<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 MARCH 31, 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 May 1, 1998, there were 26,604,858 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 March 31, 1998 3
and December 31, 1997
Consolidated Income Statements for the three 4
months ended March 31, 1998 and 1997
Consolidated Statements of Comprehensive Income for the three 5
months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flow for the three 6
months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, December 31,
1998 1997
--------- ---------
(thousands, except share data)
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................... $ 51,099 $ 38,748
Short-term investments, at fair value ........ 26,870 19,773
Accounts and notes receivable, less
allowances of $786 and $469, respectively .. 27,942 29,141
Inventories .................................. 11,953 11,281
Amounts due from related parties ............. 1,875 2,286
Income taxes receivable ...................... 351 805
Deferred income taxes, net ................... 12,717 8,309
Prepaid expenses and other current assets .... 1,730 1,760
--------- ---------
Total current assets ..................... 134,537 112,103
Long-term investments, at fair value ............. 7,005 11,997
Property and equipment, net ...................... 9,914 9,841
Deferred income taxes, net ....................... 2,148 1,999
Other assets ..................................... 515 525
--------- ---------
Total assets ............................. $ 154,119 $ 136,465
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ....................... $ 6,291 $ 4,919
Accrued expenses ............................. 6,954 5,862
Accrued payroll and related expenses ......... 3,256 6,846
Current portion of deferred revenues ......... 9,684 7,693
Income taxes payable ......................... 4,212 429
--------- ---------
Total current liabilities ................ 30,397 25,749
Long-term portion of deferred revenues ....... 2,724 2,839
--------- ---------
Total liabilities ........................ 33,121 28,588
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
100,000,000 shares authorized; 26,571,253 and
26,126,043 shares issued and outstanding,
respectively ................................ 82,395 75,627
Retained earnings ............................ 39,531 32,875
Cumulative translation adjustment ............ (928) (625)
--------- ---------
Total shareholders' equity ............... 120,998 107,877
--------- ---------
Total liabilities and shareholders' equity $ 154,119 $ 136,465
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
TEKELEC
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
-------- --------
(thousands, except per share data)
<S> <C> <C>
REVENUES (including sales to related parties of
1998 - $1,210 and 1997 - $1,237) .......... $ 34,908 $ 20,577
COSTS AND EXPENSES:
Cost of goods sold ........................ 11,405 6,678
Research and development .................. 5,568 4,468
Selling, general and administrative ....... 9,633 7,567
Insurance recovery ........................ (1,663) --
-------- --------
Total costs and expenses .............. 24,943 18,713
-------- --------
Income from operations ........................ 9,965 1,864
Other income (expense):
Interest, net ............................. 979 516
Other, net ................................ (209) 17
-------- --------
Total other income .................... 770 533
-------- --------
Income before provision for income taxes ...... 10,735 2,397
Provision for income taxes ................ 4,079 769
-------- --------
NET INCOME ............................ $ 6,656 $ 1,628
======== ========
EARNINGS PER SHARE:
Basic ..................................... $ 0.25 $ 0.07
Diluted ................................... 0.23 0.06
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ..................................... 26,330 24,414
Diluted ................................... 29,240 26,658
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------- -------
(thousands)
<S> <C> <C>
NET INCOME ................................. $ 6,656 $ 1,628
Other comprehensive income:
Foreign currency translation adjustments (303) (797)
------- -------
COMPREHENSIVE INCOME ....................... $ 6,353 $ 831
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1998 1997
-------- --------
(thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................. $ 6,656 $ 1,628
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................... 1,359 1,067
Deferred income taxes .................................. (174) --
Changes in current assets and liabilities:
Accounts and notes receivable ........................ 1,078 1,089
Inventories .......................................... (717) (3,113)
Amounts due from related parties ..................... 411 (134)
Income taxes receivable .............................. 453 --
Prepaid expenses and other assets .................... 29 (293)
Trade accounts payable ............................... 1,436 (153)
Accrued expenses ..................................... 1,105 (263)
Accrued payroll and related expenses ................. (3,582) (1,249)
Deferred revenues .................................... 1,879 1,613
Income taxes payable ................................. 3,799 (663)
-------- --------
Total adjustments .................................. 7,076 (2,099)
-------- --------
Net cash provided by (used in) operating activities 13,732 (471)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 3,000 9,000
Purchase of available-for-sale securities .............. (5,105) (5,047)
Purchase of property and equipment ..................... (1,449) (1,637)
-------- --------
Net cash provided by (used in) investing activities (3,554) 2,316
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................. 2,374 1,508
-------- --------
Net cash provided by financing activities .......... 2,374 1,508
-------- --------
Effect of exchange rate changes on cash .................... (201) (568)
-------- --------
Net change in cash and cash equivalents ................ 12,351 2,785
Cash and cash equivalents at beginning of period ........... 38,748 17,211
-------- --------
Cash and cash equivalents at end of period ................. $ 51,099 $ 19,996
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITY:
Tax benefit related to stock options ................... $ 4,394 $ --
</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 period 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 months ended March 31, 1998 and 1997 are for
the thirteen weeks ended April 3, 1998 and March 28, 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.
Earnings per share are computed using the weighted average number of
shares outstanding and dilutive Common Stock equivalents (options and warrants).
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 following the Company's Consolidated
Income Statements. 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.
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
7
<PAGE> 8
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>
MARCH 31, December 31,
1998 1997
-------- --------
(thousands)
<S> <C> <C>
Raw materials ..................................... $ 3,055 $ 2,779
Work in process ................................... 2,511 2,448
Finished goods .................................... 6,387 6,054
-------- --------
$ 11,953 $ 11,281
======== ========
Property and equipment consist of the following:
Manufacturing and development equipment ........... $ 18,395 $ 17,645
Furniture and office equipment .................... 8,060 7,773
Demonstration equipment ........................... 3,864 3,964
Leasehold improvements ............................ 1,447 1,397
-------- --------
31,766 30,779
Less, accumulated depreciation and amortization ... (21,852) (20,938)
-------- --------
Property and equipment, net ....................... $ 9,914 $ 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 months ended March 31, 1998, an estimated effective tax
rate of 38% was applied as compared with an effective tax rate of 32% for the
three months ended March 31, 1997, and represented federal, state and foreign
taxes on the Company's income reduced by research and development and foreign
tax credits. The provision for the three months ended March 31, 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.
8
<PAGE> 9
F. BORROWINGS
The Company has a $10.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.6 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $10.0 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 March 31, 1998), and expires June 30, 1998
if not renewed. Under the terms of this facility, the Company is required to
maintain certain financial ratios and meet certain net worth and indebtedness
tests for which the Company is in compliance. 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 $2.6 million with interest at the Japanese prime
rate (1.625% at March 31, 1998) plus 0.125% per annum which expire between
August 5, 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 and Bell Atlantic Corporation represented 19%
and 15%, respectively, of revenues for the first quarter of 1998. Sales to
Nippon Telegraph and Telephone and Bell Atlantic Corporation represented 14% and
11%, respectively, of revenues for the first quarter of 1997.
9
<PAGE> 10
H. EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted per-share computations for the three
months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
NET INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 1998: (thousands except per-share amount)
<S> <C> <C> <C>
Basic EPS............................... $ 6,656 26,330 $0.25
Effect of Dilutive Securities - Stock
Options and Warrants................ -- 2,910
--------- ------
Diluted EPS............................. $ 6,656 29,240 $0.23
========= ====== =====
FOR THE THREE MONTHS ENDED MARCH 31, 1997:
Basic EPS............................... $ 1,628 24,414 $0.07
Effect of Dilutive Securities - Stock
Options and Warrants................ -- 2,244
--------- ------
Diluted EPS............................. $ 1,628 26,658 $0.06
========= ====== =====
</TABLE>
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 statement of operations items bear to total revenues:
<TABLE>
<CAPTION>
Percentage of Revenues
Three Months Ended
March 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Revenues ........................ 100.0% 100.0%
Cost of goods sold .............. 32.7 32.5
------- -------
Gross profit .................... 67.3 67.5
Research and development ........ 16.0 21.6
Selling, general & administrative 27.6 36.8
Insurance recovery .............. (4.8) --
------- -------
Total operating expenses ........ 38.8 58.4
------- -------
Income from operations .......... 28.5 9.1
Interest and other income, net .. 2.3 2.5
------- -------
Income before provision for
income taxes .................. 30.8 11.6
Provision for income taxes ...... 11.7 3.7
------- -------
Net income ...................... 19.1% 7.9%
======= =======
</TABLE>
11
<PAGE> 12
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
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Network switching ............. 61% 42%
Intelligent network diagnostics 28 39
Data network diagnostics ...... 11 19
---- ----
Total ..................... 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
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
North America ... 56% 65%
Japan ........... 16 23
Europe .......... 4 6
Rest of the World 24 6
--- ---
Total ....... 100% 100%
=== ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1997
Revenues. The Company's revenues increased by $14.3 million, or 70%,
during the first quarter of 1998 due primarily to higher sales of network
switching products and intelligent network diagnostics products.
Revenues from switching products increased by $12.6 million, or 146%, to
$21.3 million primarily due to increased EAGLE STP market acceptance worldwide
as reflected by higher international sales, the addition of EAGLE sales in the
RBOC market, the addition of sales of the Company's Local Number Portability
(LNP) feature and higher sales of software enhancements and upgrades as a result
of the larger installed base of the Company's EAGLE STP.
Revenues from intelligent network diagnostics products increased by $1.8
million, or 22%, primarily due to continued strong demand for the Company's MGTS
products in the U.S. and sales of MGTS-related development services in Japan.
12
<PAGE> 13
Revenues from data network diagnostics products declined as a percentage
of revenues in the first quarter of 1998 and were flat in dollars compared with
the first quarter of 1997. Lower sales of the Company's Chameleon products,
particularly in Japan, were offset by increased sales of third party data
diagnostics products in Japan by the Company's Japanese subsidiary.
Revenues in North America increased by $6.2 million, or 47%, primarily
as a result of higher EAGLE STP and MGTS product sales, partially offset by
lower Chameleon product sales. Sales in Japan increased by $910,000, or 19%, due
to higher sales of MGTS-related development services and third party diagnostics
products. Other international revenues increased by $7.2 million, or 290%, due
primarily to a large EAGLE STP sale in South Africa.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $350,000, or 1%, and decreased net income by $25,000, or
less than 1%, in the first quarter of 1997.
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 products, particularly the EAGLE STP product, and new applications for
the EAGLE STP such as the Company's LNP and related LSMS features. 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 declined slightly
to 67.3% in the first quarter of 1998 compared with 67.5% in the first 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, offset by a lower proportion of
traditionally higher margin MGTS product sales.
Research and Development. Research and development expenses increased
overall by $1.1 million, or 25%, and decreased as a percentage of revenue to 16%
in the first quarter of 1998 from 22% in the first 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 $2.1 million, or 27%, such expenses
decreased as a percentage of revenues to 28% in the first quarter of 1998 from
37% in the first 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
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 for the quarter.
Income Taxes. For the first quarter of 1998, an estimated effective tax
rate of 38% was applied as compared with an effective tax rate of 32% for the
first quarter of 1997, and represented federal, state and foreign taxes on the
Company's income reduced by research and development and foreign tax credits.
The provision for the first 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.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 1998, cash and cash
equivalents increased by $12.4 million to $51.1 million, after a net transfer of
approximately $2.1 million to short-term and long-term investments. Operating
activities, net of the effects of exchange rate changes on cash, provided $13.5
million. Financing activities, which represented proceeds from the issuance of
Common Stock upon the exercise of options and warrants, provided $2.4 million,
and $1.4 million was used for capital expenditures.
Accounts receivable, including amounts due from related parties,
decreased by 5% during the first three months of 1998 due primarily to lower
sales in the first quarter of 1998 compared to the fourth quarter of 1997.
Inventories increased by 6% during the first quarter of 1998 primarily to meet
customer shipments scheduled for the second quarter of 1998. Trade accounts
payable and accrued expenses increased by 28% and 19%, respectively, during the
first quarter of 1998, primarily due to the timing of purchases, and accrued
payroll decreased by 52% primarily due to the payment of 1997 employee bonuses.
Deferred revenues increased by 18% during the first quarter of 1998 primarily as
a result of the timing of EAGLE STP installations and increased deferred
warranty service billings which are recognized ratably over the warranty period.
Capital expenditures of $1.4 million during the first quarter of 1998
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.
14
<PAGE> 15
The Company has a $10.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.6 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $10.0 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 March 31, 1998), and expires June 30, 1998
if not renewed. Under the terms of this facility, the Company is required to
maintain certain financial ratios and meet certain net worth and indebtedness
tests for which the Company is in compliance. 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 $2.6 million with interest at the Japanese prime
rate (1.625% at March 31, 1998) plus 0.125% per annum which expire between
August 5, 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.
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 industrywide issue has emerged
regarding how existing application software programs and operating systems can
accommodate the year 2000 date value. The Company is currently in the
preliminary stages of conducting a comprehensive review of its computer systems,
products and significant vendors to identify the systems and
15
<PAGE> 16
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 operating 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.
"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 that 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.
16
<PAGE> 17
PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Officer Bonus Plan for the year ended December 31, 1998
10.2 Agreement dated September 9, 1997 between the Company and Shigeru
Suzuki(1) as amended by agreement dated January 6, 1998
10.3 Form of Stock Award Agreement dated January 24, 1998 between the
Registrant and its non-employee directors and schedule of
directors
10.4 Employment Offer Letter dated February 11, 1998 between the
Registrant and Michael Margolis
10.5 Stock Award Agreement dated February 17, 1998 between the
Registrant and Michael Margolis
27.1 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only)
- -------------
(1) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-Q (File No. 0-15135) for the quarter ended September 30,
1997
(b) Reports
No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1998.
17
<PAGE> 18
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
May 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> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
10.1 Officer Bonus Plan for the year ended December 31, 1998
10.2 Amended agreement dated January 6, 1998 between the
Registrant and Shigeru Suzuki
10.3 Form of Stock Award Agreement dated January 24, 1998
between the Registrant and its non-employee directors and
schedule of directors
10.4 Employment Offer Letter dated February 11, 1998 between
the Registrant and Michael Margolis
10.5 Stock Award Agreement dated February 17, 1998 between
the Registrant and Michael Margolis
27.1 Financial Data Schedule (provided for the information of
the Securities and Exchange Commission only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
Tekelec 1998 Officer Bonus Plan
The Company's executive compensation program for the year ending December 31,
1998 includes the 1998 Officer Bonus Plan as approved by the Company's Board of
Directors. Under the terms of the 1998 Officer Bonus Plan, each executive
officer is eligible to receive a cash bonus equal to a percentage of his annual
base salary if the Company achieves certain pre-established financial
performance goals for the year ending December 31, 1998. Bonuses under such Plan
are only paid if the Company's revenues and operating income meet or exceed both
a threshold 100% of the revenue goal and operating income goal as set forth in
the Company's business plan and as approved by the Board of Directors.
The following schedules list the various bonus levels achievable for the various
executive officers at certain levels of corporate and divisional performance for
1998. Bonuses are calculated and paid according to these following schedules
which are used by applying the applicable bonus percentage to the annual base
salary for the eligible officer.
Bonus payments, if any, will be made in one lump sum payable after the revenue
and operating income results for fiscal 1998 have been finalized and any review
and audit by the Company's outside accountants has been completed.
Unless additional officers are explicitly included in the 1998 Officer Bonus
Plan pursuant to a subsequent, duly adopted Board resolution, only the following
officers of the Company are eligible to participate in the 1998 Officer Bonus
Plan: Chief Executive Officer; President; Vice President, Finance, Chief
Financial Officer; Division Executives; Vice President, Operations; Vice
President, Human Resources; and the President of Tekelec, Ltd.
If an officer is subject to divisional financial performance goals, the officer
must meet the applicable divisional goals as well as the applicable Company
goals in order to be eligible to receive a bonus under the Plan.
<PAGE> 2
1998 EXECUTIVE BONUS PLAN
A. PRESIDENT AND CEO
<TABLE>
<CAPTION>
CORPORATE
FINANCIAL PERFORMANCE GOALS
---------------------------
<S> <C> <C> <C>
100.00% 105.00% 110.00%
Bonus payout as a percentage of base salary 17.50% 35.00% 70.00%
</TABLE>
B. VP FINANCE & CFO
<TABLE>
<CAPTION>
CORPORATE
FINANCIAL PERFORMANCE GOALS
---------------------------
<S> <C> <C> <C>
100.00% 105.00% 110.00%
Bonus payout as a percentage of base salary 12.50% 25.00% 50.00%
</TABLE>
C. DIVISION EXECUTIVES
<TABLE>
<CAPTION>
DIVISION FINANCIAL CORPORATE
PERFORMANCE GOAL FINANCIAL PERFORMANCE GOALS
---------------- ---------------------------
<S> <C> <C> <C> <C>
100.00% 105.00% 110.00%
100.00% Bonus Payout 12.50% 12.50% 12.50%
105.00% as a percentage 18.75% 25.00% 25.00%
110.00% of base salary 25.00% 37.50% 50.00%
</TABLE>
D. VP OPERATIONS/VP HUMAN RESOURCES
<TABLE>
<CAPTION>
CORPORATE
FINANCIAL PERFORMANCE GOALS
---------------------------
<S> <C> <C> <C>
100.00% 105.00% 110.00%
Bonus payout as a percentage of base salary 6.25% 12.50% 25.00%
</TABLE>
E. PRESIDENT TEKELEC JAPAN
<TABLE>
<CAPTION>
TEKELEC JAPAN FINANCIAL CORPORATE
PERFORMANCE GOAL FINANCIAL PERFORMANCE GOALS
---------------- ---------------------------
<S> <C> <C> <C> <C>
100.00% 105.00% 110.00%
100.00% Bonus Payout 5.00% 5.00% 5.00%
105.00% as a percentage 7.50% 10.00% 10.00%
110.00% of base salary 10.00% 15.00% 20.00%
</TABLE>
<PAGE> 1
January 6, 1998
Shigeru Suzuki
Tekelec Ltd.
Ogikubo Ekimae Building, 3F
5-28-13 Ogikubo
Suginami-ku, Tokyo 167
Japan
Dear Shigeru:
In a letter dated September 9, 1997 (the "Letter"), you and Tekelec confirmed
the principal terms of your employment with Tekelec and Tekelec Japan effective
January 1, 1998. Such terms included, among several items, a reduced work week
beginning January 1, 1998.
You have requested that we amend the Letter to provide that your reduced
workweek would commence on April 1, 1998 rather than January 1, 1998. We have
considered your request and hereby accept your proposed change of the
commencement date of your reduced work week from January 1, 1998 to April 1,
1998 subject to your acceptance of the amendments to the Letter as follows:
1. Replace the month "January" with the month "April" where it appears in
the Letter on:
(i) Page 1, 2nd paragraph, 1st line;
(ii) Page 1, 3rd paragraph, 1st line; and
(iii) Page 1, 4th paragraph, 3rd line
2. On Page 1, 2nd paragraph,2nd line, insert the phrase "commencing April
1, 1998" after the word "positions."
3. Your base salary and benefits (except to the extent modified or provided
for in the Letter) for the three-month period commencing January 1, 1998
and ending March 31, 1998, will not be less favorable than your base
salary and benefits at December 31, 1997.
Except as expressly provided above, all other terms remain unchanged and in full
force and effect.
Please acknowledge your acceptance of the amendment to the Letter herein by
signing and dating the enclosed copy of this letter where indicated below and
returning such signed copy to me for receipt no later than January 31, 1998.
Sincerely,
/s/
Allan J. Toomer
President
Acknowledged and Accepted
/s/______________________________ Dated January ___, 1998
Shigeru Suzuki
<PAGE> 1
EXHIBIT 10.3
TEKELEC
STOCK AWARD AGREEMENT
THIS STOCK AWARD AGREEMENT (this "Agreement") is made as of January 24,
1998 (the "Effective Date") by and between Tekelec, a California corporation
(the "Company"), and ___________________ ("Director").
WHEREAS, in recognition of Director's past service (including services
rendered in connection with the search for a Chief Executive Officer for the
Company) and future service to the Company and as an incentive to motivate and
retain Director as a director of the Company, the Company's Board of Directors
has awarded to Director on the Effective Date 1,500 shares (the "Shares") of the
Company's Common Stock, subject to the terms and conditions set forth herein and
on the condition that Director enter into this Agreement with the Company;
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. ACCEPTANCE AND VALUE OF SHARES. Director hereby accepts the
Shares effective as of the Effective Date as additional consideration for his
past and future service to the Company and as an incentive to motivate and
retain him as a director of the Company. The value of the Shares on the
Effective Date for tax, accounting and all other purposes shall be $32.0625 per
Share (i.e., the closing price of the Company's Common Stock on The Nasdaq Stock
Market on January 23, 1998).
2. VESTING OF SHARES. The right of Director to receive the Shares
shall vest on January 24, 1999 (the "Vesting Date") provided that Director
continues to serve without interruption as a director of the Company through the
Vesting Date.
3. FORFEITURE OF SHARES. If at any time prior to the Vesting Date,
Director ceases to serve as a director of the Company for any reason, including,
without limitation, as a result of his resignation, removal, death, disability
or failure to be nominated for re-election or to be re-elected as a director of
the Company, Director shall forfeit the Shares, which forfeiture shall be
effective on the date on which Director ceases to be a director of the Company.
Upon any forfeiture of the Shares in accordance with this Section 3, Director
shall assign and transfer the Shares to the Company or its assignee.
4. ISSUANCE AND ESCROW OF SHARES. The stock certificate (the "Stock
Certificate") evidencing the Shares shall be issued in the name of Director as
soon as administratively practicable following the Effective Date and shall be
delivered by the Company's transfer agent directly to the Secretary of the
Company (the "Secretary"). As security for Director's faithful performance of
the terms of this Agreement and to ensure the availability for delivery of the
Shares upon any forfeiture of the Shares pursuant to Section 3 hereof, Director
also agrees upon execution of this Agreement to deliver to and deposit with the
Secretary an Assignment Separate from Certificate (the "Assignment") duly
endorsed (with date left blank) in the form attached hereto as Attachment A. The
Secretary shall hold the Shares and the Assignment in an escrow which shall
terminate upon the first to occur of Director's forfeiture of the Shares
pursuant to
<PAGE> 2
Section 3 hereof or the Vesting Date. If the escrow terminates upon any
forfeiture of the Shares pursuant to Section 3 hereof, the Secretary shall
within seven days thereafter release from escrow and deliver the Stock
Certificate and the Assignment to the Company. If the escrow terminates on the
Vesting Date, the Secretary shall within seven days thereafter release from
escrow and deliver the Stock Certificate and the Assignment to Director.
5. RIGHTS AS SHAREHOLDER. Subject to the provisions of this
Agreement, Director shall exercise all rights and privileges of a shareholder of
the Company with respect to the Shares.
6. CONTINUATION AS A DIRECTOR. Neither the award of the Shares to
Director nor this Agreement shall confer upon Director any right to continue or
be nominated as a director of the Company or any of its subsidiaries or limit in
any respect the right of the Company to remove Director at any time.
7. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to Director
any taxes required to be withheld by federal, state or local law as a result of
the issuance of the Shares to Director.
8. NONTRANSFERABILITY PRIOR TO VESTING DATE. Director may not
transfer the Shares or any interest therein by sale, assignment, hypothecation,
pledge, donation, operation of law or otherwise, including without limitation
pursuant to the laws of descent and distribution, at any time prior to the
Vesting Date.
9. MISCELLANEOUS.
(a) This Agreement shall inure to the benefit of the
successors and assigns of the Company.
(b) This Agreement shall be governed by and construed under
the laws of the State of California and constitutes the entire agreement of the
parties with respect to the subject matter hereof. This Agreement may only be
amended by a writing signed by the parties hereto.
(c) If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
COMPANY: TEKELEC, a California corporation
By: Gilles C. Godin
-----------------------------------
Print Name: Gilles C. Godin
---------------------------
Title: V. P. Finance & CFO
--------------------------------
DIRECTOR: ---------------------------------------
-3-
<PAGE> 4
ATTACHMENT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________________________ One Thousand Five Hundred (1,500) shares
of the Common Stock of Tekelec, a California corporation (the "Company"),
standing in the name of the undersigned on the books of the Company represented
by Certificate No. ______ herewith and does hereby irrevocably constitute and
appoint ______________________________ attorney to transfer said stock on the
books of the Company with full power of substitution in the premises.
Signature: ____________________________
Printed Name: _________________________
Dated: ________________________________
<PAGE> 5
SCHEDULE OF DIRECTORS
Each of the following non-employee directors of Tekelec is a party to a
Stock Award Agreement in the preceding form:
Robert V. Adams
Jean-Claude Asscher
Daniel Brenner
Howard Oringer
Jon F. Rager
<PAGE> 1
EXHIBIT 10.4
TEKELEC
26580 West Agoura Road
Calabasas, California 91302
Tel 818.880.5656
Fax 818.880.6993
February 10, 1998
VIA FEDERAL EXPRESS PERSONAL AND CONFIDENTIAL
Michael L. Margolis
6934 Rocky Top Circle
Dallas, TX 75252
Dear Michael:
On behalf of Tekelec, I am pleased to offer you employment as Chief
Executive Officer and President of Tekelec, on the terms and conditions set
forth in this letter. As Tekelec's Chief Executive Officer and President, you
will report directly to the Board of Directors and will have such duties and
responsibilities as are set forth in Tekelec's Bylaws and as may be delegated to
you from time to time by the Board. As Chief Executive Officer and President, it
is expected that you will be principally responsible for developing and
implementing the tactical and strategic goals for Tekelec, in addition to
managing the day-to-day operations of Tekelec. You may select your start date so
long as it is on or before March 20, 1998. Effective upon the commencement of
your employment with Tekelec, you will be elected to the Board of Directors.
Your compensation and benefits will be as follows:
1. Your starting annual base salary will be $300,000 (i.e.,
$11,538.46 per bi-weekly period).
2. You will be eligible to participate in Tekelec's 1998 Officer
Bonus Plan, subject to the Board of Directors' approval of such 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 70% of your annual base salary as a cash bonus if Tekelec achieves certain
financial milestones in 1998. For 1998, you will be guaranteed a minimum bonus
equal to $105,000 which will be paid during the first quarter of 1999.
3. You will be entitled to take at least four weeks personal time
annually.
<PAGE> 2
Michael L. Margolis
February 10, 1998
Page 2
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).
7. Tekelec will pay you up to a maximum of $100,000 to reimburse you
for your accountable costs incurred in relocating to California or North
Carolina, including the anticipated commissions and fees for the sale of your
current home, losses incurred on the sale of your current home, the closing
costs you incur in connection with your purchase of a home in California or
North Carolina, your actual out-of-pocket travel, moving, rental and other
expenses relating to your relocation and the associated income taxes payable by
you with respect to your receipt of such reimbursement. In addition, the Company
will reimburse you for the costs of temporary housing in California or North
Carolina pending your relocation (up to a maximum of six months) and the
reasonable transportation expenses you incur traveling to such location.
8. 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"), effective as of your start date, to purchase 185,000 shares
of Tekelec Common Stock ("Options"). The exercise price of your Options will be
equal to the closing price of Tekelec's Common Stock on your start date (as
reported in The Wall Street Journal on the first business day following your
start date). Your Options will vest to the extent of 37,000 shares on the
one-year anniversary of your start date. The remaining 148,000 shares will vest
and become exercisable cumulatively in 16 equal quarterly installments of 9,250
shares each, with the first installment vesting on June 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 not less than three months after you cease to be a Tekelec
employee. 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 Chief Executive
Officer and President.
<PAGE> 3
Michael L. Margolis
February 10, 1998
Page 3
9. The Board of Directors will grant you a restricted stock award of
15,000 shares ("Restricted Shares"). The Restricted Shares will vest in five
equal annual installments of 3,000 shares each, with the first installment
vesting on the one-year anniversary of your start date and one additional
installment vesting on each anniversary thereafter provided that you remain an
employee of Tekelec.
10. If your employment with Tekelec is terminated by either you or
Tekelec under circumstances entitling you to severance benefits under the
Tekelec Officer Severance Plan and you execute and deliver to Tekelec an
Employment Separation Agreement (in the form attached to the Officer Severance
Plan), then your Options and Restricted Shares will fully vest as of the
effective date of your termination to the extent then unvested.
You have advised us that you propose to resign as Executive Vice
President, Global Accounts of, and from all other positions that you hold with,
the Ericsson Group ("Ericsson") no later than the date of your acceptance of
this offer. We understand that you believe that you can become and act as Chief
Executive Officer and President of Tekelec under the conditions anticipated in
this letter agreement without violating any of the provisions of your current
employment agreement with Ericsson (the "Ericsson Agreement"), including its
confidentiality provisions (a copy of which is attached hereto as Attachment I).
In any event, we expect you to strictly observe, and to comply fully with, all
the provisions of the Ericsson Agreement during its term (including any
provisions that survive the termination of that agreement), and to refrain from
taking any action, or causing any action to be taken, that would directly or
indirectly violate any provision thereof. By signing the enclosed copy of this
letter, you unconditionally agree to strictly observe and to comply fully with
all the terms and provisions of the Ericsson Agreement during its term and
represent and warrant that you are not currently subject to any express or
implied contractual obligations to any former or current employers under any
proprietary rights, confidentiality, non-competition or other agreements or
understandings except for the Ericsson Agreement. If you ever have any concerns
that the duties or responsibilities assigned to you may violate or have violated
the Ericsson Agreement, you agree to promptly notify in writing our legal
counsel, Bryan Cave LLP, 120 Broadway, Suite 500, Santa Monica, California
90401, Facsimile: (310) 576-2200, Attention: Ronald W. Buckly.
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 Ericsson.
<PAGE> 4
Michael L. Margolis
February 10, 1998
Page 4
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 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 and replaces and supersedes that letter agreement
dated February 6, 1998 previously provided to you. 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.
Michael, we believe that you will provide Tekelec with the leadership,
vision and management and other expertise and experience needed to continue
Tekelec as a growth company and, in turn, 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 returning such signed copy to Bryan Cave LLP in the
enclosed Federal Express envelope for receipt no later than February 13, 1998.
Sincerely,
DANIEL L. BRENNER
Daniel L. Brenner
Chairman of the Compensation Committee
of the Board of Directors of Tekelec
Acknowledged and Accepted:
Michael L. Margolis Date: February 11, 1998
- ----------------------------------- ---------------------
Michael L. Margolis
<PAGE> 5
ATTACHMENT I
5. Confidentiality.
(a) As used herein, the term "Confidential Information" refers to all
information, oral or written, belonging to, used by or in the possession of EUS
and not generally known to others outside of EUS. Such Confidential Information
includes, but is not limited to, proprietary, secret or confidential matters
relating to the business, products, or work of EUS (i) of a technical nature
such as methods, know-how, formulas, compositions, processes, computer software,
discoveries, machines, inventions, and research projects; (ii) of a business or
commercial nature such as information or compilation of data about costs,
pricing, profits, sales, product plans, markets and lists of customers; (iii)
pertaining to past or future developments or strategies such as research
development, negative test results, future marketing, and merchandising; or (iv)
which confer or could confer an advantage to EUS over its competitors.
(b) Margolis acknowledges that all of the Confidential Information is
and shall continue to be the exclusive proprietary property of EUS, whether or
not prepared in whole or in part by Margolis, whether or not disclosed to or
entrusted to the custody of Margolis by EUS or by any other person or entity or
independently learned by Margolis and whether or not Margolis gained knowledge
of such Confidential Information prior to or after the date of this Agreement.
(c) Margolis agrees that he will not disclose any Confidential
Information of EUS, in whole or in part, to any person or entity, for any reason
or purpose whatsoever, unless EUS shall have given its written consent to such
disclosure. Margolis further agrees that he shall use, in any manner other than
for and in the course of Margolis' furtherance of EUS' business, any
Confidential Information of EUS for Margolis' own purposes or for the benefit of
any other person or entity except EUS unless EUS shall have given its prior
written consent to such use.
(d) Margolis further agrees that upon demand from EUS, he will
immediately surrender to EUS all items in his possession, or in the possession
of any person or entity under his control, including copies thereof, relating
directly or indirectly to any Confidential Information, or relating directly or
indirectly to the business of EUS.
<PAGE> 1
EXHIBIT 10.5
TEKELEC
STOCK AWARD AGREEMENT
THIS STOCK AWARD AGREEMENT (this "Agreement") is made as of February 17,
1998 (the "Effective Date") by and between Tekelec, a California corporation
(the "Company"), and Michael L. Margolis ("Michael").
WHEREAS, in consideration of Michael's acceptance of employment as the
Chief Executive Officer and President of the Company and his future service as
an employee of the Company, and as an incentive to motivate and retain Michael
as an employee of the Company, the Company's Board of Directors has awarded to
Michael as of the Effective Date 15,000 shares (the "Shares") of the Company's
Common Stock, subject to the terms and conditions set forth herein and on the
condition that Michael enter into this Agreement with the Company;
NOW, THEREFORE, IT IS AGREED between the parties as follows:
1. ACCEPTANCE AND VALUE OF SHARES. Michael hereby accepts the Shares
effective as of the Effective Date as additional consideration for his
acceptance of employment as the Chief Executive Officer and President of the
Company and his future service to the Company and as an incentive to motivate
and retain him as an employee of the Company. The value of the Shares on the
Effective Date for tax, accounting and all other purposes shall be $40.4375 per
Share (i.e., the closing price of the Company's Common Stock on The Nasdaq Stock
Market on February 17, 1998).
2. VESTING OF SHARES. Subject to Sections 3 and 4 hereof, the Shares
shall vest cumulatively as to 3,000 Shares on each of the vesting dates
specified below so long as Michael continues to serve as an employee of the
Company:
<TABLE>
<CAPTION>
Number of
Vesting Date Shares Vesting
------------ --------------
<S> <C>
02/17/99 3,000
02/17/00 3,000
02/17/01 3,000
02/17/02 3,000
02/17/03 3,000
------
15,000
======
</TABLE>
3. ACCELERATED VESTING OF SHARES. In the event that prior to
February 17, 2003, Michael's employment with the Company is terminated by either
Michael or the Company under circumstances entitling Michael to severance
benefits under the Tekelec Officer Severance Plan and Michael executes and
delivers to the Company an Employment Separation Agreement (in the form attached
to such Officer Severance Plan), then the Shares will fully vest as of the
effective date of such termination of Michael's employment to the extent the
Shares are then unvested.
<PAGE> 2
4. FORFEITURE OF SHARES. If at any time prior to February 17, 2003,
Michael ceases to serve as an employee of the Company under circumstances not
entitling Michael to severance benefits under the Tekelec Officer Severance
Plan, Michael shall forfeit any Shares which are not then vested, which
forfeiture shall be effective on the date on which Michael ceases to be an
employee of the Company. Upon any forfeiture of any of the Shares in accordance
with this Section 4, Michael shall assign and transfer such forfeited Shares to
the Company or its assignee.
5. ISSUANCE AND ESCROW OF SHARES. The Shares shall be evidenced by
five stock certificates (the "Stock Certificates"), each of which shall
represent 3,000 Shares. The Stock Certificates shall be issued in the name of
Michael as soon as administratively practicable following the Effective Date and
shall be delivered by the Company's transfer agent directly to the Secretary of
the Company (the "Secretary"). As security for Michael's faithful performance of
the terms of this Agreement and to ensure the availability for delivery of the
Shares upon any forfeiture of any of the Shares pursuant to Section 4 hereof,
Michael also agrees upon execution of this Agreement to deliver to and deposit
with the Secretary five Assignments Separate from Certificate (the
"Assignments") duly endorsed (with date left blank) in the form attached hereto
as Attachment A. The Secretary shall hold the Shares and the Assignments in an
escrow and, within seven days after the date on which any of the Shares vest
hereunder, the Secretary shall release from escrow and deliver to Michael the
Stock Certificate(s) evidencing such Shares. The escrow shall terminate upon the
first to occur of (i) Michael's forfeiture of any Shares not then vested
pursuant to Section 4 hereof or (ii) the date on which all of the Shares are
vested (i.e., February 17, 2003 or such earlier date on which all remaining
unvested Shares vest in accordance with Section 3 hereof). If the escrow
terminates upon any forfeiture of Shares pursuant to Section 4 hereof, the
Secretary shall within seven days thereafter release from escrow and deliver to
the Company all Stock Certificates representing the forfeited Shares and all
Assignments then held in escrow.
6. RIGHTS AS SHAREHOLDER. Subject to the provisions of this
Agreement, Michael shall be entitled to exercise all rights and privileges of a
shareholder of the Company (including voting rights) with respect to the Shares.
7. CONTINUATION AS AN EMPLOYEE, OFFICER OR DIRECTOR. Neither the
award of the Shares to Michael nor this Agreement shall confer upon Michael any
right to continue as an employee, officer or director of the Company or any of
its subsidiaries or limit in any respect the right of the Company to terminate
Michael's employment with the Company at any time for any reason.
8. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to Michael
any taxes required to be withheld by federal, state or local law as a result of
the issuance of the Shares to Michael.
9. NONTRANSFERABILITY PRIOR TO VESTING. Michael may not at any time
transfer any Shares which are not then vested or any interest therein by sale,
assignment, hypothecation, pledge, donation, operation of law or otherwise,
including without limitation pursuant to the laws of descent and distribution.
-2-
<PAGE> 3
10. MISCELLANEOUS.
(a) This Agreement shall inure to the benefit of the
successors and assigns of the Company.
(b) This Agreement shall be governed by and construed under
the laws of the State of California and constitutes the entire agreement of the
parties with respect to the subject matter hereof. This Agreement may only be
amended by a writing signed by the parties hereto.
(c) If any provision of this Agreement is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions shall nevertheless continue in full force and effect without being
impaired or invalidated in any way.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
COMPANY: TEKELEC, a California corporation
By: Gilles C. Godin
----------------------------------
Print Name: Gilles C. Godin
--------------------------
Title: V. P. Finance & CFO
-------------------------------
MICHAEL: Michael L. Margolis
--------------------------------------
Michael L. Margolis
<PAGE> 4
ATTACHMENT A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto __________________________________ __________________________ (______)
shares of the Common Stock of Tekelec, a California corporation (the "Company"),
standing in the name of the undersigned on the books of the Company represented
by Certificate No. ______ herewith and does hereby irrevocably constitute and
appoint ________________________________________________ attorney to transfer
said stock on the books of the Company with full power of substitution in the
premises.
Signature:
---------------------------------
Printed Name: Michael L. Margolis
------------------------------
Dated:
-------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 51,099
<SECURITIES> 26,870
<RECEIVABLES> 30,603
<ALLOWANCES> 786
<INVENTORY> 11,953
<CURRENT-ASSETS> 134,694
<PP&E> 31,766
<DEPRECIATION> 21,852
<TOTAL-ASSETS> 154,119
<CURRENT-LIABILITIES> 30,397
<BONDS> 0
0
0
<COMMON> 82,395
<OTHER-SE> 38,603
<TOTAL-LIABILITY-AND-EQUITY> 154,119
<SALES> 34,908
<TOTAL-REVENUES> 34,908
<CGS> 11,405
<TOTAL-COSTS> 11,405
<OTHER-EXPENSES> 13,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,735
<INCOME-TAX> 4,079
<INCOME-CONTINUING> 6,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,656
<EPS-PRIMARY> 0.25<F1>
<EPS-DILUTED> 0.23
<FN>
<F1>Data listed for "EPS-PRIMARY" is the newly defined "BASIC EPS".
</FN>
</TABLE>
