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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
95-2746131
(I.R.S.Employer Identification Number)
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. [X]
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 3, 1997 as reported on the Nasdaq National Market, was approximately
$161,000,000.
The number of shares outstanding of the registrant's Common Stock on
March 3, 1997, was 12,325,793.
DOCUMENTS INCORPORATED BY REFERENCE
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 21, 1997 are incorporated by reference into Part III of this Annual
Report.
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TEKELEC
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1996
Page
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 23
Item 3. Legal Proceedings........................................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 24
Item 6. Selected Consolidated Financial Data........................ 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 26
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................. 35
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PART I
ITEM 1. BUSINESS.
Tekelec (the "Company") designs, manufactures and markets innovative
diagnostic systems and network switching solutions for the global communications
marketplace. Tekelec's products enable communications infrastructure suppliers
and network providers to rapidly deliver advanced communications products and
services. The Company's diagnostic systems are used in the design, installation
and maintenance of a broad range of communications equipment and networks.
Tekelec's EAGLE(R) STP switching platform enables operators of wireline and
wireless networks to deliver Advanced Intelligent Network (AIN) services such as
Caller ID, voice messaging, personal number calling, Service Provider Local
Number Portability (SP-LNP) and customized routing and billing as well as
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), PCS and cellular
operators, interexchange carriers (IXCs), competitive access providers (CAPs)
and local exchange carriers through the Company's direct sales force and
distribution and marketing relationships with Lucent Technologies, Inc. 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, Regional Bell Operating Companies
(RBOCs) and new competitive service providers that have entered the local and
long distance markets are competing with one another to offer enhanced products
and services to their customers. The passage of the Telecommunications Act of
1996 in early 1996 has increased competition among telephone operating
companies, cable companies and long distance carriers. 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.
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These include high-speed data services such as Asynchronous Transfer Mode (ATM)
and Frame Relay, AIN services such as Caller ID, voice messaging, Service
Provider Local Number Portability 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, xDSL, digital video and Fast Ethernet
are being deployed while Integrated Services Digital Network (ISDN) is
increasingly available to provide end-user access to combined voice and data
services, particularly for Internet services. With the explosive growth of the
Internet comes the need for high-capacity, high-speed, flexible data products
and services. In addition, network operators must also support these standards
and protocols in an increasing number of Local Area Networks (LANs),
Metropolitan Area Networks (MANs), Wide Area Networks (WANs) and Global Area
Networks (GANs).
As a result, network operators have become more demanding of
communications equipment suppliers to provide cost effective solutions that
enable them to increase the overall capabilities of their networks while
maintaining the highest network integrity.
DIAGNOSTIC TOOLS
The proliferation of standards and protocols, growth of the Internet
and Intranet and the increasing complexity of communications equipment and
networks are 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 shorten their product development
cycles and reduce their testing costs as these elements 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.
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INTELLIGENT NETWORK AND ADVANCED INTELLIGENT NETWORK (AIN) SWITCHING
The Intelligent Network (IN) utilizes a highly complex protocol called
Common Channel Signalling System No. 7 (SS7) to provide the basis for virtually
all new telecommunications services. The IN 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. Network operators
utilize the IN architecture to increase the efficiency of their network by
offloading signalling traffic onto the SS7 network, thus freeing up trunk line
capacity needed for revenue generating traffic.
A second generation Intelligent Network called the Advanced Intelligent
Network (AIN) is used by carriers and service providers 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 SS7 signalling. Such services include Caller ID, voice messaging,
personal number calling, Service Provider Local Number Portability and
customized routing and billing as well as digital wireless services such as PCS
and GSM.
Network operators are increasingly using SS7 networks as a source of
competitive advantage to introduce new services through software changes in IN
network elements rather than in central office switches. The key network
elements in the IN and 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
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services continue to grow. Services such as Caller ID, voice messaging, personal
number calling, Service Provider Local Number Portability 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
software will allow for third party developers to be involved in creating
applications.
The Federal Communications Commission's June 1996 order requiring that
Incumbent Local Exchange Carriers (ILECs) provide competitors with the ability
to transition customers to their networks without changing the customer's
existing telephone number (i.e., Service Provider Local Number Portability) will
have a dramatic impact upon the SS7 network and all ILECs.
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 network-to-network operators mandates extremely high
reliability and fault tolerance from the equipment as well as higher throughput
and scalability to support the rapid and 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 DIAGNOSTICS PRODUCTS
Equipment manufacturers and network operators use the Company's
diagnostic products 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:
o Designing Communications Equipment. By simulating existing and
emerging communications devices (e.g., digital switches, STPs, SCPs, routers and
hubs) and protocols (e.g., ATM, Frame Relay, SS7, ISDN, FDDI, Ethernet and Fast
Ethernet), the Company's products enable engineers to more rapidly design
communications devices that will be
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compatible with, and minimize potential breakdowns of, the networks in which the
devices will be deployed.
o 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 accelerating time to market and
potentially reducing costly failures after installation.
o Verifying Certification. By executing certain standard tests, network
operators and manufacturers use the Company's products to rapidly verify that
communications devices meet specified standards (e.g., X.25, ISDN and SS7).
o Monitoring Networks. By collecting and analyzing traffic, the
Company's products can monitor networks on a continuous basis and provide
advance notice of potential system failures, allowing faster service restoration
or even service failure prevention.
o 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
associated with service failure.
The Company's principal data network diagnostics products are:
Chameleon(R) 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, GAN, MAN 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, TCP/IP, X.25, T1, E1, Fast Ethernet, Ethernet and Token
Ring. The Chameleon Open is based on an Intel x86-based pentium hardware
platform and a UNIX operating system incorporating an X-Windows, Motif graphical
user interface. Tekelec's proprietary programming tool, Protocol Adaptable State
Machine (PASM), was added to the Chameleon Open platform in 1995 to enable ATM
signalling and Frame Relay simulation. Each Chameleon Open supports, depending
on its configuration, up to 12 network interfaces simultaneously and can be
configured as either a portable or rack mount system. Multiple systems can be
networked in a LAN or WAN configuration.
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.
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The Company's principal intelligent network diagnostics product is:
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 system supports a number of
protocols, including SS7, AIN, GSM, IS.41 and personal digital communications
(PDC) networks. Each system can simulate up to 32 SS7 links or 16 network nodes
simultaneously, and a number of MGTS/GSMT systems may be networked together.
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 distributed open
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 scaleable in configurations from 2 to
500 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. 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 250
signalling interface processors. 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.
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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,
minimizing the potential for errors. EAGLE STP software is optimized for the
capacity and redundancy features of the host hardware.
Open Software Interfaces. Users of the EAGLE STP can rapidly add new
functionality and value-added services to their network, utilizing the EAGLE
STP's open software interfaces. Major new features enabling these open
interfaces include the STP LAN feature, which allows users to attach inexpensive
general purpose computers to the EAGLE for network analysis; the Database
Transport Access feature, which allows users to change the behavior of protocols
in their network without relying on the vendor's development cycles; and the
X.25 to SS7/IS.41 Protocol Conversion feature which allows first-generation
legacy cellular switches to interwork with the more advanced SS7 cellular
network. A significant new capability enabling Service Provider Local Number
Portability on the EAGLE allows carriers to eliminate significant numbers of
dedicated Service Control Point (SCP) general purpose computers.
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.
Prices for a pair of EAGLE STPs typically range from approximately
$250,000 to $5,000,000, 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
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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 and participation in industry
organizations and international standards committees, such as the ATM Forum and
Telecommunications Industry Association (TIA), and by closely monitoring the
activities of the ITU, ETSI, ISO and Bellcore.
The Company's diagnostic product development activities are principally
focused on expanding the capabilities of the Chameleon Open and MGTS, including
their interfaces, software modules and protocol capabilities for emerging
technologies such as ATM and AIN, and adapting these products for the emerging
Network Operations market. 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 rapidly to changes in technology, industry standards and
customer requirements. This requires 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. Although 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 $17.1
million, $15.1 million, and $12.0 million in 1996, 1995 and 1994, respectively.
There were no capitalized software development costs in 1996, 1995 and 1994. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note A to Consolidated Financial Statements.
The Company's development facilities are located in California, North
Carolina, Japan and India. As of March 1, 1997, the Company had 141 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 sales and marketing strategy for its diagnostic products
is to initially target customers' research and development departments designing
the next generation of communications equipment and then to target the
manufacturing groups and ultimate users in network operations 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 and marketing strategy for its EAGLE switching
product is to continue to focus on sales to the U.S. ITC and cellular markets
and to pursue new customer relationships including RBOCs and selected
international opportunities. 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 typically
ranges from three to 18 months depending on the complexity of a customer's
planning, bidding and implementation requirements.
RBOCs and other large service providers require their suppliers to
continuously participate in Bellcore Technical Auditing programs as new hardware
and software features are introduced. Bellcore provides Technical Auditing
Services ("technical audits") to suppliers of network equipment assessing the
supplier's conformance to certain Bellcore standards which have been adopted by
RBOCs and other service providers. Ongoing technical audits of the EAGLE STP are
conducted by Bellcore and the results of these audits are available to the
Company and its customers. Bellcore does not endorse or certify any product or
service or guarantee 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.
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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 Lucent Technologies,
Inc. (formerly AT&T Network Systems) 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, Missouri, New Jersey, North
Carolina, Northern California, 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%, 22% and
20% of the Company's revenues for 1996, 1995 and 1994, respectively. In 1997,
the Company intends to transition its sales in Canada to its direct sales force.
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 diagnostic products in
France, Italy, Germany, the Netherlands, Belgium, Luxembourg, Portugal, Spain
and China. Twenty additional independent companies distribute the Company's
products in other Western European countries, the Far East (other than Japan),
Australia, 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 13%, 17% and 14% of revenues in 1996, 1995 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, unexpected 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, E 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
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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 Lucent
Technologies, Inc. and a marketing agreement with Stratus for the EAGLE STP. The
Company believes that its relationships with Lucent 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 Lucent 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, Lucent is not
precluded from selling products that are competitive with the Company's
products. A termination of the Company's relationship with Lucent or the sale of
competing products by Lucent 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, a presence on the Internet via the World
Wide Web 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, as well as maintains a presence on the Internet.
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 Morrisville, 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
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warranties. To date, warranty expenses have been consistently within
management's expectations.
CUSTOMERS
During 1996, the Company shipped approximately 600 units of its
diagnostic products to over 250 customers worldwide and 26 pairs of EAGLE STPs
to 21 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, communications equipment
manufacturers, wireless and cellular network operators and government agencies.
End users for the Company's EAGLE STP consist primarily of U.S. ITCs, PCS and
cellular operators, interexchange carriers, competitive access providers and
local exchange carriers.
The Company's diagnostic business is substantially dependent on repeat
business and, therefore, customer satisfaction and loyalty are crucial to its
long-term success. Many of the Company's largest customers in 1996 were
purchasers of the Company's diagnostic systems in prior years. Sales of
diagnostic products to Nippon Telegraph & Telephone (NTT) accounted for 12% of
the Company's 1996 revenues. No other customer accounted for more than 10% of
the Company's revenues in 1996.
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 as evidenced by the passage of the Telecommunications Act of 1996 in
early 1996 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 acceptance 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 five 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
14
<PAGE>
December 31, 1996, the Company's backlog amounted to approximately $28.0
million, of which $16.6 million related to EAGLE STP service warranty. This
compared to $23.3 million at December 31, 1995, of which $12.3 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 1995, ISO 9001
certification from Bellcore for its network switching operation in 1996 and is
currently undergoing the processes for ISO 9001 certification for its remaining
operations and expects to obtain such certification in 1997.
The Company is in the process of obtaining CE Mark registration for
certain of its diagnostic products to meet EC regulations for shipment of
products into Europe. The Company has already obtained CE Mark registration for
those products with significant demand in Europe in 1996 and currently expects
to be compliant for all remaining products before the end of the second quarter
of 1997. Although delays in the Company's ability to obtain CE Mark registration
for all of its products did not have a material impact on European sales in
1996, further delays or failure to obtain such registration could have a
material impact on future sales in Europe.
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
15
<PAGE>
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 that address 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/price
performance, functionality and reliability, timely introduction of new products,
breadth of integrated product applications, marketing and distribution
capability and customer service and support. 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 DSC and to a lesser extent
with a limited number of other manufacturers, all of which 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 further penetrate the major
telephone companies, including the RBOCs, offer products with the best
price/performance profile and be responsive to customers' needs for new features
and services.
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
16
<PAGE>
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 and timely introduction 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
17
<PAGE>
develop or license a substitute technology, the Company's business and operating
results would be materially adversely affected.
EMPLOYEES
At March 1, 1997, the Company had 367 employees, comprising 131 in
sales, marketing and support, 51 in manufacturing, 141 in research, development
and engineering and 44 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/or 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.
18
<PAGE>
GLOSSARY
AIN (Advanced Intelligent Network)...... Bellcore's set of standards for
advanced intelligent services for the
telephone networks of Regional Bell
Operating Companies.
ANSI (American National Standards
Institute)........................... The coordinating body for voluntary
standards groups within the United
States. ANSI is a member of the
International Organization for
Standardization (ISO).
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 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.
El ..................................... 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.
Fast Ethernet........................... 100 Mbps' technology for workstation
LANs from the eponymous Fast Ethernet
Alliance, which includes 3Com and
SynOptics. It has been adopted by the
IEEE as the basis for the 100BaseT
Ethernet standard.
FDDI (Fiber Distributed Data
Interface)........................... A standard for operating fiber
optic-based LANs at 110 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.
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<PAGE>
GAN (Global Area Network)............... A network of computers connected
across countries.
GSM (Global Systems for Mobile)......... The standard for a set of protocols
for digital wireless initially
deployed in Europe.
IN (Intelligent Network)................ An out-of-band, packet switched
overlay network to the in-band Public
Switched Telephone Network (PSTN). The
Intelligent Network minimally consists
of SS7-equipped Central Offices
(Service Switching Points, or SSPs),
packet switches (Signal Transfer
Points, or STPs) and databases
(Service Control Points, or SCPs).
Internet................................ The worldwide system of linked
networks that is capable of exchanging
mail and data through a common
addressing and naming system based on
TCP/IP protocols.
Intranet................................ A private network that uses Internet
software and standards.
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).
MAN (Metropolitan Area Network)......... A high-speed network designed to
link together sites in a metropolitan
or campus area. The IEEE has defined
its 802.6 standard for MANs based on
the Distributed Queue Dual Bus
technology.
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.
20
<PAGE>
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
Systems)............................. 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.
RBOCs (Regional Bell Operating
Companies)........................... (1) One of seven telephone companies
created by the AT&T divestiture. (2)
The acronym for the local telephone
companies created in 1984 as part of
the break-up of AT&T.
signalling.............................. The process by which digital
information is exchanged to establish,
control and manage connections in a
network.
SCE (Service Creation Environments)..... An application in the Advanced
Intelligent Network which allows for
the development and customization of
new telephone services, utilizing
Advanced Intelligent Network (AIN)
"building blocks". Using customized
Service Information Blocks (SIBs) and
"triggers", users describe services
such as time-of-day routing. These
descriptions are loaded into Service
Control Points (SCPs) or Service Nodes
(SNs) for execution in the network.
SCP (Service Control Point)............. A computer database that is accessed
by STPs for customer call routing
information and other special
information required for AIN services.
SMDS (Switched Multi-megabit Data
Service)............................. A communications service providing
high speed, connectionless data
transport.
21
<PAGE>
SMS (Service Management System)......... A proprietary application which
provides the user a maintenance and
administration interface to various IN
and AIN network elements.
SP-LNP (Service Provider Local
Number Portability).................. A capability mandated by the Federal
Communications Commission in June,
1996 which allows telephone customers
to change their local service provider
without changing their telephone
number. Adding SP-LNP capabilities to
the Public Switched Telephone Network
requires the introduction of three new
network elements and new software
capabilities in virtually every
existing network element.
SS7 (Common Channel 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).
TCP/IP (Transmission Control
Protocol/Internet Protocol).......... The common name for the suite of
protocols developed by the U.S.
Department of Defense in the 1970s to
support the construction of world-
wide internetworks. TCP and IP are the
two best- known protocols in the
suite. TCP corresponds to Layer 4 (the
transport layer) of the OSI reference
model. It provides reliable
transmission of data. IP corresponds
to layer 3 (the network layer) of the
OSI reference model and provides
connectionless datagram service.
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.
22
<PAGE>
xDSL.................................... Another name for an ISDN BRI channel.
Operated at the Basic Rate Interface
(with two 64 kbps circuit switched
channel), the DSL can carry both voice
and data signal at the same time, in
both directions, as well as the
signaling data used for call
information and customer data.
X.25..................................... A protocol for transfer of information
across packet data networks. X.25 was
the first packet data technology to be
widely implemented.
ITEM 2. PROPERTIES.
The Company's executive offices, as well as its principal manufacturing
and data network diagnostics product engineering and marketing operations, are
located in an approximate 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 68,000 square-foot facility in Morrisville,
North Carolina under a lease expiring in March 2003, primarily for engineering,
product development, customer support and regional sales activities for its
network switching and intelligent network diagnostics products. The Company also
has eight regional sales offices occupying an aggregate of approximately 10,600
square feet under leases expiring between 1997 and 1998 in Milbrae, California;
Boulder, Colorado; Lombard, Illinois; Kansas City, Missouri; Iselin, New Jersey;
Irving, Texas; Arlington, Virginia; and Ottawa, Canada. The Company's Japanese
subsidiary occupies approximately 10,600 square feet in Tokyo under leases
expiring between April 1997 and November 1997, and the Company's India
subsidiary occupies approximately 3,500 square feet under a lease expiring in
December 1999. The Company believes that its existing facilities will be
adequate to meet its needs at least through 1997. The Company believes it will
be able to obtain additional space when and as needed on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
23
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol TKLC. The following table sets forth the high
and low closing sales prices for the Common Stock, as reported on the Nasdaq
National Market. As of March 3, 1997, there were 197 record holders of the
Company's Common Stock based on information provided by the Company's transfer
agent.
High Low
--------- ----------
1995
----
First Quarter......................... $ 23.13 $ 15.50
Second Quarter........................ 24.50 18.25
Third Quarter......................... 26.75 21.50
Fourth Quarter........................ 22.50 10.25
1996
----
First Quarter......................... $ 14.38 $ 9.50
Second Quarter........................ 17.50 12.63
Third Quarter......................... 14.75 9.00
Fourth Quarter........................ 17.25 12.00
The Company has never paid a cash dividend. It is the present policy of
the Company to retain earnings to finance the growth and development of its
business and, therefore, the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future.
24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The statement of operations data included in the selected consolidated
financial data set forth below for the years ended December 31, 1996, 1995 and
1994 and the balance sheet data set forth below as of December 31, 1996 and 1995
are derived from, and are qualified in their entirety by reference to, the
Company's audited consolidated financial statements and notes thereto. The
statement of operations data set forth below for the years ended December 31,
1993 and 1992 and the balance sheet data set forth below as of December 31,
1994, 1993 and 1992 are derived from audited consolidated financial statements
of the Company which are not included herein.
<TABLE>
FIVE-YEAR SELECTED FINANCIAL DATA
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992
------------------------------------------------------------
(thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................................................ $ 72,126 $ 75,276 $ 61,189 $ 46,856 $ 58,090
Income (Loss) before provision
for income taxes ................................................. (284) 8,450 5,711 (17,101) (6,693)
Net income (loss) ................................................... (2,511) 6,311 4,460 (18,543) (8,296)
Earnings (Loss) per share:(1)
Primary ........................................................ $ (0.21) $ 0.52 $ 0.47 $ (2.23) $ (1.01)
Fully diluted .................................................. (0.21) 0.52 0.43 (2.23) (1.01)
Weighted average number of
shares outstanding:(1)
Primary ........................................................ 11,775 12,060 9,550 8,314 8,178
Fully diluted .................................................. 11,775 12,063 10,360 8,314 8,178
BALANCE SHEET DATA (at December 31):
Cash and investments ................................................ $ 44,244 $ 43,609 $ 7,653 $ 3,669 $ 10,067
Working capital ..................................................... 43,627 56,983 13,466 3,215 15,471
Total assets ........................................................ 82,518 80,488 34,409 28,139 38,403
Long-term obligations ............................................... -- 380 654 323 204
Shareholders' equity ................................................ 61,751 63,607 18,720 11,693 28,751
- ---------------
<FN>
(1) Earnings (Loss) per share and weighted average number of shares outstanding have been retroactively adjusted to reflect the
two-for-one stock split effected March 17, 1995.
</TABLE>
25
<PAGE>
ITEM 7. 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 in this Annual Report on Form 10-K. 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 three divisions: Data Network
Diagnostics, Intelligent Network Diagnostics and Network Switching.
The Data Network Diagnostics Division and Intelligent Network
Diagnostics Division develop and supply diagnostic products for the
communications marketplace. These products, primarily the Chameleon family of
products for the Data Network Diagnostics Division and the MGTS products for the
Intelligent Network Diagnostics Division, 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, a high-capacity packet switching platform.
26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that statement of operations items bear to total revenues:
<TABLE>
PERCENTAGE OF REVENUES
------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues ................................................................. 100.0% 100.0% 100.0%
Cost of goods sold .................................................. 37.0 33.3 33.3
--------------- --------------- ---------------
Gross profit ............................................................. 63.0 66.7 66.7
Research and development ............................................ 23.7 20.0 19.6
Selling, general and administrative ................................. 41.4 36.7 36.7
Restructuring ....................................................... 0.4 -- --
--------------- --------------- ---------------
Income (Loss) from operations ............................................ (2.5) 10.0 10.4
Interest and other income (expense), net ............................ 2.1 1.2 (1.1)
--------------- --------------- ---------------
Income (Loss) before provision for income taxes .......................... (0.4) 11.2 9.3
Provision for income taxes .......................................... 3.1 2.8 2.0
--------------- --------------- ---------------
Net income (loss) ................................................. (3.5)% 8.4% 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,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Data network diagnostics .................................................. 29% 41% 50%
Intelligent network diagnostics ........................................... 33 27 22
Network switching ......................................................... 38 32 28
--------------- --------------- ---------------
Total .............................................................. 100% 100% 100%
=============== =============== ===============
</TABLE>
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,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
North America ............................................................. 59% 59% 59%
Japan ..................................................................... 22 22 20
Europe .................................................................... 9 9 9
Rest of World ............................................................. 10 10 12
--------------- --------------- ---------------
Total .............................................................. 100% 100% 100%
=============== =============== ===============
</TABLE>
27
<PAGE>
1996 COMPARED WITH 1995
Revenues
The Company's revenues decreased by $3.2 million, or 4%, during 1996
due to lower sales of data network diagnostics products, partially offset by
higher sales of switching and intelligent network diagnostics products.
Revenues from data network diagnostics products decreased by 32%, or
$9.8 million, to $21.2 million, primarily due to lower sales in all markets for
both the Chameleon Open and the Company's older Chameleon products.
Revenues from intelligent network diagnostics products increased by
15%, or $3.1 million, to $23.7 million. This increase was primarily driven by
strong demand for the Company's MGTS products in the domestic and Japanese
markets.
Revenues from switching products increased by 15%, or $3.5 million, to
$27.2 million due primarily to increased EAGLE STP sales worldwide, particularly
internationally. This increase was lower than anticipated principally due to
delays in Regional Bell Operating Companies' SS7 network replacement and
expansion. In 1996, 26 pairs of EAGLE STPs were sold compared with 28 in 1995.
The increased revenues despite lower unit sales reflect a trend towards larger
average system sizes, combined with increased service revenues as the EAGLE
installed base grows. Revenues in North America decreased by $1.4 million, or
3%, as a result of lower Chameleon product sales, partially offset by higher
MGTS and switching product sales. Revenues in Japan decreased by $938,000, or
6%, due to lower sales of Chameleon products and the impact of exchange rate
fluctuations on currency translations in 1996, partially offset by strong MGTS
product sales. Other international revenues decreased by $862,000, or 6%,
primarily due to lower sales of both diagnostic product lines, partially offset
by higher switching product sales.
The impact of exchange rate fluctuations on currency translations
decreased revenues by approximately $2.4 million, or 3%, and increased net loss
by $257,000, or 11%.
Gross Profit
Gross profit as a percentage of revenues decreased from 67% in 1995 to
63% in 1996, due primarily to increased competition in the EAGLE product market
and lower sales of higher margin 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.
28
<PAGE>
Research And Development
Research and development expenses increased by $2.0 million, or 13%,
and represented 24% of revenues in 1996, compared to 20% in 1995. The increase
was attributable primarily to the hiring of additional personnel in the Network
Switching Division, expenses incurred in connection with the Bellcore technical
audits of the Company's EAGLE product and higher depreciation expense as a
result of equipment acquisitions for EAGLE research and development.
The Company intends to continue to make substantial investments in
product and technology development and 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.
Selling, General And Administrative
Selling, general and administrative expenses increased by $2.2 million,
or 8%, and represented 41% of revenues in 1996, compared to 37% in 1995. The
increase was attributable primarily to severance charges, recruiting activity
and relocation expenses incurred in connection with personnel changes.
Restructuring
During the third quarter of 1996, the Company recorded restructuring
charges amounting to $327,000 which represent severance pay, benefit costs and
other costs related to the consolidation of the Company's Ohio research facility
into the Company's North Carolina facility. See Note F to Consolidated Financial
Statements.
Income Taxes
Although the Company's pre-tax results showed a loss in 1996, the
Company had a tax provision of $2.2 million, compared to $2.1 million and an
effective tax rate of 25% in 1995. The provisions for both periods were
principally foreign taxes on the income of the Company's Japanese subsidiary.
The 1996 provision was impacted by the Company's inability to currently
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce future U.S. taxes. In 1995, 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 Company anticipates that it has sufficient loss and credits
carryforwards available in 1997 to offset most of its expected U.S. taxes.
However, the Company's overall tax rate is significantly influenced by the level
of income derived from its Japanese subsidiary.
29
<PAGE>
Interest, Net
Net interest income increased by $554,000 primarily as a result of
higher average investment balances in 1996.
1995 COMPARED WITH 1994
Revenues
The Company's revenues increased by $14.1 million, or 23%, during 1995
due to higher sales of both switching and intelligent network diagnostics
products.
Revenues from switching products increased by 41% in 1995 to $23.8
million due to growing market acceptance of the Company's EAGLE STP product,
particularly in the cellular market. In 1995, 28 pairs of EAGLE STPs were sold
compared with 25 in 1994.
Revenues from intelligent network diagnostics products increased by
53%, or $7.2 million, to $20.6 million due to higher sales in all markets as a
result of increased demand and market acceptance of the Company's MGTS products,
particularly internationally.
Revenues from data network diagnostics products were flat due to
increased Chameleon Open sales offset by lower sales of the Company's older
Chameleon products.
Revenues in North America increased by $7.7 million, or 21%, as a
result of higher switching and MGTS product sales, partially offset by lower
Chameleon product sales as a result of slower spending by large equipment
suppliers and major carriers in the third and fourth quarters. Revenues in Japan
increased by $4.4 million, or 36%, due to higher sales of both diagnostic
product lines and the impact of exchange rate fluctuations on currency
translations in 1995. Other international revenues grew $2.0 million, or 16%,
primarily due to higher sales of both diagnostic product lines, partially offset
by lower switching product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by approximately $1.5 million, or 2%, and increased net
income by $139,000, or 2%.
Gross Profit
Gross profit as a percentage of revenues was 67% for both 1995 and
1994. Although margins on EAGLE sales were slightly higher than in 1994, this
increase was offset by the higher proportion of EAGLE sales as a percentage of
total Company sales, as the gross profit percentage on switching products is
generally lower than on diagnostic products.
Research And Development
Research and development expenses increased by $3.1 million, or 26%, in
1995 and represented 20% of revenues for both 1995 and 1994. The dollar increase
was attributable
30
<PAGE>
primarily to increased headcount, including contractors, and included costs to
accelerate certain development programs and the Bellcore audits of the EAGLE
product.
Selling, General And Administrative
Selling, general and administrative expenses increased by $5.2 million,
or 23%, in 1995 primarily as a result of increased headcount in customer
service, increased sales commissions due to higher revenues, and higher
tradeshow and travel expenses to support the increased revenues.
Income Taxes
In 1995, the Company had an effective tax rate of 25% compared to 22%
in 1994. The provisions for both years were principally foreign taxes on the
income of the Company's Japanese subsidiary. In both years, 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.
Interest, Net
Net interest income increased by $1.5 million as a result of interest
earned on short-term cash investments resulting primarily from proceeds of the
Company's public stock offering in 1995.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, cash and cash equivalents decreased by $26.4 million to
$17.2 million, primarily due to a net transfer of approximately $27.0 million to
short-term and long-term investments. Operating activities, net of the effects
of exchange rate changes on cash, provided $5.5 million, financing activities
provided $1.1 million and $6.0 million was used for capital expenditures.
Accounts receivable, including amounts due from related parties,
decreased by 13% during 1996. The decrease was due primarily to a reduced level
of receivables with extended terms at December 31, 1996 compared to December 31,
1995 and a lower concentration of sales in the last month of the year in 1996
compared to 1995. Inventories increased by 26% during 1996 primarily to support
increased fourth quarter sales volume.
Capital expenditures were $6.0 million during 1996 and represented the
planned replacement and addition of equipment principally for research and
development, the Company's new facility in North Carolina and sales
demonstration. There are currently no significant commitments for capital
expenditures; however, the Company expects that its capital expenditures will be
at a similar level in 1997, principally for the acquisition of equipment for
research and development, sales demonstration and manufacturing operations.
31
<PAGE>
Net cash provided by financing activities in 1996 was $1.1 million,
which represented $2.1 million in proceeds from the issuance of Common Stock
upon the exercise of options and warrants, partially offset by debt and other
obligation repayments amounting to $981,000.
In September 1996, the Company repaid all of the outstanding borrowings on
its $7.5 million line of credit and terminated the credit facility. In October
1996, the Company agreed to terms for a $10 million line of credit with a U.S.
bank, collateralized by substantially all of the Company's assets and bearing
interest at, or in some cases below, the U.S. prime rate (8.25% at December 31,
1996). There have been no borrowings under this credit facility, which expires
June 30, 1998 if not renewed. Under the terms of this facility, the Company is
required to maintain certain financial ratios and meet certain net worth and
indebtedness tests for which the Company is in compliance.
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 $3.0 million with interest at the Japanese prime
rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between
May 29, 1997, and March 31, 1998, if not renewed. There have been no borrowings
under these lines of credit.
The Company's weighted average short-term borrowing rates were 11.6% and
11.5% in 1996 and 1995, respectively.
The Company believes that existing working capital, funds generated
from operations and its current bank lines of credit are sufficient to satisfy
anticipated operating requirements at least through 1997.
Foreign Exchange
International operations are subject to certain opportunities and
risks, including currency fluctuations. In 1996, 1995 and 1994, the percentages
by which weighted average exchange rates for the currencies indicated below
strengthened (weakened) against the U.S. dollar were as follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
--------- --------- ---------
Japanese yen................................ (18)% 9% 9 %
Canadian dollar............................. 1 % 0% (9)%
The change in cumulative translation adjustment in 1996 was due
primarily to the weakening of the Japanese yen against the U.S. dollar when
comparing the exchange rate at December 31, 1996 to that of December 31, 1995.
Exchange gains (losses) are recorded in the period when incurred, and amounted
to $(180,000), $(210,000) and $(235,000) in 1996, 1995 and 1994, respectively.
Exchange gains and losses include the remeasurement of certain currencies into
functional currencies and the settlement of intercompany balances.
32
<PAGE>
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
The statements which are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this report on Form 10-K are forward-looking
statements that involve certain risks and uncertainties including, but not
limited to, competition in the data network diagnostics, intelligent network
diagnostics and network switching markets, capital spending patterns of the
Company's customers, foreign currency fluctuations, general economic and
political conditions, announcements of new products by Tekelec or its
competitors, and other risks described in this Annual Report on Form 10-K and in
the Company's other Securities and Exchange Commission filings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the consolidated financial statements of the Company and its
subsidiaries included herein and listed in Item 14 (a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 21, 1997, entitled "Election of Directors" and
"Executive Officers" to be filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 21, 1997, entitled "Election of Directors -
Compensation of Directors," "Executive Compensation and Other Information,"
"Board of Directors and Compensation Committee Reports on Executive
Compensation" and "Performance Graph," to be filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 21, 1997, entitled "Common Stock Ownership of
Principal Shareholders and Management," to be filed with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 21, 1997, entitled "Certain Relationships and
Related Transactions," to be filed with the Commission.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
CONSOLIDATED FINANCIAL STATEMENTS PAGE
o Report of Independent Accountants F-1
o Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1996 F-2
o Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
o Consolidated Statements of Cash Flow for each of the
three years in the period ended December 31, 1996 F-4
o Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1996 F-5
o Notes to Consolidated Financial Statements F-6
- ---------------
PAGE
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
o Schedule II Valuation and Qualifying Accounts and Reserves
for each of the three years in the period ended
December 31, 1996 S-1
Schedules which are not listed above have been omitted because they are
not applicable or the information required to be set forth therein is included
in the consolidated financial statements or notes thereto.
LIST OF EXHIBITS
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws, as amended
35
<PAGE>
10.1 Amended and Restated 1984 Stock Option Plan, including forms of
stock option agreements(2)(3)
10.2 Amended and Restated Non-Employee Director Equity Incentive Plan,
including forms of stock award certificate and nonstatutory stock
option agreements(4), as amended February 21, 1996(3) (5)
10.3 1994 Stock Option Plan, including forms of stock option
agreements(4), as amended February 4, 1995(6), March 3, 1995 (6)
and January 27, 1996(3)(5)
10.4 Retirement Pension Rules of Tekelec Ltd.(1)(3)
10.5 Form of Indemnification Agreement between the Registrant and all
directors of the Registrant(3)(7)
10.6 Lease dated as of February 8, 1988 between the Registrant and State
Street Bank and Trust Company of California, N.A., not
individually, but solely as an Ancillary Trustee for State Street
Bank and Trust Company, a Massachusetts banking corporation, not
individually, but solely as Trustee for the AT&T Master Pension
Trust, covering the Company's principal facilities in Calabasas,
California(8)
10.7 Form of International Distributor Agreement(9) and Schedule of
Distributors
10.8 Officer Severance Plan, including form of Employment Separation
Agreement(3)(10)
10.9* Distributorship Agreement dated September 16, 1994 between the
Registrant and AT&T Corp.(11)
10.10* Compensation agreement dated November 22, 1995 between the
Registrant and Allan Toomer(3)(12)
10.11 Agreement dated March 26, 1997 between the Registrant and Allan
Toomer(3)
10.12 Employee Stock Purchase Plan, including form of subscription
agreement(3)(5)
10.13 Consulting Agreement dated August 1, 1996 between the Registrant
and Howard Oringer, including forms of Warrant and Confidentiality
Agreement(13), and Amendment No. 1 thereto dated November 30, 1996
10.14 Credit Agreement dated October 22, 1996 between the Registrant and
Imperial Bank, together with Promissory Note of the Registrant
dated October 22, 1996
36
<PAGE>
10.15 General Security Agreement dated October 22, 1996 between the
Registrant and Imperial Bank
11.1 Statement of Computation of Earnings Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- ---------------
* Confidential treatment has been granted with respect to portions of this
exhibit, and such confidential portions have been deleted and filed with
the Commission pursuant to Rule 24b-2 promulgated under the Securities
Exchange Act of 1934.
(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 Registration Statement on
Form S-8 (Registration No. 33-48079) filed with the Commission on May 22,
1992.
(3) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-82124) filed with the Commission on July 28,
1994.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-05933) filed with the Commission on June 13,
1996.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-60611) filed with the Commission on June 27,
1995.
(7) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-15135) for the year ended December 31, 1987.
(8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-15135) for the quarter ended June 30, 1988.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-4123) filed with the Commission on March 19,
1986.
37
<PAGE>
(10) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-15135) for the year ended December 31, 1993.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-15135) for the quarter ended September 30, 1994.
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-15135) for the year ended December 31, 1995.
(13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-15135) for the quarter ended September 30, 1996.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed or required to be filed by the
Registrant during the quarter ended December 31, 1996.
(c) EXHIBITS
See the list of Exhibits under Item 14(a)3 of this Annual Report on
Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES
See the Schedule under Item 14(a)2 of this Annual Report on Form 10-K.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEKELEC
By: /s/ Allan J. Toomer
------------------------------------
Allan J. Toomer, President
Dated: March 31, 1997
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- ----------------------------- --------------
/s/ Jean-Claude Asscher Chairman of the Board March 31, 1997
- ---------------------------------
Jean-Claude Asscher
/s/ Allan J. Toomer President and Director March 31, 1997
- ---------------------------------
Allan J. Toomer
/s/ Robert V. Adams Director March 31, 1997
- ---------------------------------
Robert V. Adams
/s/ Daniel L. Brenner Director March 31, 1997
- ---------------------------------
Daniel L. Brenner
/s/ Howard Oringer Director March 31, 1997
- ---------------------------------
Howard Oringer
/s/ Jon F. Rager Director March 31, 1997
- ---------------------------------
Jon F. Rager
/s/ Gilles C. Godin Vice President, Finance and March 31, 1997
- --------------------------------- Chief Financial Officer
Gilles C. Godin
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC
We have audited the accompanying consolidated balance sheets of Tekelec
and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flow, and the financial
statement schedule for each of the three years in the period ended December 31,
1996. These financial statements and the financial statement schedule 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 consolidated financial position of
Tekelec and Subsidiaries as of December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents, in all material respects the information
required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Sherman Oaks, California
February 5, 1997
F-1
<PAGE>
<TABLE>
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(thousands, except per share data)
<S> <C> <C> <C>
REVENUES (including sales to related parties of
1996 - $4,130; 1995 - $5,305; 1994 - $3,809) ......................... $ 72,126 $ 75,276 $ 61,189
COSTS AND EXPENSES:
Cost of goods sold ................................................... 26,682 25,035 20,388
Research and development ............................................. 17,076 15,054 11,962
Selling, general and administrative .................................. 29,842 27,653 22,466
Restructuring ........................................................ 327 -- --
--------------- --------------- ---------------
Total costs and expenses ........................................... 73,927 67,742 54,816
Income (Loss) from operations ............................................. (1,801) 7,534 6,373
Other income (expense):
Interest, net ........................................................ 1,693 1,139 (327)
Other, net ........................................................... (176) (223) (335)
--------------- --------------- ---------------
Total other income (expense) ....................................... 1,517 916 (662)
--------------- --------------- ---------------
Income (Loss) before provision for income taxes ........................... (284) 8,450 5,711
Provision for income taxes ........................................... 2,227 2,139 1,251
--------------- --------------- ---------------
NET INCOME (LOSS) .................................................. $ (2,511) $ 6,311 $ 4,460
=============== =============== ===============
EARNINGS (LOSS) PER SHARE:
Primary ............................................................ $ (0.21) $ 0.52 $ 0.47
Fully diluted ...................................................... (0.21) 0.52 0.43
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary ............................................................ 11,775 12,060 9,550
Fully diluted ...................................................... 11,775 12,063 10,360
See notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
TEKELEC
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995
--------------- ---------------
(thousands, except share data)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................................. $ 17,211 $ 43,609
Short-term investments, at fair value ..................................................... 17,913 --
Accounts and notes receivable, less allowances
1996-- $368; 1995-- $391 .............................................................. 17,026 19,167
Inventories ............................................................................... 8,116 6,423
Amounts due from related parties .......................................................... 2,381 3,053
Prepaid expenses and other current assets ................................................. 1,747 1,232
--------------- ---------------
Total current assets .................................................................... 64,394 73,484
Long-term investments, at fair value ........................................................... 9,120 --
Property and equipment, net .................................................................... 8,174 6,107
Other assets ................................................................................... 830 897
--------------- ---------------
Total assets ............................................................................ $ 82,518 $ 80,488
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt ............................... $ -- $ 570
Trade accounts payable .................................................................... 5,631 3,960
Accrued expenses .......................................................................... 5,989 4,404
Accrued payroll and related expenses ...................................................... 4,027 3,294
Deferred revenues ......................................................................... 3,778 2,908
Current portion of other obligations ...................................................... -- 31
Income taxes payable ...................................................................... 1,342 1,334
--------------- ---------------
Total current liabilities ............................................................... 20,767 16,501
Long-term debt ................................................................................. -- 380
--------------- ---------------
Total liabilities ....................................................................... 20,767 16,881
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, without par value, 50,000,000 shares authorized;
issued and outstanding 1996--12,010,099; 1995-- 11,599,073 .............................. 57,049 54,936
Retained earnings ......................................................................... 3,879 6,390
Cumulative translation adjustments ........................................................ 823 2,281
--------------- ---------------
Total shareholders' equity .............................................................. 61,751 63,607
--------------- ---------------
Total liabilities and shareholders' equity .............................................. $ 82,518 $ 80,488
=============== ===============
See notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(thousands)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (2,511) $ 6,311 $ 4,460
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................ 3,842 3,643 4,406
Changes in current assets and liabilities:
Accounts and notes receivable ...................................... 1,810 (5,022) (5,522)
Inventories ........................................................ (1,840) (2,079) 400
Amounts due from related parties ................................... 672 (1,515) (294)
Income taxes receivable ............................................ -- -- 216
Prepaid expenses and other current assets .......................... (564) (567) 427
Trade accounts payable ............................................. 1,776 (188) (304)
Accrued expenses ................................................... 1,645 1,346 (703)
Accrued payroll and related expenses ............................... 755 (865) 559
Deferred revenues .................................................. 870 1,496 932
Income taxes payable ............................................... 307 810 (150)
--------------- --------------- ---------------
Total adjustments ................................................ 9,273 (2,941) (33)
--------------- --------------- ---------------
Net cash provided by
operating activities ............................................ 6,762 3,370 4,427
--------------- --------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
(Increase) Decrease in restricted cash ............................... -- 1,000 (1,000)
Purchase of available-for-sale securities ............................ (45,033) -- --
Proceeds from maturity of available-for-sale
securities ....................................................... 18,000 -- --
Purchase of property and equipment ................................... (6,008) (4,530) (1,508)
(Increase) Decrease in other assets .................................. (17) (305) 222
--------------- --------------- ---------------
Net cash (used in) investing activities .......................... (33,058) (3,835) (2,286)
--------------- --------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments of short-term
borrowings ....................................................... (570) (796) (1,878)
Proceeds from long-term debt ......................................... -- -- 1,000
Repayment of long-term debt .......................................... (380) (240) (140)
Repayments of other obligations ...................................... (31) (323) (235)
Proceeds from issuance of common stock and stock
option tax benefits ................................................ 2,113 38,996 1,591
--------------- --------------- ---------------
Net cash provided by financing activities ........................ 1,132 37,637 338
--------------- --------------- ---------------
Effect of exchange rate changes on cash ................................... (1,234) (216) 505
--------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents .................................................... (26,398) 36,956 2,984
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR ........................ 43,609 6,653 3,669
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR .............................. $ 17,211 $ 43,609 $ 6,653
=============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest ........................................................... $ 98 $ 231 $ 343
Income taxes ....................................................... 1,970 1,543 1,131
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
TEKELEC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<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, 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
Issuance of common stock ............. 2,013 36,520 -- -- 36,520
Exercise of stock options
and warrants ....................... 563 2,374 -- -- 2,374
Stock option tax benefits ............ -- 102 -- -- 102
Translation adjustment ............... -- -- -- (420) (420)
Net income ........................... -- -- 6,311 -- 6,311
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 1995 ................ 11,599 54,936 6,390 2,281 63,607
Exercise of stock options
and warrants ....................... 411 2,050 -- -- 2,050
Stock option tax benefits ............ -- 63 -- -- 63
Translation adjustment ............... -- -- -- (1,458) (1,458)
Net loss ............................. -- -- (2,511) -- (2,511)
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 1996 ................. 12,010 $ 57,049 $ 3,879 $ 823 $ 61,751
=============== =============== =============== =============== ===============
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
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, 1995 and
1994 financial statements have been reclassified to conform with the current
period presentation.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original 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:
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
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.
F-6
<PAGE>
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. There were no capitalized internally developed software
costs in 1996 and 1995.
LONG-TERM ASSETS
The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value.
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, 1996 and 1995, accrued product warranty costs amounted to $1.6
million and $879,000, 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 customer's final site and satisfaction of
related significant Company obligations, if any. Revenues associated with
installation are realized upon completion. 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.
ADVERTISING
Advertising costs are expensed as incurred, and amounted to $620,000,
$625,000 and $305,000 for 1996, 1995 and 1994, respectively.
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 $(180,000), $(210,000) and $(235,000) for 1996,
1995 and 1994, respectively.
F-7
<PAGE>
STOCK-BASED COMPENSATION
In 1996 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted this standard by disclosing the pro forma net income and
earnings per share amounts assuming the fair value method was adopted on January
1, 1995. See Note L.
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 represented 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. Upon expiration of this
facility during 1995, the outstanding loan balance of $1.0 million was paid in
full and the line of credit was not renewed.
NOTE C -- FAIR VALUE OF INVESTMENTS
The Company has short-term investments in corporate debt securities
with original maturities of less than 90 days whose carrying amounts approximate
their fair values because of their short maturities. These short-term
investments are included in cash and cash equivalents, are classified as
held-to-maturity securities and amounted to $3.0 million and $35.9 million at
December 31, 1996 and December 31, 1995, respectively. At December 31, 1996, the
Company also had investments classified as available-for-sale securities
included in short-term and long-term investments, consisting of $6.0 million of
United States Treasury Notes with maturities of less than one year, $9.1 million
of United States Treasury Notes with maturities of between one and two years,
and $11.9 million of corporate debt securities with maturities of less than one
year. These available-for-sale securities are accounted for at their fair value,
and unrealized gains and losses on these securities are reported as a separate
component of shareholders' equity. At December 31, 1996, unrealized gains or
losses on available-for-sale securities were not significant.
NOTE D -- BUSINESS AND CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash, investments and trade
receivables. The Company invests its excess cash in interest-bearing deposits
with major banks, United States government securities, high-quality commercial
paper and money market funds. At times the Company's cash balances may be in
excess of the FDIC insurance limits. With respect to trade receivables, the
Company sells communications diagnostic and network switching 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
F-8
<PAGE>
is not required. Credit losses, if any, have been provided for in the financial
statements and have been consistently within management's expectations.
NOTE E -- RELATED PARTY TRANSACTIONS
As of December 31, 1996, the Company's principal shareholder, a
director and his family, and a foreign-affiliated company controlled by the
director owned an aggregate of approximately 33% of the Company's outstanding
stock.
The following is a summary of transactions and balances with these
affiliates:
1996 1995 1994
---- ---- ----
(thousands)
Product sales ....................................... $4,130 $5,305 $3,809
Purchases of inventory .............................. 125 321 49
Director's fees and expenses ........................ 59 32 15
Due from affiliates ................................. 2,381 3,053 1,538
Due to affiliates ................................... 145 254 41
The amounts due from and to the affiliates are non-interest bearing.
In August 1996, the Company entered into a consulting agreement with a
director, pursuant to which such director earned $30,000 and received a warrant
to purchase 30,000 shares of the Company's Common Stock. This agreement
terminated December 31, 1996. See Note P.
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.
NOTE F -- RESTRUCTURING
During the third quarter of 1996, the Company recorded restructuring
charges amounting to $327,000 which represent severance pay and benefit costs
for eight terminated employees in research and development and support
functions, and other costs related to the consolidation of the Company's Ohio
research facility into the Company's North Carolina facility. The costs
consisted of the following:
(thousands)
Severance pay..................................................... $ 250
Other accrued expenses............................................ 57
Property and equipment write-down................................. 20
---------
$ 327
=========
At December 31, 1996, all identified employees had been terminated, and
approximately $200,000 of the severance costs and other accrued expenses had
been paid.
F-9
<PAGE>
NOTE G -- INCOME TAXES
The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
(thousands)
CURRENTLY PAYABLE:
Federal ....................... $ -- $ 88 $ 133
State ......................... 1 228 202
Foreign ....................... 2,392 2,258 916
DEFERRED:
Federal ....................... -- -- --
State ......................... -- -- --
Foreign ....................... (166) (435) --
----------- ----------- -----------
$ 2,227 $ 2,139 $ 1,251
=========== =========== ===========
The primary components of temporary differences which gave rise to
deferred taxes at December 31, 1996 and 1995 are:
DECEMBER 31,
---------------------
1996 1995
---------------------
(thousands)
DEFERRED TAX ASSETS:
Net operating loss carryforward ................... $ 9,174 $ 5,191
Foreign tax credit carryforward ................... 918 918
Allowance for doubtful accounts ................... 126 141
Inventory adjustments ............................. 1,029 883
Depreciation and amortization ..................... 205 392
Deferred product development costs ................ 100 --
Research and development
credit carryforward ............................. 2,033 1,901
Accrued liabilities ............................... 1,059 681
Warranty accrual .................................. 629 358
Other ............................................. 166 323
-------- --------
Total deferred tax asset .......................... 15,439 10,788
Less, valuation allowance ......................... (14,990) (10,271)
-------- --------
Total net deferred tax asset ...................... 449 517
-------- --------
DEFERRED TAX LIABILITIES:
Deferred product development costs ................ -- 45
Other ............................................. -- 103
-------- --------
Total deferred tax liability ...................... -- 148
-------- --------
NET DEFERRED TAX ASSET ................................. 449 369
CURRENT PORTION ........................................ 242 224
-------- --------
LONG-TERM PORTION ...................................... $ 207 $ 145
======== ========
F-10
<PAGE>
The valuation allowance for deferred taxes is based on the Company's
operating history and management's assessment of various uncertainties related
to their future realization. Because realization of deferred tax benefits is
dependent upon generating sufficient U.S. taxable income in future years, the
amount of the valuation allowance for deferred taxes may be reduced in the near
term if sustainable positive U.S. taxable income trends develop.
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:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------------------------------------
Federal statutory provision
(benefit) at 34% ................ $ (97) $ 2,873 $ 1,942
State taxes,
net of federal benefit .......... -- 152 348
Foreign taxes ........................ 785 465 394
Utilization of operating
loss carryforwards .............. -- (1,437) (1,571)
Loss for which no tax benefit
was recorded .................... 1,182 -- --
Temporary differences for which
no tax benefit was recorded ..... 252 -- --
Other ................................ 105 86 138
---------- ---------- ----------
Actual income tax provision .......... $ 2,227 $ 2,139 $ 1,251
---------- ---------- ----------
Effective tax rate ................... 784.0% 25.3% 21.9%
At December 31, 1996, the Company had available federal net operating
loss carryforwards of $24.7 million, of which $4.5 million, if utilized, will
result in a credit to Common Stock, foreign tax credit carryforwards of $918,000
and research and development credit carryforwards of $2.0 million which will
generally expire beginning in the years 2007, 1997 and 2007, respectively.
The Company has not provided for federal income taxes on $11.6 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.
F-11
<PAGE>
NOTE H -- INVENTORIES
The components of inventories are:
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(thousands)
Raw materials...................................... $ 2,825 $ 3,109
Work in process.................................... 1,869 1,653
Finished goods..................................... 3,422 1,661
--------- ----------
$ 8,116 $ 6,423
========= ==========
NOTE I -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------------
1996 1995
-------------------------
(thousands)
Manufacturing and
development equipment......................... $ 13,520 $ 10,823
Furniture and office equipment..................... 7,300 5,651
Demonstration equipment............................ 4,055 3,406
Leasehold improvements............................. 1,118 1,232
--------- ----------
25,993 21,112
Less, accumulated depreciation
and amortization................... ........... (17,819) (15,005)
--------- ----------
$ 8,174 $ 6,107
========= =========
NOTE J -- BORROWINGS
In September 1996, the Company repaid all of the outstanding borrowings
on its $7.5 million line of credit and terminated the credit facility. In
October 1996, the Company agreed to terms for a $10 million line of credit with
a U.S. bank, collateralized by substantially all of the Company's assets and
bearing interest at, or in some cases below, the U.S. prime rate (8.25% at
December 31, 1996). There have been no borrowings under this credit facility,
which expires June 30, 1998 if not renewed. Under the terms of this facility,
the Company is required to maintain certain financial ratios and meet certain
net worth and indebtedness tests for which the Company is in compliance.
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 $3.0 million with interest at the Japanese prime
rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between
May 31, 1997 and March 31, 1998, if not renewed. There have been no borrowings
under these lines of credit.
The Company's weighted average short-term borrowing rates were 11.6% and
11.5% in 1996 and 1995, respectively.
F-12
<PAGE>
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 $2.4 million, $2.4 million and $2.2 million, for
1996, 1995 and 1994, respectively.
Minimum annual noncancelable lease commitments at December 31, 1996
are:
For The Years Ending December 31,
---------------------------------
(thousands)
1997.............................................. $ 1,989
1998.............................................. 1,635
1999.............................................. 1,613
2000.............................................. 1,552
2001.............................................. 1,020
Thereafter........................................ 3,359
-------
$11,168
=======
NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has various stock option plans with maximum terms of ten
years under which 5.8 million shares of the Company's Common Stock have been
issued or reserved for issuance. The terms of options granted under these Option
Plans are determined at the time of grant, generally vest ratably over a three-
to five-year period, and in any case 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.
The Company also has Employee Stock Purchase Plans ("ESPP"), with
maximum terms of ten years, the latest of which expires in the year 2006 and
under which 200,000 shares of the Company's Common Stock have been reserved for
issuance. 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 per share at the beginning or end of each six-month offering
period.
F-13
<PAGE>
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") encourages but does not require companies
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, no compensation expense has been
recognized for the Company's stock-based compensation plans. Had compensation
costs for the Company's stock option and purchase plans been determined based
upon the methodology prescribed under SFAS 123, the Company's net income (loss)
and earnings (loss) per share would approximate the pro forma amounts below (in
thousands except per share data):
As Reported Pro forma
------------ ---------
Year Ended December 31, 1996:
Net loss............................... $ (2,511) $ (3,777)
Loss per share......................... (0.21) (0.32)
Year Ended December 31, 1995:
Net income............................. $ 6,311 $ 5,672
Earnings per share..................... 0.52 0.47
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.
A summary of the status of the Company's stock options, as of December
31, 1996, 1995 and 1994, and the changes during the year ended on those dates is
presented below (shares in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Shares Exer. Price Shares Exer. Price Shares Exer. Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year .................... 2,338 $ 8.29 2,248 $ 4.32 1,947 $ 3.68
Granted - price equals fair value ................... 612 13.43 635 18.47 1,102 5.20
Granted - price greater than fair value ............. 685 14.22 12 22.50 191 3.68
Exercised ........................................... 345 3.98 470 3.76 408 3.24
Cancelled ........................................... 872 14.22 87 5.78 584 4.39
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at year-end ............................. 2,418 9.74 2,338 8.29 2,248 4.32
========== ========== ========== ========== ========== ==========
Options exercisable at year-end ..................... 980 706 584
Options available for future grant .................. 498 1,088 1,698
Weighted average fair value of options granted
during the year:
Exercise price equals fair value at grant date .... $ 9.67 $ 13.30
Exercise price greater than fair value at
grant date ...................................... $ 4.33 $ 13.05
</TABLE>
F-14
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1996 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Wgtd. Avg. Wgtd.
Number Remaining Avg. Number Wgtd. Avg.
Outstanding Contractual Exercise Outstanding Exercise
Range of Exercise Price at 12/31/96 Life Price at 12/31/96 Price
- ------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$1.88 to $ 4.99 969 5.90 $ 3.46 654 $ 3.45
5.00 to 9.99 47 7.06 8.74 18 7.60
10.00 to 14.99 819 8.64 12.60 132 12.65
15.00 to 17.50 583 8.58 16.23 176 16.51
----------- -----------
1.88 to 17.50 2,418 7.50 9.74 980 7.12
=========== ===========
</TABLE>
The fair value of options granted during 1996 and 1995 is estimated as
$3.6 million and $3.3 million, respectively, on the dates of grants using the
Black-Scholes option-pricing model with the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 87% and 85%, respectively, for 1996 and
1995, (iii) weighted average risk-free interest rates of 6.2% and 6.9% for 1996
and 1995, respectively, (iv) weighted average expected life of 4.8 years and 5.1
years for 1996 and 1995, respectively, and (v) assumed forfeiture rate of 64%.
During 1996, 1995 and 1994, approximately 62,000, 34,000 and 85,000
shares, respectively, were purchased under the Company's ESPP at weighted
average exercise prices of $9.59, $10.95 and $3.07, respectively. At December
31, 1996 and 1995, there were approximately 138,000 and 116,000 shares,
respectively, available for future grants, and none available at December 31,
1994. The weighted average fair value of ESPP options granted in 1996 and 1995
were $4.71 and $6.03 per share, respectively.
In 1996, the Company granted warrants to purchase 30,000 shares of
common stock. The grant date fair value of these warrants was $9.80 per share.
See Note P.
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. As
determined annually by the Board of Directors, the Company may contribute
matching funds of up to 50% of the employees' payroll deductions. During 1996,
1995 and 1994, the Company's contributions amounted to $187,000, $167,000 and
$122,000, respectively.
F-15
<PAGE>
NOTE M --GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS
The Company operates in one business segment. Transfers between
geographic areas are made at prices reflecting market conditions. Geographic
segment information including sales and transfers between geographic areas is
presented below:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------------------------------
(thousands)
Revenues from unaffiliated customers
United States ........................ $ 55,040 $ 55,801 $ 47,722
Japan ................................ 15,773 16,684 12,269
Other ................................ 1,313 2,791 1,198
-------- -------- --------
Total ............................ $ 72,126 $ 75,276 $ 61,189
======== ======== ========
Transfers between geographic areas
United States ........................ $ 5,197 $ 6,060 $ 4,993
Japan ................................ -- -- --
Other ................................ -- -- --
-------- -------- --------
Total ............................ $ 5,197 $ 6,060 $ 4,993
======== ======== ========
Total revenues
United States ........................ $ 60,237 $ 61,861 $ 52,715
Japan ................................ 15,773 16,684 12,269
Other ................................ 1,313 2,791 1,198
Intersegment eliminations ............ (5,197) (6,060) (4,993)
-------- -------- --------
Total ............................ $ 72,126 $ 75,276 $ 61,189
======== ======== ========
Income (Loss) from operations
United States ........................ $ (6,437) $ 3,441 $ 4,561
Japan ................................ 4,340 3,395 1,930
Other ................................ 296 698 (118)
-------- -------- --------
Total ............................ $ (1,801) $ 7,534 $ 6,373
======== ======== ========
Identifiable assets
United States ........................ $ 67,275 $ 69,741 $ 24,905
Japan ................................ 14,948 10,019 9,056
Other ................................ 295 728 448
-------- -------- --------
Total ............................ $ 82,518 $ 80,488 $ 34,409
======== ======== ========
U.S. export sales to unaffiliated customers
by destination of sale
Europe ............................... $ 6,498 $ 7,097 $ 5,636
Other ................................ 8,029 8,184 7,284
-------- -------- --------
Total ............................ $ 14,527 $ 15,281 $ 12,920
======== ======== ========
NOTE N -- MAJOR CUSTOMERS
Sales to Nippon Telegraph and Telephone amounted to 12%, 14% and 13% of
revenues in 1996, 1995 and 1994, respectively. Sales to AT&T amounted to 12% of
revenues in 1995.
F-16
<PAGE>
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,
- -----------------------------------------
1996
- -----------------------------------------
Revenues ................................ $ 11,860 $ 16,864 $ 19,396 $ 24,006
Gross profit ............................ 7,265 10,123 11,986 16,070
Income (Loss) before provision for income
taxes .................................. (3,540) (1,151) 819 3,588
Net income (loss) ....................... (3,968) (1,412) 275 2,594
Earnings (Loss) per share:
Primary ............................ $ (0.34) $ (0.12) $ 0.02 $ 0.20
Fully diluted ...................... (0.34) (0.12) 0.02 0.20
1995
- -----------------------------------------
Revenues ................................ $ 18,630 $ 19,500 $ 19,947 $ 17,199
Gross profit ............................ 12,423 12,843 13,796 11,179
Income before provision for income taxes 2,120 2,820 3,252 258
Net income .............................. 1,468 2,050 2,560 233
Earnings per share:
Primary ............................ $ 0.14 $ 0.18 $ 0.20 $ 0.02
Fully diluted ...................... 0.13 0.18 0.20 0.02
</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 one-half or more 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 a 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,
F-17
<PAGE>
increased competition, variations in the mix of sales, fluctuation in proportion
of foreign sales, and announcements of new products by Tekelec or its
competitors.
NOTE P -- COMMON STOCK
At December 31, 1996 and 1995, the Company had warrants outstanding to
purchase an aggregate of 40,000 and 20,000 shares of its Common Stock,
respectively, as more fully discussed below.
In August 1996, pursuant to a consulting agreement between the Company
and a director, the Company issued warrants to purchase 30,000 shares of its
Common Stock at $9.50 per share to such director. These warrants vested during
1996, and were all outstanding at December 31, 1996.
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, 1995. During 1996, 4,500 of these shares were
exercised and the remaining 5,500 were cancelled.
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, and were exercisable in full at any
time prior to January 17, 1997. During 1995, 10,000 of these warrants were
exercised, and 10,000 remained outstanding at December 31, 1995 and December 31,
1996.
F-18
<PAGE>
<TABLE>
TEKELEC
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<CAPTION>
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- -------------------------------- --------------- --------------- --------------- --------------- ---------------
(thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowance for doubtful accounts $ 221 $ -- $ 161 $ 64 $ 318
Product warranty ............... 280 819 -- 272 827
Inventory provision ............ 1,089 315 -- 239 1,165
Deferred tax valuation allowance 11,958 -- -- 2,462 9,496
Year ended December 31, 1995:
Allowance for doubtful accounts $ 318 $ 120 $ -- $ 47 $ 391
Product warranty ............... 827 581 -- 529 879
Inventory provision ............ 1,165 391 -- 241 1,315
Deferred tax valuation allowance 9,496 775 -- -- 10,271
Year ended December 31, 1996:
Allowance for doubtful accounts $ 391 $ -- $ -- $ 23 $ 368
Product warranty ............... 879 1,083 -- 407 1,555
Inventory provision ............ 1,315 704 -- 329 1,690
Deferred tax valuation allowance 10,271 4,719 -- -- 14,990
</TABLE>
SCHEDULE II
S-1
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- ----------------------------------------------------------------
3.2 Bylaws, as amended
10.7 Schedule of Distributors
10.11 Agreement dated March 26, 1997 between the Registrant and
Allan Toomer
10.13 Amendment No. 1 dated November 30, 1996 to Consulting
Agreement between the Registrant and Howard Oringer
10.14 Credit Agreement dated October 22, 1996 between the Registrant
and Imperial Bank, together with Promissory Note of the
Registrant dated October 22, 1996
10.15 General Security Agreement dated October 22, 1996 between the
Registrant and Imperial Bank
11.1 Statement of Computation of Earnings Per Share
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
<PAGE>
EXHIBIT 3.2
BYLAWS
for the regulation, except as
otherwise provided by statute or
the Articles of Incorporation, of
TEKELEC
a California corporation
<PAGE>
TABLE OF CONTENTS
Section Title Page
ARTICLE I. CORPORATE OFFICES
1.1 Principal Office 1
1.2 Other Offices 1
ARTICLE II. SHARES AND SHAREHOLDERS
2.1 Meetings of Shareholders 1
(a) Place of Meetings 1
(b) Annual Meetings 1
(c) Special Meetings 1
(d) Notice of Meetings 2
(e) Adjourned Meeting and Notice Thereof 2
(f) Waiver of Notice 3
(g) Quorum 3
2.2 Action Without a Meeting 3
2.3 Voting of Shares 4
(a) In General 4
(b) Cumulative Voting 4
(c) Election by Ballot 4
2.4 Proxies 4
2.5 Inspectors of Election 5
(a) Appointment 5
(b) Duties 5
2.6 Record Date 5
2.7 Share Certificates 6
(a) In General 6
(b) Two or More Classes or Series 6
(c) Special Restrictions 7
2.8 Lost, Stolen or Destroyed Certificates 7
ARTICLE III. DIRECTORS
3.1 Powers 7
3.2 Number and Qualification of Directors 7
3.3 Election and Term of Office 8
3.4 Removal 8
(a) Removal for Cause 8
(b) Removal without Cause 8
3.5 Vacancies 8
3.6 Resignation 8
3.7 Meetings of the Board of Directors 9
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Section Title Page
(a) Regular Meetings 9
(b) Annual Meeting 9
(c) Special Meetings; Notices; Waiver of Notice 9
(d) Notice of Adjournment 9
(e) Place of Meeting 9
(f) Presence by Conference Telephone Call 9
(g) Quorum 9
3.8 Action Without Meeting 10
3.9 Committees of the Board 10
(a) Membership and Authority 10
(b) Meetings and Action 10
3.10 Fees and Compensation of Directors 11
3.11 Corporate Loans and Guaranties to Directors, Officers
and Others 11
ARTICLE IV. OFFICERS
4.1 Officers 12
4.2 Elections 12
4.3 Other Officers 12
4.4 Removal 12
4.5 Resignation 12
4.6 Vacancies 12
4.7 Chairman of the Board 13
4.8 President 13
4.9 Vice Presidents 13
4.10 Secretary 13
4.11 Chief Financial Officer 13
ARTICLE V. RECORDS AND REPORTS
5.1 Books, Records and Reports 14
(a) Books of Account and Reports 14
(b) Annual Report 14
(c) Shareholders' Requests for Financial Reports 14
5.2 Rights of Inspection 15
(a) By Shareholders 15
(b) By Directors 16
ARTICLE VI. MISCELLANEOUS
6.1 Checks, Drafts, Etc. 16
6.2 Authority to Execute Contracts 16
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Section Title Page
6.3 Representation of Shares of Other Corporations 16
6.4 Indemnification and Insurance 17
6.5 Employee Stock Purchase Plans 18
6.6 Construction and Definitions 19
6.7 Reimbursement of Disallowed Compensation 19
ARTICLE VII. AMENDMENTS
7.1 Power of Shareholders 19
7.2 Power of Directors 19
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BYLAWS
for the regulation, except as otherwise provided
by statute or the Articles of Incorporation
of
TEKELEC
Article I. General Provisions.
Section 1.1. Principal Office. The Board of Directors shall fix the location of
the principal executive office of the corporation at any place within or outside
the State of California. If the principal executive office is located outside of
such state and the corporation has one or more business offices in such state,
then the Board of Directors shall fix and designate a principal business office
in the State of California.
Section 1.2. Other Offices. The Board of Directors may at any time establish
branch or subordinate offices at any place or places where the corporation is
qualified to do business.
Article II. Shares and Shareholders.
Section 2.l. Meetings of Shareholders.
(a) Place of Meetings. Meetings of shareholders shall be held at any place
within or without the State of California designated by the Board of Directors.
In the absence of any such designation, shareholders' meetings shall be held at
the principal executive office of the corporation.
(b) Annual Meetings. An annual meeting of the shareholders of the corporation
shall be held on the second Thursday in June of each year or at such other date
and time as may be designated by the Board of Directors; provided, however, that
should said day fall upon a legal holiday, the annual meeting of shareholders
shall be held at the same time on the next day thereafter ensuing which is a
full business day. At each annual meeting directors shall be elected, and any
other proper business may be transacted.
(c) Special Meetings. Special meetings of the shareholders may be called by the
Board of Directors, the chairman of the board or the president, or by the
holders of shares entitled to cast not less than 10% of the votes at the
meeting. Upon request in writing to the chairman of the board, the president,
any vice president or the secretary by any person (other than the Board)
entitled to call a special meeting of shareholders, such officer forthwith shall
cause notice to be given to the shareholders entitled to vote that a meeting
will be held at a time requested by the person or persons calling the meeting,
which time shall be not less than 35 nor more than 60 days after the receipt of
the request. If the notice is not given within 20 days after receipt of the
request, the persons entitled to call the meeting may give the notice.
(d) Notice of Meetings. Notice of any shareholders' meeting shall be given not
less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before
the date of the meeting to each
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shareholder entitled to vote at such meeting. Such notice shall state the place,
date and hour of the meeting and (i), in the case of a special meeting, the
general nature of the business to be transacted, and no other business may be
transacted, or (ii), in the case of an annual meeting, those matters which the
Board, at the time of the giving of the notice, intends to present for action by
the shareholders. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board for election.
If any action within the scope of Section 310 (entitled "Transactions
Between Corporations and Directors or Corporations Having Interrelated
Directors"), 902 (entitled "Amendments After Issuance of Shares"), 1201
(entitled "Shareholder Approval -- Abandonment -- Attack on Validity of
Reorganization"), 1900 (entitled "Authorization for Voluntary Dissolution") or
2007 (entitled "Plan of Distribution -- Demand for Cash Payment") of the
California General Corporation Law is proposed to be taken at any meeting, the
notice shall also state the general nature of such action.
Notice of a shareholders' meeting or any report shall be given to each
shareholder either personally or by first-class mail, or, in the case of a
corporation with outstanding shares held of record by 500 or more persons on the
record date for the shareholders' meeting, notice may be sent by third-class
mail, or other means of written communication, addressed to such shareholder at
the address of such shareholder appearing on the books of the corporation or
given by such shareholder to the corporation for the purpose of notice. If no
such address appears or is given, notice shall and will be deemed to be given at
the place where the principal executive office of the corporation is located or
by publication at least once in a newspaper of general circulation in the county
in which the principal executive office is located. The notice shall be deemed
to have been given at the time when delivered personally or deposited in the
mail or sent by other means of written communication. An affidavit of mailing of
any notice executed by the secretary, assistant secretary or any transfer agent
shall be prima facie evidence of the giving of such notice or report.
If any notice or report addressed to the shareholder at the address of
such shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices or reports shall be deemed to
have been duly given without further mailing if the same shall be available for
the shareholder upon written demand of the shareholder at the principal
executive office of the corporation for a period of one year from the date of
the giving of the notice or report to all other shareholders.
(e) Adjourned Meeting and Notice Thereof. Any annual or special meeting of
shareholders may be adjourned from time to time by the vote of a majority of the
shares represented either in person or by proxy whether or not a quorum is
present. When a shareholders' meeting is adjourned to another time or place,
except as provided below, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. No other business may
be transacted at the adjourned meeting other than as set forth in this
paragraph. If the adjournment is for more than 45 days or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each shareholder of record entitled to
vote at the meeting.
(f) Waiver of Notice. The transactions of any annual or special meeting of
shareholders, however called and noticed and wherever held, are as valid as
though had at a meeting duly held
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after regular call and notice, if a quorum is present either in person or by
proxy and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice or
a consent to the holding of the meeting or an approval of the minutes thereof.
Such waiver of notice, consent or approval need not specify the nature of any
action proposed to be taken or taken at the meeting other than action within the
scope of Section 310 (entitled "Transactions Between Corporations and Directors
or Corporations Having Interrelated Directors"), 902 (entitled "Amendments After
Issuance of Shares"), 1201 (entitled "Shareholder Approval -- Abandonment --
Attack on Validity of Reorganization"), 1900 (entitled "Authorization for
Voluntary Dissolution") or 2007 (entitled "Plan of Distribution -- Demand for
Cash Payment") of the California General Corporation Law, unless such action was
unanimously approved by the shareholders entitled to vote. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting. Attendance of a person at a meeting also shall
constitute a waiver of notice of, and presence, at such meeting, except when the
person objects, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened and except that
attendance at a meeting is not a waiver of any right to object to the
consideration of matters required by the General Corporation Law to be included
in the notice but not so included, if such objection is expressly made at the
meeting.
(g) Quorum. The presence in person or by proxy of the persons entitled to vote a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business at such meeting. Except as
provided herein, the affirmative vote of a majority of the shares represented
and voting at a duly held meeting at which a quorum is present (which shares
voting affirmatively also constitute at least a majority of the required quorum)
shall be the act of the shareholders, unless the vote of a greater number or
voting by classes is required by law or the Articles of Incorporation of the
corporation.
The shareholders present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum, provided that any action taken (other than adjournment) must be approved
by at least a majority of the shares required to constitute a quorum. In the
absence of a quorum, any meeting of shareholders may be adjourned from time to
time by the vote of a majority of the shares represented either in person or by
proxy, but no other business may be transacted other than as set forth in this
paragraph.
Section 2.2. Action Without a Meeting. Any action which may be taken at any
annual or special meeting of shareholders may be taken without a meeting and
without prior notice if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Notwithstanding the foregoing and subject to Section 3.5 hereof,
directors may not be elected by written consent except by unanimous written
consent of all shares entitled to vote for the election of directors.
Unless the consents of all shareholders entitled to vote have been
solicited in writing, (a) notice of any shareholder approval pursuant to Section
310 (entitled "Transactions Between Corporations and Directors or Corporations
Having Interrelated Directors"), 902 (entitled "Amendments After Issuance of
Shares"), 1201 (entitled "Shareholder Approval -- Abandonment -- Attack on
Validity of Reorganization"), 1900 (entitled "Authorization for Voluntary
Dissolutions") or 2007 (entitled "Plan of Distribution -- Demand for Cash
Payment") of the California General
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Corporation Law without a meeting by less than unanimous written consent shall
be given at least 10 days before the consummation of the action authorized by
such approval, and (b) prompt notice shall be given of any other corporate
action approved by the shareholders without a meeting by less than unanimous
written consent to those shareholders entitled to vote who have not consented in
writing. Such notice shall be given in the same manner as notice of a
shareholders' meeting.
Section 2.3. Voting of Shares.
(a) In General. Except as otherwise provided in the Articles of Incorporation
and subject to Subparagraph (b) hereof, each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote of
shareholders. Any holder of shares entitled to vote on any matter may vote part
of the shares in favor of the proposal and refrain from voting the remaining
shares or vote them against the proposal, other than elections to office, but,
if the shareholder fails to specify the number of shares such shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares such shareholder is entitled to
vote. Except as provided herein, the affirmative vote of a majority of the
shares represented and voting at a duly held meeting at which a quorum is
present (which shares voting affirmatively also constitute at least a majority
of the required quorum) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by law or the Articles of
Incorporation of the corporation.
(b) Cumulative Voting. At any shareholders' meeting at which directors are to be
elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any
candidate a number of votes greater than the number of votes which such the
shareholder normally is entitled to cast) unless such candidate or candidates'
names have been placed in nomination prior to the voting and a shareholder has
given notice at the meeting prior to the voting of the shareholder's intention
to cumulate the shareholder's votes. If any one shareholder has given such
notice, all shareholders entitled to vote may cumulate their votes for
candidates in nomination and give any candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
shareholder's shares are normally entitled, or distribute the shareholder's
votes on the same principle among as many candidates as the shareholder thinks
fit. In any election of directors, the candidates receiving the highest number
of affirmative votes up to the number of directors to be elected are elected.
(c) Election by Ballot. The shareholders' vote may be by voice vote or ballot;
provided, however, that any election for directors must be by ballot if a
shareholder demands election by ballot at the meeting and before the voting
begins.
Section 2.4. Proxies. Every person entitled to vote shares may authorize another
person or persons to act by proxy with respect to such shares by a written proxy
signed by such person and filed with the secretary of the corporation. A proxy
shall be deemed signed by such person if such person's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission or
otherwise) by such person or such person's attorney in fact. No proxy shall be
valid after the expiration of 11 months from the date of the proxy unless
otherwise provided in the proxy. A valid proxy which does not state that it is
irrevocable shall continue in full force and effect until revoked by the person
executing it before the vote pursuant to that proxy or unless written notice of
the death or incapacity of the maker of that proxy is received by the
corporation before the vote pursuant to that proxy is counted. Such revocation
of a revocable proxy may be effected by a writing delivered
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to the corporation stating that the proxy is revoked or by a subsequent proxy
executed by the person executing the prior proxy and presented to the meeting,
or as to any meeting by attendance at such meeting and voting in person by the
person executing the proxy. The revocability of a proxy that states on its face
that it is irrevocable shall be governed by the provisions of Sections 705(e)
and 705(f) of the California General Corporation Law.
Section 2.5. Inspectors of Election.
(a) Appointment. In advance of any meeting of shareholders the Board of
Directors may appoint inspector(s) of election to act at the meeting and any
adjournment thereof. If inspectors of election are not so appointed, or if any
persons so appointed fail to appear or refuse to act, the chairman of any
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to replace
those who so fail or refuse) at the meeting. The number of inspectors shall be
either one or three. If inspectors are to be appointed at a meeting on the
request of one or more shareholders or proxies, the majority of shares
represented in person or by proxy shall determine whether one or three
inspectors are to be appointed.
(b) Duties. The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies;
receive votes, ballots or consents; hear and determine all challenges and
questions in any way arising in connection with the right to vote; count and
tabulate all votes or consents; determine when the polls shall close; determine
the result; and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders. The inspectors of election shall perform
their duties impartially, in good faith, to the best of their ability and as
expeditiously as is practical. If there are three inspectors of election, the
decision, act or certificate of a majority is effective in all respects as the
decision, act or certificate of all. Any report or certificate made by the
inspectors of election is prima facie evidence of the facts stated therein.
Section 2.6. Record Date. In order that the corporation may determine the
shareholders entitled to notice of any meeting or to vote thereat or entitled to
give consent to corporate action or entitled to receive payment of any dividend
or other distribution or allotment of any rights or entitled to exercise any
rights in respect of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than 60 nor less than 10 days
prior to the date of such meeting nor more than 60 days prior to any other
action. If no record date is fixed:
(1) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(2) The record date for determining shareholders entitled to give consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors has been taken, shall be the day on which the first written
consent is given.
(3) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the 60th day prior to the date of
such other action, whichever is later. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
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adjournment of the meeting unless the Board of Directors fixes a new record date
for the adjourned meeting, but the Board of Directors shall fix a new record
date if the meeting is adjourned for more than 45 days from the date set for the
original meeting.
Shareholders at the close of business on the record date are entitled to notice
and to vote or to receive the dividend, distribution or allotment of rights or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date, except as
otherwise provided in the Articles of Incorporation or by agreement or in the
California General Corporation Law.
Section 2.7. Share Certificates.
(a) In General. The corporation shall issue a certificate or certificates
representing shares of its capital stock. A certificate or certificates for
shares of the corporation shall be issued to each shareholder when any of such
shares are fully paid. The Board of Directors may authorize the issuance of
certificates for shares partly paid provided that these certificates shall state
the total amount of the consideration to be paid for them and the amount
actually paid. Each certificate so issued shall be signed in the name of the
corporation by the chairman or vice chairman of the Board of Directors or the
president or a vice president and by the chief financial officer or the
treasurer or an assistant treasurer or the secretary or an assistant secretary,
shall state the name of the record owner thereof and shall certify the number of
shares and the class or series of shares represented thereby. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate has ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if such person were an officer,, transfer agent or registrar at
the date of issue.
(b) Two or More Classes or Series. If the shares of the corporation are
classified or if any class of shares has two or more series, there shall appear
on the certificate one of the following:
(1) A statement of the rights, preferences, privileges and restrictions
granted to or imposed upon each class or series of shares authorized to be
issued and upon the holders thereof;
(2) A summary of such rights, preferences, privileges and restrictions with
reference to the provisions of the Articles of Incorporation and any
certificates of determination establishing same; or
(3) A statement setting forth the office or agency of the corporation from
which shareholders may obtain, upon request and without charge, a copy of the
statement mentioned in Subparagraph (1) above.
(c) Special Restrictions. There shall also appear on the certificate (unless
stated or summarized under Subparagraph (1) or (2) of Subparagraph (b) above)
the statements required by all of the following clauses to the extent
applicable:
(1) The fact that the shares are subject to restrictions upon transfer;
(2) If the shares are assessable, a statement that they are assessable;
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(3) If the shares are not fully paid, a statement of the total
consideration to be paid therefor and the amount paid thereon;
(4) The fact that the shares are subject to a voting agreement or an
irrevocable proxy or restrictions upon voting rights contractually imposed by
the corporation;
(5) The fact that the shares are redeemable; and
(6) The fact that the shares are convertible and the period for conversion.
Section 2.8. Lost, Stolen or Destroyed Certificates. Where a certificate has
been lost, destroyed or wrongfully taken, the corporation may issue a new
certificate in place of the original if the owner: (i) so requests before the
corporation has notice that the certificate has been acquired by a bona fide
purchaser; and (ii) files with the corporation, if so requested by the Board of
Directors, a bond (or other adequate security) sufficient to indemnify it
against any claim that may be made against it (including any expense or
liability) on account of loss, theft or destruction of any such certificate or
the issuance of such new certificate. Except as above provided, no new
certificate for shares shall be issued in lieu of an old certificate unless the
corporation is ordered to do so by the superior court in an action brought under
Section 419(b) of the California General Corporation Law.
Article III. Directors.
Section 3.1. Powers. Subject to the provisions of the California General
Corporation Law and any limitations in the Articles of Incorporation, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
The Board may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person, provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board.
Section 3.2. Number and Qualification of Directors. The number of directors of
this corporation shall not be less than five (5) nor more than nine (9). The
exact number of directors shall be five (5) until changed, within the limits
specified above, by a bylaw amending this Section 3.2, duly adopted by the Board
of Directors or by the shareholders. The indefinite number of directors may be
changed, or a definite number fixed without provision for an indefinite number,
by a duly adopted amendment to the Articles of Incorporation or by an amendment
to this bylaw duly adopted by the vote or written consent of holders of
two-thirds (2/3) of the outstanding shares entitled to vote; provided however,
that an amendment reducing the number or the minimum number of directors to a
number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting of the shareholders, or the shares not consenting in the
case of an action by written consent, are equal to more than sixteen and
two-thirds (16 2/3) of the outstanding shares entitled to vote thereon. No
amendment may change the stated maximum number of authorized directors to a
number greater than two (2) times the stated minimum number of directors minus
one (1).
Section 3.3. Election and Term of Office. The directors shall be elected at each
annual meeting of shareholders. Each director, including a director elected to
fill a vacancy, shall hold office until the expiration of the term for which
elected and until a successor has been elected and qualified.
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Section 3.4. Removal.
(a) Removal for Cause. The Board of Directors shall have the power to declare
vacant the office of a director who has been declared of unsound mind by an
order of court or convicted of a felony.
(b) Removal without Cause. Any or all of the directors may be removed without
cause if such removal is approved by the vote of a majority of the outstanding
shares entitled to vote, except that no director may be removed (unless the
entire board is removed) when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such director if voted
cumulatively at an election at which the same total number of votes were cast
(or, if such action is taken by written consent, all shares entitled to vote
were voted) and the entire number of directors authorized at the time of the
directors' most recent election were then being elected. Any reduction of the
authorized number of directors does not remove any director prior to the
expiration of such director's term of office.
Section 3.5. Vacancies. A vacancy or vacancies in the Board of Directors shall
be deemed to exist (i) in the event of the death, resignation or removal of any
director, (ii) if the Board of Directors by resolution declares vacant the
office of a director who has been declared of unsound mind by an order of court
or convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the shareholders fail, at any meeting of shareholders at
which any director or directors are elected, to elect the number of directors to
be elected at that meeting. Except for a vacancy created by the removal of a
director, which vacancy may be filled only by approval of the shareholders,
vacancies on the Board of Directors may be filled by a majority of the directors
then in office, whether or not less than a quorum, or by a sole remaining
director, and each director so elected shall hold office until the expiration of
the term for which elected and until his successor is elected and qualified. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. If any such election is by written consent, other than to fill a
vacancy created by removal, the consent of a majority of the outstanding shares
entitled to vote is required. If any such election is by written consent to fill
a vacancy created by removal, the unanimous consent of all shares entitled to
vote for the election of directors is required.
Section 3.6. Resignation. Any director may resign effective upon giving written
notice to the chairman of the board, the president, the secretary or the Board
of Directors of the corporation, unless the notice specifies a later time for
the effectiveness of such registration. If the registration is effective at a
future time, a successor may be elected to take office when the resignation
becomes effective.
Section 3.7. Meetings of the Board of Directors.
(a) Regular Meetings. Regular meetings of the Board of Directors may be held
without notice if the time and place of such meetings are fixed by these bylaws
or the Board of Directors.
(b) Annual Meeting. Immediately following each annual meeting of shareholders
the Board of Directors shall hold a regular meeting for the purpose of
organization, election of officers and the transaction of other business. Notice
of such meetings is hereby dispensed with.
(c) Special Meetings; Notices; Waiver of Notice. Special meetings of the Board
of Directors may be called at any time by the chairman of the board or the
president or by any vice president,
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the secretary or any two directors. Special meetings shall be held upon ten
days' notice by first class mail or 72 hours' notice delivered personally or by
telephone or telegraph. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. Notice of a meeting need not be given to any director who
signs a waiver of notice or a consent to holding the meeting or an approval of
the minutes thereof, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting. A
notice, or waiver of notice, need not specify the purpose of any regular or
special meeting of the Board of Directors.
(d) Notice of Adjournment. A majority of the directors present, whether or not a
quorum is present, may adjourn any meeting to another time and place. Notice of
the time and place of holding an adjourned meeting need not be given unless the
meeting is adjourned for more than 24 hours, in which case notice of such
adjournment to another time and place shall be given as provided herein prior to
the time of the adjourned meeting to the directors who were not present at the
time of adjournment.
(e) Place of Meeting. Meetings of the Board may be held at any place within or
without the State of California which has been designated in the notice of the
meeting or, if not stated in the notice or there is no notice, then such meeting
shall be held at the principal executive office of the corporation or such other
place designated by resolution of the Board of Directors.
(f) Presence by Conference Telephone Call. Any meeting, regular or special, of
the Board of directors may be held through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Such participation constitutes presence in person
at such meeting.
(g) Quorum. A majority of the authorized number of directors constitutes a
quorum of the Board for the transaction of business except to adjourn. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present is the act of the Board of Directors,
subject to the provisions of Sections 310 (entitled "Transactions Between
Corporations and Directors or Corporations Having Interrelated Directors"), 311
(entitled "Executive Committees") and 317(e) (relating to indemnification of
corporate agents) of the California General Corporation Law, other applicable
law and the Articles of Incorporation. A meeting at which a quorum is initially
present may continue to transact business, notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.
Section 3.8. Action Without Meeting. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting if all members of
the Board of Directors shall individually or collectively consent in writing to
such action. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Directors. Such action by written consent shall
have the same force and effect as a unanimous vote of such directors.
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Section 3.9. Committees of the Board.
(a) Membership and Authority. The Board of Directors may, by resolution adopted
by a majority of the authorized number of directors, designate one or more
committees, each constituting of two or more directors, to serve at the pleasure
of the Board of Directors. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of any committee requires the vote of a majority of the authorized
number of directors. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have all the authority of the Board
of Directors, except with respect to:
(1) The approval of any action which also requires, under the California
General Corporation Law, shareholders' approval or approval of the outstanding
shares;
(2) The filling of vacancies on the Board of Directors or in any committee;
(3) The fixing of compensation of the directors for serving on the Board of
Directors or on any committee;
(4) The amendment or repeal of bylaws or the adoption of new bylaws;
(5) The amendment or repeal of any resolution of the Board of Directors
which by its express terms is not so amendable or repealable;
(6) A distribution to the shareholders of the corporation, except at a rate
or in a periodic amount or within a price range set forth in the corporation's
Articles of Incorporation or determined by the Board of Directors; and
(7) The appointment of other committees of the Board of Directors or the
members thereof.
(b) Meetings and Action. The provisions of Section 3.7 shall apply also to
committees of the Board of Directors and action by such committees, with such
changes as are necessary to substitute the committee and its members for the
Board of Directors and its members, except that the time of meetings of
committees may be determined either by resolution of the Board of Directors or
by resolution of the committee; and notice of special committee meetings shall
also be given to all alternate members, who shall have the right to attend all
meetings of the committee. The Board of Directors may adopt rules for the
governing of any committee not inconsistent with these bylaws.
Section 3.10. Fees and Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Directors. This Section 3.10 shall not be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee or otherwise and receiving compensation for those services.
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Section 3.11. Corporate Loans and Guaranties to Directors, Officers and Others.
(a) The corporation may make a loan of money or property to, or guarantee the
obligation of, any director or officer of the corporation or of its parent if
the transaction, or an employee benefit plan authorizing the loans or guaranties
after disclosure of the right under such a plan to include officers or
directors, is approved by a majority of the shareholders entitled to act
thereon.
(b) The corporation may make loans of money or property to, or guarantee the
obligations of, any officer of the corporation, whether or not a director, or an
employee benefit plan authorizing the loan or guaranty provided that (1) the
Board of Directors determines that such a loan or guaranty or plan may
reasonably be expected to benefit the corporation, (2) the corporation has
outstanding shares held of record by 100 or more persons (determined as provided
in Section 605 of the Code) on the date of approval by the Board of Directors,
and (3) the approval of the Board of Directors is by a vote sufficient without
counting the vote of any interested director or directors.
(c) The corporation shall not make any loan of money or property to, or
guarantee the obligation of, any person upon the security of shares of the
corporation or of its parent if the corporation's recourse in the event of
default is limited to the security for the loan or guaranty, unless the loan or
guaranty is adequately secured without considering these shares, or the loan or
guaranty is approved by a majority of the shareholders entitled to act thereon.
(d) Notwithstanding Subparagraph (a) above, a corporation may advance money to a
director or officer of the corporation or of its parent for any expenses
reasonably anticipated to be incurred in the performance of the duties of the
director or officer, provided that in the absence of the advance the director or
officer would be entitled to be reimbursed for the expenses by the corporation,
its parent, or any subsidiary.
(e) The provisions of Subparagraph (a) above do not apply to the payment of
premiums in whole or in part by a corporation on a life insurance policy on the
life of a director or officer so long as repayment to the corporation of the
amount paid by it is secured by the proceeds of the policy and its cash
surrender value.
(f) This Section 3.11 does not apply to any of the following: (1) any
transaction, plan or agreement permitted under Section 408 of the California
General Corporation Law; or (2) any loan or guaranty made by a corporation that
makes loans or guaranties in the ordinary course of its business if statutes or
regulations pertaining to the corporation expressly regulate the making by the
corporation of loans to its officers or directors or the undertaking of
guaranties of the obligations of its officers or directors.
(g) For the purposes of Subparagraph (a) and (c) of this Section 3.11, "approval
by a majority of the shareholders entitled to act" means either (1) written
consent of a majority of the outstanding shares without counting as outstanding
or consenting any shares owned by any officer or director eligible to
participate in the plan or transaction that is subject to this approval, (2) the
affirmative vote of a majority of the shares present and voting at a duly held
meeting at which a quorum is otherwise present, without counting for purposes of
the vote as either present or voting any shares owned by any officer or director
eligible to participate in the plan or transaction that is subject to the
approval, or (3) the unanimous vote or written consent of the shareholders. In
the case of a corporation which has more than one class or series of shares
outstanding, the "shareholders entitled
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to act" within the meaning of this section includes only holders of those
classes or series entitled under the Articles of Incorporation to vote on all
matters before the shareholders or to vote on the subject matter of this
section, and includes a requirement for separate class or series voting, or for
more or less than one vote per share, only to the extent required by the
Articles of Incorporation.
Article IV. Officers.
Section 4.1. Officers. The officers of the corporation shall consist of a
chairman of the board or a president, or both, a secretary, a chief financial
officer and such additional officers as stated in these bylaws or determined by
the Board of Directors in accordance with Section 4.3 of these bylaws and as may
be necessary to enable the corporation to sign instruments and share
certificates. Any number of offices may be held by the same person.
Section 4.2. Elections. All officers of the corporation, except such officers as
may be otherwise appointed in accordance with Section 4.3, shall be chosen by
the Board of Directors, and serve at the pleasure of the Board of Directors,
subject to the rights, if any, of an officer under any contract of employment.
Section 4.3. Other Officers. The Board of Directors, at its discretion, may
appoint, or empower the president to appoint, one or more vice presidents, one
or more assistant secretaries, a treasurer, one or more assistant treasurers or
such other officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority and perform such duties
as provided in these bylaws or as the Board of Directors may from time to time
determine.
Section 4.4. Removal. Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by the Board of Directors or, except in the case of an officer chosen by
the Board of Directors, by an officer upon whom such power of removal may be
conferred by the Board of Directors.
Section 4.5. Resignation. Any officer may resign at any time by giving written
notice to the Board of Directors or to the president or the secretary of the
corporation without prejudice to the rights, if any, of the corporation under
any contract to which such officer is a party. Any such resignation shall take
effect on the date of receipt of such notice or at any later time specified
therein, and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 4.6. Vacancies. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these bylaws for regular appointments to such office.
Section 4.7. Chairman of the Board. The chairman of the board, if there shall be
such an officer, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the Board of Directors. If there is no
president, the chairman of the board shall in addition be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 4.8 below.
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Section 4.8. President. Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the chairman of the board, if there be such
an officer, the president shall be chief executive officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and affairs of the
corporation. He shall preside at all meetings of the shareholders and, in the
absence of the chairman of the board, or if there be none, at all meetings of
the Board of Directors. He shall have the general powers and duties of
management usually vested in the office of president of a corporation and shall
have such other powers and duties as may be prescribed by the Board of Directors
or these bylaws.
Section 4.9. Vice Presidents. In the absence or disability of the president, the
vice presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a vice president designated by the Board of
Directors, shall perform all the duties of the president and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
president. The vice presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors, these bylaws, the president or chairman of the board.
Section 4.10. Secretary. The secretary shall keep or cause to be kept, at the
principal executive office of the corporation or such other place as the Board
of Directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors and shareholders. The minutes shall show the
time and place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the Board of
Directors, a share register, or a duplicate share register, showing the names of
all shareholders and their addresses,, the number of shares held by each, the
number and date of certificates evidencing such shares, and the number and date
of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the Board of Directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody. The secretary shall not be deemed an executive officer of the
corporation and shall be limited in his responsibilities and authority to the
types of ministerial acts described in this Section 4.10 and shall have such
other powers and perform such other duties as may be prescribed by the Board of
Directors or by these bylaws.
Section 4.11. Chief Financial Officer. The chief financial officer shall have
general supervision, direction and control of the financial affairs of the
corporation and shall have such other powers and duties as may be prescribed by
the Board of Directors or these bylaws. In the absence of a named treasurer, the
chief financial officer shall be authorized and empowered to sign as treasurer
in any case where such officer's signature is required. The chief financial
officer shall keep or cause to be kept and maintained adequate and correct books
and records of accounts of the properties and business transactions of the
corporation, including its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any director.
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The chief financial officer shall deposit all moneys and other
valuables in the name and to the credit of the corporation with such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the corporation as may be ordered by the Board of Directors, shall
render to the president and directors, whenever they request it, an account of
all of his transactions as chief financial officer and of the financial
condition of the corporation and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or these bylaws.
Article V. Records and Reports.
Section 5.1. Books, Records and Reports.
(a) Books of Account and Records. The corporation shall keep adequate and
correct books and records of account and shall keep minutes of the proceedings
of its shareholders, the Board and committees of the Board and shall keep at its
principal executive office, or at the office of its transfer agent or registrar,
a record of its shareholders, giving the names and addresses of all shareholders
and the number and class of shares held by each. Such minutes shall be kept in
written form. Such other books and records shall be kept either in written form
or in any other form capable of being converted into written form.
(b) Annual Report. The annual report to shareholders referred to in Section
1501(a) of the California General Corporation Law is expressly dispensed with,
but nothing herein shall be interpreted as prohibiting the Board of Directors
from issuing annual or other periodic reports to the shareholders of the
corporation as the Board considers appropriate. In conformity with Section 1501
of the California General Corporation Law, if this corporation has 100 or more
shareholders of record, an annual report shall be sent to the shareholders of
this corporation not later than 120 days after the close of the fiscal year and
at least 15 (or, if sent by third-class mail, 35) days prior to the annual
meeting of shareholders to be held during the next fiscal year. This report
shall contain a balance sheet as of the end of that fiscal year and an income
statement and statement of changes in financial position for that fiscal year,
accompanied by a report of independent accountants or, if there is no such
report, the certificate of an authorized officer of the corporation that such
statements were prepared without audit from the books and records of the
corporation. Such report shall also include such further statements required by
law applicable to the corporation from time to time.
(c) Shareholders' Requests for Financial Reports. If no annual report for the
last fiscal year has been sent to the shareholders, the corporation shall, upon
the written request of any shareholder made more than 120 days after the close
of such fiscal year, deliver or mail to the shareholder making the request
within 30 days thereafter the same financial statements required by Section
1501(a) of the California General Corporation Law for that year. Any shareholder
or shareholders holding at least five percent of the outstanding shares of any
class of the corporation may make a written request to the corporation for an
income statement of the corporation for the three-month, six-month or nine-month
period of the current fiscal year ended more than 30 days prior to the date of
the request and a balance sheet of the corporation as of the end of the period
and, in addition, if no annual report for the last fiscal year has been sent to
shareholders, the statements referred to in Section 1501(a) of the California
General Corporation Law for the last fiscal year. The statements shall be
delivered or mailed to the person making the request within 30 days after
receipt thereof. A copy of the statements shall be kept on file in the principal
office of the corporation for 12 months
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and it shall be exhibited at all reasonable times to any shareholder demanding
an examination of the statements or a copy shall be mailed to such shareholder
upon demand.
The quarterly income statements and balance sheets referred to in this
Section 5.1(c) shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that the financial statements were
prepared without audit from the books and records of the corporation.
The corporation also shall, upon the written request of any
shareholder, mail to the shareholder a copy of the last annual, semiannual or
quarterly income statement which it has prepared and a balance sheet as of the
end of the period.
Section 5.2. Rights of Inspection.
(a) By Shareholders.
(1) Record of Shareholders. Any shareholder or shareholders holding at
least five percent in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent of such voting shares and have
filed a Schedule 14B with the United States Securities and Exchange Commission
relating to the election of directors of the corporation shall have an absolute
right to do either or both of the following: (i) inspect and copy the record of
shareholders' names and addresses and shareholdings during usual business hours
upon five business days' prior written demand upon the corporation or (ii)
obtain from the transfer agent for the corporation, upon written demand and upon
the tender of its usual charges for such a list (the amount of which charges
shall be stated to the shareholder by the transfer agent upon request), a list
of the names and addresses of the shareholders, who are entitled to vote for the
election of directors, and their shareholdings, as of the most recent record
date for which it has been compiled or as of a date specified by the shareholder
subsequent to the date of demand. The list shall be made available on or before
the later of five business days after demand is received or the date specified
therein as the date as of which the list is to be compiled.
The record of shareholders shall also be open to inspection and copying by
a shareholder or holder of a voting trust certificate at any time during usual
business hours, upon written demand on the corporation, for a purpose reasonably
related to such holder's interests as a shareholder or holder of a voting trust
certificate. Any inspection and copying under Section 5.2(a) may be made in
person or by agent or attorney.
(2) Accounting Books and Records. The accounting books and records and
minutes of proceedings of the shareholders, the Board of Directors and the
committees of the Board of Directors shall be open to inspection upon the
written demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. This right of inspection shall also extend to
the records of each subsidiary of the corporation. Such inspection by a
shareholder or holder of a voting trust certificate may be made in person or by
agent or attorney, and the right of inspection includes the right to copy and
make extracts.
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(3) Bylaws. The corporation shall keep at its principal executive office in
this state, or if its principal executive office is not in this state at its
principal business office in this state, the original or a copy of its bylaws,
as amended to date, which shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside this state and the corporation has no principal business
office in this state the corporation shall upon the written request of any
shareholder furnish to such shareholder a copy of the bylaws as amended to date.
(b) By Directors. Every director of the corporation shall have the absolute
right at any reasonable time to inspect and copy all books, records and
documents of every kind and to inspect the physical properties of the
corporation and also of its subsidiary corporations, domestic or foreign. Such
inspection by a director may be made in person or by agent or attorney and the
right of inspection includes the right to copy and make extracts.
Article VI. Miscellaneous.
Section 6.1. Checks, Drafts, Etc. All checks, drafts or other orders for payment
of money, notes or other evidences of indebtedness issued in the name of or
payable to the corporation shall be signed or endorsed by such person or persons
and in such manner as, from time to time, shall be determined by resolution of
the Board of Directors.
Section 6.2. Authority to Execute Contracts. The Board of Directors may
authorize any officer or officers or agent or agents to enter into any contract
or execute any instrument in the name of or on behalf of the corporation, and
such authority may be general or confined to specific instances; and, unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority to bind the corporation by any contract or engagement or
to pledge its credit or to render it liable for any purpose or to any amount.
Section 6.3. Representation of Shares of Other Corporations. The chairman of the
board, if any, the president or any vice president and the secretary or
assistant secretary of the corporation are authorized to vote, represent and
exercise on behalf of the corporation all rights incident to any and all shares
of any other corporation or corporations standing in the name of the
corporation. The authority herein granted to said officers to vote or represent
on behalf of the corporation any and all shares held by the corporation in any
other corporation or corporations may be exercised either by such officers in
person or by any other person authorized so to do by proxy or power of attorney
duly executed by said officers.
Section 6.4. Indemnification and Insurance.
(a) For the purposes of this Section 6.4, "director" means any person who is or
was a director of the corporation, or is or was serving at the request of the
corporation as a director of another foreign or domestic corporation, or was a
director of a foreign or domestic corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of such
predecessor corporation; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes, without limitation, attorneys' fees and any expenses of
establishing a right to indemnification under Subparagraph (d) or (e)(3) of this
Section 6.4.
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(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any proceeding (other than an action by or in
the right of the corporation to procure a judgment in its favor) by reason of
the fact that such person is or was a director of the corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such proceeding 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. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.
(c) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action by
or in the right of the corporation to procure a judgment in its favor by reason
of the fact that such person is or was a director of the corporation, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such action if such person acted in good faith, in a
manner such person believed to be in the best interests of the corporation and
with such care, including reasonable inquiry, as an ordinary prudent person in a
like position would use under similar circumstances. No indemnification shall be
made under this Subparagraph (c):
(1) In respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation in the performance of such
person's duty to the corporation, unless and only to the extent that the court
in which such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for the expenses which such court shall
determine;
(2) Of amounts paid in settling or otherwise disposing of a threatened or
pending action, with or without court approval; or
(3) Of expenses incurred in defending a threatened or pending action which
is settled or otherwise disposed of without court approval.
(d) To the extent that a director of the corporation has been successful on the
merits on defense of any proceeding referred to in Subsection (b) or (c) above
or in defense of any claim, issue or matter therein, the director shall be
indemnified against expenses actually and reasonably incurred by the director in
connection therewith.
(e) Except as provided in Subsection (d) above, any indemnification shall be
made by the corporation only if authorized in the specific case, upon a
determination that indemnification of the director is proper in the
circumstances because the director has met the applicable standard of conduct
set forth in Subsection (b) or (c) above, by:
(1) A majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(2) Approval of the shareholders, with the shares owned by the person to be
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indemnified not being entitled to vote thereon; or
(3) The court in which such proceeding is or was pending upon application
made by the corporation or the director or the attorney or other person
rendering services in connection with the defense, whether or not such
application by the director, attorney or other person is opposed by the
corporation.
Upon request by a director for indemnification, the Board of Directors
shall undertake to make a reasonable and prompt determination concerning the
propriety of indemnification of the director and, in the event no quorum of
disinterested directors is available, shall direct that the matter be considered
at the next duly held meeting of shareholders at which a quorum is present.
(f) Expenses incurred in defending any proceeding shall be advanced by the
corporation prior to the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of the director to repay such amount unless it shall
be determined ultimately that the director is entitled to be indemnified as
authorized in this section. Notwithstanding the foregoing, no advance shall be
made by this corporation if a determination is reasonably and promptly made by
the Board of Directors by a majority vote of a quorum of disinterested directors
that, based upon the facts known to the Board at the time such determination is
made, such person acted in bad faith and in a manner that such person did not
believe to be in the best interest of the corporation, or, with respect to any
criminal proceeding, that such person believed or had reasonable cause to
believe his conduct was unlawful. In no event shall any advance be made in
instances where the Board reasonably determines that such person deliberately
breached his duty to the corporation or its shareholders.
(g) The corporation shall have power to purchase and maintain insurance on
behalf of any agent of the corporation against any liability asserted against or
incurred by the agent in such capacity or arising out of the agent's status as
such whether or not the corporation would have the power to indemnify the agent
against such liability under the provisions of this section.
Section 6.5. Employee Stock Purchase Plans. The corporation may adopt and carry
out a stock purchase plan or agreement or stock option plan or agreement
providing for the issue and sale for such consideration as may be fixed of its
unissued shares, or of issued shares acquired or to be acquired, to one or more
of the employees or directors of the corporation or a subsidiary or parent
thereof or to a trustee on their behalf and for the payment for such shares in
installments or at one time, and may provide for aiding any such persons in
paying for such shares by compensation for services rendered, promissory notes
or otherwise.
A stock purchase plan or agreement or stock option plan or agreement
may include, among other features, the fixing of eligibility for participation
therein, the class and price of shares to be issued or sold under the plan or
agreement, the number of shares which may be subscribed for, the method of
payment therefor, the reservation of title until full payment therefor, the
effect of the termination of employment, an option or obligation on the part of
the corporation to repurchase the shares upon termination of employment, subject
to the provisions of the California General Corporation Law, restrictions upon
transfer of the shares and the time limits of and termination of the plan.
Section 6.6. Construction and Definitions. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the California General Corporation Law
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shall govern the construction of these bylaws. Without limiting the generality
of the foregoing, the masculine gender includes the feminine and neuter, the
singular number includes the plural and the plural number includes the singular,
and the term "person" includes a corporation as well as a natural person.
Section 6.7. Reimbursement of Disallowed Compensation. Any payments made to an
officer or director of the corporation including, but not limited to, payments
of compensation, interest, rent or reimbursement for expenses, which payments
are disallowed to the corporation in whole or in part by the Internal Revenue
Service as a deductible business expense, shall at the option of the
corporation, be reimbursed by such officer or director to the corporation to the
full extent of the amount so disallowed. Any officer or director of the
corporation who shall have received payment of any such amounts so disallowed
shall promptly, on demand, reimburse the corporation for the same. The
corporation may withhold the amount of any such disallowance from the future
compensation or other payments which may be due or become due to such officer or
director if he does not reimburse the corporation on demand.
Article VII. Amendments.
Section 7.1. Power of Shareholders. New bylaws may be adopted or these bylaws
may be amended or repealed by the affirmative vote of a majority of the
outstanding shares entitled to vote or by the written consent of such
shareholders, except as otherwise provided by law or by the Articles of
Incorporation.
Section 7.2. Power of Directors. Subject to the right of shareholders as
provided in Section 7.1 to adopt, amend or repeal bylaws, any bylaw may be
adopted, amended or repealed by the Board of Directors other than a bylaw or
amendment thereof changing the authorized number of directors, if such number is
fixed, or the maximum-minimum limits thereof, if an indefinite number.
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CERTIFICATE OF SECRETARY
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of Tekelec,
and that the foregoing bylaws, comprising nineteen (19) pages, were adopted as
the bylaws of said corporation as of the lst day of February, 1987, by the Board
of Directors of said corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 30th day of November, 1987.
/s/ RONALD W. BUCKLY
----------------------------------------
Ronald W. Buckly, Secretary
[SEAL]
<PAGE>
TEKELEC
CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected, qualified and acting
Secretary of Tekelec, a California corporation (the "Company"), and that,
pursuant to resolutions of the Board of Directors of the Company at a meeting
duly held on December 6, 1987, the following amendment to the Bylaws of the
Company was adopted:
Section 6.4. of Article VI was amended to read in its entirety as
follows:
Section 6.4. Indemnification and Insurance.
(a) For the purposes of this Section 6.4, "director" means any person
who is or was a director of the corporation, or is or was serving at
the request of the corporation as a director of another foreign or
domestic corporation, or was a director of a foreign or domestic
corporation which was a predecessor corporation of the corporation or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes, without limitation, attorneys' fees and any
expenses of establishing a right to indemnification under Subparagraph
(d) or (e)(3) of this Section 6.4.
(b) The corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in
its favor) by reason of the fact that such person is or was a director
of the corporation, against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding 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.
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall
not, of itself, create a presumption that the person did not act in
good faith and in a manner which the person reasonably believed to be
in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
(c) The corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or
completed action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that such person is or
<PAGE>
was a director of the corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or
settlement of such action if such person acted in good faith, in a
manner such person believed to be in the best interests of the
corporation and its shareholders. No indemnification shall be made
under this Subparagraph (c):
(1) In respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation in the
performance of such person's duty to the corporation and its
shareholders, unless and only to the extent that the court in which
such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for expenses and then only
to the extent that the court shall determine;
(2) Of amounts paid in settling or otherwise disposing of a
pending action without court approval; or
(3) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
(d) To the extent that a director of the corporation has been
successful on the merits in defense of any proceeding referred to in
Subsection (b) or (c) above or in defense of any claim, issue or matter
therein, the director shall be indemnified against expenses actually
and reasonably incurred by the director in connection therewith.
(e) Except as provided in Subsection (d) above, any indemnification
shall be made by the corporation only if authorized in the specific
case, upon a determination that indemnification of the director is
proper in the circumstances because the director has met the applicable
standard of conduct set forth in Subsection (b) or (c) above, by any of
the following:
(1) A majority vote of a quorum consisting of directors who are
not parties to such proceeding.
(2) If such quorum of directors is not obtainable, by inde-
pendent legal counsel in a written opinion.
(3) Approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon.
(4) The court in which such proceeding is or was pending upon
application made by the corporation or the director or the attorney or
other person rendering services in connection with the
2
<PAGE>
defense, whether or not such application by the director, attorney or
other person is opposed by the corporation.
Upon request by a director for indemnification, the Board of
Directors shall undertake to make a reasonable and prompt determination
concerning the propriety of indemnification of the director and, in the
event no quorum of disinterested directors is available, shall direct
that the matter be either determined by independent legal counsel in a
written opinion or considered at the next duly held meeting of
shareholders at which a quorum is present.
(f) Expenses incurred in defending any proceeding may be advanced by
the corporation prior to the final disposition of such proceeding upon
receipt of an undertaking by or on behalf of the director to repay such
amount if it shall be determined ultimately that the director is not
entitled to be indemnified as authorized in this section.
Notwithstanding the foregoing, no advance shall be made by this
corporation if a determination is reasonably and promptly made by the
Board of Directors by a majority vote of a quorum of disinterested
directors that, based upon the facts known to the Board at the time
such determination is made, such person acted in bad faith or in a
manner that such person did not believe to be in the best interests of
the corporation, or, with respect to any action by or in the right of
the corporation to procure a judgment in its favor, that such person
acted in bad faith or in a manner such person did not believe to be in
the best interests of the corporation and its shareholders, or, with
respect to any criminal proceeding, that such person believed or had
reasonable cause to believe his conduct was unlawful. In no event shall
any advance be made in instances where the Board reasonably determines
that such person deliberately breached his duty to the corporation or
its shareholders;
(g) The corporation shall have power to purchase and maintain insurance
on behalf of any agent of the corporation against any liability
asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such whether or not the corporation would
have the power to indemnify the agent against such liability under the
provisions of this section.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal this 2nd day of February, 1988.
[SEAL]
/s/ RONALD W. BUCKLY
----------------------------------------
Ronald W. Buckly, Secretary
3
<PAGE>
TEKELEC
CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected, qualified and acting
Secretary of Tekelec, a California corporation (the "Company"), and that,
pursuant to resolutions of the Board of Directors of the Company at a meeting
duly held on February 19, 1994, the following amendment to the Bylaws of the
Company was adopted:
Section 3.2 of Article III was amended to read in its entirety as
follows:
Section 3.2. Number and Qualification of Directors. The number
of directors of this corporation shall not be less than five
(5) nor more than nine (9). The exact number of directors
shall be seven (7) until changed, within the limits specified
above, by a bylaw amending this Section 3.2, duly adopted by
the Board of Directors or by the shareholders. The indefinite
number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by a duly adopted
amendment to the Articles of Incorporation or by an amendment
to this bylaw duly adopted by the vote or written consent of
holders of two-thirds (2/3) of the outstanding shares entitled
to vote; provided however, that an amendment reducing the
number or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its
adoption at a meeting of the shareholders, or the shares not
consenting in the case of an action by written consent, are
equal to more than sixteen and two-thirds (16 2/3) of the
outstanding shares entitled to vote thereon. No amendment may
change the stated maximum number of authorized directors to a
number greater than two (2) times the stated minimum number of
directors minus one (1).
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal this 3rd day of May, 1995.
/s/ RONALD W. BUCKLY
----------------------------------------
Ronald W. Buckly, Secretary
<PAGE>
TEKELEC
CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected, qualified and acting
Secretary of Tekelec, a California corporation (the "Company"), and that,
pursuant to resolutions duly adopted (i) by the Board of Directors of the
Company at a meeting held on February 4, 1995, and (ii) by the shareholders of
the Company at a meeting held on May 12, 1995, Section 3.11(b) of Article III of
the Bylaws of the Company was amended to read in its entirety as follows:
(b) The Board of Directors alone may approve loans of
money or property to, or the guarantee of obligations of, any
officer of the corporation, whether or not a director, or an
employee benefit plan authorizing such a loan or guaranty to
an officer provided that (1) the Board of Directors determines
that such a loan or guaranty or plan may reasonably be
expected to benefit the corporation, (2) the corporation has
outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the California
General Corporation Law) on the date of approval by the Board
of Directors, and (3) the approval of the Board of Directors
is by a vote sufficient without counting the vote of any
interested director or directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal this 15th day of May, 1995.
/s/ RONALD W. BUCKLY
----------------------------------------
Ronald W. Buckly, Secretary
<PAGE>
TEKELEC
CERTIFICATE OF SECRETARY
I hereby certify that I am the duly elected, qualified and
acting Secretary of Tekelec, a California corporation (the "Company"), and that
pursuant to a resolution of the Board of Directors of the Company adopted at a
meeting duly held on March 19, 1996, the following amendment to the Bylaws of
the Company was adopted effective as of May 10, 1996:
Section 3.2 of Article III was amended to read in its entirety
as follows:
Section 3.2. Number and Qualification of Directors. The number
of directors of this corporation shall not be less than five
(5) nor more than nine (9). The exact number of directors
shall be six (6) until changed, within the limits specified
above, by a bylaw amending this Section 3.2, duly adopted by
the Board of Directors or by the shareholders. The indefinite
number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by a duly adopted
amendment to the Articles of Incorporation or by an amendment
to this bylaw duly adopted by the vote or written consent of
holders of two-thirds (2/3) of the outstanding shares entitled
to vote; provided however, that an amendment reducing the
number or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its
adoption at a meeting of the shareholders, or the shares not
consenting in the case of an action by written consent, are
equal to more than sixteen and two-thirds (16 2/3) of the
outstanding shares entitled to vote thereon. No amendment may
change the stated maximum number of authorized directors to a
number greater than two (2) times the stated minimum number of
directors minus one (1).
IN WITNESS WHEREOF, I have hereunto set my hand and affixed
the corporate seal as of the 10th day of May, 1996.
/s/ RONALD W. BUCKLY
----------------------------------------
Ronald W. Buckly, Secretary
<PAGE>
EXHIBIT 10.7
TEKELEC
SCHEDULE OF DISTRIBUTORS
DISTRIBUTOR TERRITORY
Altech Instruments Pty, Ltd. South Africa
Bynet Israel
Eagle Telecom Puerto Rico
Euro Tech Far East, Ltd. Hong Kong
Grupo Ingedigit Venezuela
Heli-Ocean Technology Taiwan
Hitech Brazil
Industrial Electro-Communications, Inc. Philippines
KDC Corporation South Korea
Lagercrantz Communication Sweden
MEDCOM Mexico
MIBO Integra Slovenia
Nichecom New Zealand
Oy Alkas AB Finland, Baltics
Reycom Electronica SRL Argentina
Sintel Norway, Denmark
ST Computer Systems Singapore
Trend Communications Limited United Kingdom
Tekelec Australia Australia
Tekelec China China
Tekelec Espana, SA Spain and Portugal
Tekelec Airtronic SPA Italy
Tekelec Airtronic B.V. The Netherlands,Luxembourg,Belgium
Tekelec Airtronic GMBH Germany
Tekelec-Airtronic, S.A. France
Twintech Design Co. Ltd. Thailand
<PAGE>
EXHIBIT 10.11
[ON TEKELEC LETTERHEAD]
March 26, 1997
Allan J. Toomer
President
Tekelec
5151 McCrimmon Parkway
Suite 216
Morrisville, NC 27560
Dear Allan:
This letter confirms the principal terms of your employment with Tekelec
for 1997 which were approved by the Board of Directors of Tekelec and which,
upon your acceptance, will replace the executory obligations of Tekelec under
that certain letter agreement dated November 22, 1995 between you and the
Company.
The principal terms of your employment are as follows:
1. Title. You will serve as President of Tekelec through December 31, 1997.
In addition, subject to your reelection to the Board of Directors at the
Company's Annual Shareholders Meeting in May 1997, you will serve as a member of
the Board of Directors at least through December 31, 1997.
2. Annual Base Salary. Your annual base salary for 1997 will be $250,000.
3. 1997 Officer Bonus Plan. You will be eligible to participate in the 1997
Officer Bonus Plan in accordance with the terms thereof.
4. Warrant. At its meeting on January 25, 1997, the Board granted to you a
warrant to purchase 40,300 shares of Tekelec Common Stock at $18.625 per share,
vesting in three equal installments on June 30, 1997, September 30, 1997 and
December 31, 1997 as long as you remain an employee of the Company. The warrant
will vest in full and become immediately exercisable upon the termination of
your employment prior to December 31, 1997 for any reason other than (i) your
voluntary termination without "good reason" as such term is defined in the
Company's Officer Severance Plan or (ii) "for cause" as such term is defined in
the Officer Severance Plan.
5. Severance Payment. Upon the termination of your employment with the
Company (i) after June 30, 1997 for any reason or (ii) upon your death or
disability at any time, and in lieu of any severance benefits that you may be
entitled to under the Company's Officer Severance Plan, the Company will pay to
you or your estate, as the case may be, a severance payment in the amount of
$400,000, payable within 30 days following your termination in one lump sum or
at such times and in such installments as you or your estate elect. If your
<PAGE>
Allan J. Toomer
March 26, 1997
Page 2
employment with the Company terminates prior to July 1, 1997 under circumstances
not entitling you to receive the above-described $400,000 severance payment, you
will be eligible to receive severance benefits in accordance with the terms of
the Company's Officer Severance Plan.
6. Acceleration of Outstanding Options. Provided that you remain as an
officer of the Company through December 31, 1997, all installments of stock
options granted to you under the Company's 1994 Stock Option Plan that are
scheduled to vest after December 31, 1997, will vest in full and become
immediately exercisable at the close of business on December 31, 1997.
If the foregoing meets with your approval, then please so indicate by
signing the enclosed copy of this letter and returning it to me. The Company
greatly appreciates the contributions that you have made to the Company's
success and believes that you will provide Tekelec with the leadership and the
management expertise and experience needed to continue Tekelec's growth in 1997.
Very truly yours,
/s/ JON F. RAGER
Jon F. Rager
on behalf of the
Tekelec Compensation Committee
Enclosure
cc: Tekelec Board of Directors
ACCEPTED AND AGREED.
/s/ ALLAN J. TOOMER
- -------------------------------
Allan J. Toomer
Dated: March 27, 1997
<PAGE>
EXHIBIT 10.13
AMENDMENT NO. 1 TO CONSULTING AGREEMENT
THIS AMENDMENT NO. 1 TO CONSULTING AGREEMENT (this "Amendment") amends
that certain Consulting Agreement effective as of August 1, 1996 (the
"Agreement") between TEKELEC, a California corporation (the "Company"), and
HOWARD ORINGER, a California resident ("Consultant"). Capitalized terms used
herein shall have the meanings set forth in the Agreement, unless otherwise
defined herein.
WHEREAS, the parties wish to amend the Agreement to extend the term
thereof;
NOW, THEREFORE, in consideration of the foregoing recital and of the
premises and the covenants, warranties and agreements set forth below, and for
other valuable consideration received, the parties hereby agree as follows:
1. Consultancy. Section 1 of the Agreement is hereby amended to read
in its entirety as follows:
"1. CONSULTANCY. The Company hereby retains Consultants, and
Consultant hereby accepts such retention, to consult for the Company upon the
terms and subject to the conditions set forth herein, commencing as of the
Effective Date and continuing until January 1, 1997 or until this Agreement is
sooner terminated in accordance with Section 5 hereof (the "Term"). Consultant
shall render such consulting services to the Company as an independent
contractor and not as an employee, agent, joint venturer or otherwise."
2. Termination. Section 5 of the Agreement is hereby amended to read
in its entirety as follows:
"5. TERMINATION. This Agreement and Consultant's retention
hereunder shall continue until the earlier to occur of (a) January 1,
1997 or (b) the death or disability of Consultant."
3. No Other Amendments. The Agreement, except as expressly amended by
this Amendment, shall continue in full force and effect.
4. Counterparts. This Amendment may be executed in counterparts,
each of which shall be deemed an original and which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment effective
as of November 30, 1996.
TEKELEC HOWARD ORINGER
By: /s/ Allan J. Toomer Signature: /s/ Howard Oringer
-------------------------- -------------------------
Allan J. Toomer, President
<PAGE>
EXHIBIT 10.14
[IMPERIAL BANK LOGO]
CREDIT AGREEMENT
This Credit Agreement (the "Agreement") is made and entered into on
October 22, 1996, by and between Tekelec, a California corporation,
("Borrower") and Imperial Bank, a California banking corporation, ("Bank").
Borrower wishes to secure certain credit accommodations from Bank and
Bank is willing to provide credit accommodations all as provided in this
Agreement.
In consideration of mutual covenants and conditions hereof, the parties
hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.01 REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of
this Agreement, between the date of this Agreement and June 30, 1998 (the
"Commitment Termination Date"), provided that no event of default then has
occurred and is continuing, Bank will provide the Revolving Credit Commitment
of Ten Million Dollars ($10,000,000) for (a) the issuance of Letters of Credit
("Letters of Credit") and (b) loans for general working capital purposes
provided, however, that the aggregate of the Letters of Credit and Loans at
any one time shall not exceed the Revolving Credit Commitment. No Letter of
Credit shall expire beyond the Commitment Termination Date.
Borrower's obligation to repay the Revolving Credit Commitment, together with
accrued interest thereon, shall be evidenced by a promissory note issued by
Borrower in favor of Bank on the standard form used by Bank to evidence its
commercial loans.
Prior to the Commitment Termination Date, Borrower may borrow, repay and
reborrow loans under the Revolving Credit Commitment.
1.02 INTEREST RATE(S). All principal amounts owing under the Line will bear
interest, as elected by the Borrower, at either:
(i) Bank's announced prime rate as it may vary from time to
time, calculated on a 360 day(s) basis, or
(ii) Reserve adjusted LIBOR for any interest period of 1, 2,
or 3 months plus 1.90%, with minimum borrowings of $1,000,000, and $500,000
increments, or
(iii) Bank's prevailing domestic Bankers Acceptance ("BA")
rate plus 1.65% on a 30, 60, 90 day basis with minimum borrowings of $500,000,
and $500,000 increments.
1.03 FEES. Borrower shall pay to Bank a Commitment Fee, due and payable at
closing, equal to one-half of one percent (0.50%) per annum, calculated on a
360 day(s) basis.
<PAGE>
2. COLLATERAL
2.01 SECURITY PROVIDED BY BORROWER. To secure the payment and performance
of all obligations of Borrower to Bank, Borrower shall have granted a first
priority security interest in all of Borrower's accounts, deposit accounts,
instruments, chattel paper, documents, general intangibles, inventory,
equipment, furniture and fixtures, now owned or hereafter acquired by Borrower,
all proceeds and insurance proceeds of the foregoing, all guarantees and other
security therefor, and all of Borrower's books and records relating thereto
(including computer-stored information and all software relating thereto) and
all contract rights with third parties relating to the maintenance of any such
books, records and information.
3. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
3.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and
existing and in good standing under the laws of California, without limit as to
the duration of its existence and is authorized and in good standing to do
business in the State of California; Borrower has corporate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement. Borrower has
no investment in any other business entity.
3.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, as the case may be, and this Agreement is
the valid, binding and legally enforceable obligation of Borrower in accordance
with its terms; subject only to bankruptcy, insolvency or similar laws
affecting creditors rights generally.
3.03 NO CONFLICT. The execution, delivery and performance of this Agreement
are not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which it or any of its property
may be bound or affected, and do not cause any lien, charge or other
encumbrance to be created or imposed upon any such property by reason thereof.
3.04 LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower which if determined adversely to
Borrower or its interest would have a material adverse effect on the financial
condition of Borrower, and Borrower is not in default with respect to any
order, writ, injunction, decree or demand of any court or other governmental or
regulatory authority.
3.05 FINANCIAL CONDITION. The balance sheet of borrower as of June 30, 1996
a copy of which has heretofore been delivered to Bank by Borrower, and all other
statements and data submitted in writing by Borrower to Bank in connection with
any credit extended pursuant to this Agreement are true and correct, and said
balance sheet truly presents the financial condition of Borrower as of the date
thereof, and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no material adverse changes in the financial condition or business of Borrower.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted.
2
<PAGE>
3.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than those permitted by Section
5.03 hereof.
3.07 TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any governmental agency,
Borrower has no liability for renegotiation of profits.
3.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
3.09 REGULATION U. The proceeds of the Loan shall not be used to purchase or
carry margin stock (as defined within Regulation U of the Board of Governors of
the Federal Reserve system).
4. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under
borrowings, or other indebtedness, it will, unless Bank shall otherwise consent
in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
4.02 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment.
4.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause materially adverse affect upon its
financial condition or the loss of any right of redemption from any sale
thereunder; and
b. It shall have set aside on its books reserves (segregated to
the extent required by generally accepted accounting practice) deemed by it
adequate with respect thereto.
4.04 QUICK ASSETS. Maintain a minimum ratio of cash, short term and long
term investments in securities, accounts receivable divided by total current
liabilities of 1.50 to 1.0, all as computed and determined in accordance with
generally accepted accounting principles on a basis consistently maintained by
Borrower.
4.05 CURRENT RATIO. Maintain a ratio of current assets, including long term
investments, to current liabilities of not less than 2.0 to 1.00; all as
computed and determined in accordance to generally accepted accounting
principles on a basis consistently maintained by Borrower.
4.06 NET WORTH. Maintain Tangible Net Worth [meaning the excess of all assets,
excluding any value for good will, trademarks, patents, copyrights, leaseholds,
organization expense, amounts due from officers, shareholders and affiliates,
and other similar intangible items, over its liabilities] of not less than
$40,000,000.
3
<PAGE>
4.07 DEBT TO NET WORTH. Maintain a ratio of total liabilities to Tangible
Net Worth not greater than 0.75 to 1.00.
4.09 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
a. QUARTERLY FINANCIAL STATEMENT. Within forty-five (45) days after
the close of each quarter of each fiscal year of Borrower, commencing with the
quarter next ending, a balance sheet, profit and loss statement and
reconciliation of Borrower's fund balance accounts as of the close of such
period and covering operations for the portion of Borrower's fiscal year ending
on the last day of such period, all in reasonable detail, prepared in accordance
with generally accepted accounting principles on a basis consistently maintained
by Borrower and certified by an appropriate officer of Borrower;
b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event
within ninety (90) days after the close of each fiscal year of Borrower, a
report of audit of Company as of the close of and for such fiscal year, all in
reasonable detail, prepared on an AUDITED basis by an independent certified
public accountant selected by Borrower and reasonably acceptable to Bank, in
accordance with generally accepted accounting principles on a basis consistently
maintained by Borrower and certified by an appropriate officer of Borrower;
c. At Bank's written request, within ninety (90) days after the end of
Borrower's fiscal year, a certificate of the chief financial officer of
Borrower, stating that Borrower has performed and observed each and every
covenant contained in this Agreement to be performed by it and that no event has
occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of notice and the lapse of time specified herein; or, if any
such event has occurred or any such condition exists, specifying the nature
thereof;
d. Promptly after the receipt thereof by Borrower, copies of any
detailed audit reports submitted to Borrower by independent accountants in
connection with each annual or interim audit of the accounts of Borrower made by
such accountants;
e. Such other information relating to the affairs of Borrower as the
Bank reasonably may request from time to time;
f. Within thirty (30) days after and as of the end of each month,
copies of Borrower's summary accounts payable and accounts receivable agings.
g. In connection with each fiscal year end financial statement
furnished to Bank hereunder, any management letter of Borrower's independent
certified public accountant.
5. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, it will not,
without Bank's written consent, which consent will not be unreasonably withheld:
5.01 TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the
character of its business; or make any substantial change in its executive
management.
4
<PAGE>
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than loans from the Bank except
obligations now existing as shown in the financial statement dated June 30,
1996, in excess of $1,000,000;
5.03 LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned, other than
liens for taxes not delinquent and liens in Bank's favor except for those
already existing as of June 30, 1996, in excess of $1,000,000.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make, in excess of
$1,000,000, any loans or advances to any person or other entity, other than in
the ordinary and normal course of its business as now conducted or any
investment in the securities of any person or other entity other than shown on
Exhibit "A" attached hereto and made a part hereof by this reference; or
guarantee or otherwise become liable, in excess of $1,000,000 upon the
obligation of any person or other entity, except by endorsement of negotiable
instruments for deposit or collection in the ordinary and normal course of its
business, excluding advances to and/or accounts receivable from its affiliates.
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity, in
excess of $1,000,000; or liquidate, dissolve, merge or consolidate, or commence
any proceedings therefor; or sell any assets except in the ordinary and normal
course of its business as now conducted; or sell, lease, assign, or transfer
any substantial part of its business or fixed assets, or any property or other
assets necessary for the continuance of its business as now conducted,
including without limitation the selling of any property or other asset
accompanied by the leasing back of the same.
6. EVENTS OF DEFAULT
The occurrence of any of the following events of default shall, at
Bank's option, terminate Bank's commitment to lend and make all sums of
principal and interest then remaining unpaid on all Borrower's indebtedness to
Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived;
6.01 FAILURE TO PAY NOTE. Failure to pay any installment of principal or
interest on any indebtedness of Borrower to Bank, ten (10) days after its due
date, and notice of non-payment from Bank.
6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
6.03 BREACH OF WARRANTY. Any of borrower's representations or warranties
made herein or any statement or certificate at any time given in writing
pursuant hereto or in connection herewith shall be false or misleading in any
respect.
6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or
admit its inability to pay its debts as they mature; or make an assignment for
the benefit of creditors; or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business.
6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $1,000,000,
writ or warrant of attachment, or similar process shall be entered or filed
against Borrower or any of its assets and shall remain unvacated, unbonded or
unstayed for a period later than five days prior to the date of any proposed
sale thereunder.
5
<PAGE>
6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
7. MISCELLANEOUS PROVISIONS
7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of
Bank or any holder of Notes issued hereunder, in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this Agreement or any note issued in
connection with a loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
7.02 NOTICE OF DEFAULT. Borrower shall promptly notify Bank in writing of the
occurrence of any event of default hereunder or any event which upon notice
and/or the lapse of time would be an event of default.
7.03 OPERATING ACCOUNTS. Borrower shall maintain all significant business
deposit accounts at Bank.
7.04 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after
notice, with interest thereon from the date of expenditure at the rate
applicable to the Loan, reasonable attorneys' fees and all costs and expenses
paid or incurred by Bank in collecting or compromising the Loan after the
occurrence of an event of default, whether or not suit is filed. If it is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
7.05 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.06 INUREMENT. The benefits of this Agreement shall inure to the successors
and assigns of Bank and the permitted successors and assigns of Borrower.
7.07 APPLICABLE LAW. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the State of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
7.08 OFFSET. In addition to and not in limitation of all rights of offset
that Bank or other holder of the Loan may have under applicable law, Bank or
other holder of the Notes shall, upon the occurrence of any Event of Default or
any event which with the passage of time and/or notice would constitute such an
Event of Default, have the right to appropriate and apply to the payment of the
Loan any and all balances, credits, deposits, accounts or monies of Borrower
then or thereafter with Bank or other holder, within ten (10) days after the
Event of Default, and notice of the occurrence of any Event of Default by Bank
to Borrower.
7.09 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.10 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of
this Agreement and of every part hereof.
6
<PAGE>
7.11 INTEGRATION CLAUSES. Except for documents and instruments specifically
referenced herein, the Agreement constitutes the entire agreement between Bank
and Borrower regarding the Loan and all prior communications verbal or written
between Borrower and Bank shall be of no further effect or evidentiary value. In
the event of a conflict or inconsistency among any other documents and
instruments and this Agreement, the provisions of this Agreement shall prevail.
7.12 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
7.13 This Agreement may be modified only by a writing signed by both parties
hereto.
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK ("BANK")
By: /s/ NUNILO SOLER
-------------------------
Nunilo Soler
Vice President
TEKELEC ("BORROWER")
By: /s/ GILLES GODIN
-------------------------
Gilles Godin
Chief Financial Officer
7
<PAGE>
Exhibit "A"
ELIGIBLE INVESTMENTS
I. Taxable Investments
1. U.S. Treasuries and agencies of the U.S. Government
2. Negotiable certificates of deposits, time deposits, and banker's
acceptances of the top 50 banks in the world.
3. Commercial paper, rated no less than A-1*/P-1 or Aa/AA*.
4. Medium term notes within allowable maturity range, rated no less
than Aa3/AA-*.
5. Investments in Money Market Preferred Stocks rated no less than
Aa/AA*.
II. Tax-Exempt Investments
1. Short term municipal securities (one year or less) will be MIG-1 or
SP-1*.
2. Investments in Municipal Floating Rate Securities will be rated at
least Mig-1.
3. Variable rate demand notes and tax-exempt commercial paper rated Aaa
or MIG-1.
4. Tax-exempt municipal preferred rated As/AA*.
5. Tax-exempt notes/bonds regardless of maturity date shall:
A. Have credit rating of Aa3/AA-*, if no insurance, letter of
credit, or credit enhancement is present.
B. Have underlying credit rating of A/A* if credit enhancements are
present.
C. Have minimum credit enhancement quality such as insurance by the
Municipal Bonds Investors Assurance Corps. (MBIA) or by the
Financial Guarantees Insurance Corp. (FGIC) or by AMRAC
Indemnity Corp. (AMBAC), or letters of credit by a top 50
worldwide bank.
III. Investments by Borrower's Japanese subsidiary
1. In addition to investments permitted under I and II Borrower's
Japanese subsidiary may make investments in Japanese instruments
having, at a minimum, the same financial quality characteristics as
outlined in I and II.
* Asterisk indicates the "Standard & Poor's" ratings. All other ratings are
"Moody's" ratings.
<PAGE>
[IMPERIAL BANK LOGO]
NOTE
$10,000,000.00 Los Angeles, California, October 22, 1996
On June 30, 1998, and as hereinafter provided, for value received, the
undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking
corporation, or order, at its Los Angeles Regional office, the principal sum of
$10,000,000.00 maximum or such sums up to the maximum if so stated, as the Bank
may now or hereafter advance to or for the benefit of the undersigned in
accordance with the terms hereof, together with interest from date of
disbursement or N/A, whichever is later, on the unpaid principal balance [ ] at
the rate of ___% per year [X] at the rate of 0.000%* per year in excess of the
rate of interest which Bank has announced as its prime lending rate (the "Prime
Rate"), which shall vary concurrently with any change in such Prime Rate, or
$250.00, whichever is greater. Interest shall be computed at the above rate on
the basis of the actual number of days during which the principal balance is
outstanding, divided by 360, which shall, for interest computation purposes, be
considered one year.
Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal
[ ] in addition to principal [ ] __________, beginning November 30, 1996, and if
not so paid shall become a part of the principal. All payments shall be applied
first to interest, and the remainder, if any, on principal. [ ] (If checked),
Principal shall be payable in installments of $_______________, or more, each
installment on the ____ day of each ______________, beginning
_______________________. Advances not to exceed any unpaid balance owing at any
one time equal to the maximum amount specified above, may be made at the option
of Bank.
Any partial prepayment shall be applied to the installments, if any, in
inverse order of maturity. Should default be made in the payment of principal
or interest when due, or in the performance or observance, when due, of any
item, covenant or condition of any deed of trust, security agreement or other
agreement (including amendments or extensions thereof) securing or pertaining to
this note, at the option of the holder hereof and without notice or demand, the
entire balance of principal and accrued interest then remaining unpaid shall (a)
become immediately due and payable, and (b) thereafter bear interest, until paid
in full, at the increased rate of 5% per year in excess of the rate provided for
above, as it may vary from time to time.
Defaults shall include, but not be limited to, the failure of the
maker(s) to pay principal or interest when due; the filing as to each person
obligated hereon, whether as maker, co-maker, endorser or guarantor
(individually or collectively referred to as the "Obligor") of a voluntary or
involuntary petition under the provisions of the Federal Bankruptcy Act; the
issuance of any attachment or execution against any asset of any Obligor; the
death of any Obligor; or any deterioration of the financial condition of any
Obligor which results in the holder hereof considering itself, in good faith,
insecure.
[ ] If any installment payment or principal balance payment due
hereunder is delinquent ten or more days, Obligor agrees to pay a late charge in
the amount of 5% of the payment so due and unpaid, in addition to the payment;
but nothing in this paragraph is to be construed as any obligation on the part
of the holder of this note to accept payment of any installment of any payment
past due or less than the total unpaid principal balance after maturity.
If this note is not paid when due, each Obligor promises to pay all
costs and expenses of collection and reasonable attorneys fees incurred by the
holder hereof on account of such collection, plus interest at the rate
applicable to principal, whether or not suit is filed hereon. Each Obligor
shall be jointly and severally liable hereon and consents to renewals,
replacements and extensions of time for payment hereof, before, at, or after
maturity; consents to the acceptance, release or substitution of security for
this note; and waives demand and protest and the right to assert any statute of
limitations. Any married person who signs this note agrees that recourse may be
had against separate property for any obligations hereunder. The indebtedness
evidenced hereby shall be payable in lawful money of the United States. In any
action brought under or arising out of this note, each Obligor, including
successor(s) or assign(s) hereby consents to the application of California law,
to the jurisdiction of any competent court within the State of California, and
to service of process by any means authorized by California law.
No single or partial exercise of any power hereunder, or under any deed
of trust, security agreement or other agreement in connection herewith shall
preclude other or further exercises thereof or the exercise of any other such
power. The holder hereof shall at all times have the right to proceed against
any portion of the security for this note in such order and in such manner as
such holder may consider appropriate, without waiving any rights with respect
to any of the security. Any delay or omission on the part of the holder hereof
in exercising any right hereunder, or under any deed of trust, security
agreement or other agreement, shall not operate as a waiver of such right, or of
any other right, under this note or any deed of trust, security agreement or
other agreement in connection herewith.
[Initial * Subject to the conditions and limitations contained
Here] in the Credit Agreement dated 10/22/96.
TEKELEC
By: /s/ GILLES C. GODIN
- -------------------------------------- ----------------------------------
Vice President Finance & CFO
By: /s/ DOUGLAS W. MOXLEY
- -------------------------------------- ----------------------------------
Corporate Controller
<PAGE>
LIBOR ADDENDUM
[IMPERIAL BANK LOGO] TO NOTE
This Libor Addendum ("Addendum") is dated as of October 22, 1996, and
is by and between TEKELEC ("Borrower") and Imperial Bank ("Bank"). This
Addendum amends and supplements the Note to which it is attached (the "Note")
and forms a part of and is incorporated into the Note.
In the event of any inconsistency between the terms herein and the
terms of the Note, the terms herein shall in all cases govern and control. All
capitalized terms herein, unless otherwise defined herein, shall have the
meanings set forth in the Note.
1. ADVANCES.
1.1 Prime Loans. Advances permitted pursuant to the terms of the
Note or this Addendum which bear interest in relation to Bank's Prime Rate
shall be referred to herein as "Prime Loans" and each such advance shall be a
"Prime Loan." Each Prime Loan shall bear interest at an annual rate equal to
the sum of 0.000% plus the Bank's Prime Rate. "Prime Rate" shall mean the rate
of interest publicly announced by Bank from time to time in Inglewood,
California, as its prime rate for lending. The Prime Rate is not intended to
be the lowest rate of interest charged by Bank in connection with extensions of
credit to borrowers.
1.2 Libor Loans. Advances permitted pursuant to the terms of the
Note or this Addendum which bear interest in relation to the Libor Rate shall
be referred to herein as "Libor Loans" and each such advance shall be a "Libor
Loan." Each Libor Loan shall bear interest at the Libor Rate, as defined
below. A Libor Loan shall be in the minimum amount of One Million Dollars
($1,000,000) or such greater amount which is an integral multiple of Five
hundred thousand Dollars ($500,000.00). No Libor Loan shall be made after the
last Business Day that is at least three (3) months prior to the Maturity Date
described in the Note.
2. INTEREST ON LIBOR LOANS.
2.1 Rate of Interest. Each Libor Loan shall bear interest on the
unpaid principal amount thereof from the Loan Date through the date paid
(whether by acceleration or otherwise) at a rate equal to the sum of 1.900% per
annum plus the Libor Rate for the Interest Period.
(a) "Loan Date" shall mean the date on which (i) a Libor
Loan is made, a Libor Loan is continued, or a Prime Loan is converted to a
Libor Loan.
(b) "Interest Period" shall mean a period of one, two or
three months, commencing on the applicable Loan Date, as selected by Borrower
pursuant to Section 2.2; provided, however, that Borrower may not select an
Interest Period that would otherwise extend beyond the Maturity Date of the
Loan. Borrower may also select a twelve (12) month Interest Period if and when
Bank notifies Borrower that such Interest Period is available, as determined by
Bank in its sole discretion.
(c) "Libor Rate" shall mean, for the applicable Interest
Period for a Libor Loan, a rate per annum (rounded upwards, if necessary, to
the nearest 1/16 of 1%) equal to (i) the Libor Base Rate for such Interest
Period divided by (ii) 1.00 minus the Reserve Requirement Rate (expressed as a
decimal fraction) for such Interest Period.
(d) "Libor Base Rate" shall mean with respect to any
Interest Period, the rate equal to the arithmetic mean (rounded upwards, if
necessary, to the nearest 1/16 of 1%) of:
(i) the offered rates per annum for deposits in U.S.
Dollars for a period equal to such Interest Period which appears at
11:00 a.m., London time, on the Reuters Screen LIBOR Page on the
Business Day that is two (2) Business Days before the first day of such
Interest Period, in each case if at least four (4) such offered rates
appear on such page, or
(ii) if clause (i) is inapplicable, (x) the offered
rate per annum for deposits in U.S. Dollars for a period equal to such
Interest Period which appears as of 11:00 a.m., London time on the
Telerate Monitor on Telerate Screen 3750 on the Business Day which is
two (2) Business Days before the first day of such Interest Period; or
(y) if clause (x) above is inapplicable, the arithmetic mean (rounded
upwards, if necessary, to the nearest 1/16 of 1%) of the interest rates
per annum offered by at least three (3) prime banks selected by Bank at
approximately 11:00 a.m. London time, on the Business Day which is two
(2) Business Days before such date for deposits in U.S. Dollars to prime
banks in the London interbank market, in each case for a period equal to
such Interest Period in an amount equal to the amount to which the Libor
Rate applies.
Page 1 of 4
<PAGE>
(e) "Business Day" means any day on which Bank is open for
business in the State of California.
(f) "Reuters Screen LIBOR Page" means the display designated
as page LIBOR on the Reuters Monitor Money Rates Service or such other page as
may replace the LIBOR page on that service for the purpose of displaying London
interbank offered rates of major banks.
(g) "Reserve Requirement Rate" means, for any Interest
Period, the aggregate of the rates, effective as of the Business Day which is
two (2) Business Days before the first day of the Interest Period, at which:
(i) reserves (including any marginal, supplemental
or emergency reserves) are required to be maintained during such
Interest Period under Regulation D against "Eurocurrency liabilities"
(as such term is used in Regulation D) by member banks of the Federal
Reserve System; and
(ii) any additional reserves as required to be
maintained by Bank by reason of any Regulatory Change against (x) any
category of liabilities which includes deposits by reference to which
the Libor Rate is to be determined as provided in the definition of
"Libor Base Rate;" or (y) any category or extensions of credit or other
assets which include Libor Loans.
(h) "Regulatory Change" means, with respect to Bank, any
change on or after the date of the Note and this Addendum in any Governmental
Regulation, including the introduction of any new Governmental Regulation or
the rescission of any existing Governmental Regulation.
(i) "Governmental Regulation" means any (i) United States
Federal, state or foreign law or regulation (including without limitation
Regulation D); and (ii) the adoption or making of any interpretation,
application, directive or request applying to a class of lenders, including
Bank, of or under any United States Federal, state, or any foreign law or
regulation (whether or not having the force of law) by any court or by any
governmental, central banking, monetary or taxing authority charged with the
interpretation or administration of such law or regulation.
2.2 Determination of Interest Rates. Subject to the terms and
conditions of the Note and this Addendum, Borrower, at its option may request an
advance in the form of a Libor Loan, a continuation of a Libor Loan, or a
conversion of a Prime Loan into a Libor Loan, only upon delivery to Bank of an
irrevocable written notice received by Bank at least three (3) Business Days
prior to the requested Loan Date, specifying (i) the principal amount of such
Libor Loan, (ii) the requested Loan Date, and (iii) the selected Interest
Period. Upon receiving such notice, Bank shall determine (which determination
shall be in accordance with Section 2.1 and shall, absent manifest error, be
final, conclusive and binding upon all parties hereto) the Libor Rate applicable
to such Libor Loan two (2) Business Days prior to the Loan Date, and shall
promptly give notice thereof (in writing or by telephone confirmed in writing)
to Borrower. If Borrower shall fail to notify Bank of its selected Interest
Period for a Libor Loan (including the continuation of an existing Libor Loan or
the conversion or a Prime Loan into a Libor Loan), the Borrower shall be deemed
to have selected an Interest Period of three (3) months.
2.3 Computation of Interest and Fees. All computations of interest
and fees payable pursuant to the Note shall be calculated on the basis of a
three hundred sixty (360) day year for the actual number of days elapsed (less
the date of repayment).
2.4 Recordation by Bank. Bank is hereby authorized to record the
Loan Date, the applicable Interest Period, the principal amount, and the
interest rate or each Libor Loan made (or continued or converted) by Bank, and
the date and amount of each payment or prepayment of principal thereof, in
Bank's records. Any such recordation shall constitute prima facie evidence of
the accuracy of the information recorded; provided that the failure to make any
such recordation shall not in any way affect the Borrower's obligations
hereunder.
3. CONVERSION TO PRIME LOANS.
3.1 Election by Borrower. Subject to all the terms and conditions
of this Addendum, Borrower may elect from time to time to convert a Libor Loan
to a Prime Loan by giving Bank at least three (3) Business Days' prior
irrevocable notice of such election, and any such conversion of a Libor Loan
shall be made on the last day of the Interest Period with respect thereto.
3.2 Failure of Notice by Borrower. If Borrower otherwise fails to
give notice specifying its requests with respect to any Libor Loans that are
scheduled to become due, such failure shall be deemed, in the absence of any
notice from Borrower to the contrary, to be notice of a requested advance in
the form of a Prime Loan in a principal amount equal to the amount of said
Libor Loan.
4. PREPAYMENTS.
4.1 Voluntary Prepayment by Borrower. Subject to the terms and
conditions of the Note and this Addendum, Borrower may, upon at least three (3)
Business Days' irrevocable notice to Bank as provided herein, at any time and
from time to time on any Business Day prepay any Prime Loan or Libor Loan in
whole or in part, without penalty or premium, other than customary actual
"Breakage Fees" and "Prepayment Costs" as defined below, resulting from
prepayment of any Libor Loan prior to the expiration of the Interest Period
relating thereto. The notice of prepayment shall specify the date and amount
of the prepayment, and the Loan to which the
Page 2 of 4
<PAGE>
prepayment applies. Each partial prepayment of a Libor Loan shall be in an
amount not less than Fifty Thousand Dollars ($50,000) or such greater amount
which is an integral multiple of Fifty Thousand Dollars ($50,000); provided,
that unless a Libor Loan is prepaid in full, no prepayment shall be made if,
after giving effect to such prepayment, the aggregate principal amount of Libor
Loans having the same Interest Period shall be less than One Million Dollars
($1,000,000). Notice of prepayment having been delivered as aforesaid, the
principal amount of the prepayment specified in such notice shall become due and
payable on the prepayment date set forth in such notice. All payments of
principal under this Section 4 shall be accompanied by accrued but unpaid
interest on the amount being prepaid through the date of such prepayment.
4.2 Breakage Fees. If for any reason (including voluntary or
mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a
Prime Loan, or acceleration), Bank receives all or part of the principal amount
of a Libor Loan prior to the last day of the Interest Period for such Loan,
Borrower shall immediately notify Borrower's account officer at Bank and, on
demand by Bank, pay Bank the Breakage Fees, defined as the amount (if any) by
which (i) the additional interest which would have been payable on the amount so
received had it not been received until the last day of such Interest Period
exceeds (ii) the interest which would have been recoverable by Bank (without
regard to whether Bank actually so invests said funds) by placing the amount so
received on deposit in the certificate of deposit markets or the offshore
currency interbank markets or United States Treasury investment products, as the
case may be, for a period starting on the date on which it was so received and
ending on the last day of such Interest Period at the interest rate determined
by Bank in its reasonable discretion. Bank's determination as to such amount
shall be conclusive and final, absent manifest error.
4.3 Prepayment Costs. Borrower shall pay to Bank, upon the demand
of Bank, such other amount or amounts as shall be sufficient (in the sole good
faith opinion of Bank) to compensate it for any loss, costs or expense incurred
by it as a result of any prepayment by Borrower (including voluntary or
mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a
Prime Loan, or prepayment due to acceleration) of all or part of the principal
amount of a Libor Loan prior to the last day of the Interest Period for such
Loan (including without limitation any failure by Borrower to borrow a Libor
Loan on the Loan Date for such borrowing specified in the relevant notice of
borrowing hereunder). Such costs shall include, without limitation, any
interest or fees payable by Bank to lenders of funds obtained by it in order to
make or maintain its loans based on the London interbank eurodollar market.
Bank's determination as to such costs shall be conclusive and final, absent
manifest error.
5. REMEDIES UPON EVENTS OF DEFAULT.
5.1 Conversion to Prime Loans. If any Event of Default has occurred
and is continuing under the Note or this Addendum, then in addition to all other
remedies available to Bank under the Note, at the option of Bank and without
demand or notice, all Libor Loans then outstanding shall be automatically
converted to Prime Loans on the last day of each respective Interest Period for
each Libor Loan.
5.2 Indemnity. Borrower agrees to pay and indemnify Bank for, and
to hold Bank harmless from, any and all cost, loss or expense (including without
limitation any such cost, loss or expense arising from interest or fees payable
by Bank to lenders of funds obtained by it in order to maintain its Libor Loans
hereunder, or in its reemployment of funds obtained in connection with the
making or maintaining of Libor Loans) which Bank may sustain or incur as a
consequence of any default by Borrower in connection with or related to: (a)
payment of the principal amount of or interest on Libor Loans, (b) making a
borrowing or conversion of a Libor Loan after Borrower has given a notice
thereof in accordance with this Addendum, or (c) making a prepayment of a Libor
Loan after Borrower has given a notice thereof in accordance with this Addendum,
or any prepayment (whether optional or mandatory) of any Libor Loan prior to the
end of the applicable Interest Period for such Loan.
6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS.
6.1 Libor Rate Taxes. All payments of principal, interest, fees,
costs, expenses and all other amounts payable to Borrower pursuant to the Note
and this Addendum shall be made free and clear of and without reduction by
reason of all present and future income, stamp and other taxes or other charges
whatsoever imposed, assessed, levied or collected by any national government or
any political subdivision or taxing authority thereof or any organization of
which it is a member (excluding (i) any taxes imposed on or measured by the
overall net income or gross receipts of Bank by any such entity, and (ii) any
taxes which would have been imposed even if no provisions for Libor Loans had
appeared in this Addendum) (collectively, "Libor Taxes").
If any Libor Taxes are required to be withheld from any amounts
payable to Bank, Borrower shall pay such additional amounts as may be necessary
so as to yield to Bank a net amount equal to the total amount of the payments
provided for in this Addendum or under the Note which Bank would have received
if such amounts had not been subject to Libor Taxes.
If any Libor Taxes are payable directly by Borrower, they shall
be paid by Borrower prior to the date on which penalties attach for failure to
timely pay such Libor Taxes. Within forty five (45) days after the date on
which payment of any such Libor Taxes is due pursuant to applicable law,
Borrower will furnish Bank the original receipt for the full payment of such
Libor Taxes or, if such is not available, evidence of such payment satisfactory
in form and substance to Bank. Borrower shall indemnify and hold Bank harmless
against, and will reimburse to Bank, upon demand, any incremental taxes,
interest or penalties that may become payable by Bank as a result of any failure
by Borrower to pay any Libor Taxes when due.
Page 3 of 4
<PAGE>
6.2 Inability to Determine Fair Interest Rate. If at any time
Bank, in its sole and absolute discretion, determines that: (i) the amount of
the Libor Loans for periods equal to the corresponding Interest Periods are not
available to Bank in the offshore currency interbank markets, (ii) the Libor
Rate does not accurately reflect the cost to Bank of lending the Libor Loan, or
(iii) by reason of any changes arising after the date of the Note affecting the
London interbank eurodollar market, adequate and fair means do not exist for
ascertaining the applicable interest rate on the basis provided for in Sections
2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower.
Upon the giving of such notice, Bank's obligation to make Libor Loans shall
terminate, unless Bank and the Borrower agree in writing to a different
interest rate applicable to Libor Loans, or until such time as Bank notifies
Borrower that the circumstances giving rise to Bank's notice no longer exist.
While such circumstances continue to exist, (x) any requested Libor Loan shall
be treated as a request for a Prime Loan, (y) any Prime Loan that was to have
been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any
outstanding Libor Loan shall be converted retroactively, on the first day of
the then current Interest Period with respect thereto, to a Prime Loan.
6.3 Illegality or Impracticability. If (i) due to any Governmental
Regulation it shall become unlawful for Bank to continue to fund or maintain
any Libor Loans, or to perform its obligations hereunder, or (ii) due to any
contingency occurring after the date of the Note which has a material adverse
effect on the London interbank eurodollar market, it has become impracticable
for Bank to continue to fund or maintain any Libor Loans, or to perform its
obligations hereunder, then Bank shall promptly give notice thereof to
Borrower. Upon the giving of such notice, Bank's obligation to make Libor
Loans shall terminate, and in such event, (x) any requested Libor Loan shall be
treated as a request for a Prime Loan, (y) any Prime Loan that was to have been
converted to a Libor Loan shall be continued as a Prime Loan, and (z) any
outstanding Libor Loan shall be converted retroactively, on the first day of
the then current Interest Period with respect thereto, to a Prime Loan.
6.4 Governmental Regulations; Increased Costs. Borrower shall pay
to Bank, within 15 days after demand by Bank, from time to time such amounts as
Bank may determine to be necessary to compensate it for any increased costs
incurred by Bank that Bank determines are attributable to its making or
maintaining of any Libor Loans to Borrower (such increases in costs and
reductions in amounts receivable being herein called "Additional Costs"), in
each case resulting from any Regulatory Change which:
(a) imposes a new tax or changes the basis of taxation of
any amounts payable to Bank under the Note or this Addendum in respect of any
Libor Loans (other than changes which affect taxes measured by or imposed on
the overall net income of Bank by the jurisdiction in which such Bank has its
principal office); or
(b) imposes or modifies any reserve, special deposit or
similar requirements relating to any extensions of credit or other assets of,
or any deposits or other liabilities with or for the account of Bank (including
any Libor Loans or any deposits referred to in the definition of Libor Base
Rate); or
(c) imposes any other condition affecting the Note (or any
of such extensions of credit or liabilities); or
(d) imposes or modifies a Governmental Regulation regarding
capital adequacy which has or would have the effect of reducing the rate of
return on capital of Bank or any person or entity controlling Bank ("Parent")
as a consequence of its obligations hereunder to a level below that which Bank
(or its Parent) could have achieved but for such adoption, change or compliance
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by Bank to be material.
Bank will notify Borrower of any event occurring after the date of the
Note which will entitle Bank to Additional Costs pursuant to this Section 6.4 as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Bank will furnish Borrower with a statement setting
forth the basis and amount of each request by Bank for Additional Costs under
this Section 6.4. Determinations and allocations by Bank for purposes of this
Section 6.4 of the effect of any Regulatory Change on its costs of maintaining
its obligations to make Libor Loans or of making or maintaining Libor Loans or
on amounts receivable by it in respect of Libor Loans, and of the additional
amounts required to compensate Bank in respect of any Additional Costs, shall
be conclusive and final, absent manifest error.
This Addendum is executed as of the date first written above.
BORROWER BANK
TEKELEC IMPERIAL BANK,
- -------------------------------------- a California banking corporation
a Corporation
------------------------------------ By /s/ NUNILO SOLER
-----------------------------------
By /s/ GILLES C. GODIN Nunilo Soler
------------------------------------ Its Vice President
-------------------------------
Its V.P. Finance and CFO
-----------------------------------
By /s/ DOUGLAS W. MOXLEY
-----------------------------------
Its Corporate Controller
-----------------------------------
Page 4 of 4
<PAGE>
EXHIBIT 10.15
[IMPERIAL BANK LOGO]
Member FDIC
GENERAL SECURITY AGREEMENT
(TANGIBLE AND INTANGIBLE PERSONAL PROPERTY)
This Agreement is executed on October 22, 1996, by TEKELEC (hereinafter called
"Obligor"). In consideration of financial accommodations given, to be given or
continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a
security interest in (a) all property (i) delivered to Bank by Obligor, (ii)
which shall be in Bank's possession or control in any matter or for any purpose,
(iii) described below, (iv) now owned or hereafter acquired by Obligor of the
type or class described below and/or in any supplementary schedule hereto, or in
any financing statement filed by Bank and executed by or on behalf of Obligor;
(b) the proceeds, increase and products of such property, all accessions
thereto, and all property which Obligor may receive on account of such
collateral which Obligor will immediately deliver to Bank (collectively referred
to as "Collateral") to secure payment and performance of all of Obligor's
present or future debts or obligations to Bank, whether absolute or contingent
(hereafter referred to as "Debt"). Unless otherwise defined, words used herein
have the meanings given them in the California Uniform Commercial Code.
Collateral:
A. VEHICLE, VESSEL, AIRCRAFT:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Identification License or
Year Make/Manufacturer Model and Serial No. Registration No. New or Used
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Engine or other equipment: _____________________________________________________________
(For aircraft - original ink signature on copy to FAA)
B. DEPOSIT ACCOUNTS:
Type ________________________ Account Number ___________________ Amount $ ______________
In name of ______________________________________ Depository ___________________________
AND ALL EXTENSIONS OR RENEWALS THEREOF.
</TABLE>
C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe)
All personal property, whether presently existing or hereafter created
or acquired, including but not limited to: All accounts, chattel paper,
documents, instruments, money, deposit accounts and general intangibles
including returns, repossessions, books and records relating thereto,
and equipment containing said books and records. All goods including
equipment and inventory. All proceeds including, without limitation,
insurance proceeds. All guarantees and other security therefor.
The collateral not in Bank's possession will be located at:
26580 West Agoura Rd, Calabasas, CA 91302
5151 McCrimmon Pkwy, Ste. 216, Morrisville, NC
[ ] If checked, the Obligor is executing this Agreement as an Accommodation
Debtor only and the Obligor's liability is limited to the security interest
granted in the Collateral described herein. The party being accommodated is
___________________ ("Borrower").
All the terms and provisions on the reverse side hereof are incorporated herein
as though set forth in full, and constitute a part of this Agreement.
Signature
Name (indicate title, if applicable) Address
TEKELEC BY /s/ GILLES C. GODIN 26580 West Agoura Road
- -------------------------- -------------------------- --------------------------
V.P. Finance & CFO
BY /s/ DOUGLAS W. MOXLEY Calabasas, CA 91302-
- -------------------------- -------------------------- --------------------------
Corporate Controller
COPY FOR YOUR INFORMATION
- -------------------------- -------------------------- --------------------------
Page 2 of 2
<PAGE>
SECURITY AGREEMENT (CONTINUED)
Obligor represents, warrants and agrees:
1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of
collecting the Debt, of protecting, insuring or realizing on Collateral, and any
expenditure of Bank pursuant hereto, including attorneys' fees and expenses,
with interest at the rate of 24% per year, or the rate applicable to the Debt,
whichever is less, from the date of expenditure, and (c) any deficiency after
realization of Collateral.
2. Obligor will use the proceeds of any loan that becomes Debt hereunder
for the purpose indicated on the application therefore, and will promptly
contract to purchase and pay the purchase price of any property which becomes
Collateral hereunder from the proceeds of any loan made for that purpose.
3. As to all Collateral in Obligor's possession (unless specifically
otherwise agreed to by Bank in writing), Obligor will:
(a) Have, or has, possession of the Collateral at the location
disclosed to Bank and will not remove the Collateral from the location.
(b) Keep the Collateral separate and identifiable.
(c) Maintain the Collateral in good and saleable condition, repair
it if necessary, clean, feed, shelter, water, medicate, fertilize,
cultivate, irrigate, prune and otherwise deal with the Collateral in all
such ways as are considered good practice by owners of like property,
use it lawfully and only as permitted by insurance policies, and permit
Bank to inspect the Collateral at any reasonable time.
(d) Not sell, contract to sell, lease, encumber or transfer the
Collateral (other than inventory Collateral) until the Debt has been
paid, even though Bank has a security interest in proceeds of such
Collateral.
4. As to Collateral which is inventory and accounts, Obligor:
(a) May, until notice from Bank, sell, lease or otherwise dispose of
inventory Collateral in the ordinary course of business only, and
collect the cash proceeds thereof.
(b) Will, upon notice from Bank, deposit all cash proceeds as
received in a demand deposit account with Bank, containing only such
proceeds and deliver statements identifying units of inventory disposed
of, accounts which gave rise to proceeds, and all acquisitions and
returns of inventory as required by Bank.
(c) Will receive in trust, schedule on forms satisfactory to the
Bank and deliver to Bank all non-cash proceeds other than inventory
received in trade.
(d) If not in default, may obtain release of Bank's interest in
individual units of inventory upon request, therefore, payment to Bank
of the release price of such units as shown on any Collateral schedule
supplementary hereto, and compliance herewith as to proceeds thereof.
5. As to Collateral which are accounts, chattel paper, general intangibles
and proceeds described in 4(c) above, Obligor warrants, represents and agrees:
(a) All such Collateral is genuine, enforceable in accordance with
its terms, free from default, prepayment, defense and conditions
precedent (except as disclosed to and accepted by Bank in writing), and
is supported by consecutively numbered invoices to, or rights against,
the debtors thereon. Obligor will supply Bank with duplicate invoices or
other evidence of Obligor's rights on Bank's request;
(b) All persons appearing to be obligated on such Collateral have
authority and capacity to contract;
(c) All chattel paper is in compliance with law as to form, content
and manner of preparation and execution and has been properly
registered, recorded, and/or filed to protect Obligor's interest
thereunder;
(d) If an account debtor shall also be indebted to Obligor on
another obligation, any payment made by him not specifically designated
to be applied on any particular obligation shall be considered to be a
payment on the account in which Bank has a security interest. Should
any remittance include a payment not on an account, it shall be
delivered to Bank and, if no event of default has occurred, Bank shall
pay Obligor the amount of such payment;
(e) Obligor agrees not to compromise, settle or adjust any account
or renew or extend the time of payment thereof without Bank's prior
written consent.
6. Obligor owns all Collateral absolutely, and no other person has or
claims any interest in any Collateral, except as disclosed to and accepted by
Bank in writing. Obligor will defend any proceeding which may affect title to
or Bank's security interest in any Collateral, and will indemnify and hold Bank
free and harmless from all costs and expenses of Bank's defense.
7. Obligor will pay when due all existing or future charges, liens or
encumbrances on and all taxes and assessments now or hereafter imposed on or
affecting the Collateral and, if the Collateral is in Obligor's possession, the
realty on which the Collateral is located.
8. Obligor will insure the Collateral with Bank as loss payee in form and
amounts with companies, and against risks and liability satisfactory to Bank,
and hereby assigns such policies to Bank, agrees to deliver them to Bank at
Bank's request, and authorizes Bank to make any claim thereunder, to cancel the
insurance on Obligor's default, and to receive payment of and endorse any
instrument in payment of any loss or return premium. If Obligor should fail to
deliver the required policy or policies to the Bank, Bank may, at Obligor's cost
and expense, without any duty to do so, get and pay for insurance naming as the
insured, at Bank's option, either both Obligor and Bank, or only Bank, and the
cost thereof shall be secured by this Security Agreement, and shall be repayable
as provided in Paragraph 1 above.
9. Obligor will give Bank any information it requires. All information at
any time supplied to Bank by Obligor (including, but not limited to, the value
and condition of Collateral, financial statements, financing statements, and
statements made in documentary Collateral) is correct and complete, and Obligor
will notify Bank of any adverse change in such information. Obligor will
promptly notify Bank of any change of Obligor's residence, chief executive
office or mailing address.
10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act
which Obligor is obligated hereby to do, to exercise such rights as Obligor may
exercise, to use such equipment as Obligor might use, to enter Obligor's
premises to give notice of Bank's security interest, and to collect Collateral
and proceeds and to execute and file in Obligor's name any financing statements
and amendments thereto required to perfect Bank's security interest hereunder,
all to protect and preserve the Collateral and Bank's rights hereunder. Bank
may:
(a) Endorse, collect and receive delivery or payment of instruments
and documents constituting Collateral;
(b) Make extension agreements with respect to or affecting
Collateral, exchange it for other Collateral, release persons liable
thereon or take security for the payment thereof, and compromise
disputes in connection therewith;
(c) Use or operate Collateral for the purpose of preserving
Collateral or its value and for preserving or liquidating Collateral.
11. If more than one Obligor signs this Agreement, their liability is joint
and several. Any Obligor who is married agrees that recourse may be had against
separate property for the Debt. Discharge of any Obligor except for full
payment, or any extension, forbearance, change of rate of interest, or
acceptance, release or substitution of Collateral or any impairment or
suspension of Bank's rights against an Obligor, or any transfer of an Obligor's
interest to another shall not affect the liability of any other Obligor. Until
the Debt shall have been paid or performed in full, Bank's rights shall continue
even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank
to proceed against any Obligor before any other, or to pursue any other remedy;
(b) presentment, protest and notice of protest, demand and notice of nonpayment,
demand or performance, notice of sale, and advertisement of sale; (c) any right
to the benefit of or to direct the application of any Collateral until the Debt
shall have been paid; (d) and any right of subrogation to Bank until Debt shall
have been paid or performed in full.
12. Upon default, at Bank's option, without demand or notice, all or any
part of the Debt shall immediately become due. Bank shall have all rights given
by law, and may sell, in one or more sales, Collateral in any county where Bank
has an office, Bank may purchase at such sale. Sales for cash or on credit to a
wholesaler, retailer or user of the Collateral, or at public or private auction,
are all to be considered commercially reasonable. Bank may require Obligor to
assemble the Collateral and make it available to Bank at the entrance to the
location of the Collateral, or a place designated by Bank.
Defaults shall include:
(a) Obligor's failure to pay or perform this or any agreement with
Bank or breach of any warranty herein, or Borrower's failure to pay or
perform any agreement with Bank.
(b) Any change in Obligor's or Borrower's financial condition which
in Bank's judgment impairs the prospect of Borrower's payment or
performance.
(c) Any actual or reasonably anticipated deterioration of the
Collateral or in the market price thereof which causes it, in Bank's
judgment, to become unsatisfactory as security.
(d) Any levy or seizure against Borrower or any of the Collateral.
(e) Death, termination of business, assignment for creditors,
insolvency, appointment of receiver, or the filing of any petition under
bankruptcy or debtor's relief laws of, by or against Obligor or Borrower
or any guarantor of the Debt.
(f) Any warranty or representation which is false or is believed in
good faith by Bank to be false.
13. Bank's acceptance of partial or delinquent payments or the failure of
Bank to exercise any right or remedy shall not waive any obligation of Obligor
or Borrower or right of Bank to modify this Agreement, or waive any other
similar default.
14. On transfer of all or any part of the Debt, Bank may transfer all or any
part of the Collateral. Bank may deliver all or any part of the Collateral to
any Obligor at any time. Any such transfer or delivery shall discharge Bank
from all liability and responsibility with respect to such Collateral
transferred or delivered. This Agreement benefits Bank's successors and assigns
and binds Obligor's heirs, legatees, personal representatives, successors and
assigns. Obligor agrees not to assert against any assignee of Bank any claim or
defense that may exist against Bank. Time is of the essence. This Agreement
and supplementary schedules hereto contain the entire security agreement between
Bank and Obligor. Obligor will execute any additional agreements, assignments
or documents reasonably required by Bank to carry this Agreement into effect.
15. This Agreement shall be governed by and construed in accordance with the
laws of the State of California, to the jurisdiction of whose courts the Obligor
hereby agrees to submit. Obligor agrees that service of process may be
accomplished by any means authorized by California law. All words used herein
in the singular shall be considered to have been used in the plural where the
context and construction so require.
Page 2 of 2
<PAGE>
EXHIBIT 11.1
<TABLE>
TEKELEC
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(thousands, except per share data)
<CAPTION>
PRIMARY YEAR ENDED DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) ............................. $ (2,511) $ 6,311 $ 4,460
============ ============ ============
Basis for computation of primary earnings
per common and common equivalent share:
Weighted average number of shares
outstanding during period ..................... 11,775 10,529 8,684
Weighted average (incremental) common
share equivalent after considering the
effects of options exercised and canceled
during the period and after assumed
repurchase of treasury shares -- treasury
stock method .................................. -- 1,531 866
------------ ------------ ------------
11,775 12,060 9,550
============ ============ ============
Earnings (Loss) per share ..................... $ (0.21) $ 0.52 $ 0.47
============ ============ ============
<CAPTION>
FULLY DILUTED YEAR ENDED DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss) ............................. $ (2,511) $ 6,311 $ 4,460
============ ============ ============
Basis for computation of fully diluted earnings
per common and common equivalent share:
Weighted average number of shares
outstanding during period ..................... 11,775 10,529 8,684
Weighted average (incremental) common
share equivalent after considering the
effects of options exercised and canceled
during the period and after assumed
repurchase of treasury shares -- treasury
stock method .................................. -- 1,534 1,676
------------ ------------ ------------
11,775 12,063 10,360
============ ============ ============
Earnings (Loss) per share ..................... $ (0.21) $ 0.52 $ 0.43
============ ============ ============
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
STATE OR OTHER JURISDICTION OF
NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION
- ---------------------------------------------- ------------------------------
Tekex Corporation California
Tekex Limited U.S. Virgin Islands
Tekelec Ltd. Japan
Tekelec Canada Inc. Canada
Tekelec India Private Limited India
Chameleon Network Systems, Limited United Kingdom
Protocol Technologies, Inc. California
Chameleon Network Systems California
- --------------------------------
* The subsidiaries of the Registrant do not do business under any name other
than as listed above.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following
Registration Statements of Tekelec on Form S-8 (Registration Nos. 33-48079,
33-82124, 33-60611 and 333-05933) and on Form S-3 (Registration Nos. 33-34835
and 33-62035) of our report dated February 5, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Tekelec as
of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995
and 1994, which report is included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Sherman Oaks, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000790705
<NAME> TEKELEC
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,211
<SECURITIES> 17,913
<RECEIVABLES> 19,775
<ALLOWANCES> 368
<INVENTORY> 8,116
<CURRENT-ASSETS> 64,394
<PP&E> 25,993
<DEPRECIATION> 17,819
<TOTAL-ASSETS> 82,518
<CURRENT-LIABILITIES> 20,767
<BONDS> 0
0
0
<COMMON> 57,049
<OTHER-SE> 4,702
<TOTAL-LIABILITY-AND-EQUITY> 82,518
<SALES> 72,126
<TOTAL-REVENUES> 72,126
<CGS> 26,682
<TOTAL-COSTS> 26,682
<OTHER-EXPENSES> 47,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (284)
<INCOME-TAX> 2,227
<INCOME-CONTINUING> (2,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,511)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
