<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, 1999
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 2, 1999, there were 55,040,762 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, 1999 3
and December 31, 1998
Consolidated Statements of Operations for the three and six 4
months ended June 30, 1999 and 1998
Consolidated Statements of Comprehensive Income for the 5
three and six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flow for the six months 6
ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
----------- -----------
(thousands, except share data)
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................... $ 40,816 $ 31,932
Short-term investments, at fair value ........ 13,358 37,704
Accounts and notes receivable, less
allowances of $1,219 and $763, respectively 59,171 54,606
Inventories .................................. 20,207 12,872
Amounts due from related parties ............. 1,794 1,896
Income taxes receivable ...................... 4,397 32
Deferred income taxes, net ................... 10,951 8,616
Prepaid expenses and other current assets .... 5,766 3,317
----------- -----------
Total current assets ..................... 156,460 150,975
Long-term investments, at fair value ............. 20,981 44,138
Property and equipment, net ...................... 17,888 12,859
Intangible assets, net ........................... 151,765 131
Deferred income taxes, net ....................... 1,652 1,514
Other assets ..................................... 532 625
----------- -----------
Total assets ............................. $ 349,278 $ 210,242
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term notes payable ..................... $ 100,000 $ --
Trade accounts payable ....................... 13,416 10,904
Accrued expenses ............................. 13,586 10,932
Accrued payroll and related expenses ......... 7,109 5,660
Current portion of deferred revenues ......... 26,276 10,480
Income taxes payable ......................... 1,678 4,237
----------- -----------
Total current liabilities ................ 162,065 42,213
Long-term portion of deferred revenues ........... 2,097 2,252
Long-term deferred income tax liability .......... 22,017 --
----------- -----------
Total liabilities ........................ 186,179 44,465
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
200,000,000 shares authorized; 54,952,559
and 54,328,512 shares issued
and outstanding, Respectively ............ 96,356 92,803
Retained earnings ............................ 66,440 72,084
Accumulated other comprehensive income ....... 303 890
----------- -----------
Total shareholders' equity ............... 163,099 165,777
----------- -----------
Total liabilities and shareholders' equity $ 349,278 $ 210,242
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(thousands, except per share data)
<S> <C> <C> <C>
REVENUES ...................................... $ 51,728 $ 42,949 $ $84,413 77,857
COSTS AND EXPENSES:
Cost of goods sold ........................ 17,976 14,131 29,307 25,536
Amortization of purchased technology ...... 1,496 -- 1,514 --
Research and development .................. 10,525 5,783 19,393 11,351
Selling, general and administrative ....... 15,582 10,659 26,957 18,629
Amortization of goodwill and other
intangible assets ........................ 3,726 -- 3,726 --
Acquired in-process research and
development and other
acquisition-related charges .............. 6,830 -- 6,830 --
Restructuring ............................. -- -- 1,800 --
----------- ----------- ----------- -----------
Total costs and expenses .............. 56,135 30,573 89,527 55,516
----------- ----------- ----------- -----------
Income (Loss) from operations ................. (4,407) 12,376 (5,114) 22,341
Other income (expense):
Interest income ........................... 882 1,150 2,353 2,129
Interest expense .......................... (1,093) -- (1,093) --
Other, net ................................ (6) (38) (2) (247)
----------- ----------- ----------- -----------
Total other income (expense) .......... (217) 1,112 1,258 1,882
----------- ----------- ----------- -----------
Income (Loss) before provision for income taxes (4,624) 13,488 (3,856) 24,223
Provision for income taxes ................ 1,512 5,123 1,788 9,202
----------- ----------- ----------- -----------
NET INCOME (LOSS) ..................... $ (6,136) $ 8,365 $ (5,644) $ 15,021
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic ..................................... $ (0.11) $ 0.16 $ (0.10) $ 0.28
Diluted ................................... (0.11) 0.14 (0.10) 0.26
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic ..................................... 54,766 53,434 54,618 53,043
Diluted ................................... 54,766 59,049 54,618 58,760
</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,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
NET INCOME (LOSS) .......................... $ (6,136) $ 8,365 $ (5,644) $ 15,021
Other comprehensive income (expense):
Foreign currency translation adjustments (39) (607) (587) (910)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS) ................ $ (6,175) $ 7,758 $ (6,231) $ 14,111
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
----------- -----------
(thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (5,644) $ 15,021
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ................................................ 3,705 2,722
Amortization of intangible assets ........................... 5,770 --
Write-off of acquired in-process research and development ... 6,000 --
Non-cash portion of restructuring charge .................... 800 --
Deferred income taxes ....................................... (538) (245)
Changes in current assets and liabilities (excluding
the effect of acquisition):
Accounts and notes receivable ............................. 5,172 (8,705)
Inventories ............................................... (1,337) 384
Amounts due from related parties .......................... 102 441
Income taxes receivable ................................... (445) 733
Prepaid expenses and other current assets ................. (3,226) (422)
Trade accounts payable .................................... 1,138 2,254
Accrued expenses .......................................... 2,630 2,449
Accrued payroll and related expenses ...................... (6,198) (3,026)
Deferred revenues ......................................... 1,843 1,401
Income taxes payable ...................................... (1,390) 8,170
----------- -----------
Total adjustments ....................................... 14,026 6,156
----------- -----------
Net cash provided by operating activities ............... 8,382 21,177
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities ..... 80,916 17,000
Purchase of available-for-sale securities ................... (26,157) (25,409)
Payments in connection with acquisition, net of cash acquired (49,087) --
Purchase of property and equipment .......................... (5,482) (2,704)
Purchase of technology ...................................... (1,629) --
Decrease (Increase) in other assets ......................... 71 (64)
----------- -----------
Net cash (used in) investing activities ................. (1,368) (11,177)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ...................... 2,371 5,219
----------- -----------
Net cash provided by financing activities ............... 2,371 5,219
Effect of exchange rate changes on cash ......................... (501) (767)
----------- -----------
Net change in cash and cash equivalents ..................... 8,884 14,452
Cash and cash equivalents at beginning of period ................ 31,932 38,748
----------- -----------
Cash and cash equivalents at end of period ...................... $ 40,816 $ 53,200
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1999 1998
----------- -----------
(thousands)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Tax benefit related to stock options ....................... $ 1,181 $ 6,770
Note payable in connection with acquisition ................ 100,000 --
Assets and liabilities recognized in connection
with acquisition:
Accounts receivable .................................... 9,957 --
Other current assets ................................... 13,261 --
Investments ............................................ 7,255 --
Property and equipment ................................. 3,490 --
Other Assets ........................................... 169 --
Intangibles ............................................ 61,000 --
Goodwill ............................................... 94,774 --
Accounts payable ....................................... 1,515 --
Other current liabilities .............................. 22,429 --
Deferred income tax liability .......................... 21,545 --
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
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, 1998, 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, 1999 and 1998
are for the thirteen and twenty-six weeks ended July 2, 1999 and July 3, 1998,
respectively.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1998,
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
On May 7, 1999, the Company purchased all of the outstanding stock of
IEX Corporation ("IEX"). The acquisition has been accounted for under the
purchase method of accounting, and accordingly, the consolidated financial
statements include the results and financial position of IEX beginning as of May
7, 1999. See Note B.
8
<PAGE> 9
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
B. ACQUISITION OF IEX CORPORATION
On May 7, 1999, the Company acquired all of the outstanding stock of IEX
Corporation ("IEX") for $163 million, consisting of $63 million in cash and $100
million in short-term notes maturing on November 7, 1999. IEX develops, markets
and sells solutions for intelligent networks, call centers and other
telecommunications markets.
The transaction has been accounted for under the purchase method of
accounting, and resulted in net goodwill and other intangibles of approximately
$132.9 million, with an average amortization period of five years. The total
purchase price, including acquisition expenses of $2.0 million, was allocated
among the assets acquired and liabilities assumed based on their estimated fair
values as follows:
<TABLE>
<CAPTION>
(thousands)
<S> <C>
In-process research and development .................................. $ 6,000
Developed and existing technology .................................... 48,000
Other intangibles .................................................... 13,000
Goodwill ............................................................. 94,774
Tangible assets acquired ............................................. 50,045
Deferred income tax liabilities associated with certain
intangible assets ................................................. (22,875)
Liabilities assumed .................................................. (23,944)
-----------
$ 165,000
===========
</TABLE>
Based on a third party appraisal, management determined that $6.0
million of the purchase price represented acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. This amount was recorded as a non-recurring expense in
the second quarter of 1999. Amortization expense of purchased technology and
other intangible assets resulting from the acquisition amounted to $4.3 million,
net of amortization of associated deferred income tax liabilities of $858,000,
for the three and six months ended June 30, 1999.
The following table shows pro forma revenue, net loss and net loss per
share of the Company giving effect to the IEX acquisition as of the beginning of
1998 and 1999, excluding the impact of the one-time charges noted above.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1999 1998
-------------- ---------------
(thousands, except per share amounts)
<S> <C> <C>
Revenues .................................................. $ 98,172 $ 99,898
Net loss .................................................. (13,132) (512)
Net loss per share ........................................ (0.24) (0.01)
</TABLE>
9
<PAGE> 10
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. CERTAIN BALANCE SHEET ITEMS
The components of inventories are:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
----------- -----------
(thousands)
<S> <C> <C>
Raw materials .................................. $ 7,579 $ 3,830
Work in process ................................ 1,765 2,064
Finished goods ................................. 10,863 6,978
----------- -----------
$ 20,207 $ 12,872
=========== ===========
Property and equipment consist of the following:
Manufacturing and development equipment ........ $ 23,285 $ 23,024
Furniture and office equipment ................. 16,557 9,677
Demonstration equipment ........................ 2,651 4,038
Leasehold improvements ......................... 3,724 1,953
----------- -----------
46,217 38,692
Less, accumulated depreciation and amortization (28,329) (25,833)
----------- -----------
Property and equipment, net ................ $ 17,888 $ 12,859
=========== ===========
Intangible assets consist of the following:
Goodwill ....................................... $ 94,774 $ --
Purchased technology ........................... 49,840 150
Other .......................................... 13,000 --
----------- -----------
157,614 150
Less accumulated amortization .................. (5,849) (19)
----------- -----------
Intangible assets, net ..................... $ 151,765 $ 131
=========== ===========
</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. Sales to related
parties amounted to $739,000 and $1.3 million for the three months ended June
30, 1999 and 1998, respectively, and $1.3 million and $2.5 million for the six
months ended June 30, 1999 and 1998, respectively.
10
<PAGE> 11
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
E. RESTRUCTURING
During the first quarter of 1999, the Company announced a plan to scale
down its Data Network Diagnostics Division and integrate the division into its
Intelligent Network Diagnostics Division. In connection with this activity, the
Company recorded a restructuring charge of $1.8 million consisting of cash
severance costs for 27 terminated employees in management, research and
development, support and administrative functions, and non-cash charges
consisting of the write-down of certain assets to their net realizable value.
The costs consisted of the following:
<TABLE>
<CAPTION>
Accrual as
Provision Costs of June 30,
Recorded Incurred 1999
----------- -------- -----------
(thousands)
<S> <C> <C> <C>
Severance pay ................................ $ 700 $ 700 $ --
Other accrued expenses ....................... 300 300 --
Inventory .................................... 350 150 200
Fixed assets ................................. 200 169 31
Other assets ................................. 250 91 159
------ ------ ----
$1,800 $1,410 $390
====== ====== ====
</TABLE>
At June 30, 1999, all 27 employees had been terminated, and all of the
severance costs and other accrued expenses had been paid.
F. INCOME TAXES
Although the Company had a loss for the three- and six-month periods
ended June 30, 1999, tax provisions of $1.5 million and $1.8 million,
respectively, were recorded, reflecting the effect of nondeductible
acquisition-related costs, partially offset by a benefit of $858,000 from the
utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Excluding the effect of these acquisition-related
costs, an estimated effective tax rate of 36% was applied and represented
federal, state and foreign taxes on the Company's income, reduced primarily by
research and development and foreign tax credits, compared to an effective tax
rate of 38% for the three- and six-month periods ended June 30, 1998.
G. LINES OF CREDIT AND BORROWINGS
The Company has a $15.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.5 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $15.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at the lender's prime
rate (7.75% at June 30, 1999), and expires on 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. In
connection with the Company's May 1999 acquisition of IEX Corporation, the
Company renegotiated certain terms under this credit facility, including various
financial ratios and net worth and indebtedness tests. The Company believes it
is in compliance with these requirements. 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 (1.375% at June 30, 1999) plus 0.125% per annum which expire between
November 20, 1999, and August 5, 2000, if not renewed. There have been no
borrowings under these lines of credit.
In connection with the Company's acquisition of IEX, the Company issued
$100 million in short-term notes secured by substantially all of the assets of
IEX. These notes bear interest at 7% per annum, payable quarterly, and mature on
November 7, 1999 (the "Original Maturity Date.") The maturity date may be
extended by the Company (the "Extended Maturity Date") for successive
three-month periods, subject to principal payments of at least $20 million prior
to the Initial Maturity Date and each successive Extended Maturity Date, and
provided that in any event, the maturity date can not be extended beyond
December 31, 2000. Immediately following the Initial Maturity Date, the interest
rate increases to 12%, and increases by an additional 2% at each successive
Extended Maturity Date.
11
<PAGE> 12
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
H. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are strategic operating
units that are managed separately due to their different products or geographic
location. Operating segment information for 1999 includes the post-acquisition
results on IEX (see note B). The Network Infrastructure operating segment
develops, markets and sells the Company's EAGLE STP products based on the
Company's high capacity packet switching platform; the IP7 Secure Gateway, an
SS7 gateway for signaling in converged networks, and other IP7 convergence
products; and DaVinci Network Products, which includes, among others, the
DaVinci Service Control Point, an advanced database server used for the
provisioning of telephony applications, DaVinci VoX Gateway Controller, a media
gateway controller for converged networks, and DaVinci Prepaid Services, a
prepaid calling platform. The Network Diagnostics operating segment develops,
markets and sells diagnostic products, including MGTS a diagnostic tool used
primarily by equipment suppliers for research and development; MGTS Sentinel,
used for testing within telecommunications networks; MGTS i3000, used to perform
diagnostics in converged networks; and Chameleon data diagnostics performance
analyzers. The Japan Diagnostics operating segment sells the Company's and third
parties' diagnostic products to customers in Japan. The Call Center operating
segment develops and supplies software-based solutions for Call Centers,
including TotalView Workforce Management and TotalNet Call Routing. Transfers
between operating segments are made at prices reflecting market conditions. The
allocation of revenues from external customers by geographic area is determined
by the destination of the sale.
The Company's operating segments and geographical information are as follows (in
thousands):
OPERATING SEGMENTS
<TABLE>
<CAPTION>
Net Sales
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Network Infrastructure ..... $ 30,497 $ 28,137 $ 50,862 $ 49,425
Network Diagnostics ........ 12,664 10,144 20,546 19,445
Call Center Products ....... 3,574 -- 3,574 --
Japan Diagnostics .......... 3,672 5,230 8,505 10,876
Other products ............. 1,551 -- 1,551 --
Intercompany Eliminations .. (230) (562) (625) (1,889)
----------- ----------- ----------- -----------
Total net sales ........ $ 51,728 $ 42,949 $ 84,413 $ 77,857
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Operating Income (Loss)
--------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Network Infrastructure .......... $ 5,614 $ 11,385 $ 8,926 $ 19,410
Network Diagnostics(1) .......... 3,282 1,845 1,301 3,426
Call Center Products ............ 1,377 -- 1,377 --
Japan Diagnostics ............... (109) 1,135 191 2,578
Other products .................. 675 -- 675 --
Intercompany Eliminations ....... (8) 344 153 129
General Corporate(2) ............ (15,238) (2,333) (17,737) (3,202)
----------- ----------- ----------- -----------
Total operating income (loss) $ (4,407) $ 12,376 $ (5,114) $ 22,341
=========== =========== =========== ===========
</TABLE>
(1) Network Diagnostics operating segment reflects the $1,800 restructuring
charge recorded in the six months ended June 30, 1999 (see Note E).
(2) General Corporate includes acquisition-related charges and amortization
of $12,033 for the three and six months ended June 30, 1999, and a
benefit of $1,663 for the settlement of an insurance claim in the six
months ended June 30, 1998.
12
<PAGE> 13
ENTERPRISE-WIDE DISCLOSURES
The following table sets forth, for the periods indicated, revenues from
external customers by principal product line:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Network Infrastructure ............... $ 30,497 $ 28,137 $ 50,824 $ 49,425
Network Diagnostics .................. 16,106 14,812 28,426 28,432
Call Center Products ................. 3,574 -- 3,574 --
Other Products ....................... 1,551 -- 1,551 --
----------- ----------- ----------- -----------
Total revenues from external
customers ...................... $ 51,728 $ 42,949 $ 84,413 $ 77,857
=========== =========== =========== ===========
</TABLE>
The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
North America ........................ $ 40,178 $ 26,683 $ 61,308 $ 46,274
Japan ................................ 3,672 5,230 8,505 10,876
Europe ............................... 2,925 2,456 4,727 3,943
Rest of World ........................ 4,953 8,580 9,873 16,764
----------- ----------- ----------- -----------
Total revenues from external
customers ...................... $ 51,728 $ 42,949 $ 84,413 $ 77,857
=========== =========== =========== ===========
</TABLE>
The following table sets forth, for the periods indicated, long-lived assets by
geographic area in which the Company holds assets:
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
United States ............. $ 18,502 $ 12,348
Japan ..................... 1,066 1,216
Other ..................... 46 51
----------- -----------
Total long-lived assets $ 19,614 $ 13,615
=========== ===========
</TABLE>
13
<PAGE> 14
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
I. 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, 1999 and 1998:
<TABLE>
<CAPTION>
NET INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------------
FOR THE THREE MONTHS ENDED JUNE 30, 1999: (thousands except per share amount)
<S> <C> <C> <C>
Basic EPS ............................... $ (6,136) 54,766 $ (0.11)
Effect of Dilutive Securities - Stock
Options and Warrants ................ -- --
----------- -----------
Diluted EPS ............................. $ (6,136) 54,766 $ (0.11)
=========== ===========
FOR THE THREE MONTHS ENDED JUNE 30, 1998:
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 SIX MONTHS ENDED JUNE 30, 1999:
Basic EPS ............................... $ (5,644) 54,618 $ (0.10)
Effect of Dilutive Securities - Stock
Options and Warrants ................ -- --
----------- -----------
Diluted EPS ............................. $ (5,644) 54,618 $ (0.10)
=========== ===========
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
=========== ===========
</TABLE>
14
<PAGE> 15
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 1998. 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.
In January 1999, the Company scaled down its Data Network Diagnostics
Division and integrated this division into its Intelligent Network Diagnostics
Division. (See Note E to Consolidated Financial Statements.) In May 1999, the
Company acquired all of the outstanding stock of IEX Corporation, which
develops, markets and sells solutions for intelligent networks, call centers and
other telecommunications markets. The acquisition was accounted for under the
purchase method of accounting, and accordingly, the Company's results of
operations include the results of IEX beginning as of May 7, 1999. In connection
with the acquisition, the Company recorded approximately $132.9 million of
goodwill and other intangible assets, net of related deferred income tax
liabilities. During the second quarter of 1999, the Company recorded a charge of
$6.0 million related to the write-off of purchased in-process research and
development in connection with the acquisition of IEX, and an additional
$830,000 charge for the write-off of certain assets made redundant by the
acquisition.
15
<PAGE> 16
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain income statement items bear to total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................ 34.8 32.9 34.7 32.8
Amortization of purchased technology .......... 2.9 -- 1.8 --
----------- ----------- ----------- -----------
Gross profit .................................. 62.3 67.1 63.5 67.2
Research and development ...................... 20.3 13.5 23.0 14.6
Selling, general and administrative ........... 30.1 24.8 32.0 23.9
Amortization of goodwill and other purchased
intangibles ................................... 7.2 -- 4.4 --
Non-recurring acquisition-related charges ..... 13.2 -- 8.1 --
Restructuring ................................. -- -- 2.1 --
----------- ----------- ----------- -----------
Total operating expenses ...................... 70.8 38.3 69.6 38.5
----------- ----------- ----------- -----------
Income (loss) from operations ................. (8.5) 28.8 (6.1) 28.7
Interest and other income (expense), net ...... (0.4) 2.6 1.5 2.4
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes (8.9) 31.4 (4.6) 31.1
Provision for income taxes .................... 2.9 11.9 2.1 11.8
----------- ----------- ----------- -----------
Net income (loss) ............................. (11.8)% 19.5% (6.7)% 19.3%
=========== =========== =========== ===========
</TABLE>
16
<PAGE> 17
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Network Infrastructure 59% 65% 60% 63%
Network Diagnostics .. 31 35 34 37
Call Center .......... 7 -- 4 --
Other ................ 3 -- 2 --
-------- -------- -------- --------
Total ............ 100% 100% 100% 100%
======== ======== ======== ========
</TABLE>
The following table sets forth, for the periods indicated, the revenues
by geographic territories as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
-----------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
North America 78% 62% 73% 59%
Japan ....... 7 12 10 14
Europe ...... 6 6 5 5
Rest of World 9 20 12 22
-------- -------- -------- --------
Total ... 100% 100% 100% 100%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE THREE MONTHS ENDED
JUNE 30, 1998
Revenues. The Company's revenues increased by $8.8 million, or 20%,
during the second quarter of 1999 due to the inclusion of post-acquisition sales
of IEX products following the Company's acquisition of IEX during the quarter.
Revenues from Network Infrastructure products increased by $2.4 million,
or 8%, to $30.5 million due to the inclusion of post-acquisition sales of IEX's
Intelligent Network products, partially offset by lower EAGLE STP revenues as a
result of lower unit sales and lower average STP system prices. The lower
average STP system prices were due to the continued trend towards smaller
average system sizes, and were partially offset by higher sales of upgrades and
software enhancements to the Company's larger installed base of EAGLE STP
systems.
17
<PAGE> 18
Revenues from network diagnostics products increased by $1.3 million, or
9%, due principally to higher sales of MGTS diagnostics products, primarily as a
result of increased market acceptance of the Company's MGTS Sentinel product,
partially offset by lower sales of the Company's traditional MGTS products,
particularly in Japan.
Revenues in North America increased by $13.5 million, or 51%, due
primarily to the inclusion of post-acquisition IEX product sales. Sales in Japan
decreased by $1.6 million, or 30%, due to lower Chameleon and MGTS product
sales, partially offset by higher sales of MGTS-related development services.
Revenues in Europe increased by $469,000, or 19%, due to higher EAGLE STP
product sales. Rest of world revenues decreased by $3.6 million, or 42%, due
primarily to lower EAGLE STP product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by $500,000, or 1%, and did not have a material effect on net
loss in the second quarter of 1999.
A significant portion of the Company's revenues in each quarter results
from orders that are received in that quarter, and are difficult to predict.
Further, the Company typically generates a significant portion of its revenues
for each quarter in the last month of the quarter. The Company establishes its
expenditure levels based on its expectations as to future revenues, and if
revenue levels were to fall below expectations, then such shortfall would cause
expenses to be disproportionately high. Therefore, a drop in near-term demand
would significantly affect revenues, causing a disproportionate reduction in
profits or even losses in a quarter.
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 products and related applications and
the MGTS Sentinel; market acceptance of the Company's recently introduced IP7
and DaVinci VoX products, as well as future products; growth in the markets for
the Company's products; and the Company's ability to address other existing and
new markets for its products.
Gross Profit. Gross profit as a percentage of revenues decreased to
62.3% in the second quarter of 1999 compared with 67.1% in the second quarter of
1998. The decrease in gross margins was principally due to the amortization of
purchased technology, principally in connection with the acquisition of IEX, and
lower margins in Japan due to a higher percentage of lower margin sales,
primarily development services. Excluding the amortization of purchased
technology related to the IEX acquisition, gross profit as a percentage of
revenue for the three months ended June 30, 1999 was 65.2%.
Research and Development. Research and development expenses increased
overall by $4.7 million, or 82%, and increased as a percentage of revenues to
20% in the second quarter of 1999 from 13% in the second quarter of 1998. The
dollar increase was attributable principally to the inclusion of
post-acquisition IEX research and development expenses, and increased expenses
incurred in connection with the hiring of additional personnel for product
development and enhancements for both network infrastructure and intelligent
network diagnostics products, primarily related to the Company's continued
development of products to address the IP/SS7 market. Based on the Company's
present product development plans, the Company expects that its research and
development expenses for the remainder of 1999 will increase in dollars when
compared to prior periods in 1998.
18
<PAGE> 19
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.9 million, or 46%, and increased as a
percentage of revenues to 30% in the second quarter of 1999 from 25% in the
second quarter of 1998. The dollar increase was primarily due to the inclusion
of post-acquisition IEX selling, general and administrative expenses, and
increased personnel and infrastructure-related expenses incurred to support the
growing EAGLE STP installed base and anticipated higher sales levels. The
Company expects that selling, general and administrative expenses for the
remainder of 1999 will increase in dollars when compared to prior periods.
Interest and Other Income (Expense), Net. Net interest expense was
$211,000 for the second quarter of 1999 compared to net interest income of $1.2
million in the second quarter of 1998. The net expense reflected interest
expense incurred for notes issued in connection with the acquisition of IEX, and
lower invested cash balances due to cash payments made in connection with the
acquisition of IEX.
Income Taxes. Although the Company had a loss for the three-month period
ended June 30, 1999, a tax provision of $1.5 million was recorded, reflecting
the effect of nondeductible acquisition-related costs, partially offset by a
benefit of $858,000 from the utilization of deferred tax liabilities related to
certain of these acquisition-related costs. Excluding the effect of these
acquisition-related costs, an estimated effective tax rate of 36% was applied
and represented federal, state and foreign taxes on the Company's income,
reduced primarily by research and development and foreign tax credits, compared
to an effective tax rate of 38% for the three months ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE SIX MONTHS ENDED
JUNE 30, 1998
Revenues. The Company's revenues increased by $6.6 million, or 8%,
during the six months ended June 30, 1999 due primarily to the inclusion of
post-acquisition IEX product sales following the Company's acquisition of IEX in
May 1999.
Revenues from network infrastructure products increased by $1.4 million,
or 3%, to $50.9 million due primarily to the addition of sales of IEX's
Intelligent Network Products, partially offset by lower EAGLE STP revenues as a
result of lower unit sales and lower average STP system prices. The lower
average STP system prices were due to smaller average system sizes sold in 1999,
and were partially offset by higher sales of upgrades and software enhancements
to the Company's larger installed base of EAGLE STP systems.
Revenues from network diagnostics products were flat. Higher sales of
intelligent network diagnostic products were partially offset by lower sales of
data network diagnostic products.
Revenues in North America increased by $15.0 million, or 32%, primarily
as a result of the inclusion of post-acquisition IEX product sales and higher
EAGLE STP sales. Sales in Japan decreased by $2.4 million, or 22%, due to lower
Chameleon and MGTS product sales, partially offset by higher sales of
MGTS-related development services. Revenues in Europe increased by $784,000, or
20%, due to higher EAGLE STP product sales. Rest of world revenues decreased by
$6.9 million, or 41%, due primarily to lower EAGLE STP product sales.
19
<PAGE> 20
The impact of exchange rate fluctuations on currency translations
increased revenues by $898,000, or 1%, and did not have a material effect on net
income in the six months ended June 30, 1999.
Gross Profit. Gross profit as a percentage of revenues decreased to
63.5% in the six months ended June 30, 1999 compared with 67.2% in the six
months ended June 30, 1998. The decrease in gross margins was primarily due to
the amortization of purchased technology, primarily in connection with the
acquisition of IEX, and lower margins in Japan due to a higher percentage of
lower margin sales, primarily development services. Excluding the amortization
of purchased technology related to the IEX acquisition, gross profit as a
percentage of sales was 65.3%.
Research and Development. Research and development expenses increased
overall by $8.0 million, or 71%, and increased as a percentage of revenues to
23% in the six months ended June 30, 1999 from 15% in the six months ended June
30, 1998. The dollar increase was attributable principally to the inclusion of
post-acquisition IEX research and development expenses and increased expenses
incurred in connection with the hiring of additional personnel for product
development and enhancements for both network infrastructure and intelligent
network diagnostics products, primarily related to the Company's continued
development of products to address the IP/SS7 market.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.3 million, or 45%, and increased as a
percentage of revenues to 32% in the six months ended June 30, 1999 from 24% in
the six months ended June 30, 1998. The dollar increase was primarily due to the
inclusion of post-acquisition IEX selling, general and administrative expenses
and increased personnel and infrastructure-related expenses incurred to support
the growing EAGLE STP installed base and anticipated higher sales levels. The
increase compared to 1998 was also due to a $1.6 million insurance settlement
which benefited the 1998 expenses.
Interest and Other Income (Expense), Net. Net interest income decreased
by $869,000, or 41%, during the six months ended June 30, 1999 due primarily to
interest expense incurred for notes issued in connection with the acquisition of
IEX, and lower invested cash balances due to cash payments made in connection
with the acquisition of IEX.
Income Taxes. Although the Company had a loss for the six-month period
ended June 30, 1999, a tax provision of $1.8 million was recorded reflecting
the effect of nondeductible acquisition-related costs partially offset by a
benefit of $858,000 from the utilization of deferred tax liabilities related to
certain of these acquisition-related costs. Excluding the effect of these
acquisition-related costs, an estimated effective tax rate of 36% was applied
and represented federal, state and foreign taxes on the Company's income,
reduced primarily by research and development and foreign tax credits, compared
to an effective tax rate of 38% for the six months ended June 30, 1998.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended June 30, 1999, cash and cash
equivalents increased by $8.9 million to $40.8 million, after net proceeds of
$54.8 million from the sale of short-term and long-term investments. Operating
activities, net of the effects of exchange rate changes on cash, provided $7.9
million. Financing activities, which represented proceeds from the issuance of
Common Stock upon the exercise of options and warrants, provided $2.4 million,
and investing activities, excluding the net proceeds from the sale of short-term
and long-term investments, used $56.1 million primarily due to cash paid in
connection with the acquisition of IEX.
Accounts receivable, including amounts due from related parties,
increased by 8% during the first six months of 1999 due primarily to the
inclusion of IEX receivables partially offset by strong collections activity.
Inventory levels increased by 57% primarily due to IEX inventory requirements.
Trade accounts payable increased by 23% during the first six months of 1999,
primarily due to the inclusion of IEX payables and the increased level of
operating expenses incurred by the Company primarily to support the Company's
product development programs and anticipated higher sales levels. Deferred
revenues increased 123% during the first six months of 1999 primarily as a
result of the inclusion of IEX deferred revenues and increased extended warranty
service revenues which are deferred and recognized ratably over the warranty
period.
Capital expenditures of $5.5 million during the first six months of 1999
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion. Technology
purchases, excluding purchased technology recorded in connection with the
acquisition of IEX, amounted to $1.6 million, and consisted primarily of
software licenses purchased for use in switching and diagnostics product
applications.
The Company has a $15.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.5 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $15.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at the lender's prime
rate (7.75% at June 30, 1999), and expires on 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. In
connection with the Company's May 1999 acquisition of IEX Corporation, the
Company renegotiated certain terms of this credit facility, including various
financial ratios and net worth and indebtedness tests, and believes that the
Company is in compliance with these requirements. 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 (1.375% at June 30, 1999) plus 0.125% per annum which expire between
November 20, 1999, and August 5, 2000, if not renewed. There have been no
borrowings under these lines of credit.
21
<PAGE> 22
In connection with the Company's acquisition of IEX, the Company issued
$100 million in short-term notes secured by substantially all of the assets of
IEX. These notes bear interest at 7% per annum, payable quarterly, and mature on
November 7, 1999 (the "Original Maturity Date.") The maturity date may be
extended by the Company (the "Extended Maturity Date") for successive
three-month periods, subject to principal payments of at least $20 million prior
to the Initial Maturity Date and each successive Extended Maturity Date, and
provided that, in any event, the maturity date cannot be extended beyond
December 31, 2000. Immediately following the Initial Maturity date, the interest
rate increases to 12%, and increases by an additional 2% at each successive
Extended Maturity Date.
Although the short-term notes assumed in connection with the acquisition
of IEX Corporation include provisions allowing for the extension of the maturity
date, the Company intends to refinance the short-term notes with long-term debt
during 1999. The Company believes that it will be successful in its efforts to
refinance the short-term notes, and that its existing working capital, funds
generated through operations, and its current bank lines of credit will be
sufficient to satisfy operating requirements for at least the next twelve
months. 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.
READINESS FOR YEAR 2000
Background. As the year 2000 approaches, a critical issue has emerged
regarding how existing application software programs, operating systems and
embedded computer chips can accommodate the year 2000 date value. The Company
has a year 2000 project team in place with overall responsibility for the
Company's year 2000 compliance programs. In addition, executive management
regularly monitors the status of the Company's year 2000 remediation plans.
Project. The Company has identified potential year 2000 risks in four
categories: software and system products the Company sells to customers;
internal business software and information technology systems; systems other
than information technology systems ("Non-IT systems"); and third-party
suppliers to the Company. The Company's year 2000 project includes the following
phases for the first three categories above: (1) identifying year 2000 risks;
(2) assigning priorities to identified risks; (3) testing year 2000 compliance
for risks determined to be material to the Company; (4) correcting problems
determined to be material and not year 2000 compliant; (5) retesting corrections
that have been implemented and (6) developing contingency plans. With respect to
the Company's third-party suppliers, the Company's year 2000 project consists of
the following phases: (1) contacting suppliers for information concerning their
year 2000 readiness; (2) prioritizing suppliers as to relative importance; (3)
validating supplier responses regarding year 2000 compliance and (4) developing
contingency plans in the event that one or more suppliers fails to achieve year
2000 compliance.
22
<PAGE> 23
Assessment. The software and systems products that the Company sells to
customers consist of internally developed software, third-party software
licensed by the Company for use in or with the Company's products, hardware
systems designed and manufactured by the Company and hardware systems designed
and manufactured by third parties. The Company has identified priorities,
completed the initial testing phase and begun offering solutions to its
customers. The Company believes that its current product offerings are year 2000
compliant. For past product offerings that the Company is still supporting, the
Company is offering releases that should make such products year 2000 compliant.
However, failure to achieve year 2000 compliance for any products could
materially adversely affect sales in 1999. Additionally, if any of the Company's
mission critical products were to fail in the field as a result of year 2000
noncompliance, such failure could result in substantial liability to the Company
and have a material adverse effect on the Company's financial results, business,
market position, reputation and prospects.
Internal business software and systems consists primarily of the
Company's business information systems in the United States and at the Company's
Japanese subsidiary. The Company has implemented and tested the necessary
modifications to make its significant internal business systems year 2000
compliant, and the Company believes that such internal business software and
systems are year 2000 compliant. However, if the Company's business systems are
not year 2000 compliant, the Company could experience interruptions to its
production process, development programs and general business operations.
The Company has been advised by the suppliers of its Non-IT systems,
which consist primarily of environmental systems such as fire suppression and
security systems at the various buildings the Company occupies, that such
systems are currently year 2000 compliant.
Third-party suppliers provide component parts, purchased assemblies and
contract manufacturing services incorporated by the Company into the products
and systems it sells. The Company is requiring that each of its key suppliers
certify whether they are year 2000 compliant. The Company has also prioritized
its suppliers by level of criticality to the Company's business. Based on
information received from the Company's critical suppliers, the Company
estimates that approximately 70% of its critical suppliers are presently year
2000 compliant. The Company plans to monitor its critical suppliers and either
develop alternate sources or increase inventory levels prior to the year 2000
for those vendors considered to be at risk of not achieving year 2000
compliance. However, there can be no assurance that such alternate sources will
be available or that adequate inventory levels will be attainable if necessary,
and the Company could experience parts shortages and production interruptions if
one or more key third-party suppliers experience year 2000 problems.
Costs. Incremental costs of the Company's year 2000 project have
consisted of the hiring of two contractors to assist with administrative duties
related to the year 2000 project, consulting by PricewaterhouseCoopers LLP at
the initial stages of the project and a third-party audit team, which provides
year 2000 compliance test audit reports. Such costs in the aggregate have not
been material to the Company's financial position, results of operations or cash
flows. The balance of the effort for the Company's year 2000 project has been by
employees whose costs for this project are not tracked separately. The Company
believes that costs for the remainder of the year 2000 project will not be
material to the Company's financial position, results of operations or cash
flows.
23
<PAGE> 24
Risks. The Company's results of operations, financial condition and cash
flows could be materially adversely affected if the Company or any of its key
suppliers or customers do not achieve year 2000 compliance. Although the
Company's year 2000 project is expected to minimize the Company's risks of
experiencing a year 2000 problem, inherent risks and uncertainties exist despite
the Company's efforts. There can be no assurance that a failure on the part of
the Company, its products, its key suppliers or its customers will not be
disruptive to the Company's business. As a result of these uncertainties the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material effect on the Company's results of
operations, financial condition or cash flows.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The statements that 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, changes in customer product mix,
customer acceptance of the Company's products, capital spending patterns of
customers, including shifts in such patterns as a result of customers' deferral
of product purchases until the year 2000, competition and pricing, new product
introductions by the Company or its competitors, carrier deployment of
intelligent network services, the level and timing of research and development
expenditures, regulatory changes, readiness for the year 2000 by the Company,
its customers and its suppliers, general economic conditions and other risks
described in this Annual Report and in certain of the Company's Securities and
Exchange Commission filings. Many of these risks and uncertainties are outside
of the Company's control and are difficult for the Company to forecast. Actual
results may differ materially from those expressed or implied in such
forward-looking statements.
24
<PAGE> 25
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 14, 1999, the Company held its 1999 Annual Meeting of
Shareholders (the "Annual Meeting").
(b) At the Annual Meeting, the following persons were elected as
directors of the Company. The numbers 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 50,407,324 483,629
Jean-Claude Asscher 50,414,182 476,771
Daniel L. Brenner 50,409,109 481,844
Michael L. Margolis 50,357,120 533,833
Howard Oringer 50,408,922 481,031
Jon F. Rager 50,419,092 471,861
</TABLE>
(c) At the Annual Meeting, the shareholders approved, with 22,892,413
votes cast in favor and 16,756,218 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 by 5,000,000. There were 173,537
abstentions and 11,068,785 broker nonvotes with respect to this matter.
(d) At the Annual Meeting, with 50,791,915 votes cast in favor, the
shareholders ratified the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the year ending December 31, 1999.
59,986 votes were cast against such ratification, and there were 39,052
abstentions with respect to this matter.
ITEM 5. OTHER INFORMATION
Notice of any shareholder proposal to be presented at the Company's Annual
Meeting of Shareholders to be held in 2000 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 December 6, 1999.
25
<PAGE> 26
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 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(2), together with Promissory Note
of the Registrant dated July 15, 1998(2), as amended April 18,
1999.
10.2 Amendment No. 1 dated March 8, 1999 to Tekelec Officer Severance
Plan.
10.3 1994 Stock Option Plan, including forms of stock option
agreements(3), as amended February 4, 1995(4), March 3, 1995(4),
January 27, 1996(5), February 26, 1997(6), March 19, 1997(6),
March 20, 1998(2) and March 19, 1999.
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 Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended June 30, 1998.
(3) 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.
(4) 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.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-05933) filed with the Commission on June
13, 1996.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-28887) filed with the Commission on June
10, 1997.
26
<PAGE> 27
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 16, 1999
/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> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
10.1 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(2), together with Promissory Note of the Registrant
dated July 15, 1998(2), as amended April 18, 1999.
10.2 Amendment No. 1 dated March 8, 1999 to Tekelec Officer Severance Plan.
10.3 1994 Stock Option Plan, including forms of stock option agreements(3),
as amended February 4, 1995(4), March 3, 1995(4), January 27, 1996(5),
February 26, 1997(6), March 19, 1997(6), March 20, 1998(2) and March 19,
1999.
27.1 Financial Data Schedule (provided for the information of the Securities
and Exchange Commission only.)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment ("Amendment") amends that certain Credit Agreement
("Agreement") dated April 18, 1999 by and between Tekelec ("Borrower") and
Imperial Bank ("Bank") as follows:
1. Section 4.9 of the Agreement is hereby amended in its entirety to read as
follows:
DEBT TO NET WORTH. Maintain on a quarterly basis a consolidated ratio of
total liabilities to Net Worth of not greater than 2.00:1.00
Except as provided above, the Agreement remains unchanged.
5. This Amendment is effective as of July 30, 1999, and the parties hereby
confirm that the Agreement as amended is in full force and effect.
TEKELEC IMPERIAL BANK
"BORROWER" "BANK"
By: /s/ GILLES C. GODIN By: /s/ NILO SOLER
-------------------------- -------------------------
Its: V.P. Finance and CFO Its: Vice President
By: /s/ MICHAEL L. MARGOLIS
--------------------------
Its: President and CEO
<PAGE> 1
EXHIBIT 10.2
UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
TEKELEC
TO ACTION TAKEN WITHOUT A MEETING
Pursuant to the authority granted to the directors of Tekelec, a
California corporation (the "Company"), to take action by unanimous written
consent without a meeting by the California Corporations Code and the Company's
Bylaws, the undersigned, each being a duly elected director and together
constituting all of the directors of the Company, upon due consideration and
consultation, do hereby each and all consent to the adoption of the following
preamble and resolutions:
Amendment to Officer Severance Plan
WHEREAS, the Compensation Committee of the Company's Board of Directors
has recommended to the Board of Directors that the Company's Officer Severance
Plan be amended to provide for the accelerated vesting of an eligible officer's
options and rights to purchase securities of the Company under certain
circumstances in connection with a "Change in Control" of the Company (as such
term as defined in the Company's Officer Severance Plan);
NOW, THEREFORE, BE IT RESOLVED, that the Officer Severance Plan
("Severance Plan") be, and hereby is, amended, effective immediately, to add
Section 6(d) to the Severance Plan to read in its entirely as follows:
"(d) (i) If in connection with, or within two yeas following, a Change in
Control of the Company, (A) an Eligible Officer's employment with the Company
(or the Acquiror) is terminated by the Company (or the Acquiror) without Cause
or (B) an Eligible Officer terminates his/her employment with the Company (or
the Acquiror) for "Good Reason," then all of such Eligible Officer's then
unvested options and other rights to purchase or acquire securities or other
property of the Company or the Acquiror (including but not limited to any
options or rights assumed by the Acquiror in connection with the Change in
Control), other than any such options or rights that were granted after the
effective date of the Change in Control, shall automatically vest and become
immediately exercisable in full and all of such Eligible Officer's options and
rights to purchase securities or other property of the Company and/or the
Acquiror (other than any such options and rights that are granted after the
effective date of the Change in Control, which options and rights shall be
governed by the terms thereof) shall be exercisable for a period of one year
following the effective date of such Eligible Officer's termination of
employment with the Company or the
<PAGE> 2
Acquiror, as the case may be (notwithstanding any terms or provisions to
the contrary in any applicable stock option plan, stock option agreement or
other plan or agreement); provided, however, that any such option or other
right shall not be exercisable after the expiration of the term of such
option or other right set forth in the option agreement or other agreement
evidencing such right.
(ii) If in connection with a Change in Control of the Company
described in Section 2(e)(iii) of this Plan, an Eligible Officer is not
offered, at least ten days prior to the effective date of such Change in
Control, employment with the Acquiror after the effective date of the
Change in Control on terms and conditions generally no less favorable to
the Eligible Officer than the terms and conditions of his/her employment in
effect with the Company immediately prior to the effective date of the
Change in Control, then all of such Eligible Officer's unvested options and
other rights to purchase or acquire the Company's securities that are
outstanding immediately prior to the effective date of the Change in
Control shall automatically vest and become immediately exercisable in full
and all of such Eligible Officer's options and rights to purchase or
acquire the Company's securities that are outstanding immediately prior to
the effective date of the Change in Control shall be exercisable for a
period of one year following the effective date of such Change in Control
(notwithstanding any terms or provisions to the contrary in any applicable
stock option plan, stock option agreement or other plan or agreement);
provided, however, that any such option or other right shall not be
exercisable after the expiration of the term of such option or other right
set forth in the option agreement or other agreement evidencing such
right.''
General Resolution
- ------------------
RESOLVED, that any and all actions taken by persons who are or have been
officers or directors of the Company, which would have been in conformity with
the above resolution if such resolution had been in effect at the time of such
action, be, and hereby are, ratified, approved and confirmed in all respects;
and
RESOLVED FURTHER, that the officers of the Company, or any of them, be,
and they hereby are, authorized to perform any acts, including the payment of
any and all expenses, and to execute and deliver any and all documents, that
any or all of them deem necessary or appropriate in their opinion to carry out
any or all of the foregoing resolutions.
<PAGE> 3
This Consent may be signed in counterparts, all of which together shall
constitute one and the same instrument. This Consent is executed effective as
of March 8, 1999.
- ----------------------------------- -----------------------------------
Jean-Claude Asscher, Chairman Robert V. Adams
- ----------------------------------- -----------------------------------
Daniel L. Brenner Michael L. Margolis
- ----------------------------------- -----------------------------------
Howard Oringer Jon F. Rager
<PAGE> 1
Exhibit 10.3
TEKELEC
1994 STOCK OPTION PLAN
1. Section 3. 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 Nineteen Million (19,000,000) 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."
2. Section 7.e. Section 7.e. of the 1994 Stock Option Plan is hereby
amended to read in its entirety as follows:
"Termination of Eligibility. If an Optionee ceases to serve as
an Employee for any reason other than death or permanent and total
disability (within the meaning of Section 22(e)(3) of the Code) and
thereby terminates his or her Continuous Status as an Employee, he or
she may, but only within three (3) months following the date he or she
ceases his or her Continuous Status as an Employee (subject to any
earlier termination of the Option as provided by its terms), exercise
his or her Option to the extent that he or she was entitled to exercise
it at the date of such termination. To the extent that he or she was not
entitled to exercise the Option at the date of such termination, or if
he or she does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
Notwithstanding anything to the contrary herein, the Committee may at
any time and from time to time prior to the termination of an Option,
with the consent of the Optionee, extend the period of time during
<PAGE> 2
which the Optionee may exercise his or her Option following the date he
or she ceases his or her Continuous Status as an Employee; provided,
however, that the maximum period of time during which an Option shall be
exercisable following the date on which an Optionee terminates his or
her Continuous Status as an Employee shall not exceed an aggregate of
one (1) year, that the Option shall not be, or as a result of such
extension become, exercisable after the expiration of the term of such
Option as set forth in the Option Agreement and, notwithstanding any
extension of time during which the Option may be exercised, that such
Option, unless otherwise amended by the Committee, shall only be
exercisable to the extent the Optionee was entitled to exercise it on
the date he or she ceased his or her Continuous Status as an Employee."
Dated: March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 40,816
<SECURITIES> 13,358
<RECEIVABLES> 62,184
<ALLOWANCES> 1,219
<INVENTORY> 20,207
<CURRENT-ASSETS> 156,460
<PP&E> 46,217
<DEPRECIATION> 28,329
<TOTAL-ASSETS> 349,278
<CURRENT-LIABILITIES> 162,065
<BONDS> 0
0
0
<COMMON> 96,356
<OTHER-SE> 66,743
<TOTAL-LIABILITY-AND-EQUITY> 349,278
<SALES> 84,413
<TOTAL-REVENUES> 84,413
<CGS> 30,821
<TOTAL-COSTS> 30,821
<OTHER-EXPENSES> 58,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,093
<INCOME-PRETAX> (3,856)
<INCOME-TAX> 1,788
<INCOME-CONTINUING> (5,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,644)
<EPS-BASIC> (0.10)<F1>
<EPS-DILUTED> (0.10)
<FN>
<F1>DATA LISTED FOR "EPS-PRIMARY" IS THE NEWLY
DEFINED "BASIC EPS".
</FN>
</TABLE>
