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The following item was the
subject of a Form 12b-25
and is included herein: Item 1.
FORM 10-K/A NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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26580 WEST AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 880-5656
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sale price of the Common Stock
on March 1, 1995 as reported on the Nasdaq National Market, was approximately
$85,067,012.
The number of shares outstanding of the registrant's Common Stock on
March 1, 1995, as retroactively adjusted to reflect the registrant's March 1995
two-for-one stock split, was 9,177,696.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the
year ended December 31, 1994 are incorporated by reference into Parts II and IV
of this Annual Report. Portions of the registrant's definitive Proxy Statement
to be delivered to shareholders in connection with their Annual Meeting of
Shareholders to be held on May 12, 1995 are incorporated by reference into Part
III of this Annual Report.
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PART I
ITEM 1. 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.
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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:
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.
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
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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.
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
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supports, depending on its configuration, up to 12 network 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 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.
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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.
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 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.
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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.
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 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.
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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.
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.
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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:
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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.
DCS 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:
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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>
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to the
Registrant's Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Calabasas, California.
TEKELEC
By: /s/ PHILIP J. ALFORD
--------------------------------
Philip J. Alford, President
Dated: April 12, 1995
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