<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, 2000
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, 2000, there were 57,632,251 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> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 2000 and 3
December 31, 1999
Consolidated Statements of Operations for the three 4
months ended March 31, 2000 and 1999
Consolidated Statements of Comprehensive Income for the 5
three months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flow for the three months 6
ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES
- ----------
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
-------- --------
(thousands, except share data)
ASSETS (unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 85,057 $ 46,671
Short-term investments, at fair value ................. 15,474 37,997
Accounts and notes receivable, less
allowances of $1,459 and $1,478, respectively ....... 71,069 83,649
Inventories ........................................... 26,337 24,310
Amounts due from related parties ...................... 1,635 1,847
Income taxes receivable ............................... 9,964 --
Deferred income taxes, net ............................ 10,186 8,365
Prepaid expenses and other current assets ............. 12,253 5,150
-------- --------
Total current assets .............................. 231,975 207,989
Long-term investments, at fair value ....................... 29,307 21,996
Property and equipment, net ................................ 22,085 21,667
Intangible assets, net ..................................... 127,493 135,706
Deferred income taxes, net ................................. 2,320 2,780
Other assets ............................................... 4,319 4,296
-------- --------
Total assets ...................................... $417,499 $394,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ................................ $ 15,400 $ 16,249
Accrued expenses ...................................... 16,321 19,196
Accrued payroll and related expenses .................. 8,159 8,937
Current portion of deferred revenues .................. 36,352 35,330
Income taxes payable .................................. -- 575
-------- --------
Total current liabilities ......................... 76,232 80,287
Long-term convertible debt ................................. 116,635 115,786
Deferred income taxes ...................................... 17,990 19,229
Long-term portion of deferred revenues ..................... 4,213 2,537
-------- --------
Total liabilities ................................. 215,070 217,839
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, without par value, 200,000,000 shares
authorized; issued and outstanding 57,534,465
and 55,713,127 respectively ......................... 129,583 101,385
Retained earnings ..................................... 70,726 72,528
Accumulated other comprehensive income ................ 2,120 2,682
-------- --------
Total shareholders' equity ........................ 202,429 176,595
-------- --------
Total liabilities and shareholders' equity ........ $417,499 $394,434
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
(thousands, except per share data)
<S> <C> <C>
REVENUES ....................................................... $ 60,062 $ 32,685
COSTS AND EXPENSES:
Cost of goods sold ........................................ 19,752 11,330
Amortization of purchased technology ...................... 2,541 19
Research and development .................................. 12,239 8,868
Selling, general and administrative ....................... 19,362 11,375
Amortization of goodwill and other intangible assets ...... 5,672 --
Restructuring ............................................. -- 1,800
-------- --------
Total costs and expenses .............................. 59,566 33,392
-------- --------
Income (Loss) from operations .................................. 496 (707)
Other income (expense):
Interest income ........................................... 1,512 1,471
Interest expense .......................................... (2,193) --
Other, net ................................................ (28) 4
-------- --------
Total other income (expense) .......................... (709) 1,475
-------- --------
Income (Loss) before provision for income taxes ................ (213) 768
Provision for income taxes ................................ 1,589 276
-------- --------
NET INCOME (LOSS) .................................... $ (1,802) $ 492
======== ========
EARNINGS (LOSS) PER SHARE:
Basic ..................................................... $ (0.03) $ 0.01
Diluted ................................................... (0.03) 0.01
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ..................................................... 56,537 54,471
Diluted ................................................... 56,537 58,612
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
------- -------
(thousands)
<S> <C> <C>
NET INCOME (LOSS) ................................ $(1,802) $ 492
Other comprehensive expense:
Foreign currency translation adjustments .... (562) (548)
------- -------
COMPREHENSIVE LOSS ............................... $(2,364) $ (56)
======= =======
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
(thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ (1,802) $ 492
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation ............................................... 2,753 1,674
Amortization ............................................... 8,213 19
Amortization of deferred financing costs ................... 198 --
Non-cash portion of restructuring charge ................... -- 800
Convertible debt accretion ................................. 849 --
Deferred income taxes ...................................... (1,032) 225
Changes in assets and liabilities:
Accounts and notes receivable ............................ 12,395 7,894
Inventories .............................................. (2,049) (2,501)
Amounts due from related parties ......................... 212 129
Income taxes receivable .................................. 2,852 (105)
Prepaid expenses and other current assets ................ (7,106) (866)
Trade accounts payable ................................... (704) 3,142
Accrued expenses ......................................... (2,921) (2,720)
Accrued payroll and related expenses ..................... (679) (1,143)
Deferred revenues ........................................ 2,695 2,742
Income taxes payable ..................................... (869) (3,717)
-------- --------
Total adjustments ...................................... 14,807 5,573
-------- --------
Net cash provided by operating activities .............. 13,005 6,065
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities .... 34,505 20,850
Purchase of available-for-sale securities .................. (19,293) (17,909)
Purchase of property and equipment ......................... (3,204) (2,661)
Purchase of technology ..................................... -- (1,080)
Decrease (increase) in other assets ........................ (240) 31
-------- --------
Net cash provided by (used in) investing activities .... 11,768 (769)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ..................... 14,086 867
-------- --------
Net cash provided by financing activities .............. 14,086 867
-------- --------
Effect of exchange rate changes on cash ......................... (473) (453)
-------- --------
Net change in cash and cash equivalents .................... 38,386 5,710
Cash and cash equivalents at beginning of period ................ 46,671 31,932
-------- --------
Cash and cash equivalents at end of period ...................... $ 85,057 $ 37,642
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
Tax benefit related to stock options ....................... $ 14,112 $ --
</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, 1999, 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
consolidated financial statements for the three months ended March 31, 2000 and
1999 are for the thirteen weeks ended March 31, 2000 and April 2, 1999,
respectively.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1999,
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
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.
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 that were refinanced with convertible notes in
November 1999 (Note G). IEX develops, markets and sells solutions for
intelligent networks, call centers and other telecommunications markets.
7
<PAGE> 8
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The transaction has been accounted for under the purchase method of
accounting, and resulted in net goodwill and other intangibles of approximately
$133.4 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 ................................................... 95,274
Tangible assets acquired ................................... 50,045
Deferred income tax liabilities associated with certain
intangible assets ...................................... (22,875)
Liabilities assumed ........................................ (24,444)
---------
$ 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 $6.8 million,
net of amortization of associated deferred income tax liabilities of $1.2
million, for the three months ended March 31, 2000.
The following table shows pro forma revenues, net income and earnings
per share of the Company giving effect to the IEX acquisition as of the
beginning of 1999 and 2000, excluding the impact of the one-time charges noted
above.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
2000 1999
-------- --------
(thousands, except per share amounts)
<S> <C> <C>
Revenues ..................... $ 60,062 $ 43,397
Net income (loss) ............ (1,802) (8,206)
Earnings (Loss) per share .... (0.03) (0.15)
</TABLE>
8
<PAGE> 9
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. CERTAIN BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
MARCH 31, December 31,
2000 1999
--------- ---------
The components of inventories are: (thousands)
<S> <C> <C>
Raw materials ....................................... $ 9,764 $ 7,490
Work in process ..................................... 1,549 2,366
Finished goods ...................................... 15,024 14,454
--------- ---------
$ 26,337 $ 24,310
========= =========
Property and equipment consist of the following:
Manufacturing and development equipment ............. $ 32,076 $ 31,124
Furniture and office equipment ...................... 16,742 16,007
Demonstration equipment ............................. 3,053 3,207
Leasehold improvements .............................. 4,529 4,105
--------- ---------
56,400 54,443
Less, accumulated depreciation and amortization ..... (34,315) (32,776)
--------- ---------
Property and equipment, net .................... $ 22,085 $ 21,667
========= =========
Intangible assets consist of the following:
Goodwill ............................................ $ 95,274 $ 95,274
Purchased technology ................................ 49,712 49,712
Other ............................................... 13,000 13,000
--------- ---------
157,986 157,986
Less accumulated amortization ....................... (30,493) (22,280)
--------- ---------
Intangible assets, net ......................... $ 127,493 $ 135,706
========= =========
</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 $728,000 and $511,000 for the three months ended March 31,
2000 and 1999, respectively.
9
<PAGE> 10
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>
PROVISION
RECORDED
-----------
(thousands)
<S> <C>
Severance pay.................................... $ 700
Other accrued expenses........................... 300
Inventory........................................ 350
Fixed assets..................................... 200
Other assets..................................... 250
-----------
$ 1,800
===========
</TABLE>
At December 31, 1999, all 27 employees had been terminated, and all of
the severance costs and other accrued expenses had been paid.
F. INCOME TAXES
The income tax provision for the three month period ended March 31,
2000 was $1.6 million and reflected the effect of non-deductible
acquisition-related costs, partially offset by benefits of $1.2 million from the
utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Excluding the effect of these acquisition-related
items, 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 36% for the three month period ended March 31, 1999.
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 $2.8 million available to the Company's Japanese
subsidiary from various Japan-based banks.
10
<PAGE> 11
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (9.00% at March 31, 2000), 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. 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 $2.8 million with interest at the Japanese prime
rate (1.375% at March 31, 2000) plus 0.125% per annum which expire between
August and November 2000, if not renewed. There have been no borrowings under
these lines of credit.
In November 1999, the Company completed its private placement of $135.0
million principal amount at maturity of its 3.25% convertible subordinated
discount notes due 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds at issuance before discounts and expenses of
approximately $115.2 million). The gross proceeds at issuance included
approximately $15.2 million from the sale of notes issued upon the initial
purchasers' exercise in full of their over-allotment option. The Notes have a
five-year term and are non-callable for the first three years.
H. OPERATING SEGMENT INFORMATION
The Network Systems operating segment develops, markets and sells the
Company's Eagle STP products based on the Company's high capacity packet
switching platform; IP7 Secure Gateway, an SS7 gateway for signaling in
converged networks, and other IP7 convergence products; and new network systems
products resulting from the Company's acquisition of IEX, including Service
Control Point, an advanced database server used for the provisioning of
telephony applications, VoX Gateway Controller, a media gateway controller for
converged networks, and 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, Sentinel used for testing and
surveillance within telecommunications networks and i3000, used to perform
diagnostics in converged networks. The Japan Diagnostics operating segment sells
the Company's and third parties' diagnostic products to customers in Japan. The
Call Center operating segment develops, markets and sells 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 geographical area is determined by the destination of the sale.
11
<PAGE> 12
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's operating segments and geographical information are as follows (in
thousands):
OPERATING SEGMENTS
<TABLE>
<CAPTION>
Net Sales
------------------------
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Network Systems ........................ $ 36,519 $ 20,365
Network Diagnostics .................... 12,678 7,882
Call Center Products ................... 6,686 --
Japan Diagnostics ...................... 4,799 4,833
Intercompany Eliminations .............. (620) (395)
-------- --------
Total net sales ................... $ 60,062 $ 32,685
======== ========
</TABLE>
<TABLE>
<CAPTION>
Operating Income (Loss)
------------------------
Three Months Ended
March 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Network Systems ........................ $ 9,788 $ 3,312
Network Diagnostics(1) ................. 2,075 (1,981)
Call Center Products ................... 1,916 --
Japan Diagnostics ...................... 215 300
Intercompany Eliminations .............. (136) 161
General Corporate(2) ................... (13,362) (2,499)
-------- --------
Total operating income (loss) ..... $ 496 $ (707)
======== ========
</TABLE>
(1) Network Diagnostics operating segment reflects the $1,800 restructuring
charge recorded in the three months ended March 31, 1999 (see Note E).
(2) General Corporate includes acquisition-related charges and amortization
of $8,072 for the three months ended March 31, 2000.
12
<PAGE> 13
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
March 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
Network Systems ................................. $36,519 $20,365
Network Diagnostics ............................. 16,857 12,320
Call Center Products ............................ 6,686 --
------- -------
Total revenues from external customers ..... $60,062 $32,685
======= =======
</TABLE>
The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
North America ................................... $47,575 $21,130
Japan ........................................... 4,804 4,833
Europe .......................................... 2,642 1,802
Rest of World ................................... 5,041 4,920
------- -------
Total revenues from external customers ..... $60,062 $32,685
======= =======
</TABLE>
The following table sets forth, for the periods indicated, long-lived assets by
geographic area in which the Company holds assets:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
United States .................... $152,382 $ 13,986
Japan ............................ 1,115 1,145
Other ............................ 400 47
-------- --------
Total long-lived assets ..... $153,897 $ 15,178
======== ========
</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 months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
NET INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2000: (thousands except per share amount)
<S> <C> <C> <C>
Basic EPS ..................................... $(1,802) 56,537 $(0.03)
Effect of Dilutive Securities - Stock
Options and Warrants ..................... -- --
------- -------
Diluted EPS ................................... $(1,802) 56,537 $(0.03)
======= =======
FOR THE THREE MONTHS ENDED MARCH 31, 1999:
Basic EPS ..................................... $ 492 54,471 $ 0.01
Effect of Dilutive Securities - Stock
Options and Warrants ..................... -- 4,141
------- -------
Diluted EPS ................................... $ 492 58,612 $ 0.01
======= =======
</TABLE>
14
<PAGE> 15
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, 1999. 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.
OVERVIEW
In May 1999, the Company acquired all of the outstanding stock of IEX
Corporation ("IEX"), which develops, markets and sells solutions for intelligent
networks, call centers and other telecommunications markets. The Company
accounted for the IEX acquisition under the purchase method of accounting, and
the results of operations for the three month period ended March 31, 2000
include the results of operations of IEX. In connection with the acquisition,
the Company also recorded approximately $133.4 million of goodwill and other
intangible assets, net of related deferred income tax liabilities.
The Company's product offerings are currently organized along three
distinct product lines: network systems, network diagnostics and call center.
Network Systems Products. Prior to the Company's May 1999 acquisition
of IEX, the Company's network systems product line was known as the network
switching product line and consisted principally of the Eagle STP and products,
features and applications based on the Eagle platform, including the IP7 Secure
Gateway and the Company's local number portability solution. As a result of the
acquisition of IEX, the network systems product line has been expanded to
include IEX's network products, including, among others, Network Switch, Service
Node, the Service Control Point, VoX Gateway Controller, Prepaid Services and
other convergence products.
Network Diagnostics Products. In January 1999, the Company scaled back
its data network diagnostics product line and integrated it into its intelligent
network diagnostics product line. Prior to that time, the Company treated these
product lines separately for organizational and financial reporting purposes.
Since that time, the Company has reported these products together as the network
diagnostics product line. This product line consists principally of the MGTS
family of diagnostics products, the Sentinel and the i3000.
Call Center Products. The Company's IEX call center business develops
and supplies software-based solutions for call centers, and its products include
the TotalView workforce management and TotalNet call routing solutions.
15
<PAGE> 16
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
March 31,
----------------------
2000 1999
-------- -------
<S> <C> <C>
Revenues ................................................... 100.0% 100.0%
Cost of goods sold ......................................... 32.9 34.7
Amortization of purchased technology ....................... 4.2 --
-------- -------
Gross profit ............................................... 62.9 65.3
Research and development ................................... 20.4 27.2
Selling, general and administrative ........................ 32.2 34.8
Amortization of goodwill and other purchased intangibles ... 9.5 --
Restructuring .............................................. -- 5.5
-------- -------
Total operating expenses ................................... 62.1 67.5
-------- -------
Income (Loss) from operations .............................. 0.8 (2.2)
Interest and other income (expense), net ................... (1.2) 4.5
-------- -------
Income (Loss) before provision for income taxes ............ (0.4) 2.3
Provision for income taxes ................................. 2.6 0.8
-------- -------
Net income (loss) .......................................... (3.0%) 1.5%
======== =======
</TABLE>
16
<PAGE> 17
The following table sets forth, for the periods indicated, the revenues
by principal product line as a percentage of total revenues. Revenues shown
below for the network systems product line represent revenues from the product
line previously known as the network switching product line and also include
revenues earned from IEX's intelligent network products after the Company's May
1999 acquisition of IEX. Revenues shown below for the network diagnostics
product line include revenues from sales of both intelligent network and data
network diagnostics products.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------
Three Months Ended
March 31,
----------------------
2000 1999
------- ------
<S> <C> <C>
Network Systems ............................. 61% 62%
Network Diagnostics ......................... 28 38
Call Center ................................. 11 --
--- ---
Total ............................... 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
March 31,
----------------------
2000 1999
------- -------
<S> <C> <C>
North America ............................... 79% 65%
Japan ....................................... 8 15
Europe ...................................... 4 5
Rest of World ............................... 9 15
--- ---
Total ............................... 100% 100%
=== ===
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1999
Revenues. The Company's revenues increased by $27.4 million, or 84%,
during the first quarter of 2000 due primarily to higher sales of Eagle STP
products and services and secondarily to the inclusion of post-acquisition sales
of IEX network systems and call center products following the acquisition of
IEX.
Revenues from network systems products increased by $16.2 million, or
79%, to $36.5 million due primarily to higher sales of Eagle STP products.
17
<PAGE> 18
Revenues from network diagnostics products increased by $4.5 million,
or 37%, due principally to higher sales of the Company's Sentinel and MGTS
diagnostics products.
Revenues in North America increased by $26.4 million, or 125%, due
primarily to the higher sales of Eagle STP products and the inclusion of
post-acquisition IEX product sales. Sales in Japan were essentially flat.
Revenues in Europe increased by $840,000, or 47%, due to higher network
diagnostic product sales. Rest of world revenues increased by $121,000.
The impact of exchange rate fluctuations on currency translations
increased revenues by $489,000, or 1%, and did not have a material effect on net
income in the first quarter of 2000.
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
Sentinel diagnostic products, and market acceptance of the Company's suite of
products for converged circuit and packet networks, including the IP7 Secure
Gateway and VoX Gateway network systems products and the i3000 and IP7
Sentinel diagnostics products.
Gross Profit. Gross profit as a percentage of revenues decreased to
62.9% in the first quarter of 2000 compared with 65.3% in the first quarter of
1999. The decrease in gross margins was primarily due to the amortization of
purchased technology, principally in connection with the acquisition of IEX,
partially offset by higher network systems margins due to proportionally higher
upgrades and extensions sales, and the inclusion of higher margin call center
product sales as a result of the acquisition of IEX. Excluding the amortization
of purchased technology related to the IEX acquisition, gross profit as a
percentage of revenues for the three months ended March 31, 2000 was 67.1%.
18
<PAGE> 19
Research and Development. Research and development expenses increased
overall by $3.4 million, or 38%, and decreased as a percentage of revenues to
20.4% in the first quarter of 2000 from 27.2% in the first quarter of 1999. 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 systems and network diagnostics
products, primarily related to the Company's continued development of products
to address the Internet Protocol ("IP")/Signaling System #7 ("SS7") market.
Based on the Company's present product development plans, the Company expects
that its research and development expenses for the remainder of 2000 will
increase in dollars when compared to prior periods in 1999.
The Company intends to continue to make substantial investments in
product and technology development and believes that its future success depends
in large part upon its ability to continue to enhance existing products and to
develop or acquire new products that maintain the Company's technological
competitiveness.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $8.0 million, or 70%, and decreased as a
percentage of revenues to 32.2% in the first quarter of 2000 from 34.8% in the
first quarter of 1999. 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
2000 will increase in dollars when compared to prior periods.
Interest and Other Income (Expense), net. Net interest expense was
$681,000 for the first quarter of 2000 compared to net interest income of $1.5
million in the first quarter of 1999. The net expense reflected interest expense
of $2.2 million incurred for convertible debt issued in connection with the
acquisition of IEX.
Income Taxes. The income tax provision for the first quarter of 2000
was $1.6 million and reflected the effect of non-deductible acquisition-related
costs, partially offset by a benefit of $1.2 million from the utilization of
deferred tax liabilities related to certain of these acquisition-related costs.
Excluding the effect of these acquisition-related items, 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 36% for the first quarter of
1999.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
During the three month period ended March 31, 2000, cash and cash
equivalents increased by $38.4 million to $85.1 million, after net proceeds of
$15.2 million from the sale of short-term and long-term investments. Operating
activities, including the effects of exchange rate changes on cash, provided
$12.5 million. Financing activities, which represented proceeds from the
issuance of Common Stock upon the exercise of options and warrants, provided
$14.1 million, and investing activities, excluding the net proceeds from the
sale of short-term and long-term investments, used $3.4 million primarily due to
capital expenditures.
Accounts receivable, including amounts due from related parties,
decreased by 15% during the first three months of 2000 due primarily to lower
sales levels in the first quarter of 2000 compared to the fourth quarter of
1999. Inventory levels increased by 8% primarily to support higher anticipated
future sales levels and a broader product offering.
Capital expenditures of $3.2 million during the first three months of
2000 represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.
The Company has a $15.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.8 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 (9.00% at March 31, 2000), 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. 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 $2.8 million with interest at the Japanese prime
rate (1.375% at March 31, 2000) plus 0.125% per annum which expire between
August and November 2000, if not renewed. There have been no borrowings under
these lines of credit.
In November 1999, the Company completed its private placement of $135.0
million principal amount at maturity of its 3.25% convertible subordinated
discount notes due 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds at issuance before discounts and expenses of
approximately $115.2 million). The gross proceeds at issuance included
approximately $15.2 million from the sale of notes issued upon the initial
purchasers' exercise in full of their over-allotment option. The Notes have a
five-year term and are non-callable for the first three years.
20
<PAGE> 21
On November 4, 1999, the Company used a portion of the net proceeds
from the Notes to retire all of the $100 million in short-term notes which had
been issued in May 1999 in connection with the acquisition of IEX Corporation.
The Company believes 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.
NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principals to revenue recognition in the financial statements. The
Company is currently evaluating the provisions of SAB 101 and its potential
impact on the Company's revenue recognition policy.
YEAR 2000 COMPLIANCE
The Company has not experienced, and does not expect to experience, any
significant problems associated with year 2000 issues. Similarly, to the
Company's knowledge, distributors, suppliers, and other third parties with which
the Company conducts business have not experienced material year 2000 problems
to date. The Company did not incur material expenditures to test, repair, or
replace equipment in connection with year 2000 issues.
21
<PAGE> 22
"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 Tekelec's management. These statements are subject to
and involve certain risks and uncertainties including, but not limited to:
- - timing of significant orders and shipments, and the resulting
fluctuation of the Company's operating results;
- - capital spending patterns of customers, including shifts in such
patterns as a result of customers' deferral of product purchases until
the year 2000;
- - the Company's relatively limited product offerings;
- - risks relating to the convergence of voice and data networks;
- - competition and pricing;
- - the Company's relatively limited number of customers;
- - new product introductions by the Company or by its competitors;
- - risks relating to the Company's acquisition of IEX Corporation;
- - product liability risks;
- - the continued growth in third party purchases of diagnostics systems;
- - customer acceptance of the Company's products;
- - regulatory changes;
- - uncertainties relating to the Company's international operations;
- - intellectual property protection;
- - the Company's relationships with key shareholders; and
- - general economic conditions.
22
<PAGE> 23
PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (provided for the information of the
Securities and Exchange Commission only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 2000.
23
<PAGE> 24
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 15, 2000
/s/ Michael L. Margolis
------------------------------------------
Michael L. Margolis
President and Chief Executive Officer
(Duly authorized officer)
/s/ Douglas W. Moxley
------------------------------------------
Douglas W. Moxley
Corporate Controller
(Principal financial and chief
accounting officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 85,057
<SECURITIES> 44,781
<RECEIVABLES> 74,163
<ALLOWANCES> 1,459
<INVENTORY> 26,337
<CURRENT-ASSETS> 231,975
<PP&E> 56,400
<DEPRECIATION> 34,315
<TOTAL-ASSETS> 417,499
<CURRENT-LIABILITIES> 76,232
<BONDS> 0
0
0
<COMMON> 129,583
<OTHER-SE> 72,846
<TOTAL-LIABILITY-AND-EQUITY> 417,499
<SALES> 60,062
<TOTAL-REVENUES> 60,062
<CGS> 22,293
<TOTAL-COSTS> 22,293
<OTHER-EXPENSES> 37,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,193
<INCOME-PRETAX> (213)
<INCOME-TAX> 1,589
<INCOME-CONTINUING> (1,802)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,802)
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
