<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26580 W. AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(Address and zip code of principal executive offices)
(818) 880-5656
(Registrant's telephone number, including area code)
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 [ ]
As of August 3, 1998, there were 53,798,655 shares of the registrant's
common stock, without par value, outstanding.
<PAGE> 2
TEKELEC
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Income Statements for the three and six
months ended June 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income for the three
and six months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flow for the six
months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, December 31,
1998 1997
------------- -------------
(thousands, except share data)
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 53,200 $ 38,748
Short-term investments, at fair value .............. 26,435 19,773
Accounts and notes receivable, less
allowances of $634 and $469, respectively ........ 37,569 29,141
Inventories ........................................ 10,822 11,281
Amounts due from related parties ................... 1,844 2,286
Income taxes receivable ............................ 58 805
Deferred income taxes, net ......................... 8,352 8,309
Prepaid expenses and other current assets .......... 2,175 1,760
------------- -------------
Total current assets ........................... 140,455 112,103
Long-term investments, at fair value ................... 13,744 11,997
Property and equipment, net ............................ 9,770 9,841
Deferred income taxes, net ............................. 2,164 1,999
Other assets ........................................... 555 525
------------- -------------
Total assets ................................... $ 166,688 $ 136,465
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ............................. $ 6,976 $ 4,919
Accrued expenses ................................... 8,258 5,862
Accrued payroll and related expenses ............... 3,802 6,846
Current portion of deferred revenues ............... 9,572 7,693
Income taxes payable ............................... 1,778 429
------------- -------------
Total current liabilities ...................... 30,386 25,749
Long-term portion of deferred revenues ............. 2,325 2,839
------------- -------------
Total liabilities .............................. $ 32,711 $ 28,588
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
200,000,000 shares authorized; 53,717,339 and
52,252,086 shares issued and outstanding,
respectively ................................... 87,616 75,627
Retained earnings .................................. 47,896 32,875
Cumulative translation adjustment .................. (1,535) (625)
------------- -------------
Total shareholders' equity ..................... 133,977 107,877
------------- -------------
Total liabilities and shareholders' equity ..... $ 166,688 $ 136,465
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
TEKELEC
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Sales to third parties ....................... $ 41,669 $ 24,279 $ 75,367 $ 43,619
Sales to related parties ..................... 1,280 798 2,490 2,035
------------- ------------- ------------- -------------
Total revenues ........................... 42,949 25,077 77,857 45,654
COSTS AND EXPENSES:
Cost of goods sold ........................... 14,131 9,012 25,536 15,690
Research and development ..................... 5,783 4,789 11,351 9,257
Selling, general and administrative .......... 10,659 7,914 20,292 15,481
Insurance recovery ........................... -- -- (1,663) --
------------- ------------- ------------- -------------
Total costs and expenses ................. 30,573 21,715 55,516 40,428
------------- ------------- ------------- -------------
Income from operations ........................... 12,376 3,362 22,341 5,226
Other income (expense):
Interest, net ................................ 1,150 513 2,129 1,029
Other, net ................................... (38) (29) (247) (12)
------------- ------------- ------------- -------------
Total other income ....................... 1,112 484 1,882 1,017
------------- ------------- ------------- -------------
Income before provision for income taxes ......... 13,488 3,846 24,223 6,243
Provision for income taxes ................... 5,123 476 9,202 1,245
------------- ------------- ------------- -------------
NET INCOME ............................... $ 8,365 $ 3,370 $ 15,021 $ 4,998
============= ============= ============= =============
EARNINGS PER SHARE:
Basic ........................................ $ 0.16 $ 0.07 $ 0.28 $ 0.10
Diluted ...................................... 0.14 0.06 0.26 0.09
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ........................................ 53,434 49,856 53,043 49,353
Diluted ...................................... 59,049 55,176 58,760 54,257
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
(thousands)
<S> <C> <C> <C> <C>
NET INCOME ....................................... $ 8,365 $ 3,370 $ 15,021 $ 4,998
Other comprehensive income:
Foreign currency translation adjustments ..... (607) 1,128 (910) 331
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME ............................. $ 7,758 $ 4,498 $ 14,111 $ 5,329
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
------------- -------------
(thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .................................................. $ 15,021 $ 4,998
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 2,722 2,228
Deferred income taxes ....................................... (245) --
Changes in current assets and liabilities:
Accounts and notes receivable ........................... (8,705) (6,509)
Inventories ............................................. 384 (4,784)
Amounts due from related parties ........................ 441 7
Income taxes receivable ................................. 733 --
Prepaid expenses and other current assets ............... (422) (1,836)
Trade accounts payable .................................. 2,254 186
Accrued expenses ........................................ 2,449 1
Accrued payroll and related expenses .................... (3,026) (26)
Deferred revenues ....................................... 1,401 6,694
Income taxes payable .................................... 8,170 (192)
------------- -------------
Total adjustments ....................................... 6,156 (4,231)
------------- -------------
Net cash provided by operating activities .............. 21,177 767
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities ..... 17,000 15,000
Purchase of available-for-sale securities ................... (25,409) (8,051)
Purchase of property and equipment .......................... (2,704) (3,304)
(Increase) Decrease in other assets ......................... (64) 11
------------- -------------
Net cash provided by (used in) investing activities ..... (11,177) 3,656
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 5,219 3,337
------------- -------------
Net cash provided by financing activities ............... 5,219 3,337
------------- -------------
Effect of exchange rate changes on cash ......................... (767) 293
------------- -------------
Net change in cash and cash equivalents ..................... 14,452 8,053
Cash and cash equivalents at beginning of period ................ 38,748 17,211
------------- -------------
Cash and cash equivalents at end of period ...................... $ 53,200 $ 25,264
============= =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITY:
Tax benefit related to stock options ........................ $ 6,770 $ --
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. BASIS OF PRESENTATION
The consolidated financial statements are unaudited, other than the
consolidated balance sheet at December 31, 1997, and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
condition, operating results and cash flows for the interim periods.
The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year. Certain
items shown in the prior financial statements have been reclassified to conform
with the presentation of the current period.
The Company operates under a thirteen-week calendar quarter. For
financial statement presentation purposes, however, the reporting periods are
referred to as ended on the last calendar day of the quarter. The accompanying
financial statements for the three and six months ended June 30, 1998 and 1997
are for the thirteen and twenty-six weeks ended July 3, 1998 and June 27, 1997,
respectively.
In 1998, the Company adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition," which addresses software revenue recognition under
generally accepted accounting principles. The adoption of SOP 97-2 did not
result in a significant change in the Company's revenue recognition practices.
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," and accordingly has included a
separate Statement of Comprehensive Income. Comprehensive income generally
represents all changes in shareholders' equity during the period except those
resulting from investments by, or distributions to, shareholders.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1997
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
7
<PAGE> 8
B. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 establishes standards for public enterprises'
reporting of information about operating segments in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997 and requires
restatement of earlier periods presented; however, the interim reporting
provisions of SFAS No. 131 are not required to be applied in the initial year of
adoption. Management is currently evaluating the requirements of SFAS No. 131.
C. CERTAIN BALANCE SHEET ITEMS
The components of inventories are:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1998 1997
------------- -------------
(thousands)
<S> <C> <C>
Raw materials ......................................... $ 3,915 $ 3,738
Work in process ....................................... 1,593 2,448
Finished goods ........................................ 5,314 5,095
------------- -------------
$ 10,822 $ 11,281
============= =============
Property and equipment consist of the following:
Manufacturing and development equipment ............... $ 19,157 $ 17,645
Furniture and office equipment ........................ 8,413 7,773
Demonstration equipment ............................... 3,755 3,964
Leasehold improvements ................................ 1,471 1,397
------------- -------------
32,796 30,779
Less, accumulated depreciation and amortization ....... (23,026) (20,938)
------------- -------------
Property and equipment, net ........................... $ 9,770 $ 9,841
============= =============
</TABLE>
D. RELATED PARTY TRANSACTIONS
Sales to related parties consist of, and amounts due from related
parties are, the result of transactions between the Company and foreign
affiliates controlled by the Company's Chairman of the Board.
E. INCOME TAXES
For the three- and six-month periods ended June 30, 1998, an estimated
effective tax rate of 38% was applied as compared with effective tax rates of
12% and 20% for the three- and six-month periods ended June 30, 1997,
respectively, and represented federal, state and foreign taxes on the Company's
income reduced primarily by research and development and foreign tax credits.
The provision for the three- and six-month periods ended June 30, 1997 were
principally foreign taxes on the income of the Company's Japanese subsidiary and
the provision for taxes on the Company's U.S.
8
<PAGE> 9
taxable income at the federal alternative minimum tax rate and applicable state
taxes, and reflected the Company's ability to utilize a portion of its prior
years' U.S. loss carryforwards.
F. BORROWINGS
In July 1998, the Company renewed its line of credit with a U.S. bank
and increased the maximum credit available under this line to $15.0 million. The
company also has lines of credit aggregating $2.5 million available to its
Japanese subsidiary from various Japan-based banks.
The Company's $15.0 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at, or in some cases
below, the U.S. prime rate (8.5% at June 30, 1998), and expires June 30, 2000 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. There have been no borrowings
under this credit facility.
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 $2.5 million with interest at the Japanese prime
rate (1.625% at June 30, 1998) plus 0.125% per annum which expire between
November 20, 1998, and March 31, 1999, if not renewed. There have been no
borrowings under these lines of credit.
G. MAJOR CUSTOMERS
Sales to Telkom SA Limited represented 14% and 16% of revenues for the
three- and six-month periods ended June 30, 1998, respectively, and sales to
Nextel represented 12% of revenues for the three-month period ended June 30,
1998. Sales to Bell Atlantic Corporation represented 15% and 13% of revenues for
the three- and six-month periods ended June 30, 1997, respectively, and sales to
Nippon Telegraph & Telephone represented 11% of revenues for the six-month
period ended June 30, 1997.
9
<PAGE> 10
H. EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per-share computations for the
three- and six-month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
NET INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
FOR THE THREE MONTHS ENDED JUNE 30, 1998: (thousands except per share amount)
<S> <C> <C> <C>
Basic EPS ................................... $ 8,365 53,434 $ 0.16
Effect of Dilutive Securities - Stock
Options and Warrants .................... -- 5,615
------------- -------------
Diluted EPS ................................. $ 8,365 59,049 $ 0.14
============= =============
FOR THE THREE MONTHS ENDED JUNE 30, 1997:
Basic EPS ................................... $ 3,370 49,856 $ 0.07
Effect of Dilutive Securities - Stock
Options and Warrants .................... -- 5,320
------------- -------------
Diluted EPS ................................. $ 3,370 55,176 $ 0.06
============= =============
FOR THE SIX MONTHS ENDED JUNE 30, 1998:
Basic EPS ................................... $ 15,021 53,043 $ 0.28
Effect of Dilutive Securities - Stock
Options and Warrants .................... -- 5,717
------------- -------------
Diluted EPS ................................. $ 15,021 58,760 $ 0.26
============= =============
FOR THE SIX MONTHS ENDED JUNE 30, 1997:
Basic EPS ................................... $ 4,998 49,353 $ 0.10
Effect of Dilutive Securities - Stock
Options and Warrants .................... -- 4,904
------------- -------------
Diluted EPS ................................. $ 4,998 54,257 $ 0.09
============= =============
</TABLE>
I. COMMON STOCK
All references to numbers of shares and per share amounts have been
retroactively adjusted to reflect the two-for-one split of the Company's common
stock distributed July 6, 1998 to all shareholders of record on June 19, 1998.
10
<PAGE> 11
ITEM 2. 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 Item 1 of this Quarterly Report and the Consolidated
Financial Statements and Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain consolidated income statement items bear to total
revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
--------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ............................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 32.9 35.9 32.8 34.4
------------- ------------- ------------- -------------
Gross profit ........................ 67.1 64.1 67.2 65.6
Research and development ............ 13.5 19.1 14.6 20.3
Selling, general & administrative ... 24.8 31.6 26.0 33.9
Insurance recovery .................. -- -- (2.1) --
------------- ------------- ------------- -------------
Total operating expenses ............ 38.3 50.7 38.5 54.2
------------- ------------- ------------- -------------
Income from operations .............. 28.8 13.4 28.7 11.4
Interest and other income, net ...... 2.6 1.9 2.4 2.2
------------- ------------- ------------- -------------
Income before provision for
income taxes ...................... 31.4 15.3 31.1 13.6
Provision for income taxes .......... 11.9 1.9 11.8 2.7
------------- ------------- ------------- -------------
Net income .......................... 19.5% 13.4% 19.3% 10.9%
============= ============= ============= =============
</TABLE>
11
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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
-------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Network switching ................. 65% 52% 63% 47%
Intelligent network diagnostics ... 28 31 28 35
Data network diagnostics .......... 7 17 9 18
------------- ------------- ------------- -------------
Total ......................... 100% 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
-----------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North America .......... 62% 73% 59% 69%
Japan .................. 12 13 14 18
Europe ................. 6 5 5 5
Rest of the World ...... 20 9 22 8
----------- ----------- ----------- -----------
Total ............. 100% 100% 100% 100%
=========== =========== =========== ===========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1997
Revenues. The Company's revenues increased by $17.9 million, or 71%,
during the second quarter of 1998 due primarily to higher sales of network
switching products and intelligent network diagnostics products, partially
offset by lower sales of data network diagnostics products.
Revenues from switching products increased by $15.1 million, or 116%, to
$28.1 million due primarily to increased EAGLE STP market acceptance worldwide
and secondarily to higher sales of software enhancements and upgrades to the
Company's larger EAGLE STP installed base.
Revenues from intelligent network diagnostics products increased by $4.0
million, or 51%, due primarily to higher sales of the Company's MGTS products
internationally and sales of MGTS-related development services in Japan.
12
<PAGE> 13
Revenues from data network diagnostics products decreased by $1.2
million, or 30%, due to lower sales of the Company's Chameleon products,
particularly in Japan, partially offset by increased sales of third-party data
diagnostics products in Japan by the Company's Japanese subsidiary.
Revenues in North America increased by $8.4 million, or 46%, primarily
as a result of higher EAGLE STP sales. Sales in Japan increased by $1.9 million,
or 59%, due to higher sales of MGTS-related development services and third-party
data diagnostics products, partially offset by lower Chameleon product sales.
Revenues in Europe increased by $1.2 million, or 102%, due to higher EAGLE STP
and MGTS product sales. Other international revenues increased by $6.3 million,
or 279%, due primarily to a large EAGLE STP sale in South Africa.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $826,000, or 2%, and decreased net income by $13,000, or
less than 1%, in the second quarter of 1998.
The Company believes that its future revenue growth depends in large
part upon a number of factors, including the continued market acceptance of the
Company's switching and intelligent network diagnostics products, particularly
the EAGLE STP product, and new applications for the EAGLE STP. The Company
expects that switching product sales will continue to grow in 1998 both in
dollars and as a percentage of total revenues, although at a lower rate of
growth than in 1997.
Gross Profit. Gross profit as a percentage of revenues increased to
67.1% in the second quarter of 1998 compared with 64.1% in the second quarter of
1997. Overall gross profit percentage benefited from higher switching product
margins due to sales of larger EAGLE STP systems combined with increased
revenues from STP software and upgrades, and improved manufacturing efficiencies
as a result of higher sales volumes.
Research and Development. Research and development expenses increased
overall by $1.0 million, or 21%, and decreased as a percentage of revenue to 14%
in the second quarter of 1998 from 19% in the second quarter of 1997. The dollar
increase was attributable principally to increased expenses incurred in
connection with the hiring of additional personnel for product development and
enhancements primarily for switching and intelligent network diagnostics
products. Based on expected revenues and expense levels, the Company believes
that research and development expenses will continue to be higher in dollars and
lower as a percentage of total revenues for the remainder of 1998 when compared
with 1997.
Selling, General and Administrative Expenses. Although selling, general
and administrative expenses increased by $2.7 million, or 35%, such expenses
decreased as a percentage of revenues to 25% in the second quarter of 1998 from
32% in the second quarter of 1997. The dollar increase was primarily due to
increased personnel and commission expenses incurred as a result of the higher
sales levels. Based on expected revenues and expense levels, the Company
believes that selling, general and administrative expenses will continue to be
higher in dollars and lower as a percentage of total revenues for the remainder
of 1998 when compared with 1997.
13
<PAGE> 14
Interest Income. Interest income increased by $637,000, or 124%, during
the second quarter of 1998 due primarily to higher cash and investment balances
compared to the second quarter of 1997.
Income Taxes. For the second quarter of 1998, an estimated effective tax
rate of 38% was applied as compared with an effective tax rate of 12% for the
second quarter of 1997, and represented federal, state and foreign taxes on the
Company's income reduced primarily by research and development and foreign tax
credits. The provision for the second quarter of 1997 was principally foreign
taxes on the income of the Company's Japanese subsidiary and the provision for
taxes on the Company's U.S. taxable income at the federal alternative minimum
tax rate and applicable state taxes, and reflected the Company's ability to
utilize a portion of its prior years' U.S. loss carryforwards.
The Company expects that its effective tax rate for the remainder of
1998 should approximate 38%; however, changes in assumptions regarding the
Company's ability to utilize its deferred income tax assets and the level of
various tax credits generated during 1998 may cause the effective tax rate to
vary.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 1997
Revenues. The Company's revenues increased by $32.2 million, or 71%,
during the first six months of 1998 due to higher sales primarily of network
switching products and secondarily of intelligent network diagnostics products.
Revenues from switching products increased by $27.7 million, or 128%, to
$49.4 million primarily due to increased EAGLE STP market acceptance worldwide
including substantially higher international sales and higher sales of EAGLE STP
features, software enhancements and upgrades to the Company's larger EAGLE STP
installed base.
Revenues from intelligent network diagnostics products increased by $5.8
million, or 36%, to $21.7 million, due primarily to sales of MGTS-related
development services in Japan and continued strong demand for the Company's MGTS
products worldwide.
Revenues from data network diagnostics products decreased by $1.3
million, or 16%, due primarily to lower second quarter sales of the Company's
Chameleon products, particularly in Japan, partially offset by increased sales
of third party data diagnostics products in Japan by the Company's Japanese
subsidiary.
14
<PAGE> 15
Revenues in North America increased by $14.6 million, or 46%, primarily
as a result of higher EAGLE STP sales. Sales in Japan increased by $2.9 million,
or 36%, due to higher sales of MGTS-related development services and third party
data diagnostics products, partially offset by lower Chameleon product sales.
Revenues in Europe increased by $1.6 million, or 66%, due primarily to higher
MGTS and EAGLE STP product sales. Other international revenues increased by
$13.2 million, or 368%, due primarily to large EAGLE STP sales in South Africa.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $1.2 million, or 1%, and decreased net income by $39,000,
or less than 1%, in the first six months of 1998.
Gross Profit. Gross profit as a percentage of revenues increased to
67.2% in the first six months of 1998 compared with 65.6% in the first six
months of 1997, due to higher switching product margins attributable primarily
to sales of larger EAGLE STP systems and increased revenues from STP software
and upgrades, and improved manufacturing efficiencies due to higher sales
volumes.
Research and Development. Although research and development expenses
increased overall by $2.1 million, or 23%, such expenses decreased as a
percentage of revenue to 15% in the first six months of 1998 from 20% in the
first six months of 1997. The dollar increase was attributable principally to
increased expenses incurred in connection with the hiring of additional
personnel for product development and enhancements primarily for switching and
intelligent network diagnostics products.
Selling, General and Administrative Expenses. Although selling, general
and administrative expenses increased by $4.8 million, or 31%, such expenses
decreased as a percentage of revenues to 26% in the first six months of 1998
from 34% in the first six months of 1997. The dollar increase was due primarily
to increased personnel and commission expenses incurred as a result of the
higher sales levels.
Insurance Recovery. During the first quarter of 1998, the Company
recorded the proceeds from the settlement of an insurance claim in the amount of
approximately $1.7 million, net of applicable costs. The net proceeds were
recorded as a decrease in operating expenses in the first quarter of 1998.
Interest Income. Interest income increased by $1.1 million, or 107%,
during the first six months of 1998 due primarily to higher cash and investment
balances compared to the first six months of 1997.
Income Taxes. For the first six months of 1998, an estimated effective tax
rate of 38% was applied as compared with an effective tax rate of 20% for the
first six months of 1997, and represented federal, state and foreign taxes on
the Company's income reduced primarily by research and development and foreign
tax credits. The provision for 1997 was principally foreign taxes on the income
of the Company's Japanese subsidiary and the provision for taxes on the
Company's U.S.
15
<PAGE> 16
taxable income at the federal alternative minimum tax rate and applicable state
taxes, and reflected the Company's ability to utilize a portion of its prior
years' U.S. loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended June 30, 1998, cash and cash
equivalents increased by $14.5 million to $53.2 million, after a net transfer of
approximately $8.4 million to short-term and long-term investments. Operating
activities, net of the effects of exchange rate changes on cash, provided $20.4
million. Financing activities, which represented proceeds from the issuance of
Common Stock upon the exercise of options and warrants, provided $5.2 million,
and $2.7 million was used for capital expenditures.
Accounts receivable, including amounts due from related parties,
increased by 25% during the first six months of 1998 due primarily to higher
international sales in the second quarter of 1998 compared to the fourth quarter
of 1997, which typically carry longer payment terms. Trade accounts payable and
accrued expenses increased by 42% and 41%, respectively, during the first six
months of 1998, primarily due to the timing of purchases, and accrued payroll
decreased by 44% primarily due to the payment in 1998 of 1997 employee bonuses.
Deferred revenues increased by 13% during the first six months of 1998 primarily
as a result of the timing of EAGLE STP installations and related revenues.
Capital expenditures of $2.7 million during the first six months of 1998
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.
In July 1998, the Company renewed its line of credit with a U.S. bank
and increased the maximum credit available under this line to $15.0 million. The
company also has lines of credit aggregating $2.5 million available to its
Japanese subsidiary from various Japan-based banks.
The Company's $15.0 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at, or in some cases
below, the U.S. prime rate (8.5% at June 30, 1998), and expires June 30, 2000 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. There have been no borrowings
under this credit facility.
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 $2.5 million with interest at the Japanese prime
rate (1.625% at June 30, 1998) plus 0.125% per annum which expire between
November 20, 1998 and March 31, 1999, if not renewed. There have been no
borrowings under these lines of credit.
Upon the expiration of the above-described credit facilities, the
Company believes that, if necessary, it would be able to arrange for credit
facilities on terms generally no less favorable than those described above.
16
<PAGE> 17
The Company believes that existing working capital, funds generated from
operations and current bank lines of credit should be sufficient to satisfy
anticipated operating requirements at least through 1998. Nonetheless, the
Company may seek additional sources of capital as necessary or appropriate to
fund acquisitions or to otherwise finance the Company's growth or operations;
however, there can be no assurance that such funds, if needed, will be available
on favorable terms, if at all.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for public enterprises' reporting of information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented;
however, the interim reporting provisions of SFAS No. 131 are not required to be
applied in the initial year of adoption. Management is currently evaluating the
requirements of SFAS No. 131.
READINESS FOR YEAR 2000
As the year 2000 approaches, a critical industry-wide issue has emerged
regarding how existing application software programs and operating systems can
accommodate the year 2000 date value. The Company is currently conducting a
comprehensive review of its computer systems, products and significant vendors
to identify the systems and products which could be affected by this issue.
Based on the results of the review conducted to date, management does not
anticipate that the Company will incur significant remediation expenses or be
required to invest heavily in computer system or product improvements in order
to be year 2000 compliant. To the extent the Company's products, systems or
significant vendors are not fully year 2000 compliant, there can be no assurance
that such noncompliance will not result in product failures, systems
interruptions or significant costs necessary to update software that, alone or
in the aggregate, would not have a material adverse effect on the Company's
business, financial condition, results of operations, cash flows or business
prospects.
17
<PAGE> 18
"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 are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that reflect the current belief,
expectations or intent of the Company's management. These statements are subject
to and involve certain risks and uncertainties including, but not limited to,
timing of significant orders and shipments, product mix, customer acceptance of
the Company's products, capital spending patterns of customers, competition and
pricing, new product introductions by the Company or its competitors, carrier
deployment of intelligent network services, the timing of research and
development expenditures, regulatory changes, general economic conditions and
other risks described in the Company's Annual Report on Form 10-K and in certain
of the Company's other Securities and Exchange Commission filings. Actual
results may differ materially from those expressed or implied in such
forward-looking statements.
18
<PAGE> 19
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 15, 1998, the Company held its 1998 Annual Meeting of
Shareholders (the "Annual Meeting").
(b) At the Annual Meeting, the following persons were elected as
directors of the Company. The number of votes cast for each director, as well as
the number of votes withheld, are listed opposite each director's name.
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES CAST FOR DIRECTOR VOTES WITHHELD
- ---------------- ----------------------- --------------
<S> <C> <C>
Robert V. Adams 42,651,260 1,432,774
Jean-Claude Asscher 43,628,580 455,454
Daniel L. Brenner 43,628,580 455,454
Michael L. Margolis 43,628,580 455,454
Howard Oringer 43,628,580 455,454
Jon F. Rager 43,628,580 455,454
</TABLE>
(c) At the Annual Meeting, the shareholders approved, with 35,775,316
votes cast in favor and 8,266,742 votes cast against, an amendment to the
Company's 1994 Stock Option Plan increasing the aggregate number of shares of
Common Stock authorized for issuance thereunder from 12,000,000 to 14,000,000.
There were 41,976 abstentions and no broker nonvotes with respect to this
matter.
(d) At the Annual Meeting, with 44,013,812 votes cast in favor, the
shareholders ratified the appointment of Coopers & Lybrand L.L.P. (now known as
PricewaterhouseCoopers LLP) as independent accountants of the Company for the
year ending December 31, 1998. 20,778 votes were cast against such ratification,
and there were 49,444 abstentions with respect to this matter.
All share numbers referenced above have been retroactively adjusted to
reflect the two-for-one stock split of the Company's common stock distributed
July 6, 1998 to shareholders of record on June 19, 1998.
ITEM 5. OTHER INFORMATION
Notice of any shareholder proposal to be presented at the Company's Annual
Meeting of Shareholders to be held in 1999 that is not submitted to the Company
pursuant to SEC Rule 14a-8 will be considered untimely if not received by the
Company on or before February 20, 1999.
19
<PAGE> 20
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Registrant
10.1 Employment Offer Letter dated April 1, 1998 between the
Registrant and Ronald W. Buckly
10.2 Credit Agreement dated October 22, 1996 between the Registrant
and Imperial Bank (1), as amended by First Amendment to Credit
Agreement dated July 15, 1998, together with Promissory Note of
the Registrant dated July 15, 1998
10.3 1994 Stock Option Plan, including forms of stock option
agreements(2), as amended February 4, 1995(3), March 3, 1995(3),
January 27, 1996(4), February 26, 1997(5), March 19, 1997(5)
and March 20, 1998
27.1 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only)
- -----------------------------
(1) Incorporated by reference to the Registrants Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1997.
(2) 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.
(3) 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.
(4) 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.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 333-28887) filed with the Commission
on June 10, 1997.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements 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
August 13, 1998
/s/ Michael L. Margolis
-------------------------------------
Michael L. Margolis
President and Chief Executive Officer
(Duly authorized officer)
/s/ Gilles C. Godin
-------------------------------------
Gilles C. Godin
Chief Financial Officer and
Vice President, Finance
(Principal financial and chief
accounting officer)
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation of the Registrant
10.1 Employment Offer Letter dated April 1, 1998 between the
Registrant and Ronald W. Buckly
10.2 First Amendment to Credit Agreement dated July 15, 1998, between
the Registrant and Imperial Bank, together with Promissory Note
of the Registrant dated July 15, 1998
10.3 Amendment to 1994 Stock Option Plan dated March 20, 1998
27.1 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only)
</TABLE>
<PAGE> 1
EXHIBIT 3.1
EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TEKELEC
I.
The name of the corporation is Tekelec.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California General
Corporation Law.
III.
The corporation is authorized to issue only one class of shares of stock,
designated "Common Stock," and the total number of shares which this
corporation is authorized to issue is two hundred million (200,000,000).
Upon amendment of this Article III, each outstanding share of Common Stock
is split up and converted into two (2) shares of Common Stock.
IV.
This corporation elects to be governed by all of the provisions of the
General Corporation Law of 1977, as amended, not otherwise applicable to it
under Chapter 23 thereof.
V.
(a) Limitations of Directors' Liability. The liability of the directors
of this corporation for monetary damages shall be eliminated to the fullest
extent permissible under California law.
(b) Indemnification of Corporate Agents. This corporation is authorized
to provide indemnification of its agents (as defined in Section 317 of the
California General Corporation Law) for breach of duty to this corporation and
its shareholders through bylaw provisions or through agreements with the
agents, or both, in excess of the indemnification otherwise permitted by such
Section 317, subject to the limits on such excess indemnification set forth in
Section 204 of the California General Corporation Law.
(c) Repeal or Modification. Any repeal or modification of the foregoing
provisions of this Article V by the shareholders of this corporation shall not
adversely affect any right or protection of a director or agent of this
corporation existing at the time of such repeal or modification.
<PAGE> 1
April 1, 1998
PERSONAL AND CONFIDENTIAL
Ronald W. Buckly
470 22nd Street
Santa Monica, CA 90402
Dear Ron:
On behalf of Tekelec, I am pleased to offer you employment as
Vice President and General Counsel of Tekelec, on the terms and conditions set
forth in this letter. As Vice President and General Counsel, you will report
directly to Tekelec's Chief Executive Officer, will be principally responsible
for Tekelec's legal matters and will have such other duties and responsibilities
as may be delegated to you from time to time by the Chief Executive Officer and
the Board of Directors. You may select your start date so long as it is on or
before April 15, 1998.
Your compensation and benefits will be as follows:
1. Your starting annual base salary will be $200,000 (i.e.,
$7,692.31 per bi-weekly period).
2. You will be eligible to participate in Tekelec's 1998 Officer
Bonus Plan, with your participation to be calculated as if you were a full time
employee as of January 1, 1998 and determined in accordance with a percentage of
your 1998 base salary. Under the terms of the 1998 Officer Bonus Plan, you will
be eligible to receive up to 50% of your annual base salary as a cash bonus if
Tekelec achieves certain financial milestones in 1998.
3. You will be entitled to take four weeks personal time
annually.
4. You will receive applicable benefits, including health,
dental, vision, long-term disability and life insurance, as are generally
provided to Tekelec's executive officers.
5. You will be offered the opportunity to participate in
Tekelec's Employee Stock Purchase Plan and 401(k) Plan upon your satisfaction of
the eligibility requirements for such plans.
6. You will be covered by Tekelec's Officer Severance Plan (a
copy of which has been previously provided to you).
<PAGE> 2
Ronald W. Buckly
April 1, 1998
Page 2
7. The Compensation Committee of Tekelec will grant to you stock
options (incentive stock options to the maximum extent permitted under law, with
the balance being nonstatutory stock options) under Tekelec's 1994 Stock Option
Plan (the "Plan") to purchase 90,000 shares of Tekelec Common Stock ("Options"),
effective as of the later of your start date or the date of the Compensation
Committee's action granting such options (the "grant date"). The exercise price
of your Options will be equal to the closing price of Tekelec's Common Stock on
the grant date (as reported in The Wall Street Journal on the first business day
following the grant date). Your Options will vest to the extent of 18,000 shares
on the one-year anniversary of your start date. The remaining 72,000 shares will
vest and become exercisable cumulatively in 16 equal quarterly installments of
4,500 shares each, with the first installment vesting on September 30, 1999 and
one additional installment vesting on the last day of each calendar quarter
thereafter as long as you remain an employee of Tekelec. Your Options will
expire, to the extent previously unexercised, upon the earlier of ten years from
the date of grant or a date not less than three months after you cease to be a
Tekelec employee as determined in accordance with the terms of the Plan. The
Options will in all respects be subject to the terms and provisions of the Plan
and the stock option agreement evidencing the grant of the Options. In addition
to the foregoing grant, it is anticipated that the Compensation Committee will
periodically, typically annually, consider whether additional options should be
granted to you while you remain an officer of the Company.
8. You may serve as "of counsel" to Bryan Cave LLP through
December 31, 1998, on such terms and conditions upon which you and Bryan Cave
may mutually agree; provided, that (i) your performance of your "of counsel"
responsibilities and duties does not materially interfere with the discharge of
your duties and responsibilities as Vice President and General Counsel of the
Company; and (ii) you agree to terminate such "of counsel" relationship or
modify the terms of such relationship upon 30 days notice if I determine, in my
sole discretion, that such termination or modification would be in the best
interests of the Company. Unless I advise you otherwise, you may continue your
"of counsel" relationship commencing January 1, 1999 subject to the conditions
(i) and (ii) in the immediately preceding sentence.
You are aware that Tekelec prohibits employees from unlawfully
using confidential or proprietary information belonging to any other person or
entity. By signing the enclosed copy of this letter, you agree not to disclose
or use or induce Tekelec or any of its employees to use any trade secrets or
confidential or proprietary information belonging to any of your former
employers.
As a condition of commencing your employment with Tekelec, you
will be required to sign Tekelec's standard "Confidentiality and Non-Disclosure
Agreement and Assignment of Rights" (a copy of which will be provided to you
under separate cover). As with every Tekelec employee, you reserve the right to
terminate your employment at any time, and we
<PAGE> 3
Ronald W. Buckly
April 1, 1998
Page 3
reserve the right to terminate your employment at will. We hope and expect,
however, that this will be a long and mutually beneficial relationship.
This letter agreement contains our entire understanding with
respect to your employment with Tekelec. The provisions of this letter may be
amended only by a writing signed by you and Tekelec. If you have any questions
about the meaning of any of the terms or provisions included herein, please let
me know at your earliest convenience. This letter agreement shall be construed
under the laws of California.
Ron, we believe that Tekelec can provide you with opportunities
for professional growth and financial return. We look forward to working with
you and to a mutually fulfilling and rewarding relationship.
If this letter agreement is acceptable to you, then please
acknowledge your acceptance by signing and dating the enclosed copy of this
letter agreement where indicated below and faxing and returning such signed copy
to me for receipt no later than April 6, 1998.
Sincerely,
/s/ MICHAEL L. MARGOLIS
------------------------------------
Michael L. Margolis
Chief Executive Officer and President
Acknowledged and Accepted:
/s/ RONALD W. BUCKLY
- -------------------------------------- Date: April 1, 1998
Ronald W. Buckly
<PAGE> 1
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment ("Amendment") is made as of July 15, 1998 by and between
Tekelec, a California corporation ("Borrower") and Imperial Bank, a California
banking corporation ("Bank") and amends that certain Credit Agreement
("Agreement") dated as of October 22, 1996, by and between Borrower and Bank as
follows:
1. Section 1.01 is hereby amended and restated in its entirety to read as
follows:
1.01 REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of
this Agreement, between the date of this Agreement and June 30, 2000 (the
"Commitment Termination Date"), provided that no event of default then
has occurred and is continuing, Bank will provide the Revolving Credit
Commitment of Fifteen Million Dollars ($15,000,000) for (a) the issuance
of Letters of Credit ("Letters of Credit") and (b) loans ("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 Date, Borrower may borrow, repay and reborrow
loans under the Revolving Credit Commitment.
2. Section 4.06 is hereby amended and restated in its entirety to provide as
follows:
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 60,000,000.
3. Section 4.09(f) is hereby amended and restated in its entirety to provide
as follows:
f. Within sixty (60) days after and as of the last day of
December of each year, and the last day of June of each year, copies of
Borrower's summary accounts payable and accounts receivable agings.
FIRST AMENDMENT-TEKELEC PAGE 1
<PAGE> 2
4. Borrower shall pay to Bank a Commitment Fee, due and payable upon
Borrower's execution and delivery to Bank of this Amendment, equal to
$120,000 ($60,000 for each year by which Bank's commitment is extended by
this Amendment).
5. Judicial Reference.
(a) Other than (i) nonjudicial foreclosure and all matters in
connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, any security agreement, any
note or any other agreement or document executed by Borrower in
connection with this transaction ("Loan Documents"), which controversy,
dispute or claim is not settled in writing within thirty (30) days after
the "Claim Date" (defined as the date on which a party subject to any
Loan Document gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference
proceeding in California in accordance with the provisions of Section 638
et. seq. of the California Code of Civil Procedure, or their successor
section ("CCP"), which shall constitute the exclusive remedy for the
settlement of any controversy, dispute or claim concerning any Loan
Document, including whether such controversy, dispute or claim is subject
to the reference proceeding and except as set forth above, the parties
waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County
where the Real Property, if any, is located or Los Angeles County if none
(the "Court"). The referee shall be a retired Judge of the Court selected
by mutual agreement of the parties, and if they cannot so agree within
forty-five (45) days after the Claim Date, the referee shall be promptly
selected by the Presiding Judge of the Court (or his representative). The
referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection
should take and subscribe to the oath of office as provided for in Rule
244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP Section
170.6. The referee shall (a) be requested to set the matter for hearing
within sixty (60) days after the date of selection of the referee and (b)
try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any
decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP Section 644 in any court in the
State of California having jurisdiction. Any party may apply for a
reference proceeding at any time after thirty (30) days following notice
to any other party of the nature of the controversy, dispute or claim, by
filing a petition for a hearing and/or trial. All discovery permitted by
this Agreement shall be completed no later than fifteen (15) days before
the first hearing date established by the referee. The referee may extend
such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days
written notice, and request for production or inspection of documents
shall be responded to within ten (10) days after service. All disputes
FIRST AMENDMENT-TEKELEC PAGE 2
<PAGE> 3
relating to discovery which cannot be resolved by the parties shall be
submitted to the referee whose decision shall be final and binding upon
the parties. Pending appointment of the referee as provided herein, the
Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of
the reference proceeding. All proceedings and hearings conducted before
the referee, except for trial, shall be conducted without a court reporter
except that when any party so requests, a court reporter will be used at
any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter.
The costs of the court reporter at the trial shall be borne equally by the
parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable
orders that will be binding upon the parties. The referee shall issue a
single judgment at the close of the reference proceeding which shall
dispose of all of the claims of the parties that are the subject of the
reference. The parties hereto expressly reserve the right to contest or
appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the
right to findings of facts, conclusions of laws, a written statement of
decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a reference proceeding under
this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be
determined by the reference procedure herein described will be resolved
and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration
Act, Section 1280 through Section 1294.2 of the CCP as amended from time
to time. The limitations with respect to discovery as set forth
hereinabove shall apply to any such arbitration proceeding.
6. Except as provided above, the Agreement remains unchanged.
FIRST AMENDMENT-TEKELEC PAGE 3
<PAGE> 4
7. This Amendment is effective as of the date first written above and the
parties hereby confirm that the Agreement as amended is in full force and
effect.
TEKELEC ("Borrower") IMPERIAL BANK ("Bank")
By: /s/ GILLES C. GODIN By: /s/ NUNILO B. SOLER
--------------------------- -----------------------------
Name: Gilles C. Godin Name: Nunilo B. Soler
Title: V.P. Finance & CFO Title: Vice President
By: /s/ DOUGLAS W. MOXLEY
---------------------------
Name: Douglas W. Moxley
Title: Corporate Controller
FIRST AMENDMENT-TEKELEC PAGE 4
<PAGE> 5
[LOGO]
IMPERIAL BANK LIBOR ADDENDUM
Member FDIC TO NOTE
This Libor Addendum ("Addendum") is dated as of July 15, 1998, 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
0.00% 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 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*.
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. *$500,000.00
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 1.90% 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 (1), two (2) or
three (3) 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> 6
(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 are 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 of 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 of 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 of 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> 7
prepayment applies. Each partial prepayment of a Libor Loan shall be in an
amount not less than Five Hundred Thousand Dollars ($500,000.00) or such greater
amount which is an integral multiple of Five Hundred Thousand Dollars* 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.
*500,000.00
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> 8
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 on 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/ GILLES C. GODIN , By /s/ NILO B. SOLER
-------------------------------- ------------------------------
Nilo Soler
Its V.P. Finance & CFO Its Vice President
By /s/ DOUGLAS W. MOXLEY
--------------------------------'
Its Corporate Controller
--------------------------------
Page 4 of 4
<PAGE> 9
[IMPERIAL BANK LOGO]
PROMISSORY NOTE
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$15,000,000.00 07-15-1998 06-30-2000 BS
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: TEKELEC LENDER: IMPERIAL BANK
26580 W. AGOURA ROAD LOS ANGELES REGIONAL OFFICE
CALABASAS, CA 91302 201 N. FIGUEROA STREET
LOS ANGELES, CA 90012-2623
================================================================================
<TABLE>
<S> <C> <C>
PRINCIPAL AMOUNT: $15,000,000.00 INITIAL RATE; 8.500% DATE OF NOTE: JULY 15, 1998
</TABLE>
PROMISE TO PAY, TEKELEC ("BORROWER") PROMISES TO PAY TO IMPERIAL BANK
("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE
PRINCIPAL AMOUNT OF FIFTEEN MILLION & 00/100 DOLLARS ($15,000,000.00) OR SO MUCH
AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING
PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE
OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 2000. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING AUGUST 15,
1998, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. Subject to designation of a different interest rate
index by Borrower as provided below, the interest rate on this Note is subject
to change from time to time based on changes in an Index which is the Imperial
Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as
its Prime Rate of interest from time to time. Lender will tell Borrower the
current index rate upon Borrower's request. Borrower understands that Lender may
make loans based on other rates as well. The interest rate change will not occur
more often than each day. THE INDEX CURRENTLY IS 8.500%. THE INTEREST RATE TO BE
APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO
THE INDEX, RESULTING IN AN INITIAL RATE OF 8.500%. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
INTEREST RATE OPTIONS. The following interest rate options are available under
this Note:
(a) DEFAULT OPTION. The interest rate margin and index described in the
"VARIABLE INTEREST RATE" paragraph above (the "Default Option").
(b) LIBOR. A margin of 1.900 percentage points over LIBOR. For purposes of
this Note, LIBOR shall mean London Inter-Bank Offered Rate as provided in
the LIBOR ADDENDUM TO NOTE attached hereto and made a part hereof.
When the interest rate is based on a fixed rate, the rate shall be in effect for
a period of the number of days or months as indicated in the rate option
description (the "Interest Period"), in any case extended to the next succeeding
business day when necessary, beginning on a borrowing date, conversion date or
expiration date of the then current Interest Period. Adjustments in the interest
rate due to changes in the maximum nonusurious interest rate allowed (the
"Highest Lawful Rate") shall be made on the effective day of any change in the
Highest Lawful Rate.
Provided Borrower is not in default under this Note, Borrower may designate in
advance which of the above interest rate indexes shall be applicable to any loan
advance under this Note and shall designate any optional Interest Period
applicable to any fixed rate loan or advance. In the absence of any such
designation the interest rate option shall be the Default Option. Thereafter
unpaid principal balances under this Note may be converted (at the end of an
Interest Period if the index used to determine the interest rate therefore is a
fixed rate) to another of the above interest rate options, or continued for an
additional interest period, when applicable, as designated by Borrower in
advance; and in the absence of sufficient advance designation as to conversion
to or continuation of a fixed rate index, the index shall be converted to the
Default Option. Notwithstanding the foregoing, a fixed rate index may not be
elected for a loan or advance under this Note, nor any conversion to or
continuation of a fixed rate index be elected, if the Interest Period thereof
would extend beyond the maturity of this Note.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $250.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default; (a) cures the default within ten (10) days; or (b) if the
cure requires more than ten (10) days, immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 5.000 percentage points over the index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated, post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER
IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S
REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE
STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY
TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR
BORROWER AGAINST THE OTHER. (INITIAL HERE [INITIAL]). THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Note against any and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized
<PAGE> 10
07-15-1998 PROMISSORY NOTE PAGE 2
(Continued)
================================================================================
person. All oral requests shall be confirmed in writing on the day of the
request. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: GILLES C. GODIN, VICE
PRESIDENT/CFO; and DOUGLAS W. MOXLEY, AVP/CONTROLLER. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and all
matters in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this document ("Agreement"), which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil Procedure, or
their successor section "CCP"), which shall constitute the exclusive remedy for
the settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the
reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where the Real
Property, if any, is located or Los Angeles County if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual agreement of
the parties, and if they cannot so agree within forty-five (45) days after the
Claim Date, the referee shall be promptly selected by the Presiding Judge of
the Court (or his representative). The referee shall be appointed to sit as a
temporary judge, with all of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
170.6. The referee shall (a) be requested to set the matter for hearing within
sixty (60) days after the Claim Date and (b) try any and all issues of law or
fact and report a statement of decision upon them, if possible, within ninety
(90) days of the Claim Date. Any decision rendered by the referee will be
final, binding and conclusive and judgment shall be entered pursuant to CCP 644
in any court in the State of California having jurisdiction. Any party may
apply for a reference proceeding at any time after thirty (30) days following
notice to any other party of the nature of the controversy, dispute or claim,
by filing a petition for a hearing and/or trial. All discovery permitted by
this Agreement shall be completed no later than fifteen (15) days before the
first hearing date established by the referee. The referee may extend such
period in the event of a party's refusal to provide requested discovery for any
reason whatsoever, including, without limitation, legal objections raised to
such discovery or unavailability of a witness due to absence or illness. No
party shall be entitled to "priority" in conducting discovery. Depositions may
be taken by either party upon seven (7) days written notice, and request for
production or inspection of documents shall be responded to within ten (10)
days after service. All disputes relating to discovery which cannot be resolved
by the parties shall be submitted to the referee whose decision shall be final
and binding upon the parties. Pending appointment of the referee as provided
herein, the Superior Court is empowered to issue temporary and/or provisional
remedies, as appropriate.
2. Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time
and place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding.
All proceedings and hearings conducted before the referee, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
referee. The party making such a request shall have the obligation to arrange
for and pay for the court reporter. The costs of the court reporter at the
trial shall be borne equally by the parties.
3. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of law, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
4. In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute
between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, 1280 through 1294.2 of the CCP as amended
from time to time. The limitations with respect to discovery as set forth
hereinabove shall apply to any such arbitration proceeding.
CREDIT AGREEMENT. This Note is subject to the provisions of the Credit
Agreement dated October 22, 1996 and all amendments thereto and replacements
therefor.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
any applicable statute of limitations, presentment, demand for payment, protest
and notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also agree
that Lender may modify this loan without the consent of or notice to anyone
other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
TEKELEC
By: /s/ GILLES C. GODIN By: /s/ DOUGLAS W. MOXLEY
----------------------------------- --------------------------------
GILLES C. GODIN, VICE PRESIDENT/CFO DOUGLAS W. MOXLEY,AVP/CONTROLLER
================================================================================
Variable Rate, Line of Credit.
<PAGE> 11
SIGNATURE AUTHORIZATION
================================================================================
BORROWER: TEKELEC LENDER: Imperial Bank
26580 W. AGOURA ROAD Los Angeles Regional Office
CALABASAS, CA 91302 201 N. Figueroa Street
Los Angeles, CA 90012-2623
================================================================================
THIS SIGNATURE AUTHORIZATION IS ATTACHED TO AND BY THIS REFERENCE IS MADE A
PART OF EACH BORROWING RESOLUTION, DATED JULY 15, 1998, AND EXECUTED IN
CONNECTION WITH A LOAN OR OTHER FINANCIAL ACCOMMODATIONS BETWEEN IMPERIAL BANK
AND TEKELEC.
The individuals named below, any one acting alone, are hereby authorized and
appointed for and on behalf of Borrower from time to time to do any of the
following:
(1) To request advances of credit under the Agreement and to effect repayment
of any credit outstanding under the Agreement;
(2) To execute and deliver assignments, borrowing certificates, instruments,
schedules, reports, invoices, bills, shipping documents and such other
documents or certificates as may be necessary or appropriate under the
Agreement or any other agreement or instrument relating thereto or delivered in
connection therewith;
(3) To transfer and endorse to Bank in payment of Borrower's obligations to
Bank any checks, drafts, notes or other instruments payable to Borrower; and
(4) To do or perform any and all other acts or matters in any way relating to
any or all of the foregoing.
The undersigned individuals each further certifies that the specimen signatures
below are the genuine signatures of the individuals designated herein and that
their signatures shall be binding on Borrower until Bank receives written
notice of termination of the authority of any such designated individuals.
Signature: /s/ GILLES C. GODIN
--------------------------------
Name:
--------------------------------------
Signature: /s/ DOUGLAS W. MOXLEY
--------------------------------
Name:
--------------------------------------
Signature:
--------------------------------
Name:
--------------------------------------
THIS SIGNATURE AUTHORIZATION IS EXECUTED ON JULY 15, 1998.
BORROWER:
TEKELEC
By: /s/ GILLES C. GODIN
---------------------------------------
GILLES C. GODIN, VICE PRESIDENT/CFO
By: /s/ DOUGLAS W. MOXLEY
---------------------------------------
DOUGLAS W. MOXLEY, AVP/CONTROLLER
LENDER:
Imperial Bank
By: /s/ NILO B. SOLER
--------------------------------------
Authorized Officer
================================================================================
<PAGE> 12
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$15,000,000.00 07-15-1998 06-30-2000 [Initial]
- -----------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Borrower: TEKELEC LENDER: Imperial Bank
26580 W. AGOURA ROAD Los Angeles Regional Office
CALABASAS, CA 91302 201 N. Figueroa Street
Los Angeles, CA 90012-2623
</TABLE>
===============================================================================
LOAN TYPE. This is a Variable Rate (at Imperial Bank Prime Rate, making an
initial rate of 8.500%), Revolving Line of Credit Loan to a Corporation for
$15,000,000.00 due on June 30, 2000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
[ ] _______ Personal, Family, or Household Purposes or Personal Investment.
[X] _______ Business (including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: GENERAL OPERATING NEEDS
AND OCCASIONAL SIGHT OR STANDBY LETTERS OF CREDIT.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $15,000,000.00 as follows:
<TABLE>
<S> <C>
Amount paid to Borrower directly: $15,000,000.00
$15,000,000.00 Deposited to Account #07-110-464*
--------------
Note Principal: $15,000,000.00
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct
from Borrower's account numbered 07-110-464 the amount of any loan payment. If
the funds in the account are insufficient to cover any payment, Lender shall
not be obligated to advance funds to cover the payment. At any time and for any
reason, Borrower or Lender may voluntarily terminate Automatic Payments.
INTERNATIONAL SUB-LIMITS. Subject to conditions and limitations as specified in
the Credit Agreement dated October 22, 1996, as it may be revised from time to
time. Proceeds are to be available and applied as required for International
transactions.
DISBURSEMENT PROVISION. *or by Cashier's Check or by wire transfer when
advances are requested.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER.
THIS AUTHORIZATION IS DATED JULY 15, 1998.
BORROWER:
TEKELEC
<TABLE>
<S> <C>
By: /s/ GILLES C. GODIN By: /s/ DOUGLAS W. MOXLEY
------------------------------------ ----------------------------------
GILLES C. GODIN, VICE PRESIDENT/CFO DOUGLAS W. MOXLEY, AVP/CONTROLLER
</TABLE>
===============================================================================
<PAGE> 1
EXHIBIT 10.3
AMENDMENT NO. 6 TO
TEKELEC
1994 STOCK OPTION PLAN
Section 3 of the Tekelec 1994 Stock Option Plan is hereby amended to read
in its entirety as follows:
"3. SHARES RESERVED.
The maximum aggregate number of Shares reserved for issuance pursuant
to the Plan shall be Seven Million (7,000,000) Shares or the number of
shares of stock to which such Shares shall be adjusted as provided in
Section 10 of the Plan. Such number of Shares may be set aside out of
authorized but unissued Shares not reserved for any other purpose, or out
of issued Shares acquired for and held in the treasury of the Company from
time to time.
Shares subject to, but not sold or issued under, any Option
terminating, expiring or canceled for any reason prior to its exercise in
full, shall again become available for Options thereafter granted under
the Plan, and the same shall not be deemed an increase in the number of
Shares reserved for issuance under the Plan."
Dated: March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 53,200
<SECURITIES> 26,435
<RECEIVABLES> 40,137
<ALLOWANCES> 634
<INVENTORY> 10,822
<CURRENT-ASSETS> 140,455
<PP&E> 32,796
<DEPRECIATION> 23,026
<TOTAL-ASSETS> 166,688
<CURRENT-LIABILITIES> 30,386
<BONDS> 0
0
0
<COMMON> 87,616
<OTHER-SE> 46,361
<TOTAL-LIABILITY-AND-EQUITY> 166,688
<SALES> 42,949
<TOTAL-REVENUES> 42,949
<CGS> 14,131
<TOTAL-COSTS> 14,131
<OTHER-EXPENSES> 16,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,488
<INCOME-TAX> 5,123
<INCOME-CONTINUING> 8,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,365
<EPS-PRIMARY> 0.16<F1><F2>
<EPS-DILUTED> 0.14<F2>
<FN>
<F1>DATA LISTED FOR "EPS-PRIMARY" IS THE NEWLY DEFINED "BASIC EPS"
<F2>EPS DATA REFLECTS TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK
EFFECTED JULY 6, 1998.
</FN>
</TABLE>
