-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K519Z0w3YFulx7jEo7Mvi5ylDfwm0gRK/uMaWw/SgQcLotKLzNHbqnu/RkfM+gaG kY/3NZwpWQpl70Q9y/ODnw== 0000950138-97-000320.txt : 19970815 0000950138-97-000320.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950138-97-000320 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKELEC CENTRAL INDEX KEY: 0000790705 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 952746131 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15135 FILM NUMBER: 97662739 BUSINESS ADDRESS: STREET 1: 26580 W AGOURA RD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188805656 MAIL ADDRESS: STREET 1: 26580 W AGOURA RD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-15135 TEKELEC (Exact name of registrant as specified in its charter) CALIFORNIA (State or other jurisdiction of incorporation or organization) 95-2746131 (I.R.S. Employer Identification No.) 26580 W. AGOURA ROAD, CALABASAS, CALIFORNIA 91302 (Address and zip code of principal executive offices) (818) 880-5656 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 11, 1997, there were 25,564,952 shares of the registrant's common stock, without par value, outstanding (after giving effect to a two-for-one stock split of the registrant's common stock effective August 8, 1997; see Note I to Notes to Consolidated Financial Statements included herein). TEKELEC FORM 10-Q INDEX PAGE PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at June 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations for the three and six months ended June 30, 1997 and 1996 4 Consolidated Statements of Cash Flow for the six months ended June 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 SIGNATURES 21 2 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TEKELEC CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, 1997 1996 ------------ ------------ (thousands, except share data) ASSETS (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents ............................. $ 25,264 $ 17,211 Short-term investments, at fair value ................. 9,018 17,913 Accounts and notes receivable, less allowances of $413 and $368, respectively ........... 23,527 17,026 Inventories ........................................... 12,932 8,116 Amounts due from related parties ...................... 2,373 2,381 Prepaid expenses and other current assets ............. 3,598 1,747 ------------ ------------ Total current assets .............................. 76,712 64,394 Long-term investments, at fair value ....................... 11,066 9,120 Property and equipment, net ................................ 9,270 8,174 Other assets ............................................... 830 830 ------------ ------------ Total assets ...................................... $ 97,878 $ 82,518 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable ................................ $ 5,819 $ 5,631 Accrued expenses ...................................... 6,001 5,989 Accrued payroll and related expenses .................. 4,011 4,027 Deferred revenues ..................................... 10,472 3,778 Income taxes payable .................................. 1,158 1,342 ------------ ------------ Total current liabilities ......................... 27,461 20,767 ------------ ------------ Total liabilities ................................. 27,461 20,767 ------------ ------------ SHAREHOLDERS' EQUITY (NOTE I): Common stock, without par value, 100,000,000 shares authorized; 25,124,882 and 24,020,198 shares issued and outstanding, respectively ........................................ 60,386 57,049 Retained earnings ..................................... 8,877 3,879 Cumulative translation adjustment ..................... 1,154 823 ------------ ------------ Total shareholders' equity ........................ 70,417 61,751 ------------ ------------ Total liabilities and shareholders' equity ........ $ 97,878 $ 82,518 ============ ============
See notes to consolidated financial statements. 3 TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (thousands, except per share data) REVENUES: Sales to third parties ...................... $ 24,279 $ 15,898 $ 43,619 $ 27,033 Sales to related parties .................... 798 966 2,035 1,691 ------------ ------------ ------------ ------------ Total revenues .......................... 25,077 16,864 45,654 28,724 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Cost of goods sold .......................... 9,012 6,741 15,690 11,336 Research and development .................... 4,789 4,372 9,257 8,687 Selling, general and administrative ......... 7,914 7,302 15,481 14,170 ------------ ------------ ------------ ------------ Total costs and expenses ................ 21,715 18,415 40,428 34,193 ------------ ------------ ------------ ------------ Income (Loss) from operations .................... 3,362 (1,551) 5,226 (5,469) Other income (expense): Interest, net ............................... 513 417 1,029 840 Other, net .................................. (29) (17) (12) (62) ------------ ------------ ------------ ------------ Total other income ...................... 484 400 1,017 778 ------------ ------------ ------------ ------------ Income (Loss) before provision for income taxes .. 3,846 (1,151) 6,243 (4,691) Provision for income taxes .................. 476 261 1,245 689 ------------ ------------ ------------ ------------ NET INCOME (LOSS) ....................... $ 3,370 $ (1,412) $ 4,998 $ (5,380) ============ ============ ============ ============ EARNINGS (LOSS) PER SHARE (NOTE I): Primary ..................................... $ 0.12 $ (0.06) $ 0.18 $ (0.23) Fully diluted ............................... 0.12 (0.06) 0.18 (0.23) WEIGHTED AVERAGE NUMBER OF SHARES (NOTE I): Primary ..................................... 27,588 23,434 27,168 23,354 Fully diluted ............................... 28,092 23,434 27,960 23,354
See notes to consolidated financial statements. 4 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
Six Months Ended June 30, --------------------------- 1997 1996 ------------ ------------ (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) .......................................... $ 4,998 $ (5,380) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization .............................. 2,228 1,801 Changes in current assets and liabilities: Accounts and notes receivable ............................ (6,509) 6,654 Inventories .............................................. (4,784) (2,436) Amounts due from related parties ......................... 7 1,426 Prepaid expenses and other current assets ................ (1,836) (187) Trade accounts payable ................................... 186 (227) Accrued expenses ......................................... 1 (1,547) Accrued payroll and related expenses ..................... (26) (158) Deferred revenues ........................................ 6,694 807 Income taxes payable ..................................... (192) (391) ------------ ------------ Total adjustments ...................................... (4,231) 5,742 ------------ ------------ Net cash provided by operating activities ............. 767 362 ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from maturity of available-for-sale securities .... 15,000 -- Purchase of available-for-sale securities .................. (8,051) (18,089) Purchase of property and equipment ......................... (3,304) (3,113) Decrease in other assets ................................... 11 195 ------------ ------------ Net cash provided by (used in) investing activities .... 3,656 (21,007) ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings ........................ -- 245 Repayment of long-term debt ................................ -- (120) Repayment of other obligations ............................. -- (25) Proceeds from issuance of common stock ..................... 3,337 1,000 ------------ ------------ Net cash provided by financing activities .............. 3,337 1,100 ------------ ------------ Effect of exchange rate changes on cash ......................... 293 (538) ------------ ------------ Net change in cash and cash equivalents .................... 8,053 (20,083) Cash and cash equivalents at beginning of period ................ 17,211 43,609 ------------ ------------ Cash and cash equivalents at end of period ...................... $ 25,264 $ 23,526 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR Interest ................................................... $ -- $ 70 Income taxes ............................................... 1,396 1,107
See notes to consolidated financial statements. 5 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) A. BASIS OF PRESENTATION The consolidated financial statements are unaudited, other than the consolidated balance sheet at December 31, 1996, and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Management, necessary for a fair presentation of the Company's financial condition, operating results and cash flows for the interim periods. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year. Certain items shown in the prior financial statements have been reclassified to conform with the presentation of the current period. The Company operates under a thirteen-week calendar quarter. However, for financial statement presentation purposes, the reporting periods are referred to as ended on the last calendar day of the quarter. The accompanying financial statements for the three and six months ended June 30, 1997 and 1996 are for the thirteen and twenty-six weeks ended June 27, 1997 and June 28, 1996, respectively. Earnings per share are computed using the weighted average number of shares outstanding and dilutive common stock equivalents (options and warrants). These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1996 and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 6 B. STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement requires dual presentation of newly defined basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for fiscal years ending after December 15, 1997 and requires restatement of all prior period EPS data presented. Earlier application is not permitted. However, disclosure of pro forma EPS data computed using SFAS No. 128 in the notes to the financial statements is permitted in the periods prior to required adoption. The pro forma EPS data for the three and six months ended June 30, 1997 and 1996 computed using SFAS No. 128 is as follows (shares in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- EARNINGS (LOSS) PER SHARE: 1997 1996 1997 1996 ------- ------- ------ -------- Basic................................... $ 0.14 $(0.06) $ 0.20 $(0.23) Diluted................................. 0.12 (0.06) 0.18 (0.23) WEIGHTED AVERAGE NUMBER OF SHARES: Basic................................... 24,928 23,434 24,676 23,354 Diluted................................. 27,588 23,434 27,168 23,354 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the requirements of SFAS No. 130. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the requirements of SFAS No. 131. 7 C. FAIR VALUE OF INVESTMENTS The Company has short-term investments in corporate debt securities with original maturities of less than 90 days whose carrying amounts approximate their fair values because of their short maturities. These short-term investments are included in cash and cash equivalents, are classified as held-to-maturity securities and amounted to $11.8 million and $3.0 million at June 30, 1997 and December 31, 1996, respectively. At June 30, 1997, the Company also had investments classified as available-for-sale securities included in short-term and long-term investments, consisting of $20.1 million of United States Treasury Notes with maturities of up to two years. These available-for-sale securities are accounted for at their fair value, and unrealized gains and losses on these securities are reported as a separate component of shareholders' equity. At June 30, 1997, unrealized gains or losses on available-for-sale securities were not significant. 8 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) D. CERTAIN BALANCE SHEET ITEMS The components of inventories are: JUNE 30, December 31, 1997 1996 ------------ ------------ (thousands) Raw materials .................................... $ 2,861 $ 2,825 Work in process .................................. 2,792 1,869 Finished goods ................................... 7,279 3,422 ------------ ------------ $ 12,932 $ 8,116 ============ ============ Property and equipment consist of the following: Manufacturing and development equipment .......... $ 15,430 $ 13,520 Furniture and office equipment ................... 7,702 7,300 Demonstration equipment .......................... 3,925 4,055 Leasehold improvements ........................... 1,147 1,118 ------------ ------------ 28,204 25,993 Less, accumulated depreciation and amortization .. (18,934) (17,819) ------------ ------------ Property and equipment, net ...................... $ 9,270 $ 8,174 ============ ============ E. RELATED PARTY TRANSACTIONS Sales to related parties consist of, and amounts due from related parties are, the result of transactions between the Company and foreign affiliates controlled by the Company's Chairman of the Board. F. INCOME TAXES For the three-month and six-month periods ended June 30, 1997, the Company had tax provisions of $476,000 and $1,245,000, respectively, resulting in effective tax rates of 12% and 20%, respectively. The provisions for 1997 were primarily foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. Although the Company's pre-tax results for the three-month and six-month periods ended June 30, 1996 showed a loss, the Company had tax provisions of $261,000 and $689,000, respectively, which were principally foreign taxes on the income of the Company's Japanese subsidiary and reflected the Company's inability to currently recognize a benefit for its U.S. loss and credits carryforwards, which remain available to reduce future U.S. taxes. The Company anticipates that it has sufficient loss and credits carryforwards available to offset most of its expected U.S. taxes in 1997. 9 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) G. BORROWINGS The Company has a $10.0 million line of credit with a U.S. bank and lines of credit aggregating $3.1 million available to the Company's Japanese subsidiary from certain Japan-based banks. The Company's $10.0 million line of credit is collateralized by substantially all of the Company's assets, bears interest at, or in some cases below, the U.S. prime rate (8.5% at June 30, 1997), and expires June 30, 1998, if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests with which the Company is in compliance. There have been no borrowings under this credit facility. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $3.1 million with interest at the Japanese prime rate (1.625% at June 30, 1997) plus 0.125% per annum which expire between March 31, 1998 and August 5, 1998, if not renewed. There have been no borrowings under these lines of credit. H. MAJOR CUSTOMERS Sales to NYNEX amounted to 15% of revenues for the second quarter of 1997. Sales to GTE amounted to 21% of revenues for the second quarter of 1996, and sales to Nippon Telegraph & Telephone amounted to 10% of revenues for the second quarter of 1996. Sales to Nippon Telegraph & Telephone amounted to 11% and 12% of revenues for the first six months of 1997 and 1996, respectively. Sales to NYNEX amounted to 13% of revenues for the first six months of 1997 and sales to GTE amounted to 13% of revenues for the first six months of 1996. I. COMMON STOCK On July 24, 1997, the Company's Board of Directors approved a two-for-one stock split of the Company's common stock. The additional stock will be distributed on August 22, 1997 to shareholders of record on August 8, 1997. All references to numbers of shares and related prices, and per share amounts have been restated to reflect the stock split. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto included in Item 1 of this Quarterly Report and by the Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 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. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that certain statement of operations items bear to total revenues: Percentage of Revenues --------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Revenues ............................. 100.0% 100.0% 100.0% 100.0% Cost of goods sold ................... 35.9 40.0 34.4 39.5 -------- -------- -------- -------- Gross profit ......................... 64.1 60.0 65.6 60.5 -------- -------- -------- -------- Research and development ............. 19.1 25.9 20.3 30.2 Selling, general and administrative .. 31.6 43.3 33.9 49.3 -------- -------- -------- -------- Total operating expenses ............. 50.7 69.2 54.2 79.5 -------- -------- -------- -------- Income (Loss) from operations ........ 13.4 (9.2) 11.4 (19.0) Interest and other income, net ....... 1.9 2.4 2.2 2.7 -------- -------- -------- -------- Income(Loss) before provision for income taxes ...................... 15.3 (6.8) 13.6 (16.3) Provision for income taxes ........... 1.9 1.6 2.7 2.4 -------- -------- -------- -------- Net income (loss) .................... 13.4% (8.4)% 10.9% (18.7)% ======== ======== ======== ======== The following table sets forth, for the periods indicated, the revenues by principal product line as a percentage of total revenues: Percentage of Revenues ----------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Data network diagnostics ............ 17% 25% 18% 36% Intelligent network diagnostics ..... 28 33 32 30 Network switching ................... 55 42 50 34 -------- -------- -------- -------- Total ...................... 100% 100% 100% 100% ======== ======== ======== ======== 11 The following table sets forth, for the periods indicated, the revenues by geographic territories as a percentage of total revenues: Percentage of Revenues ----------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- North America ...................... 73% 64% 69% 60% Japan .............................. 13 18 18 22 Europe ............................. 5 8 5 9 Rest of the World .................. 9 10 8 9 -------- -------- -------- -------- Total ..................... 100% 100% 100% 100% ======== ======== ======== ======== THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1996 Revenues. The Company's revenues increased by $8.2 million, or 49%, during the second quarter of 1997 due to higher sales of network switching products and intelligent network diagnostics products. Revenues from switching products increased by $6.8 million, or 95%, in the second quarter of 1997 primarily due to an 86% increase in EAGLE STP unit sales as a result of increased market acceptance principally in the U.S. Additionally, EAGLE STP average selling price increased as a result of the Company's sales of larger systems in the Regional Bell Operating Company (RBOC) market. The Company expects that its switching product revenues will continue to grow both in dollars and as a percentage of revenues for the remainder of 1997 when compared to 1996. Revenues from intelligent network diagnostics products increased by $1.5 million, or 28%, due primarily to increased MGTS product sales in the U.S. Revenues from data network diagnostics products decreased by $100,000, or 2%. The Company has taken steps to expand its Chameleon products' reach into the network operator market including the planned introduction, in the second half of 1997, of software applications addressing specific needs of this market which could provide additional sales opportunities. Revenues in North America increased by $7.6 million, or 72%, primarily as a result of higher EAGLE STP and MGTS product sales. Sales in Japan increased by $281,000, or 9%, primarily due to higher Chameleon product sales, partially offset by unfavorable exchange rate fluctuations on foreign currency translations. Other international revenues increased by $292,000 or 9%. 12 The impact of exchange rate fluctuations on foreign currency translations decreased revenues by approximately $400,000, or 2%, and decreased net income by $26,000, or 1%, in the second quarter of 1997. The Company believes that its future revenue growth depends in large part upon a number of factors, including the continued market acceptance of the Company's products, particularly the EAGLE STP product and the successful introduction of new applications such as the Company's EAGLE STP/Local Number Portability feature. Gross Profit. Gross profit as a percentage of revenues increased from 60% in the second quarter of 1996 to 64% in the second quarter of 1997, primarily due to higher switching product margins and improved manufacturing efficiencies due to higher sales volumes. These factors were partially offset by a lower proportion of diagnostics product sales, which typically carry higher margins than switching products. Research and Development. Although research and development expenses increased by $417,000, or 10%, in the second quarter of 1997, such expenses decreased as a percentage of revenues from 26% in the second quarter of 1996 to 19% in the second quarter of 1997. The dollar increase was due to increased switching product expenses of approximately $800,000, partially offset by lower research and development spending for diagnostics products. This increase was primarily attributable to ongoing development expenses for the Company's local number portability feature on the EAGLE STP product and consisted principally of expenses incurred in connection with the hiring of additional personnel and contractors and higher depreciation expenses as a result of equipment acquisitions. Based on expected revenues and expense levels, the Company believes that research and development expenses will continue to be lower as a percentage of revenues for the remainder of 1997 when compared with 1996. Selling, General and Administrative Expenses. Although selling, general and administrative expenses increased by $612,000, or 8%, in the second quarter of 1997, such expenses decreased as a percentage of revenues from 43% in the second quarter of 1996 to 32% in the second quarter of 1997. The dollar increase was due primarily to the accrual of certain costs for performance-related award programs and increased support infrastructure costs to meet the requirements of the growing EAGLE installed base and higher sales levels. Based on expected revenues and expense levels, the Company believes that selling, general and administrative expenses will continue to be lower as a percentage of revenues for the remainder of 1997 when compared with 1996. Income Taxes. For the three-month period ended June 30, 1997, the Company had a tax provision of $476,000, resulting in an effective tax rate of 12%. The provision for 1997 was primarily foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. Although the Company's pre-tax results for the three-month period ended June 30, 1996 showed a loss, the Company had a tax provision of $261,000 for such period. This provision was principally foreign taxes on the income of the Company's Japanese subsidiary and reflected the Company's inability to currently recognize a benefit for its U.S. loss and credits carryforwards, which remain available to reduce future U.S. taxes. The Company anticipates that 13 it has sufficient loss and credits carryforwards available to offset most of its expected U.S. taxes in 1997. SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996 Revenues. The Company's revenues increased by $16.9 million, or 59%, during the first six months of 1997 due primarily to higher sales of network switching 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 switching products increased by $13.1 million, or 133%, primarily due to a 90% increase in EAGLE STP unit sales as a result of increased market acceptance primarily in the U.S. Additionally, EAGLE STP average selling price increased as a result of the Company's sales of larger systems in the Regional Bell Operating Company (RBOC) market. Revenues from intelligent network diagnostics products increased by $6.0 million, or 70%, primarily due to strong demand for the Company's MGTS products particularly in the domestic and Japanese wireless markets. Revenues from data network diagnostics products, which consisted primarily of sales to the research and development market, decreased by $2.2 million, or 22%, due primarily to lower worldwide sales in the first quarter of 1997 of the Company's Chameleon products. Revenues in North America increased by $14.9 million, or 89%, primarily as a result of higher EAGLE STP and MGTS product sales. Sales in Japan increased by $1.7 million, or 27%, due primarily to higher MGTS product sales, partially offset by unfavorable exchange rate fluctuations on foreign currency translations. Other international revenues increased by $320,000 or 6%. The impact of exchange rate fluctuations on foreign currency translations decreased revenues by $1.1 million, or 2%, and decreased the Company's net income by $102,000, or 2%, in the first six months of 1997. Gross Profit. Gross profit as a percentage of revenues increased from 61% in the first half of 1996 to 66% in the first half of 1997, primarily due to higher switching product margins and improved manufacturing efficiencies as a result of higher sales volumes. These factors were partially offset by a lower proportion of diagnostics product sales, which typically carry higher margins than switching products. In addition, switching product margins in the first half of 1996 were adversely impacted by certain non-recurring costs. Research and Development. Although research and development expenses increased overall by $570,000, or 7%, in the first six months of 1997, such expenses decreased as a 14 percentage of revenues from 30% in the first six months of 1996 to 20% in the first six months of 1997. The dollar increase in such expenses was primarily attributable to ongoing development expenses for the Company's local number portability solution on the EAGLE STP product and consisted principally of expenses incurred in connection with the hiring of additional personnel and contractors and higher depreciation expenses as a result of equipment acquisitions. This increase was partially offset by lower research and development spending for diagnostics products. Selling, General and Administrative Expenses. Although selling, general and administrative expenses increased by $1.3 million, or 9%, in the first six months of 1997, such expenses decreased as a percentage of revenues from 49% in the first six months of 1996 to 34% in the first six months of 1997. The dollar increase in such expenses was primarily due to increased support infrastructure costs to meet the requirements of the growing EAGLE installed base and higher sales levels, and the accrual of certain costs for performance-related award programs. Income Taxes. For the six-month period ended June 30, 1997, the Company had a tax provision of $1.2 million, resulting in an effective tax rate of 20%. The provision for 1997 was primarily foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. Although the Company's pre-tax results for the six-month period ended June 30, 1996 showed a loss, the Company had a tax provision of $689,000 for such period. This provision was primarily foreign taxes on the income of the Company's Japanese subsidiary and reflected the Company's inability to currently recognize a benefit for its U.S. loss and credits carryforwards, which remain available to reduce future U.S. taxes. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 1997, cash and cash equivalents increased by $8.1 million to $25.3 million, primarily due to a net transfer of approximately $6.9 million from short-term and long-term investments. In addition, financing activities provided $3.3 million, operating activities, including the effects of exchange rate changes on cash, provided $1.1 million while capital expenditures used $3.3 million. Accounts receivable, including amounts due from related parties, increased by 33% during the first six months of 1997 due primarily to higher sales levels and $6.7 million in accounts receivable billings for which revenue had not yet been recognized. These billings primarily represented shipments to customers for which revenue recognition is dependent upon customer acceptance, which had not yet occurred at June 30, 1997. Inventories increased by 59% during the first six months of 1997 primarily to meet customer shipments scheduled for the third quarter of 1997 and product requirements for customer trials. Deferred revenues increased by 177% primarily due to shipments to customers with extended acceptance periods. Capital expenditures amounted to $3.3 million during the first six months of 1997 and represented the planned addition of equipment principally for EAGLE research and development. 15 The net cash provided by financing activities in the first six months of 1997 amounted to $3.3 million which represented net proceeds from the issuance of Common Stock upon the exercise of stock options and warrants. The Company has a $10.0 million line of credit with a U.S. bank and lines of credit aggregating $3.1 million available to the Company's Japanese subsidiary from certain Japan-based banks. The Company's $10.0 million line of credit is collateralized by substantially all of the Company's assets, bears interest at, or in some cases below, the U.S. prime rate (8.5% at June 30, 1997), and expires June 30, 1998, if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance. There have been no borrowings under this credit facility. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $3.1 million with interest at the Japanese prime rate (1.625% at June 30, 1997) plus 0.125% per annum which expire between March 31, 1998 and August 5, 1998, if not renewed. There have been no borrowings under these lines of credit. Upon the expiration of the above-described credit facilities, the Company believes that, if necessary, it would be able to arrange for credit facilities on terms generally no less favorable than those described above. The Company believes that existing working capital, funds generated from operations, and its current bank lines of credit should be sufficient to satisfy anticipated operating requirements at least through 1997. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement requires dual presentation of newly defined basic and diluted earnings per share ("EPS") on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for fiscal years ending after December 15, 1997 and requires restatement of all prior period EPS data presented. Earlier application is not permitted. The Company has determined that in some periods the presentation of basic EPS data under SFAS No. 128 may differ significantly from previously reported EPS data as a result of the exclusion of dilutive common stock equivalents (options and warrants) in the basic EPS calculation. See Note B for further information and the pro forma impact on EPS data for the periods ending June 30, 1997 and 1996. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from 16 investments by, or distributions to, shareholders. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the requirements of SFAS No. 130. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management is currently evaluating the requirements of SFAS No. 131. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 The statements which are not actual reported financial results or historical facts contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve certain risks and uncertainties including, but not limited to, timing of significant orders and shipments, product mix, capital spending patterns of customers, competition and pricing, new product introductions by the Company or its competitors, carrier deployment of intelligent network services, the timing of research and development expenditures, regulatory changes, general economic conditions and other risks described in the Company's Annual Report on Form 10-K and in the Company's other Securities and Exchange Commission filings. 17 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 21, 1997, the Company held its 1997 Annual Meeting of Shareholders (the "Annual Meeting"). (b) At the Annual Meeting, the following persons were elected as directors of the Company. The number of votes cast for each director, as well as the number of votes withheld, are listed opposite each director's name. Name of Director Votes Cast for Director Votes Withheld - -------------------------------------- ------------------------ -------------- Robert V. Adams ........................ 10,152,417 160,298 Jean-Claude Asscher .................... 10,293,217 19,498 Daniel L. Brenner ...................... 10,292,431 20,284 Howard Oringer ......................... 10,274,481 38,234 Jon F. Rager ........................... 10,293,181 19,534 Allan J. Toomer ........................ 10,291,735 20,980 (c) At the Annual Meeting, the shareholders approved, with 5,792,383 votes cast in favor and 2,343,827 votes cast against, an amendment to the Company's 1994 Stock Option Plan increasing the aggregate number of shares of Common Stock authorized for issuance thereunder from 2,000,000 to 3,000,000. There were 10,016 abstentions and 2,166,489 broker nonvotes with respect to this matter. (d) At the Annual Meeting, with 10,297,105 votes cast in favor, the shareholders ratified the appointment of Coopers & Lybrand L.L.P. as independent accountants of the Company for the year ending December 31, 1997. 8,365 votes were cast against such ratification, and there were 7,245 abstentions with respect to this matter. 18 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Registrant 11.1 Statement of Computation of Earnings Per Share for the Three and Six Months Ended June 30, 1997 and 1996. 27.1 Financial Data Schedule (b) Reports No reports on Form 8-K were filed by the Company during the six months ended June 30, 1997. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKELEC August 14, 1997 /s/ Allan J. Toomer ---------------------------------------- Allan J. Toomer President (Duly authorized officer) /s/ Gilles C. Godin ---------------------------------------- Gilles C. Godin Chief Financial Officer and Vice President, Finance (Principal financial and chief accounting officer) 20 INDEX TO EXHIBITS Exhibit Number Description - -------------- ---------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Registrant 11.1 Statement of Computation of Earnings Per Share for the Three and Six Months Ended June 30, 1997 and 1996 27.1 Financial Data Schedule 21 EX-3.1 2 AMENDED/RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF TEKELEC I. The name of the corporation is Tekelec. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California General Corporation Law. III. The corporation is authorized to issue only one class of shares of stock, designated "Common Stock," and the total number of shares which this corporation is authorized to issue is one hundred million (100,000,000). Upon amendment of this Article III, each outstanding share of Common Stock is split up and converted into two (2) shares of Common Stock. IV. This corporation elects to be governed by all of the provisions of the General Corporation Law of 1977, as amended, not otherwise applicable to it under Chapter 23 thereof. V. (a) Limitations of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporation Law) for breach of duty to this corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by such Section 317, subject to the limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. (c) Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article V by the shareholders of this corporation shall not adversely affect any right or protection of a director or agent of this corporation existing at the time of such repeal or modification. EX-11.1 3 STATEMENT OF COMP EARNINGS PER SHARE EXHIBIT 11.1 TEKELEC STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended PRIMARY June 30, June 30, (thousands, except per share data) ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net income (loss) .......................................... $ 3,370 $ (1,412) $ 4,998 $ (5,380) ========== ========== ========== ========== Basis for computation of primary earnings per common and common equivalent share: Weighted average number of shares outstanding during period .................................. 24,928 23,434 24,676 23,354 Weighted average (incremental) common share equivalent after considering the effects of options exercised and canceled during the period and after assumed repurchase of treasury shares--treasury stock method ............................................... 2,660 -- 2,492 -- ---------- ---------- ---------- ---------- 27,588 23,434 27,168 23,354 ========== ========== ========== ========== Earnings (Loss) per share .................................. $ 0.12 $ (0.06) $ 0.18 $ (0.23) ========== ========== ========== ========== Three Months Ended Six Months Ended FULLY DILUTED June 30, June 30, (thousands, except per share data) ---------------------- ---------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net income (loss) .......................................... $ 3,370 $ (1,412) $ 4,998 $ (5,380) ========== ========== ========== ========== Basis for computation of fully diluted earnings per common and common equivalent share: Weighted average number of shares outstanding during period .................................. 24,928 23,434 24,676 23,354 Weighted average (incremental) common share equivalent after considering the effects of options exercised and canceled during the period and after assumed repurchase of treasury shares -- treasury stock method ............................................... 3,164 -- 3,284 -- ---------- ---------- ---------- ---------- 28,092 23,434 27,960 23,354 ========== ========== ========== ========== Earnings (Loss) per share .................................. $ 0.12 $ (0.06) $ 0.18 $ (0.23) ========== ========== ========== ==========
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 25,264 9,018 26,313 413 12,932 76,712 28,204 18,934 97,878 27,461 0 0 0 60,386 10,031 97,878 45,654 45,654 15,690 24,738 0 0 0 6,243 1,245 0 0 0 0 4,998 0.18 0.18
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