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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2000
REGISTRATION NO. 333-95649
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________
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 Number)
26580 W. AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-5656
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
______________
RONALD W. BUCKLY
VICE PRESIDENT AND GENERAL COUNSEL
TEKELEC
26580 W. AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-5656
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
______________
COPIES TO:
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KATHERINE F. ASHTON, ESQ. ROBERT J. ENDICOTT, ESQ. SCOTT STANTON, ESQ.
BRYAN CAVE LLP BRYAN CAVE LLP GRAY CARY WARE & FREIDENRICH LLP
120 BROADWAY, SUITE 300 ONE METROPOLITAN SQUARE 4365 EXECUTIVE DRIVE
SANTA MONICA, CALIFORNIA 90401 SUITE 3600 SUITE 1600
(310) 576-2100 ST. LOUIS, MISSOURI 63102 SAN DIEGO, CALIFORNIA 92121-2189
FAX: (310) 576-2200 (314) 259-2000 (858) 677-1400
FAX: (314) 259-2020 FAX: (858) 677-1477
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______________
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE (1) REGISTRATION FEE
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3.25% Convertible Subordinated Discount Notes $135,000,000 $35,640
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Common Stock, without par value (2) (2)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended. Such
fee was paid with the initial Registration Statement filed January 28,
2000.
(2) Such indeterminate number of shares of common stock as shall be issuable
upon conversion of the Convertible Notes being registered hereunder. No
separate consideration will be received by Tekelec upon conversion of the
Convertible Notes, and, accordingly, no additional registration fee is
payable pursuant to Rule 457(i) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE SELLING SECURITYHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND THE SELLING SECURITYHOLDERS ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY , 2000
[LOGO]
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$135,000,000
3.25% CONVERTIBLE SUBORDINATED DISCOUNT NOTES DUE 2004 AND
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
- --------------------------------------------------------------------------------
This prospectus relates to (1) $135,000,000 aggregate principal amount at
maturity of 3.25% convertible subordinated discount notes due 2004 of Tekelec, a
California corporation, and (2) the shares of common stock, without par value,
of Tekelec issuable upon conversion of the notes. The notes and the common stock
that are offered for resale in this prospectus are offered for the accounts of
their current holders, to whom we also refer as the selling securityholders. The
notes were initially acquired from Tekelec by Deutsche Bank Securities Inc. and
Warburg Dillon Read LLC, to whom we refer together as the initial purchasers, in
November 1999 in connection with a private offering.
The notes are convertible at any time on or after January 31, 2000 into
Tekelec common stock unless we have previously redeemed or otherwise purchased
the notes, at a conversion rate of 56.3393 shares per $1,000 principal amount at
maturity, subject to adjustment in certain events. Our common stock is traded on
the Nasdaq National Market under the symbol "TKLC." On February 7, 2000, the
closing price of the common stock was $33.625 per share.
Interest on the notes is payable on May 2 and November 2 of each year,
commencing on May 2, 2000. The notes were originally issued at a price of
$853.54 per $1,000 principal amount at maturity, referred to as the "issue
price," which represented an original issue discount of 14.646% from the
principal amount at maturity, referred to as the "original issue discount." The
payment of the principal amount of the notes at maturity, together with cash
interest paid over the term of the notes, represents a yield to maturity of
6.75% per year, computed on a semi-annual bond equivalent basis.
We may not redeem the notes prior to November 2, 2002. Thereafter, we may
redeem the notes on at least 30 days' notice at our option, in whole or in part,
at the redemption prices set forth in this prospectus, in each case together
with accrued but unpaid interest. Subject to certain restrictions and
conditions, in the event of a change of control of Tekelec, as defined in the
indenture governing the notes, each holder of the notes will have the right to
require us to repurchase all or any portion of such holder's notes at the issue
price of the notes plus accrued original issue discount, together with accrued
but unpaid interest. See "Description of the Notes -- Change in Control" and "--
Optional Redemption."
The notes are general unsecured obligations of Tekelec and are subordinated
in right of payment to all our existing and future senior indebtedness, as
defined in the indenture governing the notes. The notes are also effectively
subordinated to all existing and future indebtedness and other liabilities of
our subsidiaries. The indenture does not restrict the incurrence of senior
indebtedness or other indebtedness of Tekelec and its subsidiaries. As of
November 30, 1999, we had approximately $44.7 million of consolidated
indebtedness and other obligations effectively ranking senior to the notes and
$17.9 million available to be drawn upon under our credit facilities which would
be senior to the notes.
Tekelec will not receive any of the proceeds from sales of the notes or the
shares by the selling securityholders. The notes and the shares may be offered
in negotiated transactions or otherwise at market prices prevailing at the time
of sale or at negotiated prices. The selling securityholders may be deemed to be
"underwriters" as defined in the Securities Act of 1933. If any broker-dealers
are used by the selling securityholders, any commissions paid to broker-dealers
and, if broker-dealers purchase any notes or shares as principals, any profits
received by such broker-dealers on the resale of the notes or shares may be
deemed to be underwriting discounts or commissions under the Securities Act. In
addition, any profits realized by the selling securityholders may be deemed to
be underwriting commissions.
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any of the securities offered hereby by any person in any
jurisdiction in which it is unlawful for such person to make such an offering or
solicitation.
INVESTING IN THE NOTES AND THE COMMON STOCK ISSUABLE UPON THEIR CONVERSION
INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 2000.
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SUMMARY
In this prospectus, the words "Tekelec," "we," "our," "ours" and "us" refer
only to Tekelec and its subsidiaries (unless indicated otherwise), and not to
any of the selling securityholders. The following summary contains basic
information about this offering. It likely does not contain all of the
information that is important to you. You should read the entire prospectus,
including the financial information and related notes, and the documents we have
incorporated by reference into this prospectus before making an investment
decision.
TEKELEC
OUR BUSINESS
Tekelec designs, manufactures, markets and supports a suite of infrastructure
and diagnostics products for existing and converging telecommunications
networks. Our infrastructure products are used in the signaling portion of these
networks to control, establish and terminate voice and data communications. Our
products allow carriers and service providers to develop and offer intelligent
services such as call waiting, caller ID, voice messaging, toll free calls,
prepaid calling and local number portability. Our diagnostics products enable
carriers and communications equipment manufacturers to simulate, test and
monitor network elements. We also develop, sell and support management software
for call center operations.
Demand for communications infrastructure has expanded rapidly due to
increasing competition among service providers and subscriber demand for data
communications, connectivity and intelligent services. According to
International Data Corp., an independent market research firm, the number of
Internet users is expected to grow to 320 million by 2003 from approximately 93
million in 1998. Service providers are rapidly building out data networks to
accommodate the resulting growth in traffic and are increasingly seeking
reliable and efficient infrastructure products and interfaces that facilitate
the convergence of voice and data networks. We believe that this rapid build-out
will increase the demand for products that extend the reliability of today's
voice networks and enable the delivery of intelligent services to converged
networks.
We are the leading supplier in North America of signal transfer points, a key
element of the signaling infrastructure for traditional voice networks. Our
Eagle STP and DaVinci SCP are based on Signaling System #7 (SS7), which is the
industry standard used in such networks. Telecommunications carriers use our
Eagle STP to control calls and to direct the signaling messages that coordinate
the provision of intelligent services. We recently introduced a suite of
products based on SS7 technology for converged voice and data networks. These
products include our IP7 Secure Gateway and DaVinci VoX Gateway Controller,
which provide a highly scalable and flexible solution to extend the reliability
and features of voice networks to converged networks.
We believe that our products are differentiated based on their superior
performance, reliability, versatility and innovative features. We sell our
infrastructure and diagnostics products to established and emerging
telecommunications carriers and equipment suppliers around the world. Our
infrastructure product customers include AT&T Wireless, Bell Atlantic, Level 3,
Nextel, Orange Personal Commumications Services, Sprint, U S WEST and Vodafone
Airtouch. Our diagnostics product customers include Alcatel, Cisco, Ericsson,
GTE, Lucent, Motorola, Nortel, Sprint and U S WEST. We market our products
through a variety of channels, including our direct sales forces and OEM,
distributor and other reseller relationships with telecommunications equipment
suppliers such as Daewoo, Lucent, Sonus Networks, Tellabs and Unisys.
Our objective is to be the premier supplier of infrastructure and diagnostics
products for existing and converging networks. We intend to focus on the market
opportunities arising from the convergence of voice and data networks and to
apply our technology to develop products and services for such networks. In
order to achieve our goal we intend to leverage our established customer
relationships and our expertise in SS7 technology. Our strategy is to maintain
technology leadership, target the convergence of voice and data networks, expand
internationally and pursue new market segments and additional strategic
relationships.
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THE OFFERING
Issuer................................ Tekelec. For purposes of this summary,
"Tekelec," "we," "us" and "our" refer to
Tekelec and not to its subsidiaries.
Securities Offered.................... $135,000,000 aggregate principal amount
at maturity of 3.25% convertible
subordinated discount notes due 2004
that were previously issued in a private
offering, and shares of Tekelec common
stock as may be issued upon conversion
of the notes.
Issue Price........................... $853.54 per $1,000 principal amount at
maturity, which represents an original
issue discount of 14.646% from the
principal amount at maturity, plus
accrued interest from November 2, 1999,
the date of issue.
Conversion............................ You may convert a note into shares of
Tekelec's common stock at any time on or
after January 31, 2000 through the
maturity date, unless the note has been
previously redeemed or repurchased. The
conversion rate will be 56.3393 shares
per $1,000 of principal amount at
maturity of the notes, subject to
adjustment in certain circumstances.
This results in an initial conversion
price of $15.15 per share, or a 20%
premium to the closing price of $12.625
of our common stock on the Nasdaq
National Market on October 26, 1999. The
number of shares into which a note is
convertible will not be adjusted for
accrued original issue discount or for
accrued but unpaid interest. See
"Description of the Notes-- Conversion."
Interest Payment Dates................ Interest of 3.25% per year will be paid
semi-annually on the principal amount at
maturity on May 2 and November 2 of each
year, commencing on May 2, 2000.
Maturity and Yield.................... The notes will mature on November 2,
2004. The payment of the principal
amount of the notes at maturity,
together with cash interest paid over
the term of the notes, will yield 6.75%
per year, calculated on a semi-annual
bond equivalent basis, to an investor
who holds a note from the initial
issuance date until maturity.
Optional Redemption................... At any time after November 2, 2002, we
may at our option redeem the notes in
whole or in part at increasing
redemption prices calculated to include
the accrued original issue discount to
the date of redemption. Upon such
redemption we are also required to pay
accrued but unpaid interest to the date
of redemption. See "Description of the
Notes-- Optional Redemption."
Change in Control..................... Upon the occurrence of a "change in
control," we will be required under some
circumstances to make an offer to
repurchase each holder's notes at the
issue price of the notes plus accrued
but unpaid interest and accrued original
issue discount to the date of
repurchase. See "Description of the
Notes-- Change in Control."
Ranking............................... The notes are: (1) unsecured; (2)
subordinated to all of our existing and
future indebtedness not expressly
subordinated to or on a parity with the
notes; and (3) effectively subordinated
to all existing and future indebtedness
of our subsidiaries. As of November 30,
1999, we had approximately $44.7 million
of consolidated indebtedness and other
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obligations effectively ranking senior
to the notes and $17.9 million available
to be drawn upon under our credit
facilities, which effectively ranks
senior to the notes. See "Description of
Existing Indebtedness." The indenture
governing the notes does not restrict
our or our subsidiaries' ability to
incur senior indebtedness or any other
indebtedness or liabilities.
Registration Rights................... We have agreed to use our reasonable
best efforts to cause the shelf
registration statement, of which this
prospectus is a part, to become
effective under the Securities Act
within 150 days after the date on which
we file the shelf registration
statement. If we do not comply with
certain covenants set forth in the
registration rights agreement, we will
be required to pay liquidated damages to
the holders of the notes. See
"Description of the Notes-- Registration
Rights."
Use of Proceeds....................... We will not receive any proceeds from
the sale by the selling securityholders
of the notes or common stock.
Original Issue Discount on
Notes................................. Each note was issued with original issue
discount for United States federal
income tax purposes. The amount of the
discount is the difference between the
principal amount of the note at maturity
and its issue price. You should be aware
that accrued original issue discount
will be includable periodically in your
gross income as ordinary income for
United States federal income tax
purposes before conversion, redemption,
other disposition or maturity of your
notes, whether or not those notes
ultimately are converted, redeemed, sold
to us or others or paid at maturity.
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Unless otherwise indicated in this prospectus, all share and per-share data
has been adjusted to reflect our March 1995, August 1997 and July 1998
two-for-one stock splits.
IEX(R), Eagle(R), Chameleon(R) and the Tekelec logo are registered trademarks
of Tekelec. Tekelec, IP(7), IP(7) Secure Gateway, IP(7) Sentinel, DaVinci,
DaVinci Vox Gateway Controller, MGTS, MGTS Companion, MGTS i3000, MGTS Flex,
ATM(7) Inspector, TALI, TotalView and TotalNet are trademarks of Tekelec.
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SUMMARY CONSOLIDATED FINANCIAL DATA
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1994 1995 1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
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STATEMENT OF OPERATIONS
DATA:
Revenues ..................... $ 61,189 $ 75,276 $ 72,126 $ 125,140 $ 176,669 $ 127,515 $ 149,156
Income (Loss) before provision
for income taxes ........... 5,711 8,450 (284) 29,741 55,551 40,957 174
Net income (loss) ............ 4,460 6,311 (2,511) 28,996 39,209 25,393 (4,724)
Earnings (Loss) per share:
Basic ...................... $ 0.13 $ 0.15 $ (0.05) $ 0.58 $ 0.73 $ 0.48 $ (0.09)
Diluted .................... 0.12 0.13 (0.05) 0.51 0.67 0.43 (0.09)
Weighted average number of
shares outstanding:
Basic ...................... 34,736 42,116 47,100 50,408 53,518 53,315 54,776
Diluted(1) ................. 37,259 48,207 47,100 56,842 58,708 58,770 54,776
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SEPTEMBER 30, 1999
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ACTUAL AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and investments ................... $ 79,800 $ 91,071
Working capital (deficiency) ........... (2,082) 109,189
Total assets ........................... 360,123 375,351
Long-term liabilities .................. 23,369 138,597
Total shareholders' equity ............. 167,838 167,838
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(1) Reflects the dilutive effect of outstanding options and warrants for
periods in which we had net income. In accordance with generally accepted
accounting principles, such effect is not reflected for periods in which we
recorded a loss, as this effect would decrease the loss per share in these
periods.
(2) Adjusted to give effect to the initial private offering of the notes in
November 1999 and the application of the net proceeds from that offering.
We will not receive any proceeds from the sale by the selling
securityholders of the notes or the shares of common stock issued on
conversion of the notes.
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RISK FACTORS
Before you participate in this offering, you should be aware that there are
various risks, including the ones listed below. You should carefully consider
these risk factors and the other information contained in this prospectus in
evaluating this offering.
BECAUSE OUR QUARTERLY OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY
FLUCTUATE, THE MARKET PRICE FOR OUR STOCK MAY BE VOLATILE.
Our quarterly operating results are difficult to predict and may fluctuate
significantly. We have failed to achieve our revenue and net income expectations
for certain prior periods and it is possible that we will fail to achieve such
expectations in the future. Fluctuations in our quarterly operating results may
contribute to the volatility in our stock price, which may affect the market
price of the notes. A number of factors, many of which are outside our control,
can cause these fluctuations, including among others:
- the size, timing, terms and conditions of orders and shipments;
- the lengthy sales cycle of our network infrastructure products;
- the progress and timing of the convergence of voice and data networks and
other convergence-related risks described below;
- the capital spending patterns of customers, including deferrals or
cancellations of purchases due to year 2000 compliance concerns;
- the success or failure of strategic alliances and acquisitions;
- unanticipated delays or problems in releasing new products or services;
- the mix of products and services that we sell;
- the introduction and market acceptance of new products and technologies;
- the timing of our customers' deployment of intelligent network services
and new technologies;
- the timing and level of our research and development expenditures and
other expenses; and
- the expansion of our marketing and support operations, both domestically
and internationally.
In addition, we operate with limited product backlog that is shippable in any
quarter because we typically ship products within a short period of time after
receipt of an order. Consequently, our product sales in any quarter depend
largely on orders booked and shipped in that quarter. A significant portion of
our product shipments in each quarter occurs at or near the end of the quarter.
Since individual orders can represent a meaningful percentage of our revenues
and net income in any quarter, the deferral of or failure to close a single
order in a quarter can result in a revenue and net income shortfall that causes
us to fail to meet securities analysts' expectations for that period. We base
our current and future expense levels on our internal operating plans and sales
forecasts, and our operating costs are to a large extent fixed. As a result, we
may not be able to sufficiently reduce our costs in any quarter to compensate
for an unexpected near-term shortfall in revenues, and even a small shortfall
could disproportionately and adversely affect our operating results for that
quarter.
The factors described above are difficult to forecast and could have a
material adverse effect on our business, operating results and financial
condition. In the fourth quarter of 1998 and in the first quarter of 1999, we
experienced lower than expected revenues and as a result did not meet securities
analysts' expectations for revenues and net income. The principal reasons for
these shortfalls included the decision by certain of our customers to defer
purchases of network infrastructure products for a variety of reasons including
a slower rate in the convergence of voice and data networks than was anticipated
and general industry concerns over year 2000 compliance-related issues. We
cannot assure you that we will not experience similar shortfalls in the future,
which would adversely
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affect our operating results. Accordingly, you should not rely on the results of
any one quarter as an indication of our future performance.
IF CUSTOMERS SIGNIFICANTLY CHANGE THEIR BUYING PATTERNS BECAUSE OF YEAR 2000
CONCERNS, OR IF OUR PRODUCTS ARE NOT YEAR 2000 COMPLIANT, OUR BUSINESS WOULD
SUFFER.
Many currently installed computer systems, software programs and embedded
chips were designed to use only a two-digit date field. These date fields need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. If these date fields are not updated, systems and programs could fail or
give erroneous results when referencing dates after December 31, 1999.
We believe that the purchasing patterns of our customers and potential
customers may be significantly affected by the year 2000 issue. Many companies
have expended significant resources to correct or replace older software systems
to achieve year 2000 compliance. These expenditures may result in reduced funds
available to purchase our products. In addition, many customers and potential
customers may also defer installing or purchasing additional equipment until
several months following January 1, 2000 in order to stabilize their network
systems and infrastructure or until they have evaluated our products for year
2000 compliance. Year 2000 issues could cause a significant number of companies,
including our current customers, to reevaluate their current system needs and,
as a result, switch to other systems or suppliers. These year 2000 issues could
adversely affect our business.
The software and systems products that we sell consist of internally
developed software, software licensed by us from third parties for use in or
with our products, hardware systems designed and manufactured by us and hardware
systems designed and manufactured by third parties. We believe that our current
product offerings are year 2000 compliant. For past product offerings that we
are still supporting, we are offering releases that should make these products
year 2000 compliant. Failure to achieve year 2000 compliance for any of our
products would have a material adverse effect on our future sales. Additionally,
if any of our critical products were to fail in the field as a result of year
2000 noncompliance, the failure could result in substantial liability to us and
have a material adverse effect on our financial results, business, market
position, reputation and prospects.
WE HAVE LIMITED PRODUCT OFFERINGS, AND OUR REVENUES MAY SUFFER IF DEMAND FOR ANY
OF THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT.
We derive a substantial portion of our revenues from a limited number of
products. During each of 1997, 1998 and the first nine months of 1999, our Eagle
products and related services generated over 50% of our revenues, and we expect
that these products and services and our other network infrastructure products
will continue to account for a substantial majority of our revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for these products, such as competition or technological change, could
cause a decrease in our revenues and profitability. Therefore, continued and
widespread market acceptance of these products is critical to our future
success. Moreover, our future financial performance will depend in significant
part on the successful and timely development, introduction and customer
acceptance of new and enhanced versions of our Eagle products and our other
network infrastructure solutions. We cannot assure you that we will continue to
be successful in developing and marketing our network infrastructure products
and related services.
RISKS RELATED TO THE POTENTIAL CONVERGENCE OF VOICE AND DATA NETWORKS
Currently, voice conversations are carried primarily over circuit switched
networks. Another type of network, packet switched networks, carries primarily
data. Circuit and packet networks use fundamentally different technologies. We
expect a substantial portion of any increases in our future sales of network
infrastructure products to result from the interconnection, or convergence, of
circuit and packet networks. Therefore, this convergence presents several
significant and related risks to our business.
IF THE CONVERGENCE OF CIRCUIT AND PACKET NETWORKS DOES NOT OCCUR, OR TAKES
LONGER THAN ANTICIPATED, ANY INCREASES IN SALES OF OUR NETWORK INFRASTRUCTURE
PRODUCTS, AND OUR PROFITABILITY, WOULD BE ADVERSELY AFFECTED.
Any factor which might prevent or slow the convergence of circuit and
packet networks could materially and adversely affect growth opportunities
for our business. Such factors include:
- the failure to solve or difficulty in solving certain technical obstacles
to the transmission of voice conversations over a packet network;
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- delays in the formulation of standards for the transmission of voice
conversations over a packet network; and
- the imposition on packet network operators of access fees, which they
currently do not pay.
It may be difficult or impossible to solve certain technical obstacles to the
transmission of voice conversations over a packet network with the same quality
and reliability of a circuit network. For example, delays or gaps in the timing
of a message are typically not as critical to data transmissions as they are to
voice conversations. The nature of packet switching makes it difficult to
prevent such delays or gaps as well as to repair such defects in a way that does
not degrade the quality of a voice conversation. If this problem is not solved,
the convergence of circuit and packet networks may never fully occur or may
occur at a much slower rate than we anticipate. It may also be difficult or
time-consuming for the industry to agree to standards incorporating any one
solution to such technical issues if such a solution does exist. Without uniform
standards, substantial convergence of circuit and packet networks may not occur.
We do not expect that these technical problems will be solved, uniform
standards agreed upon or market acceptance of such solutions to occur in time to
generate significant sales opportunities related to convergence before the
second half of 2000. However, convergence may well take much longer or, as noted
above, not fully occur at all. Moreover, uncertainty regarding the technology or
standards employed in converged networks may cause carriers to delay their
purchasing plans.
Finally, the imposition of access fees on packet networks might slow the
convergence of circuit and packet networks. Today, federal regulation requires
an operator of a long distance circuit network to pay an access fee to the local
phone company serving the recipient of a long distance call. Packet network
operators do not currently pay such access fees. In the future, access fees may
be imposed on carriers using packet networks to transmit voice calls. These
access fees might also be imposed on the termination of "pure" data messages by
operators of packet networks. The imposition of these access fees would reduce
the economic advantages of using packet networks for voice and other
transmissions, which may slow the convergence of circuit and packet networks.
IF OUR INFRASTRUCTURE PRODUCTS DO NOT PLAY AN INTEGRAL ROLE IN THE ARCHITECTURE
FOR CONVERGED CIRCUIT AND PACKET NETWORKS, OUR BUSINESS AND PROFITABILITY WOULD
SUFFER.
Many of our principal products are designed to facilitate a particular type
of network architecture called Signaling System #7, or SS7. If this technology
does not play a significant role in future network architecture for converged
networks, our products will become less competitive or obsolete. We cannot
assure you that SS7 or our products will play a key role as network architecture
designs for converged circuit and packet networks evolve. In addition, SS7 may
be modified substantially for the architecture of converged networks. If this
modification occurs, we may need to substantially change or adapt our product
design. Any of these changes or adaptations may be costly. Moreover, we may not
be able to respond to this modification in a timely manner, or at all.
CUSTOMERS MAY PREFER FULLY INTEGRATED SWITCHING SOLUTIONS OFFERED BY OUR
COMPETITORS.
Our product strategy is to develop and provide only certain parts of a
network switch which would be used in converged circuit and packet networks.
This means that our new IP7 Secure Gateway and DaVinci VoX Gateway Controller
will need to be deployed with the products of other manufacturers in order to
constitute a complete switching solution for a converged network. Some of our
competitors, including Lucent, Nortel and Cisco, intend to manufacture fully
integrated switches for converged networks that would not require any of our
products. Some or all of our customers or potential customers may prefer to
purchase such a fully integrated switching product rather than purchasing our
convergence switching products. They may prefer a fully integrated switch, even
if our convergence switching products are offered with the switch components
made by others. Customers may choose this option because of the convenience of
"one-stop shopping," or because they believe that the fully integrated products
are superior. If a significant number of our potential customers prefer a fully
integrated solution made entirely by one manufacturer, our strategy could fail
because our products do not achieve broad market acceptance for converged
networks, and our business could suffer.
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<PAGE> 10
OUR DEPENDENCE ON STRATEGIC RELATIONSHIPS WITH MANUFACTURERS OF OTHER PRODUCTS
MAKES US POTENTIALLY VULNERABLE TO THE ACTIONS AND PERFORMANCE OF OTHER
MANUFACTURERS.
Because our new IP(7) Secure Gateway and DaVinci VoX Gateway Controller will
need to be bundled with the products of other manufacturers in order to
constitute a switch in converged circuit and packet networks, we may be
adversely affected by the actions of the manufacturers of the other necessary
switch elements. First, these manufacturers may not choose to make their product
designs compatible with ours. Second, those manufacturers who do choose to make
their products compatible with ours may not develop or deliver their products on
a timely basis, or may not develop products which perform as expected or are
priced competitively. Third, manufacturers of these products may also
subsequently change the design of their products in a manner which makes it
difficult or impossible to make our products compatible. Fourth, manufacturers
of these products may decide to develop a fully integrated network switch for
converged networks and may cease selling non-integrated switching products.
Finally, because we intend to market a product which incorporates network
switching products made by others, any other manufacturer who markets our
products together with its products may terminate or cease to fully support its
efforts to sell our products. All of these actions will be outside of our
control. Any of these actions could materially and adversely affect our business
and profitability.
IF UNIFORM STANDARDS ARE ACCEPTED WHICH VARY SIGNIFICANTLY FROM THE STANDARDS WE
HAVE PROPOSED FOR ONE PART OF THE ARCHITECTURE FOR CONVERGED CIRCUIT AND PACKET
NETWORKS, OUR BUSINESS AND PROFITABILITY COULD BE MATERIALLY AND ADVERSELY
AFFECTED.
There are currently no uniform governing standards with respect to the
architecture of the converged circuit switched and packet switched networks. We
have submitted particular proposals for one part of these standards to various
standards governing bodies, which would allow our new IP(7) Secure Gateway to
interface with other elements of a network switch in a converged network. If our
interface, which we call our TALI interface, is not adopted or if it is adopted
in a different form, we may need to substantially modify our product design.
Such modifications may be costly, may take a significant amount of time and may
not prove successful. Any of these would cause our business and operating
results to suffer.
IF OUR PRODUCTS DO NOT SATISFY CUSTOMER DEMAND FOR PERFORMANCE OR PRICE, OUR
CUSTOMERS COULD PURCHASE PRODUCTS FROM OUR COMPETITORS.
If we are not able to compete successfully against our current and future
competitors, our current and potential customers may choose to purchase similar
products offered by our competitors, which would negatively affect our revenues.
We face formidable competition from a number of companies offering a variety of
network infrastructure, diagnostics or call center products. The markets for our
products are subject to rapid technological changes, evolving industry standards
and regulatory developments. Our competitors include many large domestic and
international companies as well as many smaller established and emerging
technology companies. We compete principally on the basis of:
- product performance and functionality;
- product quality and reliability;
- customer service and support; and
- price.
Many of our competitors have substantially greater financial resources,
product development, marketing, distribution and support capabilities, name
recognition and other resources than we do. We anticipate that competition will
continue to intensify with the anticipated convergence of voice and data
networks. We may not be able to compete effectively or to maintain or capture
meaningful market share, and our business could be harmed, if our competitors'
solutions provide higher performance, offer additional features and
functionality or are more reliable or less expensive than our products.
Increased competition could force us to lower our prices or take other actions
to differentiate our products, which could adversely affect our operating
results.
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<PAGE> 11
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF ANY OF THESE
CUSTOMERS COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
Historically, a limited number of customers has accounted for a significant
percentage of our revenues in each fiscal quarter. Less than 10% of our
customers accounted for 70% of our revenues in each of 1998 and the first nine
months of 1999. We anticipate that our operating results in any given period
will continue to depend to a significant extent upon revenues from a small
number of customers. In addition, we anticipate that the mix of customers in
each fiscal period will continue to vary. In order to increase our revenues, we
will need to attract additional significant customers on an ongoing basis. Our
failure to sell a sufficient number of products or to obtain a sufficient number
of significant customers during a particular period could adversely affect our
operating results.
IF WE FAIL TO DEVELOP OR INTRODUCE NEW PRODUCTS IN A TIMELY FASHION, OUR
BUSINESS WILL SUFFER.
If we fail to develop or introduce on a timely basis new products or product
enhancements that achieve market acceptance, our business will suffer. The
markets for our network infrastructure and diagnostics products are
characterized by rapidly changing technology, frequent new product introductions
and enhancements and evolving industry standards. Our success will depend to a
significant extent upon our ability to accurately anticipate the evolution of
new products and technologies and to enhance our existing products. It will also
depend on our ability to develop and introduce innovative new products that gain
market acceptance. Finally, sales of both our network infrastructure and our
diagnostics products depend in part on the continuing development and deployment
of emerging standards and new services based on these standards. We cannot
assure you that we will be successful in selecting, developing, manufacturing
and marketing new products or enhancing our existing products on a timely or
cost-effective basis. Moreover, we may encounter technical problems in
connection with our product development that could result in the delayed
introduction of new products or product enhancements. In addition, products or
technologies developed by others may render our products noncompetitive or
obsolete.
WE MAY BE UNABLE TO ACHIEVE THE ANTICIPATED BENEFITS FROM THE IEX ACQUISITION IF
IEX DOES NOT PERFORM ACCORDING TO OUR EXPECTATIONS OR IF WE DO NOT INTEGRATE IEX
INTO OUR OPERATIONS EFFECTIVELY.
We expect that our acquisition of IEX Corporation will result in certain
benefits to us, including: expanding our potential market for network
infrastructure products; broadening our product offerings; and acquiring
additional engineering and technology resources. Our acquisition of IEX creates
a number of risks that we must address to realize these benefits. First, our
customers may not accept IEX's network infrastructure products when sold in
conjunction with ours. Second, we must successfully complete the integration of
IEX into our existing business according to our plans. In particular, we will
need to coordinate the respective sales and marketing teams of IEX and Tekelec,
which may pose unanticipated risks. Third, if any of our material assumptions
regarding the business prospects for IEX at the time of the acquisition were
materially inaccurate, we may not accomplish our strategic objectives and our
business, financial condition and operating results could be adversely affected.
Finally, we incurred substantial non-recurring charges in connection with the
acquisition of IEX in 1999. We cannot assure you that we will not incur
additional material charges in subsequent quarters to reflect additional costs
associated with our ownership of IEX. If we do not adequately address these
risks, we may not realize the anticipated benefits, and our business and
operating results could be adversely affected.
LITIGATION RELATED TO PRODUCT LIABILITY CLAIMS COULD BE EXPENSIVE AND COULD
NEGATIVELY AFFECT OUR PROFITABILITY.
Products as complex as ours may contain undetected errors when first
introduced or as new versions are released. Such errors, particularly those that
result in a failure of our switching products or telecommunications networks,
could harm our customer relationships and business. We cannot assure you that
our products will not have these kinds of errors. A product liability claim
brought against us could result in costly, protracted, highly disruptive and
time consuming litigation, which would harm our business. In addition, we may be
subject to claims arising from our failure to properly service or maintain our
products or to adequately remedy defects in our products once such defects have
been detected. Our agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
it is possible that the limitation of liability provisions contained in our
agreements may not be effective under the laws of some jurisdictions,
particularly since we have significant international sales. Although we maintain
product liability insurance, it may not be sufficient to cover all claims to
which we may be subject. The successful assertion against us of one or a series
of large uninsured claims would harm our business. Although we have not
experienced any significant product liability claims to date, our sale and
support of products may entail the risk of these types of claims, and subject us
to such claims in the future.
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<PAGE> 12
IF CUSTOMERS DO NOT CONTINUE TO PURCHASE TEST SYSTEMS, OUR DIAGNOSTICS BUSINESS
WOULD BE HARMED.
The future success of our diagnostics business will depend on continued
growth in the market for telecommunications test systems and services and the
continued commercial acceptance of our diagnostics products as solutions to
address the testing requirements of telecommunications equipment manufacturers
and network operators. While most of our existing and potential customers have
the technical capability and financial resources to produce their own test
systems and perform test services internally, many have chosen to purchase a
substantial portion of their test equipment needs. We cannot assure you that our
customers will continue to purchase their test systems from third parties or
that potential new customers will purchase test equipment. Even if they do, they
may choose the diagnostics products and services offered by our competitors.
Certain of our customers in the diagnostics market also manufacture network
infrastructure products that compete or may compete with our current or future
network infrastructure products. Increasing competition in the network
infrastructure market may cause these customers to reduce their purchases of our
diagnostics products.
WE ARE DEPENDENT ON RELATIONSHIPS WITH STRATEGIC PARTNERS AND DISTRIBUTORS AND
OTHER RESELLERS.
We believe that our ability to compete successfully against other network
infrastructure product manufacturers depends in part on distribution and
marketing relationships with leading communications equipment suppliers. If we
cannot successfully enter these types of relationships on favorable terms to us
or maintain these relationships, our business may suffer.
In addition, we expect to increasingly rely on the deployment of our products
with those of other manufacturers, systems integrators and other resellers, both
domestically and internationally. To the extent our products are so
incorporated, we depend on the timely and successful development of those other
products. Although we currently have a network of distributors for our
diagnostics products and use distributors only to a limited extent or not at all
with respect to our other product lines, we may expand our distribution
activities with respect to our other products, including network infrastructure
products.
In addition, we act as an original equipment manufacturer, commonly referred
to as an "OEM," with respect to some of the products that we manufacture and
sell to resellers. A number of these resellers market our products with their
products. If these resellers are unable to develop their products in a timely
fashion or are unable to gain market acceptance, their demand for our products
will decrease, which would negatively impact our revenues. In addition, because
we compete directly with some of our OEM customers, those customers may choose
to purchase products from other vendors with whom they do not compete.
COMPLIANCE WITH TELECOMMUNICATIONS REGULATIONS AND STANDARDS MAY BE DIFFICULT
AND COSTLY, AND IF WE FAIL TO COMPLY, OUR PRODUCT SALES WOULD DECREASE.
In order to maintain market acceptance, our products must continue to meet a
significant number of regulations and standards. In the United States, our
products must comply with various regulations defined by the Federal
Communications Commission and Underwriters Laboratories as well as standards
established by Telcordia (formerly Bell Telecommunications Research).
Internationally, our products must comply with standards established by
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunications Union. As these
standards evolve, we will be required to modify our products or develop and
support new versions of our products. The failure of our products to comply, or
delays in compliance, with the various existing and evolving industry standards
could delay introduction of our products, which could harm our business.
In order to penetrate our target markets, it is important that we ensure the
interoperability of our products with the operations, administration,
maintenance and provisioning systems used by our customers. To ensure this
interoperability, we periodically submit our products to technical audits.
Failure or delay in obtaining favorable technical audit results could adversely
affect our ability to sell products to some segments of the communications
market.
Government regulatory policies are likely to continue to have a major impact
on the pricing of existing as well as new public network services and,
therefore, are expected to affect demand for such services and the
communications products, including our products, that support such services.
Tariff rates, whether determined autonomously by carriers or in response to
regulatory directives, may affect cost effectiveness of deploying public network
services. Tariff policies are under continuous review and are subject to change.
User uncertainty regarding future policies may also affect demand for
communications products, including our products. In
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<PAGE> 13
addition, the convergence of circuit and packet networks could be subject to
governmental regulation. Regulatory initiatives in this area could adversely
affect our business.
WE HAVE SIGNIFICANT INTERNATIONAL SALES, AND INTERNATIONAL MARKETS HAVE INHERENT
RISKS.
International sales are subject to inherent risks, including unexpected
changes in regulatory requirements and tariffs, difficulties in staffing and
managing foreign operations and distributors, longer payment cycles, greater
difficulty in accounts receivable collection and potentially adverse tax
consequences. Doing business overseas is generally more costly than doing
business in the United States. We sell our products worldwide through our direct
sales forces, distributors and other resellers and wholly owned subsidiaries in
Japan and the United Kingdom. International sales accounted for 42% of our
revenues in 1996, 27% in 1997, 31% in 1998 and 23% in the first nine months of
1999. Our sales through our Japanese subsidiary, and to a limited extent, other
sales, are denominated in local currencies while other international sales are
U.S. dollar-denominated. We expect that international sales will continue to
account for a significant portion of our revenues in future periods.
Exchange rate fluctuations on foreign currency transactions and translations
arising from international operations may contribute to fluctuations in our
business and operating results. Fluctuations in exchange rates could also affect
demand for our products. If, for any reason, exchange or price controls or other
restrictions in foreign countries are imposed, our business and operating
results could suffer. In addition, any inability to obtain local regulatory
approvals in foreign markets on a timely basis could harm our business.
In particular, if we are not able to manage our planned expansion into
Europe, our business may suffer. In addition, we are relatively unknown in
Europe, and we may have difficulty establishing relationships or building name
recognition there, which could adversely affect our performance in this market.
Moreover, European telecommunications networks generally have a different
structure, and our products may not be completely compatible with this different
structure. As a result, our products may not be competitive with those of our
competitors in Europe.
Access to foreign markets is often difficult due to the established
relationships between a government-owned or controlled communications operating
company and its traditional indigenous suppliers of communications equipment.
These foreign communications networks are in many cases owned or strictly
regulated by government. We cannot assure you that we will be able to
successfully penetrate these markets, particularly for our switching products.
THE LOSS OF SERVICES OF KEY PERSONNEL OR FAILURE TO ATTRACT AND RETAIN
ADDITIONAL KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
We depend to a significant extent upon the continuing services and
contributions of our senior management team and other key personnel,
particularly Michael L. Margolis, our Chief Executive Officer and President;
Gary Crockett, our Chief Technical Officer and IEX's Chief Executive Officer and
President; Cecil Boyd, our Senior Vice President and General Manager, Network
Systems Division; Danny Parker, our Vice President and General Manager, Network
Diagnostics Division; and Lee Smith, our Vice President, Strategy and Business
Development. We do not have long-term employment agreements or other
arrangements with our employees which would prevent them from leaving Tekelec.
Our future success also depends upon our ongoing ability to attract and retain
highly skilled personnel. Competition for these employees is intense. We are
currently actively searching for a Chief Financial Officer. Our business could
suffer if we were to lose any key personnel and not be able to find appropriate
replacements in a timely manner or if we were unable to attract and retain
additional highly skilled personnel.
WE CANNOT ASSURE YOU THAT OUR MEASURES TO PROTECT OUR PROPRIETARY TECHNOLOGY AND
OTHER INTELLECTUAL PROPERTY RIGHTS ARE ADEQUATE.
Our success depends to a significant degree on our proprietary technology and
other intellectual property. Although we regard our technology as proprietary,
we have sought only limited patent protection. We rely on a combination of
patents, copyrights, trademarks, trade secrets, confidentiality agreements and
contractual restrictions to establish and protect our proprietary rights. These
measures, however, afford only limited protection and may not prevent third
parties from misappropriating our technology or other intellectual property. In
addition, the laws of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States, which makes
misappropriation of our technology and other intellectual property more likely.
If we fail to successfully enforce or defend our intellectual property rights or
if we fail to detect misappropriation of our proprietary rights, our ability to
effectively compete could be seriously impaired.
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<PAGE> 14
Our pending patent and trademark registration applications may not be
allowed, and our competitors may challenge the validity or scope of our patent
or trademark registration applications. In addition, we may face challenges to
the validity or enforceability of our proprietary rights and litigation may be
necessary to enforce and protect our rights, to determine the validity and scope
of our proprietary rights and the rights of others, or to defend against claims
of infringement or invalidity. Any such litigation would be expensive and time
consuming, would divert our management and key personnel from business
operations and would likely harm our business and operating results.
IF THIRD PARTIES CLAIM THAT WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, WE
MAY BE PREVENTED FROM SELLING CERTAIN PRODUCTS AND INCUR SIGNIFICANT EXPENSES TO
RESOLVE THESE CLAIMS.
Third parties may claim that we are infringing their intellectual property
rights. Any claims made against us regarding patents or other intellectual
property rights could be expensive and time consuming to resolve or defend,
would divert our management and key personnel from our business operations and
may require us to modify or cease marketing our products, develop new
technologies or products, acquire licenses to proprietary rights that are the
subject of the infringement claim or refund to our customers all or a portion of
the amounts they paid for infringing products. If such claims are asserted, we
cannot assure you that we would prevail or be able to acquire any necessary
licenses on acceptable terms, if at all. In addition, we may be requested to
defend and indemnify certain of our customers and resellers against claims that
our products infringe the proprietary rights of others. We may also be subject
to potentially significant damages or injunctions against the sale of certain
products or use of certain technologies.
We receive from time to time claims of infringement from third parties or
otherwise become aware of relevant patents or other intellectual property rights
of third parties that may lead to disputes. Although we believe that our
intellectual property rights are sufficient to allow us to sell our existing
products without violating the valid proprietary rights of others, we cannot
assure you that our technologies or products do not infringe on the proprietary
rights of third parties or that such parties will not initiate infringement
actions against us.
IF WE ARE UNABLE TO PROCURE SOME OF OUR SUBSYSTEMS AND COMPONENTS FROM OTHER
MANUFACTURERS, WE MAY NOT BE ABLE TO OBTAIN SUBSTITUTE SUBSYSTEMS OR COMPONENTS
ON TERMS THAT ARE AS FAVORABLE.
Certain of our products contain subsystems or components acquired from other
OEMs. These OEM products are often available only from a limited number of
manufacturers. In the event that an OEM product becomes unavailable from a
current OEM vendor, second sourcing would be required. This sourcing may not be
available on reasonable terms, if at all, and could delay customer deliveries,
which could adversely affect our business.
OUR RELATIONSHIP WITH OUR CHAIRMAN OF THE BOARD COULD LEAD TO CONFLICTS OF
INTEREST.
Jean-Claude Asscher, Chairman of our Board of Directors, together with his
spouse, personally owns an aggregate of 3.5% of our outstanding shares. Mr.
Asscher is the President and controlling shareholder of Tekelec-Airtronic, S.A.,
a France-based electronics company which, together with certain of its
subsidiaries, acts as our European distributors. In addition, Edouard Givel,
through Natinco, S.A., a Luxembourg investment company which he controls and
which is a minority shareholder of Tekelec-Airtronic, S.A., owns 19.3% of our
outstanding shares. Due to Mr. Asscher's relationship with Mr. Givel and his
role from time-to-time as an advisor to Natinco, Mr. Asscher may be deemed to
share with Mr. Givel the beneficial ownership of the shares of our common stock
held by Natinco.
Sales of our products and services to Tekelec-Airtronic and its subsidiaries
accounted for approximately $4,300,000, or 2.4%, of our revenues for 1998 and
approximately $1,681,000, or 1.1%, of our revenues for the first nine months of
1999. We expect that Tekelec-Airtronic and its subsidiaries will continue to act
as the European distributors of our diagnostics products. If Mr. Asscher and Mr.
Givel act together, they would be our largest shareholder, controlling
approximately 22.8% of our currently outstanding shares, and would have the
power to elect a significant number of directors on our board of directors and
to exert significant influence over our business and affairs and over the
outcome of actions requiring board or shareholder approval.
In addition, decisions concerning our operations or financial structure may
present conflicts of interest between all of our shareholders and the holders of
the notes. For example, if we encounter financial difficulties or are unable to
pay our debts as they mature, the interests of our shareholders might conflict
with those of the holders of the notes. Moreover, our shareholders may have
14
<PAGE> 15
an interest in pursuing acquisitions, divestitures, financings, mergers,
consolidations or other transactions that, in their judgment, could enhance
their equity investment, even though such transactions might involve risk to the
holders of the notes. Any such conflict of interest may be resolved in favor of
our shareholders and to the detriment of the holders of the notes.
FUTURE SALES OF SHARES BY OUR OFFICERS AND DIRECTORS MAY DEPRESS THE MARKET
PRICE OF OUR COMMON STOCK.
All of our directors and executive officers own or have options to acquire
shares of our common stock. Sales of our common stock by any of these
individuals could be perceived negatively by investors and could cause the
market price of our common stock to drop.
BECAUSE THERE MAY NOT BE AN ACTIVE MARKET FOR THE NOTES, AN INVESTMENT IN THE
NOTES MAY NOT BE LIQUID.
Because the notes were recently issued in a private offering, we cannot
assure you as to the liquidity of any trading market that exists or may develop
for the notes, your ability to sell your notes, the price at which you would be
able to sell your notes or whether any trading market will continue. In such a
market, the notes could trade at prices higher or lower than their principal
amount, depending on many factors, including prevailing interest rates, the
market for similar securities and our operating results. We do not intend to
apply for listing of the notes on any U.S. securities exchange or for the
inclusion of the notes on any automated quotation system. The notes are eligible
for trading in the PORTAL market of the National Association of Securities
Dealers, Inc.
THE NOTES ARE SUBORDINATED TO SENIOR INDEBTEDNESS.
In the event of bankruptcy, liquidation or reorganization of Tekelec, our
assets will be available to pay obligations on the notes only after all senior
indebtedness and liabilities have been paid. There may not be sufficient assets
remaining to pay amounts due on any or all of the notes then outstanding. The
notes are general unsecured obligations of Tekelec and will be subordinated in
right of payment to all our existing and future senior indebtedness, as defined
in the indenture governing the notes. The indenture will not restrict the
incurrence of senior indebtedness or other indebtedness of Tekelec and its
subsidiaries. The notes will also be effectively subordinated to all existing
and future indebtedness and other liabilities of our subsidiaries. As of
November 30, 1999, on a pro forma basis after giving effect to the sale of notes
and use of proceeds from the notes, we had approximately $44.7 million of
consolidated indebtedness and other obligations effectively ranking senior to
the notes and we had $17.9 million available to be drawn upon under our credit
facilities, which would be senior to the notes.
RATING AGENCIES MAY PROVIDE UNSOLICITED RATINGS ON THE NOTES THAT COULD REDUCE
THE MARKET VALUE OR LIQUIDITY OF THE NOTES.
Although we have not requested a rating of the notes from any rating
agencies, rating agencies may rate the notes. These ratings could be higher or
lower than expected by investors. There is a risk that a lower than expected
rating of your note from a rating agency could reduce the market value or
liquidity of your note.
FORWARD-LOOKING STATEMENTS
The statements that are not historical facts contained in this prospectus 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 our operating results;
- capital spending patterns of customers, including shifts in such patterns
as a result of customers' cancellation or deferral of product purchases
due to year 2000 compliance concerns;
- our relatively limited product offerings;
- risks relating to the convergence of voice and data networks;
- competition and pricing;
- our relatively limited number of customers;
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<PAGE> 16
- new product introductions by us or by our competitors;
- risks relating to our acquisition of IEX Corporation;
- product liability risks;
- the continued growth in third party purchases of diagnostics systems;
- customer acceptance of our products;
- regulatory changes;
- our readiness for the year 2000;
- uncertainties relating to our international operations;
- intellectual property protection;
- our relationships with key shareholders;
- risks relating to the notes offered by this prospectus;
- general economic conditions; and
- other risks described in this prospectus and in our filings with the
Securities and Exchange Commission.
Many of these risks and uncertainties are outside of our control and are
difficult for us to forecast. Actual results may differ materially from those
expressed or implied in such forward-looking statements.
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USE OF PROCEEDS
Tekelec will not receive any proceeds from the sale by the selling
securityholders of the notes or the shares of common stock issued on conversion
of the notes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and do
not expect to pay cash dividends in the foreseeable future. Our current policy
is to retain all of our earnings to finance future growth and acquisitions.
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol
"TKLC." The following table sets forth the high and low closing sales prices of
our common stock on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
------ ------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter .................................. $22.69 $14.05
Second Quarter ................................. 25.13 19.94
Third Quarter .................................. 24.63 13.75
Fourth Quarter ................................. 22.25 10.63
Year Ended December 31, 1999:
First Quarter .................................. $22.25 $ 7.06
Second Quarter ................................. 12.19 6.69
Third Quarter .................................. 17.19 9.13
Fourth Quarter ................................. 23.50 12.19
Year Ended December 31, 2000:
First Quarter (through February 7, 2000) ....... $34.44 $24.25
</TABLE>
On February 7, 2000, the last reported sales price of our common stock on the
Nasdaq National Market was $33.625 per share. As of that date, there were
approximately 269 holders of record of our common stock.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
our company and our subsidiaries for each of the periods indicated. We
calculated the ratio of earnings to fixed charges by dividing earnings by total
fixed charges. Earnings consist of pretax income plus fixed charges and
amortization of capitalized interest less capitalized interest. Fixed charges
consist of interest expense on all indebtedness and a portion of rent expense
(33%) we estimated to be the interest component of those rentals. We had a
deficiency of earnings to fixed charges of $284,000 for the year ended December
31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges ...... 6.31 9.20 (0.68) 36.69 67.66 72.08 1.05
</TABLE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999,
on an actual basis and as adjusted to reflect the initial private offering of
the notes in November 1999 and the application of net proceeds of $111.3 million
from that offering. This table should be read in conjunction with the "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus and our consolidated financial statements and notes thereto, which
have been incorporated by reference into this prospectus. See "Documents
Incorporated by Reference."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS)
------------------------
AS
ACTUAL ADJUSTED
--------- ----------
(UNAUDITED)
<S> <C> <C>
Cash, cash equivalents and short-term investments ........... $ 50,908 $ 62,179
======== ========
Long-term investments ....................................... $ 28,892 $ 28,892
======== ========
Short-term notes payable .................................... $100,000 $ --
Long-term debt-- 3.25% convertible subordinated discount
notes due 2004 ............................................ -- 115,228
-------- --------
Total debt ........................................ 100,000 115,228
-------- --------
Common stock ................................................ 98,328 98,328
Retained earnings ........................................... 67,360 67,360
Accumulated other comprehensive income ...................... 2,150 2,150
-------- --------
Total shareholders' equity ........................ 167,838 167,838
-------- --------
Total capitalization .............................. $267,838 $283,066
======== ========
</TABLE>
18
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from
our consolidated financial statements audited by PricewaterhouseCoopers LLP. The
statement of operations data for the nine-month periods ended September 30, 1998
and 1999 and the balance sheet data at September 30, 1999 set forth below are
unaudited, but in the opinion of our management include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation thereof. The statement of operations data for the nine-month period
ended September 30, 1999 is not necessarily indicative of results to be expected
for any future period. The selected consolidated financial data set forth below
should be read in conjunction with, and is qualified in its entirety by,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our audited consolidated financial statements and notes thereto
incorporated by reference into this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................. $ 61,189 $ 75,276 $ 72,126 $ 125,140 $ 176,669 $ 127,515 $ 149,156
Cost of goods sold ..................... 20,388 25,035 26,682 41,524 58,883 42,196 52,285
Amortization of purchased
technology ........................... -- -- -- -- 19 -- 3,978
--------- --------- --------- --------- --------- --------- ---------
Gross profit ............................. 40,801 50,241 45,444 83,616 117,767 85,319 92,893
Research and development ............... 11,962 15,054 17,076 21,019 26,371 18,216 30,274
Selling, general and
administrative ....................... 22,466 27,653 29,842 34,971 40,458 29,314 44,395
Amortization of goodwill and other
intangible assets .................... -- -- -- -- -- -- 9,781
Acquired in-process research and
development and other
acquisition-related charges .......... -- -- -- -- -- -- 6,830
Restructuring .......................... -- -- 327 -- -- -- 1,800
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) from operations ............ 6,373 7,534 (1,801) 27,626 50,938 37,789 (187)
Interest and other income, net ......... (662) 916 1,517 2,115 4,613 3,168 361
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) before provision for
income taxes ........................... 5,711 8,450 (284) 29,741 55,551 40,957 174
Provision for income taxes ............. 1,251 2,139 2,227 745 16,342 15,564 4,898
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ............... $ 4,460 $ 6,311 $ (2,511) $ 28,996 $ 39,209 $ 25,393 $ (4,724)
========= ========= ========= ========= ========= ========= =========
Earnings (Loss) per share:
Basic .................................. $ 0.13 $ 0.15 $ (0.05) $ 0.58 $ 0.73 $ 0.48 $ (0.09)
Diluted ................................ 0.12 0.13 (0.05) 0.51 0.67 0.43 (0.09)
Weighted average number of shares
outstanding:
Basic .................................. 34,736 42,116 47,100 50,408 53,518 53,315 54,776
Diluted ................................ 37,259 48,207 47,100 56,842 58,708 58,770 54,776
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997 1999
--------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments .............. $ 7,653 $ 43,609 $ 44,244 $ 70,518 $ 79,800
Working capital (deficiency) ..... 13,466 56,983 44,688 86,354 (2,082)
Total assets ...................... 34,409 80,488 82,518 136,465 360,123
Long-term liabilities ............. 654 380 1,061 2,839 23,369
Shareholders' equity .............. 18,720 63,607 61,751 107,877 167,838
</TABLE>
19
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the
forward-looking statements as a result of a number of factors including those
referred to in "Risk Factors." 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
Our product offerings are currently organized along three distinct product
lines: network infrastructure, network diagnostics and call center.
Network Infrastructure Products. Prior to our May 1999 acquisition of IEX,
our network infrastructure product line was known as our network switching
product line and consisted principally of our Eagle STP and products, features
and applications based on our Eagle platform, including our IP(7) Secure Gateway
and our local number portability solution. As a result of our acquisition of
IEX, our network infrastructure product line has been expanded to include IEX's
DaVinci network products, including, among others, the DaVinci Service Control
Point, the DaVinci VoX Gateway Controller, DaVinci Prepaid Services and other
DaVinci convergence products.
Network Diagnostics Products. In January 1999, we scaled back our data
network diagnostics product line and integrated it into our intelligent network
diagnostics product line. Prior to that time, we treated these product lines
separately for organizational and financial reporting purposes. Since that time,
we have reported these products together as our network diagnostics product
line. This product line consists principally of our MGTS family of diagnostics
products and IP(7) Sentinel.
Call Center Products. Our 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.
IEX Acquisition. We accounted for the IEX acquisition under the purchase
method of accounting, and our results of operations for the nine-month period
ended September 30, 1999 include the results of operations of IEX beginning on
May 7, 1999. In connection with the acquisition, we also recorded approximately
$132.9 million of goodwill and other intangible assets, net of related deferred
income tax liabilities. During the second quarter of 1999 and in connection with
the acquisition of IEX, we recorded a charge of $6.0 million related to the
write-off of purchased in-process research and development and an additional
$830,000 charge for the write-off of certain assets made redundant by the
acquisition.
20
<PAGE> 21
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
-----------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues ................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ......................... 37.0 33.2 33.3 33.1 35.0
Amortization of purchased technology ..... -- -- -- -- 2.7
------ ------ ------ ------ ------
Gross profit ............................... 63.0 66.8 66.7 66.9 62.3
Research and development ................. 23.7 16.8 14.9 14.3 20.3
Selling, general and administrative ........ 41.4 27.9 22.9 23.0 29.8
Amortization of goodwill and other
purchased intangibles ................. -- -- -- -- 6.6
Non-recurring acquisition-related
charges ................................. -- -- -- -- 4.6
Restructuring ............................ 0.4 -- -- -- 1.2
------ ------ ------ ------ ------
Total operating expenses ......... 65.5 44.7 37.8 37.3 62.5
------ ------ ------ ------ ------
Income (Loss) from operations .............. (2.5) 22.1 28.9 29.6 (0.1)
Interest and other income, net ........... 2.1 1.7 2.6 2.5 0.2
------ ------ ------ ------ ------
Income (Loss) before provision for
income taxes ............................. (0.4) 23.8 31.5 32.1 0.1
Provision for income taxes ............... 3.1 0.6 9.3 12.2 3.3
------ ------ ------ ------ ------
Net income (loss) ..................... (3.5)% 23.2% 22.2% 19.9% (3.2)%
====== ====== ====== ====== ======
</TABLE>
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 infrastructure product line represent revenues from the product
line previously known as the network switching product line and, for the nine
months ended September 30, 1999, also include revenues earned from our DaVinci
network products after our May 1999 acquisition of IEX. Revenues shown below for
the network diagnostics product line include revenues from sales of both our
intelligent network and data network diagnostics products.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Network Infrastructure ..... 35% 58% 66% 66% 62%
Network Diagnostics ........ 65 42 34 33 29
Call Center ................ -- -- -- -- 8
Other ...................... -- -- -- 1 1
------ ------ ------ ------ ------
Total ............ 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
</TABLE>
The following table sets forth, for the periods indicated, revenues by
geographic territories as a percentage of total revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------------------------------------
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- -------------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
North America ........ 58% 73% 69% 66% 77%
Japan ................ 22 13 12 13 9
Europe ............... 9 5 4 4 5
Rest of World ........ 11 9 15 17 9
------ ------ ------ ------ ------
Total ...... 100% 100% 100% 100% 100%
====== ====== ====== ====== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
Revenues. Our revenues increased by $21.6 million, or 17%, during the nine
months ended September 30, 1999 due primarily to the inclusion of
post-acquisition IEX product sales following our acquisition of IEX in May 1999.
21
<PAGE> 22
Revenues from network infrastructure products increased by $7.7 million, or
9%, to $92.1 million due primarily to the addition of sales of IEX's intelligent
network products.
Revenues from network diagnostics products increased by $1.5 million, or 4%,
to $43.1 million due to higher sales of intelligent network diagnostics products
partially offset by lower sales of data network diagnostics products.
Revenues in North America increased by $29.6 million, or 35%, primarily as a
result of the inclusion of post-acquisition IEX product sales and higher sales
of Eagle and intelligent network diagnostics products. Sales in Japan decreased
by $2.9 million, or 18%, due to lower Chameleon and MGTS product sales,
partially offset by higher sales of MGTS-related development services. Revenues
in Europe increased by $2.8 million, or 57%, due to higher network
infrastructure product sales. Rest of world revenues decreased by $7.9 million,
or 37%, due primarily to lower network infrastructure product sales.
The impact of exchange rate fluctuations on currency translations increased
revenues by $1.8 million, or 1%, and did not have a material effect on net loss
in the nine months ended September 30, 1999.
Gross Profit. Gross profit as a percentage of revenues decreased to 62.3% in
the nine months ended September 30, 1999 compared with 66.9% in the nine months
ended September 30, 1998. The decrease in gross margins was primarily due to the
amortization of purchased technology, primarily in connection with the
acquisition of IEX, and lower margins in Japan due to a higher percentage of
lower margin sales, primarily development services. Excluding the amortization
of purchased technology related to the IEX acquisition, gross profit as a
percentage of sales was 65.0%.
Research and Development. Research and development expenses increased overall
by $12.1 million, or 66%, and increased as a percentage of revenues to 20.3% in
the nine months ended September 30, 1999 from 14% in the nine months ended
September 30, 1998. The dollar increase was attributable principally to the
inclusion of post-acquisition IEX research and development expenses and
increased expenses incurred in connection with the hiring of additional
personnel for product development and enhancements for both network
infrastructure and intelligent network diagnostics products, primarily related
to our continued development of products to address the IP/SS7 market.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $15.1 million, or 51%, and increased as a
percentage of revenues to 30% in the nine months ended September 30, 1999 from
23% in the nine months ended September 30, 1998. The dollar increase was
primarily due to the inclusion of post-acquisition IEX selling, general and
administrative expenses and increased personnel and infrastructure-related
expenses incurred to support the growing Eagle STP installed base and
anticipated higher sales levels. The increase compared to 1998 was also due to a
$1.6 million insurance settlement which benefited the 1998 expenses.
Interest and Other Income (Expense), net. Net interest income decreased by
$3.0 million, or 87%, during the nine months ended September 30, 1999 due
primarily to interest expense incurred for notes issued in connection with the
acquisition of IEX, and lower invested cash balances due to cash payments made
in connection with the acquisition of IEX.
Income Taxes. The income tax provision for the nine-month period ended
September 30, 1999 was $4.9 million and reflected the effect of non-deductible
acquisition-related costs, partially offset by a benefit of $2.3 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 our income, reduced primarily by research
and development and foreign tax credits, compared to an effective tax rate of
38% for the nine-month period ended September 30, 1998.
1998 COMPARED WITH 1997
Revenues
Our revenues increased by $51.5 million, or 41%, during 1998 due to higher
sales of network infrastructure products and intelligent network diagnostics
products. Sales of data network diagnostics products decreased both in dollars
and as a percentage of total sales.
22
<PAGE> 23
Revenues from network infrastructure products increased by 62%, or $44.3
million, to $116.3 million due primarily to increased Eagle STP market
acceptance worldwide as reflected by higher international sales, increased sales
of upgrades and software enhancements to our larger Eagle STP installed base and
higher sales of local number portability and local service management system
features. In 1998, we sold 62 pairs of Eagle STPs compared with 45 pairs in
1997.
Revenues from intelligent network diagnostics products increased by 27%, or
$9.7 million, to $46.3 million. This increase was primarily driven by higher
sales of development services in Japan and the addition of sales of our IP7
Sentinel product domestically, partially offset by lower MGTS product sales in
Japan.
Revenues from data network diagnostics products decreased by 15%, or $2.5
million, to $14.1 million primarily due to lower sales of our Chameleon products
in all markets, partially offset by increased sales of third-party data
diagnostics products in Japan by our Japanese subsidiary.
Revenues in North America increased by $29.9 million, or 33%, as a result of
higher network infrastructure and MGTS product sales, partially offset by lower
Chameleon product sales. Revenues in Japan increased by $5.6 million, or 34%,
due primarily to higher sales of MGTS-related development services and
third-party data diagnostics products, partially offset by lower Chameleon and
MGTS product sales. Revenues in Europe increased by $1.1 million, or 16%, due to
higher network infrastructure product sales. Other international revenues
increased by $15.0 million, or 141%, primarily due to higher network
infrastructure product sales including a large sale in South Africa.
The impact of exchange rate fluctuations on currency translations, which
consisted primarily of the translation of Japanese yen into U.S. dollars,
decreased revenues by approximately $1.5 million, or 1%, and did not have a
significant impact on net income.
Gross Profit
Gross profit as a percentage of revenues was essentially flat at 67% in each
of 1997 and 1998.
Research and Development
Although research and development expenses increased by $5.4 million, or 25%,
such expenses decreased as a percentage of revenues from 17% in 1997 to 15% in
1998. The dollar increase was attributable primarily to ongoing development
expenses in the Network Switching Division with respect to development of new
features for the Eagle products and consisted principally of expenses incurred
in connection with the hiring of additional personnel and higher depreciation
expense resulting from equipment acquisitions.
Selling, General and Administrative
Although selling, general and administrative expenses increased by $5.5
million, or 16%, these expenses decreased as a percentage of revenues from 28%
in 1997 to 23% in 1998. The increase in dollars was attributable primarily to
increased infrastructure costs required to meet the needs of the growing Eagle
installed base and to support higher sales levels of switching and intelligent
network diagnostics products. Sales, general and administrative expenses were
reduced in 1998 by the proceeds from the settlement of an insurance claim in the
amount of approximately $1.7 million, net of applicable costs.
Income Taxes
During 1998, we recorded tax benefits of $3.7 million resulting from a
reduction of our valuation allowance for deferred taxes and tax benefits
associated with research and development tax credits. The reduction in the
valuation allowance was based on our improved income trend and management's
assessment of various uncertainties related to our ability to utilize certain
research and development tax credit carryforwards. For the year ended December
31, 1998, excluding the one-time tax benefits, we had a tax provision of $20.0
million, resulting in an effective tax rate of 36%. For 1997, we had an
effective tax rate of 33% excluding a one-time tax benefit of $9.0 million
resulting from a reduction of our valuation allowance for deferred taxes.
23
<PAGE> 24
Interest, Net
Net interest income increased by $2.4 million primarily as a result of higher
average investment balances in 1998.
1997 COMPARED WITH 1996
Revenues
Our revenues increased by $53.0 million, or 73%, during 1997 due to higher
sales of network infrastructure products and intelligent network diagnostics
products. Sales of data network diagnostics products decreased both in dollars
and as a percentage of total sales.
Revenues from network infrastructure products increased by 184%, or $46.6
million, to $71.9 million due primarily to increased Eagle STP market acceptance
principally in the U.S., and the addition of sales of our local number
portability and related local service management system features. Additionally,
the Eagle STP average selling price increased as a result of our sales of larger
systems to the regional bell operating company market. In 1997, we sold 45 pairs
of Eagle STPs compared with 26 pairs in 1996.
Revenues from intelligent network diagnostics products increased by 43%, or
$11.0 million, to $36.6 million. This increase was primarily driven by strong
demand for our MGTS products in all geographic markets, particularly North
America.
Revenues from data network diagnostics products decreased by 21%, or $4.6
million, to $16.6 million primarily due to lower sales in all markets for both
the Chameleon Open and our older Chameleon products.
Revenues in North America increased by $49.5 million, or 118%, as a result of
higher switching and MGTS product sales, partially offset by lower Chameleon
product sales. Revenues in Japan increased by $638,000, or 4%, due primarily to
higher sales of MGTS products partially offset by the impact of exchange rate
fluctuations on currency translations in 1997. Other international revenues
increased by $2.8 million, or 19%, primarily due to higher network
infrastructure product sales in the rest of the world and higher MGTS product
sales in Europe.
The impact of exchange rate fluctuations on currency translations, which
consisted primarily of the translation of Japanese yen into U.S. dollars,
decreased revenues by approximately $1.9 million, or 2%, and did not have a
significant impact on net income.
Gross Profit
Gross profit as a percentage of revenues increased from 63% in 1996 to 67% in
1997, due primarily to the addition of sales of higher margin local number
portability and local service management system features and improved
manufacturing efficiencies due to higher sales volumes.
Research and Development
Although research and development expenses increased by $3.9 million, or 23%,
such expenses decreased as a percentage of revenues from 24% in 1996 to 17% in
1997. The dollar increase was attributable primarily to ongoing development
expenses in the Network Switching Division with respect to our local number
portability and local service management system features for the Eagle STP
product, and consisted principally of expenses incurred in connection with the
hiring of additional personnel and higher depreciation expense resulting from
equipment acquisitions. Additionally, research and development expenses
increased as a result of the accrual of certain costs for performance-related
award programs.
Selling, General and Administrative
Although selling, general and administrative expenses increased by $5.1
million, or 17%, such expenses decreased as a percentage of revenues from 41% in
1996 to 28% in 1997. The increase in dollars was attributable primarily to
increased infrastructure costs to meet the needs of the growing Eagle installed
base and to support higher sales levels of network infrastructure and
intelligent network diagnostics products, and the accrual of certain costs for
performance-related award programs.
24
<PAGE> 25
Income Taxes
During 1997, we recorded a tax benefit of $9.0 million resulting from a
reduction of our valuation allowance for deferred taxes. The reduction in the
valuation allowance was based on our improved income trend and management's
assessment of various uncertainties related to the future realization of our
deferred tax benefits. For the year ended December 31, 1997, excluding the
one-time tax benefit, we had a tax provision of $9.7 million, resulting in an
effective tax rate of 33%. Although our 1996 pretax results showed a loss, we
had a tax provision of $2.2 million, which consisted principally of foreign
taxes on the income of our Japanese subsidiary and reflected our then inability
to recognize a benefit for our U.S. loss and credits carryforwards.
Interest, Net
Net interest income increased by $685,000 primarily as a result of higher
average investment balances in 1997.
LIQUIDITY AND CAPITAL RESOURCES
General
During 1998 and the first nine months of 1999, we financed our net working
capital and capital expenditure requirements principally from operations,
available cash and the proceeds from the issuance of common stock resulting from
the exercise of options and warrants. Our principal sources of liquidity for the
next year are expected to consist of cash generated by operations, available
cash including funds available under our current bank lines of credit, proceeds
from the exercise of options and warrants and the proceeds from the private
offering of our convertible subordinated discount notes.
During the nine-month period ended September 30, 1999, cash and cash
equivalents decreased by $8.3 million to $23.6 million, after net proceeds of
$32.9 million from the sale of short-term and long-term investments. Operating
activities, including the effects of exchange rate changes on cash, provided
$14.3 million for the nine months ended September 30, 1999. Financing
activities, which represented proceeds from the issuance of common stock upon
the exercise of options and warrants, provided $3.7 million, and investing
activities, excluding the net proceeds from the sale of short-term and long-term
investments, used $59.2 million primarily due to cash paid in connection with
the acquisition of IEX.
During 1998, cash and cash equivalents decreased by $6.8 million to $31.9
million, after a net purchase of approximately $50.1 million of short-term and
long-term investments. Financing activities, which represented proceeds from the
issuance of common stock upon the exercise of options and warrants, provided
$7.6 million and investing activities, excluding purchases of short-term and
long-term investments, used $8.9 million. Operating activities, including the
effects of exchange rate changes on cash, provided $44.5 million.
Accounts receivable, including amounts due from related parties, increased by
29% during the first nine months of 1999 due primarily to higher sales levels.
Inventory levels increased by 70%, primarily to the support of higher sales
levels and a broader product offering, including the added IEX products. Trade
accounts payable increased by 44% during the first nine months of 1999,
primarily due to the inclusion of IEX payables and the increased level of
operating expenses we incurred to support our product development programs and
anticipated higher sales levels. Deferred revenues increased 133% during the
first nine months of 1999 primarily as a result of the inclusion of IEX deferred
revenue and increased extended warranty service revenues which are deferred and
recognized ratably over the warranty period.
Accounts receivable at December 31, 1998, including amounts due from related
parties, increased by 80% compared to December 31, 1997, due primarily to
increased sales levels and a higher concentration of sales at the end of the
fourth quarter of 1998 compared to 1997. Inventories increased by 14% during
1998 primarily to support the increased sales levels and the expanded breadth of
our products. During 1998, trade accounts payable and accrued expenses increased
by 122% and 86%, respectively, primarily due to the timing of purchases and the
increased level of operating expenses we incurred primarily to support higher
sales levels and our product development programs. Deferred revenues increased
by 21% primarily as a result of increased extended warranty service revenues
that we recognize ratably over the warranty period and the timing of
installation activities.
Capital expenditures of $8.5 million during the first nine months of 1999
represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion. Technology
purchases, excluding purchased technology recorded in connection with the
acquisition of IEX, amounted to $1.8 million, and consisted primarily of
software licenses purchased for use in network infrastructure and diagnostics
product applications.
25
<PAGE> 26
Capital expenditures were $8.7 million during 1998 and represented the
planned acquisition of equipment principally for research and development,
manufacturing operations and facility expansion.
We have a $15.0 million line of credit with a U.S. bank and lines of credit
aggregating $2.8 million available to our Japanese subsidiary from various
Japan-based banks.
Our $15.0 million credit facility is collateralized by substantially all of
our assets, bears interest at the lender's prime rate (8.5% at December 31,
1999), and expires on June 30, 2000 if not renewed. Under the terms of this
facility, we are required to maintain certain financial ratios and meet certain
net worth and indebtedness tests. In connection with our May 1999 acquisition of
IEX Corporation, we renegotiated certain terms of this credit facility,
including various financial ratios and net worth and indebtedness tests, and
believe that we are in compliance with these requirements. There were no
borrowings under this credit facility in 1998 or the first nine months of 1999.
Our Japanese subsidiary has collateralized yen-denominated lines of credit
with Japan-based banks, primarily available for use in Japan, amounting to the
equivalent of $2.9 million with interest at the Japanese prime rate (1.375% at
December 31, 1999) plus 0.125% per annum which expire between August 2000 and
November 2000, if not renewed. There were no borrowings under these lines of
credit in 1998 or the first nine months of 1999.
On November 2, 1999, we completed our private placement of the notes offered
by this prospectus, issued at 85.35% of their face amount (equivalent to gross
proceeds at issuance before discounts and expenses of approximately
$115,200,000). The gross proceeds at issuance before discounts and expenses
included approximately $15,200,000 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-redeemable for the first three years of their
five-year term. On November 4, 1999, we used a portion of the net proceeds from
the notes to retire all of the $100,000,000 in short-term notes which we issued
in May 1999 in connection with our acquisition of IEX Corporation.
We believe that our existing working capital, funds generated through
operations and our current bank lines of credit will be sufficient to satisfy
our operating requirements for at least the next twelve months. Nonetheless, we
may seek additional sources of capital as necessary or appropriate to fund
acquisitions or to otherwise finance our growth or operations. We cannot assure
you that such funds, if needed, will be available on favorable terms, if at all.
Foreign Exchange
International operations are subject to certain opportunities and risks,
including currency fluctuations. In 1996, 1997 and 1998, the percentages by
which weighted average exchange rates for the Japanese yen weakened against the
U.S. dollar were 18%, 9% and 7%, respectively.
The change in cumulative translation adjustments in 1998 was due primarily to
the strengthening of the Japanese yen against the U.S. dollar when comparing the
exchange rate at December 31, 1998, to that of December 31, 1997. Realized
exchange gains (losses) are recorded in the period when incurred, and amounted
to $(180,000), $(273,000) and $56,000 and in 1996, 1997 and 1998, respectively.
Exchange gains and losses include the remeasurement of certain currencies into
functional currencies and the settlement of intercompany balances.
YEAR 2000
Background. As the year 2000 approached, a critical issue emerged regarding
how existing application software programs, operating systems and embedded
computer chips would accommodate the year 2000 date value. The year 2000 issue
results from computer programs and systems using only two digits instead of four
to identify one year. Systems that do not properly recognize the date may
process and record information incorrectly or possibly fail to function in the
year 2000.
We have a year 2000 project team in place with overall responsibility for our
year 2000 compliance programs. Our management also regularly monitors the status
of our year 2000 remediation plans.
Year 2000 Project. We identified potential year 2000 risks for Tekelec in the
following four categories:
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- software and system products we sell to customers;
- internal business software and information technology systems;
- third-party systems other than information technology systems; and
- third-party suppliers to Tekelec.
Our year 2000 project required that we take the following steps to address
the first three risks named above: (1) identify year 2000 risks; (2) assign
priorities to identified risks; (3) test year 2000 compliance for risks
determined to be material to us; (4) correct problems determined to be material
and not year 2000 compliant; (5) retest corrections that had been implemented;
and (6) develop contingency plans. As part of our year 2000 project and with
respect to the fourth risk involving our third-party suppliers, we: (1)
contacted suppliers for information concerning their year 2000 readiness; (2)
prioritized suppliers as to relative importance; (3) validated supplier
responses regarding year 2000 compliance and (4) developed contingency plans in
the event that one or more suppliers failed to achieve year 2000 compliance.
Assessment of Year 2000 Risks. The software and systems products that we sell
to customers consist of internally developed software, software licensed by us
from third parties for use in or with our products, hardware systems designed
and manufactured by us and hardware systems designed and manufactured by third
parties. We have identified priorities, completed the initial testing phase and
begun offering solutions to our customers. We believe that our current product
offerings are year 2000 compliant. For past product offerings that we are still
supporting, we are offering releases that should make these products year 2000
compliant. However, failure to achieve year 2000 compliance for any of our
products could materially adversely affect sales in the first half of 2000.
Additionally, if any of our critical products were to fail in the field as a
result of year 2000 noncompliance, the failure could result in substantial
liability to us and have a material adverse effect on our financial results,
business, market position, reputation and prospects.
Our internal business software and systems consist primarily of our business
information systems in the United States and at our Japanese subsidiary. We have
implemented and tested the necessary modifications to make our significant
internal business systems year 2000 compliant, and we believe that these
internal business software and systems are year 2000 compliant. However, if our
business systems are not year 2000 compliant, we could experience interruptions
to our production process, development programs and general business operations.
Our third party suppliers of systems (other than information technology
systems) have advised us that such systems are currently year 2000 compliant.
These systems consist primarily of environmental systems such as fire
suppression and security systems at our various building sites.
Third-party suppliers provide component parts, purchased assemblies and
contract manufacturing services which we incorporate into the products and
systems we sell. We require that each of our key suppliers certify that it is
year 2000 compliant. We also prioritize our suppliers by level of importance to
our business. Based on information received from our critical suppliers, we
estimate that virtually all of our critical suppliers are presently year 2000
compliant. We monitored our critical suppliers and either developed alternate
sources or increased inventory levels prior to the year 2000 for vendors
considered to be at risk of not achieving year 2000 compliance. However, there
can be no assurance that such alternate sources will be available or that
adequate inventory levels will be attainable if necessary, and we could
experience parts shortages and production interruptions if one or more key
third-party suppliers experiences year 2000 problems.
Costs to Address Year 2000 Issues. Incremental costs of our year 2000 project
have consisted of the engagement of a professional services firm to provide
consulting services at the initial stages of the project, the hiring of two
contractors to assist with administrative duties related to the year 2000
project and the engagement of a third-party audit team to provide year 2000
compliance test audit reports. The total costs of the project have not been
material to our financial position, results of operations or cash flows.
Employees whose costs for this project are not tracked separately have provided
the balance of the effort for our year 2000 project. We believe that costs for
the remainder of the year 2000 project will not be material to our financial
position, results of operations or cash flows.
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Risks of Year 2000 Issues. Our results of operations, financial condition and
cash flows could be materially adversely affected if Tekelec or any of our key
suppliers or customers are not year 2000 compliant. Although we have not
experienced any significant year 2000 problems and our year 2000 project is
expected to minimize our risks such problems, inherent risks and uncertainties
exist despite our efforts. There can be no assurance that a failure on the part
of Tekelec, our products, our key suppliers or our customers will not be
disruptive to our business. As a result of these uncertainties we are unable to
determine at this time whether the consequences of year 2000 failures will have
a material effect on our results of operations, financial condition or cash
flows.
REORGANIZATION
In January 1999, we announced our decision to scale down our Data Network
Diagnostics Division and integrate the division into our Intelligent Network
Diagnostics Division. In connection with this reorganization, we recorded a
charge of approximately $1.8 million in the first quarter of 1999, which
represents a workforce reduction of 27 employees and the write-off of certain
assets related to the Data Network Diagnostics Division.
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BUSINESS
OVERVIEW
Tekelec designs, manufactures, markets and supports infrastructure products
and diagnostics systems for telecommunications networks. Our customers include
telecommunications carriers, network service providers and equipment
manufacturers. We also develop and sell management software to operators of call
centers.
Our network infrastructure products help direct and control voice and data
communications. They enable carriers to control, establish and terminate calls.
They also allow carriers to offer intelligent services, which include any
services other than the call or data transmission itself. Examples include
familiar products such as call waiting, caller ID, voice messaging, toll free
calls (e.g., "800" calls), prepaid calling cards and local number portability.
We believe that voice and data networks will increasingly interoperate, or
converge, which will provide significant opportunities to expand sales of our
network infrastructure products.
Our diagnostics products simulate a controlled network environment, which
allows carriers and communications equipment manufacturers to test products to
ensure that products conform to specifications and to evaluate network
performance without risking the failure of the existing network. Some of our
diagnostics products also allow the monitoring, diagnosis and surveillance of
network elements while the network is in operation.
Our call center products provide workforce management and intelligent call
routing systems for single and multiple site call centers. We sell our call
center products primarily to customers in industries with significant call
center operations.
INDUSTRY BACKGROUND
Demand for communications equipment has expanded rapidly in recent years.
Driving this trend has been the growth in demand for data communications and
wireless connectivity, deregulation and the emergence of new competitors,
services and technologies.
Growth in data traffic has been most visibly driven by the increase in the
number of businesses and consumers that use the Internet. According to
International Data Corp., an independent market research firm, the number of
people accessing the Internet was approximately 93 million in 1998 and is
expected to grow to 320 million by 2003. The number of wireless subscribers has
also grown rapidly in recent years, doubling from 1996 levels to 80 million
subscribers in the United States in 1998, according to the Cellular Telephone
Industry Association. The increase in data traffic, combined with the inherent
efficiency of packet switched networks, has led many carriers to build new
packet networks and to seek ways to cause existing circuit switched networks to
interface reliably and efficiently with these new packet switched networks.
Deregulation has played a key role in the emergence of new competitive
service providers. The U.S. Telecommunications Act of 1996 mandates incumbent
local exchange carriers to provide greater interconnection in order to
facilitate the entry of new competitors. Technological developments such as
xDSL, cable modems and broadband wireless have enabled alternative access
technologies and fostered new types of service providers.
As competition has grown, intelligent services have become core competitive
features of a network, providing incremental revenues to service providers and
offering more service choices to subscribers. As these services have become less
expensive and more widely accessible, customer demand for them has grown.
Deregulation has also spurred the offering of intelligent services. The
Telecommunications Act mandates that subscribers of U.S. telephone service be
given the option of changing their local service provider while retaining their
local phone number. European Union officials recently announced a recommendation
that local service providers allow subscribers to retain their telephone numbers
while changing providers by January 1, 2001. Current FCC regulations require
that wireless customers in the U.S. be offered this same option in 2002.
As a result of these trends, service providers are seeking to differentiate
their products and services while lowering their costs. This has increased
demand for technologies that enable the rapid creation and delivery of
innovative services on existing and converged networks. Some of the key
challenges that service providers face in expanding their network infrastructure
include:
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- expanding and/or upgrading their signaling network infrastructure to
support new and enhanced services;
- building and managing networks that can cost-effectively support circuit
and packet network convergence; and
- testing new network elements and monitoring increasingly complex networks.
Similarly, telecommunications equipment manufacturers and network operators
need advanced and flexible ways to test and monitor equipment in existing and
converged networks in a cost efficient manner.
Signaling and Intelligent Services
Current voice telephone networks consist of two basic elements -- switching
and signaling. The switching portion of a network carries and routes the actual
voice or data comprising a "call." The signaling portion of a network instructs
the switching portion how to do its job. Signaling messages are carried on a
different transmission path than the actual call itself. Signaling is
responsible for establishing and terminating a call. The signaling portion of
the network also enables service providers to offer intelligent services such as
call waiting, caller ID and voice messaging.
The signaling portions of existing voice telephone networks in the U.S. are
based upon a set of complex standards known as Signaling System #7, or SS7. The
primary network elements within a circuit network architecture based on SS7 are
as follows:
[Description of diagram: A schematic diagram with the caption "Circuit Network
Architecture" appears. The diagram consists of two rows. In the top row are
three boxes labeled "STP." To the right of the third box is a cylinder labeled
"SCP." The STPs are connected by lines. The third box is connected by a line to
the cylinder labeled "SCP." In the second row, the following items appear in
order, and each item is connected by a line to the item next to it: (1) a
telephone, (2) a circle labeled "SSP Circuit Switch," (3) a "cloud" labeled
"Circuit Network," (4) a circle labeled "SSP Circuit Switch," and (5) a
telephone. In addition, each of the SSP circles is connected by a line to an STP
box in the first row.]
Signal Transfer Point (STP) -- A signal transfer point is a packet switch for
the signaling portion of the network. It controls and directs the signaling
messages used to establish and terminate telephone calls and to coordinate the
provision of intelligent services.
Service Switching Point (SSP) -- A service switching point is a carrier's
switch that connects to the SS7 network and serves as the origination and
termination points for the SS7 messages in a network. In this capacity, the
service switching point, via signaling transfer points, sends and processes the
signaling messages used to establish and terminate telephone calls. When a
service switching point identifies a call requiring instructions for intelligent
services, it sends a signaling message to a signal transfer point and awaits
further routing or call processing instructions.
Service Control Point (SCP) -- A service control point is a specialized
database containing network and customer information. It is queried by service
switching points via signaling transfer points for information required for the
delivery of intelligent services. Different service control points contain the
information used by the SS7 network to perform different types of functions.
Service Node -- A service node is a group of service control points, service
switching points and/or other software or hardware that has been configured to
provide a particular intelligent service.
Signaling Links -- A signaling link is a connection or channel between any
two different parts of the signaling portion of the network, or a connection or
channel between the signaling part of the network and the switching part of the
network. To create additional network capacity to accommodate increases in
signaling traffic, additional links must be added to signal transfer points, or
new signal transfer points must be added.
The market for SS7 equipment is driven by growth in network traffic and by
demand for intelligent services. Carriers and service providers must increase
the performance and capacity of their signaling networks in order to increase
call processing capacity or to offer intelligent services. Because of its role
in providing reliability and features to a voice network, SS7 switches must
deliver high performance and reliability. Typically, these switches need to
deliver 99.999% reliability or less than three minutes of unscheduled downtime
per year. Service providers also require an SS7 solution that is scalable --
that is, a solution that can initially be matched to
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support a carrier's current capacity but with the capability to have its
capacity increased to support the carrier's growth without requiring a
replacement of certain network elements.
Supporting Voice and Data Convergence
Currently, virtually all networks which carry both voice and data
communications rely on a technology called circuit switching. Another
technology, packet switching, has been used almost exclusively for data only
networks. Circuit switching and packet switching are fundamentally different
technologies. Unlike circuit networks, packet networks do not currently have a
distinct signaling portion of the network. While circuit switching has offered
reliable and high quality voice communications, packet switching is inherently
more efficient and cost effective. Industry sources estimate that the cost of a
transmission minute is as much as 25% to 50% less for a packet network than for
a circuit network.
The cost and performance superiority of packet switching has led many
incumbent and new carriers to build packet networks to handle data traffic. It
has also led carriers to explore the transmission of voice communications over
packet networks. This would require circuit networks and packet networks to
seamlessly interconnect. No widely accepted technology exists which would allow
a switch to direct voice transmissions over both circuit and packet networks.
Nor does a widely accepted technology currently exist which would allow a switch
to connect voice communications to multiple destinations over a packet switched
network with the same quality as a circuit network.
Packet networks will need signaling to provide the same reliability and
quality of transmissions as circuit networks and to provide the intelligent
services consumers have come to expect and demand. Because SS7 is the industry
standard for U.S. voice networks, we believe that signaling for the converged
circuit and packet networks will be based upon SS7 as well. This would allow new
carriers with packet networks to more easily interconnect with existing circuit
networks and would allow incumbent carriers to leverage their investment in
their existing networks even as they build out their data networks.
Tekelec believes that the primary network elements of converged circuit and
packet networks based on SS7 would be as follows:
[Description of diagram: A schematic diagram with the caption "Converged Network
Architecture" appears. The diagram consists of four rows. In the top row are
three boxes labeled "STP." To the right of the third box is a cylinder labeled
"SCP." Each of the STPs is connected by lines. The third box is connected by a
line to the cylinder labeled "SCP." In the second row is one box labeled
"Signaling Gateway," and in the third row is a box labeled "Media Gateway
Controller;" the boxes in the second and third rows are connected by a line, and
the Signaling Gateway box is connected to the middle STP box immediately above
it in the first row. In the fourth row, the following items appear in order, and
each item is connected by a line to the item next to it: (1) a telephone, (2) a
circle labeled "SSP Circuit Switch," (3) a box labeled "Media Gateway," (4) a
"cloud" labeled "Packet Network," (5) a box labeled "Media Gateway," (6) a
circle labeled "SSP Circuit Switch," and (7) a telephone. In addition, each of
the SSP circles is connected by a line to an STP box in the first row, and each
of the Media Gateway boxes is connected by a line to the Media Gateway
Controller box in the third row.]
Signal Transfer Point -- As in the present circuit networks, a signal
transfer point relays messages needed to establish and terminate telephone calls
and to coordinate the provision of intelligent services. It can relay messages
within the circuit network, between circuit and packet networks, and possibly
within some forms of packet networks.
Service Control Point -- As in the present circuit networks, a service
control point is a specialized database containing information used to deliver
intelligent services.
Signaling Gateway -- A signaling gateway receives signaling messages from
signal transfer points, reformats these messages and presents them to one or
more media gateway controllers.
Media Gateway Controller -- A media gateway controller is a specialized
computer that provides the intelligence to direct switching. It controls one or
more media gateways.
Media Gateway -- A media gateway receives the message part of a call and
redirects it as specified by the media gateway controller to a single
destination or to multiple destinations. If necessary, a media gateway can
translate the actual call from a packet switching format to a circuit switching
format and vice versa.
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A primary difference between this converged architecture and the circuit
architecture described above is the use of the signaling gateway, media gateway
controller and media gateway to perform the same switch functions as are
currently performed by certain service switching points in circuit networks. In
our view of the converged architecture, these three switch components would not
all have to be made and sold in one integrated product by one equipment
manufacturer. Instead, any of these switch components could be bundled and sold
with switch components made by different manufacturers, or even sold separately.
We believe carriers are seeking fully featured signaling products designed
specifically for SS7 that can facilitate the convergence of circuit and packet
networks, without compromising functionality, reliability, scalability, support
and flexibility. We also believe that equipment manufacturers are looking for
signaling products which they can easily bundle and sell with their own switch
components.
THE TEKELEC SOLUTION
We are a leading designer and developer of signaling products for converging
circuit and packet networks. Our infrastructure and diagnostics products assist
our customers in meeting their primary challenges in the converging environment:
differentiating their offerings and lowering network costs. We offer SS7-based
signaling systems and services to enable the delivery of intelligent services
and facilitate convergence of voice and data networks. We believe that our open,
standards-based solutions are highly reliable and will enable operators of
converged networks to more cost-effectively manage their networks and offer
intelligent services.
Our Eagle STP has been widely deployed and, according to Frost & Sullivan, an
independent market research firm, had a 73% market share of all signal transfer
point sales in North America in 1998. The Eagle STP offers high capacity and
throughput, reliability and efficiency that support the growth of traffic and
demand for intelligent services in service provider networks. The reliability of
our products enables us to offer service providers product solutions that reduce
their total cost of ownership of network infrastructure products. Our Eagle STP
products meet industry standards for 99.999% reliability and less than 3 minutes
of unscheduled downtime per year.
We recently introduced a suite of products for converged circuit and packet
networks. These products include a signaling gateway and a media gateway
controller, two of the three components comprising a switch in converged circuit
and packet networks. Our products are designed so that they may be purchased in
combination with switch components made by other manufacturers, or purchased
separately, depending on the customer's preference.
Our approach offers more flexibility and lower costs to carriers. They can
choose to purchase from among multiple vendors each of the switch components
which offers the optimal performance for their needs. They can also potentially
upgrade or expand a switch by selectively replacing components, instead of
having to replace the entire switch. We also believe our approach is more
scalable than a fully integrated switch.
Our approach also offers advantages to our equipment manufacturer customers.
By bundling our products with their switch components, these customers can avoid
the significant research and development expenditures that they would incur if
they were to develop all three switch elements. In addition, by concentrating
their efforts on only certain of the switch elements, they may be able to
significantly reduce the time it takes for them to enter the converged switch
market.
For a description of risks of our approach to the convergence of circuit and
packet networks, see "Risk Factors -- Risks related to the potential convergence
of voice and data networks" on page 8.
OUR BUSINESS STRATEGY
Our objective is to be the premier supplier of signaling infrastructure and
diagnostics products to existing and emerging communications markets. Key
elements of our strategy to achieve this objective include:
Maintaining Technology Leadership. We believe that one of our core
competitive strengths is the breadth of our knowledge and expertise in
communications technologies, particularly in SS7 and related signaling
technologies. We have developed this expertise over a period of 20 years. We
intend to enhance our existing products and to develop new products by
continuing to make significant investments in research and development. As part
of our commitment to technology leadership, we recently developed and submitted
the Transport Adapter Layer Interface (TALI) Internet protocol signaling
interface, which allows a signaling gateway to interface with
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a media gateway controller, to the Internet Engineering Task Force, a standards
governing body. We have also assumed a leadership role within the Softswitch
Consortium, an industry organization created for global cooperation and
coordination in the development of open standards and interoperability for
packet networks.
Targeting the Convergence of Voice and Data Networks. We are investing
significantly to develop signaling products that enable the convergence of
circuit and packet networks. We have recently introduced the IP7 product line
and the DaVinci VoX Gateway Controller to target this convergence market. We
believe our pursuit of this new market opportunity leverages our SS7 expertise
and will enhance the market potential for our traditional solutions by ensuring
customers that investments in Tekelec equipment can be upgraded to perform in
converged networks.
Expanding Internationally. We are increasingly pursuing international
opportunities, primarily through the European sales office we established in the
United Kingdom in 1998 and through our Japanese subsidiary. Our European sales
efforts have resulted in significant new customers, including Orange Personal
Communications Systems, divisions of France Telecom and Vodafone. A recent
European Union recommendation provides that telecommunications service providers
should offer number portability throughout the continent by January 1, 2001. If
implemented, the recommendation is expected to result in increasing demand for
SS7 network elements such as signal transfer points to accommodate the increase
in signaling traffic. To complement our direct sales approach in Europe and
facilitate our international expansion in South America and other parts of the
world, we intend to evaluate potential distribution relationships with
established equipment vendors and systems integrators that have greater
resources and market recognition internationally than Tekelec.
Pursuing Additional Strategic Relationships, OEM Partners and Acquisitions.
We intend to seek additional strategic relationships, including original
equipment manufacturer partners, referral arrangements, distribution agreements
and acquisition candidates. Our existing strategic relationships include
technology development and OEM relationships with Tellabs and Sonus Networks, a
technology development and marketing relationship with Telcordia and
distribution relationships with Lucent, Daewoo, Unisys and numerous other
product distributors. See "-- Customers." We are currently devoting significant
attention to establishing additional relationships with developers of
convergence solutions that require SS7 signaling and call control capabilities.
Pursuing New Market Segments. We intend to continue our strategy of
internally developing and acquiring products in order to enter new market
segments. A number of products currently under development will enable us to
serve new niche markets, including diagnostics for packet networks using voice
over Internet protocols and new mobile technologies. Our recent acquisition of
IEX greatly expanded our potential markets to include the markets for packet
networks using voice over Internet protocols, call control solutions, prepaid
calling platforms and solutions for call centers, among others.
Seeking Additional Opportunities to Provide Upgrades, Extensions and Service
Agreements. We intend to leverage our strong customer relationships to seek
opportunities to better serve our customers' needs in the future. In particular,
we will continue to develop and market software upgrades, link extensions,
extended service agreements and other enhancements as a means to pursue repeat
business opportunities.
PRODUCTS
We currently offer products in three broad categories: network infrastructure
products, network diagnostics products and call center products.
Network Infrastructure Products
Our network infrastructure products include our Eagle STP and IP7 products
and our DaVinci intelligent network products. Our network infrastructure
products enable telecommunications service providers to create, enhance and
customize the intelligent services they offer. Our principal network
infrastructure products are described below:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
Eagle STP............................. Our Eagle STP is a highly reliable signal transfer point
which is tailored to the SS7 switching needs of carriers,
network service providers and wireless operators, among
</TABLE>
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<TABLE>
<S> <C>
others. It offers high capacity and throughput, features a
fully distributed, standards-based, open architecture and is
scalable from 2 to 500 links. It is sold in pairs for
redundancy.
DaVinci Service Control Point......... Our DaVinci Service Control Point is a specialized database
that contains network and customer information needed to
process calls requiring special treatment, such as credit
card calls or other intelligent services. The DaVinci
Service Control Point supports interfaces to most major
switch vendors. Its graphical user interface enables the
development, testing and deployment of intelligent services.
DaVinci Network Switch................ Our DaVinci Network Switch is a service switching point that
is used primarily in the DaVinci Service Node described
below. The DaVinci Network Switch has a modular architecture
and provides T1 and E1 interfaces.
DaVinci Service Node.................. Our DaVinci Service Node combines the DaVinci Network
Switch, DaVinci Service Control Point and other DaVinci
elements to enable sophisticated applications such as
prepaid services. Its graphical user interface also enables
the development, testing and deployment of intelligent
services.
IP(7) Secure Gateway.................. Our IP(7) Secure Gateway is a highly scalable signaling
gateway which can provide signaling
information to media gateway
controllers in multiple locations. It
can deliver these services in
multi-protocol, multi-vendor converged
networks.
DaVinci VoX Gateway Controller........ Our DaVinci VoX Gateway Controller is a media gateway
controller that is highly scalable and can control media
gateways in multiple locations. It interfaces to both
asynchronous transfer mode and Internet protocol networks
via proprietary and standards-based interfaces.
</TABLE>
Network Diagnostics Products
Equipment manufacturers and network service providers utilize our diagnostics
products to perform a wide variety of test applications that simulate, monitor
and analyze network communications infrastructures. Our customers use our
diagnostics products for:
- Designing Communications Equipment. By simulating existing and emerging
communications devices, nodes and protocols, our products enable engineers
to quickly design communications devices that will transition into
emerging network infrastructures, minimizing potential breakdowns of
network components deployed throughout the network.
- Ensuring Product Reliability. By simulating actual network conditions
within an operating environment, including protocol errors and other
network failures, our products can help ensure that communications
equipment manufacturers produce devices that will operate error-free, thus
accelerating time to market and potentially reducing costly failures after
installation.
- Verifying Certification. By executing conformance and performance test
suites, network operators and manufacturers use our products to rapidly
verify that communication devices meet specified standards.
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- Monitoring Networks. By collecting and analyzing traffic, our products can
monitor the health of networks on a continuous basis and provide advance
notice of potential system failures, allowing quicker service restoration
or even preventing service failure.
- Troubleshooting. By identifying the specific location and type of
communication error, our products can isolate which network device has
failed. Our products help technicians and engineers repair devices and
networks promptly and minimize expensive downtime associated with service
failure.
Our principal network diagnostics products are described below:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
IP(7) Sentinel.................... Our IP(7) Sentinel is an SS7 network maintenance and diagnostics
system which provides network surveillance and fault management
capabilities, including problem simulation, analysis and resolution
verification. Its passive monitoring and proactive testing
capabilities enable service providers to quickly detect and resolve
problems from a single platform. The IP(7) Sentinel also integrates
with existing voice and third-party systems that supply custom
solutions in areas such as fraud detection and business
applications.
MGTS.............................. Our MGTS is a signaling diagnostics system designed to provide a
diagnostics and test platform for research and development,
laboratory and telecommunications service provider environments. The
MGTS supports various protocols, including SS7 and personal
communications systems, permits the design of customized testing
scenarios and can be used with multiple user groups and geographic
locations.
MGTS Companion.................... Our MGTS Companion is a portable signaling diagnostics system which
serves as a network diagnostics tool during the network
implementation of signaling products and provides installation and
verification testing and operational acceptance testing. The MGTS
Companion permits testers to design customized testing scenarios or
to use lab-based scenarios and also tests roaming and other mobile
network services.
MGTS i3000........................ Our MGTS i3000 is a complete diagnostics system for convergence
network technologies. The diagnostics applications built on our MGTS
i3000 technology address wireline and wireless communications
equipment manufacturers' convergence test and verification needs.
MGTS Flex......................... Our MGTS Flex provides SS7 multi-protocol conversion functions for
the rapid deployment of new services in complex networks.
ATM(7) Inspector.................. Our ATM(7) Inspector is a high performance protocol analysis
diagnostics system which can simultaneously test, monitor and
simulate SS7 signalling traffic over asynchronous transfer signaling
links.
</TABLE>
Call Center Products
Our call center products provide planning, management and call routing and
control tools for single call centers and for complex, multiple site call center
environments. These tools help call center managers maximize call center
productivity, achieve service level targets and reduce costs. Our principal call
center products are described below.
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
TotalView..................... Our TotalView Workforce Management Solution for single and multiple
site call centers generates staff schedules based on call center
workload and availability and the skills of call center staff. It
performs real-time monitoring and analysis of call center operations
and, as conditions change, adjusts staff schedules and routes call
center workload to available staff having appropriate skills.
TotalView also provides detailed, customized databases and reports to
assist in optimizing call center performance and forecasting call
center staffing requirements.
TotalNet...................... Our TotalNet Call Routing Solution for multiple site call centers
routes calls to multiple locations as if they were a single call center
and balances workload across call center sites based on staffing
levels, call volume and caller requirements. TotalNet also maintains
call center statistics and analyzes call center operations.
</TABLE>
PRODUCT DEVELOPMENT
The communications market is characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. Standards
for new technologies and services such as intelligent network, personal
communications services (PCS), Internet protocol and asynchronous transfer mode
are still evolving. As these standards evolve and the demand for services and
applications increases, we intend to adapt and enhance our products and develop
and support new products. We solicit product development input through
discussions with our customers and participation in various industry
organizations and standards committees, such as the Telecommunications Industry
Association, the Internet Engineering Task Force, the Softswitch Consortium and
the Asynchronous Transfer Mode Forum, and by closely monitoring the activities
of the International Telecommunications Union, the European Telecommunications
Standards Institute and the International Organization for Standardization and
Telcordia.
Our network infrastructure product development group is principally focused
on addressing the requirements of the converged voice and data networks and on
the release of new software versions to incorporate enhancements or new features
or functionality desired by customers. This group also focuses on compliance
with standards to enable the Eagle and DaVinci solutions to address additional
domestic and international markets. In addition, we plan continued improvement
of hardware components to improve their performance and capabilities.
Our diagnostics product development activities are principally focused on
expanding the capabilities of the MGTS and IP7 Sentinel products, including
their interfaces, software modules and protocol capabilities for emerging
technologies such as intelligent network and asynchronous transfer mode, and
adapting these products for the network operations market. From time to time we
engage in development projects for special applications requested by our
customers. We typically retain the right to use the developed technology in
future products that are not competitive with the specific application for which
the development work was performed.
Our call center product development activities are principally focused on
expanding the capabilities of the call center products, including the skills and
multimedia scheduling capabilities of the TotalView workforce management product
and the functionality of the TotalNet call routing product.
SALES AND MARKETING
Our sales and marketing strategies include selling through our direct sales
forces, indirectly through distributors and other resellers, entering into
strategic alliances and targeting certain markets and customers. To promote
awareness of Tekelec and our products, we also advertise in trade journals,
exhibit at trade shows, maintain a presence on the Internet and use direct mail.
Distribution. We sell our network infrastructure, network diagnostics and
call center products in the U.S. principally through our separate direct sales
forces and, for the Eagle STP and certain other infrastructure products to a
lesser extent, indirectly through strategic relationships with various third
parties. Our direct sales forces operate out of our headquarters in Calabasas,
California and our regional offices located in Colorado, Georgia, Illinois, New
Jersey, North Carolina, Northern California and Texas. We sell our network
infrastructure products internationally through our direct sales force, a
distributor in South Korea, Unisys, Lucent and our wholly owned subsidiary in
the United Kingdom. We sell our diagnostics products internationally through a
network of
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<PAGE> 37
approximately 30 distributors and our wholly owned subsidiaries in Japan and the
United Kingdom. Our Japanese subsidiary, which presently sells only diagnostics
products, generated approximately 22% of our revenues for 1996, 10% for 1997,
12% for 1998 and 9% for the first nine months of 1999.
Tekelec-Airtronic, S.A., an affiliate of Tekelec, and its wholly owned
subsidiaries are the distributors of our diagnostics products in France, Italy,
Germany, the Netherlands, Belgium, Luxembourg, Portugal, Spain and China. Twenty
four additional independent companies distribute our products in other Western
European countries, the Far East (other than Japan), Australia, Mexico, Puerto
Rico, New Zealand, Latin America, the Middle East and South Africa. Distributors
typically purchase products directly from Tekelec pursuant to agreements that
are exclusive for a particular territory and are cancelable by either party upon
90 days notice. Export sales through international distributors accounted for
approximately 13% of our revenues for 1996, 12% for 1997, 7% for 1998 and 7% for
the first nine months of 1999.
Strategic Relationships. We believe that our current and future strategic
relationships with leading communications equipment suppliers will improve
market penetration and acceptance for our network infrastructure products. These
suppliers have long-standing relationships with public telecommunications
carriers and provide a broad range of services to these carriers through their
existing sales and support networks. Tekelec seeks strategic relationships that:
- enhance our presence and strengthen our competitive position in our target
markets;
- offer products that complement our network infrastructure solutions to
provide value-added networking solutions; and
- leverage our core technologies to enable communications equipment
suppliers to develop enhanced products with market differentiation that
can be integrated with our Eagle platform and convergence solutions.
Our strategic relationships include:
- a development and OEM agreement with Tellabs under which Tellabs will
market certain of our infrastructure products with its media gateway;
- an informal alliance with Sonus Networks in which we will market our IP(7)
Secure Gateway and DaVinci VoX Gateway Controller and Service Control
Point with Sonus' media gateway;
- a non-exclusive distribution agreement with Lucent under which Lucent
distributes our Eagle STP;
- a non-exclusive international distribution agreement with Unisys under
which Unisys distributes our network infrastructure products;
- an exclusive distribution and OEM agreement with Daewoo under which Daewoo
distributes our Eagle STP in South Korea; and
- a strategic marketing and sales alliance with Telcordia under which
Tekelec and Telcordia jointly market each other's products and have
exchanged interface specifications to allow the interworking of our IP(7)
Secure Gateway and Telcordia's ISCP(R) System for the delivery of
intelligent services across packet networks utilizing voice over Internet
protocol.
We believe that our strategic third party relationships provide us with
additional opportunities to penetrate the SS7 network infrastructure and
convergence markets and demonstrate our strategic partners' recognition of the
technical advantages of our Eagle STP and IP7 Secure Gateway products and our
DaVinci network products. Through our relationships with, among others, Tellabs,
Sonus Networks, Lucent, Unisys, Daewoo and Telcordia, we are enhancing our
market presence and our ability to access leading telephone companies. In
general, these agreements can be terminated by either party on limited notice
and, except for our agreement with Daewoo, do not require minimum purchases.
Tellabs, Lucent, Unisys, Telcordia also are not precluded from selling products
that are competitive with our products. Although our current sales through our
relationships with Lucent, Unisys and Telcordia are not significant, a
termination of our relationship with Lucent, Unisys or Telcordia, or the sale of
competing products by Lucent, Tellabs, Unisys or Telcordia, could adversely
affect our business and operating results.
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<PAGE> 38
SERVICE, SUPPORT AND WARRANTY
We believe that customer service, support and training are important to
building and maintaining strong customer relationships. We service, repair and
provide technical support for our products. Support services include 24-hour
technical support, remote access diagnostics and servicing capabilities,
extended maintenance and support programs, comprehensive technical customer
training, extensive customer documentation, field installation and emergency
replacement. We also offer to our customers and certain resellers of our
products training with respect to the proper use, support and maintenance of our
products.
We maintain an in-house repair facility and provide ongoing training and
telephone assistance to customers and international distributors and other
resellers from our headquarters in Calabasas, California, certain U.S. regional
offices and our Japanese subsidiary. Our technical assistance center in
Morrisville, North Carolina, supports our network infrastructure products on a
24 hour-a-day, seven day-a-week basis. Our technical assistance center in
Richardson, Texas, supports our call center products and certain of our network
infrastructure products.
We typically warrant our products against defects in materials and
workmanship for one year after the sale and thereafter offer extended service
warranties.
CUSTOMERS
Our customers include end users and marketing intermediaries. End users for
our network infrastructure products consist primarily of network service
providers, wireless network operators, interexchange carriers, competitive
access providers, local exchange carriers and Regional Bell Operating Companies.
End users for our diagnostic products include interexchange carriers, telephone
operating companies, communications equipment manufacturers, wireless network
operators and government agencies. Our call center solutions have been sold
primarily to Fortune 500 companies, financial services companies and
telecommunications carriers. Although no customer accounted for more than 10% of
our revenues in 1998 or the first nine months of 1999, less than 10% of our
customers accounted for 70% of total revenues in each of 1998 and the first nine
months of 1999. We anticipate that our operating results in any given period
will continue to depend to a significant extent upon revenues from a small
percentage of our customers.
Our diagnostics business is substantially dependent on repeat business. Many
of our largest customers in 1998 and during the first nine months of 1999 were
purchasers of our diagnostics systems in prior years.
BACKLOG
Backlog for our Eagle products typically consists of contracts or purchase
orders for both product delivery scheduled within the next 12 months and Eagle
STP extended service warranty to be provided over periods of up to five years.
Backlog for our DaVinci and call center products typically consists of products
and services ordered for delivery within the next 12 months. Orders for our
diagnostics products are usually placed by customers on an as-needed basis, and
we have typically been able to ship these products within 15 to 30 days after
acceptance of the purchase order. Primarily because of variations in the size
and duration of orders received by Tekelec and customer delivery requirements,
which may be subject to cancellation or rescheduling by the customer, our
backlog at any particular date may not be a meaningful indicator of future
financial results.
At September 30, 1999, our backlog amounted to approximately $119.3 million,
of which $56.9 million related to Eagle STP service warranty. This compared to a
backlog of approximately $65.1 at September 30, 1998, of which $37.6 related to
Eagle STP service warranty. At December 31, 1998, our backlog amounted to
approximately $72.8 million, of which $45.3 million related to Eagle STP service
warranty. This compared to a backlog of $59.0 million at December 31, 1997, of
which $28.7 million related to Eagle STP service warranty.
COMPETITION
Network Infrastructure Products. The market for our network infrastructure
products is intensely competitive and has been highly concentrated among a
limited number of dominant suppliers. We presently compete in the network
infrastructure market with, among others, Alcatel, Cisco, Nortel, Telcordia,
Ericsson, Lucent and Siemens. We expect competition to increase in the future
from existing and new competitors.
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<PAGE> 39
We believe that the principal competitive factors in the network
infrastructure products market are product performance and functionality,
product quality and reliability, customer service and support, price and the
supplier's financial resources and marketing and distribution capability. We
anticipate that responsiveness in adding new features and functionality will
become an increasingly important competitive factor. While some of our
competitors have greater financial resources, we believe that we compete
favorably in other respects. New entrants or established competitors may,
however, offer products which are superior to our products in performance,
quality, service and support and/or are priced lower than our products.
Some of our competitors, including Lucent, Nortel and Cisco, manufacture and
offer fully integrated network infrastructure products for converged networks.
These products include an SS7 signaling gateway, a media gateway controller and
a media gateway. Our strategy, however, is to develop and provide the SS7
signaling gateway and the media gateway controller elements of network
infrastructure solutions for converged circuit and packet networks. This means
that our products will need to be combined with the media gateways of other
vendors to constitute a complete network infrastructure switch for a converged
network. Some customers may prefer to purchase fully integrated network
infrastructure switches from our competitors rather than purchase our network
infrastructure products either because of the convenience of "one-stop shopping"
or because they believe that the fully integrated switch is superior. Our
ability to compete in the market for network infrastructure switches will also
be limited if media gateway manufacturers develop fully integrated switches and
cease selling media gateways on a non-integrated basis or bundled with our
convergence products.
We believe that our ability to compete successfully in the network
infrastructure market also depends in part on our distribution and marketing
relationships with leading communications equipment suppliers and resellers. If
we cannot successfully enter into these relationships on terms that are
favorable to us or if we cannot maintain these relationships, our business may
suffer.
Diagnostics Products. The communications diagnostics market is intensely
competitive and subject to rapid technological change and evolving industry
standards. We compete primarily in the high performance segment of this market,
and our principal competitors are Agilent Technologies, Inet Technologies and GN
Nettest. We also compete with a number of other manufacturers, some of which
have greater financial, marketing, manufacturing and technological resources
than Tekelec. We believe that our long-term success will depend in part on our
ability to be a leader in offering diagnostics products that address new
emerging industry standards and to offer a broad line of integrated
applications.
We believe that the principal competitive factors in the communications
diagnostics market in which we compete are product and price performance,
functionality and reliability, timely introduction of new products, breadth of
integrated product applications, marketing and distribution capability and
customer service and support. Although we believe that we compete favorably, new
or established competitors could offer products which are superior to or cost
less than our products.
Call Center Products. The market for call center products is extremely
competitive. We compete principally with TCS and Blue Pumpkin Software in the
market for workforce management solutions and with Geotel and Genesys in the
market for call routing solutions. We also compete to a lesser extent in these
markets with a number of other manufacturers, some of which have greater
financial, marketing, manufacturing and other resources than Tekelec. We believe
that the success of our TotalView product will depend in part on our ability to
offer competitive prices and to further develop our workforce management
scheduling and other technologies and our international distribution channels.
We believe that the success of our TotalNet product will depend to a significant
degree on our ability to develop market penetration and to improve product
functionality through strategic partnering with third parties.
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<PAGE> 40
INTELLECTUAL PROPERTY
Our success depends to a significant degree on our proprietary technology and
other intellectual property. Although we regard our technology as proprietary,
we have sought only limited patent protection. We rely on a combination of
patents, copyrights, trademarks, trade secrets, confidentiality agreements and
contractual restrictions to establish and protect our proprietary rights. These
measures, however, afford only limited protection and may not prevent third
parties from misappropriating our technology or other intellectual property. In
addition, the laws of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States and thus make the
possibility of misappropriation of our technology and other intellectual
property more likely. If we fail to successfully enforce or defend our
intellectual property rights or if we fail to detect misappropriation of our
proprietary rights, our ability to effectively compete could be seriously
impaired.
Our pending patent and trademark registration applications may not be allowed
and our competitors may challenge the validity or scope of our patent or
trademark registration applications. In addition, we may face challenges to the
validity or enforceability of our proprietary rights and litigation may be
necessary to enforce and protect our rights, to determine the validity and scope
of our proprietary rights and the rights of others, or to defend against claims
of infringement or invalidity. Any such litigation would be expensive and time
consuming, would divert our management and key personnel from business
operations and would likely harm our business and operating results.
The communications industry is characterized by the existence of a large
number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are important to Tekelec. There are currently no pending material claims that
our products, trademarks or other proprietary rights infringe the proprietary
rights of others. However, we cannot assure you that we will not receive
communications from third parties in the future asserting that our products
infringe or may infringe the proprietary rights of third parties. Any claims
made against us regarding patents or other intellectual property rights could be
expensive and time consuming to resolve or defend, would divert our management
and key personnel from our business operations and may require us to modify or
cease marketing our products, develop new technologies or products, acquire
licenses to proprietary rights that are the subject of the infringement claim or
refund to our customers all or a portion of the amounts paid for infringing
products. If such claims are asserted, we cannot assure you that we would
prevail or be able to acquire any necessary licenses on acceptable terms, if at
all. In addition, we may be requested to defend and indemnify certain of our
customers and resellers against claims that our products infringe the
proprietary rights of others. We may also be subject to potentially significant
damages or injunctions against the sale of certain products or use of certain
technologies.
EMPLOYEES
At January 10, 2000, we had 839 employees, comprising 255 in sales, marketing
and support, 81 in manufacturing, 390 in research, development and engineering
and 113 in management, administration and finance. Virtually all of our
employees hold stock options and/or participate in our employee stock purchase
plan. None of our employees is represented by a labor union, and we have not
experienced any work stoppages. We believe that our relations with our employees
are excellent.
FACILITIES
Our executive offices and principal manufacturing operations are located in
Calabasas, California at a facility consisting of approximately 58,000 square
feet. We lease the facility under a lease expiring in November 2004, subject to
a five-year renewal option.
We also occupy a 152,000 square-foot facility in Morrisville, North Carolina
under a lease expiring in November 2009. This facility is used primarily for
engineering, product development, customer support and regional sales activities
for our network infrastructure products and our intelligent network diagnostics
products.
IEX leases a facility consisting of approximately 72,000 square feet in
Richardson, Texas under a lease expiring in May 2003, subject to a five-year
renewal option. The IEX facility is used for engineering, product development,
customer support, and general administrative and sales activities for our Da
Vinci network infrastructure products and our call center products.
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<PAGE> 41
We also have six regional sales offices occupying an aggregate of
approximately 9,500 square feet under leases expiring between 2000 and 2004 in
Campbell, California; Aurora, Colorado; Duluth, Georgia; Lombard, Illinois;
Tinton Falls, New Jersey; and Irving, Texas.
Our Japanese subsidiary occupies approximately 10,600 square feet in Tokyo
under leases expiring between April 2000 and November 2000. Our subsidiary in
the United Kingdom occupies approximately 1,700 square feet in London under a
month-to-month lease.
We believe that our existing facilities will be adequate to meet our needs at
least through the next year, and that we will be able to obtain additional space
when and as needed on acceptable terms.
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<PAGE> 42
MANAGEMENT
The executive officers and directors of Tekelec as of February 7, 2000, their
positions with Tekelec and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Michael L. Margolis.................... 54 Director, Chief Executive Officer and President
Gary Crockett.......................... 47 Chief Executive Officer and President, IEX
Corporation, and Chief Technical Officer
Cecil E. Boyd.......................... 50 Senior Vice President and General Manager, Network
Systems Division
Danny L. Parker........................ 41 Vice President and General Manager,
Network Diagnostics Division
Ronald W. Buckly....................... 48 Vice President and General Counsel
David Frankie.......................... 54 Vice President, Operations and Quality
Teresa Pippin.......................... 43 Vice President, Human Resources
Lee Smith.............................. 41 Vice President, Strategy and Business Development
Jean-Claude Asscher.................... 71 Chairman of the Board
Robert V. Adams........................ 68 Director
Daniel L. Brenner...................... 48 Director
Howard Oringer......................... 57 Director
Jon F. Rager........................... 59 Director
</TABLE>
Mr. Margolis joined Tekelec as Chief Executive Officer and President and as a
director in February 1998. From 1977 until February 1998, Mr. Margolis held
various officer and management positions with the Ericsson Group, a manufacturer
of telecommunications equipment, where he most recently served as Executive Vice
President, Global Accounts from March 1997 until joining Tekelec, and as
Executive Vice President and General Manager, Network Systems Division from
September 1994 until March 1997.
Mr. Crockett continued to serve as Chief Executive Officer and President of
IEX Corporation upon Tekelec's acquisition of IEX in May 1999 and assumed the
position of Chief Technical Officer in February 2000. Mr. Crockett joined IEX as
Chief Executive Officer and President in 1988.
Mr. Boyd joined Tekelec as General Manager, Intelligent Network Diagnostics
Division in September 1996 and served as Vice President and General Manager,
Intelligent Network Diagnostics Division from November 1997 until February 1999,
as Vice President and General Manager, Network Switching Division from
February 1999 until January 2000 and as Senior Vice President and General
Manager, Network Switching Division from January 2000 until February 2000 when
he assumed his present position as Senior Vice President and General Manager,
Network Systems Division. From 1974 until joining Tekelec, Mr. Boyd was employed
by Northern Telecom, where he most recently served as Vice President, Service
Operations, North America from July 1994 until September 1996.
Mr. Parker joined Tekelec as Senior Director, Customer Service for the
Network Switching Division in November 1994. He served as Assistant Vice
President, Customer Service for the Network Switching Division from April 1998
until May 1998, as Assistant Vice President, Marketing for the Network Switching
Division from May 1998 until February 1999 and as Vice President and General
Manager, Intelligent Network Diagnostics Division from February 1999 until
February 2000 when he assumed his present position as Vice President and General
Manager, Network Diagnostics Division.
Mr. Buckly joined Tekelec as Vice President and General Counsel in April 1998
and has served as its Corporate Secretary since 1987. From March 1996 until
joining Tekelec, Mr. Buckly was a partner in the international law firm of Bryan
Cave LLP and from 1986 until March 1996, he was a partner in the international
law firm of Coudert Brothers. Since April 1998, Mr. Buckly has served as of
counsel to Bryan Cave LLP.
Mr. Frankie joined Tekelec as Vice President, Operations in December 1996,
became Vice President, Operations and Quality in March 1997 and became an
executive officer of Tekelec in November 1997 in his capacity as Vice President,
Operations and Quality. From April 1991 until December 1996, Mr. Frankie was
employed as Program Manager by the Thomas Group, a management consulting firm.
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<PAGE> 43
Ms. Pippin joined Tekelec as Vice President, Human Resources in February
1999. From September 1994 until joining Tekelec, Ms. Pippin held various human
resource positions with Ericsson Inc. where she most recently served as its Vice
President, Human Resources and Operational Development.
Mr. Smith joined Tekelec as Director and Program Manager, Special Projects in
March 1988, and commencing in March 1989 he held various non-officer sales and
marketing positions until his appointment as Vice President, Strategy and
Business Development in May 1998. In February 1999, Mr. Smith became an
executive officer of Tekelec in his capacity as Vice President, Strategy and
Business Development.
Mr. Asscher has been a director of Tekelec since July 1972 and Chairman of
the Board since June 1982. He served as President of Tekelec from October 1975
to June 1982 and as Vice President from July 1972 to May 1973. He has been the
President and principal shareholder of Tekelec-Airtronic, S.A., a French
electronics company, since he founded that company in 1961.
Mr. Adams has been a director of Tekelec since December 1991. Since 1990, Mr.
Adams has served as the Chairman of the Board of Documentum, Inc. From March
1989 until September 1999, Mr. Adams served as the Chief Executive Officer and
President of Xerox Technology Ventures, a venture capital company responsible
for identifying, developing and managing new business opportunities for Xerox
Corporation. Mr. Adams presently also serves as a director of ENCAD, Inc. and
Peerless Systems Corp.
Mr. Brenner has been a director of Tekelec since May 1990. Mr. Brenner served
as Vice President, Law and Regulatory Policy for the National Cable Television
Association (NCTA) from June 1992 until August 1999 when he became Senior Vice
President, Law and Regulatory Policy.
Mr. Oringer has been a director of Tekelec since January 1992. Since November
1994, Mr. Oringer has served as Managing Director of Communications Capital
Group, a consulting firm. From January 1994 until July 1994 and from August 1996
until December 1996, Mr. Oringer also served as a consultant to Tekelec. Mr.
Oringer also serves as a member of the Board of Directors of Verilink
Corporation, Digital Microwave Corporation and Vertel Corp.
Mr. Rager became a director of Tekelec in October 1975, resigned in September
1979 and was re-elected in January 1981. Since 1976, Mr. Rager has been a
practicing accountant with, and President of, Rager Bell Doskocil & Meyer CPAs
(and its predecessors).
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PRINCIPAL SHAREHOLDERS
The following table and notes set forth certain information regarding the
beneficial ownership of Tekelec's common stock as of January 10, 2000 by:
- each person who is known to own beneficially more than 5% of the
outstanding shares of Tekelec's common stock;
- each of Tekelec's directors and executive officers who own shares of
Tekelec's common stock; and
- all current directors and executive officers of Tekelec as a group.
As of January 10, 2000 there were 55,719,727 shares of our common stock
outstanding.
Shares of common stock which an individual or group has a right to acquire
within 60 days after January 10, 2000 pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage of ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any other
person shown in the table. Except as indicated below, the beneficial owners have
sole voting and investment power with respect to all shares of common stock
shown as being beneficially owned by them, subject to community property laws,
where applicable.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED PERCENT
- ------------------------ ------------- ----------
<S> <C> <C>
Jean-Claude Asscher(1) .......................................... 12,739,746 22.8%
Tekelec-Airtronic, S.A.
Edouard Givel(2) ................................................ 10,737,842 19.3
Natinco, S.A.
Brookside Capital Partners Fund L.P.(3) ......................... 2,986,786 5.3
State of Wisconsin Investment Board(4) .......................... 2,930,000 5.3
Michael L. Margolis(5) .......................................... 222,359 *
Daniel L. Brenner(6) ............................................ 205,600 *
Ronald W. Buckly(7) ............................................. 145,629 *
David Frankie(8) ................................................ 140,349 *
Jon F. Rager(9) ................................................. 140,288 *
Howard Oringer(10) .............................................. 105,600 *
Robert V. Adams(11) ............................................. 91,584 *
Danny Parker(12) ................................................ 76,157 *
Cecil Boyd(13) .................................................. 73,115 *
Lee Smith(14) ................................................... 71,236 *
Teresa Pippin(15) ............................................... 54,406 *
Gary Crockett ................................................... 625 *
All current directors and executive officers as a group (13
persons) (16) ................................................. 14,066,694 24.8
</TABLE>
- ----------
* Less than one percent
(1) Includes 10,737,842 shares which are owned by Mr. Givel and of which Mr.
Asscher may be deemed to be a beneficial owner (see footnote 2 below) and
125,464 shares owned by Muriel Asscher, Mr. Asscher's wife. Also includes
62,600 shares subject to options or warrants held by Mr. Asscher which are
exercisable or become exercisable within 60 days after January 10, 2000.
(2) These shares are held in the name of Natinco, S.A., a Luxembourg investment
company which holds minority interests in a number of U.S. and Europe-based
companies, including a minority interest in Tekelec-Airtronic. Mr. Givel
has advised Tekelec that he owns substantially all of the equity interest
in Natinco and holds the Tekelec shares for investment only. Mr. Asscher
has from time to time acted as an advisor to Mr. Givel with respect to his
investment in Tekelec. Due to Mr. Asscher's role as advisor, Mr. Asscher
may be deemed to share voting and investment power with respect to these
shares and therefore to be a beneficial owner thereof within the meaning of
Rule 13d-3 of the Securities Exchange Act of 1934. Mr. Asscher has advised
Tekelec that he has no beneficial or financial interest in Natinco and that
he disclaims beneficial ownership of these shares.
(3) Includes 1,126,786 shares issuable upon conversion of notes which become
convertible within 60 days after January 10, 2000.
(4) Based on a Schedule 13G dated February 10, 2000, wherein the State of
Wisconsin Investment Board reported sole voting and dispositive power as to
such shares.
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(5) Includes 30,000 restricted shares awarded to Mr. Margolis in connection
with the commencement of his employment with Tekelec. The 30,000 shares
vest in five equal annual installments commencing in February 1999, and
24,000 shares were unvested at January 10, 2000. Also includes 182,050
shares subject to options held by Mr. Margolis which are exercisable or
become exercisable within 60 days after January 10, 2000.
(6) Includes 152,600 shares subject to options or warrants held by Mr. Brenner
which are exercisable or become exercisable within 60 days after January
10, 2000.
(7) Includes 131,820 shares subject to options or warrants held by Mr. Buckly
which are exercisable or become exercisable within 60 days after January
10, 2000.
(8) Includes 127,250 shares subject to options held by Mr. Frankie which are
exercisable or become exercisable within 60 days after January 10, 2000.
(9) 24,688 of these shares are held by TI Partners, a partnership of which Mr.
Rager is the managing general partner, as to which shares Mr. Rager has
sole voting and investment power. Mr. Rager, together with a trust of which
he is the trustee and a beneficiary, owns a majority interest in the
partnership. Also includes 37,600 shares subject to options or warrants
held by Mr. Rager which are exercisable or become exercisable within 60
days after January 10, 2000.
(10) Includes 62,600 shares subject to options or warrants held by Mr. Oringer
which are exercisable or become exercisable within 60 days after January
10, 2000.
(11) Includes 87,600 shares subject to options or warrants held by Mr. Adams
which are exercisable or become exercisable within 60 days after January
10, 2000.
(12) Includes 54,070 shares subject to options held by Mr. Parker which are
exercisable or become exercisable within 60 days after January 10, 2000.
(13) Includes 73,115 shares subject to options held by Mr. Boyd which are
exercisable or become exercisable within 60 days after January 10, 2000.
(14) Includes 18,230 shares subject to options held by Mr. Smith which are
exercisable or become exercisable within 60 days after January 10, 2000.
(15) Includes 53,360 shares subject to options held by Ms. Pippin which are
exercisable or become exercisable within 60 days after January 10, 2000.
(16) Includes 1,042,895 shares subject to options and/or warrants held by all
current directors and executive officers as a group which are exercisable
or become exercisable within 60 days after January 10, 2000.
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DESCRIPTION OF EXISTING INDEBTEDNESS
GENERAL
We have a credit facility with Imperial Bank which permits us to borrow the
amounts we may from time to time request up to an aggregate principal amount of
75% of eligible accounts receivable, but in no event more than $15,000,000. We
may use the credit facility for working capital purposes and for the issuance of
letters of credit by the bank. The credit facility expires on June 30, 2000 if
we do not renew it. There are no borrowings currently outstanding under this
credit facility.
SECURITY
As security for our obligations under the credit facility, we granted to
Imperial Bank a first priority lien on all of our assets except the assets we
acquired as a result of our acquisition of IEX in May 1999.
INTEREST RATES
The credit facility bears interest at a variable rate per year equal to the
rate of interest Imperial Bank from time to time announces as its prime lending
rate. If we default under the credit facility, the bank may at its option
increase the interest rate to a rate equal to 5% more than the rate that would
otherwise apply to the loan.
COVENANTS
The credit facility imposes certain financial covenants and other
restrictions that, among other things:
- require us to maintain certain financial ratios and meet certain net worth
and indebtedness tests;
- restrict us from borrowing additional funds or creating any liens on our
assets; and
- limit our ability to make certain acquisitions, dispose of certain assets
and engage in mergers and other business combinations where the
transaction involves more than $1,000,000.
EVENTS OF DEFAULT
The credit facility provides that certain events will constitute events of
default, including:
- our failure to pay amounts owed under the credit facility;
- our failure to observe or perform any covenants set forth in the credit
facility;
- the falsity of any of our representations or warranties to the bank;
- our inability to pay certain of our other debt;
- the imposition of certain judgments against us;
- the institution of bankruptcy proceedings by or against us which are not
timely dismissed; or
- a material adverse change in our financial condition.
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DESCRIPTION OF THE NOTES
The notes were issued under an indenture dated as of November 2, 1999,
between us and Bankers Trust Company, as trustee. The following statements are
subject to the detailed provisions of the indenture and are qualified in their
entirety by reference to the indenture. Copies of the indenture are available at
our principal executive offices or upon request to us or to the trustee and have
also been filed by us with the SEC. See "Documents Incorporated by Reference"
and "Where You Can Find More Information." Wherever particular provisions of the
indenture are referred to, those provisions are incorporated by reference as a
part of the statements made and the statements are qualified in their entirety
by that reference. For purposes of this summary, the terms "Tekelec," "we," "us"
and "our" refer only to Tekelec and not to any of our subsidiaries.
GENERAL
The notes represent our unsecured general obligations convertible into common
stock as described under "-- Conversion." The notes were issued at an original
price of $853.54 per $1,000 principal amount at maturity, which represented an
original issue discount of 14.646% from the principal amount at maturity. The
aggregate principal amount at maturity of the notes is $135,000,000 (which
includes the initial purchasers' over-allotment option, which they have
exercised in full). The aggregate original issue price of the notes was
$115,227,900. We have issued the notes in denominations of $1,000 or multiples
thereof. The notes will mature on November 2, 2004, unless we redeem them or you
convert them earlier.
The notes bear interest on the principal amount at maturity from their issue
date at an annual rate of 3.25%. Interest is payable semi-annually on May 2 and
November 2 of each year, commencing on May 2, 2000, to holders of record at the
close of business on the preceding April 15 and October 15, as the case may be.
We may pay interest by mailing checks to holders.
The indenture does not restrict us from paying dividends other than as
described below under "-- Payment of Excess Cash Dividends." Additionally, the
indenture does not restrict us from incurring debt or repurchasing our equity
securities or entering into any other financial covenants.
We will make payment of principal, and you may present the notes for
conversion, registration of transfer and exchange, without service charge, at
the office of our paying agent, initially the trustee in New York, New York, and
at the corporate trust office of the trustee in New York, New York.
The notes are being offered at a substantial discount from their principal
amount at maturity. The federal income tax consequences of this discount are
discussed under "Material United States Federal Income Tax Considerations --
U.S. Holders -- Payment of Interest -- Original Issue Discount." Original issue
discount means the difference between the issue price of the notes and their
principal amount at maturity. The calculation of the accrual of original issue
discount in the period during which a note remains outstanding will be on a
semi-annual bond equivalent basis, using a 360-day year composed of twelve
30-day months. The accrual began on November 2, 1999, the first date of issuance
of the notes.
CONVERSION
The holders of the notes are entitled at any time on or after January 31,
2000 and before the close of business on the date of maturity of the notes,
subject to prior redemption or repurchase pursuant to the change in control
provisions, to convert the notes, or portions thereof (if the portions are
$1,000 or whole multiples thereof) into 56.3393 shares of common stock per
$1,000 of principal amount of notes, which we refer to as the conversion rate.
The conversion rate is subject to adjustment upon the occurrence of an
"adjustment event" as discussed below. Upon conversion, you will not be entitled
to any payment or adjustment on account of accrued and unpaid interest or
accrued original issue discount on the notes. Our delivery to you of the fixed
number of shares of common stock into which the note is then convertible
(together with any cash payment in lieu of any fractional share of common stock)
will be deemed to satisfy our obligation to pay the principal amount of the
note, including the accrued and unpaid interest and the accrued original issue
discount on the note attributable to the period from the first date of issuance
of the relevant notes to the date of surrender for conversion. Thus, the accrued
and unpaid interest and accrued original issue discount are deemed to be paid in
full rather than canceled, extinguished or forfeited.
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If you surrender notes for conversion during the period after any interest
record date and prior to the corresponding interest payment date, you must pay
us the interest payable on those notes, unless they have been called for
redemption on a redemption date within the period or on the interest payment
date. You may not convert notes called for redemption after the close of
business on the business day preceding the date fixed for redemption unless we
default in payment of the redemption price. We will not issue fractional shares
of common stock on conversion. Rather, we will pay the converting holder in cash
an amount equal to the fair market value of the fractional interest, unless
payment in cash is prohibited by our indebtedness, in which case we will issue
fractional shares.
With respect to any notes that are "restricted securities" on the conversion
date, the shares of common stock distributed upon conversion will be treated as
"restricted securities" and will bear a legend to that effect. You will not be
able to transfer these shares except pursuant to an effective registration
statement or pursuant to an exemption from the registration requirements of the
Securities Act. All such shares will be issued in physical certificated form and
will not be eligible for receipt in global form through the facilities of The
Depository Trust Company, or "DTC." With respect to notes that are no longer
"restricted securities" on a conversion date, either as a result of a resale of
the notes pursuant to the shelf registration statement or otherwise, all shares
of common stock distributed upon conversion will be freely transferable without
restriction under the Securities Act, other than by our affiliates, and those
shares will be eligible for receipt in global form through the facilities of
DTC.
The conversion rate per share of common stock is subject to adjustment in
certain events, including upon the occurrence of an adjustment event. We use the
term "adjustment event" to mean the following:
- the issuance of common stock as a dividend or distribution on common
stock;
- certain subdivisions and combinations of the common stock;
- the issuance to all holders of common stock of certain rights or warrants
to purchase common stock; and
- the distribution to all holders of common stock of shares of our capital
stock (other than common stock), evidences of our indebtedness or other
assets, including securities (not including the rights, warrants,
dividends and distributions referred to above and dividends and
distributions in connection with our liquidation or paid in cash).
The conversion rate will not be adjusted for accrued original issue discount or
for accrued but unpaid interest.
To the extent permitted by law, we may increase the conversion rate by any
amount for any period of at least 20 days if our board of directors has made a
determination that such increase would be in our best interests. We may also
make such increase in the conversion rate as our board of directors deems
advisable to avoid or diminish any income tax to holders of common stock
resulting from any dividend or distribution of stock, or rights to acquire
stock, or from any event treated as such for income tax purposes. See "Material
United States Federal Income Tax Considerations -- U.S. Holders -- Adjustments
of Conversion Rate."
If a reorganization event occurs pursuant to which any holders of common
stock are entitled to receive other securities, cash or other property, then we
must provide holders of notes with the right to convert their notes into the
kind and amount of the securities, cash or other property they would have
received upon the consummation of such reorganization event if they had
converted their notes immediately before the reorganization event. We use the
term "reorganization event" to mean the following:
- any recapitalization or reclassification of shares of common stock, other
than changes involving par value, or as a result of a subdivision or
combination of the common stock;
- any consolidation or merger involving Tekelec, other than one that does
not result in a reclassification, conversion, exchange or cancellation of
common stock;
- any sale or transfer of all or substantially all of our assets; or
- any compulsory share exchange pursuant to which any holders of common
stock are entitled to receive other securities, cash or other property.
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<PAGE> 49
Any company that succeeds to us or acquires all or substantially all of our
assets will be required to provide in its governing documents the foregoing
rights and also to provide, as nearly equivalent as practicable, for the other
rights of the holders of notes described under this "-- Conversion" heading.
PAYMENT OF EXCESS CASH DIVIDENDS
If we declare and pay excess cash dividends on our common stock, then we will
pay to you, at the time of the payment of the common stock dividend, an amount
equal to the excess, based on the number of shares of common stock that you
would have received had you converted all of your notes, unless you convert and
receive those dividends as a holder of common stock. We use the term "excess
cash dividends" to mean the amount by which any cash dividend, when combined
with the total of all cash dividends paid in the prior 12 months, exceeds 15% of
the last sale price of the common stock as of the trading day immediately
preceding the date of declaration of such dividend.
CHANGE IN CONTROL
If we experience a change in control, then you will have the right to require
us to repurchase your notes, including any portion thereof which is $1,000
principal amount at maturity or any integral multiple thereof, on the date that
is 45 days after the date of a notice from us to all holders of notes that a
change in control has occurred. If this right is exercised, we will be required
to repurchase your notes for cash. The cash repurchase price of the notes is the
original issue price plus accrued original issue discount, together with accrued
but unpaid interest, if any, up to but excluding the date that is 45 days after
the notice. This right to require us to repurchase the notes will exist upon the
occurrence of any change in control whether or not the relevant transaction has
been approved by our management and may not be waived by our management. Your
exercise of this right will be irrevocable.
Your right to require us to repurchase the notes upon a change in control
will not apply if either:
- the last sale price of the common stock for five of the ten trading days
before the date of the change in control equals or exceeds 105% of the
effective conversion price immediately before the closing of that
transaction; or
- (a) the consideration paid for the common stock in a transaction
constituting the change in control consists of cash, securities that are
traded on a national securities exchange or quoted on the Nasdaq National
Market, or a combination of cash and such securities, and (b) the
aggregate fair market value of such consideration for one share of common
stock is at least 105% of the effective conversion price immediately
before the closing of that transaction.
For purposes of the above, the effective conversion price is equal to the note
issue price plus accrued original issue discount divided by the conversion rate
in effect immediately before the closing of the transaction.
The existence of the right to require us to repurchase the notes upon a
change in control may deter certain mergers, tender offers or other takeover
attempts and may thereby adversely affect the market price of our common stock.
A "change in control" includes the following:
- if any person or group acquires direct or indirect beneficial ownership of
shares of our capital stock sufficient to entitle such person to exercise
more than 50% of the total voting power of all classes of our capital
stock entitled to vote generally in elections of directors. Such an
acquisition could occur by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise;
- if we sell, lease, exchange or otherwise transfer, in one transaction or a
series of related transactions, all or substantially all of our assets to
any person or group; or
- if a majority of our board of directors is not comprised of directors who
were members of the board on the date the notes are first issued or of
directors who were nominated or elected or whose nomination or election
was recommended or endorsed by a majority of the board of directors who
were members of the board on the date the notes are first issued.
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<PAGE> 50
OPTIONAL REDEMPTION
We may not redeem the notes prior to November 2, 2002. On or after November
2, 2002, at our option, we may redeem the notes, in whole or in part, at the
applicable redemption price. We must give holders at least 30 and not more than
60 calendar days' notice of the redemption date. The table below shows
redemption prices of notes per $1,000 principal amount at maturity at November
2, 2002, at November 2, 2003 and at maturity on November 2, 2004. The prices
reflect the accrued original issue discount calculated through each date. The
redemption price of a note redeemed between these dates would include an
additional amount reflecting the additional original issue discount accrued
since the next preceding date in the table to the actual redemption date.
<TABLE>
<CAPTION>
(1) (2) REDEMPTION
NOTE ISSUE ACCRUED ORIGINAL PRICE
REDEMPTION DATE PRICE ISSUE DISCOUNT (1)+ (2)
---------- ---------------- -----------
<S> <C> <C> <C>
November 2, 2002 ...... $ 853.54 $ 81.99 $ 935.53
November 2, 2003 ...... 853.54 113.16 966.70
November 2, 2004 ...... 853.54 146.46 1,000.00
</TABLE>
We are also required to pay accrued and unpaid interest to the date of
redemption.
SUBORDINATION OF NOTES
Upon any distribution to our creditors in a liquidation or dissolution or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to us or our property, the payment of the principal of and interest on
the notes will be subordinated, to the extent provided in the indenture, in
right of payment to the prior payment in full of all senior indebtedness.
If a default under our senior indebtedness exists, we may not make any
payment, directly or indirectly, of principal of or interest on the notes or
acquire any of the notes at any time, unless and until such default has been
cured or waived or has ceased to exist. While we are in default with respect to
any senior indebtedness, as such default is defined under any such senior
indebtedness or in any agreement pursuant to which any senior indebtedness has
been issued (other than default in payment of the principal of, or premium, if
any, or interest on any senior indebtedness) permitting the holders thereof to
accelerate the maturity thereof, we may not make any payment with respect to
principal of or interest on the notes for 183 days following written notice to
us from any holder of any senior indebtedness, any such holder's representative
or the trustee or trustees under any indenture under which any instrument
evidencing any such senior indebtedness may have been issued, that such an event
of default has occurred and is continuing. However, if the maturity of such
senior indebtedness is accelerated, we may not make any payment on the notes
until we have paid such senior indebtedness that has matured or such
acceleration has been cured or waived.
Senior indebtedness is defined in the indenture as indebtedness, as defined
below, of Tekelec and our subsidiaries outstanding at any time except
indebtedness that by its terms is subordinate in right of payment to the notes
or indebtedness that is not otherwise senior in right of payment to the notes.
Senior indebtedness does not include indebtedness of Tekelec to any of Tekelec's
subsidiaries. Indebtedness with respect to any person is defined as the
principal of, and premium, if any, and interest on:
(a) all indebtedness of such person for borrowed money, including all
indebtedness evidenced by notes, bonds, debentures or other securities
sold by such person for money;
(b) all obligations incurred by such person in the acquisition, whether by
way of purchase, merger, consolidation or otherwise and whether by such
person or another person, of any business, real property, other assets
or services, except accounts payable or other accrued current
liabilities or obligations incurred in the ordinary course of business
in connection with the obtaining of materials or services;
(c) guarantees by such person of indebtedness described in clause (a) or (b)
of another person;
(d) all renewals, extensions, refundings, deferrals, restructurings,
amendments and modifications of any such indebtedness, obligation or
guarantee;
(e) all reimbursement obligations of such person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of such person;
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<PAGE> 51
(f) all capital lease obligations of such person; and
(g) all net obligations of such person under interest rate swap or similar
agreements of such person.
The indenture does not restrict us from creating any indebtedness, including
additional senior indebtedness, or any indebtedness by our subsidiaries. As of
November 30, 1999, we had approximately $44.7 million of consolidated
indebtedness and other obligations effectively ranking senior to the notes and
$17.9 million available to be drawn upon under our credit facilities, which
would rank senior to the notes. See "Description of Existing Indebtedness."
By reason of the subordination provisions described above, in the event of
insolvency, funds that would otherwise be payable to noteholders will be paid to
the holders of senior indebtedness to the extent necessary to pay senior
indebtedness in full. As a result of these payments, our general creditors may
recover less, pro rata, than holders of senior indebtedness and such general
creditors may recover more, pro rata, than holders of notes or our other
subordinated indebtedness.
EVENTS OF DEFAULT AND REMEDIES
An event of default is defined in the indenture as being any of the
following:
- our default in payment of the principal amount at maturity, issue price
plus accrued original issue discount, redemption price or any change in
control repurchase price when due, upon maturity, acceleration, redemption
or otherwise, on any of the notes;
- our default for 30 days in payment of any installment of interest on the
notes;
- our default for 60 days after notice in the observance or performance of
any other covenants in the indenture; and
- certain events involving our bankruptcy, insolvency or reorganization.
The indenture provides that if any event of default exists, the trustee or
the holders of not less than 25% in principal amount of the notes then
outstanding may declare the relevant amount of all notes to be due and payable
immediately. The relevant amount is the sum of the issue price of the notes plus
accrued original issue discount from their date of issue to the date of
declaration. However, if we cure all defaults, except the nonpayment of
principal and interest with respect to any notes that become due by
acceleration, and certain other conditions are met, the holders of a majority in
principal amount of notes then outstanding may rescind that acceleration.
Holders may similarly waive past defaults.
The holders of a majority in principal amount of the notes then outstanding
have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the trustee, subject to certain
limitations specified in the indenture. The indenture provides that the trustee
may withhold notice to the holders of notes of any default, except in payment of
principal or interest with respect to the notes, if the trustee considers it in
the interest of the holders of the notes to do so.
MODIFICATION OF THE INDENTURE
The indenture contains provisions permitting us and the trustee, with the
consent of the holders of not less than a majority in principal amount of the
notes at the time outstanding, to modify the indenture and the rights of the
holders of the notes. However, without the consent of the holder of each note so
affected, we cannot make any modification that will:
- extend the final maturity of the notes;
- reduce the rate or extend the time for payment of interest;
- reduce the principal amount;
- impair or affect the right of a holder to institute suit for the payment
of principal or interest;
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<PAGE> 52
- change the currency in which the notes are payable;
- impair the right to convert the notes into common stock; or
- reduce the percentage of notes, the consent of the holders of which is
required for any modification.
GLOBAL NOTE, BOOK-ENTRY FORM
Notes are issued in fully registered form without coupons, in denominations
of $1,000 principal amount and multiples thereof. Notes sold by the selling
securityholders pursuant to the registration statement of which this prospectus
forms a part will be represented by global notes, except as set forth below
under "Certificated Notes." The global notes will be deposited with, or on
behalf of, DTC and registered in the name of Cede & Co. as DTC's nominee.
Beneficial interests in the global notes will be exchangeable for definitive
certificated notes only in accordance with the terms of the indenture.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants deposit with DTC. DTC also facilitates
the settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and certain
other organizations. DTC is owned by a number of its direct participants and by
the NYSE, the American Stock Exchange, Inc., and the NASD. Access to DTC's
system is also available to others such as securities brokers and dealers, banks
and trust companies that clear through or maintain a custodial relationship with
a direct participant, either directly or indirectly. The rules applicable to DTC
and its participants are on file with the SEC.
Purchases of interests in global notes under DTC's system must be made by or
through direct participants, which will receive a credit for the interest in the
global notes on DTC's records. The ownership interest of each actual purchaser
of each interest in the global notes (the "beneficial owner") is in turn to be
recorded on the direct and indirect participants' records. Beneficial owners
will not receive written confirmation from DTC of their purchase, but beneficial
owners are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the direct
or indirect participant through which the beneficial owner entered into the
transaction. Transfers of ownership interests in the global notes are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in global notes, except in the event that use of the
book-entry system for one or more global notes is discontinued.
To facilitate subsequent transfers, all global notes deposited by
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of global notes with DTC and their registration in the
name of Cede & Co. effects no change in beneficial ownership. DTC has no
knowledge of the actual beneficial owners of the global notes; DTC's records
reflect only the identity of the direct participants to whose accounts such
global notes are credited, which may or may not be the beneficial owners. The
participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices will be sent to Cede & Co. If less than all of the global
notes are being redeemed, and unless otherwise notified by either us or the
trustee, DTC's practice is to determine by lot the amount of the interest of
each direct participant in such issue to be redeemed.
Neither DTC nor Cede & Co. will consent or vote with respect to global
notes. Under its usual procedures, DTC will mail an omnibus proxy to us as soon
as possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
global notes are credited on the record date (identified in a listing attached
to the omnibus proxy).
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<PAGE> 53
Payment of interest on and the redemption price of the global notes will be
made to DTC. DTC's practice is to credit direct participants' accounts on the
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on the payable
date. Payments by participants to beneficial owners will be governed by standing
instructions and customary practices as is the case with securities held for the
accounts of customers in bearer form or registered in "street name" and will be
the responsibility of such participant and not of DTC, any agents, or us,
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of interest on and the redemption price of the global
notes to DTC is our responsibility, disbursement of such payments to direct
participants will be the responsibility of DTC, and disbursement of such
payments to the beneficial owners will be the responsibility of direct and
indirect participants.
A beneficial owner must give notice to elect to have its interest in the
global notes purchased or tendered, through its participant, to the paying
agent, and must effect delivery of this interest by causing the direct
participant to transfer the participant's interest in the global notes, on DTC's
records, to the paying agent. The requirement for physical delivery of global
notes in connection with a demand for purchase or a mandatory purchase will be
deemed satisfied when the ownership rights in the global notes are transferred
by direct participants on DTC's records.
DTC may discontinue providing its services as securities depositary with
respect to the global notes at any time by giving reasonable notice to us or to
our agents. Under such circumstances, or if DTC is at any time unable to
continue as depositary, and a successor depositary is not appointed by Tekelec
within 90 days, Tekelec will cause notes to be issued in definitive form in
exchange for the global notes.
DTC's management is aware that some computer applications, systems, and the
like for processing data, which we refer to collectively as systems, that are
dependent upon calendar dates, including dates before, on, and after January 1,
2000, may encounter "Year 2000 problems." DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, relating to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third-party vendors from whom DTC licenses software and hardware, and
third-party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the financial community that it is contacting
(and will continue to contact) third-party vendors from whom DTC acquires
services to:
- impress upon them the importance of such services being Year 2000
compliant; and
- determine the extent of their efforts for Year 2000 remediation (and,
as appropriate, testing) of their services.
In addition, DTC is in the process of developing such contingency plans as it
deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the financial community for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind. The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable, but we take no
responsibility for the accuracy thereof.
Neither we, the trustee, any paying agent nor the registrar for the notes
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interest in a global
security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
CERTIFICATED NOTES
The notes represented by the global note are exchangeable for certificated
notes in definitive form if:
- DTC notifies us that it is unwilling or unable to continue as depositary
for the global note and a successor is not appointed within 90 days or if
at any time DTC ceases to be a clearing agency registered under the
Exchange Act, or
- we, in our discretion and at any time, determine not to have all of the
notes represented by the global note.
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INFORMATION CONCERNING THE TRUSTEE
Bankers Trust Company, as the trustee under the indenture, has been
appointed by Tekelec as paying agent, conversion agent, registrar and custodian
with regard to the notes. The indenture provides that in case an event of
default has occurred (which has not been cured or waived), the trustee
thereunder will exercise such rights and powers vested in it under the indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The indenture and provisions of the Trust Indenture Act of 1939,
incorporated by reference to the Indenture contain limitations on the rights of
the trustee thereunder, should it become a creditor of Tekelec, to obtain
payment of certain claims in certain cases or to realize on certain property
received by it in respect of any such claims, as security or otherwise. The
trustee is permitted to engage in other transactions; provided, however, that if
it acquires any conflicting interest (within the meaning of the Trust Indenture
Act) it must eliminate such conflicting interest or resign.
REGISTRATION RIGHTS
We have entered into a registration rights agreement with the initial
purchasers for the benefit of the holders of the securities offered by this
prospectus. That agreement obligates us, at our sole expense, as follows:
- to file with the Securities and Exchange Commission a shelf registration
statement as soon as practicable, but in no event more than 90 days after
the closing of the issue of the notes, covering resales of the notes and
the common stock issuable upon conversion of the notes. We refer to those
securities collectively as the "registrable securities." This prospectus
is part of the shelf registration statement;
- to use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act within 150
days after the date we file it; and
- to use our reasonable best efforts to keep the shelf registration
statement effective and usable until the earlier of (1) such time as all
the registrable securities have been sold under the shelf registration
statement, transferred under Rule 144 under the Securities Act or
otherwise transferred in a way that eliminates the Securities Act transfer
restrictions for future resales by non-affiliates and (2) the expiration
of the holding period applicable to the registrable securities held by
persons other than our affiliates under Rule 144(k) under the Securities
Act, or any successor provision, subject to certain permitted exceptions.
We will be permitted, however, to suspend the use of the shelf registration
statement during certain black-out periods relating to pending corporate
developments, public filings with the SEC, and similar events, if we determine
in good faith that it is in our best interest and if we provide written notice
of the suspension to legal counsel for the holders of a majority in interest of
the registrable securities and any holders who have advised us of their intent
to sell their registrable securities. The suspension period may not exceed 30
days in any three-month period, except under certain circumstances relating to
material corporate developments or similar material events. However, we will not
be permitted to suspend the use of the shelf registration statement for a period
exceeding 90 days in any 12-month period.
We have agreed to:
- provide each holder of registrable securities with copies of the
prospectus that is a part of the shelf registration statement,
- notify each holder of registrable securities when the shelf registration
statement has become effective, and
- take certain other actions as are required to permit unrestricted resales
of the registrable securities.
A holder that sells registrable securities pursuant to the shelf registration
statement (a) will usually be required to be named as a selling securityholder
in the related prospectus and to deliver the prospectus to purchasers, (b) will
be subject to certain of the civil liability provisions under the Securities Act
in connection with such sales, (c) will be required to notify Tekelec of its
intent to distribute registrable securities pursuant to the registration
statement at least three business days prior to making such distribution and
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(d) will be bound by the provisions of the registration rights agreement that
are applicable to such a holder, including certain indemnification rights and
obligations.
Promptly upon request from any holder of registrable securities, Tekelec will
provide a form of notice and questionnaire to be completed and delivered by such
holder to Tekelec at least three business days prior to any intended
distribution of registrable securities pursuant to the shelf registration
statement. In order to be named as a selling securityholder in the shelf
registration statement when it first becomes effective, holders are required to
complete and deliver such a notice and questionnaire prior to the effectiveness
of the shelf registration statement. Upon receipt of a completed questionnaire,
together with such other information as may be reasonably requested by Tekelec,
from a holder following the effectiveness of the shelf registration statement,
Tekelec will, as promptly as practicable but in any event within five business
days of such receipt, file such amendments to the shelf registration statement
or supplements to the related prospectus as are necessary to permit such holder
to deliver such prospectus to purchasers of registrable securities. Any holder
that does not complete and deliver a questionnaire or provide such other
information will not be named as a selling securityholder in the prospectus and
therefore will not be permitted to sell any registrable securities pursuant to
the shelf registration statement.
If a registration default occurs, then the note interest rate will be
increased 0.25% annually, subject to certain exceptions. Following the cure of a
registration default, the interest rate will become the rate in effect
immediately prior to the registration default. We use the term "registration
default" to mean if:
- the SEC has not declared the shelf registration statement effective within
150 days after the date on which we file it, or
- we fail to keep the shelf registration statement that has been declared
effective continuously effective and usable, subject to the permitted
blackout periods described above, for the period required.
Each registrable security will contain a legend to the effect that the holder
will be deemed to have agreed to be bound by the provisions of the registration
rights agreement.
The above summary of certain provisions of the registration rights agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the registration rights
agreement, which has been filed with the SEC and which is available upon request
to us. See "Where You Can Find More Information."
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material United States federal income tax
consequences relating to the purchase, ownership and disposition of the notes
and of the common stock into which the notes may be converted. This summary
represents the opinion of Tekelec's counsel, Bryan Cave LLP, as to the material
United States federal income tax consequences thereof. For purposes of this
summary, the Internal Revenue Code of 1986, as amended, is referred to as the
"Code" and the Internal Revenue Service is referred to as the "IRS."
This summary:
- does not purport to be a complete analysis of all the potential tax
consequences that may be material to a holder based on his or her
particular tax situation;
- is based on the provisions of the Code, the existing or proposed Treasury
regulations, administrative pronouncements, and judicial authority, all of
which are subject to change, possibly on a retroactive basis;
- deals only with holders that will hold notes and common stock into which
notes may be converted as "capital assets" within the meaning of Section
1221 of the Code; and
- does not address tax consequences applicable to holders that may be
subject to special tax rules, such as banks, tax-exempt organizations,
pension funds, insurance companies, dealers in securities or foreign
currencies or persons that will hold notes as a position in a hedging
transaction, "straddle" or "conversion transaction" for tax purposes or
persons that have a "functional currency" other than the U.S. dollar.
Tekelec has not sought any ruling from the IRS with respect to the statements
made and the conclusions reached in the following summary, and the IRS may not
agree with the statements and conclusions expressed in this summary. In
addition, the IRS is not precluded from successfully adopting a contrary
position. This summary does not consider the effect of any applicable state,
local, foreign or other tax laws.
As used herein, the term "U.S. Holder" means a beneficial owner of a note or
common stock that is, for United States federal income tax purposes:
- a citizen or resident, as defined in Section 7701(b) of the Code, of the
United States;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust subject to the primary supervision of a United States court and
the control of one or more United States persons.
U.S. HOLDERS
PAYMENT OF INTEREST -- ORIGINAL ISSUE DISCOUNT
The semi-annual stated interest payments on the notes ("qualified stated
interest") are includable in the income of a U.S. Holder as ordinary income at
the time such interest is received or accrued in accordance with such U.S.
Holder's method of accounting for United States federal income tax purposes.
In addition, the notes were issued with original issue discount ("OID"),
which is equal to the difference between their issue price and their stated
redemption price at maturity. The "issue price" of the notes was $853.54. The
"stated redemption price at maturity" of
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the notes is $1,000. Regardless of their method of accounting, U.S. Holders of
notes are required to include such OID in ordinary income before it is paid,
under the rules described below.
A U.S. Holder is required to include OID in income for United States federal
income tax purposes as it accrues. OID accrues daily in accordance with a
constant yield method based on a compounding of interest. Under this method,
U.S. Holders of the notes are required to include in income increasingly greater
amounts of OID in successive accrual periods. The OID allocable to any accrual
period equals the product of the adjusted issue price of the notes as of the
beginning of such period and the notes' yield to maturity, less any qualified
stated interest allocable to that accrual period. The "adjusted issue price" of
the notes as of the beginning of any accrual period equals the issue price of
the notes increased by OID previously included in income and decreased by any
payments under the notes, other than qualified stated interest. Because OID
accrues and is includable in income at least annually and no payments other than
qualified stated interest will be made under the notes, the adjusted issue price
of the notes will increase throughout their term. OID includable in income
therefore will increase during each accrual period.
MARKET DISCOUNT
A U.S. Holder, who purchases a note subsequent to its original issuance at a
price that is lower than the revised issue price of the note (as defined in
Section 1278(a)(4) of the Code), may be affected by the "market discount"
provisions of the Code. The market discount on any note generally will equal the
revised issue price of the note minus the price at which the holder purchased
the note. Subject to a de minimis exception, the market discount provisions
generally require a U.S. Holder to treat as ordinary income any gain recognized
on a subsequent disposition or redemption of the note to the extent of the
"accrued market discount" at the time of such disposition or redemption. If a
note with accrued market discount is converted into common stock, the amount of
such accrued market discount generally will be taxable as ordinary income upon
disposition of the common stock. Market discount on the note will be treated as
accruing on a straight line basis over the term of such note, unless the U.S.
Holder elects to accrue market discount using a constant yield method. In
addition, if a U.S. Holder of a note with market discount incurs or maintains
indebtedness to purchase or carry the note, any interest deduction attributable
to such indebtedness may be disallowed until the note matures or is disposed of
in a taxable transaction.
A U.S. Holder may elect to include market discount in income for United
States federal income tax purposes as it accrues, using either a ratable or a
constant yield method. If a U.S. Holder makes this election, the rule described
above requiring the deferral of deductions for interest expense will not apply.
If made, the election will apply to all market discount obligations that the
U.S. Holder acquires on or after the first day of the first taxable year to
which the election applies, and the election may not be revoked without the
consent of the IRS.
MARKET PREMIUM
A U.S. Holder, who purchases a note subsequent to its original issuance for
an amount in excess of its then adjusted issue price but below its stated
redemption price at maturity, will have paid an "acquisition premium" equal to
this excess. If this happens, then each of the U.S. Holder's subsequent accruals
of OID into gross income is to be reduced by an allocable portion of the
premium. The allocable portion is determined based on the current period OID
multiplied by a fraction having a numerator which is the acquisition premium and
having a denominator which is the remaining OID. If a U.S. Holder purchases a
note for more than the amount payable on maturity, no OID will be included in
such purchasing holders' income.
If a U.S. Holder purchases a note subsequent to its original issuance for an
amount that, when reduced by the value of the conversion feature, is over its
stated redemption price at maturity, then the U.S. Holder will be treated as
having purchased the note with "premium" equal to the excess. The value of the
conversion feature is the excess, if any, of the note's purchase price over what
the note's fair market value would be if there were no conversion feature. The
U.S. Holder generally may elect to amortize this premium over the remaining term
of the note on a constant yield method, and the amount amortized in any year
will be treated as a reduction in the qualified state interest from the note for
that year. If the U.S. Holder does not elect to amortize the premium on the
note, then the premium will decrease the gain or increase the loss that the U.S.
Holder otherwise will recognize on disposition of the note. Any election to
amortize premium applies to all debt obligations, other than debt obligations
the interest on which is excludable from gross income, that the U.S. Holder
holds at the beginning of the first taxable year to which the election applies
and that the U.S. Holder thereafter acquires. U.S. Holders may not revoke an
election to amortize premium without the consent of the IRS.
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EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON OID
In the event of a change of control, U.S. Holders have the right to require
Tekelec to repurchase the notes at a cash repurchase price specified in
"Description of the Notes -- Change in Control." Treasury regulations provide
that the right of U.S. Holders of the notes to require redemption of the notes
upon the occurrence of a change of control will not affect the yield or maturity
date of the notes unless, based on all the facts and circumstances as of the
issue date, it is more likely than not that a change of control giving rise to
the redemption right will occur. Tekelec does not intend to treat this
redemption provision of the notes as affecting the computation of the yield to
maturity of the notes.
Tekelec, at its option, may redeem the notes, in whole or in part, at any
time on or after November 1, 2002, at redemption prices specified in
"Description of the Notes -- Optional Redemption." Under Treasury regulations,
Tekelec is deemed to exercise any option to redeem if the exercise of the option
would lower the yield of the debt instrument. Tekelec believes, and intends to
take the position, that it will not be treated as having exercised an option to
redeem under these rules.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the sale, exchange or redemption of a note, a U.S. Holder generally will
recognize capital gain or loss equal to the difference between the amount
received on such disposition (other than amounts received in respect of accrued
and unpaid interest, which will be taxable as ordinary income) and the U.S.
Holder's adjusted tax basis in the note. A U.S. Holder's adjusted tax basis in a
note generally will be the cost of the note to such U.S. Holder, increased by
OID previously included in income by a U.S. Holder and by market discount that a
U.S. Holder has elected to include in income as it accrues and decreased by
market premium that a U.S. Holder has elected to amortize. Gain or loss realized
on the sale, exchange or redemption of a note generally will be capital gain or
loss, and will be long-term capital gain or loss if, at the time of such
disposition, the note had been held for more than one year.
CONVERSION OF THE NOTES
A U.S. Holder generally will not recognize any income, gain or loss upon
conversion of a note into common stock, except with respect to cash received in
lieu of a fractional share of common stock. Such U.S. Holder's tax basis in the
common stock received on conversion of a note will be the same as the U.S.
Holder's adjusted tax basis in the note at the time of the conversion, reduced
by any basis allocable to a fractional share, and the holding period for the
common stock received on conversion generally will include the holding period of
the note converted.
To the extent, however, that any common stock received upon conversion is
considered attributable to accrued interest and accrued OID not previously
included in income by the U.S. Holder, the receipt of the common stock will be
taxable as ordinary income. The U.S. Holder's tax basis in the shares of common
stock considered attributable to accrued interest and accrued OID generally will
equal the amount of such accrued interest included in income, and the holding
period for such common stock will begin on the date of conversion.
Cash received in lieu of a fractional share of common stock upon conversion
should be treated as a payment in exchange for the fractional share of common
stock. Accordingly, the receipt of cash in lieu of a fractional share of common
stock generally should result in capital gain or loss, which is equal to the
difference between the cash received for the fractional share and the U.S.
Holder's adjusted tax basis in the fractional share.
ADJUSTMENTS OF CONVERSION RATE
The conversion rate of the notes is subject to adjustment under certain
circumstances, as described under "Description of the Notes -- Conversion."
Section 305 of the Code treats as a distribution taxable as a dividend (to the
extent of a corporation's current or accumulated earnings and profits) certain
actual or constructive distributions of stock with respect to stock or
convertible securities. Under Treasury regulations, an adjustment in the
conversion rate, or the failure to make such an adjustment, may be treated as a
constructive dividend to the U.S. Holder of a note. Generally, a U.S. Holder's
tax basis in a note is increased by the amount of any such constructive
dividend.
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DIVIDENDS ON THE COMMON STOCK
The amount of any distributions by Tekelec in respect of the common stock
received on the conversion will be equal to the amount of cash and the fair
market value, on the date of distribution, of any property distributed.
Generally, distributions will be treated as a dividend, subject to a tax as
ordinary income, to the extent of Tekelec's current or accumulated earnings and
profits. Dividends paid to a corporate U.S. Holder may qualify for the dividends
received deduction. To the extent that a U.S. Holder receives distributions on
the common stock in excess of Tekelec's current and accumulated earning and
profits, the distribution will be treated first as a tax-free return of capital
to the extent of the U.S. Holder's tax basis in the common stock and thereafter
as long-term or short-term capital gain from the sale or exchange of such common
stock, depending on the U.S. Holder's holding period for the common stock.
SALE OF THE COMMON STOCK
Upon the sale or exchange of common stock, a U.S. Holder generally will
recognize capital gain or loss equal to the difference between (1) the amount of
cash and the fair market value of the property received upon the sale or
exchange and (2) such U.S. Holder's adjusted tax basis in the common stock. Such
capital gain or loss will be long-term if the U.S. Holder's holding period in
the common stock is more than one year at the time of the sale or exchange. A
U.S. Holder's basis and holding period in the common stock received upon
conversion of a note are determined as discussed above under "-- U.S. Holders --
Conversion of the Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to payments of
principal, premium, if any, interest or dividends on or the proceeds from the
sale or other disposition of the notes or common stock with respect to certain
non-corporate U.S. Holders. These U.S. Holders generally will be subject to
backup withholding at a rate of 31% if:
- the U.S. Holder fails to furnish its taxpayer identification number
("TIN") to the payor or establish an exemption from backup withholding;
- the IRS notifies the payor that the TIN furnished by the U.S. Holder is
incorrect;
- the IRS notifies the payor that the U.S. Holder has failed to report
interest, dividends or original issue discount described in Section
3406(c) of the Code; or
- the U.S. Holder fails to certify, under penalty of perjury, that the U.S.
Holder is not subject to backup withholding under the Code.
Any amount withheld under backup withholding is allowable as a credit against
the U.S. Holder's United States federal income tax liability and may entitle
such U.S. Holder to a refund, provided that the required information is
furnished to the IRS.
NON U.S. HOLDERS
PAYMENT OF INTEREST -- ORIGINAL ISSUE DISCOUNT
Generally, interest income of a Non U.S. Holder that is not effectively
connected with a United States trade or business is subject to withholding tax
at a 30% rate (or, if applicable, a lower treaty rate). Interest, including OID,
paid on a note by Tekelec or its agent to a Non U.S. Holder, however, will
qualify for the "portfolio interest exemption" (provided Tekelec is not a
"USRPHC" as defined below under "-- Non U.S. Holders -- FIRPTA Treatment") and
therefore will not be subject to United States federal income tax or withholding
tax, provided that such interest income (including OID) is not effectively
connected with a United States trade or business of the Non U.S. Holder and
provided that the Non U.S. Holder:
- does not actually or constructively own (pursuant to the conversion
feature of the notes or otherwise) 10% or more of the combined voting
power of all classes of stock of Tekelec entitled to vote;
- is not a controlled foreign corporation related to Tekelec actually or
constructively through stock ownership;
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- is not a bank that acquired the notes in consideration for an extension of
credit made pursuant to a loan agreement entered into in the ordinary
course of business; and
- either (a) provides a Form W-8 (or a suitable substitute form) signed
under penalties of perjury that includes its name and address and
certifies as to its non-United States status in compliance with applicable
law and regulations, or (b) is a securities clearing organization, bank or
other financial institution that holds customers' securities in the
ordinary course of its trade or business and provides a statement to
Tekelec or its agent under penalties of perjury in which it certifies that
such a Form W-8 (or a suitable substitute) has been received by it from
the Non U.S. Holder or qualifying intermediary and furnishes Tekelec or
its agent with a copy.
Treasury regulations that become effective January 1, 2001, provide
alternative methods for satisfying the certification requirement described
above. These Treasury regulations also will require, in the case of notes held
by a foreign partnership, that (a) the certification described above be provided
by the partners rather than by the foreign partnership (unless the foreign
partnership agrees to become a "withholding foreign partnership") and (b) the
partnership provides certain information, including a United States TIN. A
look-through rule will apply in the case of tiered partnerships.
Except to the extent that an applicable treaty otherwise provides, a Non U.S.
Holder generally is taxed in the same manner as a U.S. Holder with respect to
interest if the interest income is effectively connected with a United States
trade or business of the Non U.S. Holder. Effectively connected interest
received by a corporate Non U.S. Holder may also, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate (or, if
applicable, a lower treaty rate). Even though such effectively connected
interest is subject to income tax, and may be subject to branch profits tax, it
is not subject to withholding tax if the Non U.S. Holder delivers a properly
executed IRS Form 4224 to the payor.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Subject to the discussion below under "-- Non U.S. Holders -- FIRPTA
Treatment," a Non U.S. Holder of a note generally is not subject to United
States federal income tax or withholding tax on any gain realized on the sale,
exchange, or redemption of a note (including the receipt of cash in lieu of
fractional shares upon conversion of a note into common stock but not including
any amount representing interest or accrued market discount) unless:
- such Non U.S. Holder is an individual who is present in the United States
for 183 days or more in the taxable year of sale, exchange, or redemption,
and certain other conditions are met;
- such gain is effectively connected with the conduct by a Non U.S. Holder
of a trade or business within the United States and if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by the Non U.S. Holder; or
- the Non U.S. Holder is subject to Code provisions applicable to certain
U.S. expatriates.
CONVERSION OF THE NOTES
Generally, a Non U.S. Holder will not be subject to United States federal
income tax or withholding tax upon the conversion of a note into common stock
except to the extent cash is received in lieu of fractional shares where any of
the conditions described in "-- Non U.S. Holders -- Sale, Exchange or Redemption
of the Notes" is satisfied.
DIVIDENDS ON THE COMMON STOCK
Distributions by Tekelec with respect to the common stock that are treated as
dividends paid (or deemed paid) as described above under "-- U.S. Holders --
Dividends on the Common Stock" to a Non U.S. Holder (excluding dividends that
are effectively connected with the conduct by a Non U.S. Holder of a trade or
business within the United States and are taxable as described below) will be
subject to United States federal withholding tax at a 30% rate (or, if
applicable, a lower treaty rate). Except to the extent that an applicable tax
treaty otherwise provides, a Non U.S. Holder will be taxed in the same manner as
a U.S. Holder on dividends paid (or deemed paid) that are effectively connected
with the conduct by a Non U.S. Holder of a trade or business within the United
States. If such Non U.S. Holder is a foreign corporation, it may also be subject
to a United States branch profits tax on such effectively
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connected income at a 30% rate or such lower rate as may be specified by an
applicable treaty. Even though such effectively connected dividends are subject
to income tax, and may be subject to the branch profits tax, they will not be
subject to United States withholding tax if the Non U.S. Holder delivers a
properly executed IRS Form 4224 to the payor.
Under current Treasury regulations, dividends paid to an address in a foreign
country are presumed to be paid to a resident of that country (unless the payor
has knowledge to the contrary) for purposes of the withholding discussed above,
and under the current interpretation of the Treasury regulations, for purposes
of determining the applicability of a treaty rate. Under Treasury regulations
that become effective for distributions after 2000, however, a Non U.S. Holder
of common stock who wishes to claim the benefit of an applicable treaty rate
would be required to satisfy applicable certification and other requirements. In
addition, under these Treasury regulations, in the case of common stock held by
a foreign partnership, the certification requirement generally would be applied
to the partners of the partnership (unless the partnership agrees to become a
"withholding foreign partnership") and the partnership would be required to
provide certain information, including a United States TIN. These Treasury
regulations also provide look-through rules for tiered partnerships.
SALE OF THE COMMON STOCK
Subject to the discussion below under "-- Non U.S. Holders -- FIRPTA
Treatment," a Non U.S. Holder generally will not be subject to United States
federal income tax or withholding tax on gain realized on the sale of common
stock unless one of the conditions described in "-- Non U.S. Holders -- Sale,
Exchange or Redemption of the Notes" is satisfied.
FIRPTA TREATMENT
Under the Foreign Investment in Real Property Tax Act of 1980, as amended
("FIRPTA"), foreign persons generally are subject to United States federal
income tax on capital gain realized on the sale or other disposition of any
interest (other than solely as a creditor) in a corporation that is a United
States real property holding corporation (a "USRPHC"). Under FIRPTA, a
corporation is a USRPHC if the fair market value of the United States real
property interests held by the corporation is 50% or more of the aggregate fair
market value of certain assets of the corporation. Tekelec does not believe that
it is currently a USRPHC. If Tekelec is not a USRPHC, a Non U.S. Holder will not
be subject to United States federal income tax imposed by FIRPTA on a sale or
other disposition of the notes or common stock . If Tekelec is a USRPHC, a Non
U.S. Holder generally will not be subject to FIRPTA withholding on proceeds from
a sale or other disposition of notes or common stock by reason of Tekelec's
USRPHC status unless the Non U.S. Holder's interest in the note or the common
stock exceeds the relevant threshold described below.
Because Tekelec's common stock is regularly traded, a Non U.S. Holder will
not be subject to FIRPTA withholding on a sale or other disposition of common
stock unless such Non U.S. Holder owns, actually or constructively, common stock
with a fair market value in excess of 5% of the fair market value of all the
common stock outstanding at any time during the shorter of the five-year period
preceding such sale or the Non U.S. Holder's holding period. In the case of a
sale or other disposition of notes, the relevant ownership threshold depends
upon whether the notes are regularly traded. If the notes are not regularly
traded, a Non U.S. Holder will be subject to FIRPTA withholding only if on the
date the Non U.S. Holder acquired such notes they had a fair market value
greater than 5% of the aggregate value of the outstanding common stock. If the
notes are publicly traded, a Non U.S. Holder will be subject to FIRPTA
withholding only if such Non U.S. Holder owned more than 5% of the total value
of all the notes outstanding at any time during the shorter of the five-year
period preceding such disposition or the Non U.S. Holder's holding period for
such notes.
The notes are designated as eligible for trading in the PORTAL market.
DEATH OF A NON U.S. HOLDER
A note held by an individual who is a Non U.S. Holder at the time of his
death will not be included in the decedent's gross estate for United States
estate tax purposes, provided that, at the time of the Non U.S. Holder's death,
he did not own, actually or constructively, 10% or more of the total combined
voting power of all classes of stock of Tekelec entitled to vote, and provided
that, at the time of death, payments with respect to such notes would not have
been effectively connected with the conduct by such Non U.S. Holder of a trade
or business within the United States.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
United States information reporting requirements and backup withholding tax
will not apply to payments on a note to a Non U.S. Holder if the statement
described in "-- Non U.S. Holders -- Payment of Interest -- Original Issue
Discount" is duly provided by such Non U.S. Holder, provided that the payor does
not have actual knowledge that the holder is a United States person.
Information reporting requirements and backup withholding requirements will
not apply to any payment of the proceeds received on the sale of a note or any
payment of the proceeds received on the sale of the common stock that is
effected outside the United States by a foreign office of a "broker" (as defined
in applicable Treasury regulations), unless such broker is (a) a United State
person; (b) a foreign person that derives 50% or more of its gross income for
certain periods from activities that are effectively connected with the conduct
of a trade or business in the United States; (c) a controlled foreign
corporation for United States federal income tax purposes; or (d) (after
December 31, 2000) a foreign partnership more than 50% of the capital or profits
of which is owned by one or more United States persons or which engages in a
United States trade or business. Payment of the proceeds of any such sale
effected outside the United States by a foreign office of any broker that is
described in (a), (b), (c), or (d) of the preceding sentence will not be subject
to backup withholding tax but will be subject to information reporting
requirements, unless such broker has documentary evidence in its records that
the beneficial owner is a Non U.S. Holder and certain other conditions are met,
or the beneficial owner otherwise establishes an exemption. Payment of the
proceeds of any such sale to or through a United States office of a broker is
subject to both information reporting and backup withholding requirements,
unless the beneficial owner of the notes provides the statement described in "--
Non U.S. Holders -- Payments of Interest -- Original Issue Discount" or
otherwise establishes an exemption.
If paid to an address outside the United States, dividends on common stock
held by a Non U.S. Holder generally will not be subject to the information
reporting and backup withholding requirements described in this section,
provided that the payor does not have actual knowledge that the holder is a
United States person. Under Treasury regulations effective with respect to
payments made after December 31, 2000, however, dividend payments will be
subject to information reporting and backup withholding unless applicable
certification requirements are satisfied (see the discussion above "-- Non U.S.
Holders -- Dividends").
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF UNITED STATES FEDERAL
INCOME TAXATION THAT MAY BE RELEVANT TO A HOLDER OF NOTES, OR SHARES OF COMMON
STOCK THAT ARE RECEIVED UPON CONVERSION OF THE NOTES, IN LIGHT OF A HOLDER'S
PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES, OR SHARES OF COMMON STOCK THAT
ARE RECEIVED UPON CONVERSION OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT
OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our Articles of Incorporation authorize the issuance of up to 200,000,000
shares of common stock, without par value. As of January 10, 2000, 55,719,727
shares of common stock were outstanding, and we had reserved 11,263,719 shares
for issuance upon the exercise of outstanding options and warrants.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders, except that, upon
giving notice required by law, shareholders may cumulate their votes in the
election of directors. Holders of common stock are entitled to receive ratably
such dividends as may be declared by the board of directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
Tekelec, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preference of any
outstanding senior securities. Holders of common stock have no preemptive rights
and have no rights to convert their common stock into any other securities. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
RIGHTS PLAN
We have adopted a shareholder rights plan and authorized the issuance of one
common share purchase right for each outstanding share of common stock. The
rights agreement between us and U.S. Stock Transfer Corporation, as rights
agent, contains the terms of the shareholder rights plan. The following is a
summary of some of the terms of the plan. Since the terms of the plan may differ
from the general information provided below, you should only rely on the actual
provisions of the rights agreement. If you would like to read the rights
agreement, it is on file with the Commission, or you may request a copy from us.
Exercisability of Rights. Under the rights agreement, one right attaches to
each outstanding share of common stock and, when exercisable, entitles the
registered holder to purchase from us for a purchase price of $90, one share of
common stock, subject to customary antidilution adjustments.
The rights will not become exercisable until the earlier of:
- ten business days following a public announcement or our determination
that a person or group has become the beneficial owner of securities
representing 15% or more (except that for Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons, the
threshold is 30%) of the voting power of our voting stock without the
approval of our board of directors; or
- ten business days, or such later date as our board of directors may
determine, following the commencement of, or the announcement of an
intention to commence, a tender offer or exchange offer that would result
in a person or group becoming the beneficial owners of securities
representing 15% or more of the voting power of Tekelec's voting stock
without the approval of our board of directors (or such later date as our
board of directors may determine, but in no event later than the date that
any person or group actually becomes such an owner).
Additionally, at any time a person or a group has become the beneficial owner
of securities representing 15% or more (or, for Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons, 30% or more) of
the voting power of our voting stock without the approval of our board of
directors, the "flip-in" and "flip-over" features of the rights or, at the
discretion of our board of directors, the exchange feature of the rights, may be
exercised by any holder, except for such person or group. A summary description
of each of these, and certain other, features follows:
"Flip In" Feature. In the event that a person or group becomes the beneficial
owner of securities representing 15% or more (or, for Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons, 30% or more) of
the voting power of our voting stock without the approval of our board of
directors, each holder of a right, except for such person or group, will have
the right to acquire, upon exercise of the right, instead of one share of common
stock, shares of common stock having a value equal to twice
63
<PAGE> 64
the exercise price of the right. For example, if we assume that the purchase
price of $90 is in effect on the date that the flip-in feature of the right is
exercised, any holder of a right, except for the person or group that has become
the beneficial owner of securities representing 15% or more (or 30% or more, as
the case may be) of the voting power of our voting stock, can exercise his or
her right by paying us $90 in order to receive from us shares of common stock
having a value equal to $180.
Exchange Feature. At any time after a person or group becomes the beneficial
owner of securities representing 15% or more (or, for Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons, 30% or more) of
the voting power of our voting stock without the approval of our board of
directors, but less than 50% of the voting power of our voting stock, our board
of directors may, at its option, exchange all or some of the rights, except for
those held by such person or group, for common stock at an exchange ratio of one
share of common stock per right and cash instead of fractional shares, if any.
Use of this exchange feature means that eligible rights holders would not have
to pay a purchase price before receiving additional shares of common stock.
"Flip Over" Feature. In the event we are acquired in a merger or other
business combination transaction or 50% or more of our assets or earning power
is sold, each holder of a right, except for a person or group that is the
beneficial owner of securities representing 15% or more (or, for Mr. Asscher,
Mr. Givel, Tekelec-Airtronic, Natinco and certain other related persons, 30% or
more) of the voting power of our voting stock without the approval of our board
of directors, will have the right to receive, upon exercise of the right, the
number of shares of the acquiring company's capital stock with the greatest
voting power having a value equal to twice the exercise price of the right.
Redemption of Rights. At any time before the earlier of ten business days
following a public announcement or our determination that a person or group has
become the beneficial owner of securities representing 15% or more (except that,
for Mr. Asscher, Mr. Givel, Tekelec-Airtronic and Natinco and certain other
related persons, the threshold is 30%) of the voting power of our voting stock
without the approval of our board of directors, our board of directors may
redeem all of the rights at a redemption price of $0.005 per right, subject to
adjustment. The right to exercise the rights, as described above under "--
Exercisability of Rights," will terminate upon redemption and, at that time, the
holders of the rights will have the right to receive only the redemption price
for each right held.
Amendment of Rights Agreement. At any time, our board of directors may amend
any or all of the terms of the rights and the rights agreement without the
consent of the holders of the rights, including to shorten or lengthen any of
the time periods in the rights agreement or increase or decrease the purchase
price or the triggering percentages (except that Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons must approve
certain amendments to the thresholds applicable to them). However, at any time
after a person or group beneficially owns securities representing 15% or more
(or, for Mr. Asscher, Mr. Givel, Tekelec-Airtronic, Natinco and certain other
related persons, 30% or more) of the voting power of our voting stock without
the approval of our board of directors, our board of directors may not adopt
amendments to the rights agreement that adversely affect the interests of the
holders of the rights. However, once the rights are no longer redeemable, our
board of directors may not adopt any amendment that would lengthen the time
period during which the rights are redeemable, and the triggering percentage may
not be less than the greater of the greatest percentage of voting power
beneficially owned by any person or group (other than Mr. Asscher, Mr. Givel,
Tekelec-Airtronic, Natinco and certain other related persons) and 10%.
Termination of Rights. If not previously exercised, the rights will expire on
September 5, 2007, unless we earlier redeem or exchange the rights or extend the
final expiration date.
Anti-takeover Effects. Our shareholder rights plan has certain anti-takeover
effects. Once the rights have become exercisable, the rights will cause
substantial dilution to a person or group that attempts to acquire or merge with
Tekelec in certain circumstances. Accordingly, the existence of the shareholder
rights plan may deter potential acquirors from making a takeover proposal or
tender offer. The shareholder rights plan should not interfere with any merger
or other business combination approved by our board of directors since we may
redeem the rights as described above and since a transaction approved by our
board of directors would not cause the rights to become exercisable.
TRANSFER AGENT
Tekelec's transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation, Glendale, California.
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<PAGE> 65
SELLING SECURITYHOLDERS
The notes offered hereby were originally issued by Tekelec and sold by the
initial purchasers in transactions exempt from the registration requirements of
the Securities Act (1) in the United States only to "qualified institutional
buyers" in reliance on Rule 144A under the Securities Act and (2) outside the
United States pursuant to Regulation S under the Securities Act. The selling
securityholders (which term includes their transferees, pledgees, donees or
their successors) may from time to time offer and sell pursuant to this
prospectus any or all of the notes and the shares of common stock that may be
acquired by the selling securityholders upon conversion of the notes.
The following table is based upon information provided to us by or on behalf
of each selling securityholder and indicates with respect to each selling
securityholder:
- the aggregate principal amount of the notes beneficially owned by such
selling securityholder as of February 10, 2000;
- the maximum amount of notes that such selling securityholder may offer
under this prospectus;
- the number of shares of common stock beneficially owned by such selling
securityholder as of February 10, 2000; and
- the maximum number of shares of common stock that may be offered for the
account of such selling securityholder under this prospectus.
The table below also indicates by footnote reference any material relationship
that a selling securityholder has had with Tekelec during the past three
years. This prospectus covers all of the notes and common stock shown in the
table below, and we may from time to time supplement or amend this prospectus to
reflect the required information regarding selling securityholders and to
include additional selling securityholders.
<TABLE>
<CAPTION>
PRINCIPAL NO. OF NO. OF
AGGREGATE AMOUNT SHARES OF SHARES OF
PRINCIPAL OF NOTES COMMON STOCK COMMON STOCK
AMOUNT OFFERED OWNED PRIOR OFFERED
NAME OF SELLING SECURITYHOLDER OF NOTES HEREBY TO OFFERING(1) HEREBY(1)
------------------------------ ---------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
1976 Distribution Trust FBO A. R. .................
Lauder/Zinterhofer ........................... 8,000 8,000 450 450
1976 Distribution Trust FBO Jane A. Lauder ........ 8,000 8,000 450 450
AIG/National Union Fire Insurance ................. 635,000 635,000 35,775 35,775
Alexandra Global Investment Fund I Ltd. ........... 1,000,000 1,000,000 56,339 56,339
Allstate Insurance Company ........................ 1,500,000 1,500,000 84,508 84,508
Arbitex Master Fund L.P. .......................... 1,500,000 1,500,000 84,508 84,508
Argent Classic Convertible Arbitrage Fund
(Bermuda) L.P. ............................... 4,000,000 4,000,000 225,357 225,357
Arpeggio Fund, LP ................................. 500,000 500,000 28,169 28,169
Associated Electric & Gas
Insurance Services Limited ................... 200,000 200,000 11,267 11,267
Bancroft Convertible Fund, Inc. ................... 1,000,000 1,000,000 56,339 56,339
Bear, Stearns & Co. Inc. .......................... 750,000 750,000 42,254 42,254
Black Diamond Offshore LDC ........................ 502,000 502,000 28,282 28,282
BNP Arbitrage SNC(2) .............................. 3,000,000 3,000,000 169,017 169,017
Brookside Capital Partners Fund L.P.(3) ........... 20,000,000 20,000,000 1,126,786 1,126,786
BUI Social Security Board ......................... 15,000 15,000 845 845
California Public Employees' Retirement System .... 3,000,000 3,000,000 169,017 169,017
City University of New York ....................... 40,000 40,000 2,253 2,253
Deephaven Domestic Convertible Trading Ltd. ....... 2,000,000 2,000,000 112,678 112,678
Deutsche Bank Securities Inc. ..................... 47,471,000 47,471,000 2,674,482 2,674,482
Double Black Diamond Offshore LDC ................. 1,373,000 1,373,000 77,353 77,353
Ellsworth Convertible Growth and
Income Fund, Inc.............................. 1,000,000 1,000,000 56,339 56,339
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
PRINCIPAL NO. OF NO. OF
AGGREGATE AMOUNT SHARES OF SHARES OF
PRINCIPAL OF NOTES COMMON STOCK COMMON STOCK
AMOUNT OFFERED OWNED PRIOR OFFERED
NAME OF SELLING SECURITYHOLDER OF NOTES HEREBY TO OFFERING(1) HEREBY(1)
------------------------------ ---------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C>
Forest Alternative Strategies Fund II LP A 5M ..... 60,000 60,000 3,380 3,380
Forest Alternative Strategies Fund II LP A 5I ..... 190,000 190,000 10,704 10,704
Forest Fulcrum Fund LP ............................ 850,000 850,000 47,888 47,888
Forest Global Convertible Fund Series A 5 ......... 3,700,000 3,700,000 208,455 208,455
Global Bermuda Limited Partnership ................ 1,350,000 1,350,000 76,058 76,058
Grable Foundation ................................. 57,000 57,000 3,211 3,211
Grady Hospital .................................... 60,000 60,000 3,380 3,380
Gryphon Domestic III, LLC ......................... 2,700,000 2,700,000 152,116 152,116
Investcorp - SAM Fund Limited ..................... 4,800,000 4,800,000 270,428 270,428
Island Holdings ................................... 15,000 15,000 845 845
Kentfield Trading, Ltd. ........................... 7,085,000 7,085,000 399,163 399,163
Lakeshore International, Ltd. ..................... 2,650,000 2,650,000 149,299 149,299
LLT Limited ....................................... 200,000 200,000 11,267 11,267
Mainstay Convertible Fund ......................... 2,750,000 2,750,000 154,933 154,933
Maryland State Retirement System .................. 867,000 867,000 48,846 48,846
Merrill Lynch Insurance Group ..................... 141,000 141,000 7,943 7,943
Morgan Stanley Dean Witter Convertible
Securities Trust ............................. 1,000,000 1,000,000 56,339 56,339
New Orleans Firefighters .......................... 64,000 64,000 3,605 3,605
Occidental Petroleum .............................. 108,000 108,000 6,084 6,084
Ohio BWC .......................................... 76,000 76,000 4,281 4,281
Rhapsody Fund, LP ................................. 1,400,000 1,400,000 78,875 78,875
Shell Pension Trust ............................... 85,000 85,000 4,788 4,788
Starvest Combined Portfolio ....................... 1,000,000 1,000,000 56,339 56,339
UBS AG London Branch .............................. 7,835,000 7,835,000 441,418 441,418
White River Securities LLC ........................ 750,000 750,000 42,254 42,254
Worldwide Transactions Ltd. ....................... 125,000 125,000 7,042 7,042
TOTAL .................. 129,420,000 129,420,000 7,291,409 7,291,409
</TABLE>
- ----------
(1) Reflects the shares of common stock into which the notes held by such
securityholder are convertible at the initial conversion rate. The
conversion rate and the number of shares of common stock issuable upon
conversion of the notes are subject to adjustment under certain
circumstances. See "Description of the Notes -- Conversion."
(2) As of January 17, 2000, BNP Arbitrage SNC beneficially owned an additional
9,211 shares of Tekelec common stock. Those shares are not covered by this
prospectus.
(3) As of January 10, 2000, Brookside Capital Partners Fund L.P. beneficially
owned an additional 1,860,000 shares of Tekelec common stock. Those shares
are not covered by this prospectus. As of January 10, 2000 and including the
shares which become issuable upon conversion of the notes within 60 days
after January 10, 2000, Brookside Capital Partners Fund L.P. beneficially
owned more than 5% of the outstanding shares of Tekelec common stock. See
"Principal Shareholders."
The selling securityholders named above may, in transactions exempt from the
registration requirements of the Securities Act, have sold, transferred or
otherwise disposed of all or a portion of their notes and common stock since the
date on which they provided the information in the table regarding their notes
and common stock. Any such sales would affect the data in the above table.
Assuming that the selling securityholders dispose of all of the notes and common
stock offered by this prospectus and that they do not acquire any additional
notes or shares of common stock, none of the selling securityholders would
continue to own any notes or shares of common stock upon completion of the
offering pursuant to this prospectus (except for any shares of common stock
currently owned by a selling securityholder as described in the footnotes to the
above table).
66
<PAGE> 67
PLAN OF DISTRIBUTION
The selling securityholders received the notes in connection with a private
placement. The selling securityholders may sell the notes and underlying common
stock from time to time. The selling securityholders may sell all or a portion
of the securities in one or more transactions:
- on the exchange on which the securities are traded, if any;
- in the over-the-counter market;
- in separately negotiated transactions; or
- in a combination of such transactions.
Each sale may be made at market prices prevailing at the time of the sale or at
negotiated prices. Some or all of the securities may be sold through brokers
acting on behalf of the selling securityholders or to dealers or underwriters
for resale by them. In connection with such sales, such brokers, dealers and
underwriters may receive compensation in the form of discounts or commissions
from the selling securityholders and may receive commissions from the purchasers
of securities for whom they act as broker or agent (which discounts and
commissions are not anticipated to exceed those customary in the types of
transactions involved). Any broker or dealer participating in any such sale may
be deemed to be an "underwriter" within the meaning of the Securities Act of
1933 and will be required to deliver a copy of this prospectus to any person who
purchases any of the securities from or through such broker or dealer.
In connection with any sales through a broker, such broker may act as agent
for the selling securityholder or may purchase from the selling securityholder
all or a portion of such securities as principal. Securities sold by a broker
may be made in one or more of the following transactions:
- block transactions (which may involve crosses) in which a broker may
sell all or a portion of such securities as agent but may position
and resell all or a portion of the block as principal to facilitate
the transaction;
- purchases by any broker as principal and resale by such broker for
its own account;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which any broker
solicits purchasers;
- sales "at the market" to or through the market maker or into an
existing trading market, on an exchange or otherwise, for such
securities; and
- sales in other ways not involving market makers or established
trading markets, including direct sales to institutions or
individual purchasers.
We are permitted to suspend the use of this prospectus in connection with
the sales of notes and the underlying common stock by holders upon the happening
of certain events or if there exists any fact that makes any statement of
material fact made in this prospectus untrue or that requires the making of
additions to or changes in the prospectus in order to make the statements herein
not misleading until such time as we advise the selling securityholders that use
of the prospectus may be resumed. We have agreed to pay the cost of the
registration of the securities and the preparation of this prospectus and the
registration statement under which it is filed. The expenses so payable by us
are estimated to be approximately $145,000.
In order to comply with the securities laws of certain states, if
applicable, the notes and the underlying common stock may be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the notes and the underlying common stock may not be
sold unless these securities have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
67
<PAGE> 68
Any securities covered by this prospectus that qualify for sale pursuant to
Rule 144 or Rule 144A of the Securities Act of 1933 may be sold under Rule 144
or Rule 144A rather than pursuant to this prospectus. There can be no assurance
that any selling securityholder will sell any or all of the notes or the
underlying common stock described herein, and any selling securityholder may
transfer, devise or gift such securities by other means not described herein.
Certain of the initial purchasers engage in transactions with, and from time
to time have performed services for, us and our subsidiaries in the ordinary
course of business.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for Tekelec
by Bryan Cave LLP. Ronald W. Buckly, Tekelec's Vice President and General
Counsel, is of counsel to Bryan Cave LLP, which firm has provided legal services
to Tekelec since March 1996.
EXPERTS
The consolidated financial statements incorporated in this Registration
Statement by reference to the Annual Report on Form 10-K of Tekelec for the year
ended December 31, 1998, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of IEX Corporation at December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998,
appearing in the Current Report (Form 8-K) of Tekelec dated May 7, 1999, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
DOCUMENTS INCORPORATED BY REFERENCE
This prospectus incorporates certain documents about us by reference
that are not presented in or delivered with this prospectus. The information
incorporated by reference is an important part of this prospectus. We are
incorporating by reference in this prospectus the following documents which were
filed with the Securities and Exchange Commission under the Exchange Act:
- our annual report on Form 10-K for our fiscal year ended December
31, 1998;
- our quarterly reports on Form 10-Q for the periods ended March 31,
1999, June 30, 1999 and September 30, 1999;
- our Proxy Statement for our 1999 annual meeting of shareholders; and
- our current reports on Form 8-K dated May 7, 1999; May 14, 1999;
August 25, 1999; October 20, 1999; October 28, 1999; and November 4,
1999, including financial statements of certain acquired affiliates.
We also are incorporating by reference in this prospectus all reports
and other documents that we file after the date of this prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the notes and the underlying common stock under this
prospectus. These reports and documents will be incorporated by reference in and
considered to be a part of this prospectus as of the date of filing of such
reports and documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference herein will be modified or superseded for purposes of
this prospectus to the extent that a statement in any document that we file
after the date of this prospectus that also is incorporated by reference herein
modifies or supersedes such prior statement. Any such statement so modified or
superseded will not, except as so modified or superseded, constitute a part of
this prospectus.
This prospectus incorporates by reference documents which are not
presented in this prospectus or delivered to you with it. You may request, and
we will send to you, without charge, copies of these documents, other than
exhibits to these documents, which we will send to you for a reasonable fee.
Requests should be directed to the office of the Secretary, Tekelec, 26580 West
Agoura Road, Calabasas, California 91302 (telephone (818) 880-5656).
68
<PAGE> 69
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information filed by us at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Tekelec's filings are also available
to the public from commercial document retrieval services and at the web site
maintained by the Commission at http://www.sec.gov.
Our common stock is listed on the Nasdaq National Market under the
symbol "TKLC" and our SEC filings can also be read and obtained at the following
Nasdaq address:
The Nasdaq Stock Market
Reports Section
1735 K Street, N.W.
Washington, D.C. 20006
69
<PAGE> 70
================================================================================
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF NOTES OR
COMMON STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
AFTER THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY THE NOTES OR COMMON STOCK IN ANY CIRCUMSTANCES
UNDER WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary ................................................................ 3
Risk Factors ........................................................... 7
Forward-Looking Statements ............................................. 15
Use of Proceeds ........................................................ 17
Dividend Policy ........................................................ 17
Price Range of Common Stock ............................................ 17
Ratio of Earnings to Fixed Charges ..................................... 18
Capitalization ......................................................... 18
Selected Consolidated Financial Data ................................... 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 20
Business ............................................................... 29
Management ............................................................. 42
Principal Shareholders ................................................. 44
Description of Existing Indebtedness ................................... 46
Description of the Notes ............................................... 47
Material United States Federal Income Tax Considerations ............... 56
Description of Capital Stock ........................................... 63
Selling Securityholders ................................................ 65
Plan of Distribution ................................................... 67
Legal Matters .......................................................... 68
Experts ................................................................ 68
Documents Incorporated by Reference .................................... 68
Where You Can Find More Information .................................... 69
</TABLE>
----------------
================================================================================
================================================================================
$135,000,000
[LOGO]
3.25% CONVERTIBLE
SUBORDINATED DISCOUNT
NOTES DUE 2004
AND SHARES OF
COMMON STOCK
ISSUABLE UPON
CONVERSION THEREOF
----------------
PROSPECTUS
----------------
FEBRUARY , 2000
================================================================================
70
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and sales commissions)
relating to the registration of the securities being registered hereby will be
borne by us. These expenses are estimated to be as follows:
<TABLE>
<S> <C>
SEC registration fee .................................... $ 35,640
Nasdaq Fee .............................................. 17,500
Accounting fees and expenses ............................ 20,000*
Legal fees and expenses ................................. 40,000*
Printing ................................................ 10,000*
Trustee's Fees and Expenses ............................. 10,000*
Miscellaneous expenses .................................. 11,860*
--------
Total ......................................... $145,000*
========
</TABLE>
- -------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code provides that a
corporation may indemnify corporate "agents" (including directors, officers and
employees of the corporation) against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with defending
non-derivative actions if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe the
conduct of such person was unlawful, and against expenses actually and
reasonably incurred in connection with defending derivative actions if such
person acted in good faith and in a manner such person believed to be in the
best interests of the corporation and its shareholders. Indemnification is
obligatory to the extent that an agent of a corporation has been successful on
the merits in defense of any such proceeding against such agent, but otherwise
may be made only upon a determination in each instance either by a majority vote
of a quorum of the Board of Directors (other than directors involved in such
proceeding), by independent legal counsel if such a quorum of directors is not
obtainable, by the shareholders (other than shareholders to be indemnified), or
by the court, that indemnification is proper because the agent has met the
applicable statutory standards of conduct. Corporations may also advance
expenses incurred in defending proceedings against corporate agents, upon
receipt of an undertaking that the agent will reimburse the corporation unless
it is ultimately determined that the agent is entitled to be indemnified against
expenses reasonably incurred.
The indemnification provided by Section 317 of the California
Corporations Code is not deemed to be exclusive of any other rights to which
agents of the Company seeking indemnification may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise, both
as to action in an official capacity and as to action in another capacity while
holding such office, to the extent such additional rights are authorized in the
articles of the corporation. Article V of the Company's Restated Articles of
Incorporation authorizes the Company to provide for indemnification of its
agents for breach of duty to the Company and its shareholders, through bylaw
provisions or through agreements with such agents, or both, in excess of the
indemnification otherwise permitted by Section 317, subject to the limits on
such excess indemnification set forth in Section 204 of the California General
Corporation Law.
Article VI of the Company's bylaws provides for the indemnification of
all past and current directors to the maximum extent and in the manner permitted
by Section 317. Additionally, the Company has entered into Indemnification
Agreements with its directors under which the Company has undertaken to
indemnify each such agent to the fullest extent permitted by its Articles of
Incorporation, bylaws and applicable law against all expenses,
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<PAGE> 72
liability and loss (which are not paid by insurance or otherwise by the Company)
reasonably incurred or suffered by such agent in connection with the defense of
any action or proceeding to which the agent was or is a party or is threatened
to be made a party by reason of conduct in his capacity as an officer or
director, or in which the agent is or may be involved by reason of the fact that
he is or was serving as an officer or director of the Company, not including
actions brought for violation of Section 16 of the Securities Exchange Act of
1934 or for failure to qualify for an exemption under Section 4 of the
Securities Act of 1933.
The Company also maintains on behalf of its directors and officers
insurance protection against certain liabilities arising out of the discharge of
their duties.
ITEM 16. EXHIBITS.
See Exhibit Index.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a view registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to
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<PAGE> 73
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, we
have been advised that in the opinion of the SEC that such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
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<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Calabasas, State of
California, on February 14, 2000.
TEKELEC
By: /s/ Michael L. Margolis
-----------------------------------
Michael L. Margolis, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Jean-Claude Asscher
- ------------------------------------- Chairman of the Board February 14, 2000
Jean-Claude Asscher
/s/ Michael L. Margolis President, Chief Executive
- ------------------------------------- Officer and Director February 14, 2000
Michael L. Margolis
/s/ Robert V. Adams*
- ------------------------------------- Director February 14, 2000
Robert V. Adams
/s/ Daniel L. Brenner*
- ------------------------------------- Director February 14, 2000
Daniel L. Brenner
/s/ Howard Oringer
- ------------------------------------- Director February 14, 2000
Howard Oringer
*By /s/ Ronald W. Buckly
---------------------------------
Ronald W. Buckly
Attorney-in-Fact
</TABLE>
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<PAGE> 75
<TABLE>
<S> <C> <C>
/s/ Jon F. Rager
- ------------------------------------- Director, President and February 14, 2000
Jon F. Rager Chief Executive Officer
(Principal Executive
Officer)
/s/ Douglas Moxley
- ------------------------------------- Controller (Principal February 14, 2000
Douglas Moxley Financial Officer and
Principal Accounting
Officer)
</TABLE>
II-5
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
2.1 Purchase Agreement dated as of October 27, 1999 among the Registrant,
Deutsche Bank Securities Inc. and Warburg Dillon Read LLC (1)
4.1 Indenture dated as of November 2, 1999 between the Registrant and
Bankers Trust Company as Trustee, including form of the Registrant's
3.25% Convertible Subordinated Discount Notes due 2004 (1)
4.2 Registration Rights Agreement dated as of November 2, 1999 among the
Registrant, Deutsche Bank Securities Inc. and Warburg Dillon Read LLC
(1)
5.1 Opinion of Bryan Cave LLP
8.1 Tax Opinion of Bryan Cave LLP
12.1 Statement of Ratio of Earnings to Fixed Charges (1)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (1)
25.1 Statement regarding Eligibility of Trustee on Form T-1 (1)
</TABLE>
- ----------
(1) Previously filed.
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<PAGE> 1
Exhibit 5.1
February 14, 2000
Tekelec
26580 W. Agoura Road
Calabasas, California 91302
Re: Tekelec
Registration Statement on Form S-3
Ladies and Gentlemen:
We are acting as special counsel to Tekelec, a California
corporation (the "Company"), in connection with its registration statement on
Form S-3 (the "Registration Statement"), filed with the Securities and Exchange
Commission (the "Commission"), relating to resales of up to $135,000,000
aggregate principal amount at maturity of the Company's 3.25% Convertible
Subordinated Discount Notes due 2004 (the "Notes") and the 7,605,805 shares (as
such number may be adjusted) of Common Stock, without par value, of the Company
(the "Common Stock") issuable upon conversion of the Notes in accordance with
the Indenture between the Company and Bankers Trust Company, as trustee ("the
Trustee"). This opinion letter is furnished to you at your request to enable you
to fulfill the requirements of Item 601(b)(5) of Regulation S-K in connection
with the Registration Statement.
In connection herewith, we have examined and relied without
independent investigation as to matters of fact upon such certificates of public
officials, such statements and certificates of officers of the Company and
originals or copies certified to our satisfaction of the Registration Statement,
the Indenture, the Registration Rights Agreement, dated as of November 2, 1999,
between the Company and the initial purchasers named therein, the Restated
Articles of Incorporation and Bylaws of the Company, proceedings of the Board of
Directors of the Company and such other corporate records, documents,
certificates and instruments as we have deemed necessary or appropriate in order
to enable us to render the opinions expressed below. In rendering this opinion,
we have assumed the genuineness of all signatures on all documents examined by
us, the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic originals of all
documents submitted to us as certified or photocopies.
<PAGE> 2
Based upon the foregoing and in reliance thereon and subject to
the qualifications and limitations stated herein, we are of the opinion that:
(i) The Notes constitute valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms
subject to the qualification that the enforceability of the Company's
obligations thereunder may be limited by bankruptcy, fraudulent
conveyance, insolvency, reorganization, moratorium, and other similar
laws relating to or affecting creditor's rights generally and by general
equitable principles, including without limitation, concepts of
materially, reasonableness, public policy, and good faith and fair
dealing, and the possible unavailability of specific performance,
injunctive relief or other equitable remedies, regardless of whether
such principles or remedies are considered in a proceeding of law or in
equity.
(ii) The shares of Common Stock issuable upon conversion of the
Notes, when issued in accordance with the terms of the Indenture, will
be validly issued, fully paid and non-assessable.
This opinion is not rendered with respect to any laws other than
the laws of the State of New York, the general corporate laws of the State of
California and the federal laws of the United States.
We hereby consent to the filing of this opinion letter with the
Commission as Exhibit 5.1 to the Registration Statement. We also consent to the
reference to our firm under the heading "Legal Matters" in the Registration
Statement. In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933 or the rules and regulations of the Commission.
Very truly yours,
/s/ BRYAN CAVE LLP
<PAGE> 1
Exhibit 8.1
February 14, 2000
Tekelec
26580 W. Agoura Road
Calabasas, California 91302
Re: Tekelec
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Tekelec, a California corporation
(the "Company"), in connection with the filing of a Preliminary Prospectus (the
"Preliminary Prospectus") contained in the Company's Registration Statement
under the Securities Act of 1933 (Reg. No. 333-95649). The Preliminary
Prospectus relates to (1) $135,000,000 aggregate principal amount at maturity of
3.25% convertible subordinated discount notes due 2004 of the Company and (2)
the shares of common stock, without par value, of the Company issuable upon
conversion of the notes. Except as otherwise indicated herein, all capitalized
terms used in this letter have the same meaning assigned to them in the
Preliminary Prospectus.
In rendering our opinion, we have examined and relied upon
without independent investigation as to matters of fact the Preliminary
Prospectus and such other documents, certificates and instruments as we have
considered relevant for purposes of this opinion. We have assumed without
independent verification that the Preliminary Prospectus is accurate and
complete in all material respects, and our opinion is conditioned expressly on,
among other things, the accuracy as of the date hereof, and the continuing
accuracy, of all of such facts, information, covenants, statements and
representations through and as of the date of consummation of the filing. Any
material changes in the facts referred to, set forth or assumed herein or in the
Preliminary Prospectus may affect the conclusions stated herein.
In rendering our opinion, we have considered the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
existing or proposed Treasury Regulations promulgated thereunder (the
"Regulations"), administrative pronouncement, and judicial authority, as we have
considered relevant. It should be noted that the Code and such Regulations,
judicial decisions and administrative pronouncements are subject to change at
any time and, in some circumstances, with retroactive effect. A material change
in any of the authorities upon which our opinion is based could affect our
conclusions herein.
Based solely upon the foregoing and in reliance thereon and
subject to the exceptions, limitations and qualifications stated herein, we
confirm that the statements contained in the Preliminary Prospectus under the
caption "Material United States Federal Income Tax
<PAGE> 2
Considerations" insofar as such statements constitute matters of law or legal
conclusions, as qualified therein, are our opinion and that such statements
fairly describe the material federal income tax consequences of the offering of
the convertible subordinated discount notes and are true, correct and complete
in all material respects.
Except as expressly set forth above, we express no other opinion.
We consent to the reference to this firm in the Preliminary Prospectus under the
caption "Material United States Federal Income Tax Considerations" and to the
filing of this opinion as an exhibit to the Registration Statement. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933 or the
rules and regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ BRYAN CAVE LLP
Bryan Cave LLP
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement on Form S-3 (No. 333-95649) of our report dated February
2, 1999 relating to the financial statements and financial statement schedule,
which appears in Tekelec's Annual Report on Form 10-K for the year ended
December 31, 1998. We also consent to the references to us under the headings
"Experts" and "Selected Consolidated Financial Data" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
February 10, 2000
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 1 to the Registration Statement (Form S-3) and related Prospectus of Tekelec
for the registration of $135,000,000 of convertible subordinated notes and to
the incorporation by reference therein of our report dated February 23, 1999,
with respect to the financial statements of IEX Corporation at December 31, 1998
and for the three years in the period then ended, included in the Current Report
(Form 8-K) of Tekelec dated May 7, 1999, filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 10, 2000
