diagnostic systems are:
Chameleon Open. The Chameleon Open is a multiprotocol analyzer that
features a flexible open architecture for a family of applications that provide
simultaneous full bandwidth testing of broadband, LAN and WAN equipment and
networks. It can perform tests at speeds up to 155 Mbps and currently supports a
number of protocols and interfaces including ATM, SMDS, FDDI, Frame Relay, ISDN
PRI, TCP/IP, X.25, T1, E1, Ethernet and Token Ring. The Chameleon Open is based
on an Intel x86-based hardware platform and a UNIX operating system
incorporating X-Windows, Motif, a graphical user interface. Each system
supports, depending on its configuration, up to 12 network
25
<PAGE> 28
interfaces simultaneously and can be configured as either a portable or rack
mounted system. Multiple systems can be networked in a LAN or WAN configuration.
MGTS/GSMT. The MGTS/GSMT system is used primarily for SS7-based device
simulation, load generation and network monitoring. In its fully configured
form, the system includes Tekelec's proprietary programming tool, PASM, that can
be used to design customized testing scenarios. The MGTS/GSMT software runs on
Sun Microsystems and Hewlett-Packard UNIX operating systems with an X-Windows,
Motif graphical user interface. The MGTS/GSMT systems support a number of
protocols, including SS7, AIN, GSM, IS-41 and personal digital communications
(PDC) networks. Each unit can simulate up to 32 SS7 links or 16 network nodes
simultaneously and a number of MGTS may be networked together.
Chameleon 32 Plus. The Chameleon 32 Plus is a sophisticated diagnostic
system that simulates and analyzes multiple types of communications devices and
networks. Research and development users utilize the Chameleon 32 to
comprehensively test ISDN primary and basic rate interfaces, SS7 and data
protocols such as Frame Relay and X.25.
List prices for the Company's principal diagnostic products range from
approximately $35,000 to $150,000 depending on configuration.
Network Switching Products
EAGLE STP. The Company introduced the EAGLE STP in early 1992. The EAGLE
STP is designed to meet the demands of SS7 switching and features a fully
distributed standards-based open architecture. Its open distributed
architecture, high capacity and throughput are tailored to the SS7 switching
needs of common carriers, local exchange carriers and PCS and cellular
operators. The EAGLE STP is economically scalable in configurations from 8 to
268 links. On-going software releases provide continual product improvement to
meet the evolving needs of end users. As is required in SS7 networks, the EAGLE
is sold and deployed in pairs, for redundancy. The EAGLE has the following
features:
Designed for SS7 Standards. The EAGLE STP is designed to exceed the
requirements for STPs as defined by Bell Communications Research (Bellcore) and
presently supports both American National Standards Institute (ANSI) and
International Telephone and Telegraph Consultative Commission (CCITT) SS7
standards. Bellcore defines the standards used primarily by the RBOCS for
equipment used in their networks. EAGLE is currently undergoing initial
technical audit by Bellcore. See "-- Sales, Marketing and Support."
Powerful, Distributed Architecture. The EAGLE STP features a fully
distributed, open architecture, utilizing Intel x86 microprocessors. The
performance of the product results from its uniquely distributed architecture
and the elimination of central processors. In the EAGLE STP, all SS7 network
intelligence, including SS7 routing information, is distributed among up to 134
signalling interfaces, each with its own dedicated processor. Each interface is
interconnected via a high speed, redundant bus subsystem. The bus subsystem
utilizes two, counter-rotating 125 Mbps busses and features proprietary
switching and buffering algorithms, which minimize collision and guarantee
message delivery between all attached interfaces. All interfaces attached to the
bus subsystem are hot-swappable, so that interface repair or replacement does
not affect system operation.
Open Software Architecture. The EAGLE STP's software is fully modular and
written entirely in industry standard programming languages. All software is
released in complete versions, eliminating the need for interim patching in
order to minimize the potential for errors. EAGLE STP software is optimized for
the capacity and redundancy features of the host hardware. Users of the EAGLE
STP can add functionality and services to their network, utilizing the EAGLE
STP's open software interfaces.
Ease of Operation and Maintenance. EAGLE STP installations generally do not
require any enhancements to the central office's power supply, cooling system or
flooring and require less than
26
<PAGE> 29
36 square feet of space. An EAGLE STP can usually be installed in less than one
week. No scheduled maintenance is required to support the EAGLE STP, eliminating
the requirement for on-site personnel.
Prices for a pair of EAGLE STPs typically range from approximately $250,000
to $2,000,000, depending on configuration and associated software applications.
Compliance with Industry Standards
The Company's products are designed to meet a significant number of
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, the Company's products must comply with various
regulations defined by the Federal Communications Commission (FCC) and
Underwriters Laboratories as well as standards established by Bellcore and the
ANSI. Internationally, the Company's products must comply with standards
established by telecommunications authorities in various countries as well as
with recommendations of the CCITT and the International Standards Organization
(ISO). The failure of the Company's products to comply, or delays in compliance,
with the various existing and evolving standards could have a material adverse
effect on the Company's business and operating results. See "Risk Factors --
Compliance with Regulations and Evolving Industry Standards."
PRODUCT DEVELOPMENT
The communications market is characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. Standards
for new services such as ATM, AIN and PCS are still evolving. As these standards
and the demand for services and applications evolve, the Company intends to
adapt its products or develop and support new products. The Company solicits
product development input through discussions with users of the Company's
products, as well as participation in industry organizations and international
standards committees such as the ATM Forum and European Telecommunications
Standards Institute (ETSI).
The Company's diagnostic product development activities are focused on
expanding the capabilities of the Chameleon Open, including its interfaces and
software modules, and the protocol capabilities for emerging technologies such
as ATM and AIN. From time to time the Company engages in development projects
for special applications for customers. The Company is usually free to use such
technology in future products which are not competitive with the specific
application for which the development work was performed.
The Company's network switching product development group has as its
priority the release of new software versions to incorporate enhancements
desired by customers and compliance with standards to enable EAGLE to address
additional domestic and international markets. In addition, the Company plans
continued improvement of hardware components to improve performance and
capability.
The Company utilizes a common standards-based open architecture approach in
the design of its products. This approach facilitates and accelerates the
development of new applications and products and permits the Company to enhance
existing products by substituting new hardware or software modules. This modular
approach also helps to extend the life cycles of the Company's products, ensure
compatibility among successive generations of products and simplify
manufacturing.
The Company's success depends to a substantial degree upon its ability to
respond to changes in technology, industry standards and customer requirements.
This will require the timely selection, development and marketing of
enhancements and new products on a cost-effective basis. The Company has
invested and expects to continue to invest substantial resources in the
development of new products and technology and product enhancements. There can
be no assurance that the Company's product development efforts will result in
commercially successful new or enhanced
27
<PAGE> 30
products or that the Company's products will not be rendered obsolete or
noncompetitive by changing technology or new competitive products.
Products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or as new versions are released. Such
errors have occurred in the past. While the Company's products have not
experienced any significant errors, such errors, particularly those that result
in a failure of the Company's switching products, could have a material adverse
effect on the Company's customer relationships, business and operating results.
There can be no assurance that, despite thorough testing by the Company and by
customers, errors will not be found in the Company's products.
Product development includes expenditures for research and development, new
product design, enhancement of existing products, and selective acquisition of
technology. Research and development expenses amounted to approximately $16.2
million, $17.6 million, and $12.0 million, in 1992, 1993 and 1994, respectively.
The Company has also capitalized certain additional software development costs
totalling approximately $2.6, $165,000 and $0 in 1992, 1993 and 1994,
respectively. These costs are amortized over a period not to exceed three years.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes A, E and I to Consolidated Financial Statements.
The Company's development facilities are located in California, North
Carolina, Ohio and Japan. As of March 1, 1995, the Company had 110 persons
engaged full time in product development. The Company believes that recruiting
and retaining highly skilled engineering personnel is essential to its success.
To the extent that the Company is not successful in attracting and retaining its
technical staff, its business and operating results would be adversely affected.
See "Risk Factors -- Dependence on Key Personnel."
SALES, MARKETING AND SUPPORT
The Company's strategy for its diagnostic products is initially to target
customers' research and development departments designing the next generation of
communications equipment and then to target the manufacturing groups and
ultimate users as equipment is manufactured, certified and installed. This
strategy permits the Company to gain expertise in testing emerging technologies
in the early stages of their life cycles.
The Company's sales strategy for its EAGLE switching product is to maintain
its leadership position in the U.S. ITC and cellular markets and to pursue
selected international opportunities and new customer relationships including
RBOCs. Current and future strategic alliances will continue to be an integral
component of the strategy to reach broader markets and attain greater market
presence. The network switching sales cycle ranges from three to twelve months
depending on the complexity of a customer's planning, bidding and implementation
requirements.
In order to penetrate the portion of the public carrier market dominated by
the RBOCs, it is important that ongoing technical audits of the EAGLE STP be
conducted by Bellcore to help the Company ensure interoperability with the
operations, administration, maintenance and provisioning systems used by the
RBOCs to manage their networks. Bellcore is currently in the process of
conducting its initial technical audit, and upon completion a copy of the
technical auditing report will be available to the Company. Bellcore does not
endorse or certify any product or service or guaranty its performance. Failure
or delay in obtaining favorable technical audit results could have a material
adverse effect on the Company's ability to sell EAGLE STP to this large segment
of the communications carrier market.
Domestic Distribution. The Company sells its diagnostic and switching
products in the U.S. principally through separate direct sales forces and, for
the EAGLE STP, also through strategic relationships with AT&T and Stratus. The
Company's direct sales forces operate out of the
28
<PAGE> 31
Company's headquarters in Calabasas, California and its regional offices located
in Colorado, Illinois, New Jersey, North Carolina, Northern California,
Tennessee, Texas and Virginia.
International Distribution. The Company sells its diagnostic products
internationally through a network of 26 distributors and two wholly owned
subsidiaries in Japan and Canada. The Company's Japanese subsidiary, which
presently sells only diagnostic products, generated approximately 22%, 25% and
20% of the Company's revenues for 1992, 1993 and 1994, respectively. The Company
currently sells its switching products internationally through its direct sales
force.
Tekelec-Airtronic, S.A., an affiliate of the Company, and its wholly owned
subsidiaries are the distributors of the Company's products in France, Italy,
Germany, The Netherlands, Belgium, Luxembourg, Portugal and Spain. Twenty-one
additional independent companies distribute the Company's products in other
Western European countries, the Far East (other than Japan), New Zealand, the
Middle East, South America and South Africa. Distributors typically purchase
products directly from the Company pursuant to agreements that are exclusive for
a particular territory and are cancelable by either party upon 90 days notice.
Export sales to international distributors accounted for approximately 17%, 19%
and 14% of revenues in 1992, 1993 and 1994, respectively.
The Company typically invoices export sales in U.S. dollars and its foreign
subsidiaries invoice sales in their respective local currency. International
sales are subject to inherent risks, including longer payment cycles, unexcepted
changes in regulatory requirements and tariffs, difficulties in staffing and
managing foreign operations and distributors, greater difficulty in accounts
receivable collection and potentially adverse tax consequences. Additionally,
exchange rate fluctuations on foreign currency transactions and translations
arising from international operations may contribute to fluctuations in the
Company's business and operating results. Fluctuations in exchange rates could
also affect demand for the Company's products. In addition, due to the technical
nature of the Company's products, certain of the Company's export sales must be
licensed by the Office of Export Administration of the U.S. Department of
Commerce. The Company's products are subject, in certain international
jurisdictions, to reduced protection for the Company's copyrights and
trademarks. See Notes A, D and M to Consolidated Financial Statements.
Strategic Relationships. The Company believes that it can improve market
penetration and acceptance for its EAGLE products through strategic
relationships with leading communications equipment suppliers. These suppliers
have long-standing relationships with public carriers and provide a broad range
of services to these carriers through their existing sales and support networks.
Tekelec seeks strategic relationships that (i) enhance the Company's presence in
its target markets, (ii) offer products that complement the EAGLE to provide
value-added networking solutions and (iii) leverage the Company's core
technologies enabling the communications equipment suppliers to develop enhanced
products with market differentiation that can be integrated with the EAGLE
platform.
The Company has a non-exclusive distribution agreement with AT&T and a
marketing agreement with Stratus for the EAGLE STP. The Company believes that
its relationships with AT&T and Stratus demonstrate recognition of the technical
advantages of the EAGLE STP. The Company believes that these agreements provide
the Company with additional opportunities to penetrate the SS7 network switching
marketplace. Through the Company's relationships with AT&T and Stratus, the
Company has enhanced its market presence and its ability to access leading
telephone companies such as the RBOCs. In general, these agreements can be
terminated by either party on limited notice and do not require minimum
purchases. Furthermore, AT&T is not precluded from selling products that are
competitive with the Company's products. A termination of the Company's
relationship with AT&T or the sale of competing products by AT&T could
materially and adversely affect the Company's business and operating results.
See "Risk Factors -- Competition" and "-- Relationship with AT&T."
29
<PAGE> 32
Advertising and Promotion. The Company uses advertising in trade journals,
exhibitions at trade shows and direct mail to promote awareness of the Company
and its products. The Company has been most successful in generating sales
through demonstrations of its products and, therefore, focuses its advertising
and promotional activities on generating opportunities for demonstrations. The
Company also provides extensive training for, and merchandising aids to, its
direct sales force and distributors. These include sales brochures,
demonstration systems and promotional product literature. In order to support
the Company's marketing efforts, the Company also publishes a newsletter for its
customers and distributors.
Services, Support and Warranty. The Company believes that customer service,
support and training are important to building and maintaining strong customer
relationships. The Company services, repairs and provides technical support for
its products. The Company maintains an in-house repair facility and provides
ongoing training and telephone assistance to customers and international
distributors from its headquarters in Calabasas, California, certain U.S.
regional offices and its Japanese subsidiary. The Company's Technical Assistance
Center in Raleigh, North Carolina, supports the Company's switching products on
a 24 hour-a-day, seven day-a-week basis. Support services include 24-hour
technical support, remote access diagnostic and servicing capabilities, extended
maintenance and support programs, comprehensive technical customer training,
extensive customer documentation, field installation and emergency replacement.
The Company typically warrants its products against defects in materials and
workmanship for one year after the sale and thereafter offers extended service
warranties. To date, warranty expenses have been consistently within
management's expectations.
CUSTOMERS
During 1994, the Company shipped approximately 850 units of its diagnostic
products to over 160 customers worldwide and 23 pairs of EAGLE STPs to 18
customers. The Company's customers include end users and marketing
intermediaries. End users for the Company's diagnostic products include long
distance carriers, telephone operating companies, equipment manufacturers and
government agencies. End users for the Company's EAGLE STP consist primarily of
U.S. ITCs and cellular providers.
The Company's diagnostic business is substantially dependent on repeat
business and, therefore, customer satisfaction and loyalty are crucial to its
long-term success. Sales of diagnostic products to Nippon Telegraph & Telephone
(NTT) accounted for 13% of the Company's 1994 revenues. No other customer
accounted for more than 10% of the Company's revenues in 1994.
The top 20 end-user customers for the Company's diagnostic systems during
1994 were:
<TABLE>
<CAPTION>
<S> <C>
Ameritech Corporation MCI Telecommunications Corporation
AT&T Morgan Guaranty Trust Company
Bell Atlantic Corporation Motorola, Inc.
Bell Northern Research NEC America, Inc.
BellSouth Corporation NTT
Boston Technology, Inc. SBC Communications, Inc.
DSC Communications Corporation (DSC) Siemens AG
Fujitsu Network Switching of America, Inc. Sprint Corporation
GTE Corporation U.S. Government Agencies
LORAL Space Information Systems U S WEST Communications, Inc.
</TABLE>
The top 10 end-user customers for the Company's EAGLE STP product during
1994 were:
<TABLE>
<CAPTION>
<S> <C>
Ameritech Cellular SBC Communications, Inc.
ComNet Telstra
GTE Intelligent Network Services, Inc. Thunder Bay Telephone Company
Interstate Fibernet Transaction Network Systems, Inc.
McCaw Cellular Communications, Inc./AT&T U.S. Signal, Inc.
</TABLE>
30
<PAGE> 33
Federal and state agencies, including the FCC, regulate many of the
Company's domestic customers. The FCC and a majority of the states have enacted
or are considering regulations based upon alternative pricing methods.
Uncertainty regarding future pricing policies and the cost effectiveness of
deploying public network services may affect demand for communications products,
including the Company's products. However, the Company believes that
deregulation of the telecommunications market and new methods of price
regulation could increase the demand for products such as those offered by the
Company which enhance the efficiency of the network or allow the expedited
introduction of new revenue-producing services.
BACKLOG
Orders for the Company's diagnostic products are usually placed by
customers on an as-needed basis, and the Company has typically been able to ship
these products in 15 to 30 days after the receipt of the purchase order. Backlog
for switching products typically consists of contracts or purchase orders for
both product delivery scheduled within the next 12 months and EAGLE STP extended
service warranty to be provided over the next three years. Because of variations
in the magnitude and duration of orders received by the Company, and customer
delivery requirements, which may be subject to cancellation or rescheduling, the
Company's backlog at any particular date may not be a meaningful indicator of
future financial results. At December 31, 1994, the Company's backlog amounted
to approximately $18.1 million, of which $8.6 million related to EAGLE STP
service warranty. This compared to $9.9 million at December 31, 1993, of which
$3.1 million related to EAGLE STP service warranty.
MANUFACTURING
The Company's manufacturing operations consist of the procurement and
inspection of components, final assembly, burn-in, quality control testing and
packaging. Printed circuit boards, chassis and most of the other major
components used in the Company's products are subassembled to the Company's
specifications by independent contractors with whom the Company generally has
had long-standing working relationships. The assembled components are then
delivered to the Company's production facilities for final assembly, quality
control testing and product configuration, including software installation. The
Company's products incorporate the Company's proprietary software as well as
software licensed from third parties. The Company believes that its use of
independent contractors for subassembly coupled with in-house final assembly
improves production planning, increases efficiency, reduces costs and improves
quality.
The Company has a computerized manufacturing inventory control system which
integrates and monitors purchasing, inventory control and production. The
Company's quality control process tests for reliability and conformance with
product specifications and utilizes certain automated software test procedures.
The Company received ISO 9002 certification from Bellcore in February 1995.
The Company generally uses industry standard components for its products
which are available from multiple sources; however, a few key components, such
as certain microprocessors, video displays and power supplies, are currently
only available from single suppliers. Vendor supply agreements often include
provisions requiring the vendor to maintain a specified level of key components.
The Company believes that inventory levels of key components, including those
maintained by vendors, are adequate. In addition, should any components become
unavailable the Company believes that functionally similar, if not identical,
components could be obtained, and any necessary internal redesign accomplished,
without materially adversely impacting the Company. To date, the Company has not
experienced any significant delays in obtaining components from its suppliers
and independent contractors. However, the electronics industry is subject to
rapid technological change. Components become obsolete and are discontinued by
manufacturers as new succeeding generations are introduced. An inability to
obtain essential components, if prolonged, could materially adversely affect the
Company's business and operating results and damage customer relationships. See
"Risk Factors -- Dependence on Key Suppliers."
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<PAGE> 34
COMPETITION
Diagnostic Products. The communications diagnostic market is intensely
competitive and subject to rapid technological change and evolving industry
standards. The Company primarily competes in the high performance segment of the
market. Its principal competitor is Hewlett-Packard. The Company also competes
with a number of other manufacturers, some of which have greater financial,
marketing, manufacturing and technological resources than the Company. The
Company believes that its long-term success will depend in part on its ability
to be a leader in offering products for new emerging industry standards and to
offer a broad line of integrated applications.
The Company believes that the principal competitive factors in the
communications diagnostic market in which the Company competes are product
performance, functionality and reliability, timely introduction of new products,
marketing and distribution capability and customer service and support. The
Company anticipates that the price/performance characteristics and breadth of
integrated product applications will become increasingly important competitive
factors. Although price has not been a major factor, the Company anticipates
increased price competition in the future. The Company believes that it competes
favorably, although there can be no assurance that new or established
competitors will not offer products superior to or lower in price than those of
the Company.
Network Switching Products. The market for STPs is highly competitive and
has been highly concentrated among a limited number of dominant suppliers. The
Company expects competition to increase in the future from existing and new
competitors. The Company presently competes with Northern Telecom Limited, DSC,
Ericsson and Alcatel, all of whom have significantly greater financial,
marketing, manufacturing and other resources and larger installed customer bases
than the Company. The Company believes that its long-term success will depend on
its ability to penetrate the major telephone companies, offer products with the
best price/performance profile and be responsive to customers' needs for new
features and services. See "Risk Factors -- Competition" and "-- Relationship
with AT&T."
The Company believes that the principal competitive factors in the network
switching products market are product price/performance characteristics and
reliability, customer service and support and the supplier's financial
resources, marketing and distribution capability. The Company anticipates that
responsiveness in adding new features will become an increasingly important
competitive factor. While the Company's competitors have greater financial
resources, the Company believes it competes favorably in other respects.
However, there can be no assurance that new entrants or established competitors
with greater financial resources have not or will not offer products superior in
performance, quality, service and support to, and/or lower in price than, those
of the Company.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright and
trademark laws and contractual restrictions to establish and protect proprietary
rights in its products. The Company does not hold any patents with respect to
its products. The Company has entered into confidentiality and invention
assignment agreements with its employees, and enters into non-disclosure
agreements with its suppliers, distributors and appropriate customers among
others so as to limit access to and disclosure of its proprietary information.
There can be no assurance that these statutory and contractual arrangements will
prove sufficient to deter misappropriation of the Company's technologies or
independent third-party development of similar technologies. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely. The Company believes that, because of the rapid pace of technological
change in the communications market, legal protections for its products are less
significant factors in the Company's success than the knowledge, ability and
experience of the Company's employees, the frequency of product enhancements and
the quality of support services provided by the Company.
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<PAGE> 35
The communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are important to the Company. There are no currently pending material claims
that the Company's products, trademarks or other proprietary rights infringe the
proprietary rights of third parties. However, there can be no assurance that the
Company will not receive communications from third parties in the future
asserting that the Company's products infringe or may infringe the proprietary
rights of third parties. In its distribution agreements and certain of its major
customer agreements, the Company agrees to indemnify its customers for any
expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. In the event of litigation to
determine the validity of any third-party claims, such litigation, whether or
not determined in favor of the Company, could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from productive tasks. In the event of an adverse ruling in such
litigation, the Company might be required to discontinue the use and sale of
infringing products, expend significant resources to develop non-infringing
technology or obtain licenses from third parties. There can be no assurance that
licenses from third parties would be available on reasonable commercial terms,
if at all. In the event of a successful claim against the Company and the
failure of the Company to develop or license a substitute technology, the
Company's business and operating results would be materially adversely affected.
EMPLOYEES
At March 1, 1995, the Company had 310 employees, comprising 122 in sales,
marketing and support, 44 in manufacturing, 110 in research, development and
engineering and 34 in management, administration and finance. The Company
believes that its future success will depend in part on its ability to attract,
motivate and retain highly qualified personnel. Many employees hold stock
options and participate in an employee stock purchase plan. None of the
Company's employees is represented by a labor union and the Company has not
experienced any work stoppages. The Company believes that its employee relations
are excellent.
PROPERTIES
The Company's executive offices, as well as its principal manufacturing,
engineering and marketing operations, are located in a 58,000 square-foot
facility in Calabasas, California under a lease which expires in November 2004
with an option to extend for an additional five years. The Company also occupies
a 21,600 square-foot facility in Morrisville, North Carolina under a lease
expiring in July 1996, and a 6,800 square-foot facility in Columbus, Ohio under
a lease expiring in March 1997. Both facilities are used primarily for
engineering, product development, customer support and regional sales
activities. The Company recently signed leases for two additional facilities in
Morrisville, North Carolina to provide for anticipated growth. The first is a
five-year lease (cancellable by the Company under certain circumstances) for an
8,800 square-foot facility to which Network Diagnostic Division employees of the
Morrisville facility will relocate in April 1995. The second is a seven-year
lease, with an option to renew for an additional seven years, for a 40,000
square-foot facility to which the Company expects to relocate the Network
Switching Division employees of its Morrisville facility during the fourth
quarter of 1995. The Company also has eight regional sales offices occupying an
aggregate of approximately 14,500 square feet under leases expiring between 1995
and 1997. These are located in Milbrae, California; Boulder, Colorado; Lombard,
Illinois; Nashville, Tennessee; Iselin, New Jersey; Irving, Texas; Reston,
Virginia; and Whitby, Canada. The Company's Japanese subsidiary occupies
approximately 10,600 square feet in Tokyo under leases expiring between August
1995 and November 1996. The Company believes that its existing facilities,
together with the additional facilities it has leased in North Carolina, will be
adequate to meet its needs at least through 1995. The Company believes it will
be able to obtain additional space when and as needed on acceptable terms. See
Note K to Consolidated Financial Statements.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Philip J. Alford......... 41 President and Director
Allan J. Toomer.......... 52 Senior Vice President and General Manager, Network
Switching Division
William C. Shaw.......... 47 Senior Vice President and General Manager, Network
Diagnostic Division
Shigeru Suzuki........... 45 Vice President, Japan Operations and President, Tekelec,
Ltd.
Gilles C. Godin.......... 36 Vice President, Finance and Chief Financial Officer
William J. Minchin....... 58 Vice President, Operations
Jean-Claude Asscher...... 66 Chairman of the Board
Robert V. Adams(1)(2).... 63 Director
Philip Black(1).......... 40 Director
Daniel L. Brenner(1)(2).. 43 Director
Howard Oringer........... 52 Director
Jon F. Rager(1)(2)....... 55 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Alford has been a director and President of the Company since January
1994. He served as the Company's Chief Financial Officer from June 1985 until
February 1994, as Vice President, Finance from May 1986 until October 1990, as
Senior Vice President from October 1990 until July 1993 and as Senior Vice
President and General Manager, International Division from July 1993 until
January 1994.
Mr. Toomer joined the Company in October 1992 as Senior Vice President,
Network Products and became Senior Vice President and General Manager, Network
Switching Division in July 1993. From 1973 until June 1992, he held various
officer positions at Northern Telecom, a telecommunications equipment
manufacturer, where he most recently served as Vice President, Customer Service.
Mr. Shaw joined the Company in November 1993 as Senior Vice President and
General Manager, Network Diagnostic Division. He was employed by Hewlett-Packard
from April 1990 until November 1993 as a Business Unit Manager at its Colorado
Telecommunications Division, and from 1983 until April 1990, as the Marketing
and Research and Development Manager for its Roseville Personal Computer
Division.
Mr. Suzuki has been President of Tekelec, Ltd., the Company's wholly owned
Japanese subsidiary, since September 1985 and has also served as the Company's
Vice President, Japan Operations since May 1988.
Mr. Godin joined the Company in November 1986 as Controller and then served
as Corporate Controller from October 1990 until July 1993 and as Treasurer from
October 1990 until February 1994. Mr. Godin has served as Vice President,
Finance since July 1993 and as Chief Financial Officer since February 1994.
Mr. Minchin has been Vice President, Operations of the Company since April
1988.
Mr. Asscher has been a director of the Company since July 1972 and Chairman
of the Board since June 1982. He served as President of the Company from October
1975 to June 1982, and as Vice President from July 1972 to May 1973. He has been
the President and principal shareholder of
34
<PAGE> 37
Tekelec-Airtronic, S.A. (Tekelec-Airtronic), a French electronics company, since
he founded that company in 1961.
Mr. Adams has been a director of the Company since December 1991. Since
March 1989, he has been the Chief Executive Officer and President of Xerox
Technology Ventures, a venture capital company which identifies, develops and
manages new business opportunities for Xerox Corporation. Mr. Adams has also
served as a director of ENCAD, Inc. since December 1994.
Mr. Black became a director of the Company in 1981, resigned in October
1991 and was re-elected in February 1994. He also served as the Company's Vice
President from September 1979 until June 1982, as President from June 1982 until
August 1987, as Chief Executive Officer from December 1985 until August 1987 and
as Vice Chairman of the Board from August 1987 until October 1991. From March
1990 until August 1991, Mr. Black served as Managing Director of Echelon Europe,
Ltd., a sense and control networking company. In September 1991, Mr. Black
became Chief Executive Officer, Treasurer and a director of Avalon Control
Technologies, a private consulting firm for industrial networks, and served in
those capacities until June 1994 when that company ceased operations. Since
April 1994, Mr. Black has served as President and Chief Executive Officer of
Chevry, a software marketing company.
Mr. Brenner has been a director of the Company since May 1990. From
September 1986 to June 1992, he was an Adjunct Professor of Law and the Director
of the Communications Law Program at the University of California, Los Angeles.
In June 1992, Mr. Brenner assumed his present position as Vice President, Law
and Regulatory Policy for the National Cable Television Association. Mr. Brenner
served on the Board of Directors of the Corporation for Public Broadcasting from
November 1986 to March 1991, and served as its Vice Chairman from 1989 to March
1991.
Mr. Oringer has been a director of the Company since January 1992. From
February 1987 until November 1994, he served as Chairman of the Board and Chief
Executive Officer of TeleSciences, Inc., a manufacturer of telecommunications
equipment. Since November 1994, Mr. Oringer has served as Managing Director of
Communications Capital Group, a consulting firm. From January 1994 until July
1994, Mr. Oringer also served as a consultant to the Company.
Mr. Rager became a director of the Company in October 1975, resigned in
September 1979 and was re-elected in January 1981. Since 1976, Mr. Rager has
been a practicing accountant with, and President of, Rager Bell Doskocil & Meyer
CPAs (and its predecessors).
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<PAGE> 38
COMMON STOCK OWNERSHIP OF
PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1995 by (i) each person
who is known to own beneficially more than 5% of the outstanding shares of the
Company's Common Stock, (ii) each of the Company's directors and executive
officers and (iii) all current directors and executive officers of the Company
as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
SHARES BENEFICIALLY ----------------------------------
NAME OF BENEFICIAL OWNER(1) OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------- ----------------------- --------------- --------------
<S> <C> <C> <C>
Jean-Claude Asscher.................. 3,868,520(2)(3) 41.5% 34.9%
Edouard Givel........................ 2,767,064(4) 29.7 25.0
Kopp Investment Advisors, Inc........ 1,317,320(5) 14.1 11.9
Bentley Capital Management, Inc...... 561,000(6) 6.0 5.1
Philip J. Alford..................... 181,760(3) 2.0 1.6
Robert V. Adams...................... 50,246(3) 0.1 *
Shigeru Suzuki....................... 39,538(3) * *
Howard Oringer....................... 37,688(3) * *
Gilles C. Godin...................... 34,700(3) * *
Daniel L. Brenner.................... 22,772(3) * *
Philip Black......................... 15,000(3) * *
William C. Shaw...................... 7,770(3) * *
Jon F. Rager......................... 9,672(3)(7) * *
William J. Minchin................... 9,000(3) * *
Allan J. Toomer...................... 8,000(3) * *
All current directors and officers as
a group (12 persons)............... 4,284,666(2)(3)(7) 46.0 38.7
</TABLE>
- ---------------
* Less than one percent.
(1) Such persons have sole voting and investment power with respect to all
shares of Common Stock shown as being beneficially owned by them, subject to
community property laws, where applicable, and the information contained in
the footnotes to this table.
(2) Includes 2,767,064 shares which are owned by Mr. Givel and of which Mr.
Asscher may be deemed a beneficial owner (see footnote 4 below), and 975,292
shares owned by Tekelec-Airtronic, a French corporation of which Mr. Asscher
is the President and majority shareholder.
(3) Includes 20,000, 118,500, 12,000, 5,118, 36,500, 34,700, 21,000, 15,000,
2,500, 9,000, 8,000, 6,000 and 288,318 shares subject to options and/or
warrants held by Messrs. Asscher, Alford, Adams, Suzuki, Oringer, Godin,
Brenner, Black, Rager, Minchin, Toomer and Shaw and all current directors
and officers as a group, respectively, which are exercisable or become
exercisable within 60 days after March 31, 1995.
(4) These shares are held in the name of Natinco, S.A. (Natinco), a Luxembourg
investment company which holds minority interests in a number of
Europe-based companies, including a minority interest in Tekelec-Airtronic.
Mr. Givel has advised the Company that he owns substantially all of the
equity interest in Natinco and holds the shares in the Company for
investment only. Mr. Asscher has from time to time acted for, and is the
advisor to, Mr. Givel with respect to his investment in the Company. Due to
Mr. Asscher's relationship with Mr. Givel and his role as advisor, Mr.
Asscher may be deemed to share voting and investment power with respect to
these shares and therefore to be a beneficial owner thereof within the
meaning of Rule 13d-3 of the Exchange Act. Mr. Asscher has advised the
Company that he has no beneficial or financial interest in Natinco and that
he disclaims beneficial ownership of these shares.
36
<PAGE> 39
(5) Based on a Schedule 13G dated February 10, 1995, wherein Kopp Investment
Advisors, Inc. reported shared dispositive power as to 1,317,320 shares.
(6) Based on a Schedule 13D dated March 3, 1995.
(7) 7,172 of these shares are held by TI Partners, a partnership of which Mr.
Rager is the managing general partner, as to which shares Mr. Rager has sole
voting and investment power. Mr. Rager, together with a trust of which he is
the trustee and a beneficiary, owns a majority interest in such partnership.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
without par value. As of March 31, 1995, there were 9,322,682 shares of Common
Stock outstanding, held of record by 202 shareholders, and 2,420,280 shares
reserved for issuance upon the exercise of outstanding options and warrants. The
holders of Common Stock are entitled to one vote for each share held of record
on each matter submitted to a vote of shareholders, except that, upon giving
notice required by law, shareholders may cumulate their votes in the election of
directors. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding senior securities. Holders of Common Stock have no preemptive rights
and have no rights to convert their Common Stock into any other securities. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, when issued, validly issued, fully paid and nonassessable.
The Company's Transfer Agent and Registrar is U.S. Stock Transfer
Corporation, Glendale, California.
37
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Alex.
Brown & Sons Incorporated, Volpe, Welty & Company and Cruttenden Roth
Incorporated, have severally agreed to purchase from the Company the following
respective number of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................
Volpe, Welty & Company..........................................................
Cruttenden Roth Incorporated....................................................
---------
Total........................................................................... 1,750,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are to be purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the public offering
contemplated hereby, the offering price and other selling terms may be changed
by the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 262,500
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 1,750,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,750,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on the Nasdaq Stock
Market may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before commencement of sales in this
offering. The passive market making transactions must comply with applicable
price and volume limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for the security. If all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded. Net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a prior period and must
be discontinued when such limit is reached. Passive market making may stabilize
the market price of the Common Stock at a level above that which might otherwise
prevail and if commenced, may be discontinued at any time.
38
<PAGE> 41
The Company has agreed that until 90 days after the date of this
Prospectus, it will not, without the prior written consent of Alex. Brown & Sons
Incorporated, sell, offer to sell, issue, distribute or otherwise dispose of any
shares of Common Stock or any options, rights or warrants with respect to any
Common Stock or register for sale under the Securities Act, any Common Stock,
subject to certain limited exceptions. Further, the directors and executive
officers of the Company, Tekelec-Airtronic and Natinco have agreed not to
directly or indirectly sell, contract to sell, grant any option to purchase or
otherwise transfer or dispose of an aggregate of approximately 4,284,666 shares
of the Company's Common Stock (including 288,318 shares issuable under options
and warrants which are exercisable or become exercisable within 60 days after
March 31, 1995) for a period of 90 days (180 days in the case of Mr. Asscher,
Tekelec-Airtronic and Natinco) after the date of this Prospectus without the
prior written consent of Alex. Brown & Sons Incorporated.
LEGAL MATTERS
The validity of the shares of the Company's Common Stock offered hereby
will be passed upon for the Company by Coudert Brothers, Los Angeles,
California. Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo
Alto, California, are acting as counsel for the Underwriters in connection with
certain legal matters relating to the offering being made hereby. Coudert
Brothers holds a warrant, exercisable in full at any time prior to July 21,
1999, to purchase 30,000 shares of Common Stock at $2.875 per share. Ronald W.
Buckly, a member of Coudert Brothers, is Corporate Secretary of Tekelec.
EXPERTS
The consolidated balance sheets as of December 31, 1994 and 1993 and the
consolidated statements of operations, shareholders' equity and cash flow for
the three years in the period ended December 31, 1994 are included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
39
<PAGE> 42
GLOSSARY
AIN (Advanced Intelligent
Network).................... Bellcore's set of standards for advanced
intelligent services for the telephone networks
of Regional Bell Operating Companies.
ATM (Asynchronous Transfer
Mode)....................... A broadband, low-delay, packet-based switching
and multiplexing technique. Usable capacity is
segmented into fixed-size cells, consisting of
header and information fields, allocated to
services on demand.
BRI (Basic Rate Interface).... One interface type used to access the
Integrated Services Digital Network. The BRI
interface allows two simultaneous calls across
a single pair of copper wires.
CCITT (International Telephone
and Telegraph Consultative
Committee).................. A United Nations organization which establishes
international telecommunications standards.
E1............................ The European telecommunications standard
defining circuits that operate at speeds of
2.048 Mbps, similar to T1 lines in the United
States.
Ethernet...................... A standard set of specifications for a
particular type of LAN that employs baseband
signalling (single signal on a cable) and has a
transmission rate of 10 Mbps.
FDDI (Fiber Distributed Data
Interface).................. A standard for operating fiber optic-based LANs
at 100 Mbps used for high speed and backbone
applications.
Frame Relay................... A variable length packet-based transmission
technology that is used to transmit data at
speeds up to 2 Mbps.
GSM (Global Systems for
Mobile)....................... The standard for a set of protocols for digital
wireless initially deployed in Europe.
ISDN (Integrated Services
Digital Network).............. Public digital communications services
supporting a wide range of data, voice and
image services accessed by standard interfaces
integrated with customer control.
IS-41......................... One of the Interim Standards for North American
mobile applications for digital cellular.
LAN (Local Area Network)...... A type of high-speed data communications
arrangement in which multiple computer and
related products in an office or campus
environment are connected by means of a
standard transmission medium (typically coaxial
cable, twisted-pair wire or optical fiber).
Mbps (Megabits per second).... A measurement unit, equal to 1,048,576 bits per
second, used to describe data transfer rates as
a function of time.
MSC (Mobile Switching
Center)..................... A switch that coordinates trunk call set-up to
and from users in a digital cellular network.
OC3........................... A standard for operating fiber optic-based WANs
at 155 Mbps.
40
<PAGE> 43
Packet Switching.............. A data transmission technique whereby user
information is segmented and routed in discrete
data envelopes called packets, each with its
own appended control information for routing,
sequencing and error checking.
PCS (Personal Communications
Services)................... A set of evolving standards and protocols
providing for the concept of one number per
user and associated advanced intelligent
services regardless of location primarily
involving mobile communications.
PDC (Personal Digital
Communications)............. A set of protocol standards for Japanese
digital cellular mobile network promulgated by
NEC.
Primary Rate Interface
(PRI)......................... A T1 or E1 circuit used to carry 23 or 30 ISDN
calls, respectively. In an ISDN PRI, a single
channel is used for signalling for calls placed
on all of the other channels in the T1 or E1
circuit.
protocol...................... A formal set of standards governing the
establishment of a communications link and
controlling the format and timing of
transmissions between two devices.
signalling.................... The process by which digital information is
exchanged to establish, control and manage
connections in a network.
SCP (Service Control Point)... A computer database that is accessed by STPs
for customer call routing information.
SMDS (Switched Multi-megabit
Data Service)............... A communications service providing high speed
(up to TS3), connectionless data transport.
SS7 (Common Chanel Signalling
System No. 7)............... A complex protocol which governs signalling
between certain devices in a digital telephone
network.
SSP (Service Switching
Point)........................ An SSP is a component of the central office
switch that sets up trunk connections. When an
SSP identifies an AIN call, it routes a
signalling message to the STP and awaits
further instructions for call processing.
STP (Signal Transfer Point)... An STP is a switch that handles the signalling
messages used to set up telephone calls,
queries external databases for routing and
processing information and dispatches call
handling instructions.
T1............................ The North American telecommunications standard
defining a circuit that multiplexes and
switches 24 channels and operates at speeds of
1.544 Mbps (T3 is the equivalent of 27 T1
circuits).
WAN (Wide Area Network)....... A network that extends beyond the distance that
can be accommodated by local cabling methods. A
WAN typically utilizes public carrier services
to connect sites, which may span a city, state,
country or the world.
X.25.......................... A protocol for transfer of information across
packet data networks. X.25 was the first packet
data technology to be widely implemented.
41
<PAGE> 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants...................................................... F-1
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1994................................................ F-2
Consolidated Balance Sheets as of December 31, 1993 and 1994........................... F-3
Consolidated Statements of Cash Flow for each of the three years
in the period ended December 31, 1994................................................ F-4
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1994................................................ F-5
Notes to Consolidated Financial Statements............................................. F-6
</TABLE>
42
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC
We have audited the accompanying consolidated balance sheets of Tekelec as
of December 31, 1994 and 1993, and the related consolidated statements of
operations, shareholders' equity, and cash flow for each of the three years in
the period ended December 31, 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tekelec as
of December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Sherman Oaks, California
February 3, 1995, except for Note P,
as to which the date is March 17, 1995
F-1
<PAGE> 46
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1992 1993 1994
-------- --------- --------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues (including sales to related parties of 1992 --
$3,881; 1993 -- $3,972; 1994 -- $3,809)................. $ 58,090 $ 46,856 $ 61,189
Costs and expenses:
Cost of goods sold...................................... 18,864 16,836 20,388
Research and development................................ 16,181 17,570 11,962
Selling, general and administrative..................... 27,413 23,756 22,466
Restructuring........................................... 2,767 5,988 --
-------- --------- --------
Total costs and expenses............................. 65,225 64,150 54,816
-------- --------- --------
Income (Loss) from operations............................. (7,135) (17,294) 6,373
Interest and other income (expense), net................ 442 193 (662)
-------- --------- --------
Income (Loss) before provision for income taxes........... (6,693) (17,101) 5,711
Provision for income taxes.............................. 1,603 1,442 1,251
-------- --------- --------
Net income (loss).................................. $ (8,296) $ (18,543) $ 4,460
======== ========= ========
Earnings (Loss) per share: (Note P)
Primary............................................ $ (1.01) $ (2.23) $ 0.47
Fully diluted...................................... (1.01) (2.23) 0.43
Weighted average number of shares: (Note P)
Primary............................................ 8,178 8,314 9,550
Fully diluted...................................... 8,178 8,314 10,360
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 47
TEKELEC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994
-------- --------
(THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,669 $ 6,653
Restricted cash................................................ -- 1,000
Accounts and notes receivable, less allowances
1993 -- $221; 1994 -- $318.................................. 8,446 14,215
Inventories.................................................... 4,715 4,391
Amounts due from related parties............................... 1,244 1,538
Income taxes receivable........................................ 216 --
Prepaid expenses............................................... 1,048 704
-------- --------
Total current assets................................... 19,338 28,501
Property and equipment, net...................................... 6,769 4,794
Technology, net.................................................. 1,156 423
Other assets..................................................... 876 691
-------- --------
Total assets........................................... $ 28,139 $ 34,409
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt.... $ 3,004 $ 1,366
Trade accounts payable......................................... 4,289 4,005
Accrued expenses............................................... 3,859 3,213
Accrued payroll and related expenses........................... 3,557 4,132
Deferred revenues.............................................. 480 1,412
Current portion of other obligations........................... 265 312
Income taxes payable........................................... 669 595
-------- --------
Total current liabilities.............................. 16,123 15,035
Long-term debt................................................... -- 620
Long-term portion of other obligations........................... 323 34
-------- --------
Total liabilities...................................... 16,446 15,689
-------- --------
Commitments and contingencies
Shareholders' equity: (Note P)
Common stock, without par value, 50,000,000 shares authorized;
issued and outstanding 1993 -- 8,529,454;
1994 -- 9,022,612........................................... 14,349 15,940
Retained earnings (deficit).................................... (4,381) 79
Cumulative translation adjustments............................. 1,725 2,701
-------- --------
Total shareholders' equity............................. 11,693 18,720
-------- --------
Total liabilities and shareholders' equity............. $ 28,139 $ 34,409
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 48
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1992 1993 1994
------- -------- --------
(THOUSANDS)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)....................................... $(8,296) $(18,543) $ 4,460
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 4,999 5,522 4,406
Deferred income taxes................................ 465 145 --
Non-cash component of restructuring charge........... 1,710 2,969 --
Changes in current assets and liabilities:
Accounts and notes receivable...................... 996 (1,150) (5,522)
Inventories........................................ (1,053) (370) 400
Amounts due from related parties................... 199 (23) (294)
Income taxes receivable............................ 379 530 216
Prepaid expenses................................... 212 (242) 427
Trade accounts payable............................. 410 2,369 (304)
Accrued expenses................................... 1,685 (449) (703)
Accrued payroll and related expenses............... 590 1,569 559
Deferred revenues.................................. 286 (208) 932
Income taxes payable............................... (450) 372 (150)
------- -------- -------
Total adjustments.................................. 10,428 11,034 (33)
------- -------- -------
Net cash provided by (used in) operating
activities...................................... 2,132 (7,509) 4,427
------- -------- -------
Cash flow from investing activities:
Increase in restricted cash............................. -- -- (1,000)
Purchase of property and equipment...................... (6,929) (2,476) (1,508)
Investments in technology............................... (2,596) (165) --
Decrease (Increase) in other assets..................... (202) (681) 222
------- -------- -------
Net cash used in investing activities.............. (9,727) (3,322) (2,286)
------- -------- -------
Cash flow from financing activities:
Proceeds from (payments of) short-term borrowings....... -- 3,004 (1,878)
Proceeds from long-term debt............................ -- -- 1,000
Repayment of long-term debt............................. -- -- (140)
Proceeds from (payments of) other obligations........... (313) 184 (235)
Proceeds from issuance of common stock.................. 644 662 1,591
------- -------- -------
Net cash provided by financing activities.......... 331 3,850 338
------- -------- -------
Effect of exchange rate changes on cash................... 49 583 505
------- -------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (7,215) (6,398) 2,984
Cash and cash equivalents at beginning
of the year............................................. 17,282 10,067 3,669
------- -------- -------
Cash and cash equivalents at end of the year.............. $10,067 $ 3,669 $ 6,653
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................ $ 59 $ 327 $ 343
Income taxes............................................ 1,406 439 1,131
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 49
TEKELEC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED CUMULATIVE TOTAL
NUMBER EARNINGS TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT (DEFICIT) ADJUSTMENTS EQUITY
--------- ------ --------- ----------- -------------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1991.... 8,096 $13,043 $ 22,458 $ 844 $ 36,345
Exercise of stock options... 168 644 -- -- 644
Translation adjustment...... -- -- -- 58 58
Net loss.................... -- -- (8,296) -- (8,296)
----- ------- -------- ------ --------
Balance, December 31, 1992.... 8,264 13,687 14,162 902 28,751
Exercise of stock options... 266 662 -- -- 662
Translation adjustment...... -- -- -- 823 823
Net loss.................... -- -- (18,543) -- (18,543)
----- ------- -------- ------ -------
Balance, December 31, 1993.... 8,530 14,349 (4,381) 1,725 11,693
Exercise of stock options... 493 1,591 -- -- 1,591
Translation adjustment...... -- -- -- 976 976
Net income.................. -- -- 4,460 -- 4,460
----- ------- -------- ------ --------
Balance, December 31, 1994.... 9,023 $15,940 $ 79 $2,701 $ 18,720
===== ======= ======== ====== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 50
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated. Certain items shown in the December 31, 1992 and 1993 financial
statements have been reclassified to conform with the current period
presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are provided using the
straight-line method. The estimated useful lives are:
<TABLE>
<S> <C>
Manufacturing and development
equipment.......................... 3-5 years
Furniture and office equipment....... 5 years
Demonstration equipment.............. 3 years
Leasehold improvements............... The shorter of useful life or lease term
</TABLE>
TECHNOLOGY
Product development costs, including costs of purchased and licensed
technology incurred to enhance significantly a product that results in the
creation and sales of a new generation of products, are capitalized; costs
incurred in conceptualization and design of new products are expensed as
incurred.
Amortization is based on the greater of related net shipments made during
the period to total anticipated net shipments, or the three-year straight-line
method. Capitalized internally developed software costs for 1992 were $472,000.
There were no capitalized internally developed software costs in 1993 and 1994.
PRODUCT WARRANTY COSTS
The Company generally warrants its products for one year after sale and
provides for estimated future warranty costs at the time revenue is recognized.
At December 31, 1993 and 1994, accrued product warranty costs amounted to
$280,000 and $827,000, respectively, and are included in accrued expenses.
REVENUE RECOGNITION
Revenues from sales of diagnostic products are generally recognized when
products are shipped. Revenues from sales of switching products are recognized
upon shipment to the cus-
F-6
<PAGE> 51
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
tomer's final site for installation and satisfaction of any related significant
Company obligations. Extended warranty service revenues are recognized ratably
over the warranty period. Engineering service revenues are recognized on
delivery or as the services are performed.
INCOME TAXES
Income tax expense is the tax payable for the period and the change during
the period in deferred tax assets and liabilities. Deferred income taxes are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted rates in effect during the year in which
the differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
TRANSLATION OF FOREIGN CURRENCIES
Translation of foreign currencies is accounted for using the local currency
as the functional currency of the Company's foreign subsidiaries. All assets and
liabilities are translated at current exchange rates while revenues and expenses
are translated at average rates in effect for the period. The resulting gains
and losses are included in a separate component of shareholders' equity. Gains
(losses) on foreign currency transactions are reflected in net income (loss) and
amounted to $(132,000), $253,000, and $(235,000) for 1992, 1993, and 1994,
respectively.
EARNINGS (LOSS) PER SHARE
Earnings (Loss) per share are computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and warrants).
NOTE B -- RESTRICTED CASH
At December 31, 1994, the Company's Japanese subsidiary had $1.0 million of
restricted cash included in current assets, which represents cash on deposit at
a bank in Japan as collateral for outstanding short-term borrowings in the U.S.
under a $2.0 million line of credit. See Note J.
NOTE C -- CONCENTRATION OF CREDIT RISK
The Company sells communications diagnostic and network systems worldwide
primarily to telephone operating companies, equipment manufacturers, and
corporations that use its systems to design, install, maintain, test and operate
communications equipment and networks. Credit is extended based on an evaluation
of each customer's financial condition, and generally collateral is not
required. Credit losses, if any, have been provided for in the financial
statements and have been consistently within management's expectations.
The Company places its temporary cash investments in high credit quality
financial instruments and limits the amount of credit exposure to any one
issuer. Generally, the investments made mature within 90 days.
NOTE D -- RELATED PARTY TRANSACTIONS
As of December 31, 1994, the Company's principal shareholder, a director
and his family, and a foreign-affiliated company controlled by the director
owned an aggregate of approximately 47% of the Company's outstanding stock.
F-7
<PAGE> 52
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of transactions and balances with these
affiliates:
<TABLE>
<CAPTION>
1992 1993 1994
------ ------ ------
(THOUSANDS)
<S> <C> <C> <C>
Product sales........................................ $3,881 $3,972 $3,809
Purchases of inventory............................... 83 42 49
Director's fees and expenses......................... 24 24 15
Due from affiliates.................................. 1,222 1,244 1,538
Due to affiliates.................................... 33 14 41
</TABLE>
The amounts due from and to the affiliates are non-interest bearing.
In January 1994, the Company entered into a six-month consulting agreement
with a director pursuant to which such director received $52,000 and a warrant
to purchase 20,000 shares of the Company's Common Stock. See Note P.
NOTE E -- RESTRUCTURINGS
During the fourth quarter of 1992, the Company announced a restructuring
plan designed to reduce operating expenses and scale back product lines that had
not met profitability expectations and that were not anticipated to contribute
to the Company's long-term strategy. In connection with this restructuring, the
Company recorded a $2.8 million charge consisting of severance costs for 33
terminated employees in management, research and development, support and
administrative functions and the write-down of technology and other assets
associated with the scaled back product lines.
During the second quarter of 1993, management reorganized the Company into
a divisional structure and in connection with such reorganization, the Company
recorded a $400,000 restructuring charge consisting of severance costs
associated with the related termination of employees and closure of the
Company's Alabama facility.
After incurring continued losses, the Company implemented in the fourth
quarter of 1993, an organizational and strategic restructuring aimed at
returning the Company to profitability by significantly reducing overhead
expenses and improving cash flow and further rationalizing the Company's
business lines. In connection with this restructuring, the Company discontinued
its network monitoring and field service product lines. A restructuring charge
of $5.6 million was recorded representing severance pay for 65 terminated
employees in management, research and development, support and administrative
functions, the write-down of technology and other assets associated with the
discontinued product lines, the write-off of a management information system
project which the Company terminated and the accrual of other exit costs
associated with the restructuring, including costs related to the sale of the
Company's Australian subsidiary.
F-8
<PAGE> 53
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Restructuring charges consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
-----------------
1992 1993
------ ------
(THOUSANDS)
<S> <C> <C>
Severance pay.................................................. $ 937 $2,256
Inventory write-down........................................... 185 438
Property and equipment write-down.............................. -- 1,175
Technology write-down.......................................... 1,415 613
Other assets write-down........................................ 110 743
Other expenses................................................. 120 763
------ ------
$2,767 $5,988
====== ======
</TABLE>
At December 31, 1994, all identified employees had been terminated and all
the severance costs and accrued expenses had been paid.
NOTE F -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1992 1993 1994
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Currently payable (receivable):
Federal..................................................... $ (147) $ (159) $ 133
State....................................................... -- 39 202
Foreign..................................................... 1,183 1,311 916
Deferred:
Federal..................................................... 424 314 --
State....................................................... 32 -- --
Foreign..................................................... 111 (63) --
------ ------ ------
$1,603 $1,442 $1,251
====== ====== ======
</TABLE>
F-9
<PAGE> 54
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The primary components of temporary differences which gave rise to deferred
taxes at December 31, 1993 and 1994 are:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1993 1994
-------- ---------
(THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward.................................... $ 8,112 $ 5,565
Foreign tax credit carryforward.................................... 811 918
Allowance for doubtful accounts.................................... 138 117
Inventory adjustments.............................................. 677 775
Depreciation and amortization...................................... 260 323
Research and development credit carryforward....................... 865 1,141
Accrued liabilities................................................ 618 264
Warranty accrual................................................... 113 325
Other.............................................................. 448 230
-------- -------
Total deferred tax asset........................................... 12,042 9,658
Less, valuation allowance.......................................... (11,958) (9,496)
-------- -------
Total net deferred tax asset....................................... 84 162
-------- -------
Deferred tax liabilities:
Depreciation and amortization...................................... -- --
Deferred product development costs................................. -- 84
Other.............................................................. 84 78
-------- -------
Total deferred tax liability....................................... 84 162
-------- -------
Net deferred tax asset............................................... -- --
Current portion...................................................... -- --
-------- -------
Long-term portion (included in other assets)......................... $ -- $ --
======== =======
</TABLE>
The provision for income taxes differs from the amount obtained by applying
the federal statutory income tax rate to income before provision for income
taxes as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Federal statutory provision (benefit) rate............... (34.0)% (35.0)% 34.0%
Research and development credits......................... (0.7) -- --
State taxes, net of federal benefit...................... 0.7 0.2 6.1
Foreign taxes............................................ 16.6 2.9 6.9
Utilization of operating loss carryforwards.............. -- -- (27.5)
Loss for which no tax benefit was recorded............... 35.8 32.3 --
Temporary differences for which no tax benefit was
recorded............................................... 6.0 7.9 --
Other.................................................... (0.4) 0.1 2.4
----- ----- -----
24.0% 8.4% 21.9%
===== ===== =====
</TABLE>
At December 31, 1994, the Company had available federal net operating loss
carryforwards of $14.8 million, foreign tax credit carryforwards of $918,000 and
research and development credit carryforwards of $1.1 million which will
generally expire beginning in the years 2007, 1997 and 2007, respectively.
F-10
<PAGE> 55
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has not provided for federal income taxes on $8.0 million of
undistributed earnings of its foreign subsidiaries which have been reinvested in
their operations. If these earnings were distributed, net operating loss
carryforwards and foreign tax credits available under current law would
eliminate the resulting federal income tax liability.
NOTE G -- INVENTORIES
The components of inventories are:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
------- -------
(THOUSANDS)
<S> <C> <C>
Raw materials............................................... $2,283 $2,197
Work in process............................................. 1,465 1,246
Finished goods.............................................. 967 948
------ ------
$4,715 $4,391
====== ======
</TABLE>
NOTE H -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1994
-------- --------
(THOUSANDS)
<S> <C> <C>
Manufacturing and development equipment...................... $ 9,594 $ 8,567
Furniture and office equipment............................... 6,948 5,022
Demonstration equipment...................................... 3,868 3,249
Leasehold improvements....................................... 1,224 1,257
-------- --------
21,634 18,095
Less, accumulated depreciation and amortization.............. (14,865) (13,301)
-------- --------
$ 6,769 $ 4,794
======== ========
</TABLE>
NOTE I -- TECHNOLOGY
Technology consists of capitalized product development costs, net of
accumulated amortization of $1.1 million and $1.2 million at December 31, 1993
and 1994, respectively.
NOTE J -- BORROWINGS
The Company has a $7.5 million line of credit and a $2.0 million line of
credit with U.S. banks and lines of credit aggregating $3.5 million available to
the Company's Japanese subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit with a U.S. bank is
collateralized by substantially all of the Company's assets, bears interest at
the U.S. prime rate (8.5% at December 31, 1994) plus 2.5% per annum and expires
September 30, 1995, if not renewed. Maximum borrowings available under the line
of credit are based on eligible accounts receivable and amounted to $6.6 million
at December 31, 1994, of which $126,000 was then outstanding. This line of
credit includes a $1.0 million long-term credit facility payable in 47 monthly
installments of $20,000 each which began in June 1994 and a final installment of
$60,000 due in May 1998 or upon the expiration of the underlying $7.5 million
line of credit, if not renewed. At December 31, 1994, $860,000 was outstanding
under this long-term facility, of which $620,000 was included under long-term
debt.
F-11
<PAGE> 56
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 1994, the Company established a $2.0 million line of credit
with a U.S. bank, collateralized by restricted cash deposits in Japan, with
interest at the U.S. prime rate plus 0.375% per annum. This line of credit
expires May 31, 1995, if not renewed. Borrowings at any time may not exceed the
cash amount on deposit. At December 31, 1994, $1.0 million was outstanding under
this line of credit.
The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.5 million with interest at the Japanese prime
rate (3% at December 31, 1994) plus 0.125% per annum which expire between May
29, 1995 and March 31, 1996, if not renewed. There have been no borrowings under
these lines of credit.
The Company's weighted average short-term borrowing rates were 7.2% and
8.8% in 1993 and 1994, respectively.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing facilities together with
certain office equipment under operating lease agreements. Lease terms generally
range from one to ten years; certain building leases contain options for renewal
for additional periods and are subject to increases up to 10% every 24 months.
Total rent expense was $1.8 million, $2.1 million, and $2.0 million, for
1992, 1993, and 1994, respectively.
Minimum annual non-cancelable lease commitments at December 31, 1994, are:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
DECEMBER 31,
--------------------
(THOUSANDS)
<S> <C>
1995............................................ $1,595
1996............................................ 1,242
1997............................................ 799
1998............................................ 747
1999............................................ 807
Thereafter...................................... 4,234
------
$9,424
======
</TABLE>
During 1992, the Company recorded legal expenses and costs for the defense
and settlement of certain litigation against the Company and its then President
that was initiated by a former officer of the Company. The terms of the
settlement are subject to a confidentiality clause.
NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has various stock option plans (Option Plans) with maximum
terms of 10 years. Five million fifty thousand shares of the Company's Common
Stock have been issued or reserved for issuance under these plans.
The terms of options granted under these Option Plans are determined at the
time of grant. The option price may not be less than the fair market value per
share on the date of grant. Both incentive stock options and nonstatutory stock
options can be issued under the Option Plans.
F-12
<PAGE> 57
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Combined stock option activity under the Option Plans is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Number of option shares:
Granted..................... 626,530 1,947,502 1,292,348
Exercised................... 102,272 150,126 407,982
Cancelled................... 232,840 1,865,548 583,632
Outstanding at end of
year..................... 2,015,210 1,947,038 2,247,772
Option price range:
Granted..................... $ 5.25 - $8.63 $ 2.63 - $5.63 $ 3.00 - $16.38
Exercised................... 1.88 - 6.25 1.88 - 4.38 1.88 - 6.13
Cancelled................... 1.88 - 9.25 3.25 - 9.25 3.00 - 13.63
Outstanding at end of
year..................... 1.88 - 9.25 1.88 - 6.25 1.88 - 16.38
</TABLE>
At December 31, 1994, options for 575,514 shares were exercisable at
exercise prices ranging from $1.875 to $7.75 per share and have exercise periods
of up to ten years.
The Company has an Employee Stock Purchase Plan (the "ESPP") with a maximum
term of ten years. Four hundred fifty thousand shares of the Company's Common
Stock have been reserved for issuance under the ESPP. Eligible employees may
authorize payroll deductions of up to 10% of their compensation to purchase
shares of Common Stock at 85% of the lower of the market price at the beginning
or end of each six-month offering period. During 1992, 1993, and 1994, 65,866,
114,824, and 85,176 shares, respectively, were purchased under the ESPP at
average prices of $4.72, $2.34, and $3.07, respectively.
The Company has a 401(k) tax-deferred savings plan under which eligible
employees may authorize from 2% to 12% of their compensation to be invested in
employee-elected investment funds managed by an independent trustee. The Company
may contribute matching funds of up to 50%, as determined annually by the Board
of Directors, of the employees' payroll deductions. During 1992, 1993, and 1994,
the Company's contributions amounted to $352,000, none, and $122,000,
respectively.
NOTE M -- INTERNATIONAL SALES AND FOREIGN OPERATIONS
International sales, including foreign operations, primarily in Japan,
Western Europe, and the Far East, amounted to 43%, 51%, and 43% of revenues in
1992, 1993, and 1994, respectively.
The following table sets forth financial data of the Company's foreign
operations:
<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
(THOUSANDS)
<S> <C> <C> <C>
Revenues.................................................. $15,132 $14,784 $13,467
Income before provision for income taxes.................. 2,036 2,156 1,659
Total assets.............................................. 10,059 11,400 13,651
</TABLE>
NOTE N -- MAJOR CUSTOMERS
Sales to Nippon Telegraph and Telephone amounted to 13%, 16%, and 13% of
revenues in 1992, 1993, and 1994, respectively.
F-13
<PAGE> 58
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS
-------------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FOR THE YEARS ENDED DECEMBER 31,
1993
Revenues............................... $11,157 $11,425 $12,658 $11,616
Gross profit........................... 7,309 7,498 7,622 7,591
Loss before provision for income
taxes................................ (3,015) (3,503) (2,561) (8,022)
Net loss............................... (3,334) (3,823) (2,804) (8,582)
Loss per share:
Primary.............................. $ (0.40) $ (0.46) $ (0.34) $ (1.02)
Fully diluted........................ (0.40) (0.46) (0.34) (1.02)
1994
Revenues............................... $12,986 $13,810 $15,638 $18,755
Gross profit........................... 8,246 9,494 10,606 12,455
Income before provision for income
taxes................................ 243 1,216 1,880 2,372
Net income............................. 126 877 1,357 2,100
Earnings per share:
Primary.............................. $ 0.01 $ 0.10 $ 0.15 $ 0.20
Fully diluted........................ 0.01 0.10 0.14 0.20
</TABLE>
Tekelec typically operates with a limited backlog, and most of its revenues
in each quarter result from orders received in that quarter. Further, Tekelec
typically generates up to one-half of its revenues for each quarter in the last
month of the quarter. Tekelec establishes its expenditure levels based on its
expectations as to future revenues, and if revenue levels were to fall below
expectations this would cause expenses to be disproportionately high. Therefore,
a drop in near term demand would significantly affect revenues, causing
disproportionate reduction in profits or even losses in any quarter. Tekelec's
operating results may fluctuate for this reason or as a result of a number of
other factors, including general economic and political conditions (such as
recessions in the U.S. and Japan), capital spending patterns of Tekelec's
customers, increased competition, variations in the mix of sales, fluctuation in
proportion of foreign sales and announcements of new products by Tekelec or its
competitors. The Company's results for 1993 include pre-tax restructuring
charges amounting to $400,000 in the second quarter and $5.6 million in the
fourth quarter and the effect of the Company's inability throughout the year to
currently recognize benefits amounting to $8.0 million for its tax loss and
credits carryforwards. In 1994, Tekelec's quarterly revenues increased by up to
61% as compared to prior year's quarters. The Company believes these increases
resulted from increased market acceptance of its products. The Company's results
for 1994 include the effect of the Company's ability to recognize benefits
amounting to $1.6 million for its tax loss carryforwards.
NOTE P -- COMMON STOCK
At December 31, 1993 and 1994, the Company had warrants outstanding to
purchase an aggregate of 20,000 and 80,000 shares of its Common Stock,
respectively, as more fully discussed below.
In 1992, the Company issued warrants to purchase a total of 20,000 shares
of its Common Stock to two directors at $7.5625 per share. These warrants were
re-priced to $3.595 per share in 1993, are
F-14
<PAGE> 59
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercisable in full at any time prior to January 17, 1997, and were outstanding
at December 31, 1994 and 1993.
In January 1994, pursuant to a consulting agreement between the Company and
a director, the Company issued warrants to purchase 20,000 shares of its Common
Stock at $3.4375 per share to such director, all of which were outstanding at
December 31, 1994. These warrants vested during 1994, and are exercisable in
full at any time prior to January 20, 1999.
In April 1994, the Company issued warrants to purchase 10,000 shares of its
Common Stock at $3.375 per share to one director, all of which were outstanding
at December 31, 1994. These warrants vest and become exercisable in 20 equal
quarterly installments beginning on April 19, 1994.
In July 1994, the Company issued warrants to purchase 30,000 shares of its
Common Stock at $2.875 per share, exercisable in full at any time prior to July
21, 1999, all of which were outstanding at December 31, 1994.
On March 17, 1995, the Company effected a two-for-one stock split. All
references to numbers of shares and related prices, per share amounts, and stock
option plan data have been restated to reflect the stock split.
F-15
<PAGE> 60
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CON-
NECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TION NOT CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESEN-
TATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY UN-
DERWRITER. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE-
QUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Additional Information................ 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 11
Price Range of Common Stock........... 11
Dividend Policy....................... 11
Capitalization........................ 12
Selected Consolidated Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 21
Management............................ 34
Common Stock Ownership of Principal
Shareholders and Management......... 36
Description of Capital Stock.......... 37
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Glossary.............................. 40
Index to Consolidated Financial
Statements.......................... 42
- --------------------------------------------
- --------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
1,750,000 SHARES
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
VOLPE, WELTY & COMPANY
CRUTTENDEN ROTH
INCORPORATED
April , 1995
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 61
EDGAR APPENDIX
This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T
regarding graphic and image information. It describes material appearing on the
inside front cover and on page 23 of the Prospectus included in the Registration
Statement.
INSIDE FRONT COVER
The first illustration shows the components of a simplified SS7 network
using Tekelec's EAGLE STP and MGTS/GSMT products. A photograph of Tekelec's
EAGLE STP is shown. The EAGLE STP is shown connected to a graphical
representation of an SCP and to a "cloud" that is representative of an SS7
network. The "SS7 network" cloud is connected via (i) a line to a photograph of
a Tekelec MGTS/GSMT diagnostic system (ii) an SS7 link line to an SSP/Central
Office Switch and (iii) a link line to an MSC. The SSP is shown connected via
(i) an ISDN line to a telephone and (ii) a voice line going into a "cloud"
representing a public switched network. The MSC is shown connected via (i) a
GSM/PCS connection to a mobile phone and (ii) a trunk line into the "cloud"
representing the same public switched network to which the SSP is connected.
The second illustration shows the components of a simplified
LAN/WAN/broadband network using Tekelec's Chameleon Open diagnostic system. The
illustration shows a "cloud" representing a WAN incorporating ATM, Frame Relay
or SMDS. The "cloud" is connected on one side via an OC3 interface to a smart
router/switch. The smart router/switch is connected to a graphic representation
of an Ethernet LAN showing a ring with several PCs which is shown connected to a
photograph of Tekelec's Chameleon Open diagnostic system. On the other side, the
"cloud" is connected via a T3/T1 line to another smart router/switch. This
router/switch in turn is connected to a graphic representation of a Token Ring
LAN to which several PCs are attached, which in turn is shown connected to the
same photograph of Tekelec's Chameleon Open. The WAN "cloud" is also connected
to the photograph of Tekelec's Chameleon Open.
PAGE 22
This illustration is a representation of a "generic" SS7 network showing a
graphic representation of an STP. The STP is connected on one side to a
graphical representation of an SCP. Below, the STP is connected to a "cloud"
that is representative of an SS7 network. The "SS7 cloud" is connected via (i)
an SS7 link line to an SSP/Central Office Switch and (ii) a link line to an MSC.
The SSP/Central Office Switch is shown connected via (i) an ISDN line to a
telephone instrument and (ii) a voice line going into a "cloud" representing a
public switched network. The MSC is shown connected via (i) a GSM/PCS connection
to a mobile phone and (ii) a trunk line into the "cloud" representing the same
public switched network to which the SSP is connected.
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses (other than underwriting
discounts and commissions) payable by the Company in connection with the
issuance and distribution of the securities being registered. All the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee.
<TABLE>
<CAPTION>
REGISTRANT
----------
<S> <C>
SEC registration fee............................................. $ 13,446
NASD filing fee.................................................. 4,400
Nasdaq listing fee............................................... 17,500
Blue sky fees and expenses....................................... *
Printing and engraving expenses.................................. *
Accounting fees and expenses..................................... *
Legal fees and expenses.......................................... *
Registrar and transfer agent's fees and expenses................. *
Miscellaneous expenses........................................... *
---------
Total.................................................. $ *
=========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code provides that a corporation
may indemnify corporate "agents" (including directors, officers and employees of
the corporation) against expenses, judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with defending
non-derivative actions if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful, and against expenses actually and
reasonably incurred in connection with defending derivative actions if such
person acted in good faith and in a manner such person believed to be in the
best interests of the corporation and its shareholders. Indemnification is
obligatory to the extent that an agent of a corporation has been successful on
the merits in defense of any such proceeding against such agent, but otherwise
may be made only upon a determination in each instance either by a majority vote
of a quorum of the Board of Directors (other than directors involved in such
proceeding), by independent legal counsel if such a quorum of directors is not
obtainable, by the shareholders (other than shareholders to be indemnified), or
by the court, that indemnification is proper because the agent has met the
applicable statutory standards of conduct. Corporations may also advance
expenses incurred in defending proceedings against corporate agents, upon
receipt of an undertaking that the agent will reimburse the corporation unless
it is ultimately determined that the agent is entitled to be indemnified against
expenses reasonably incurred.
The indemnification provided by Section 317 of the California Corporations
Code is not deemed to be exclusive of any other rights to which agents of the
Company seeking indemnification may be entitled under any bylaw, agreement, vote
of shareholders or disinterested directors, or otherwise, both as to action in
an official capacity and as to action in another capacity while holding such
office, to the extent such additional rights are authorized in the articles of
the corporation. Article V of the Company's Restated Articles of Incorporation
authorizes the Company to provide for indemnification of its agents for breach
of duty to the Company and its shareholders, through bylaw provisions or through
agreements with such agents, or both, in excess of the indemnification otherwise
permitted by Section 317, subject to the limits on such excess indemnification
set forth in Section 204 of the California General Corporation Law.
II-1
<PAGE> 63
Article VI of the Company's bylaws provides for the indemnification of all
past and current directors to the maximum extent and in the manner permitted by
Section 317. Additionally, the Company has entered into Indemnification
Agreements with its directors under which the Company has undertaken to
indemnify each such agent to the fullest extent permitted by its Articles of
Incorporation, bylaws and applicable law against all expenses, liability and
loss (which are not paid by insurance or otherwise by the Company) reasonably
incurred or suffered by such agent in connection with the defense of any action
or proceeding to which the agent was or is a party or is threatened to be made a
party by reason of conduct in his capacity as an officer or director, or in
which the agent is or may be involved by reason of the fact that he is or was
serving as an officer or director of the Company, not including actions brought
for violation of Section 16 of the Securities Exchange Act or for failure to
qualify for an exemption under Section 4 of the Securities Act.
The Company also maintains on behalf of its directors and officers
insurance protection against certain liabilities arising out of the discharge of
their duties.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Registrant, as amended.(1)
3.2 Bylaws of Registrant, as amended.(2)
5.1 Opinion of Coudert Brothers.(3)
23.1 Consent of Coudert Brothers (included in Exhibit 5.1).(3)
23.2 Consent of Coopers & Lybrand L.L.P.
24.1 Power of Attorney (see page II-4 of this Registration Statement).
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-15135) for the year ended December 31, 1994.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-15135) for the year ended December 31, 1987.
(3) To be filed by amendment.
II-2
<PAGE> 64
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions set forth in Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared effective.
The Registrant hereby undertakes that, for the purpose of determining any
liability under the Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The Registrant hereby undertakes that, for the purpose of determining any
liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 65
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF CALABASAS, STATE OF CALIFORNIA, ON APRIL 12, 1995.
TEKELEC
By: /s/ PHILIP J. ALFORD
------------------------------------
Philip J. Alford, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Philip J. Alford, Gilles C. Godin and Jon
F. Rager, or any one of them, his attorneys-in-fact and agents, each with full
power of substitution for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Registration Statement, and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto each of
said attorneys-in-fact and agents full power and authority to do so and perform
each and every act and thing requisite and necessary to be done in connection
with this Registration Statement, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that any one of
said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ PHILIP J. ALFORD President and Director April 12, 1995
- --------------------------------------------- (Principal Executive Officer)
Philip J. Alford
/s/ GILLES C. GODIN Vice President, Finance and April 12, 1995
- --------------------------------------------- Chief Financial Officer
Gilles C. Godin (Principal Financial and
Accounting Officer)
/s/ JEAN-CLAUDE ASSCHER Chairman of the Board April 12, 1995
- ---------------------------------------------
Jean-Claude Asscher
/s/ ROBERT V. ADAMS Director April 12, 1995
- ---------------------------------------------
Robert V. Adams
/s/ PHILIP BLACK Director April 12, 1995
- ---------------------------------------------
Philip Black
/s/ DANIEL L. BRENNER Director April 12, 1995
- ---------------------------------------------
Daniel L. Brenner
/s/ HOWARD ORINGER Director April 12, 1995
- ---------------------------------------------
Howard Oringer
/s/ JON F. RAGER Director April 12, 1995
- ---------------------------------------------
Jon F. Rager
</TABLE>
II-4
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ----------------------- ------------------------------------------------------------ -----
<S> <C> <C>
1.1 Form of Underwriting Agreement.
23.2 Consent of Coopers & Lybrand L.L.P.
</TABLE>
<PAGE> 1
WSGR DRAFT OF APRIL 11, 1995
1,750,000 SHARES
TEKELEC
Common Stock
UNDERWRITING AGREEMENT
___________, 1995
ALEX. BROWN & SONS INCORPORATED
VOLPE, WELTY & COMPANY
CRUTTENDEN ROTH INCORPORATED
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Tekelec, a California corporation (the "Company"), proposes to sell to
the several underwriters (the "Underwriters") named in Schedule I hereto an
aggregate of 1,750,000 shares of the Company's Common Stock, without par value
(the "Firm Shares"). The respective amounts of the Firm Shares to be so
purchased by the Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to 262,500 additional shares of the Company's Common Stock (the
"Option Shares") as set forth below.
As the Underwriters, you have advised the Company (a) that you are
authorized to enter into this Agreement and (b) that each of you is willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata
portion of the Option Shares if you elect to exercise the over-allotment option
in whole or in part for the accounts of the several Underwriters. The Firm
Shares and the Option Shares (to the extent the aforementioned option is
exercised) are herein collectively called the "Shares."
<PAGE> 2
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants as follows:
(a) A registration statement on Form S-3 (File No.
33-__________) with respect to the Shares has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act") and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission under the Act. The Company has satisfied the
conditions for the use of Form S-3. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of Rule 430A of the Rules and Regulations) contained therein and
the exhibits, financial statements and schedules, as finally amended and
revised through the date hereof, have heretofore been delivered by the Company
to you. The term "Registration Statement" as used in this Agreement shall mean
such registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A of the Rules and Regulations, the information
deemed to be part of the registration statement at the time it became effective
pursuant to Rule 430A of the Rules and Regulations) and, in the event of any
amendment thereto after the effective date of such registration statement,
shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended. The Registration Statement has been
declared effective by the Commission under the Act, and no post-effective
amendment to this Registration Statement has been filed as of the date of this
Agreement. The form of prospectus first filed by the Company with the
Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as
the "Prospectus." Each preliminary prospectus included in the Registration
Statement prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus." Any reference herein to any Preliminary Prospectus
or the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein, as of the date of such Preliminary
Prospectus or Prospectus, as the case may be, and, in the case of any reference
herein to any Prospectus, also shall be deemed to include any documents
incorporated by reference therein, and any supplements or amendments thereto,
filed with the Commission after the date of filing of the Prospectus under
Rules 424(b) and 430A, and prior to the termination of the offering of the
Shares by the Underwriters.
(b) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
California, with corporate power and authority to own its properties and
conduct its business as described in the Registration Statement; the
subsidiaries of the Company listed in Exhibit 21.1 to the Company's Report on
Form 10-K for the year ended December 31, 1994 (collectively, the
"Subsidiaries") have been duly organized and are validly existing as
corporations in good standing under the laws of the respective jurisdictions of
their incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement;
the Company and each of the Subsidiaries
-2-
<PAGE> 3
are duly qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification and in which failure to
so qualify would materially adversely affect the business or financial
condition of the Company and the Subsidiaries, taken as a whole; the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and are owned
by the Company free and clear of all liens, encumbrances and security
interests; and no options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding.
(c) The outstanding shares of Common Stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable; the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be validly
issued, fully paid and nonassessable; and no preemptive rights of shareholders
or similar contractual rights to purchase exist with respect to any of the
Shares or the issue and sale thereof and there are no registration rights with
respect to the capital stock of the Company which have not been satisfied or
waived in connection with the offering of the Shares.
(d) The Shares conform with the statements concerning
them in the Registration Statement.
(e) The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the Company.
(f) The Commission has not issued an order preventing or
suspending the use of any Preliminary Prospectus relating to the proposed
offering of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains, and the Prospectus and any amendments or
supplements thereto will contain, all statements which are required to be
stated therein by, and in all respects conform or will conform, as the case may
be, to the requirements of, the Act and the Rules and Regulations. The
documents incorporated by reference in the Prospectus, at the time the
Registration Statement becomes effective or, in the case of documents filed
after the time the Registration Statement becomes effective, at the time they
will be filed with the Commission, will conform at such times in all respects
to the requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or the Act, as applicable, and the Rules and Regulations of the
Commission thereunder. Neither the Registration Statement nor any amendment
thereto, and neither the Prospectus nor any supplement thereto, including any
documents incorporated by reference therein, contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from
the Registration Statement or the Prospectus, or any such amendment or
supplement, in reliance upon, and in conformity with, written information
furnished to the Company by or on behalf of any Underwriter, specifically for
use in the preparation thereof.
-3-
<PAGE> 4
(g) The consolidated financial statements of the Company
and the Subsidiaries, together with related notes and schedules incorporated by
reference in the Registration Statement, present fairly the consolidated
financial position and the results of operations of the Company and
Subsidiaries, at the indicated dates and for the indicated periods. Such
financial statements have been prepared in accordance with generally accepted
principles of accounting, consistently applied throughout the periods involved,
and all adjustments necessary for a fair presentation of results for such
periods have been made. The summary financial and statistical data included or
incorporated by reference in the Registration Statement present fairly the
information shown therein and have been compiled on a basis consistent with the
consolidated financial statements.
(h) There is no action or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency which might result in
any material adverse change in the condition, financial or otherwise, of the
Company and the Subsidiaries taken as a whole or the earnings, business
affairs, management, or business prospects of the Company and the Subsidiaries
taken as a whole.
(i) The Company and the Subsidiaries have good and
marketable title to all of the properties and assets reflected in the
consolidated financial statements (or as described in the Registration
Statement or the documents incorporated by reference therein) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance of any
kind except those reflected in such financial statements (or as described in
the Registration Statement) or which are not material in amount. The Company
and the Subsidiaries occupy their leased properties under valid and binding
leases conforming to the description thereof set forth in the Registration
Statement or the documents incorporated by reference therein.
(j) The Company and the Subsidiaries have filed (or
obtained extensions to file for) all federal, state and foreign income tax
returns which have been required to be filed and have paid all taxes indicated
by said returns and all assessments received by them or any of them to the
extent that such taxes have become due.
(k) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, of the Company and the Subsidiaries taken as a whole or the
earnings, business affairs, management, or business prospects of the Company
and the Subsidiaries taken as a whole, whether or not occurring in the ordinary
course of business, and there has not been any material transaction entered
into by the Company or the Subsidiaries, other than transactions in the
ordinary course of business and changes and transactions contemplated by the
Registration Statement, as it may be amended or supplemented. The Company and
the Subsidiaries have no material contingent obligations which are not
disclosed in the Registration Statement or in the documents incorporated by
reference therein, as the same may be amended or supplemented.
-4-
<PAGE> 5
(l) Neither the Company nor any of the Subsidiaries is in
default under any agreement, lease, contract, indenture or other instrument or
obligation to which it is a party or by which it or any of its properties is
bound and which default is of material significance in respect of the business
or financial condition of the Company and the Subsidiaries taken as a whole.
The consummation of the transactions herein contemplated and the fulfillment of
the terms hereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any of
the Subsidiaries is a party, except where such conflict, breach or default
would not have a material adverse effect on the business or financial condition
of the Company and the Subsidiaries, taken as a whole, or of the Articles of
Incorporation or Bylaws of the Company or any order, rule or regulation
applicable to the Company or any of the Subsidiaries of any court or of any
regulatory body or administrative agency or other governmental body having
jurisdiction.
(m) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
National Association of Securities Dealers, Inc. (the "NASD") or may be
necessary to qualify the Shares for public offering by the Underwriters under
state securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(n) The Company and each of the Subsidiaries hold all
material licenses, certificates and permits from governmental authorities which
are necessary to the conduct of their businesses. The Company has not been
advised, and has no knowledge that either it or any of its Subsidiaries has not
conducted or is not conducting business in compliance with all applicable laws,
rules and regulations of the jurisdictions in which it has conducted or is
conducting business, including, without limitation, all applicable local, state
and federal employment and environmental laws and regulation, except where
failure to have been or to be in compliance did not and would not have a
material adverse effect on the condition, financial or otherwise, of the
Company and the Subsidiaries taken as a whole or the earnings, business
affairs, management or business prospects of the Company and the Subsidiaries
taken as a whole.
(o) Coopers & Lybrand L.L.P., who have certified certain
of the consolidated financial statements filed with the Commission and
incorporated by reference in the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations.
(p) The Company and the Subsidiaries own or possess or
can acquire on reasonable terms adequate rights to use all patents, trademarks,
service marks, trade names, copyrights, mask work rights, technology know-how
and other intellectual property rights and trade secrets ("Intellectual
Property") necessary to conduct the business now operated as described in the
Prospectus except where the failure to possess such rights would not have a
material adverse effect on the business or financial condition of the Company
and the Subsidiaries, taken as a whole, and, except as disclosed in the
Prospectus, neither the Company nor any of the Subsidiaries has received
-5-
<PAGE> 6
any notice of infringement of or conflict with (or knows of such infringement
of or conflict with) rights of others with respect to the Intellectual Property
which, individually or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse effect upon the
condition, financial or otherwise, of the Company and the Subsidiaries taken as
a whole or the earnings, business affairs, management, or business prospects of
the Company and the Subsidiaries taken as a whole; and except as disclosed in
the Prospectus, the Company and the Subsidiaries do not, in the conduct of
their businesses as now conducted as described in the Prospectus, infringe or
conflict with any Intellectual Property of any third party, where such
infringement or conflict, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse effect upon the condition,
financial or otherwise, of the Company and the Subsidiaries taken as a whole or
the earnings, business affairs, management, or business prospects of the
Company and the Subsidiaries taken as a whole.
(q) The Company has obtained the agreement of each of its
executive officers and directors and certain shareholders not to offer for
sale, agree to sell, sell, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or securities of the Company, including
securities convertible into, exchangeable for or exercisable for securities of
the Company for a period of ninety (90) days (and one hundred eighty (180) days
in the case of Jean-Claude Asscher, Tekelec-Airtronic, S.A. and Natinco, S.A.)
after the date of the Prospectus without the prior written consent of Alex.
Brown & Sons Incorporated.
(r) The Common Stock is duly listed and quoted on the
Nasdaq National Market.
(s) To date, the Company has filed any and all filings
required by the Act, the Exchange Act and the Rules and Regulations and such
filings have conformed in all material respects to the requirements of the Act,
the Exchange Act and the Rules and Regulations, as the case may be, and have
not included any untrue statements of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading in the
light of the circumstances under which they were made.
2. Purchase Sale and Delivery of the Firm Shares. On the basis
of the representations, warranties and covenants herein contained, and subject
to the conditions herein set forth, the Company agrees to sell to the
Underwriters and each Underwriter agrees severally and not jointly, to purchase
at a price of $____ per share, the number of Firm Shares set forth opposite the
name of each Underwriter in Schedule I hereof, subject to adjustments in
accordance with Section 9 hereof.
Payment for the Firm Shares to be sold hereunder is to be made
in New York Clearing House funds by certified or bank cashier's check drawn to
the order of the Company against delivery of certificates therefor for the
accounts of the Underwriters. Such payment and delivery are to be made at the
offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland at 10:00 a.m., Baltimore time, on the fifth business day
after the date of this Agreement or at such other time and date not later than
five (5) business days thereafter as
-6-
<PAGE> 7
you and the Company shall agree upon in writing, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and are not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Underwriters
request in writing not later than the third business day prior to the Closing
Date, and will be made available for inspection by the Underwriters at least
one business day prior to the Closing Date.
In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in the first
paragraph of this Section 2. The option granted hereby may be exercised in
whole or in part but only once and at any time upon written notice given within
30 days after the date of this Agreement, by you, the Underwriters, to the
Company setting forth the number of Option Shares as to which the Underwriters
are exercising the option, the names and denominations in which the Option
Shares are to be registered and the time and date at which such certificates
are to be delivered. The time and date at which certificates for Option Shares
are to be delivered shall be determined by the Underwriters but shall not be
earlier than three nor later than ten (10) full business days after the
exercise of such option, nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date
of exercise of the option is three or more days before the Closing Date, the
notice of exercise shall set the Closing Date as the Option Closing Date. The
number of Option Shares to be purchased by each Underwriter shall be in the
same proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to 1,750,000,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over- allotments in the sale of the Firm Shares by the Underwriters. The
Underwriters may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date in New York Clearing House funds by certified or
bank cashier's check drawn to the order of the Company against delivery of
certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135
East Baltimore Street, Baltimore, Maryland.
3. Offering by the Underwriters. It is understood that the
Underwriters are to make a public offering of the Firm Shares as soon as they
deem it advisable to do so. The Firm Shares are to be initially offered to the
public at the public offering price set forth in the Prospectus. The
Underwriters may from time to time thereafter change the public offering price
and other selling terms. To the extent, if at all, that any Option Shares are
purchased pursuant to Section 2 hereof, the Underwriters will offer them to the
public on the foregoing terms.
It is further understood that you will act in the offering and
sale of the Shares in accordance with a Master Agreement Among Underwriters
entered into by each of you.
-7-
<PAGE> 8
4. Covenants of the Company. The Company covenants and agrees
with the several Underwriters that:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and Regulations
and (ii) not file any amendment to the Registration Statement or supplement to
the Prospectus or documents incorporated by reference therein of which the
Underwriters shall not previously have been advised and furnished with a copy
or which is not in compliance with the Rules and Regulations or to which the
Underwriters shall have reasonably objected in writing and (iii) file on a
timely basis all reports and any definitive proxy or information statements
required to be filed by the Company with the Commission subsequent to the date
of the Prospectus and prior to the termination of the offering of the Shares by
the Underwriters.
(b) The Company will advise the Underwriters promptly of
any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the use of the Prospectus or of the institution
of any proceedings for that purpose, and the Company will use its best efforts
to prevent the issuance of any such stop order preventing or suspending the use
of the Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) The Company will cooperate with the Underwriters in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Underwriters may reasonably have designated in writing and
will make such applications, file such documents, and furnish such information
as may be reasonably required for that purpose, provided the Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time, prepare
and file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long as the
Underwriters may reasonably request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of,
the Underwriters, from time to time, as many copies of any Preliminary
Prospectus as the Underwriters may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Underwriters may reasonably request. The Company will deliver to the
Underwriters, at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Underwriters such number of copies of the
Registration Statement, including documents incorporated by reference therein,
but without exhibits, and of all amendments thereto, as the Underwriters may
reasonably request.
-8-
<PAGE> 9
(e) If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event shall
occur as a result of which, in the judgment of the Company or in the opinion of
counsel for the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(f) The Company will make generally available to its
security holders, as soon as it is practicable to do so, but in any event not
later than fifteen (15) months after the effective date of the Registration
Statement, an earning statement (which need not be audited) in reasonable
detail, covering a period of at least twelve (12) consecutive months beginning
after the effective date of the Registration Statement, which earning statement
shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the
Rules and Regulations and will advise you in writing when such statement has
been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Underwriters copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
shareholders or filed with any securities exchange pursuant to the requirements
of such exchange or with the Commission pursuant to the Act or the Exchange
Act. The Company will deliver to the Underwriters similar reports with respect
to significant subsidiaries, as that term is defined in the Rules and
Regulations, which are not consolidated in the Company's financial statements.
(h) The Company will not, during the ninety (90) days
following the effective date of the Registration Statement and without the
prior written consent of Alex. Brown & Sons Incorporated, directly or
indirectly, sell (including without limitation any short sale), offer to sell,
grant any option for the sale of, issue, distribute or otherwise dispose of any
shares of Common Stock or any options, rights or warrants with respect to any
Common Stock or any security convertible into Common Stock, or register any
Common Stock for sale under the Act, except that the Company may, without such
consent, (i) issue shares upon the exercise of options granted, or grant
options to purchase shares (provided that such options are not exercisable
within such ninety (90) day period and provided further that no such options
are granted to any current executive officer of the Company other than pursuant
to the Company's Employee Stock Purchase Plan) pursuant to its Amended and
Restated 1984 Stock Option Plan, its 1994 Stock Option Plan, its Employee Stock
Purchase Plan or its Amended and Restated Non-Employee Director Equity
Incentive Plan or pursuant to warrants outstanding on the date of this
Agreement and (ii) issue shares upon the exercise of a warrant to purchase
30,000 shares of Common Stock issued to Coudert Brothers and register such
shares pursuant to the registration rights provisions of such warrant.
-9-
<PAGE> 10
(i) The Company will apply the net proceeds of the sale
of the Common Stock sold by it substantially in accordance with its statements
under the caption "Use of Proceeds" in the Prospectus.
(j) The Company will maintain a transfer agent and
registrar for its Common Stock.
(k) The Company will cause the Shares to be listed on the
Nasdaq National Market upon notice of issuance.
5. Costs and Expenses. The Company will pay all costs, expenses
and fees incident to the performance of the obligations of the Company under
this Agreement, including, without limiting the generality of the foregoing,
the following: accounting fees of the Company; the fees and disbursements of
counsel for the Company; the cost of printing and delivering to, or as
requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the Master Agreement
Among Underwriters, the Underwriters' Selling Memorandum, the Underwriters'
Questionnaire, the Invitation Letter, the Listing Application, the Blue Sky
Survey and any supplements or amendments thereto; the filing fees of the
Commission, the filing fees and expenses incident to securing any required
review by the National Association of Securities Dealers, Inc. (the "NASD") of
the terms of the sale of the Shares; the Listing Fee of the Nasdaq National
Market; and the expenses, including the fees and disbursements of counsel for
the Underwriters, incurred in connection with the qualification of the Shares
under state securities or Blue Sky laws. Any transfer taxes imposed on the
sale of the Shares to the several Underwriters will be paid by the Company.
The Company shall not, however, be required to pay for any of the Underwriters
expenses (other than those related to qualification under state securities or
Blue Sky laws) except that, if this Agreement shall not be consummated because
the conditions in Section 7 hereof are not satisfied, or because this Agreement
is terminated by the Underwriters pursuant to Section 6 hereof, or by reason of
any failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission
of any Underwriter, then the Company shall reimburse the several Underwriters
for reasonable out-of-pocket expenses, including fees and disbursements of
counsel, reasonably incurred in connection with investigating, marketing and
proposing to market the Shares or in contemplation of performing their
obligations hereunder; but the Company shall not in any event be liable to any
of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters. The several
obligations of the Underwriters to purchase the Firm Shares on the Closing Date
and the Option Shares, if any, on the Option Closing Date are subject to the
accuracy, as of the Closing Date or the Option Closing Date, as the case may
be, of the representations and warranties of the Company contained herein, and
to the performance by the Company of its covenants and obligations hereunder
and to the following additional conditions:
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<PAGE> 11
(a) No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been issued
and no proceedings for that purpose shall have been taken or, to the knowledge
of the Company, shall be contemplated by the Commission.
(b) The Underwriters shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of Coudert
Brothers, counsel for the Company, dated the Closing Date or the Option Closing
Date, as the case may be, addressed to the Underwriters to the effect that:
(i) The Company has been duly organized
and is validly existing as a corporation in good standing
under the laws of the State of California, with corporate
power and authority to own its properties and conduct its
business as described in the Prospectus; the Subsidiaries have
been duly organized and are validly existing as corporations
in good standing under the laws of the respective
jurisdictions of their incorporation, with corporate power and
authority to own their properties and conduct their business
as described in the Prospectus; the Company and the
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their respective
businesses require such qualification, or in which the failure
to qualify would have a materially adverse effect upon the
business of the Company and the Subsidiaries taken as a whole;
and the outstanding shares of capital stock of the
Subsidiaries have been duly authorized and validly issued, are
fully paid and nonassessable and are owned by the Company
(other than directors' qualifying shares); and, to such
counsel's knowledge, the outstanding shares of capital stock
of the Subsidiaries are owned free and clear of all liens,
encumbrances and security interests, and no options,
warranties or other rights to purchase, agreements or other
obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and
outstanding capital stock as set forth under the caption
"Capitalization" in the Prospectus; the authorized shares of
its Common Stock have been duly authorized; the outstanding
shares of its Common Stock, have been duly authorized and
validly issued and are fully paid and nonassessable; all of
the Shares conform in all material respects to the description
thereof contained in the Prospectus; the certificates for the
Shares are in due and proper form; the shares of Common Stock,
including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will
be validly issued, fully paid and nonassessable when issued
and paid for as contemplated by this Agreement; and no
preemptive rights of shareholders exist in the Company's
Articles of Incorporation or Bylaws, or, to such counsel's
knowledge, in any other agreement to which the Company is a
party, with respect to any of the Shares or the issue and sale
thereof and, to such counsel's knowledge, no registration
rights exist with respect to the capital stock of the Company
which have not been satisfied or waived in connection with the
offering of the Shares.
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<PAGE> 12
(iii) The Registration Statement has
become effective under the Act and, to such counsel's
knowledge, no stop order proceedings with respect thereto have
been instituted or are pending or threatened under the Act.
(iv) The Registration Statement and the
Prospectus and each amendment or supplement thereto and each
document incorporated by reference therein comply as to form
in all material respects with the requirements of the Act or
the Exchange Act, as applicable, and the applicable Rules and
Regulations thereunder (except that such counsel need express
no opinion as to (i) the consolidated financial statements,
schedules and other financial and financial statistical
information included or incorporated by reference therein or
(ii) any information furnished in writing by or through the
Underwriters specifically for use in preparation thereof).
(v) The statements under the caption
"Description of Capital Stock" in the Prospectus, and the
description of the Company's Common Stock contained in its
Registration Statement on Form 8-A filed November 12, 1986,
insofar as such statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries
and fairly and correctly present the information called for
with respect to such documents and matters of law, as the case
may be, in all material respects.
(vi) Such counsel does not know of any
contracts or documents required to be filed as exhibits to or
incorporated by reference in the Registration Statement or
described in the Registration Statement or the Prospectus
which are not so filed, incorporated by reference or described
as required, and such contracts and documents as are
summarized in the Registration Statement or the Prospectus or
in the Company's filings under the Exchange Act incorporated
by reference therein are fairly summarized in all material
respects.
(vii) Such counsel knows of no material
legal proceedings pending or threatened against the Company or
any of the Subsidiaries of a character which are required to
be disclosed in the Registration Statement under the Act or in
filings under the Exchange Act and the Rules and Regulations
thereunder.
(viii) The execution and delivery of this
Agreement and the consummation of the transactions herein
contemplated do not and will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a
default under, the Articles of Incorporation or Bylaws of the
Company, or any agreement or instrument known to such counsel
to which the Company or any of the Subsidiaries is a party or
by which the Company or any of the Subsidiaries may be bound.
(ix) This Agreement has been duly
authorized, executed and delivered by the Company.
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<PAGE> 13
(x) No approval, consent, order,
authorization, designation, declaration or filing by or with
any regulatory, administrative or other governmental body is
necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein
contemplated (other than as may be required by the National
Association of Securities Dealers, Inc. with respect to
compensation of the Underwriters and compliance with Rule
10b-6A under the Exchange Act or as required by state
securities and Blue Sky laws as to which such counsel need
express no opinion) except such as have been obtained or made,
specifying the same.
In rendering such opinion, Coudert Brothers may rely
as to matters governed by the laws of states other than
California or Federal laws on local counsel in such
jurisdictions, provided that, in each case, Coudert Brothers
shall state that they believe that they and the Underwriters
are justified in relying on such other counsel. In addition
to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that the
Registration Statement, as of the time it became effective
under the Act, the Prospectus or any amendment or supplement
thereto, on the date it was filed pursuant to Rule 424(b), or
any of the documents incorporated by reference therein, as of
the date of effectiveness of the Registration Statement or, in
the case of documents incorporated by reference in the
Prospectus after the date of effectiveness of the Registration
Statement, as of the respective dates when such documents were
filed with the Commission, contain an untrue statement of a
material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and the Registration Statement and the Prospectus,
or any amendment or supplement thereto, as of the Closing Date
or the Option Closing Date, as the case may be, contain an
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading (except that such
counsel need express no view as to consolidated financial
statements, schedules and other financial and financial
statistical information included or incorporated by reference
therein). With respect to such statement, Coudert Brothers
may state that their belief is based upon the procedures set
forth therein, but is without independent check and
verification.
(c) The Underwriters shall have received from Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters, an opinion dated the Closing Date or the Option Closing Date, as
the case may be, substantially to the effect specified in subparagraphs (ii),
(iii), (iv), and (ix) of Paragraph (b) of this Section 6, and that the Company
is a validly organized and existing corporation under the laws of the State of
California. In rendering such opinion, Wilson, Sonsini, Goodrich & Rosati may
rely as to all matters governed other than by the laws of the State of
California or Federal laws on the opinion of counsel referred to in Paragraph
(b) of this Section 6. In addition to the matters set forth above, such
opinion shall also
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<PAGE> 14
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, as of
the time it become effective under the Act, and the Prospectus or any amendment
or supplement thereto, on the date it was filed pursuant to Rule 424(b), or any
of the documents incorporated by reference therein, as of the date of
effectiveness of the Registration Statement or, in the case of documents
incorporated by reference in the Prospectus after the date of effectiveness of
the Registration Statement, as of the respective dates when such documents were
filed with the Commission, and the Registration Statement and the Prospectus,
or any amendment or supplement thereto, as of the Closing Date or the Option
Closing Date, as the case may be, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (except that such
counsel need express no view as to consolidated financial statements, schedules
and other financial and financial statistical information included or
incorporated by reference therein). With respect to such statement, Wilson,
Sonsini, Goodrich & Rosati may state that their belief is based upon the
procedures set forth therein, but is without independent check and
verification.
(d) The Underwriters shall have received at or prior to
the Closing Date from Wilson, Sonsini, Goodrich & Rosati a memorandum or
summary, in form and substance satisfactory to the Underwriters, with respect
to the qualification for offering and sale by the Underwriters of the Shares
under the state securities or Blue Sky laws of such jurisdictions as the
Underwriters may reasonably have designated to the Company.
(e) The Underwriters shall have received (i) on the date
of this Agreement, a letter, dated the date hereof, from Coopers & Lybrand
L.L.P., addressed to the Underwriters, confirming that they are independent
certified public accountants within the meaning of the Securities Act and the
applicable published Rules and Regulations for the respective periods reported
on by such firm, and stating, on the basis of performing the procedures set
forth in the letter signed by such firm and carried out through a date not more
than five days prior to the date hereof, the conclusions and findings of such
firm with respect to the financial information and other matters covered by its
letter delivered to the Underwriters concurrently with the execution of this
Agreement, and (ii) on the Closing Date or the Option Closing Date, as the case
may be, a signed letter from Coopers & Lybrand L.L.P., dated the Closing Date
or the Option Closing Date, as the case may be, which shall confirm, on the
basis of a review in accordance with the procedures set forth in the letter
signed by such firm and dated and delivered to the Underwriters on the date
hereof that nothing has come to their attention during the period from the date
five days prior to the date hereof, to a date not more than five days prior to
the Closing Date or the Option Closing Date, as the case may be, which would
require any change in their letter dated the date hereof if it were required to
be dated and delivered on the Closing Date or the Option Closing Date, as the
case may be. All such letters shall be in form and substance satisfactory to
the Underwriters.
(f) The Underwriters shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the President and the Chief Financial Officer of the Company to
the effect that, as of the Closing Date or the Option Closing Date, as the case
may be, each of them severally represents as follows:
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<PAGE> 15
(i) The Registration Statement has
become effective under the Act and no stop order suspending
the effectiveness of the Registration Statement has been
issued, and no proceedings for such purpose have been taken or
are, to his knowledge, contemplated by the Commission.
(ii) He does not know of any litigation
instituted or threatened against the Company of a character
required to be disclosed in the Registration Statement which
is not so disclosed; he does not know of any material contract
required to be filed as an exhibit to the Registration
Statement which is not so filed; and the representations and
warranties of the Company contained in Section 1 hereof are
true and correct as of the Closing Date or the Option Closing
Date, as the case may be.
(iii) He has carefully examined the
Registration Statement and the Prospectus and, to his
knowledge, as of the effective date of the Registration
Statement, the statements contained in the Registration
Statement, including any document incorporated by reference
therein, were true and correct, and such Registration
Statement and Prospectus, including any document incorporated
by reference therein, did not omit to state a material fact
required to be stated therein or necessary in order to make
the statements therein not misleading and, to his knowledge,
since the effective date of the Registration Statement, no
event has occurred which should have been set forth in a
supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment.
(g) The Company shall have furnished to the Underwriters
such further certificates and documents confirming the representations and
warranties contained herein and related matters as the Underwriters may
reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been
approved for listing on the Nasdaq National Market.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects satisfactory to the Underwriters and to Wilson,
Sonsini, Goodrich & Rosati, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be
terminated by the Underwriters by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option Closing
Date, as the case may be.
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
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<PAGE> 16
7. Conditions of the Obligations of the Company. The obligations
of the Company to sell and deliver the portion of the Shares required to be
delivered as and when specified in this Agreement are subject to the conditions
that at the Closing Date or the Option Closing Date, as the case may be, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and in effect or proceedings therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act against any losses, claims, damages or liabilities to
which such Underwriter or such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
or incorporated by reference in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made, and will reimburse
on a monthly basis each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement, or omission or alleged omission made or
incorporated by reference in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any such amendment or supplement, in reliance
upon and in conformity with written information furnished to the Company by or
through the Underwriters specifically for use in the preparation thereof; and
provided further, that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Preliminary Prospectus, the
indemnity agreement contained in this paragraph shall not inure to the benefit
of any Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or expenses purchased the Common Stock concerned (or to
the benefit of any person controlling such Underwriter) if the Prospectus (or
the Prospectus as amended or supplemented if the Company shall have made any
amendments thereof or supplements thereto which shall have been furnished to
such Underwriter within a reasonable amount of time prior to the confirmation
of such sale) does not contain such statement, alleged statement, omission or
alleged omission, and copy of such Prospectus shall not have been sent or given
to such person by such Underwriter at or prior to the written confirmation of
such sale to such person as required by the Act. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration Statement, and each person, if any, who controls the Company
within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become
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<PAGE> 17
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained or incorporated by reference in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made; and will reimburse on a monthly basis any legal or other
expenses reasonably incurred by the Company or any such director, officer, or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter shall be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made or incorporated by reference in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Underwriters specifically for use in
the preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available to any
party who shall fail to give notice as provided in this Section 8(c) if the
party to whom notice was not given was unaware of the proceeding to which such
notice would have related and was prejudiced by the failure to give such
notice, but the failure to give such notice shall not relieve the indemnifying
party or parties from any liability which it or they may have to the
indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as incurred
the fees and disbursements of such counsel related to such proceeding. In any
such proceeding, any indemnified party shall have the right, to retain its own
counsel at its own expense. Notwithstanding the foregoing, the indemnifying
party shall pay as incurred the fees and expenses of the counsel retained by
the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel
or (ii) the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them. It is understood that
the indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall
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<PAGE> 18
not be liable for any settlement of any proceeding effected without its written
consent but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or
judgment.
(d) If the indemnification provided for in this Section 8
is unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other from the offering of the Shares.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law or if the indemnified party failed to give the
notice required under Section 8(c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 8(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act), shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations in this
Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
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<PAGE> 19
(e) In any proceeding relating to the Registration
Statement, any Preliminary Prospectus, the Prospectus or any supplement or
amendment therein, including any document incorporated by reference therein,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
9. Default by Underwriters. If on the Closing Date or the Option
Closing Date, as the case may be, any Underwriter shall fail to purchase and
pay for the portion of the Shares which such Underwriter has agreed to purchase
and pay for on such date (otherwise than by reason of any default on the part
of the Company), the non-defaulting Underwriters shall use their best efforts
to procure within 24 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company such amounts as may be agreed upon and
upon the terms set forth herein, the Firm Shares or Option Shares, as the case
may be, which the defaulting Underwriter or Underwriters failed to purchase.
If during such 24 hours the non-defaulting Underwriters shall not have procured
such other Underwriters, or any others, to purchase the Firm Shares or Option
Shares, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares with
respect to which such default shall occur does not exceed 10% of the Firm
Shares or Option shares as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion in the respective
numbers of Firm Shares or Option Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares or Option Shares,
as the case may be, which such defaulting Underwriter or Underwriters failed to
purchase, or (b) if the aggregate number of shares of Firm Shares or Option
Shares, as the case may be, with respect to which such default shall occur
exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the Company or the non-defaulting Underwriters will have the right, by
written notice given within the next 24-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or the Company except to the extent provided in
Section 8 hereof. In the event of a default by any Underwriter or
Underwriters, as set forth in this Section 9, the Closing Date or Option
Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, as you, as Underwriters, may determine in order that the
required changes in the Registration Statement or in the Prospectus or in any
other documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any action taken
under this Section 9 shall not relieve any defaulting Underwriter from
liability in respect of any default of such Underwriter under this Agreement.
10. Notices. All communications hereunder shall be in writing
and, except as otherwise provided herein, will be mailed, delivered or
telegraphed and confirmed as follows: If to the Underwriters, to Alex. Brown &
Sons Incorporated, 101 California Street, 46th Floor, San Francisco, California
94111, Attention: Andrew T. Sheehan, with a copy to Wilson, Sonsini, Goodrich &
Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California
94304-
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<PAGE> 20
1050, Attention: Jeffrey D. Saper, Esq.; if to the Company, to Tekelec, 26580
West Agoura Road, Calabasas, California 91302, Attention: President, with a
copy to Coudert Brothers, 1055 West 7th Street, 20th Floor, Los Angeles,
California 90017, Attention: Ronald W. Buckly, Esq.
11. Termination. This Agreement may be terminated by you by
notice to the Company as follows:
(a) any time prior to the earlier of (i) the time the
Firm Shares are released by you for sale by notice to the Underwriters or (ii)
11:30 a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business affairs, management or
business prospects of the Company and its Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or any other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, calamity, crisis or change on the financial markets of the United
States would, in your reasonable judgment, make the offering or delivery of the
Shares impracticable, (iii) suspension of trading in securities on the New York
Stock Exchange or the American Stock Exchange or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities, on
either such Exchange, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by either federal or New York State authorities, or (vi) the taking of any
action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the Untied Sates; or
(c) as provided in Sections 6 and 9 of this Agreement;
This Agreement also may be terminated by you, by notice to the
Company, as to any obligation of the Underwriters to purchase the Option
Shares, upon the occurrence at any time prior to the Option Closing Date of any
of the events described in subparagraph (b) above or as provided in Sections 6
and 9 of this Agreement.
12. Successors. This Agreement has been and is made solely for
the benefit of the Underwriters and the Company and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Shares merely because of such purchase.
-20-
<PAGE> 21
13. Miscellaneous. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or its directors or officers and (c)
delivery and payment for the Shares under this Agreement. This Agreement
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof and supersedes all prior understandings, negotiations and
agreements of such parties, oral or written.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
TEKELEC
By:
---------------------------------------
President
The foregoing Underwriting Agreement
is hereby confirmed and accepted as of
the date first above written:
ALEX. BROWN & SONS INCORPORATED
VOLPE, WELTY & COMPANY
CRUTTENDEN ROTH INCORPORATED
By ALEX. BROWN & SONS INCORPORATED
By:
----------------------------------
Authorized Officer
-21-
<PAGE> 22
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------------------------------------------------- ---------------------
<S> <C>
Alex. Brown & Sons Incorporated
Volpe, Welty & Company
Cruttenden Roth Incorporated
---------
Total 1,750,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-3 (File No.
33- ) of our report dated February 3, 1995, except for note P, as to which
the date is March 17, 1995, on our audits of the consolidated financial
statements of Tekelec. We also consent to the reference to our firm under the
caption "Experts."
COOPERS & LYBRAND L.L.P.
Sherman Oaks, California
April 12, 1995
