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 SEPTEMBER 30, 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 November 3, 2000, there were 58,712,520 shares of the
registrant's common stock, without par value, outstanding.
<PAGE>
TEKELEC
FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION PAGE
-------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Income for the
three and nine months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flow for the nine months 6
ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES
----------
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TEKELEC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
2000 1999
---------------- --------------
(thousands, except share data)
(UNAUDITED) (audited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.............................. $ 84,789 $ 46,671
Short-term investments, at fair value.................. 37,454 37,997
Accounts and notes receivable, less
allowances of $1,272 and $1,478, respectively........ 87,524 83,649
Inventories............................................ 24,620 24,310
Amounts due from related parties....................... -- 1,847
Income taxes receivable................................ 8,324 --
Deferred income taxes, net............................. 9,666 8,365
Prepaid expenses and other current assets.............. 15,927 5,150
--------------- --------------
Total current assets............................... 268,304 207,989
Long-term investments, at fair value........................ 35,000 21,996
Property and equipment, net................................. 28,661 21,667
Intangible assets, net...................................... 111,777 135,706
Deferred income taxes, net.................................. 2,825 2,780
Other assets................................................ 4,011 4,296
--------------- --------------
Total assets....................................... $ 450,578 $ 394,434
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable................................. $ 17,883 $ 16,249
Accrued expenses....................................... 17,757 19,196
Accrued payroll and related expenses................... 10,752 8,937
Current portion of deferred revenues................... 40,730 35,330
Income taxes payable................................... -- 575
--------------- --------------
Total current liabilities.......................... 87,122 80,287
Long-term convertible debt.................................. 118,376 115,786
Long-term portion of deferred revenues...................... 1,985 2,537
Long-term deferred income tax liability..................... 15,702 19,229
--------------- --------------
Total liabilities.................................. 223,185 217,839
--------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, without par value,
200,000,000 shares authorized; 58,521,797 and
55,713,127 shares issued and outstanding,
respectively....................................... 146,836 101,385
Retained earnings...................................... 78,920 72,528
Accumulated other comprehensive income................. 1,637 2,682
--------------- --------------
Total shareholders' equity......................... 227,393 176,595
--------------- --------------
Total liabilities and shareholders' equity......... $ 450,578 $ 394,434
=============== ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
(thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES.......................................... $ 83,755 $ 64,743 $ 217,965 $ 149,156
COSTS AND EXPENSES:
Cost of goods sold........................... 27,313 22,978 72,089 52,285
Amortization of purchased technology......... 2,530 2,464 7,601 3,978
Research and development .................... 14,380 10,881 39,519 30,274
Selling, general and administrative ......... 22,036 17,438 63,428 44,395
Amortization of goodwill and other intangible
assets .................................... 5,416 6,055 16,504 9,781
Acquired in-process research and development
and other acquisition-related charges ..... -- -- -- 6,830
Restructuring ............................... -- -- -- 1,800
--------- --------- ---------- ----------
Total costs and expenses ................ 71,675 59,816 199,141 149,343
--------- --------- ---------- ----------
Income (Loss) from operations..................... 12,080 4,927 18,824 (187)
Interest and other income (expense):
Interest income.............................. 2,303 935 5,654 3,288
Interest expense............................. (2,181) (1,765) (6,539) (2,858)
Other, net................................... 28 (67) (132) (69)
--------- --------- ---------- ----------
Total other income (expense)............. 150 (897) (1,017) 361
--------- --------- ---------- ----------
Income before provision for income taxes 12,230 4,030 17,807 174
Provision for income taxes .................. 6,072 3,110 11,415 4,898
--------- --------- ---------- ----------
NET INCOME (LOSS)........................ $ 6,158 $ 920 $ 6,392 $ (4,724)
========= ========= ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic ....................................... $ 0.11 $ 0.02 $ 0.11 $ (0.09)
Diluted ..................................... 0.10 0.02 0.10 (0.09)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ....................................... 58,322 55,094 57,777 54,776
Diluted ..................................... 64,542 58,864 64,429 54,776
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2000 1999 2000 1999
---- ---- ---- ----
(thousands)
<S> <C> <C> <C> <C>
NET INCOME (LOSS)................................. $ 6,158 $ 920 $ 6,392 $ (4,724)
Other comprehensive income (expense):
Foreign currency translation adjustments..... (478) 1,847 (1,045) 1,260
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS)....................... $ 5,680 $ 2,767 $ 5,347 $ (3,464)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Nine Months Ended
September 30,
-------------------------------
2000 1999
---- ----
(thousands)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)................................................... $ 6,392 $ (4,724)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation................................................... 8,567 5,960
Amortization................................................... 24,106 14,289
Amortization of deferred financing costs....................... 608 --
Write-off of acquired in-process research and development...... -- 6,000
Non-cash portion of restructuring charge....................... -- 800
Convertible debt accretion .................................... 2,590 --
Deferred income taxes.......................................... (4,913) (3,653)
Tax benefit related to stock options exercised................. 22,317 1,830
Changes in assets and liabilities (excluding the effect
of acquisition):
Accounts and notes receivable................................ (4,176) (6,934)
Inventories.................................................. (368) (2,758)
Amounts due from related parties............................. 1,847 931
Income taxes receivable...................................... (8,324) (781)
Prepaid expenses and other current assets.................... (10,785) (1,635)
Trade accounts payable....................................... 1,898 2,899
Accrued expenses............................................. (1,421) 1,436
Accrued payroll and related expenses......................... 1,851 (4,881)
Deferred revenues............................................ 4,859 3,011
Income taxes payable......................................... (575) 1,542
----------- -----------
Total adjustments.......................................... 38,081 18,056
----------- -----------
Net cash provided by operating activities.................. 44,473 13,332
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities........ 56,525 58,682
Purchase of available-for-sale securities...................... (68,986) (25,740)
Payments in connection with acquisition, net of cash acquired.. -- (49,087)
Purchase of property and equipment............................. (15,631) (8,463)
Purchase of technology......................................... (177) (1,774)
Decrease (Increase) in other assets............................ (354) 111
----------- -----------
Net cash used in investing activities...................... (28,623) (26,271)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......................... 23,133 3,694
----------- -----------
Net cash provided by financing activities.................. 23,133 3,694
Effect of exchange rate changes on cash............................. (865) 957
----------- -----------
Net change in cash and cash equivalents........................ 38,118 (8,288)
Cash and cash equivalents at beginning of period.................... 46,671 31,932
----------- -----------
Cash and cash equivalents at end of period.......................... $ 84,789 $ 23,644
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D)
(unaudited)
Nine Months Ended
September 30,
------------------------------
2000 1999
---- ----
(thousands)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION:
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>
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 presented.
The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year. Certain
amounts in the prior period financial statements have been reclassified to
conform with the current period presentation.
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 nine months ended September 30, 2000 and
1999 are for the thirteen and thirty-nine weeks ended September 29, 2000 and
October 1, 1999, respectively.
These interim 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The SEC has
recently issued additional guidance on SAB 101 in the form of a frequently asked
questions document issued on October 13, 2000. The Company is currently
evaluating the provisions of SAB 101 and this recently issued guidance and its
potential impact on the Company's revenue recognition policy.
8
<PAGE>
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
applied prospectively to new awards in a business combination, modifications to
outstanding awards, and changes to grantee status that occur on or after July 1,
2000, except for the provisions related to repricings and the definition of an
employee, which apply to awards after December 15, 1998. Additional provisions
of FIN 44 related to modifications to fixed stock option awards to add a reload
feature are effective for awards modified after January 12, 2000. The adoption
of FIN 44 did not have a material impact on its financial statements.
In June 1998, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133" Accounting for Derivative
Instruments and Hedging Activities." The statement requires the recognition of
all derivatives as either assets or liabilities in the balance sheet and the
measurement of those instruments at fair value. The accounting for changes in
the fair value of a derivative depends on the planned use of the derivative and
the resulting designation. Because the Company does not currently hold any
derivative instruments and only engages in limited hedging activities, the
impact of the adoption of SFAS No. 133 is not currently expected to have a
material impact on financial position, results of operations or cash flows. The
Company is currently evaluating the provisions of SFAS No.133 and its potential
impact on the Company's financial statements. The Company will be required to
implement SFAS No. 133 in the first quarter of fiscal 2001.
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 (See Note G). 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
$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>
9
<PAGE>
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 $6.7 million
and $20.2 million, net of amortization of associated deferred income tax
liabilities of $1.1 million and $3.5 million, for the three and nine months
ended September 30, 2000.
The following table shows pro forma revenue, net income (loss) and net
income (loss) per share of the Company giving effect to the IEX acquisition as
of the beginning of 1999, excluding the impact of one-time charges.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
---- ----
(thousands, except per share amounts)
<S> <C> <C>
Revenues........................................................ $ 217,965 $ 162,915
Net income (loss)............................................... 6,392 (15,824)
Net income (loss) per share..................................... 0.10 (0.29)
</TABLE>
C. CERTAIN BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
2000 1999
---------- ------------
The components of inventories are: (thousands)
<S> <C> <C>
Raw materials ........................................... $ 10,187 $ 7,490
Work in process ......................................... 1,860 2,366
Finished goods .......................................... 12,573 14,454
----------- -----------
$ 24,620 $ 24,310
Property and equipment consist of the following:
Manufacturing and development equipment ................. $ 39,666 $ 31,124
Furniture and office equipment .......................... 19,695 16,007
Demonstration equipment ................................. 3,194 3,207
Leasehold improvements .................................. 6,140 4,105
----------- -----------
68,695 54,443
Less, accumulated depreciation and amortization.......... (40,034) (32,776)
----------- -----------
Property and equipment, net ........................ $ 28,661 $ 21,667
=========== ===========
Intangible assets consist of the following:
Goodwill................................................. $ 95,274 $ 95,274
Purchased technology..................................... 49,889 49,712
Other.................................................... 13,000 13,000
----------- -----------
158,163 157,986
Less accumulated amortization............................ (46,386) (22,280)
----------- -----------
Intangible assets, net.............................. $ 111,777 $ 135,706
=========== ===========
</TABLE>
10
<PAGE>
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
D. RELATED PARTY TRANSACTIONS
Sales to related parties consisted of transactions between the Company
and foreign affiliates controlled by the Company's Chairman of the Board. In
April 2000, these foreign affiliates were sold to an unrelated company. Sales
transacted subsequent to the sale of the former affiliates and amounts due are
no longer considered related party transactions. Sales to related parties
through the date of the sale amounted to $779,000 and $1.7 million for the nine
months ended September 30, 2000 and 1999, respectively.
The Company's Japanese subsidiary purchases, for resale, products from
an affiliate controlled by the Company's Chairman under a distribution
arrangement. These purchases from the related party were $561,000 and $1.2
million for the three and nine months ended September 30, 2000, respectively.
Amounts due to the related party at September 30, 2000 were $194,000.
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 provisions for the three and nine month periods ended
September 30, 2000 were $6.1 million and $11.4 million, respectively, and
reflected the effect of non-deductible acquisition-related costs, partially
offset by benefits of $1.1 million and $3.5 million, respectively from the
utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Excluding the effect of acquisition-related items, an
estimated effective tax rate of 36% was applied for the three and nine month
periods ended September 30, 2000 and 1999 and represented federal, state and
foreign taxes on the Company's income, reduced primarily by research and
development and foreign tax credits.
11
<PAGE>
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
G. LINES OF CREDIT AND BORROWINGS
The Company had a $15.0 million line of credit that expired on June 30,
2000 and was replaced by a $20.0 million line of credit on July 31, 2000 on
substantially the same terms and conditions as the expired line of credit.
The Company's $20.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at or, in some cases,
below the lender's prime rate (9.5% at September 30, 2000), and expires on July
31, 2001, 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 (1.5% at September 30, 2000) plus 0.125% per annum which expire between
November 2000 and August 2001, if not renewed. There have been no borrowings
under these lines of credit.
In November 1999, the Company completed the private placement of $135.0
million principal amount at maturity of 3.25% convertible subordinated discount
notes due in 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after the first three years.
H. 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; the IP7 Secure Gateway, an SS7/IP gateway for signaling in
converged networks, and other IP7 convergence products; and network systems
products resulting from the Company's acquisition of IEX, including ASi 4000
Service Control Point, an advanced database server used for the provisioning of
telephony applications, and VXi Media Gateway Controller, a controller for
converged networks. 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, a diagnostic tool
used primarily by network operators for testing and surveillance within
telecommunications networks, and i3000, a diagnostic tool for converged and
third generation wireless 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.
12
<PAGE>
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 Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Network Systems................................... $ 56,121 $ 41,712 $ 140,277 $ 92,821
Network Diagnostics............................... 13,809 12,162 40,645 32,708
Call Center Products.............................. 8,447 7,189 23,153 12,067
Japan Diagnostics ................................ 7,802 4,608 18,896 13,113
Intercompany Eliminations......................... (2,424) (928) (5,006) (1,553)
--------- --------- --------- --------
Total net sales.............................. $ 83,755 $ 64,743 $ 217,965 $ 149,156
========= ========= ========= ========
<CAPTION>
Operating Income (Loss)
-----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Network Systems................................... $ 18,976 $ 11,441 $ 43,322 $ 20,045
Network Diagnostics (1)........................... 2,837 3,450 7,771 4,751
Call Center Products.............................. 3,393 3,012 8,296 5,363
Japan Diagnostics................................. 331 250 1,074 441
Intercompany Eliminations ........................ 108 (567) (751) (414)
General Corporate(2).............................. (13,565) (12,659) (40,888) (30,373)
------------ ----------- ---------- ----------
Total operating income (loss)................ $ 12,080 $ 4,927 $ 18,824 $ (187)
============ =========== ========== ==========
</TABLE>
--------------------------------
(1) Network Diagnostics operating segment reflects the $1,800 restructuring
charge recorded in the nine months ended September 30, 1999 (see Note E).
(2) General Corporate includes acquisition-related charges and amortization of
$7,816 and $8,455 for the three months ended September 30, 2000 and 1999,
respectively, and $23,704 and $20,488 for the nine months ended September
30, 2000 and 1999, respectively.
13
<PAGE>
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 Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Network Systems................................... $ 56,121 $ 41,712 $ 140,277 $ 92,821
Network Diagnostics............................... 19,187 15,842 54,535 44,268
Call Center Products.............................. 8,447 7,189 23,153 12,067
--------- --------- ---------- ---------
Total revenues from external customers....... $ 83,755 $ 64,743 $ 217,965 $ 149,156
========= ========= ========== =========
</TABLE>
The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
North America..................................... $ 60,829 $ 53,261 $ 161,709 $ 114,569
Japan............................................. 7,828 4,657 18,952 13,162
Europe............................................ 4,351 3,095 10,791 7,822
Rest of World..................................... 10,747 3,730 26,513 13,603
--------- --------- ---------- ---------
Total revenues from external customers....... $ 83,755 $ 64,743 $ 217,965 $ 149,156
========= ========= ========== =========
</TABLE>
The following table sets forth, for the periods indicated, long-lived assets by
geographic area in which the Company holds assets:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
United States..................................... $ 143,039 $ 160,109
Japan............................................. 1,078 1,175
Other............................................. 332 385
---------- ----------
Total long-lived assets...................... $ 144,449 $ 161,669
========== ==========
</TABLE>
Sales to one customer accounted for 10% and 12% of revenues for the three and
nine months ended September 30, 2000, respectively, and included sales from
network systems and call center operating segments. Sales to one customer
accounted for 10% of revenues for the three months ended September 30, 1999 and
included sales from network systems, network diagnostics and call center
operating segments. There were no customers accounting for 10% or more of
revenues for the nine months ended September 30, 1999.
14
<PAGE>
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 nine month periods ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
NET INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-----------------------------------------------------
<S> <C> <C> <C>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000: (thousands, except per share amount)
Basic EPS........................................ $ 6,158 58,322 $ 0.11
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- 6,220
------ ------
Diluted EPS...................................... $ 6,158 64,542 $ 0.10
====== ======
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999:
Basic EPS........................................ $ 920 55,094 $ 0.02
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- 3,770
------ ------
Diluted EPS...................................... $ 920 58,864 $ 0.02
====== ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000:
Basic EPS........................................ $ 6,392 57,777 $ 0.11
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- 6,652
------ ------
Diluted EPS...................................... $ 6,392 64,429 $ 0.10
====== ======
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999:
Basic EPS........................................ $ (4,724) 54,776 $ (0.09)
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- --
------ ------
Diluted EPS...................................... $ (4,724) 54,776 $ (0.09)
======= ======
</TABLE>
J. COMMON STOCK
On August 25, 1997, the Company adopted a shareholder rights plan to
protect shareholders against unsolicited attempts to acquire control of the
Company where such transactions do not offer what the Company believes to be an
adequate price to all shareholders. Under the plan, a dividend distribution of
one right for each outstanding share of Tekelec Common Stock was made to
shareholders of record on September 5, 1997, and such rights expire on
September 5, 2007. As adjusted to take into account the Company's 1998
two-for-one stock split, each right, when exercisable, entitles the registered
holder to purchase from the Company one share of Common Stock at a price of $90
per share, subject to adjustment (the "Purchase Price").
15
<PAGE>
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The rights will be exercisable only if a person or group (except for
certain exempted persons or groups, including those shareholders of the Company
who at the time of adoption of the plan beneficially owned more than 15% of the
Company's Common Stock) acquires 15% or more of Tekelec's Common Stock or
announces a tender offer which would result in ownership of 15% or more of the
Common Stock. Under the plan, if any person or group (other than the Company,
any subsidiary of the Company, any employee benefit plan of the Company or any
exempted person or group) acquires 15% or more of the Company's outstanding
voting stock without the prior written consent of the Company's Board of
Directors, each right, except those held by such acquiring persons or group,
would entitle the holder of the right to acquire, by paying to the Company the
then current Purchase Price, such number of shares of the Company's Common Stock
as would equal the result obtained by multiplying the then current Purchase
Price by the number of shares of Common Stock for which the right is then
exercisable and then dividing the product by 50% of the then current per-share
market price of the Company's Common Stock.
The Company may redeem the rights at a redemption price of $0.005 per
right at any time until ten business days after a person or group acquires 15%
or more of the Company's outstanding shares of voting stock. At any time after a
person or group acquires 15% or more, but less than 50%, of the Company's
outstanding shares of voting stock, the Company may also exchange each right for
one share of Common Stock.
16
<PAGE>
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 of IEX are included in the results of operations
beginning May 1999. 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, and $6.0 million of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use that was recorded as a
non-recurring expense in the second quarter of 1999.
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, Service Node, Service
Control Point, VXi Media Gateway Controller, 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.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, percentages
that certain income statement items bear to total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................... 32.6 35.5 33.1 35.0
Amortization of purchased technology.................. 3.0 3.8 3.5 2.7
------------ -------------- ------------ -------------
Gross profit.......................................... 64.4 60.7 63.4 62.3
Research and development.............................. 17.2 16.8 18.1 20.3
Selling, general and administrative................... 26.3 26.9 29.1 29.8
Amortization of goodwill and other
purchased intangibles............................... 6.5 9.4 7.6 6.6
Non-recurring acquisition-related charges............. -- -- -- 4.6
Restructuring......................................... -- -- -- 1.2
------------ -------------- ------------ -------------
Total operating expenses.............................. 50.0 53.1 54.8 62.5
------------ -------------- ------------ -------------
Income (loss) from operations......................... 14.4 7.6 8.6 (0.1)
Interest and other income (expense), net.............. 0.2 (1.4) (0.4) 0.2
------------ -------------- ------------ -------------
Income before provision for income taxes.............. 14.6 6.2 8.2 0.1
Provision for income taxes............................ 7.2 4.8 5.3 3.3
------------ -------------- ------------ -------------
Net income (loss)..................................... 7.4% 1.4% 2.9% (3.2)%
============ ============== ============ =============
</TABLE>
The following table sets forth, for the periods indicated, revenues by
principal product line as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Network Systems................................... 67% 64% 64% 62%
Network Diagnostics............................... 23 25 25 30
Call Center Products.............................. 10 11 11 8
--------- ---------- ----------- ---------
Total........................................ 100% 100% 100% 100%
========= ========== =========== =========
</TABLE>
18
<PAGE>
The following table sets forth, for the periods indicated, revenues by
geographic territories as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
North America..................................... 73% 82% 74% 77%
Japan............................................. 9 7 9 9
Europe............................................ 5 5 5 5
Rest of World..................................... 13 6 12 9
--------- --------- ---------- ----------
Total........................................ 100% 100% 100% 100%
========= ========= ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. The Company's revenues increased by $19.0 million, or 29%,
during the third quarter of 2000 due primarily to higher sales of network
systems products and services and secondarily to increased sales of MGTS
diagnostics and call center products.
Revenues from network systems products increased by $14.4 million, or
35%, to $56.1 million due primarily to higher sales of the Company's IP7 and
local number portability products, and secondarily to increased sales of
extensions and upgrades.
Revenues from network diagnostics products increased by $3.3 million,
or 21%, due principally to higher sales of the Company's MGTS diagnostics
products.
Revenues from call center products increased by $1.3 million, or 17%,
primarily as a result of higher TotalView product sales.
Revenues in North America increased by $7.6 million, or 14%, due
primarily to higher sales of network systems products. Sales in Japan increased
by $3.2 million, or 68%, as a result of higher sales of MGTS and third-party
data diagnostics products. Revenues in Europe increased by $1.3 million, or 41%,
due principally to higher network diagnostic product sales. Rest of world
revenues increased by $7.0 million, or 188%, due primarily to higher network
systems product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by $84,000, or less than 1%, and did not have a material
effect on net income in the third quarter of 2000.
19
<PAGE>
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
could 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 as
well as the Company's suite of products for converged circuit and packet
networks, including the IP7 Secure Gateway and VXi Gateway network systems
products and the i3000.
GROSS PROFIT. Gross profit as a percentage of revenue increased to
64.4% in the third quarter of 2000 compared to 60.7% in 1999. The increase in
gross margin was primarily due to proportionately greater sales of higher margin
upgrade and extension sales. Excluding the amortization of purchased technology
related to the IEX acquisition, gross profit as a percentage of revenues for the
three months ended September 30, 2000 was 67.2% compared to 64.5% for the three
months ended September 30, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
overall by $3.5 million, or 32%, and increased as a percentage of revenues to
17.2% in the third quarter of 2000 from 16.8% in the third quarter of 1999. The
increase was attributable principally to 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") and Media Gateway
Controller, or "Softswitch," markets. 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 $4.6 million, or 26%, and decreased as a
percentage of revenues to 26.3% in the third quarter of 2000 from 26.9% in the
third quarter of 1999. The dollar increase was primarily due to increased
personnel and infrastructure-related expenses incurred to support the Company's
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.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and intangible assets decreased by $639,000, and decreased as a
percentage of revenue to 6.5% for the three months ended September 30, 2000 as
compared to 9.4% for the three months ended September 30, 1999.
20
<PAGE>
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by
$416,000, or 24%, as a result of the higher principal amount, $135 million, of
the convertible debt issued in November 1999 to retire the notes issued in
connection with the acquisition of IEX, which had a lower principal amount, $100
million. Interest income increased $1.4 million, or 146%, due to higher invested
cash balances in 2000 compared to 1999 due to cash payments made in connection
with the acquisition of IEX in 1999.
INCOME TAXES. The income tax provision for the third quarter of 2000
was $6.1 million and reflected the effect of non-deductible acquisition-related
costs, partially offset by a benefit of $1.1 million from the utilization of
deferred tax liabilities related to certain of these acquisition-related costs.
Excluding the effect of acquisition-related items, an estimated effective tax
rate of 36% was applied for the three month periods ended September 30, 2000 and
1999 and represented federal, state and foreign taxes on the Company's income,
reduced primarily by research and development and foreign tax credits.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. The Company's revenues increased by $68.8 million, or 46.1%,
during the nine months ended September 30, 2000 due primarily to higher sales of
network systems products and services and secondarily to the inclusion of
post-acquisition sales of IEX call center products following the acquisition of
IEX and higher sales of network diagnostics products.
Revenues from network systems products increased by $47.5 million, or
51%, to $140.2 million due primarily to higher sales of Eagle STP products and
the Company's local number portability and IP7 products.
Revenues from network diagnostics products increased by $10.3 million,
or 23%, due principally to higher sales of the Company's Sentinel and MGTS
diagnostics products.
Revenues from call center products increased by $11.1 million, or 92%,
as a result of revenues for the nine months ended September 30, 2000 reflecting
sales for the entire nine months compared to the nine months ended September 30,
1999, which only included sales following the May 1999 acquisition.
Revenues in North America increased by $47.1 million, or 41%, due
primarily to higher sales of Eagle STP products and the inclusion of IEX product
sales. Sales in Japan increased $5.8 million, or 44%, as a result of higher
sales of MGTS and third-party data diagnostics products. Revenues in Europe
increased by $3.0 million, or 38%, due to higher network diagnostic product
sales. Rest of world revenues increased by $12.9 million, or 95%, due to
increased Eagle STP sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by $1.3 million, or 1%, and did not have a material effect on
net income in the nine months ended September 30, 2000.
21
<PAGE>
GROSS PROFIT. Gross profit as a percentage of revenues increased to
63.4% in the nine months ended September 30, 2000 compared with 62.3% in the
nine months ended September 30, 1999. The increase in gross margin was primarily
due to higher network systems margins related to proportionally higher upgrade
and extension sales, partially offset by higher amortization of purchased
technology, primarily in connection with the acquisition of IEX for the entire
nine months ended September 30, 2000 compared to five months of amortization
during the nine months ended September 30, 1999. Excluding the amortization of
purchased technology related to the IEX acquisition, gross profit as a
percentage of sales improved to 66.7% for the nine months ended September 30,
2000 compared to 65.0% for the nine months ended September 30, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
overall by $9.2 million, or 30.5%, and decreased as a percentage of revenues to
18.1% in the nine months ended September 30, 2000 from 20.3% in the nine months
ended September 30, 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 IP/SS7 market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $19.0 million, or 42.9%, and decreased as a
percentage of revenues to 29.1% in the nine months ended September 30, 2000 from
29.8% in the nine months ended September 30, 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.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of
goodwill and intangible assets increased by $6.7 million, or 69%, and increased
as a percentage of revenue to 7.6% in the nine months ended September 30, 2000
as compared to 6.6% in the nine months ended September 30, 1999. The increase
was due to amortization of goodwill and intangible assets primarily resulting
from the acquisition of IEX for the entire nine months during the nine months
ended September 30, 2000 compared to five months of amortization incurred during
the nine months ended September 30, 1999.
INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased
by $3.7 million, or 129%, primarily as a result of interest incurred for
convertible debt issued to retire the notes issued in connection with the
acquisition of IEX for the nine months ended September 30, 2000 compared to five
months of interest incurred during the nine months ended September 30, 1999 for
notes issued in connection with the acquisition of IEX. Interest income
increased $2.4 million, or 72.0%, due to higher invested cash balances in 2000
compared to the same period in 1999 when the Company's cash balances were lower
due to cash payments made in connection with the May 1999 acquisition of IEX.
INCOME TAXES. The income tax provision for the nine months ended
September 30, 2000 was $11.4 million and reflected the effect of non-deductible
acquisition-related costs, partially offset by a benefit of $3.5 million from
the utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Excluding the effect of acquisition-related items, an
estimated effective tax rate of 36% was applied for the nine month periods ended
September 30, 2000 and 1999 and represented federal, state and foreign taxes on
the Company's income, reduced primarily by research and development and foreign
tax credits.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 2000, cash and cash
equivalents increased by $38.1 million to $84.8 million, after $12.5 million net
purchases of short-term and long-term investments. Operating activities, net of
the effects of exchange rate changes on cash, provided $43.6 million. Financing
activities, which represented proceeds from the issuance of Common Stock upon
the exercise of options and warrants, provided $23.1 million, and investing
activities, excluding net purchases of short-term and long-term investments,
used $16.2 million primarily for capital expenditures.
Accounts receivable, including amounts due from related parties,
increased by 2% during the first nine months of 2000 due to increased sales,
partially offset by strong collections activity. Income taxes receivable
increased by $8.3 million in the first nine months of 2000 due primarily to the
effect of tax benefits related to the exercise of stock options. Prepaid
expenses and other current assets increased by $10.8 million in the first nine
months of 2000 due primarily to costs of sales that were deferred pending the
completion of certain large systems projects. Deferred revenues increased by 13%
due to the deferral of revenue related to these large systems projects.
Capital expenditures of $15.6 million during the first nine months of
2000 represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion.
The Company had a $15.0 million line of credit that expired on June 30,
2000 which was replaced by a $20.0 million line of credit on July 31, 2000 on
substantially the same terms and conditions as the expired line of credit.
The Company's $20.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at or, in some cases,
below the lender's prime rate (9.5% at September 30, 2000), and expires on July
31, 2001, 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 (1.5% at September 30, 2000) plus 0.125% per annum which expire between
November 2000 and August 2001, if not renewed. There have been no borrowings
under these lines of credit.
In November 1999, the Company completed the private placement of $135.0
million principal amount at maturity of 3.25% convertible subordinated discount
notes due in 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after the first three years.
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 issued in
May 1999 in connection with the acquisition of IEX Corporation.
23
<PAGE>
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Adoption of SAB 101 is required in the fourth quarter of 2000. The SEC has
recently issued additional guidance on SAB 101 in the form of a frequently asked
questions document issued on October 13, 2000. The Company is currently
evaluating the provisions of SAB 101 and this recently issued guidance and its
potential impact on the Company's revenue recognition policy.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
applied prospectively to new awards in a business combination, modifications to
outstanding awards, and changes to grantee status that occur on or after July 1,
2000, except for the provisions related to repricings and the definition of an
employee, which apply to awards after December 15, 1998. Additional provisions
of FIN 44 related to modifications to fixed stock option awards to add a reload
feature are effective for awards modified after January 12, 2000. The adoption
of FIN 44 did not have a material impact on its financial statements.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." The statement requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the planned use of the
derivative and the resulting designation. Because the Company does not currently
hold any derivative instruments and only engages in limited hedging activities,
the impact of the adoption of SFAS No. 133 is not currently expected to have a
material impact on financial position, results of operations or cash flows. The
Company is currently evaluating the provisions of SFAS No. 133 and its potential
impact on the Company's financial statements. The Company will be required to
implement SFAS No. 133 in the first quarter of fiscal 2001.
24
<PAGE>
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.
25
<PAGE>
"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 and other sections of this Quarterly Report 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 and the resulting fluctuation of the Company's operating results;
changes in customer product mix; customer acceptance of the Company's products;
capital spending patterns of customers; the Company's 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 its competitors; risks related to the Company's
acquisition of IEX; product liability risks; the continued growth in third party
purchases of diagnostics systems; uncertainties relating to the Company's
international operations; intellectual property protection; carrier deployment
of intelligent network services; the level and timing of research and
development expenditures; regulatory changes; general economic conditions; and
other risks described in this Quarterly Report, the Company's Annual Report on
Form 10-K for 1999 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 or mitigate.
Actual results may differ materially from those expressed or implied in such
forward-looking statements.
26
<PAGE>
PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 18, 2000, Alcatel USA, Inc. and Alcatel USA Sourcing, L.P.
(collectively, "Alcatel") filed a complaint against Tekelec in the United States
District Court for the Eastern District of Texas, Sherman Division. The
complaint alleges that Tekelec makes and sells products that infringe two
patents owned by Alcatel Sourcing. The patents at issue relate to a system and
method for application location register routing in a telecommunications
network. Although Alcatel does not identify in its complaint the specific
Tekelec products that purportedly infringe the patents at issue, Tekelec
believes that Alcatel's allegations relate to a particular software application
offered by Tekelec as a feature on its EAGLE STP for routing query messages in
wireless networks. Alcatel seeks a permanent injunction enjoining the Company
from infringing the patents at issue, unspecified general and exemplary damages,
and an award of costs.
On September 26, 2000, Tekelec filed its answer and counterclaim to
Alcatel's complaint denying Alcatel's claims of infringement and raising several
affirmative defenses. Tekelec has also asserted several counterclaims against
Alcatel seeking declaratory relief that Tekelec has not infringed the Alcatel
patents and that such patents are invalid and unenforceable. Tekelec believes
that it has strong defenses to Alcatel's claims on the grounds of invalidity,
noninfringement and inequitable conduct by Alcatel, and is defending the action
vigorously. The litigation is currently in the early stages of discovery and has
not yet been set for trial.
27
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement and Promissory Note dated July 31, 2000
between the Registrant and Union Bank of California
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 September 30, 2000.
28
<PAGE>
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
November 13, 2000
/s/ Michael L. Margolis
---------------------------------------
Michael L. Margolis
President and Chief Executive Officer
(Duly authorized officer)
/s/ Paul J. Pucino
----------------------------------------
Paul J. Pucino
Chief Financial Officer and
Vice President
(Principal financial and chief
accounting officer)
29
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INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
10.1 Loan Agreement, dated July 31, 2000, between the
Registrant and Union Bank of California, together with
Promissory Note of the Registrant dated July 31, 2000.
27.1 Financial Data Schedule (provided for the information of
the Securities and Exchange Commission only)
30
