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Bryan Cave LLP
120 Broadway, Suite 300
Santa Monica, CA 90401-2386
Tel (310) 576-2100
Fax (310) 576-2200
www.bryancave.com |
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January 12, 2011
VIA EDGAR
Mr. Larry Spirgel
Assistant Director
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
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Re: |
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Tekelec
Definitive Proxy Statement
Filed April 7, 2010
File No. 000-15135 |
Dear Mr. Spirgel:
Tekelec (Tekelec or the Company) is in receipt of the letter dated December 20, 2010 (the
Comment Letter) of the staff of the Division of Corporation Finance of the Securities and
Exchange Commission (the Commission) regarding Tekelecs definitive proxy statement filed with
the Commission on April 7, 2010 (the Proxy Statement). This letter sets forth the Companys
response to the Comment Letter. The requested information is presented in the order of the
numbered comments in the Comment Letter. For your convenience, each response is preceded by an
italicized recitation of the corresponding comment set forth in the Comment Letter.
Compensation Discussion and Analysis, page 19
2009 Compensation Determinations, page 25
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In your response letter, please discuss to what extent your cash bonus and performance based
restricted stock unit programs reward past performance. We note that cash bonus awards are
determined in part by adjusted operating income and revenue and that performance based
restricted stock unit awards are determined by revenue. We further note statements in your
Form 10-K for the year ended December 31, 2009 regarding backlog. Specifically, on page 38 you
state your belief that orders turn to revenue within six to fifteen months. Going forward,
please address how the timing of your revenue recognition impacts the setting of performance
targets and potentially operates to reward past performance. |
Response: The Company respectfully advises the staff that cash bonus awards under its 2009
Executive Officer Bonus (the Bonus Plan) and awards of performance-based restricted stock units
(PRSUs) under its Amended and Restated 2003 Equity Compensation Plan are not designed to, and
they do not, reward past performance. As discussed in the Proxy Statement, the Board of
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Mr. Larry Spirgel
January 12, 2011
Page 2
Directors of the Company (the Board) and the Compensation Committee of the Board (the
Committee) determined the 2009 targets for adjusted operating income of $115,000,000, revenue of
$480,000,000 and orders of $480,000,000 based on the Companys internal operating plan. While the
internal operating plan takes into account the fact that revenue (and thus adjusted operating
income) is not immediately recognized under generally accepted accounting principles (GAAP) when
orders are received and that orders backlog exists at the start of the year, in setting the targets
and award levels, the Board and the Committee did not independently consider the timing of the
revenue recognition of the underlying orders. Instead, as disclosed in the Proxy Statement, the
Company focused on establishing targets based on the internal operating budget for which attainment
was not assured and which would require significant effort on the part of its named executive
officers.
As noted in the staffs comment, the Companys Annual Report on Form 10-K for the year ended
December 31, 2009 discloses that orders typically turn to revenue within six to fifteen months.
Once an order is received, the Company still has substantial performance obligations to fulfill in
earning the revenue associated with the order, including delivering the products and having them
operate in a manner acceptable to the customer, providing warranty support and, in many cases,
providing professional services. For this reason, under GAAP,
revenue recognition does not occur at the time of, or often even shortly following, the receipt of
an order.
Linking compensation to orders incentivizes the Companys named executive officers to support the
Companys efforts to win new business during the measurement period. Linking compensation to
revenue and, in the case of the Bonus Plan, adjusted operating income, incentivizes the Companys
named executive officers during the measurement period to execute on the Companys business
strategy, to convert orders into revenue and earnings and to continue to generate orders and
revenue. The incentivized performance, whether for purposes of the Bonus Plan or the PRSUs,
therefore occurs in the measurement period for which the executive officer is being incentivized.
In addition, as disclosed in the Proxy Statement, the Company selected multiple target measures
under the Bonus Plan to mitigate the risk of incenting adverse behaviors with respect to any one
measure. The Company believes that using revenues and adjusted operating income as performance
criteria helps discourage excessive risk-taking with respect to booking orders that the Company may
ultimately be unable to convert, whether in the measurement period or a future period, into revenue
and, thus, adjusted operating income. Likewise, the Companys equity compensation program was only
partially comprised of revenue-based PRSUs so that the program does not focus on any one
performance measure.
In future filings, the Company confirms that it will provide additional disclosure explaining how
the adjusted operating income, revenue and orders targets were selected, and how the timing of its
revenue recognition does or does not affect the setting of performance targets and does or does not
potentially operate to reward past performance.
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Mr. Larry Spirgel
January 12, 2011
Page 3
Sales Commission Plan, page 32
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Please discuss the material terms of Mr. Claudys sales commission plan, including the
percentage of sales number used to determine commissions, how the plan operates, and why you
determined that percentage level was appropriate. Disclose the extent to which he achieved his
sales commission target. |
Response: During 2009, Mr. Claudy, like the Companys other key sales professionals,
participated in the Companys 2009 Sales Compensation Policy, which the Company also refers to as
the Companys 2009 Sales Compensation Plan and the 2009 sales commission plan (referred to herein
as the 2009 sales commission plan). The objectives of the 2009 sales commission plan are to
reward outstanding field sales effort and to retain the highest performing sales professionals.
The level of compensation payable under the 2009 sales commission plan is based on the achievement
of assigned sales (i.e., orders) quotas or objectives.
Under the 2009 sales commission plan, at the beginning of 2009 the Company provided Mr. Claudy with
sales quotas and applicable commission rates. Because Mr. Claudy is responsible for overseeing the
Companys worldwide sales, Mr. Claudys total sales quota for 2009 equaled the Companys sales
target of $480,000,000, which was established based on the Companys internal operating plan.
Consistent with the Companys internal operating plan, Mr. Claudys total sales quota was comprised
of separate quotas of $337,400,000 for the Companys legacy products and $142,600,000 for its
emerging products.
The Company then established for 2009 a target sales commission of 255,000 euros, or $355,356 (such
dollar amount, and all other euro to dollar converted amounts in this response, have been converted
based on an average euro to dollar exchange rate of 1.393553 for 2009). The Company determined
that this target was appropriate for Mr. Claudy based on external market compensation data for
comparable positions and the Companys stated pay philosophy of targeting total cash compensation
between the 50th and 75th percentile of that market range. This target was
disclosed in the Companys grants of plan-based awards table for 2009 and was used to derive the
specific percentage of sales numbers that were applied to determine commissions, which are
discussed below.
To set Mr. Claudys commission rates, the Company first established a base commission rate of
0.05312500%. The Company used the base commission rate to establish separate commission rates for
Mr. Claudys legacy quota and his emerging quota. The Company set the legacy commission rate at
80% of the base commission rate (0.04250000%) and the emerging commission rate at 150% of the base
commission rate (0.07968750%). The different weights given to the legacy and emerging rates
reflect the Companys focus on incentivizing Mr. Claudy to focus on growing sales of the Companys
emerging products. If Mr. Claudy exceeded 100% of his total target annual quota through a
combination of product group sales (i.e., legacy or emerging products), his commission rate on
future sales would have increased by 50% over base rates. If he exceeded 100% in both
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Mr. Larry Spirgel
January 12, 2011
Page 4
product
groups, his commission rate on future sales in each product group would have
increased by 100% over base rates. The plan also provided for Mr. Claudy to earn (i) adjusted commissions for
certain legacy product sales of over $250,000 to new customers and of over $500,000 to existing
customers and (ii) commissions on certain pre-2007 sales to the extent that the Company received
the revenue from those sales in 2009.
During
2009, the Companys commissionable sales of legacy products totaled $343.4 million, representing
approximately 101.8% of Mr. Claudys quota, and sales of emerging products totaled $87.6 million,
representing approximately 61.4% of Mr. Claudys quota. Based on the Companys 2009 performance,
Mr. Claudy earned sales commissions of 158,795 euros, or $221,289, related to sales of legacy
products, 69,802 euros, or $97,273, related to sales of emerging products, and 14,802 euros, or
$20,627, related to pre-2007 sales. For 2009, Mr. Claudy therefore earned a total sales commission
of 243,399 euros, or $339,189, and achieved approximately 95.5% of his target sales commission.
The Company has determined that in the summary compensation table in the Proxy Statement it
reported Mr. Claudys 2009 target rather than earned sales
commission, resulting in a $16,167
overstatement in the amount of the earned commission. Given that the earned commission was
overstated by only approximately 4.8%, that total compensation was, as a result, overstated in the
summary compensation table by only approximately 1.1%, and that the overstatement did not impact
the determination of the Companys named executive officers, the Company respectfully submits that
the overstatement is not material to the Proxy Statement or the Companys Form 10-K for the year
ended December 31, 2009. The Company plans to reflect the corrected amount of the sales commission
earned by Mr. Claudy for 2009 in the Companys proxy statement for its 2011 annual meeting of
shareholders.
In future filings, to the extent required, the Company will disclose in its proxy statements the
material terms of any applicable sales compensation plans in place during the year, including the
items highlighted by the staff in its comment.
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Please explain in your response letter why you reported Mr. Claudys sales commission target
in the non-equity incentive plan awards column of the grants of plan-based awards table, but
reported the sales commissions he earned in the salary column of the summary compensation
table. It appears that Mr. Claudys sales commissions earned should be reported as non-equity
incentive plan compensation in the summary compensation table. Please advise and tell us how
you intend to report his sales commissions in future filings. |
Response: The Company respectfully advises the staff that the Company reported Mr.
Claudys sales commission target in the non-equity incentive plan awards column of the grants of
plan-based awards table based on its determination that Mr. Claudys 2009 sales commission plan was
a non-equity incentive plan as defined in Item 402(a)(6)(iii) of Regulation S-K. The sales
commission plan was intended to serve as an incentive for performance to occur over a specified
period but did not
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Mr. Larry Spirgel
January 12, 2011
Page 5
fall within the definition of an equity incentive plan as set forth in Item 402(a)(6)(iii). The
Company reported the sales commissions earned by Mr. Claudy under the 2009 sales commission plan in
the salary column of the summary compensation table based on the guidance set forth in Question 15
of the Questions and Answers, dated May 1997, of the ABA Technical Session Between the SEC Staff
and the Joint Committee on Employee Benefits. In response to the staffs comment and based on Item
402(c)(2)(vii) of Regulation S-K, however, the Company intends in future filings to report
commissions earned under Mr. Claudys sales commission plans in the non-equity incentive plan
compensation column of the summary compensation table rather than in the salary column of the
table.
* * * * *
As requested in the Comment Letter, the Company acknowledges that:
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the Company is responsible for the adequacy and accuracy of the disclosure in the
filing; |
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staff comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the filing; and |
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the Company may not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United States. |
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Mr. Larry Spirgel
January 12, 2011
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Please feel free to contact the undersigned at (310) 576-2154 if you have any further questions.
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Sincerely yours,
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/s/ Katherine F. Ashton
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Katherine F. Ashton |
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cc: |
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Krish A. Prabhu, Tekelec
Gregory S. Rush, Tekelec
Stuart H. Kupinsky, Esq., Tekelec |
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