-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, G2Wk4CMsj34ueh0lY5uzNywSi0I3lL6P1Xasn1bonJv4So+E86uTyzxb641uwZ6b BtReQVdmOv0IjmfujmEHNQ== 0000950148-95-000161.txt : 19950414 0000950148-95-000161.hdr.sgml : 19950414 ACCESSION NUMBER: 0000950148-95-000161 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19950412 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: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 033-58551 FILM NUMBER: 95528254 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 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1995 REGISTRATION NO. 33- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ 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 OF OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
26580 WEST AGOURA ROAD CALABASAS, CALIFORNIA 91302 (818) 880-5656 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ PHILIP J. ALFORD PRESIDENT TEKELEC 26580 WEST AGOURA ROAD CALABASAS, CALIFORNIA 91302 (818) 880-5656 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO: RONALD W. BUCKLY, ESQ. JEFFREY D. SAPER, ESQ. KATHERINE F. ASHTON, ESQ. HARRY K. PLANT, ESQ. COUDERT BROTHERS RANA B. DIORIO, ESQ. 1055 WEST SEVENTH STREET, 20TH FLOOR WILSON, SONSINI, GOODRICH & ROSATI LOS ANGELES, CALIFORNIA 90017 PROFESSIONAL CORPORATION (213) 688-9088 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94304 (415) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and the Underwriting Agreement is executed. ------------------------ 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. / / ------------------------ CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF MAXIMUM AGGREGATE SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------- Common Stock, without par value.............. 2,012,500 $19.375 $38,992,188 $13,446 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Includes 262,500 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the amount of the registration fee based on the average of the high and low reported sale prices of a share of Registrant's Common Stock as reported by the Nasdaq National Market on April 7, 1995 in accordance with Rule 457 of the Securities Act of 1933. ------------------------ 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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION APRIL 12, 1995 1,750,000 SHARES [LOGO] COMMON STOCK ------------------ All of the shares of Common Stock offered hereby are being sold by Tekelec ("Tekelec" or the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "TKLC." On April 10, 1995, the last sale price for the Common Stock as reported was $21.75 per share. See "Price Range of Common Stock." ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS." ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------------ Per Share.............................. $ $ $ - ------------------------------------------------------------------------------------------------------ Total(3)............................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information relating to indemnification of the Underwriters. (2) Before deducting expenses of the offering estimated at $400,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 262,500 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May , 1995. ALEX. BROWN & SONS INCORPORATED VOLPE, WELTY & COMPANY CRUTTENDEN ROTH INCORPORATED THE DATE OF THIS PROSPECTUS IS MAY , 1995. 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be available for inspection and copying at the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Company's Common Stock is traded on the Nasdaq National Market. Reports, proxy statements and other information concerning the Company may also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-3, including amendments thereto, under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission, each such statement being qualified in all respects by such reference. The Registration Statement may be inspected without charge at the offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office upon the payment of the fees prescribed by the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (1) the Company's Annual Report on Form 10-K for the year ended December 31, 1994; (2) the Company's Amendment No. 1 on Form 10-K/A filed April 12, 1995, amending the Company's Annual Report on Form 10-K for the year ended December 31, 1994; (3) the Company's Report by Issuer of Securities Quoted on the Nasdaq National Market on Form 10-C filed March 23, 1995; and (4) the Company's Registration Statement on Form 8-A filed November 12, 1986, registering the Company's Common Stock under Section 12(g) of the Exchange Act. Reference is also made to the "Description of Capital Stock" in this Prospectus for a current description of the Company's Common Stock. All documents filed by the Company with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the termination of the offering of the Common Stock registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated herein by reference shall be deemed modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the documents incorporated by reference into this Prospectus (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents). Requests for such copies should be directed to the Vice President, Finance and Chief Financial Officer, Tekelec, 26580 West Agoura Road, Calabasas, California 91302. Telephone: (818) 880-5656. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING." 2 4 TEKELEC'S ADVANCED DIAGNOSTIC AND SWITCHING SYSTEMS ENHANCE THE QUALITY AND PERFORMANCE OF COMMUNICATIONS NETWORKS (PRODUCT ILLUSTRATIONS -- SEE EDGAR APPENDIX) The EAGLE STP is designed to enable operators of wireline and wireless networks to offer enhanced services such as caller ID, personal number calling and wireless calling services. The MGTS/GSMT System is used to simulate and monitor SS7, AIN and PCS networks and services. EAGLE and MGTS/GSMT are key elements to enable the SS7-based Advanced Intelligent Network Architecture. Equipment manufacturers and network operators use the Chameleon Open's powerful real-time analysis and simulation tools to reduce the time and expense to develop and monitor new communication products and services. The Chameleon Opens support simultaneous testing of LAN, WAN and broadbased network and protocols, including AIM, Frame Relay, ISDN and Ethernet. Chameleon, EAGLE and the Tekelec logo are registered trademarks of Tekelec. This Prospectus also includes the trademarks of other companies. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including notes thereto, appearing elsewhere in this Prospectus or incorporated herein by reference. A glossary describing terms that appear in this Prospectus can be found on pages 40 and 41. THE COMPANY Tekelec designs, manufactures and markets advanced diagnostic systems and innovative network switching solutions for the global communications marketplace. The Company is a leading supplier of diagnostic systems used in the design, installation and maintenance of a broad range of communications equipment and networks. Tekelec's EAGLE STP switching platform enables operators of wireline and wireless networks to deliver Advanced Intelligent Network (AIN) services such as Caller ID and personal number calling as well as digital wireless services such as PCS and GSM. The Company has established relationships with AT&T and Stratus Computer, Inc. (Stratus) to complement its marketing of the EAGLE STP and believes that these relationships demonstrate recognition of the EAGLE STP's technical advantages. The Company's core competitive strength is the breadth of its expertise in communications technologies, gained over 15 years primarily as a supplier of high-end multiprotocol diagnostic systems. The Company has leveraged this expertise to target emerging, high-growth communications markets for services such as SS7-based AIN, digital wireless and ATM-based broadband multimedia. These services are being deployed by network operators seeking to differentiate themselves in response to increasing competition. The Company has developed products that utilize open distributed architectures to facilitate the development of new applications and to support emerging protocols and services. The Company's diagnostic products address the proliferation of standards and protocols and the increasing complexity of communications equipment and networks. The Chameleon Open enables simultaneous full bandwidth testing of broadband, LAN and WAN equipment and networks and supports a wide range of protocols. The MGTS/GSMT system is used to test equipment and networks for SS7, AIN, GSM and emerging PCS services. The Company sells its diagnostic products worldwide through a direct sales force and a network of international distributors to long distance carriers, telephone operating companies, communications equipment manufacturers, wireless and cellular network operators and government agencies. Major customers include Nippon Telegraph & Telephone, AT&T, GTE Corporation, Motorola, Inc., MCI Telecommunications Corporation, BellSouth Corporation, NEC America, Inc., Siemens AG and Sprint Corporation. Tekelec has become a leading supplier of STP switching systems to U.S. independent telephone companies and cellular carriers since introducing the EAGLE STP in 1992. Tekelec's EAGLE STP is a high-capacity, fault-tolerant packet-switching platform designed to meet the complex requirements of SS7 switching. The EAGLE STP is sold worldwide by a direct sales force and through distribution and marketing relationships with AT&T and Stratus. As of December 31, 1994, 38 pairs of EAGLE STPs had been sold to customers including McCaw Cellular Communications, Inc., SBC Communications, Inc., Ameritech Corporation, Telstra and GTE Intelligent Network Services, Inc. The Company experienced significant losses in 1992 and 1993, but returned to profitability in 1994 as a result of actions taken in connection with its December 1993 restructuring and increased market acceptance of its products, particularly the EAGLE STP and the Chameleon Open. The Company was incorporated in California in 1971 and entered the communications diagnostic business in 1979 and the network switching business in 1992. Unless the context otherwise requires, the terms "Tekelec" and the "Company" are used herein to refer to Tekelec and its wholly owned subsidiaries. The Company's executive offices are located at 26580 West Agoura Road, Calabasas, California 91302, and its telephone number is (818) 880-5656. 3 6 RISK FACTORS The Common Stock offered hereby involves a high degree of risk. See "Risk Factors." THE OFFERING Common Stock offered hereby...................... 1,750,000 shares Common Stock to be outstanding after the offering....................................... 11,072,682 shares(1) Use of proceeds.................................. For general corporate purposes, including working capital. Nasdaq National Market symbol.................... TKLC
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- 1990 1991 1992 1993 1994 -------- -------- -------- --------- -------- (THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues........................ $ 42,148 $ 52,449 $ 58,090 $ 46,856 $ 61,189 Income (Loss) before provision for income taxes............. 8,228 6,740 (6,693) (17,101) 5,711 Net income (loss)............... 5,040 4,581 (8,296) (18,543) 4,460 Earnings (Loss) per share(2).... $ 0.61 $ 0.53 $ (1.01) $ (2.23) $ 0.47 Weighted average number of shares outstanding(2)........ 8,244 8,576 8,178 8,314 9,550
DECEMBER 31, 1994 ---------------------------- ACTUAL AS ADJUSTED(3) -------- -------------- (THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and restricted cash.................... $ 7,653 $ 43,127 Working capital............................................... 13,466 48,940 Total assets.................................................. 34,409 69,883 Long-term obligations......................................... 654 654 Total shareholders' equity.................................... 18,720 54,194
- ------------------ (1) Based on shares outstanding as of March 31, 1995. Excludes (i) 2,370,280 shares subject to options outstanding under the Company's Amended and Restated 1984 Stock Option Plan, 1994 Stock Option Plan and Amended and Restated Non-Employee Director Equity Incentive Plan as of March 31, 1995 and (ii) 50,000 shares issuable upon exercise of warrants outstanding as of such date. (2) Primary and fully diluted per share amounts and primary and fully diluted weighted average shares outstanding are the same for all periods presented, except that in the year ended December 31, 1994, fully diluted net income per share and fully diluted weighted average number of shares outstanding were $0.43 and 10,360,000, respectively. (3) Adjusted to give effect to the estimated net proceeds of this offering based upon an assumed public offering price of $21.75 per share. See "Use of Proceeds." ------------------------ Except as otherwise specified, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. All share and per share data in this Prospectus have been adjusted to reflect a two-for-one stock split of the Company's Common Stock effected in March 1995. 4 7 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Recent History of Losses. The Company experienced declining revenues in 1993 and incurred substantial losses in 1992 and 1993 of $8.3 million and $18.5 million, respectively. Such losses were primarily as a result of delayed product introductions which adversely affected revenues and significant research and development expenditures, particularly for the development of its EAGLE STP. Although the Company returned to profitability in 1994 as a result of actions taken in connection with its December 1993 restructuring and increased market acceptance of its products, there can be no assurance that the Company's profitability will continue on a quarterly or annual basis in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Fluctuations in Quarterly Results; Seasonality; Lengthy Sales Cycle. The Company has experienced and may in the future experience significant fluctuations in revenues and operating results from quarter to quarter as a result of a number of factors, including the timing of significant orders and shipments, product mix, delays in shipment, 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, expansion of marketing and support operations, changes in material costs, production or quality problems, currency fluctuations, disruptions in sources of supply, regulatory changes and general economic conditions. The Company expects that sales of its EAGLE STP, which has a significantly higher average selling price and generally lower gross margin than the Company's diagnostic products, will account for an increasing percentage of the Company's revenues. Consequently, the addition or cancellation of EAGLE STP sales may exacerbate quarterly fluctuations in revenues and operating results. In addition, a large portion of the Company's product shipments in each quarter occurs at or near the end of each quarter. Due to the relatively fixed nature of many of the Company's costs, including personnel and facilities costs, a shortfall in the net revenues in any quarter would have a proportionately greater impact on the Company's results of operations for that quarter. The Company typically experiences lower sales and order levels in the first quarter when compared with the preceding fourth quarter due primarily to the capital spending patterns of its customers, and the Company believes that this pattern will continue in the first quarter of 1995. To a lesser extent, the Company's international sales are also subject to seasonal fluctuations. The Company expects these seasonal patterns to continue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results" and Note O to Consolidated Financial Statements. Orders for the EAGLE STP have generally involved lengthy sales cycles, making it difficult to predict the precise quarter in which sales will occur. The EAGLE STP sales cycle typically varies in length based on a number of factors including customer network engineering and installation requirements and the relative size of the customer's network. The Company's product shipments to a single customer can represent a significant portion of a quarter's revenues, and delays in the timing of such shipments could have a material adverse effect on the Company's business and operating results. Competition. The Company's primary markets are intensely competitive and are subject to rapid technological change, evolving industry standards and regulatory developments. The Company's existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, larger installed customer bases and longer-standing relationships with customers than the Company. The Company's principal competitor in the network diagnostic products market is Hewlett-Packard Company (Hewlett-Packard). The Company's principal competitors in the network 5 8 switching products market include major communications equipment suppliers such as Northern Telecom Limited, DSC Communications Corporation (DSC), Ericsson S.A. and Alcatel. The Company expects competition to increase in the future from existing competitors and from other companies that may enter the Company's existing or future markets with solutions which may be less costly or provide higher performance or additional features. Certain of the Company's customers in the network diagnostic market also manufacture switches that compete with the EAGLE STP. Increasing competition in the switching market may cause these customers to reduce their purchases of the Company's diagnostic products. The Company believes that its ability to compete successfully depends on several factors, both within and outside of its control, including the price, quality, reliability and performance of the Company's and its competitors' products, the timing and success of new product introductions or product enhancements by the Company and its competitors, quality of customer service and support, the emergence of new industry standards, the development of technical innovations, the attraction and retention of qualified personnel, regulatory changes and general market and economic conditions. Increasing competition could materially and adversely affect the Company's results of operations through price reductions and loss of market share. There can be no assurance that the Company will be able to compete successfully in the future. See "Business -- Competition." Rapid Technological Change; New Product Development. The markets for the Company's diagnostic and switching products are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions and enhancements. Sales of diagnostic products such as those offered by the Company depend in part on the continuing development and deployment of emerging standards and new services based on such standards. The Company's success will depend to a significant extent upon its ability to enhance its existing products and to develop and introduce innovative new products that gain market acceptance. In recent years, sales of the Company's diagnostic products were adversely affected in part by the Company's failure to introduce new products or enhancements in a timely manner, particularly enhancements for its MGTS signalling product and a Frame Relay application for its Chameleon product. In order to respond to evolving standards and to remain competitive, the Company intends to continue to make substantial investments in new product and technology development. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or enhancing its existing products on a timely or cost-effective basis, or that products or technologies developed by others will not render the Company's products noncompetitive or obsolete. Moreover, the Company may encounter technical problems in connection with its product development that could result in the delayed introduction of new products or product enhancements. Failure to develop or introduce on a timely basis new products or product enhancements that achieve market acceptance would materially and adversely affect the Company's business, operating results and financial condition. Products as complex as those offered by the Company may contain undetected errors when first introduced or as new versions are released. Such errors have occurred in the past. While the Company's products have not experienced any significant errors, such errors, particularly those that result in a failure of the Company's switching products, could have a material adverse effect on the Company's customer relationships, business and operating results. There can be no assurance that, despite thorough testing by the Company and by its customers, errors will not be found in the Company's products. See "Business -- Product Development." Relationship with AT&T. The Company believes that its ability to compete successfully in the switching market depends in part on distribution and marketing relationships with leading communications equipment suppliers. In September 1994, the Company entered into a non-exclusive distribution agreement with AT&T for the EAGLE STP. The Company believes its relationship with AT&T enhances its market presence and its ability to access leading telephone companies. The Company expects that AT&T's purchases under the distribution agreement will represent a significant percentage of the Company's switching product revenues in 1995. In addition, the Company 6 9 has sold EAGLE STPs to purchasers affiliated with AT&T. The Company's agreement with AT&T can be terminated by either party at any time for any reason and does not impose any minimum purchase requirements on AT&T. Consequently, there can be no assurance that AT&T or its affiliates will continue to place orders with the Company or that the Company's relationship with AT&T will continue for an extended period of time or will be of continuing value to the Company. Under the distribution agreement, AT&T is not precluded from developing or selling products that are competitive with the Company's products, and such competition could materially and adversely affect the Company's business and operating results. If the relationship with AT&T were to terminate, there can be no assurance that the Company could establish a similar relationship with another company. See "Business -- Sales, Marketing and Support." Evolving Market for Advanced Intelligence Network (AIN) Services. A substantial portion of the Company's revenues are derived from the sale of diagnostic systems and switching systems that enable network operators to offer AIN services. Although several network operators offer or have announced plans to offer AIN services, there can be no assurance that network operators will be able to introduce these services successfully, that such services will gain widespread market acceptance or that network operators will use the Company's products in the deployment of these services. In addition, the timing of the implementation of AIN services by network operators may be affected by the need to obtain necessary regulatory approvals and other factors. Delays in the introduction of AIN services, failure of these services to gain widespread market acceptance or the decision of network operators not to use the Company's products in the deployment of these services would materially and adversely affect the Company's business, operating results and financial condition. Compliance with Regulations and Evolving Industry Standards. In order to gain broader market acceptance, the Company's products must meet a significant number of regulations and standards. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories as well as standards established by Bell Communications Research ("Bellcore"). Internationally, the Company's products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the International Telephone and Telegraph Consultative Committee (CCITT). In addition, standards for new services such as ATM and PCS are still evolving. As these standards evolve, the Company will be required to modify its products or develop and support new versions of its products. The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving industry standards could delay introduction of the Company's products, which could have a material adverse effect on the Company's business and operating results. In order to penetrate the portion of the public carrier market dominated by the Regional Bell Operating Companies (RBOCs), it is important that ongoing technical audits of the EAGLE STP be conducted by Bellcore to help the Company ensure interoperability with the operations, administration, maintenance and provisioning systems used by the RBOCs to manage their networks. Bellcore is currently in the process of conducting its initial technical audit of the EAGLE STP. See "Business -- Sales, Marketing and Support." Failure or delay in obtaining favorable technical audit results could have a material adverse effect on the Company's ability to sell products to this large segment 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 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 the Company's products. 7 10 Risks Associated with International Business. The Company sells its products worldwide through its direct sales force, distributors and wholly owned subsidiaries in Japan and Canada. International sales accounted for 43%, 51% and 43% of the Company's revenues in 1992, 1993 and 1994, respectively. The Company's sales through its Japanese and Canadian subsidiaries are denominated in local currencies while other international sales are U.S. dollar-denominated. The Company expects that international sales will continue to account for a significant portion of its revenues in future periods. 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. Additionally, exchange rate fluctuations on foreign currency transactions and translations arising from international operations may contribute to fluctuations in the Company's business and operating results. Fluctuations in exchange rates could also affect demand for the Company's products. If, for any reason, exchange or price controls or other restrictions in foreign countries are imposed, the Company's business and operating results could be materially adversely affected. In addition, any inability to obtain local regulatory approvals in foreign markets on a timely basis could have a material adverse effect on the Company's business or operating results. Foreign communications networks are in most cases owned or strictly regulated by government. Access to such 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. There can be no assurance that the Company will be able to successfully penetrate these markets, particularly for its switching products. Dependence on Key Suppliers. Certain key components used in the Company's products, such as certain microprocessors, video displays and power supplies, are currently being purchased from sole sources, and the Company does not have any long-term supply agreements to ensure uninterrupted supply of these components. The inability to obtain sufficient sole or limited source components as required, or to develop alternative sources if and as required, could result in delays or reductions in product shipments which could materially and adversely affect the Company's operating results and damage customer relationships. See "Business -- Manufacturing." Dependence on Key Personnel. The Company's success depends to a significant extent upon the continuing contributions of its key management, technical, sales and marketing and other key personnel. The Company does not have employment agreements or other arrangements with such individuals which would prevent them from leaving the Company. The Company's future success also depends upon its ability to attract and retain highly skilled personnel. Competition for such employees is intense. The loss of any current key employees or the inability to attract and retain additional key personnel could have a material adverse effect on the Company's business and operating results. Limited Protection of Proprietary Technology. The Company depends in part upon its proprietary technology and know-how to differentiate its products from those of its competitors. The Company does not have any patents and relies upon a combination of trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company generally enters into confidentiality and invention assignment agreements with its employees and non-disclosure and confidentiality agreements with its suppliers, distributors and appropriate customers, among others, and limits access to and disclosure of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's proprietary technology without authorization. Accordingly, there can be no assurance that such laws and contractual agreements will prove sufficient to deter misappropriation of the Company's technology or independent third-party development of similar technologies. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the 8 11 same extent as do the laws of the United States and thus make the possibility of misappropriation of the Company's technology and products more likely. Risk of Third Party Claims of Infringement. 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 the Company. There are no currently pending material claims that the Company's products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, there can be no assurance that third parties will not assert infringement claims against the Company, that any such assertion of infringement will not result in litigation, or that the Company would prevail in such litigation or be able to license any valid and infringed patents of third parties on commercially reasonable terms. Furthermore, litigation, regardless of its outcome, could result in substantial cost to and diversion of effort by the Company. Any infringement claims or litigation against the Company could materially and adversely affect the Company's business, results of operations and financial condition. Control by Tekelec-Airtronic and Its Affiliates. Upon completion of this offering, Tekelec-Airtronic, S.A. (Tekelec-Airtronic) and Jean-Claude Asscher, a director of the Company, will own an aggregate of 9.9% of the Company's outstanding shares. Mr. Asscher is the President and controlling shareholder of Tekelec-Airtronic, a France-based electronics company which, together with certain of its subsidiaries, acts as European distributors for the Company. In addition, upon completion of this offering, Edouard Givel, through Natinco, S.A. (Natinco), a Luxembourg investment company which he controls and which is a minority shareholder of Tekelec-Airtronic, will own 25.0% of the Company's outstanding shares. Due to Mr. Asscher's relationship with Mr. Givel and his role as an advisor to Natinco, Mr. Asscher may be deemed to share with Mr. Givel the beneficial ownership of the shares of the Company's Common Stock held by Natinco. Sales of the Company's products and services to Tekelec-Airtronic and its subsidiaries accounted for approximately 6.7%, 8.5% and 6.2% of the Company's net revenues for 1992, 1993 and 1994, respectively. The Company expects that Tekelec-Airtronic and its subsidiaries will continue to act as European distributors for the Company. In the past, the Company has purchased certain components from Tekelec-Airtronic and its subsidiaries and expects that it will continue to do so in the future. Mr. Asscher, Tekelec-Airtronic and Mr. Givel may be subject to potential conflicts of interest with respect to future transactions with Tekelec. There can be no assurance that such conflicts will be resolved in the best interests of the Company. Although Tekelec-Airtronic, Mr. Asscher and Mr. Givel will not have majority control of the Company, if they act together they will constitute the largest shareholder of the Company, controlling approximately 34.9% of the outstanding shares upon completion of this offering, and continue to have the power to elect a significant number of the Company's Board of Directors and to exert significant influence over the Company's business and affairs and over the outcome of actions requiring shareholder approval. See "Common Stock Ownership of Principal Shareholders and Management." Volatility of Stock Price. The Common Stock is currently trading at or near its record high, and has experienced significant price and volume fluctuations. The market price of the Company's Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in the Company's operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products or enhancements by the Company or its competitors, delays in new product introductions or enhancements, developments in the Company's relationships with its customers, strategic partners or suppliers, general conditions in the communications industries, changes in investment strategy by significant shareholders and other events or factors, which may be unrelated to the Company. There can be no assurance that the market price of the Company's Common Stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's operating performance. 9 12 Shares Eligible for Future Sale. Sales of substantial amounts of Common Stock in the public market after this offering could adversely affect prevailing market prices for the Company's Common Stock. The executive officers and certain directors of the Company owning an aggregate of 416,146 shares (including options and warrants to purchase an aggregate of 268,318 shares, which are exercisable or become exercisable within 60 days after March 31, 1995) and certain shareholders of the Company owning an aggregate of 3,868,520 shares (including options to purchase an aggregate of 20,000 shares which are exercisable or become exercisable within 60 days after March 31, 1995) have agreed not to sell or transfer any shares owned by them for a period of 90 and 180 days, respectively, after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. Subject to such restrictions and the resale limitations of Rule 144 under the Securities Act, all of the outstanding shares of the Company's Common Stock will be eligible for sale. Securities and Exchange Commission Inquiry. The Commission has issued a formal order for an investigation relating to certain trading in the securities of the Company. The formal order states that the Commission staff has information tending to show that certain individuals and entities may have traded stock of the Company while in possession of material non-public information and/or may have disclosed material non-public information to others in breach of their fiduciary duties or other relationships of trust and confidence, which allegations, if true, would result in possible violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act. In connection with this investigation, the Commission has stated that its inquiry should not be construed as an indication by the Commission or its staff that any violations of law have occurred and should not be considered as an adverse reflection upon any person, entity, security or transaction. Although the Company does not believe that the investigation will uncover violations of law by the Company or any of its current officers and directors, or that the investigation will result in a material adverse effect on the business, operating results or financial condition of the Company, the ultimate outcome of the investigation cannot be predicted as of the date of this Prospectus. 10 13 USE OF PROCEEDS The net proceeds from the sale of the shares of Common Stock offered hereby are estimated to be $35,474,000 ($40,855,000 if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $21.75 per share and after deducting estimated underwriting discounts and commissions and offering expenses. The net proceeds will be used primarily for general corporate purposes, including working capital, product development and acquisition of capital equipment. The Company expects to spend approximately $3.5 million during the last three quarters of 1995 for the purchase of such equipment. Although the Company may use a portion of the proceeds to acquire products, technologies or businesses that are complementary to the Company's business, it currently has no understandings or agreements with respect to any such specific acquisitions. Until the net proceeds of the offering are used, they will be invested in short-term, interest- and dividend-bearing obligations or securities. PRICE RANGE OF COMMON STOCK The Company's Common Stock has traded on the Nasdaq National Market under the symbol "TKLC." The following table sets forth, for the periods indicated, the high and low last reported sale prices for the Common Stock.
HIGH LOW ------ ------ 1993 First Quarter.......................................... $ 5.25 $ 3.38 Second Quarter......................................... 3.75 2.56 Third Quarter.......................................... 6.00 2.44 Fourth Quarter......................................... 6.13 2.88 1994 First Quarter.......................................... 4.38 3.00 Second Quarter......................................... 5.00 2.88 Third Quarter.......................................... 6.75 3.75 Fourth Quarter......................................... 17.00 6.00 1995 First Quarter.......................................... 23.13 15.50 Second Quarter (through April 10, 1995)................ 21.75 18.25
On April 10, 1995, the last reported sale price of the Company's Common Stock was $21.75 per share. As of March 31, 1995, there were approximately 202 record holders of the Company's Common Stock. DIVIDEND POLICY The Company has never paid a cash dividend. It is the present policy of the Company to retain earnings to finance the future growth and development of its business and, therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. In addition, certain restrictions in one of the Company's line of credit agreements restrict the Company's ability to pay dividends. 11 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1994, and as adjusted to reflect the receipt of net proceeds from the sale of the shares of Common Stock pursuant to this offering at an assumed offering price of $21.75 per share:
DECEMBER 31, 1994 ----------------------- ACTUAL AS ADJUSTED ------- ----------- (THOUSANDS) Long-term obligations................................................ $ 654 $ 654 Shareholders' equity: Common Stock, 50,000,000 shares authorized, without par value; 9,022,612 shares issued and outstanding; 10,772,612 shares outstanding as adjusted(1)...................................... 15,940 51,414 Retained earnings.................................................. 79 79 Cumulative translation adjustments................................. 2,701 2,701 ------- ----------- Total shareholders' equity...................................... 18,720 54,194 ------- ----------- Total capitalization....................................... $19,374 $54,848 ======== ==========
- --------------- (1) Excludes (i) 2,247,772 shares subject to options outstanding as of December 31, 1994 under the Company's Amended and Restated 1984 Stock Option Plan, 1994 Stock Option Plan and Amended and Restated Non-Employee Director Equity Incentive Plan at a weighted average exercise price of $4.42 per share and (ii) 80,000 shares issuable upon exercise of warrants outstanding as of December 31, 1994 at a weighted average exercise price of $3.26 per share. Since December 31, 1994, 300,070 shares have been issued upon exercise of options and warrants. 12 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below as of and for the years ended December 31, 1990, 1991, 1992, 1993 and 1994 have been derived from the Consolidated Financial Statements of the Company audited by Coopers & Lybrand L.L.P. This selected consolidated financial information 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 the Company's audited Consolidated Financial Statements and Notes thereto included elsewhere herein.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1990 1991 1992 1993 1994 ------- ------- ------- -------- ------- (THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues............................ $42,148 $52,449 $58,090 $ 46,856 $61,189 Cost of goods sold................ 13,782 16,364 18,864 16,836 20,388 ------- ------- ------- -------- ------- Gross profit........................ 28,366 36,085 39,226 30,020 40,801 Research and development.......... 6,931 10,867 16,181 17,570 11,962 Selling, general and administrative................. 14,168 19,353 27,413 23,756 22,466 Restructuring..................... -- -- 2,767 5,988 -- ------- ------- ------- -------- ------- Income (Loss) from operations....... 7,267 5,865 (7,135) (17,294) 6,373 Interest and other income (expense), net................. 961 875 442 193 (662) ------- ------- ------- -------- ------- Income (Loss) before provision for income taxes...................... 8,228 6,740 (6,693) (17,101) 5,711 Provision for income taxes........ 3,188 2,159 1,603 1,442 1,251 ------- ------- ------- -------- ------- Net income (loss)......... $ 5,040 $ 4,581 $(8,296) $(18,543) $ 4,460 ======== ======== ======== ========= ======== Earnings (Loss) per share(1): Primary........................... $ 0.61 $ 0.53 $ (1.01) $ (2.23) $ 0.47 Fully diluted..................... 0.61 0.53 (1.01) (2.23) 0.43 Weighted average number of shares outstanding(1): Primary........................... 8,244 8,576 8,178 8,314 9,550 Fully diluted..................... 8,244 8,576 8,178 8,314 10,360
DECEMBER 31, -------------------------------------------------------- 1990 1991 1992 1993 1994 ------- ------- ------- -------- ------- (THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and restricted cash................... $16,397 $17,282 $10,067 $ 3,669 $ 7,653 Working capital..................... 22,418 26,443 15,471 3,215 13,466 Total assets........................ 37,455 43,893 38,403 28,139 34,409 Long-term obligations............... 680 437 204 323 654 Total shareholders' equity.......... 30,316 36,345 28,751 11,693 18,720
- --------------- (1) Weighted average number of shares outstanding and earnings (loss) per share have been retroactively adjusted to reflect the two-for-one stock split of the Company's Common Stock effected in March 1995. 13 16 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 elsewhere in this Prospectus. 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. CORPORATE ORGANIZATION The Company is organized into two divisions: Network Diagnostic and Network Switching. The Network Diagnostic Division develops and supplies diagnostic systems for the communications marketplace. Its products are the foundation of the Company's business and the source of the technology and expertise that has facilitated the Company's entry into other markets. The Network Switching Division capitalized on the Company's expertise in SS7 to develop the EAGLE STP, a high-capacity, fault-tolerant packet-switching platform first introduced in 1992. As more fully described below, the Company experienced significant losses in 1992 and 1993, but returned to profitability in 1994 as a result of actions taken in connection with its December 1993 restructuring and increased market acceptance of its products, particularly the EAGLE STP and the Chameleon Open. The cost savings realized in connection with such restructuring were consistent with those anticipated. See Note E to Consolidated Financial Statements. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that statement of operations items bear to total revenues:
PERCENTAGE OF REVENUES FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1992 1993 1994 ----- ----- ----- Revenues....................................................... 100.0% 100.0% 100.0% Cost of goods sold........................................... 32.5 35.9 33.3 ----- ----- ----- Gross profit................................................... 67.5 64.1 66.7 Research and development..................................... 27.9 37.5 19.6 Selling, general and administrative.......................... 47.2 50.7 36.7 Restructuring................................................ 4.8 12.8 -- ----- ----- ----- Income (Loss) from operations.................................. (12.4) (36.9) 10.4 Interest and other income (expense), net..................... 0.8 0.4 (1.1) ----- ----- ----- Income (Loss) before provision for income taxes................ (11.6) (36.5) 9.3 Provision for income taxes................................... 2.8 3.1 2.0 ----- ----- ----- Net income (loss)......................................... (14.4)% (39.6)% 7.3% ===== ===== =====
The following table sets forth, for the periods indicated, the revenues by principal product line as a percentage of total revenues:
PERCENTAGE OF REVENUES FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1992 1993 1994 ---- ---- ---- Network diagnostic products............................................ 93% 82% 72% Network switching products............................................. 7 18 28 ---- ---- ---- Total........................................................ 100% 100% 100% ==== ==== ====
14 17 The following table sets forth, for the periods indicated, the revenues by geographic territory as a percentage of total revenues:
PERCENTAGE OF REVENUES FOR THE YEARS ENDED DECEMBER 31, ---------------------- 1992 1993 1994 ---- ---- ---- North America.......................................................... 59% 54% 59% Japan.................................................................. 22 25 20 Europe................................................................. 10 11 9 Rest of the World...................................................... 9 10 12 ---- ---- ---- Total........................................................ 100% 100% 100% ==== ==== ====
1994 COMPARED WITH 1993 Revenues. The Company's revenues increased by $14.3 million or 31% during 1994 due to higher sales of both switching and diagnostic products. Revenues from switching products doubled in 1994 to $16.8 million due to growing market acceptance of the Company's EAGLE STP product, particularly in the cellular market. In 1994, 23 pairs of EAGLE STPs were sold (including one pair sold under the Company's September 1994 distribution agreement with AT&T) compared with 13 in 1993. The Company expects that 1995 sales of its network switching products will continue to grow both in dollars and as a percentage of total revenues although at a reduced percentage rate of growth compared with 1994. Revenues from diagnostic products increased by 15%, or $5.8 million, to $44.3 million. This increase was primarily driven by an $8.8 million increase in worldwide sales of the Chameleon Open (which was first shipped in the second quarter of 1993) and the September 1994 introduction of the Company's ATM Application Module for this product. Sales of the Chameleon Open represented 26% of 1994 total diagnostic product sales compared with 7% in 1993. These increases were partially offset by lower worldwide sales of certain older diagnostic products as the Company continued its product evolution to the Chameleon Open platform supporting multiple protocol diagnostics. The Company expects that 1995 sales of its Chameleon Open will continue to grow both in dollars and as a percentage of diagnostic product revenues although at a reduced percentage rate of growth compared with 1994. Revenues in North America increased by $10.8 million or 43% as a result of higher switching and diagnostic product sales. Despite slightly lower sales of diagnostic products, revenues in Japan increased by $520,000 or 4% due to the impact of favorable exchange rates in 1994. Other international revenues grew $3.0 million or 31% primarily due to higher switching product sales. The impact of exchange rate fluctuations on currency translations increased revenues by approximately $1.0 million or 2% and increased net income by $86,000 or 2%. Gross Profit. Gross profit as a percentage of revenues improved from 64% in 1993 to 67% in 1994 principally due to lower per unit manufacturing overhead costs and higher margins on EAGLE STP sales due to shipments of larger systems and reduced sales discounts. The gross profit percentage on switching products is generally lower than on diagnostic products. Changes in the following factors, among others, may affect gross profit: product and distribution channel mix, competition, customer discounts, supply and demand conditions in the electronic components industry, internal manufacturing capabilities and efficiencies, foreign currency fluctuations and general economic conditions. Research and Development. Research and development expenses in 1994 decreased by $5.6 million or 32% and from 38% to 20% as a percentage of revenues. These decreases were 15 18 attributable primarily to reduced headcount in research and development and termination of certain projects following the December 1993 restructuring in which certain product lines were discontinued. Expenses related to EAGLE also declined due to completion of its initial development. The Company believes that its future success depends in large part upon its ability to continue to enhance existing products and develop new products that maintain its technological competitiveness. The Company intends to continue to make substantial investments in product and technology development and believes that total research and development expenses will not change significantly as a percentage of revenues in 1995. Selling, General and Administrative. Selling, general and administrative expenses in 1994 decreased by $1.3 million or 5% primarily as a result of the December 1993 restructuring. The decline due to the restructuring was partially offset by employee bonuses and increased sales commissions based upon the achievement in 1994 of certain business performance targets. Income Taxes. In 1994, the Company had an effective tax rate of 22%, compared to 8% in 1993. The provisions for both years were principally foreign taxes on the income of the Company's Japanese subsidiary. In 1994, the Company was able to utilize a portion of its prior years' U.S. loss carryforwards, and consequently provided for taxes on its U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. The 1993 provision was impacted by the Company's inability to 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 in 1995 to offset its expected U.S. taxes, and therefore its federal and state effective tax rates should be similar in 1995 to those in 1994. However, the Company's overall tax rate is significantly influenced by the level of income derived from its Japanese subsidiary. 1993 COMPARED WITH 1992 Revenues. The Company's revenues declined by $11.2 million or 19% during 1993 primarily due to lower sales of diagnostic products, partially offset by increased sales of switching products. The decrease in revenues was primarily due to delayed product introductions and difficult economic conditions worldwide. As part of its restructuring, the Company further rationalized its business lines to enhance its ability to be successful within its resource constraints for 1994 and thereafter. See "Restructurings." Revenues from diagnostic products decreased by $15.7 million or 29%. Of this amount, sales of the signalling/wireless diagnostic products decreased by $9.3 million or 43% primarily due to lower sales in the U.S. following an unusually high level of sales during the first nine months of 1992, which was primarily related to the significant SS7 deployment by the RBOCs. In addition, sales of diagnostic products for LAN and WAN applications decreased by $5.8 million or 20% due primarily to lower worldwide sales of LAN and field service protocol analyzers. This decrease was partially offset by sales of the Chameleon Open which first shipped in the second quarter of 1993. Sales of LAN protocol analyzers declined due to a slowed market for FDDI research and development, the emergence of competing technologies such as ATM and increased competition. Revenues from switching products increased by $4.5 million or 115% primarily due to higher sales of EAGLE STPs products in the U.S., higher sales of other switching products in Canada and the first international EAGLE STP sale in New Zealand. Revenues in North America decreased by $9.1 million or 27% primarily as a result of lower sales of diagnostic products partially offset by higher switching product sales. Sales in Japan decreased by $782,000 or 6% due to lower field service diagnostic product sales. Other international sales decreased by $1.3 million or 12% primarily due to lower sales of LAN/WAN and field service diagnostic products, partially offset by the first international EAGLE STP sale. 16 19 The impact of exchange rates fluctuations on currency translations increased revenues by $1.4 million or 3% and decreased net loss by $100,000 or 1%. Gross Profit. Gross profit as a percentage of revenues decreased from 68% in 1992 to 64% in 1993 principally due to changes in the product mix of the Company's sales and a higher percentage of fixed overhead costs due to lower revenues. The changes in the product mix reflected a shift in the Company's sales to a lower proportion of sales of higher margin signalling/wireless diagnostic products and a higher proportion of EAGLE products which carried lower margins than the Company's traditional diagnostic business due in part to marketing strategies to gain market position. Research and Development. Research and development expenses increased by $1.4 million or 9% in 1993. This increase was due primarily to the hiring of additional engineering personnel and increased third-party contractor costs incurred in connection with the ongoing development of EAGLE, which was in the early stages of its product life cycle. Research and development expenses increased as a percentage of revenues primarily due to lower than anticipated overall revenues and increased expenses as described above. Research and development expenses for EAGLE accounted for approximately 36% of the total research and development expenses for 1993. The Company also capitalized software development costs totaling $165,000 in 1993 related principally to SMDS, the Company's new broadband WAN application, as compared to $2.6 million in 1992. Selling, General and Administrative. Selling, general and administrative expenses decreased by 13% in 1993. Selling expenses decreased by $2.3 million and general and administrative expenses decreased by $1.3 million, primarily as a result of the expense reduction measures implemented as part of the December 1992 restructuring and lower legal expenses, partially offset by a currency translation effect of approximately $450,000 on the Company's foreign operations. Restructurings. During 1992 and 1993 the Company recorded restructuring charges of $2.8 million and $6.0 million, respectively. See Note E to Consolidated Financial Statements. Income Taxes. Although the Company's pre-tax results showed a loss for the years ended December 31, 1992 and 1993, the effective tax rates were 24% and 8%, respectively. The provisions principally consisted of foreign taxes on the income of the Company's Japanese subsidiary and reflected the Company's inability to recognize any benefit for its U.S. loss and credits carryforwards, which remain available to reduce future U.S. taxes. 17 20 QUARTERLY RESULTS The following tables set forth selected unaudited quarterly consolidated statement of operations items and the percentages such items bear to total revenues. In the opinion of the Company, this information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Prospectus and all necessary adjustments (consisting only of normal recurring adjustments) have been included to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends. See "Risk Factors -- Fluctuations in Quarterly Results; Seasonality; Lengthy Sales Cycle."
QUARTERS ENDED(1) -------------------------------------------------------------------------------------------- MARCH SEPT. MARCH SEPT. 31, JUNE 30, 30, DEC. 31, 31, JUNE 30, 30, DEC. 31, 1993 1993 1993 1993 1994 1994 1994 1994 -------- -------- -------- -------- -------- -------- -------- -------- (THOUSANDS, EXCEPT PER SHARE DATA) Revenues.......................... $ 11,157 $ 11,425 $ 12,658 $ 11,616 $ 12,986 $ 13,810 $ 15,638 $ 18,755 Cost of goods sold.............. 3,848 3,927 5,036 4,025 4,740 4,316 5,032 6,300 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit...................... 7,309 7,498 7,622 7,591 8,246 9,494 10,606 12,455 Research and development........ 4,283 4,430 4,460 4,397 2,772 2,742 3,066 3,382 Selling, general and administrative................ 6,043 6,237 5,738 5,738 4,943 5,336 5,568 6,619 Restructuring................... -- 400 -- 5,588 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- -------- Income (Loss) from operations..... (3,017) (3,569) (2,576) (8,132) 531 1,416 1,972 2,454 Interest and other income (expense), net................ 2 66 15 110 (288) (200) (92) (82) -------- -------- -------- -------- -------- -------- -------- -------- Income (Loss) before provision for income taxes.................... (3,015) (3,503) (2,561) (8,022) 243 1,216 1,880 2,372 Provision for income taxes...... 319 320 243 560 117 339 523 272 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss)......... $ (3,334) $ (3,823) $ (2,804) $ (8,582) $ 126 $ 877 $ 1,357 $ 2,100 ======== ======== ======== ======== ======== ======== ======== ======== Earnings (Loss) per share(2): Primary......................... $ (0.40) $ (0.46) $ (0.34) $ (1.02) $ 0.01 $ 0.10 $ 0.15 $ 0.20 Fully diluted................... (0.40) (0.46) (0.34) (1.02) 0.01 0.10 0.14 0.20 Weighted average number of shares outstanding(2): Primary......................... 8,272 8,274 8,328 8,380 8,558 9,064 9,262 10,436 Fully diluted................... 8,272 8,274 8,328 8,380 8,558 9,064 9,740 10,644
AS A PERCENTAGE OF TOTAL REVENUES ---------------------------------------------------------------------------------------------- Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold............ 34.5 34.4 39.8 34.7 36.5 31.3 32.2 33.6 --------- -------- -------- -------- --------- -------- -------- -------- Gross profit.................... 65.5 65.6 60.2 65.3 63.5 68.7 67.8 66.4 Research and development...... 38.3 38.8 35.2 37.8 21.3 19.9 19.6 18.0 Selling, general and administrative.............. 54.2 54.6 45.3 49.4 38.1 38.6 35.6 35.3 Restructuring................. -- 3.5 -- 48.1 -- -- -- -- --------- -------- -------- -------- --------- -------- -------- -------- Income (Loss) from operations... (27.0) (31.3) (20.3) (70.0) 4.1 10.2 12.6 13.1 Interest and other income (expense), net.............. -- 0.6 0.1 0.9 (2.2) (1.4) (0.6) (0.4) --------- -------- -------- -------- --------- -------- -------- -------- Income (Loss) before provision for income taxes.............. (27.0) (30.7) (20.2) (69.1) 1.9 8.8 12.0 12.7 Provision for income taxes.... 2.9 2.8 1.9 4.8 0.9 2.5 3.3 1.5 --------- -------- -------- -------- --------- -------- -------- -------- Net income (loss)....... (29.9)% (33.5)% (22.1)% (73.9)% 1.0% 6.3% 8.7% 11.2% ========= ======== ======== ======== ========= ======== ======== ========
- --------------- (1) 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. During 1993 and 1994, the quarters ended on: April 2, 1993; July 2, 1993; October 1, 1993; December 31, 1993; April 1, 1994; July 1, 1994; September 30, 1994; and December 31, 1994. (2) Weighted average number of shares outstanding and earnings (loss) per share have been retroactively adjusted to reflect the two-for-one stock split of the Company's Common Stock effected in March 1995. Tekelec typically operates with a limited backlog, and most of its revenues in each quarter result from orders received in that quarter. Further, Tekelec typically generates a significant portion of its revenues for each quarter at or near the end of the quarter. Tekelec establishes its expenditure levels based on its expectations as to future revenues, and if revenue levels in any quarter were to fall below expectations this would cause expenses to be disproportionately high. Therefore, a drop in near term demand would significantly affect revenues, causing a disproportionate reduction in 18 21 profits or even losses in any quarter. Tekelec's operating results may fluctuate for this reason or as a result of a number of other factors, including general economic and political conditions (such as recessions in the U.S. and Japan), capital spending patterns of Tekelec's customers, increased competition, variations in the mix of sales, fluctuation in proportion of foreign sales, and announcements of new products by Tekelec or its competitors. The Company typically experiences lower sales and order levels in the first quarter when compared with the preceding fourth quarter due primarily to the capital spending patterns of its customers, and the Company believes that this pattern will continue in the first quarter of 1995. In 1994, Tekelec's quarterly revenues increased by up to 61% as compared to prior year's quarters. The Company believes these increases resulted from increased market acceptance of its products. The Company's results for 1993 include pre-tax restructuring charges amounting to $400,000 in the second quarter and $5.6 million in the fourth quarter and the effect of the Company's inability throughout the year to currently recognize benefits amounting to $8.0 million for its tax loss and credits carryforwards. The Company's results for 1994 include the effect of the Company's ability to recognize benefits amounting to $1.6 million for its tax loss carryforwards. The significant increase in the weighted average number of shares outstanding in the fourth quarter of 1994 is primarily attributable to the exercise of options during the period and the dilutive effect of outstanding options under the treasury stock method following the increase in the price of the Company's Common Stock. In light of subsequent increases in the price of the Company's Common Stock and the issuance of shares contemplated hereby, the weighted average number of shares outstanding in the second quarter of 1995 and in subsequent periods will be significantly higher than in prior periods. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its net working capital and capital expenditure requirements principally from operations, available cash and utilization from time to time of its U.S. credit facilities. At December 31, 1994, the Company had $6.7 million of cash and cash equivalents, representing an increase of $3.0 million from December 31, 1993 primarily attributable to net cash provided by operating activities. Accounts receivable, including amounts due from related parties, increased by 63% during 1994 due primarily to a 61% increase in sales for the fourth quarter of 1994 over 1993 fourth quarter sales. A significant portion of the Company's quarterly sales are concentrated in the last month of each quarter. Inventories decreased by 7% during 1994 primarily due to continued efforts to maximize inventory efficiency. Capital expenditures were reduced to $1.5 million during 1994 in connection with steps taken to improve the Company's liquidity following the December 1993 restructuring. Although there are currently no significant commitments for capital expenditures, the Company expects that its capital expenditures will increase significantly in 1995, primarily in connection with the planned acquisition of equipment for research and development and sales demonstration. The net cash provided by financing activities in 1994 was $338,000 which represented $1.6 million in proceeds from the issuance of Common Stock resulting from the exercise of options and warrants, and $860,000 in net proceeds from the issuance of long-term debt, offset primarily by repayments of short-term borrowings. The Company has a $7.5 million line of credit and a $2.0 million line of credit with U.S. banks and lines of credit aggregating $3.5 million available to the Company's Japanese subsidiary from various Japan-based banks. The Company's $7.5 million line of credit with a U.S. bank is collateralized by substantially all of the Company's assets, bears interest at the U.S. prime rate (8.5% at December 31, 1994) plus 2.5% per annum and expires September 30, 1995, if not renewed. Maximum borrowings available under 19 22 the line of credit are based on eligible accounts receivable and amounted to $6.6 million at December 31, 1994, of which $126,000 was then outstanding. This line of credit includes a $1.0 million long-term credit facility payable in monthly installments through May 1998 or upon the expiration of the underlying $7.5 million line of credit, if not renewed. At December 31, 1994, $860,000 was outstanding under this long-term facility, of which $620,000 was included under long-term debt. In February 1994, the Company established a $2.0 million line of credit with a U.S. bank collateralized by restricted cash deposits in Japan, with interest at the U.S. prime rate plus 0.375% per annum. This line of credit expires May 31, 1995, if not renewed. Borrowings at any time may not exceed the cash amount on deposit. At December 31, 1994, $1.0 million was outstanding under this line of credit. 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 $3.5 million with interest at the Japanese prime rate (3% at December 31, 1994) plus 0.125% per annum which expire between May 29, 1995 and March 31, 1996, 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 proceeds from this offering together with funds generated from operations, existing working capital and current bank lines of credit should be sufficient to satisfy anticipated operating requirements at least through 1995. FOREIGN EXCHANGE International operations are subject to certain opportunities and risks, including currency fluctuations. In 1992, 1993, and 1994, weighted average exchange rates for certain key currencies strengthened (weakened) against the U.S. dollar as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------- 1992 1993 1994 ----- ----- ----- Japanese yen............................. 6% 13% 9% Canadian dollar(1)....................... NA (4%) (9%)
- --------------- (1) 1992 change versus 1991 not applicable as the Company's Canadian operations did not begin operations until 1992. The change in cumulative translation adjustment in 1994 was due primarily to the strengthening of the Japanese yen against the U.S. dollar. Exchange gains (losses) are recorded in interest and other income (expense), net and amounted to $(132,000), $253,000 and $(235,000) in 1992, 1993 and 1994, respectively. Exchange gains and losses include the remeasurement of certain currencies into functional currencies and the settlement of intercompany balances. 20 23 BUSINESS Tekelec designs, manufactures and markets advanced diagnostic systems and innovative network switching solutions for the global communications marketplace. The Company is a leading supplier of diagnostic systems used in the design, installation and maintenance of a broad range of communications equipment and networks. Tekelec's EAGLE STP switching platform enables operators of wireline and wireless networks to deliver Advanced Intelligent Network (AIN) services such as Caller ID, personal number calling and digital wireless services such as Personal Communications Systems (PCS) and Global Systems for Mobile (GSM). The Company sells its diagnostic systems worldwide to long distance carriers, telephone operating companies, communications equipment manufacturers, wireless and cellular network operators and government agencies. The Company's switching products have been sold primarily to U.S. independent telephone companies (ITCs) and cellular providers through the Company's direct sales force and distribution and marketing relationships with AT&T Corp. (AT&T) and Stratus Computer, Inc. (Stratus). INDUSTRY BACKGROUND Deregulation and privatization worldwide have intensified competition among existing operators of public communications networks and encouraged the entrance of new service providers. At the same time, the convergence of telephony and computing is resulting in end-users demanding new and enhanced high quality communications services at lower cost. As a result, network operators are increasingly pressured to reduce the time and expense required to introduce such services. Together, these forces are creating the need for new equipment and infrastructure for both wireline and wireless networks. Public Networks: Increased Competition and Complexity In the U.S., long distance carriers and Regional Bell Operating Companies (RBOCs) are increasingly competing with one another and with new competitive service providers that have entered the local and long distance markets. The rapid growth of cellular and wireless networks has also further increased the number of communications alternatives offered to end users. In response to this environment, operators of public networks are seeking to lower their costs and differentiate themselves by rapidly introducing new services. These include high-speed data services such as Asynchronous Transfer Mode (ATM) and Frame Relay, Advanced Intelligent Network (AIN) services such as Caller ID, voice messaging, personal number calling which assigns a number to a user not a location and customized routing and billing as well as digital wireless services such as PCS and GSM. While communications markets are becoming increasingly competitive, a proliferation of standards and protocols is making the design and operation of communications networks more complex. Demand for high speed communications integrating voice, data and video is growing rapidly. Services based on emerging technologies, such as ATM, Frame Relay and SMDS, are being deployed while Integrated Services Digital Network (ISDN) is increasingly available to provide end-user access to combined voice and data services. In addition, network operators must also support protocols such as FDDI and Ethernet as an increasing number of Local Area Networks (LANs) are being interconnected across their Wide Area Networks (WANs). As a result, network operators have become more demanding of communications equipment suppliers to provide solutions that enable them to increase the overall functionality and flexibility of their networks at a lower cost. 21 24 Diagnostic Tools The proliferation of standards and protocols and the increasing complexity of communications equipment is creating a need for new, more sophisticated diagnostic systems capable of simultaneously testing multiple existing and emerging technologies. Network operators use diagnostic tools to efficiently monitor network performance, simulate network services and test interoperability of equipment. In an increasingly competitive environment, network operators need diagnostic systems that can reduce time to market by shortening the testing cycles necessary to model and implement new services. In addition, network operators require advanced diagnostic solutions that verify reliability of network elements, offer flexibility to support new standards and protocols as they emerge and enable them to centralize the testing expertise within their organizations. Equipment manufacturers use diagnostic tools to design and test their products, such as switches, hubs and routers, for conformance to new and existing standards and to simulate network operating conditions. Manufacturers seek diagnostic tools that enable them to reduce their product development cycles and testing costs that are principal contributors to product development time and expense. Furthermore, diagnostic tools with a flexible architecture are necessary to accommodate the rapid changes in technology. Advanced Intelligent Network (AIN) Switching In response to competition, network operators are seeking to differentiate themselves by offering advanced voice and data communications services. The AIN is a network architecture and a set of standards designed to allow network operators to create, deploy and modify these services quickly and economically. AIN services represent the merging of telephony with database information through signalling. Such services include Caller ID, voice messaging, personal number calling and customized routing and billing as well as digital wireless services such as PCS and GSM. The enabler of AIN is a highly complex protocol called the Common Channel Signalling System No. 7 (SS7). The AIN architecture uses two separate but parallel paths: one to handle the voice or data traffic and a second to carry the signalling information for call set-up and routing (out-of-band signalling). Network operators utilize the AIN architecture to increase the efficiency of their network by offloading signalling traffic onto the SS7 network. This frees up trunk line capacity needed for revenue generating traffic. Network operators are increasingly using SS7 networks as a source of competitive advantage to introduce new services through software changes in AIN network elements rather than in central office switches. The key network elements in the AIN architecture are as follows and depicted on the following page. Signal Transfer Point (STP) -- An STP is a switch that handles the signalling messages used to set up telephone calls, queries external databases for routing and processing information and dispatches call handling instructions. Service Switching Point (SSP) -- An SSP is a component of the central office switch that sets up trunk connections. When an SSP identifies an AIN call, it routes a signalling message to the STP and awaits further instructions for call processing. Service Control Point (SCP) -- An SCP is a computer database that is accessed by STPs for customer call routing and other special information required for AIN services. 22 25 (CHART -- SEE EDGAR APPENDIX) Additional components of the AIN architecture include Service Creation Environments (SCE) used to create new software-based services and Service Management Systems (SMS) used for billing and administration. While SS7 has been available since the 1980s, to date it has been used principally to support intelligent services such as call set-up, 800 number calling and calling card verification. AIN standards and services have only recently emerged and the number and complexity of these services continues to grow. Services such as Caller ID, voice messaging, personal number calling and customized routing and billing as well as digital wireless services such as PCS and GSM, all require SS7 networking technology. ISDN, driven by the growth of the Internet and telecommuting, is also increasing the need for SS7 to provide the signalling connectivity for ISDN applications. The accelerating rate of introduction of these new enhanced services enabled by SS7 has placed increasing demand for functionality and capacity on the installed base of older generation STPs. These devices are, in most cases, modified central office digital switches that fundamentally were not optimized for AIN purposes. In addition, the telecommunications industry is evolving towards an architecture of more intelligent distributed switching in which the software will allow for third party developers to be involved in creating applications. With competition among network operators accelerating the deployment of AIN services, the strategic and economic value of sophisticated switching equipment optimized for SS7 applications is rapidly increasing. In addition, the importance of SS7 networks to network operators mandates extremely high reliability and fault tolerance from the equipment as well as higher throughput and scalability to support the rapid but unpredictable growth in enhanced AIN services. Companies that offer SS7-based products that are built on scalable, open distributed architectures and enable AIN applications can benefit from this industry shift. 23 26 THE TEKELEC SOLUTION The Company has leveraged its expertise in a broad range of communications technologies and network protocols to provide equipment manufacturers and network operators products that meet their advanced diagnostic and AIN switching needs. Network Diagnostic. Tekelec is a leading supplier of highly-integrated powerful diagnostic systems for the proliferation of increasingly complex and high speed communications standards and protocols. The Company believes that the distributed, standards-based architecture of its Chameleon Open and MGTS/GSMT products enable it to offer performance features and diagnostic solutions that are superior to those offered by its competitors. These systems are networkable and incorporate software-based solutions to enable the Company to develop new applications to support emerging technologies. These products can be deployed in a variety of configurations to address customers' specific diagnostic needs in both research and development and network operations environments. Network Switching. Tekelec's EAGLE STP is designed to meet the demands of SS7 switching to enable network operators to deliver AIN services for wireline and wireless communications networks. Tekelec's EAGLE platform features a fully-distributed, standards-based, open architecture. It offers scalability and performance advantages which provide for flexibility in the design and implementation of SS7 networks. The system's reliability, ease of management and maintenance, and the ability to support evolving services are critical features to customers. Tekelec's EAGLE STP can be configured to meet customers' specific needs for capacity, functionality and cost effectiveness. STRATEGY The Company's objective is to be the premier developer and supplier of advanced diagnostic systems and innovative network switching devices to existing and emerging communications markets. The Company positions its products to capitalize on the evolution of advanced intelligent network services and internetworking worldwide. Key elements of the Company's strategy include: Leverage Expertise in Communications Technologies. The Company believes its core competitive strength is the breadth and depth of its knowledge and expertise in communications technologies, particularly in signalling, wireless and broadband. The Company has developed this expertise over a period of 15 years and continues to augment its capabilities. The Company seeks to expand the applications for its technology and to capitalize on the breadth of its broad range of communications expertise to develop new products, as it has done with the EAGLE STP. Target Key Emerging Markets. The Company's new products and ongoing research and development efforts are targeted at emerging, high growth communications markets including: - Signalling, such as SS7, to provide network-based distributed intelligence and access for AIN services; - Digital wireless services based upon GSM and emerging PCS standards to provide universal mobile access for AIN-based voice and data services; and - Broadband multimedia services based upon ATM to provide video, image, voice and data transmissions over a single network connection. Emphasize High Performance, Software-Based Products. The Company's key products utilize open distributed architectures that facilitate the development of new applications, expansion of capacity and implementation of technical advances. The Company's modular product platforms are designed to enable the Company to (i) maximize product features, (ii) reduce the time required to bring new products and applications to market and (iii) modify the features of its products as standards evolve. Because the intelligence of the Company's products is largely implemented through software which it has developed over a number of years, the Company believes that the technical features and flexibility of its products cannot easily be matched by competition. 24 27 Increase Market Penetration through Strategic Relationships. In order to gain increased acceptance and market penetration for its EAGLE STP product, the Company has focused on forming strategic relationships with leading communications equipment providers. The Company has formed relationships with AT&T and Stratus and intends to form additional alliances to continue to strengthen its competitive position and address new markets. The Company believes that the relationships with AT&T and Stratus demonstrate the recognition of the technical advantages of the EAGLE STP. Provide Responsive Technical Support and Service. In order to maintain its competitive position, promote customer satisfaction and enhance the market for its products, the Company is committed to providing rapid, high level support and service to its customers. The Company believes that direct contact with its customers allows it to anticipate future product requirements and promotes customer satisfaction. PRODUCTS Network Diagnostic Systems Equipment manufacturers and network operators use the Company's diagnostic systems to perform a wide variety of simulation and analysis to detect, diagnose and isolate communications problems. The Company's proprietary simulation language enables the controlled imitation of communications devices, traffic loads, and networks. Its analysis software helps monitor, selectively capture and interpret digitized pulses transmitted through a network. Uses of the Company's products include the following: - Designing Communications Equipment. By simulating existing and emerging communications devices (e.g., digital switches, STPs, SCPs, routers and hubs) and protocols (e.g., ATM, SS7, ISDN, FDDI and Ethernet), the Company's products assist engineers in designing communications devices that will be compatible with, and minimize potential breakdowns of, the networks in which the devices will be deployed. - Ensuring Product Reliability. By simulating a wide range of operating situations, including protocol errors and other network failures, the Company's products can help ensure that communications equipment manufacturers produce devices that will operate error-free, thereby reducing costly failures after installation. - Verifying Certification. By executing certain standard tests, network operators and manufacturers use the Company's products to verify that communications devices meet specified standards (e.g., X.25, ISDN and SS7). - Monitoring Networks. By collecting and analyzing traffic, the Company's products can monitor networks on a continuous basis and provide notice of system failures. - Troubleshooting. By identifying the specific location and type of communication error, the Company's products can isolate which network device has failed (e.g., channel bank or PBX). The Company's products help technicians and engineers repair devices and networks promptly and minimize expensive downtime. The Company's principal diagnostic systems are: Chameleon Open. The Chameleon Open is a multiprotocol analyzer that features a flexible open architecture for a family of applications that provide simultaneous full bandwidth testing of broadband, LAN and WAN equipment and networks. It can perform tests at speeds up to 155 Mbps and currently supports a number of protocols and interfaces including ATM, SMDS, FDDI, Frame Relay, ISDN PRI, TCP/IP, X.25, T1, E1, Ethernet and Token Ring. The Chameleon Open is based on an Intel x86-based hardware platform and a UNIX operating system incorporating X-Windows, Motif, a graphical user interface. Each system supports, depending on its configuration, up to 12 network 25 28 interfaces simultaneously and can be configured as either a portable or rack mounted system. Multiple systems can be networked in a LAN or WAN configuration. MGTS/GSMT. The MGTS/GSMT system is used primarily for SS7-based device simulation, load generation and network monitoring. In its fully configured form, the system includes Tekelec's proprietary programming tool, PASM, that can be used to design customized testing scenarios. The MGTS/GSMT software runs on Sun Microsystems and Hewlett-Packard UNIX operating systems with an X-Windows, Motif graphical user interface. The MGTS/GSMT systems support a number of protocols, including SS7, AIN, GSM, IS-41 and personal digital communications (PDC) networks. Each unit can simulate up to 32 SS7 links or 16 network nodes simultaneously and a number of MGTS may be networked together. Chameleon 32 Plus. The Chameleon 32 Plus is a sophisticated diagnostic system that simulates and analyzes multiple types of communications devices and networks. Research and development users utilize the Chameleon 32 to comprehensively test ISDN primary and basic rate interfaces, SS7 and data protocols such as Frame Relay and X.25. List prices for the Company's principal diagnostic products range from approximately $35,000 to $150,000 depending on configuration. Network Switching Products EAGLE STP. The Company introduced the EAGLE STP in early 1992. The EAGLE STP is designed to meet the demands of SS7 switching and features a fully distributed standards-based open architecture. Its open distributed architecture, high capacity and throughput are tailored to the SS7 switching needs of common carriers, local exchange carriers and PCS and cellular operators. The EAGLE STP is economically scalable in configurations from 8 to 268 links. On-going software releases provide continual product improvement to meet the evolving needs of end users. As is required in SS7 networks, the EAGLE is sold and deployed in pairs, for redundancy. The EAGLE has the following features: Designed for SS7 Standards. The EAGLE STP is designed to exceed the requirements for STPs as defined by Bell Communications Research (Bellcore) and presently supports both American National Standards Institute (ANSI) and International Telephone and Telegraph Consultative Commission (CCITT) SS7 standards. Bellcore defines the standards used primarily by the RBOCS for equipment used in their networks. EAGLE is currently undergoing initial technical audit by Bellcore. See "-- Sales, Marketing and Support." Powerful, Distributed Architecture. The EAGLE STP features a fully distributed, open architecture, utilizing Intel x86 microprocessors. The performance of the product results from its uniquely distributed architecture and the elimination of central processors. In the EAGLE STP, all SS7 network intelligence, including SS7 routing information, is distributed among up to 134 signalling interfaces, each with its own dedicated processor. Each interface is interconnected via a high speed, redundant bus subsystem. The bus subsystem utilizes two, counter-rotating 125 Mbps busses and features proprietary switching and buffering algorithms, which minimize collision and guarantee message delivery between all attached interfaces. All interfaces attached to the bus subsystem are hot-swappable, so that interface repair or replacement does not affect system operation. Open Software Architecture. The EAGLE STP's software is fully modular and written entirely in industry standard programming languages. All software is released in complete versions, eliminating the need for interim patching in order to minimize the potential for errors. EAGLE STP software is optimized for the capacity and redundancy features of the host hardware. Users of the EAGLE STP can add functionality and services to their network, utilizing the EAGLE STP's open software interfaces. Ease of Operation and Maintenance. EAGLE STP installations generally do not require any enhancements to the central office's power supply, cooling system or flooring and require less than 26 29 36 square feet of space. An EAGLE STP can usually be installed in less than one week. No scheduled maintenance is required to support the EAGLE STP, eliminating the requirement for on-site personnel. Prices for a pair of EAGLE STPs typically range from approximately $250,000 to $2,000,000, depending on configuration and associated software applications. Compliance with Industry Standards The Company's products are designed to meet a significant number of standards and regulations, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission (FCC) and Underwriters Laboratories as well as standards established by Bellcore and the ANSI. Internationally, the Company's products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the CCITT and the International Standards Organization (ISO). The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving standards could have a material adverse effect on the Company's business and operating results. See "Risk Factors -- Compliance with Regulations and Evolving Industry Standards." PRODUCT DEVELOPMENT The communications market is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Standards for new services such as ATM, AIN and PCS are still evolving. As these standards and the demand for services and applications evolve, the Company intends to adapt its products or develop and support new products. The Company solicits product development input through discussions with users of the Company's products, as well as participation in industry organizations and international standards committees such as the ATM Forum and European Telecommunications Standards Institute (ETSI). The Company's diagnostic product development activities are focused on expanding the capabilities of the Chameleon Open, including its interfaces and software modules, and the protocol capabilities for emerging technologies such as ATM and AIN. From time to time the Company engages in development projects for special applications for customers. The Company is usually free to use such technology in future products which are not competitive with the specific application for which the development work was performed. The Company's network switching product development group has as its priority the release of new software versions to incorporate enhancements desired by customers and compliance with standards to enable EAGLE to address additional domestic and international markets. In addition, the Company plans continued improvement of hardware components to improve performance and capability. The Company utilizes a common standards-based open architecture approach in the design of its products. This approach facilitates and accelerates the development of new applications and products and permits the Company to enhance existing products by substituting new hardware or software modules. This modular approach also helps to extend the life cycles of the Company's products, ensure compatibility among successive generations of products and simplify manufacturing. The Company's success depends to a substantial degree upon its ability to respond to changes in technology, industry standards and customer requirements. This will require the timely selection, development and marketing of enhancements and new products on a cost-effective basis. The Company has invested and expects to continue to invest substantial resources in the development of new products and technology and product enhancements. There can be no assurance that the Company's product development efforts will result in commercially successful new or enhanced 27 30 products or that the Company's products will not be rendered obsolete or noncompetitive by changing technology or new competitive products. Products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released. Such errors have occurred in the past. While the Company's products have not experienced any significant errors, such errors, particularly those that result in a failure of the Company's switching products, could have a material adverse effect on the Company's customer relationships, business and operating results. There can be no assurance that, despite thorough testing by the Company and by customers, errors will not be found in the Company's products. Product development includes expenditures for research and development, new product design, enhancement of existing products, and selective acquisition of technology. Research and development expenses amounted to approximately $16.2 million, $17.6 million, and $12.0 million, in 1992, 1993 and 1994, respectively. The Company has also capitalized certain additional software development costs totalling approximately $2.6, $165,000 and $0 in 1992, 1993 and 1994, respectively. These costs are amortized over a period not to exceed three years. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes A, E and I to Consolidated Financial Statements. The Company's development facilities are located in California, North Carolina, Ohio and Japan. As of March 1, 1995, the Company had 110 persons engaged full time in product development. The Company believes that recruiting and retaining highly skilled engineering personnel is essential to its success. To the extent that the Company is not successful in attracting and retaining its technical staff, its business and operating results would be adversely affected. See "Risk Factors -- Dependence on Key Personnel." SALES, MARKETING AND SUPPORT The Company's strategy for its diagnostic products is initially to target customers' research and development departments designing the next generation of communications equipment and then to target the manufacturing groups and ultimate users as equipment is manufactured, certified and installed. This strategy permits the Company to gain expertise in testing emerging technologies in the early stages of their life cycles. The Company's sales strategy for its EAGLE switching product is to maintain its leadership position in the U.S. ITC and cellular markets and to pursue selected international opportunities and new customer relationships including RBOCs. Current and future strategic alliances will continue to be an integral component of the strategy to reach broader markets and attain greater market presence. The network switching sales cycle ranges from three to twelve months depending on the complexity of a customer's planning, bidding and implementation requirements. In order to penetrate the portion of the public carrier market dominated by the RBOCs, it is important that ongoing technical audits of the EAGLE STP be conducted by Bellcore to help the Company ensure interoperability with the operations, administration, maintenance and provisioning systems used by the RBOCs to manage their networks. Bellcore is currently in the process of conducting its initial technical audit, and upon completion a copy of the technical auditing report will be available to the Company. Bellcore does not endorse or certify any product or service or guaranty its performance. Failure or delay in obtaining favorable technical audit results could have a material adverse effect on the Company's ability to sell EAGLE STP to this large segment of the communications carrier market. Domestic Distribution. The Company sells its diagnostic and switching products in the U.S. principally through separate direct sales forces and, for the EAGLE STP, also through strategic relationships with AT&T and Stratus. The Company's direct sales forces operate out of the 28 31 Company's headquarters in Calabasas, California and its regional offices located in Colorado, Illinois, New Jersey, North Carolina, Northern California, Tennessee, Texas and Virginia. International Distribution. The Company sells its diagnostic products internationally through a network of 26 distributors and two wholly owned subsidiaries in Japan and Canada. The Company's Japanese subsidiary, which presently sells only diagnostic products, generated approximately 22%, 25% and 20% of the Company's revenues for 1992, 1993 and 1994, respectively. The Company currently sells its switching products internationally through its direct sales force. Tekelec-Airtronic, S.A., an affiliate of the Company, and its wholly owned subsidiaries are the distributors of the Company's products in France, Italy, Germany, The Netherlands, Belgium, Luxembourg, Portugal and Spain. Twenty-one additional independent companies distribute the Company's products in other Western European countries, the Far East (other than Japan), New Zealand, the Middle East, South America and South Africa. Distributors typically purchase products directly from the Company pursuant to agreements that are exclusive for a particular territory and are cancelable by either party upon 90 days notice. Export sales to international distributors accounted for approximately 17%, 19% and 14% of revenues in 1992, 1993 and 1994, respectively. The Company typically invoices export sales in U.S. dollars and its foreign subsidiaries invoice sales in their respective local currency. International sales are subject to inherent risks, including longer payment cycles, unexcepted changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations and distributors, greater difficulty in accounts receivable collection and potentially adverse tax consequences. Additionally, exchange rate fluctuations on foreign currency transactions and translations arising from international operations may contribute to fluctuations in the Company's business and operating results. Fluctuations in exchange rates could also affect demand for the Company's products. In addition, due to the technical nature of the Company's products, certain of the Company's export sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. The Company's products are subject, in certain international jurisdictions, to reduced protection for the Company's copyrights and trademarks. See Notes A, D and M to Consolidated Financial Statements. Strategic Relationships. The Company believes that it can improve market penetration and acceptance for its EAGLE products through strategic relationships with leading communications equipment suppliers. These suppliers have long-standing relationships with public carriers and provide a broad range of services to these carriers through their existing sales and support networks. Tekelec seeks strategic relationships that (i) enhance the Company's presence in its target markets, (ii) offer products that complement the EAGLE to provide value-added networking solutions and (iii) leverage the Company's core technologies enabling the communications equipment suppliers to develop enhanced products with market differentiation that can be integrated with the EAGLE platform. The Company has a non-exclusive distribution agreement with AT&T and a marketing agreement with Stratus for the EAGLE STP. The Company believes that its relationships with AT&T and Stratus demonstrate recognition of the technical advantages of the EAGLE STP. The Company believes that these agreements provide the Company with additional opportunities to penetrate the SS7 network switching marketplace. Through the Company's relationships with AT&T and Stratus, the Company has enhanced its market presence and its ability to access leading telephone companies such as the RBOCs. In general, these agreements can be terminated by either party on limited notice and do not require minimum purchases. Furthermore, AT&T is not precluded from selling products that are competitive with the Company's products. A termination of the Company's relationship with AT&T or the sale of competing products by AT&T could materially and adversely affect the Company's business and operating results. See "Risk Factors -- Competition" and "-- Relationship with AT&T." 29 32 Advertising and Promotion. The Company uses advertising in trade journals, exhibitions at trade shows and direct mail to promote awareness of the Company and its products. The Company has been most successful in generating sales through demonstrations of its products and, therefore, focuses its advertising and promotional activities on generating opportunities for demonstrations. The Company also provides extensive training for, and merchandising aids to, its direct sales force and distributors. These include sales brochures, demonstration systems and promotional product literature. In order to support the Company's marketing efforts, the Company also publishes a newsletter for its customers and distributors. Services, Support and Warranty. The Company believes that customer service, support and training are important to building and maintaining strong customer relationships. The Company services, repairs and provides technical support for its products. The Company maintains an in-house repair facility and provides ongoing training and telephone assistance to customers and international distributors from its headquarters in Calabasas, California, certain U.S. regional offices and its Japanese subsidiary. The Company's Technical Assistance Center in Raleigh, North Carolina, supports the Company's switching products on a 24 hour-a-day, seven day-a-week basis. Support services include 24-hour technical support, remote access diagnostic and servicing capabilities, extended maintenance and support programs, comprehensive technical customer training, extensive customer documentation, field installation and emergency replacement. The Company typically warrants its products against defects in materials and workmanship for one year after the sale and thereafter offers extended service warranties. To date, warranty expenses have been consistently within management's expectations. CUSTOMERS During 1994, the Company shipped approximately 850 units of its diagnostic products to over 160 customers worldwide and 23 pairs of EAGLE STPs to 18 customers. The Company's customers include end users and marketing intermediaries. End users for the Company's diagnostic products include long distance carriers, telephone operating companies, equipment manufacturers and government agencies. End users for the Company's EAGLE STP consist primarily of U.S. ITCs and cellular providers. The Company's diagnostic business is substantially dependent on repeat business and, therefore, customer satisfaction and loyalty are crucial to its long-term success. Sales of diagnostic products to Nippon Telegraph & Telephone (NTT) accounted for 13% of the Company's 1994 revenues. No other customer accounted for more than 10% of the Company's revenues in 1994. The top 20 end-user customers for the Company's diagnostic systems during 1994 were:
Ameritech Corporation MCI Telecommunications Corporation AT&T Morgan Guaranty Trust Company Bell Atlantic Corporation Motorola, Inc. Bell Northern Research NEC America, Inc. BellSouth Corporation NTT Boston Technology, Inc. SBC Communications, Inc. DSC Communications Corporation (DSC) Siemens AG Fujitsu Network Switching of America, Inc. Sprint Corporation GTE Corporation U.S. Government Agencies LORAL Space Information Systems U S WEST Communications, Inc.
The top 10 end-user customers for the Company's EAGLE STP product during 1994 were:
Ameritech Cellular SBC Communications, Inc. ComNet Telstra GTE Intelligent Network Services, Inc. Thunder Bay Telephone Company Interstate Fibernet Transaction Network Systems, Inc. McCaw Cellular Communications, Inc./AT&T U.S. Signal, Inc.
30 33 Federal and state agencies, including the FCC, regulate many of the Company's domestic customers. The FCC and a majority of the states have enacted or are considering regulations based upon alternative pricing methods. Uncertainty regarding future pricing policies and the cost effectiveness of deploying public network services may affect demand for communications products, including the Company's products. However, the Company believes that deregulation of the telecommunications market and new methods of price regulation could increase the demand for products such as those offered by the Company which enhance the efficiency of the network or allow the expedited introduction of new revenue-producing services. BACKLOG Orders for the Company's diagnostic products are usually placed by customers on an as-needed basis, and the Company has typically been able to ship these products in 15 to 30 days after the receipt of the purchase order. Backlog for switching 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 the next three years. Because of variations in the magnitude and duration of orders received by the Company, and customer delivery requirements, which may be subject to cancellation or rescheduling, the Company's backlog at any particular date may not be a meaningful indicator of future financial results. At December 31, 1994, the Company's backlog amounted to approximately $18.1 million, of which $8.6 million related to EAGLE STP service warranty. This compared to $9.9 million at December 31, 1993, of which $3.1 million related to EAGLE STP service warranty. MANUFACTURING The Company's manufacturing operations consist of the procurement and inspection of components, final assembly, burn-in, quality control testing and packaging. Printed circuit boards, chassis and most of the other major components used in the Company's products are subassembled to the Company's specifications by independent contractors with whom the Company generally has had long-standing working relationships. The assembled components are then delivered to the Company's production facilities for final assembly, quality control testing and product configuration, including software installation. The Company's products incorporate the Company's proprietary software as well as software licensed from third parties. The Company believes that its use of independent contractors for subassembly coupled with in-house final assembly improves production planning, increases efficiency, reduces costs and improves quality. The Company has a computerized manufacturing inventory control system which integrates and monitors purchasing, inventory control and production. The Company's quality control process tests for reliability and conformance with product specifications and utilizes certain automated software test procedures. The Company received ISO 9002 certification from Bellcore in February 1995. The Company generally uses industry standard components for its products which are available from multiple sources; however, a few key components, such as certain microprocessors, video displays and power supplies, are currently only available from single suppliers. Vendor supply agreements often include provisions requiring the vendor to maintain a specified level of key components. The Company believes that inventory levels of key components, including those maintained by vendors, are adequate. In addition, should any components become unavailable the Company believes that functionally similar, if not identical, components could be obtained, and any necessary internal redesign accomplished, without materially adversely impacting the Company. To date, the Company has not experienced any significant delays in obtaining components from its suppliers and independent contractors. However, the electronics industry is subject to rapid technological change. Components become obsolete and are discontinued by manufacturers as new succeeding generations are introduced. An inability to obtain essential components, if prolonged, could materially adversely affect the Company's business and operating results and damage customer relationships. See "Risk Factors -- Dependence on Key Suppliers." 31 34 COMPETITION Diagnostic Products. The communications diagnostic market is intensely competitive and subject to rapid technological change and evolving industry standards. The Company primarily competes in the high performance segment of the market. Its principal competitor is Hewlett-Packard. The Company also competes with a number of other manufacturers, some of which have greater financial, marketing, manufacturing and technological resources than the Company. The Company believes that its long-term success will depend in part on its ability to be a leader in offering products for new emerging industry standards and to offer a broad line of integrated applications. The Company believes that the principal competitive factors in the communications diagnostic market in which the Company competes are product performance, functionality and reliability, timely introduction of new products, marketing and distribution capability and customer service and support. The Company anticipates that the price/performance characteristics and breadth of integrated product applications will become increasingly important competitive factors. Although price has not been a major factor, the Company anticipates increased price competition in the future. The Company believes that it competes favorably, although there can be no assurance that new or established competitors will not offer products superior to or lower in price than those of the Company. Network Switching Products. The market for STPs is highly competitive and has been highly concentrated among a limited number of dominant suppliers. The Company expects competition to increase in the future from existing and new competitors. The Company presently competes with Northern Telecom Limited, DSC, Ericsson and Alcatel, all of whom have significantly greater financial, marketing, manufacturing and other resources and larger installed customer bases than the Company. The Company believes that its long-term success will depend on its ability to penetrate the major telephone companies, offer products with the best price/performance profile and be responsive to customers' needs for new features and services. See "Risk Factors -- Competition" and "-- Relationship with AT&T." The Company believes that the principal competitive factors in the network switching products market are product price/performance characteristics and reliability, customer service and support and the supplier's financial resources, marketing and distribution capability. The Company anticipates that responsiveness in adding new features will become an increasingly important competitive factor. While the Company's competitors have greater financial resources, the Company believes it competes favorably in other respects. However, there can be no assurance that new entrants or established competitors with greater financial resources have not or will not offer products superior in performance, quality, service and support to, and/or lower in price than, those of the Company. INTELLECTUAL PROPERTY The Company relies on a combination of trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company does not hold any patents with respect to its products. The Company has entered into confidentiality and invention assignment agreements with its employees, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers among others so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will prove sufficient to deter misappropriation of the Company's technologies or independent third-party development of similar technologies. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. The Company believes that, because of the rapid pace of technological change in the communications market, legal protections for its products are less significant factors in the Company's success than the knowledge, ability and experience of the Company's employees, the frequency of product enhancements and the quality of support services provided by the Company. 32 35 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 the Company. There are no currently pending material claims that the Company's products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, there can be no assurance that the Company will not receive communications from third parties in the future asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements and certain of its major customer agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business and operating results would be materially adversely affected. EMPLOYEES At March 1, 1995, the Company had 310 employees, comprising 122 in sales, marketing and support, 44 in manufacturing, 110 in research, development and engineering and 34 in management, administration and finance. The Company believes that its future success will depend in part on its ability to attract, motivate and retain highly qualified personnel. Many employees hold stock options and participate in an employee stock purchase plan. None of the Company's employees is represented by a labor union and the Company has not experienced any work stoppages. The Company believes that its employee relations are excellent. PROPERTIES The Company's executive offices, as well as its principal manufacturing, engineering and marketing operations, are located in a 58,000 square-foot facility in Calabasas, California under a lease which expires in November 2004 with an option to extend for an additional five years. The Company also occupies a 21,600 square-foot facility in Morrisville, North Carolina under a lease expiring in July 1996, and a 6,800 square-foot facility in Columbus, Ohio under a lease expiring in March 1997. Both facilities are used primarily for engineering, product development, customer support and regional sales activities. The Company recently signed leases for two additional facilities in Morrisville, North Carolina to provide for anticipated growth. The first is a five-year lease (cancellable by the Company under certain circumstances) for an 8,800 square-foot facility to which Network Diagnostic Division employees of the Morrisville facility will relocate in April 1995. The second is a seven-year lease, with an option to renew for an additional seven years, for a 40,000 square-foot facility to which the Company expects to relocate the Network Switching Division employees of its Morrisville facility during the fourth quarter of 1995. The Company also has eight regional sales offices occupying an aggregate of approximately 14,500 square feet under leases expiring between 1995 and 1997. These are located in Milbrae, California; Boulder, Colorado; Lombard, Illinois; Nashville, Tennessee; Iselin, New Jersey; Irving, Texas; Reston, Virginia; and Whitby, Canada. The Company's Japanese subsidiary occupies approximately 10,600 square feet in Tokyo under leases expiring between August 1995 and November 1996. The Company believes that its existing facilities, together with the additional facilities it has leased in North Carolina, will be adequate to meet its needs at least through 1995. The Company believes it will be able to obtain additional space when and as needed on acceptable terms. See Note K to Consolidated Financial Statements. 33 36 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company and their ages are as follows:
NAME AGE POSITION - ------------------------- --- ----------------------------------------------------------- Philip J. Alford......... 41 President and Director Allan J. Toomer.......... 52 Senior Vice President and General Manager, Network Switching Division William C. Shaw.......... 47 Senior Vice President and General Manager, Network Diagnostic Division Shigeru Suzuki........... 45 Vice President, Japan Operations and President, Tekelec, Ltd. Gilles C. Godin.......... 36 Vice President, Finance and Chief Financial Officer William J. Minchin....... 58 Vice President, Operations Jean-Claude Asscher...... 66 Chairman of the Board Robert V. Adams(1)(2).... 63 Director Philip Black(1).......... 40 Director Daniel L. Brenner(1)(2).. 43 Director Howard Oringer........... 52 Director Jon F. Rager(1)(2)....... 55 Director
- --------------- (1) Member of Audit Committee. (2) Member of Compensation Committee. Mr. Alford has been a director and President of the Company since January 1994. He served as the Company's Chief Financial Officer from June 1985 until February 1994, as Vice President, Finance from May 1986 until October 1990, as Senior Vice President from October 1990 until July 1993 and as Senior Vice President and General Manager, International Division from July 1993 until January 1994. Mr. Toomer joined the Company in October 1992 as Senior Vice President, Network Products and became Senior Vice President and General Manager, Network Switching Division in July 1993. From 1973 until June 1992, he held various officer positions at Northern Telecom, a telecommunications equipment manufacturer, where he most recently served as Vice President, Customer Service. Mr. Shaw joined the Company in November 1993 as Senior Vice President and General Manager, Network Diagnostic Division. He was employed by Hewlett-Packard from April 1990 until November 1993 as a Business Unit Manager at its Colorado Telecommunications Division, and from 1983 until April 1990, as the Marketing and Research and Development Manager for its Roseville Personal Computer Division. Mr. Suzuki has been President of Tekelec, Ltd., the Company's wholly owned Japanese subsidiary, since September 1985 and has also served as the Company's Vice President, Japan Operations since May 1988. Mr. Godin joined the Company in November 1986 as Controller and then served as Corporate Controller from October 1990 until July 1993 and as Treasurer from October 1990 until February 1994. Mr. Godin has served as Vice President, Finance since July 1993 and as Chief Financial Officer since February 1994. Mr. Minchin has been Vice President, Operations of the Company since April 1988. Mr. Asscher has been a director of the Company since July 1972 and Chairman of the Board since June 1982. He served as President of the Company 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 34 37 Tekelec-Airtronic, S.A. (Tekelec-Airtronic), a French electronics company, since he founded that company in 1961. Mr. Adams has been a director of the Company since December 1991. Since March 1989, he has been the Chief Executive Officer and President of Xerox Technology Ventures, a venture capital company which identifies, develops and manages new business opportunities for Xerox Corporation. Mr. Adams has also served as a director of ENCAD, Inc. since December 1994. Mr. Black became a director of the Company in 1981, resigned in October 1991 and was re-elected in February 1994. He also served as the Company's Vice President from September 1979 until June 1982, as President from June 1982 until August 1987, as Chief Executive Officer from December 1985 until August 1987 and as Vice Chairman of the Board from August 1987 until October 1991. From March 1990 until August 1991, Mr. Black served as Managing Director of Echelon Europe, Ltd., a sense and control networking company. In September 1991, Mr. Black became Chief Executive Officer, Treasurer and a director of Avalon Control Technologies, a private consulting firm for industrial networks, and served in those capacities until June 1994 when that company ceased operations. Since April 1994, Mr. Black has served as President and Chief Executive Officer of Chevry, a software marketing company. Mr. Brenner has been a director of the Company since May 1990. From September 1986 to June 1992, he was an Adjunct Professor of Law and the Director of the Communications Law Program at the University of California, Los Angeles. In June 1992, Mr. Brenner assumed his present position as Vice President, Law and Regulatory Policy for the National Cable Television Association. Mr. Brenner served on the Board of Directors of the Corporation for Public Broadcasting from November 1986 to March 1991, and served as its Vice Chairman from 1989 to March 1991. Mr. Oringer has been a director of the Company since January 1992. From February 1987 until November 1994, he served as Chairman of the Board and Chief Executive Officer of TeleSciences, Inc., a manufacturer of telecommunications equipment. Since November 1994, Mr. Oringer has served as Managing Director of Communications Capital Group, a consulting firm. From January 1994 until July 1994, Mr. Oringer also served as a consultant to the Company. Mr. Rager became a director of the Company 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). 35 38 COMMON STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 31, 1995 by (i) each person who is known to own beneficially more than 5% of the outstanding shares of the Company's Common Stock, (ii) each of the Company's directors and executive officers and (iii) all current directors and executive officers of the Company as a group:
PERCENTAGE OF SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY ---------------------------------- NAME OF BENEFICIAL OWNER(1) OWNED BEFORE OFFERING AFTER OFFERING - ------------------------------------- ----------------------- --------------- -------------- Jean-Claude Asscher.................. 3,868,520(2)(3) 41.5% 34.9% Edouard Givel........................ 2,767,064(4) 29.7 25.0 Kopp Investment Advisors, Inc........ 1,317,320(5) 14.1 11.9 Bentley Capital Management, Inc...... 561,000(6) 6.0 5.1 Philip J. Alford..................... 181,760(3) 2.0 1.6 Robert V. Adams...................... 50,246(3) 0.1 * Shigeru Suzuki....................... 39,538(3) * * Howard Oringer....................... 37,688(3) * * Gilles C. Godin...................... 34,700(3) * * Daniel L. Brenner.................... 22,772(3) * * Philip Black......................... 15,000(3) * * William C. Shaw...................... 7,770(3) * * Jon F. Rager......................... 9,672(3)(7) * * William J. Minchin................... 9,000(3) * * Allan J. Toomer...................... 8,000(3) * * All current directors and officers as a group (12 persons)............... 4,284,666(2)(3)(7) 46.0 38.7
- --------------- * Less than one percent. (1) Such persons 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, and the information contained in the footnotes to this table. (2) Includes 2,767,064 shares which are owned by Mr. Givel and of which Mr. Asscher may be deemed a beneficial owner (see footnote 4 below), and 975,292 shares owned by Tekelec-Airtronic, a French corporation of which Mr. Asscher is the President and majority shareholder. (3) Includes 20,000, 118,500, 12,000, 5,118, 36,500, 34,700, 21,000, 15,000, 2,500, 9,000, 8,000, 6,000 and 288,318 shares subject to options and/or warrants held by Messrs. Asscher, Alford, Adams, Suzuki, Oringer, Godin, Brenner, Black, Rager, Minchin, Toomer and Shaw and all current directors and officers as a group, respectively, which are exercisable or become exercisable within 60 days after March 31, 1995. (4) These shares are held in the name of Natinco, S.A. (Natinco), a Luxembourg investment company which holds minority interests in a number of Europe-based companies, including a minority interest in Tekelec-Airtronic. Mr. Givel has advised the Company that he owns substantially all of the equity interest in Natinco and holds the shares in the Company for investment only. Mr. Asscher has from time to time acted for, and is the advisor to, Mr. Givel with respect to his investment in the Company. Due to Mr. Asscher's relationship with Mr. Givel and his 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 Exchange Act. Mr. Asscher has advised the Company that he has no beneficial or financial interest in Natinco and that he disclaims beneficial ownership of these shares. 36 39 (5) Based on a Schedule 13G dated February 10, 1995, wherein Kopp Investment Advisors, Inc. reported shared dispositive power as to 1,317,320 shares. (6) Based on a Schedule 13D dated March 3, 1995. (7) 7,172 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 such partnership. DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue up to 50,000,000 shares of Common Stock, without par value. As of March 31, 1995, there were 9,322,682 shares of Common Stock outstanding, held of record by 202 shareholders, and 2,420,280 shares reserved for issuance upon the exercise of outstanding options and warrants. 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 the Company, 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, and the shares of Common Stock offered hereby will be, when issued, validly issued, fully paid and nonassessable. The Company's Transfer Agent and Registrar is U.S. Stock Transfer Corporation, Glendale, California. 37 40 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, Alex. Brown & Sons Incorporated, Volpe, Welty & Company and Cruttenden Roth Incorporated, have severally agreed to purchase from the Company the following respective number of shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES - -------------------------------------------------------------------------------- --------- Alex. Brown & Sons Incorporated................................................. Volpe, Welty & Company.......................................................... Cruttenden Roth Incorporated.................................................... --------- Total........................................................................... 1,750,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any such shares are to be purchased. The Company has been advised by the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering contemplated hereby, the offering price and other selling terms may be changed by the Underwriters. The Company has granted the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 262,500 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 1,750,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 1,750,000 shares are being offered. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. In connection with this offering, certain Underwriters and selling group members (if any) who are qualifying registered market makers on the Nasdaq Stock Market may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act during the two business day period before commencement of sales in this offering. The passive market making transactions must comply with applicable price and volume limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and if commenced, may be discontinued at any time. 38 41 The Company has agreed that until 90 days after the date of this Prospectus, it will not, without the prior written consent of Alex. Brown & Sons Incorporated, sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock or any options, rights or warrants with respect to any Common Stock or register for sale under the Securities Act, any Common Stock, subject to certain limited exceptions. Further, the directors and executive officers of the Company, Tekelec-Airtronic and Natinco have agreed not to directly or indirectly sell, contract to sell, grant any option to purchase or otherwise transfer or dispose of an aggregate of approximately 4,284,666 shares of the Company's Common Stock (including 288,318 shares issuable under options and warrants which are exercisable or become exercisable within 60 days after March 31, 1995) for a period of 90 days (180 days in the case of Mr. Asscher, Tekelec-Airtronic and Natinco) after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. LEGAL MATTERS The validity of the shares of the Company's Common Stock offered hereby will be passed upon for the Company by Coudert Brothers, Los Angeles, California. Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, Palo Alto, California, are acting as counsel for the Underwriters in connection with certain legal matters relating to the offering being made hereby. Coudert Brothers holds a warrant, exercisable in full at any time prior to July 21, 1999, to purchase 30,000 shares of Common Stock at $2.875 per share. Ronald W. Buckly, a member of Coudert Brothers, is Corporate Secretary of Tekelec. EXPERTS The consolidated balance sheets as of December 31, 1994 and 1993 and the consolidated statements of operations, shareholders' equity and cash flow for the three years in the period ended December 31, 1994 are included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. 39 42 GLOSSARY AIN (Advanced Intelligent Network).................... Bellcore's set of standards for advanced intelligent services for the telephone networks of Regional Bell Operating Companies. ATM (Asynchronous Transfer Mode)....................... A broadband, low-delay, packet-based switching and multiplexing technique. Usable capacity is segmented into fixed-size cells, consisting of header and information fields, allocated to services on demand. BRI (Basic Rate Interface).... One interface type used to access the Integrated Services Digital Network. The BRI interface allows two simultaneous calls across a single pair of copper wires. CCITT (International Telephone and Telegraph Consultative Committee).................. A United Nations organization which establishes international telecommunications standards. E1............................ The European telecommunications standard defining circuits that operate at speeds of 2.048 Mbps, similar to T1 lines in the United States. Ethernet...................... A standard set of specifications for a particular type of LAN that employs baseband signalling (single signal on a cable) and has a transmission rate of 10 Mbps. FDDI (Fiber Distributed Data Interface).................. A standard for operating fiber optic-based LANs at 100 Mbps used for high speed and backbone applications. Frame Relay................... A variable length packet-based transmission technology that is used to transmit data at speeds up to 2 Mbps. GSM (Global Systems for Mobile)....................... The standard for a set of protocols for digital wireless initially deployed in Europe. ISDN (Integrated Services Digital Network).............. Public digital communications services supporting a wide range of data, voice and image services accessed by standard interfaces integrated with customer control. IS-41......................... One of the Interim Standards for North American mobile applications for digital cellular. LAN (Local Area Network)...... A type of high-speed data communications arrangement in which multiple computer and related products in an office or campus environment are connected by means of a standard transmission medium (typically coaxial cable, twisted-pair wire or optical fiber). Mbps (Megabits per second).... A measurement unit, equal to 1,048,576 bits per second, used to describe data transfer rates as a function of time. MSC (Mobile Switching Center)..................... A switch that coordinates trunk call set-up to and from users in a digital cellular network. OC3........................... A standard for operating fiber optic-based WANs at 155 Mbps. 40 43 Packet Switching.............. A data transmission technique whereby user information is segmented and routed in discrete data envelopes called packets, each with its own appended control information for routing, sequencing and error checking. PCS (Personal Communications Services)................... A set of evolving standards and protocols providing for the concept of one number per user and associated advanced intelligent services regardless of location primarily involving mobile communications. PDC (Personal Digital Communications)............. A set of protocol standards for Japanese digital cellular mobile network promulgated by NEC. Primary Rate Interface (PRI)......................... A T1 or E1 circuit used to carry 23 or 30 ISDN calls, respectively. In an ISDN PRI, a single channel is used for signalling for calls placed on all of the other channels in the T1 or E1 circuit. protocol...................... A formal set of standards governing the establishment of a communications link and controlling the format and timing of transmissions between two devices. signalling.................... The process by which digital information is exchanged to establish, control and manage connections in a network. SCP (Service Control Point)... A computer database that is accessed by STPs for customer call routing information. SMDS (Switched Multi-megabit Data Service)............... A communications service providing high speed (up to TS3), connectionless data transport. SS7 (Common Chanel Signalling System No. 7)............... A complex protocol which governs signalling between certain devices in a digital telephone network. SSP (Service Switching Point)........................ An SSP is a component of the central office switch that sets up trunk connections. When an SSP identifies an AIN call, it routes a signalling message to the STP and awaits further instructions for call processing. STP (Signal Transfer Point)... An STP is a switch that handles the signalling messages used to set up telephone calls, queries external databases for routing and processing information and dispatches call handling instructions. T1............................ The North American telecommunications standard defining a circuit that multiplexes and switches 24 channels and operates at speeds of 1.544 Mbps (T3 is the equivalent of 27 T1 circuits). WAN (Wide Area Network)....... A network that extends beyond the distance that can be accommodated by local cabling methods. A WAN typically utilizes public carrier services to connect sites, which may span a city, state, country or the world. X.25.......................... A protocol for transfer of information across packet data networks. X.25 was the first packet data technology to be widely implemented. 41 44 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants...................................................... F-1 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1994................................................ F-2 Consolidated Balance Sheets as of December 31, 1993 and 1994........................... F-3 Consolidated Statements of Cash Flow for each of the three years in the period ended December 31, 1994................................................ F-4 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1994................................................ F-5 Notes to Consolidated Financial Statements............................................. F-6
42 45 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC We have audited the accompanying consolidated balance sheets of Tekelec as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity, and cash flow for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tekelec as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Sherman Oaks, California February 3, 1995, except for Note P, as to which the date is March 17, 1995 F-1 46 TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 1992 1993 1994 -------- --------- -------- (THOUSANDS, EXCEPT PER SHARE DATA) Revenues (including sales to related parties of 1992 -- $3,881; 1993 -- $3,972; 1994 -- $3,809)................. $ 58,090 $ 46,856 $ 61,189 Costs and expenses: Cost of goods sold...................................... 18,864 16,836 20,388 Research and development................................ 16,181 17,570 11,962 Selling, general and administrative..................... 27,413 23,756 22,466 Restructuring........................................... 2,767 5,988 -- -------- --------- -------- Total costs and expenses............................. 65,225 64,150 54,816 -------- --------- -------- Income (Loss) from operations............................. (7,135) (17,294) 6,373 Interest and other income (expense), net................ 442 193 (662) -------- --------- -------- Income (Loss) before provision for income taxes........... (6,693) (17,101) 5,711 Provision for income taxes.............................. 1,603 1,442 1,251 -------- --------- -------- Net income (loss).................................. $ (8,296) $ (18,543) $ 4,460 ======== ========= ======== Earnings (Loss) per share: (Note P) Primary............................................ $ (1.01) $ (2.23) $ 0.47 Fully diluted...................................... (1.01) (2.23) 0.43 Weighted average number of shares: (Note P) Primary............................................ 8,178 8,314 9,550 Fully diluted...................................... 8,178 8,314 10,360
See notes to consolidated financial statements. F-2 47 TEKELEC CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1993 1994 -------- -------- (THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents...................................... $ 3,669 $ 6,653 Restricted cash................................................ -- 1,000 Accounts and notes receivable, less allowances 1993 -- $221; 1994 -- $318.................................. 8,446 14,215 Inventories.................................................... 4,715 4,391 Amounts due from related parties............................... 1,244 1,538 Income taxes receivable........................................ 216 -- Prepaid expenses............................................... 1,048 704 -------- -------- Total current assets................................... 19,338 28,501 Property and equipment, net...................................... 6,769 4,794 Technology, net.................................................. 1,156 423 Other assets..................................................... 876 691 -------- -------- Total assets........................................... $ 28,139 $ 34,409 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings and current portion of long-term debt.... $ 3,004 $ 1,366 Trade accounts payable......................................... 4,289 4,005 Accrued expenses............................................... 3,859 3,213 Accrued payroll and related expenses........................... 3,557 4,132 Deferred revenues.............................................. 480 1,412 Current portion of other obligations........................... 265 312 Income taxes payable........................................... 669 595 -------- -------- Total current liabilities.............................. 16,123 15,035 Long-term debt................................................... -- 620 Long-term portion of other obligations........................... 323 34 -------- -------- Total liabilities...................................... 16,446 15,689 -------- -------- Commitments and contingencies Shareholders' equity: (Note P) Common stock, without par value, 50,000,000 shares authorized; issued and outstanding 1993 -- 8,529,454; 1994 -- 9,022,612........................................... 14,349 15,940 Retained earnings (deficit).................................... (4,381) 79 Cumulative translation adjustments............................. 1,725 2,701 -------- -------- Total shareholders' equity............................. 11,693 18,720 -------- -------- Total liabilities and shareholders' equity............. $ 28,139 $ 34,409 ======== ========
See notes to consolidated financial statements. F-3 48 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1992 1993 1994 ------- -------- -------- (THOUSANDS) Cash flow from operating activities: Net income (loss)....................................... $(8,296) $(18,543) $ 4,460 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................ 4,999 5,522 4,406 Deferred income taxes................................ 465 145 -- Non-cash component of restructuring charge........... 1,710 2,969 -- Changes in current assets and liabilities: Accounts and notes receivable...................... 996 (1,150) (5,522) Inventories........................................ (1,053) (370) 400 Amounts due from related parties................... 199 (23) (294) Income taxes receivable............................ 379 530 216 Prepaid expenses................................... 212 (242) 427 Trade accounts payable............................. 410 2,369 (304) Accrued expenses................................... 1,685 (449) (703) Accrued payroll and related expenses............... 590 1,569 559 Deferred revenues.................................. 286 (208) 932 Income taxes payable............................... (450) 372 (150) ------- -------- ------- Total adjustments.................................. 10,428 11,034 (33) ------- -------- ------- Net cash provided by (used in) operating activities...................................... 2,132 (7,509) 4,427 ------- -------- ------- Cash flow from investing activities: Increase in restricted cash............................. -- -- (1,000) Purchase of property and equipment...................... (6,929) (2,476) (1,508) Investments in technology............................... (2,596) (165) -- Decrease (Increase) in other assets..................... (202) (681) 222 ------- -------- ------- Net cash used in investing activities.............. (9,727) (3,322) (2,286) ------- -------- ------- Cash flow from financing activities: Proceeds from (payments of) short-term borrowings....... -- 3,004 (1,878) Proceeds from long-term debt............................ -- -- 1,000 Repayment of long-term debt............................. -- -- (140) Proceeds from (payments of) other obligations........... (313) 184 (235) Proceeds from issuance of common stock.................. 644 662 1,591 ------- -------- ------- Net cash provided by financing activities.......... 331 3,850 338 ------- -------- ------- Effect of exchange rate changes on cash................... 49 583 505 ------- -------- ------- Net increase (decrease) in cash and cash equivalents..................................... (7,215) (6,398) 2,984 Cash and cash equivalents at beginning of the year............................................. 17,282 10,067 3,669 ------- -------- ------- Cash and cash equivalents at end of the year.............. $10,067 $ 3,669 $ 6,653 ======= ======== ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest................................................ $ 59 $ 327 $ 343 Income taxes............................................ 1,406 439 1,131
See notes to consolidated financial statements. F-4 49 TEKELEC CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK -------------------- RETAINED CUMULATIVE TOTAL NUMBER EARNINGS TRANSLATION SHAREHOLDERS' OF SHARES AMOUNT (DEFICIT) ADJUSTMENTS EQUITY --------- ------ --------- ----------- ------------- (THOUSANDS) Balance, December 31, 1991.... 8,096 $13,043 $ 22,458 $ 844 $ 36,345 Exercise of stock options... 168 644 -- -- 644 Translation adjustment...... -- -- -- 58 58 Net loss.................... -- -- (8,296) -- (8,296) ----- ------- -------- ------ -------- Balance, December 31, 1992.... 8,264 13,687 14,162 902 28,751 Exercise of stock options... 266 662 -- -- 662 Translation adjustment...... -- -- -- 823 823 Net loss.................... -- -- (18,543) -- (18,543) ----- ------- -------- ------ ------- Balance, December 31, 1993.... 8,530 14,349 (4,381) 1,725 11,693 Exercise of stock options... 493 1,591 -- -- 1,591 Translation adjustment...... -- -- -- 976 976 Net income.................. -- -- 4,460 -- 4,460 ----- ------- -------- ------ -------- Balance, December 31, 1994.... 9,023 $15,940 $ 79 $2,701 $ 18,720 ===== ======= ======== ====== ========
See notes to consolidated financial statements. F-5 50 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated. Certain items shown in the December 31, 1992 and 1993 financial statements have been reclassified to conform with the current period presentation. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method. The estimated useful lives are: Manufacturing and development equipment.......................... 3-5 years Furniture and office equipment....... 5 years Demonstration equipment.............. 3 years Leasehold improvements............... The shorter of useful life or lease term
TECHNOLOGY Product development costs, including costs of purchased and licensed technology incurred to enhance significantly a product that results in the creation and sales of a new generation of products, are capitalized; costs incurred in conceptualization and design of new products are expensed as incurred. Amortization is based on the greater of related net shipments made during the period to total anticipated net shipments, or the three-year straight-line method. Capitalized internally developed software costs for 1992 were $472,000. There were no capitalized internally developed software costs in 1993 and 1994. PRODUCT WARRANTY COSTS The Company generally warrants its products for one year after sale and provides for estimated future warranty costs at the time revenue is recognized. At December 31, 1993 and 1994, accrued product warranty costs amounted to $280,000 and $827,000, respectively, and are included in accrued expenses. REVENUE RECOGNITION Revenues from sales of diagnostic products are generally recognized when products are shipped. Revenues from sales of switching products are recognized upon shipment to the cus- F-6 51 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) tomer's final site for installation and satisfaction of any related significant Company obligations. Extended warranty service revenues are recognized ratably over the warranty period. Engineering service revenues are recognized on delivery or as the services are performed. INCOME TAXES Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. TRANSLATION OF FOREIGN CURRENCIES Translation of foreign currencies is accounted for using the local currency as the functional currency of the Company's foreign subsidiaries. All assets and liabilities are translated at current exchange rates while revenues and expenses are translated at average rates in effect for the period. The resulting gains and losses are included in a separate component of shareholders' equity. Gains (losses) on foreign currency transactions are reflected in net income (loss) and amounted to $(132,000), $253,000, and $(235,000) for 1992, 1993, and 1994, respectively. EARNINGS (LOSS) PER SHARE Earnings (Loss) per share are computed using the weighted average number of shares outstanding and dilutive common stock equivalents (options and warrants). NOTE B -- RESTRICTED CASH At December 31, 1994, the Company's Japanese subsidiary had $1.0 million of restricted cash included in current assets, which represents cash on deposit at a bank in Japan as collateral for outstanding short-term borrowings in the U.S. under a $2.0 million line of credit. See Note J. NOTE C -- CONCENTRATION OF CREDIT RISK The Company sells communications diagnostic and network systems worldwide primarily to telephone operating companies, equipment manufacturers, and corporations that use its systems to design, install, maintain, test and operate communications equipment and networks. Credit is extended based on an evaluation of each customer's financial condition, and generally collateral is not required. Credit losses, if any, have been provided for in the financial statements and have been consistently within management's expectations. The Company places its temporary cash investments in high credit quality financial instruments and limits the amount of credit exposure to any one issuer. Generally, the investments made mature within 90 days. NOTE D -- RELATED PARTY TRANSACTIONS As of December 31, 1994, the Company's principal shareholder, a director and his family, and a foreign-affiliated company controlled by the director owned an aggregate of approximately 47% of the Company's outstanding stock. F-7 52 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following is a summary of transactions and balances with these affiliates:
1992 1993 1994 ------ ------ ------ (THOUSANDS) Product sales........................................ $3,881 $3,972 $3,809 Purchases of inventory............................... 83 42 49 Director's fees and expenses......................... 24 24 15 Due from affiliates.................................. 1,222 1,244 1,538 Due to affiliates.................................... 33 14 41
The amounts due from and to the affiliates are non-interest bearing. In January 1994, the Company entered into a six-month consulting agreement with a director pursuant to which such director received $52,000 and a warrant to purchase 20,000 shares of the Company's Common Stock. See Note P. NOTE E -- RESTRUCTURINGS During the fourth quarter of 1992, the Company announced a restructuring plan designed to reduce operating expenses and scale back product lines that had not met profitability expectations and that were not anticipated to contribute to the Company's long-term strategy. In connection with this restructuring, the Company recorded a $2.8 million charge consisting of severance costs for 33 terminated employees in management, research and development, support and administrative functions and the write-down of technology and other assets associated with the scaled back product lines. During the second quarter of 1993, management reorganized the Company into a divisional structure and in connection with such reorganization, the Company recorded a $400,000 restructuring charge consisting of severance costs associated with the related termination of employees and closure of the Company's Alabama facility. After incurring continued losses, the Company implemented in the fourth quarter of 1993, an organizational and strategic restructuring aimed at returning the Company to profitability by significantly reducing overhead expenses and improving cash flow and further rationalizing the Company's business lines. In connection with this restructuring, the Company discontinued its network monitoring and field service product lines. A restructuring charge of $5.6 million was recorded representing severance pay for 65 terminated employees in management, research and development, support and administrative functions, the write-down of technology and other assets associated with the discontinued product lines, the write-off of a management information system project which the Company terminated and the accrual of other exit costs associated with the restructuring, including costs related to the sale of the Company's Australian subsidiary. F-8 53 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Restructuring charges consisted of the following:
FOR THE YEARS ENDED DECEMBER 31, ----------------- 1992 1993 ------ ------ (THOUSANDS) Severance pay.................................................. $ 937 $2,256 Inventory write-down........................................... 185 438 Property and equipment write-down.............................. -- 1,175 Technology write-down.......................................... 1,415 613 Other assets write-down........................................ 110 743 Other expenses................................................. 120 763 ------ ------ $2,767 $5,988 ====== ======
At December 31, 1994, all identified employees had been terminated and all the severance costs and accrued expenses had been paid. NOTE F -- INCOME TAXES The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1992 1993 1994 ------- ------- ------- (THOUSANDS) Currently payable (receivable): Federal..................................................... $ (147) $ (159) $ 133 State....................................................... -- 39 202 Foreign..................................................... 1,183 1,311 916 Deferred: Federal..................................................... 424 314 -- State....................................................... 32 -- -- Foreign..................................................... 111 (63) -- ------ ------ ------ $1,603 $1,442 $1,251 ====== ====== ======
F-9 54 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The primary components of temporary differences which gave rise to deferred taxes at December 31, 1993 and 1994 are:
DECEMBER 31, ----------------------- 1993 1994 -------- --------- (THOUSANDS) Deferred tax assets: Net operating loss carryforward.................................... $ 8,112 $ 5,565 Foreign tax credit carryforward.................................... 811 918 Allowance for doubtful accounts.................................... 138 117 Inventory adjustments.............................................. 677 775 Depreciation and amortization...................................... 260 323 Research and development credit carryforward....................... 865 1,141 Accrued liabilities................................................ 618 264 Warranty accrual................................................... 113 325 Other.............................................................. 448 230 -------- ------- Total deferred tax asset........................................... 12,042 9,658 Less, valuation allowance.......................................... (11,958) (9,496) -------- ------- Total net deferred tax asset....................................... 84 162 -------- ------- Deferred tax liabilities: Depreciation and amortization...................................... -- -- Deferred product development costs................................. -- 84 Other.............................................................. 84 78 -------- ------- Total deferred tax liability....................................... 84 162 -------- ------- Net deferred tax asset............................................... -- -- Current portion...................................................... -- -- -------- ------- Long-term portion (included in other assets)......................... $ -- $ -- ======== =======
The provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 1992 1993 1994 ------ ------ ------ Federal statutory provision (benefit) rate............... (34.0)% (35.0)% 34.0% Research and development credits......................... (0.7) -- -- State taxes, net of federal benefit...................... 0.7 0.2 6.1 Foreign taxes............................................ 16.6 2.9 6.9 Utilization of operating loss carryforwards.............. -- -- (27.5) Loss for which no tax benefit was recorded............... 35.8 32.3 -- Temporary differences for which no tax benefit was recorded............................................... 6.0 7.9 -- Other.................................................... (0.4) 0.1 2.4 ----- ----- ----- 24.0% 8.4% 21.9% ===== ===== =====
At December 31, 1994, the Company had available federal net operating loss carryforwards of $14.8 million, foreign tax credit carryforwards of $918,000 and research and development credit carryforwards of $1.1 million which will generally expire beginning in the years 2007, 1997 and 2007, respectively. F-10 55 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company has not provided for federal income taxes on $8.0 million of undistributed earnings of its foreign subsidiaries which have been reinvested in their operations. If these earnings were distributed, net operating loss carryforwards and foreign tax credits available under current law would eliminate the resulting federal income tax liability. NOTE G -- INVENTORIES The components of inventories are:
DECEMBER 31, ---------------------- 1993 1994 ------- ------- (THOUSANDS) Raw materials............................................... $2,283 $2,197 Work in process............................................. 1,465 1,246 Finished goods.............................................. 967 948 ------ ------ $4,715 $4,391 ====== ======
NOTE H -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, --------------------- 1993 1994 -------- -------- (THOUSANDS) Manufacturing and development equipment...................... $ 9,594 $ 8,567 Furniture and office equipment............................... 6,948 5,022 Demonstration equipment...................................... 3,868 3,249 Leasehold improvements....................................... 1,224 1,257 -------- -------- 21,634 18,095 Less, accumulated depreciation and amortization.............. (14,865) (13,301) -------- -------- $ 6,769 $ 4,794 ======== ========
NOTE I -- TECHNOLOGY Technology consists of capitalized product development costs, net of accumulated amortization of $1.1 million and $1.2 million at December 31, 1993 and 1994, respectively. NOTE J -- BORROWINGS The Company has a $7.5 million line of credit and a $2.0 million line of credit with U.S. banks and lines of credit aggregating $3.5 million available to the Company's Japanese subsidiary from various Japan-based banks. The Company's $7.5 million line of credit with a U.S. bank is collateralized by substantially all of the Company's assets, bears interest at the U.S. prime rate (8.5% at December 31, 1994) plus 2.5% per annum and expires September 30, 1995, if not renewed. Maximum borrowings available under the line of credit are based on eligible accounts receivable and amounted to $6.6 million at December 31, 1994, of which $126,000 was then outstanding. This line of credit includes a $1.0 million long-term credit facility payable in 47 monthly installments of $20,000 each which began in June 1994 and a final installment of $60,000 due in May 1998 or upon the expiration of the underlying $7.5 million line of credit, if not renewed. At December 31, 1994, $860,000 was outstanding under this long-term facility, of which $620,000 was included under long-term debt. F-11 56 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 1994, the Company established a $2.0 million line of credit with a U.S. bank, collateralized by restricted cash deposits in Japan, with interest at the U.S. prime rate plus 0.375% per annum. This line of credit expires May 31, 1995, if not renewed. Borrowings at any time may not exceed the cash amount on deposit. At December 31, 1994, $1.0 million was outstanding under this line of credit. 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 $3.5 million with interest at the Japanese prime rate (3% at December 31, 1994) plus 0.125% per annum which expire between May 29, 1995 and March 31, 1996, if not renewed. There have been no borrowings under these lines of credit. The Company's weighted average short-term borrowing rates were 7.2% and 8.8% in 1993 and 1994, respectively. NOTE K -- COMMITMENTS AND CONTINGENCIES The Company leases its office and manufacturing facilities together with certain office equipment under operating lease agreements. Lease terms generally range from one to ten years; certain building leases contain options for renewal for additional periods and are subject to increases up to 10% every 24 months. Total rent expense was $1.8 million, $2.1 million, and $2.0 million, for 1992, 1993, and 1994, respectively. Minimum annual non-cancelable lease commitments at December 31, 1994, are:
FOR THE YEARS ENDING DECEMBER 31, -------------------- (THOUSANDS) 1995............................................ $1,595 1996............................................ 1,242 1997............................................ 799 1998............................................ 747 1999............................................ 807 Thereafter...................................... 4,234 ------ $9,424 ======
During 1992, the Company recorded legal expenses and costs for the defense and settlement of certain litigation against the Company and its then President that was initiated by a former officer of the Company. The terms of the settlement are subject to a confidentiality clause. NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has various stock option plans (Option Plans) with maximum terms of 10 years. Five million fifty thousand shares of the Company's Common Stock have been issued or reserved for issuance under these plans. The terms of options granted under these Option Plans are determined at the time of grant. The option price may not be less than the fair market value per share on the date of grant. Both incentive stock options and nonstatutory stock options can be issued under the Option Plans. F-12 57 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Combined stock option activity under the Option Plans is as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1992 1993 1994 --------------- --------------- --------------- Number of option shares: Granted..................... 626,530 1,947,502 1,292,348 Exercised................... 102,272 150,126 407,982 Cancelled................... 232,840 1,865,548 583,632 Outstanding at end of year..................... 2,015,210 1,947,038 2,247,772 Option price range: Granted..................... $ 5.25 - $8.63 $ 2.63 - $5.63 $ 3.00 - $16.38 Exercised................... 1.88 - 6.25 1.88 - 4.38 1.88 - 6.13 Cancelled................... 1.88 - 9.25 3.25 - 9.25 3.00 - 13.63 Outstanding at end of year..................... 1.88 - 9.25 1.88 - 6.25 1.88 - 16.38
At December 31, 1994, options for 575,514 shares were exercisable at exercise prices ranging from $1.875 to $7.75 per share and have exercise periods of up to ten years. The Company has an Employee Stock Purchase Plan (the "ESPP") with a maximum term of ten years. Four hundred fifty thousand shares of the Company's Common Stock have been reserved for issuance under the ESPP. Eligible employees may authorize payroll deductions of up to 10% of their compensation to purchase shares of Common Stock at 85% of the lower of the market price at the beginning or end of each six-month offering period. During 1992, 1993, and 1994, 65,866, 114,824, and 85,176 shares, respectively, were purchased under the ESPP at average prices of $4.72, $2.34, and $3.07, respectively. The Company has a 401(k) tax-deferred savings plan under which eligible employees may authorize from 2% to 12% of their compensation to be invested in employee-elected investment funds managed by an independent trustee. The Company may contribute matching funds of up to 50%, as determined annually by the Board of Directors, of the employees' payroll deductions. During 1992, 1993, and 1994, the Company's contributions amounted to $352,000, none, and $122,000, respectively. NOTE M -- INTERNATIONAL SALES AND FOREIGN OPERATIONS International sales, including foreign operations, primarily in Japan, Western Europe, and the Far East, amounted to 43%, 51%, and 43% of revenues in 1992, 1993, and 1994, respectively. The following table sets forth financial data of the Company's foreign operations:
1992 1993 1994 ------- ------- ------- (THOUSANDS) Revenues.................................................. $15,132 $14,784 $13,467 Income before provision for income taxes.................. 2,036 2,156 1,659 Total assets.............................................. 10,059 11,400 13,651
NOTE N -- MAJOR CUSTOMERS Sales to Nippon Telegraph and Telephone amounted to 13%, 16%, and 13% of revenues in 1992, 1993, and 1994, respectively. F-13 58 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE O -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTERS ------------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- (THOUSANDS, EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, 1993 Revenues............................... $11,157 $11,425 $12,658 $11,616 Gross profit........................... 7,309 7,498 7,622 7,591 Loss before provision for income taxes................................ (3,015) (3,503) (2,561) (8,022) Net loss............................... (3,334) (3,823) (2,804) (8,582) Loss per share: Primary.............................. $ (0.40) $ (0.46) $ (0.34) $ (1.02) Fully diluted........................ (0.40) (0.46) (0.34) (1.02) 1994 Revenues............................... $12,986 $13,810 $15,638 $18,755 Gross profit........................... 8,246 9,494 10,606 12,455 Income before provision for income taxes................................ 243 1,216 1,880 2,372 Net income............................. 126 877 1,357 2,100 Earnings per share: Primary.............................. $ 0.01 $ 0.10 $ 0.15 $ 0.20 Fully diluted........................ 0.01 0.10 0.14 0.20
Tekelec typically operates with a limited backlog, and most of its revenues in each quarter result from orders received in that quarter. Further, Tekelec typically generates up to one-half of its revenues for each quarter in the last month of the quarter. Tekelec establishes its expenditure levels based on its expectations as to future revenues, and if revenue levels were to fall below expectations this would cause expenses to be disproportionately high. Therefore, a drop in near term demand would significantly affect revenues, causing disproportionate reduction in profits or even losses in any quarter. Tekelec's operating results may fluctuate for this reason or as a result of a number of other factors, including general economic and political conditions (such as recessions in the U.S. and Japan), capital spending patterns of Tekelec's customers, increased competition, variations in the mix of sales, fluctuation in proportion of foreign sales and announcements of new products by Tekelec or its competitors. The Company's results for 1993 include pre-tax restructuring charges amounting to $400,000 in the second quarter and $5.6 million in the fourth quarter and the effect of the Company's inability throughout the year to currently recognize benefits amounting to $8.0 million for its tax loss and credits carryforwards. In 1994, Tekelec's quarterly revenues increased by up to 61% as compared to prior year's quarters. The Company believes these increases resulted from increased market acceptance of its products. The Company's results for 1994 include the effect of the Company's ability to recognize benefits amounting to $1.6 million for its tax loss carryforwards. NOTE P -- COMMON STOCK At December 31, 1993 and 1994, the Company had warrants outstanding to purchase an aggregate of 20,000 and 80,000 shares of its Common Stock, respectively, as more fully discussed below. In 1992, the Company issued warrants to purchase a total of 20,000 shares of its Common Stock to two directors at $7.5625 per share. These warrants were re-priced to $3.595 per share in 1993, are F-14 59 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) exercisable in full at any time prior to January 17, 1997, and were outstanding at December 31, 1994 and 1993. In January 1994, pursuant to a consulting agreement between the Company and a director, the Company issued warrants to purchase 20,000 shares of its Common Stock at $3.4375 per share to such director, all of which were outstanding at December 31, 1994. These warrants vested during 1994, and are exercisable in full at any time prior to January 20, 1999. In April 1994, the Company issued warrants to purchase 10,000 shares of its Common Stock at $3.375 per share to one director, all of which were outstanding at December 31, 1994. These warrants vest and become exercisable in 20 equal quarterly installments beginning on April 19, 1994. In July 1994, the Company issued warrants to purchase 30,000 shares of its Common Stock at $2.875 per share, exercisable in full at any time prior to July 21, 1999, all of which were outstanding at December 31, 1994. On March 17, 1995, the Company effected a two-for-one stock split. All references to numbers of shares and related prices, per share amounts, and stock option plan data have been restated to reflect the stock split. F-15 60 - ------------------------------------------------------ - ------------------------------------------------------ NO PERSON HAS BEEN AUTHORIZED IN CON- NECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA- TION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESEN- TATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UN- DERWRITER. THIS PROSPECTUS DOES NOT CONSTI- TUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CON- TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE- QUENT TO THE DATE HEREOF. ------------------- TABLE OF CONTENTS
PAGE ---- Available Information................. 2 Additional Information................ 2 Incorporation of Certain Documents by Reference........................... 2 Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 11 Price Range of Common Stock........... 11 Dividend Policy....................... 11 Capitalization........................ 12 Selected Consolidated Financial Data................................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 14 Business.............................. 21 Management............................ 34 Common Stock Ownership of Principal Shareholders and Management......... 36 Description of Capital Stock.......... 37 Underwriting.......................... 38 Legal Matters......................... 39 Experts............................... 39 Glossary.............................. 40 Index to Consolidated Financial Statements.......................... 42 - -------------------------------------------- - --------------------------------------------
- ------------------------------------------------------ - ------------------------------------------------------ 1,750,000 SHARES COMMON STOCK ------------------- PROSPECTUS ------------------- ALEX. BROWN & SONS INCORPORATED VOLPE, WELTY & COMPANY CRUTTENDEN ROTH INCORPORATED April , 1995 - ------------------------------------------------------ - ------------------------------------------------------ 61 EDGAR APPENDIX This EDGAR Appendix is filed in compliance with Item 304 of Regulation S-T regarding graphic and image information. It describes material appearing on the inside front cover and on page 23 of the Prospectus included in the Registration Statement. INSIDE FRONT COVER The first illustration shows the components of a simplified SS7 network using Tekelec's EAGLE STP and MGTS/GSMT products. A photograph of Tekelec's EAGLE STP is shown. The EAGLE STP is shown connected to a graphical representation of an SCP and to a "cloud" that is representative of an SS7 network. The "SS7 network" cloud is connected via (i) a line to a photograph of a Tekelec MGTS/GSMT diagnostic system (ii) an SS7 link line to an SSP/Central Office Switch and (iii) a link line to an MSC. The SSP is shown connected via (i) an ISDN line to a telephone and (ii) a voice line going into a "cloud" representing a public switched network. The MSC is shown connected via (i) a GSM/PCS connection to a mobile phone and (ii) a trunk line into the "cloud" representing the same public switched network to which the SSP is connected. The second illustration shows the components of a simplified LAN/WAN/broadband network using Tekelec's Chameleon Open diagnostic system. The illustration shows a "cloud" representing a WAN incorporating ATM, Frame Relay or SMDS. The "cloud" is connected on one side via an OC3 interface to a smart router/switch. The smart router/switch is connected to a graphic representation of an Ethernet LAN showing a ring with several PCs which is shown connected to a photograph of Tekelec's Chameleon Open diagnostic system. On the other side, the "cloud" is connected via a T3/T1 line to another smart router/switch. This router/switch in turn is connected to a graphic representation of a Token Ring LAN to which several PCs are attached, which in turn is shown connected to the same photograph of Tekelec's Chameleon Open. The WAN "cloud" is also connected to the photograph of Tekelec's Chameleon Open. PAGE 22 This illustration is a representation of a "generic" SS7 network showing a graphic representation of an STP. The STP is connected on one side to a graphical representation of an SCP. Below, the STP is connected to a "cloud" that is representative of an SS7 network. The "SS7 cloud" is connected via (i) an SS7 link line to an SSP/Central Office Switch and (ii) a link line to an MSC. The SSP/Central Office Switch is shown connected via (i) an ISDN line to a telephone instrument and (ii) a voice line going into a "cloud" representing a public switched network. The MSC is shown connected via (i) a GSM/PCS connection to a mobile phone and (ii) a trunk line into the "cloud" representing the same public switched network to which the SSP is connected. 62 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses (other than underwriting discounts and commissions) payable by the Company in connection with the issuance and distribution of the securities being registered. All the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
REGISTRANT ---------- SEC registration fee............................................. $ 13,446 NASD filing fee.................................................. 4,400 Nasdaq listing fee............................................... 17,500 Blue sky fees and expenses....................................... * Printing and engraving expenses.................................. * Accounting fees and expenses..................................... * Legal fees and expenses.......................................... * Registrar and transfer agent's fees and expenses................. * Miscellaneous expenses........................................... * --------- Total.................................................. $ * =========
- --------------- * To be provided by amendment. 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. II-1 63 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, 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 or for failure to qualify for an exemption under Section 4 of the Securities Act. 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
EXHIBIT NUMBER ------ 1.1 Form of Underwriting Agreement. 3.1 Articles of Incorporation of Registrant, as amended.(1) 3.2 Bylaws of Registrant, as amended.(2) 5.1 Opinion of Coudert Brothers.(3) 23.1 Consent of Coudert Brothers (included in Exhibit 5.1).(3) 23.2 Consent of Coopers & Lybrand L.L.P. 24.1 Power of Attorney (see page II-4 of this Registration Statement).
- --------------- (1) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1994. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1987. (3) To be filed by amendment. II-2 64 ITEM 17. UNDERTAKINGS Insofar as indemnification for liability arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions set forth in Item 15, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act 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 and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. The Registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to 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. The Registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to 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. II-3 65 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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CALABASAS, STATE OF CALIFORNIA, ON APRIL 12, 1995. TEKELEC By: /s/ PHILIP J. ALFORD ------------------------------------ Philip J. Alford, President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Philip J. Alford, Gilles C. Godin and Jon F. Rager, or any one of them, his attorneys-in-fact and agents, each with full power of substitution for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Registration Statement, and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents full power and authority to do so and perform each and every act and thing requisite and necessary to be done in connection with this Registration Statement, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that any one of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ --------------- /s/ PHILIP J. ALFORD President and Director April 12, 1995 - --------------------------------------------- (Principal Executive Officer) Philip J. Alford /s/ GILLES C. GODIN Vice President, Finance and April 12, 1995 - --------------------------------------------- Chief Financial Officer Gilles C. Godin (Principal Financial and Accounting Officer) /s/ JEAN-CLAUDE ASSCHER Chairman of the Board April 12, 1995 - --------------------------------------------- Jean-Claude Asscher /s/ ROBERT V. ADAMS Director April 12, 1995 - --------------------------------------------- Robert V. Adams /s/ PHILIP BLACK Director April 12, 1995 - --------------------------------------------- Philip Black /s/ DANIEL L. BRENNER Director April 12, 1995 - --------------------------------------------- Daniel L. Brenner /s/ HOWARD ORINGER Director April 12, 1995 - --------------------------------------------- Howard Oringer /s/ JON F. RAGER Director April 12, 1995 - --------------------------------------------- Jon F. Rager
II-4 66 EXHIBIT INDEX
NUMBER DESCRIPTION PAGE - ----------------------- ------------------------------------------------------------ ----- 1.1 Form of Underwriting Agreement. 23.2 Consent of Coopers & Lybrand L.L.P.
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 WSGR DRAFT OF APRIL 11, 1995 1,750,000 SHARES TEKELEC Common Stock UNDERWRITING AGREEMENT ___________, 1995 ALEX. BROWN & SONS INCORPORATED VOLPE, WELTY & COMPANY CRUTTENDEN ROTH INCORPORATED c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Ladies and Gentlemen: Tekelec, a California corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto an aggregate of 1,750,000 shares of the Company's Common Stock, without par value (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the Underwriters are set forth opposite their names in Schedule I hereto. The Company also proposes to sell at the Underwriters' option an aggregate of up to 262,500 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Underwriters, you have advised the Company (a) that you are authorized to enter into this Agreement and (b) that each of you is willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." 2 In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Company. The Company represents and warrants as follows: (a) A registration statement on Form S-3 (File No. 33-__________) with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act") and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. The Company has satisfied the conditions for the use of Form S-3. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised through the date hereof, have heretofore been delivered by the Company to you. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A of the Rules and Regulations, the information deemed to be part of the registration statement at the time it became effective pursuant to Rule 430A of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended. The Registration Statement has been declared effective by the Commission under the Act, and no post-effective amendment to this Registration Statement has been filed as of the date of this Agreement. The form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as the "Prospectus." Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." Any reference herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein, as of the date of such Preliminary Prospectus or Prospectus, as the case may be, and, in the case of any reference herein to any Prospectus, also shall be deemed to include any documents incorporated by reference therein, and any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rules 424(b) and 430A, and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own its properties and conduct its business as described in the Registration Statement; the subsidiaries of the Company listed in Exhibit 21.1 to the Company's Report on Form 10-K for the year ended December 31, 1994 (collectively, the "Subsidiaries") have been duly organized and are validly existing as corporations in good standing under the laws of the respective jurisdictions of their incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries -2- 3 are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification and in which failure to so qualify would materially adversely affect the business or financial condition of the Company and the Subsidiaries, taken as a whole; the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company free and clear of all liens, encumbrances and security interests; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (c) The outstanding shares of Common Stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and nonassessable; and no preemptive rights of shareholders or similar contractual rights to purchase exist with respect to any of the Shares or the issue and sale thereof and there are no registration rights with respect to the capital stock of the Company which have not been satisfied or waived in connection with the offering of the Shares. (d) The Shares conform with the statements concerning them in the Registration Statement. (e) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. (f) The Commission has not issued an order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and in all respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. The documents incorporated by reference in the Prospectus, at the time the Registration Statement becomes effective or, in the case of documents filed after the time the Registration Statement becomes effective, at the time they will be filed with the Commission, will conform at such times in all respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the Act, as applicable, and the Rules and Regulations of the Commission thereunder. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, including any documents incorporated by reference therein, contains or will contain, as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter, specifically for use in the preparation thereof. -3- 4 (g) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules incorporated by reference in the Registration Statement, present fairly the consolidated financial position and the results of operations of the Company and Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data included or incorporated by reference in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the consolidated financial statements. (h) There is no action or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency which might result in any material adverse change in the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and the Subsidiaries taken as a whole. (i) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the consolidated financial statements (or as described in the Registration Statement or the documents incorporated by reference therein) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming to the description thereof set forth in the Registration Statement or the documents incorporated by reference therein. (j) The Company and the Subsidiaries have filed (or obtained extensions to file for) all federal, state and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due. (k) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and the Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions contemplated by the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Registration Statement or in the documents incorporated by reference therein, as the same may be amended or supplemented. -4- 5 (l) Neither the Company nor any of the Subsidiaries is in default under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it or any of its properties is bound and which default is of material significance in respect of the business or financial condition of the Company and the Subsidiaries taken as a whole. The consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any of the Subsidiaries is a party, except where such conflict, breach or default would not have a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole, or of the Articles of Incorporation or Bylaws of the Company or any order, rule or regulation applicable to the Company or any of the Subsidiaries of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (m) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (n) The Company and each of the Subsidiaries hold all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses. The Company has not been advised, and has no knowledge that either it or any of its Subsidiaries has not conducted or is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it has conducted or is conducting business, including, without limitation, all applicable local, state and federal employment and environmental laws and regulation, except where failure to have been or to be in compliance did not and would not have a material adverse effect on the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business affairs, management or business prospects of the Company and the Subsidiaries taken as a whole. (o) Coopers & Lybrand L.L.P., who have certified certain of the consolidated financial statements filed with the Commission and incorporated by reference in the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (p) The Company and the Subsidiaries own or possess or can acquire on reasonable terms adequate rights to use all patents, trademarks, service marks, trade names, copyrights, mask work rights, technology know-how and other intellectual property rights and trade secrets ("Intellectual Property") necessary to conduct the business now operated as described in the Prospectus except where the failure to possess such rights would not have a material adverse effect on the business or financial condition of the Company and the Subsidiaries, taken as a whole, and, except as disclosed in the Prospectus, neither the Company nor any of the Subsidiaries has received -5- 6 any notice of infringement of or conflict with (or knows of such infringement of or conflict with) rights of others with respect to the Intellectual Property which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse effect upon the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and the Subsidiaries taken as a whole; and except as disclosed in the Prospectus, the Company and the Subsidiaries do not, in the conduct of their businesses as now conducted as described in the Prospectus, infringe or conflict with any Intellectual Property of any third party, where such infringement or conflict, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse effect upon the condition, financial or otherwise, of the Company and the Subsidiaries taken as a whole or the earnings, business affairs, management, or business prospects of the Company and the Subsidiaries taken as a whole. (q) The Company has obtained the agreement of each of its executive officers and directors and certain shareholders not to offer for sale, agree to sell, sell, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or securities of the Company, including securities convertible into, exchangeable for or exercisable for securities of the Company for a period of ninety (90) days (and one hundred eighty (180) days in the case of Jean-Claude Asscher, Tekelec-Airtronic, S.A. and Natinco, S.A.) after the date of the Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. (r) The Common Stock is duly listed and quoted on the Nasdaq National Market. (s) To date, the Company has filed any and all filings required by the Act, the Exchange Act and the Rules and Regulations and such filings have conformed in all material respects to the requirements of the Act, the Exchange Act and the Rules and Regulations, as the case may be, and have not included any untrue statements of a material fact or omitted to state a material fact necessary to make the statements therein not misleading in the light of the circumstances under which they were made. 2. Purchase Sale and Delivery of the Firm Shares. On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees severally and not jointly, to purchase at a price of $____ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. Payment for the Firm Shares to be sold hereunder is to be made in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor for the accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland at 10:00 a.m., Baltimore time, on the fifth business day after the date of this Agreement or at such other time and date not later than five (5) business days thereafter as -6- 7 you and the Company shall agree upon in writing, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Underwriters request in writing not later than the third business day prior to the Closing Date, and will be made available for inspection by the Underwriters at least one business day prior to the Closing Date. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part but only once and at any time upon written notice given within 30 days after the date of this Agreement, by you, the Underwriters, to the Company setting forth the number of Option Shares as to which the Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Underwriters but shall not be earlier than three nor later than ten (10) full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to 1,750,000, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over- allotments in the sale of the Firm Shares by the Underwriters. The Underwriters may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. 3. Offering by the Underwriters. It is understood that the Underwriters are to make a public offering of the Firm Shares as soon as they deem it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth in the Prospectus. The Underwriters may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by each of you. -7- 8 4. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus or documents incorporated by reference therein of which the Underwriters shall not previously have been advised and furnished with a copy or which is not in compliance with the Rules and Regulations or to which the Underwriters shall have reasonably objected in writing and (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Company with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters. (b) The Company will advise the Underwriters promptly of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Underwriters may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long as the Underwriters may reasonably request for distribution of the Shares. (d) The Company will deliver to, or upon the order of, the Underwriters, from time to time, as many copies of any Preliminary Prospectus as the Underwriters may reasonably request. The Company will deliver to, or upon the order of, the Underwriters during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Underwriters may reasonably request. The Company will deliver to the Underwriters, at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Underwriters such number of copies of the Registration Statement, including documents incorporated by reference therein, but without exhibits, and of all amendments thereto, as the Underwriters may reasonably request. -8- 9 (e) If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (f) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than fifteen (15) months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least twelve (12) consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Underwriters copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Underwriters similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (h) The Company will not, during the ninety (90) days following the effective date of the Registration Statement and without the prior written consent of Alex. Brown & Sons Incorporated, directly or indirectly, sell (including without limitation any short sale), offer to sell, grant any option for the sale of, issue, distribute or otherwise dispose of any shares of Common Stock or any options, rights or warrants with respect to any Common Stock or any security convertible into Common Stock, or register any Common Stock for sale under the Act, except that the Company may, without such consent, (i) issue shares upon the exercise of options granted, or grant options to purchase shares (provided that such options are not exercisable within such ninety (90) day period and provided further that no such options are granted to any current executive officer of the Company other than pursuant to the Company's Employee Stock Purchase Plan) pursuant to its Amended and Restated 1984 Stock Option Plan, its 1994 Stock Option Plan, its Employee Stock Purchase Plan or its Amended and Restated Non-Employee Director Equity Incentive Plan or pursuant to warrants outstanding on the date of this Agreement and (ii) issue shares upon the exercise of a warrant to purchase 30,000 shares of Common Stock issued to Coudert Brothers and register such shares pursuant to the registration rights provisions of such warrant. -9- 10 (i) The Company will apply the net proceeds of the sale of the Common Stock sold by it substantially in accordance with its statements under the caption "Use of Proceeds" in the Prospectus. (j) The Company will maintain a transfer agent and registrar for its Common Stock. (k) The Company will cause the Shares to be listed on the Nasdaq National Market upon notice of issuance. 5. Costs and Expenses. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Master Agreement Among Underwriters, the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission, the filing fees and expenses incident to securing any required review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the Listing Fee of the Nasdaq National Market; and the expenses, including the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under state securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Company. The Company shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under state securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Underwriters pursuant to Section 6 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. Conditions of Obligations of the Underwriters. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: -10- 11 (a) No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company, shall be contemplated by the Commission. (b) The Underwriters shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Coudert Brothers, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; the Subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of the respective jurisdictions of their incorporation, with corporate power and authority to own their properties and conduct their business as described in the Prospectus; the Company and the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their respective businesses require such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company (other than directors' qualifying shares); and, to such counsel's knowledge, the outstanding shares of capital stock of the Subsidiaries are owned free and clear of all liens, encumbrances and security interests, and no options, warranties or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of its Common Stock have been duly authorized; the outstanding shares of its Common Stock, have been duly authorized and validly issued and are fully paid and nonassessable; all of the Shares conform in all material respects to the description thereof contained in the Prospectus; the certificates for the Shares are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and nonassessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of shareholders exist in the Company's Articles of Incorporation or Bylaws, or, to such counsel's knowledge, in any other agreement to which the Company is a party, with respect to any of the Shares or the issue and sale thereof and, to such counsel's knowledge, no registration rights exist with respect to the capital stock of the Company which have not been satisfied or waived in connection with the offering of the Shares. -11- 12 (iii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (iv) The Registration Statement and the Prospectus and each amendment or supplement thereto and each document incorporated by reference therein comply as to form in all material respects with the requirements of the Act or the Exchange Act, as applicable, and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to (i) the consolidated financial statements, schedules and other financial and financial statistical information included or incorporated by reference therein or (ii) any information furnished in writing by or through the Underwriters specifically for use in preparation thereof). (v) The statements under the caption "Description of Capital Stock" in the Prospectus, and the description of the Company's Common Stock contained in its Registration Statement on Form 8-A filed November 12, 1986, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate summaries and fairly and correctly present the information called for with respect to such documents and matters of law, as the case may be, in all material respects. (vi) Such counsel does not know of any contracts or documents required to be filed as exhibits to or incorporated by reference in the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed, incorporated by reference or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus or in the Company's filings under the Exchange Act incorporated by reference therein are fairly summarized in all material respects. (vii) Such counsel knows of no material legal proceedings pending or threatened against the Company or any of the Subsidiaries of a character which are required to be disclosed in the Registration Statement under the Act or in filings under the Exchange Act and the Rules and Regulations thereunder. (viii) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. (ix) This Agreement has been duly authorized, executed and delivered by the Company. -12- 13 (x) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the National Association of Securities Dealers, Inc. with respect to compensation of the Underwriters and compliance with Rule 10b-6A under the Exchange Act or as required by state securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. In rendering such opinion, Coudert Brothers may rely as to matters governed by the laws of states other than California or Federal laws on local counsel in such jurisdictions, provided that, in each case, Coudert Brothers shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it became effective under the Act, the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b), or any of the documents incorporated by reference therein, as of the date of effectiveness of the Registration Statement or, in the case of documents incorporated by reference in the Prospectus after the date of effectiveness of the Registration Statement, as of the respective dates when such documents were filed with the Commission, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to consolidated financial statements, schedules and other financial and financial statistical information included or incorporated by reference therein). With respect to such statement, Coudert Brothers may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Underwriters shall have received from Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv), and (ix) of Paragraph (b) of this Section 6, and that the Company is a validly organized and existing corporation under the laws of the State of California. In rendering such opinion, Wilson, Sonsini, Goodrich & Rosati may rely as to all matters governed other than by the laws of the State of California or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also -13- 14 include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, as of the time it become effective under the Act, and the Prospectus or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b), or any of the documents incorporated by reference therein, as of the date of effectiveness of the Registration Statement or, in the case of documents incorporated by reference in the Prospectus after the date of effectiveness of the Registration Statement, as of the respective dates when such documents were filed with the Commission, and the Registration Statement and the Prospectus, or any amendment or supplement thereto, as of the Closing Date or the Option Closing Date, as the case may be, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to consolidated financial statements, schedules and other financial and financial statistical information included or incorporated by reference therein). With respect to such statement, Wilson, Sonsini, Goodrich & Rosati may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Underwriters shall have received at or prior to the Closing Date from Wilson, Sonsini, Goodrich & Rosati a memorandum or summary, in form and substance satisfactory to the Underwriters, with respect to the qualification for offering and sale by the Underwriters of the Shares under the state securities or Blue Sky laws of such jurisdictions as the Underwriters may reasonably have designated to the Company. (e) The Underwriters shall have received (i) on the date of this Agreement, a letter, dated the date hereof, from Coopers & Lybrand L.L.P., addressed to the Underwriters, confirming that they are independent certified public accountants within the meaning of the Securities Act and the applicable published Rules and Regulations for the respective periods reported on by such firm, and stating, on the basis of performing the procedures set forth in the letter signed by such firm and carried out through a date not more than five days prior to the date hereof, the conclusions and findings of such firm with respect to the financial information and other matters covered by its letter delivered to the Underwriters concurrently with the execution of this Agreement, and (ii) on the Closing Date or the Option Closing Date, as the case may be, a signed letter from Coopers & Lybrand L.L.P., dated the Closing Date or the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such firm and dated and delivered to the Underwriters on the date hereof that nothing has come to their attention during the period from the date five days prior to the date hereof, to a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in their letter dated the date hereof if it were required to be dated and delivered on the Closing Date or the Option Closing Date, as the case may be. All such letters shall be in form and substance satisfactory to the Underwriters. (f) The Underwriters shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the President and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: -14- 15 (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission. (ii) He does not know of any litigation instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be. (iii) He has carefully examined the Registration Statement and the Prospectus and, to his knowledge, as of the effective date of the Registration Statement, the statements contained in the Registration Statement, including any document incorporated by reference therein, were true and correct, and such Registration Statement and Prospectus, including any document incorporated by reference therein, did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and, to his knowledge, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (g) The Company shall have furnished to the Underwriters such further certificates and documents confirming the representations and warranties contained herein and related matters as the Underwriters may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for listing on the Nasdaq National Market. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Underwriters and to Wilson, Sonsini, Goodrich & Rosati, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Underwriters by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). -15- 16 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse on a monthly basis each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Underwriters specifically for use in the preparation thereof; and provided further, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any Preliminary Prospectus, the indemnity agreement contained in this paragraph shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Common Stock concerned (or to the benefit of any person controlling such Underwriter) if the Prospectus (or the Prospectus as amended or supplemented if the Company shall have made any amendments thereof or supplements thereto which shall have been furnished to such Underwriter within a reasonable amount of time prior to the confirmation of such sale) does not contain such statement, alleged statement, omission or alleged omission, and copy of such Prospectus shall not have been sent or given to such person by such Underwriter at or prior to the written confirmation of such sale to such person as required by the Act. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, or controlling person may become -16- 17 subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse on a monthly basis any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter shall be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made or incorporated by reference in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Underwriters specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right, to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall -17- 18 not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act), shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. -18- 19 (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment therein, including any document incorporated by reference therein, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. Default by Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company), the non-defaulting Underwriters shall use their best efforts to procure within 24 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 24 hours the non-defaulting Underwriters shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option shares as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion in the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company or the non-defaulting Underwriters will have the right, by written notice given within the next 24-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or the Company except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Underwriters, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered or telegraphed and confirmed as follows: If to the Underwriters, to Alex. Brown & Sons Incorporated, 101 California Street, 46th Floor, San Francisco, California 94111, Attention: Andrew T. Sheehan, with a copy to Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304- -19- 20 1050, Attention: Jeffrey D. Saper, Esq.; if to the Company, to Tekelec, 26580 West Agoura Road, Calabasas, California 91302, Attention: President, with a copy to Coudert Brothers, 1055 West 7th Street, 20th Floor, Los Angeles, California 90017, Attention: Ronald W. Buckly, Esq. 11. Termination. This Agreement may be terminated by you by notice to the Company as follows: (a) any time prior to the earlier of (i) the time the Firm Shares are released by you for sale by notice to the Underwriters or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business affairs, management or business prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or any other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make the offering or delivery of the Shares impracticable, (iii) suspension of trading in securities on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities, on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in your reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or New York State authorities, or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the Untied Sates; or (c) as provided in Sections 6 and 9 of this Agreement; This Agreement also may be terminated by you, by notice to the Company, as to any obligation of the Underwriters to purchase the Option Shares, upon the occurrence at any time prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Sections 6 and 9 of this Agreement. 12. Successors. This Agreement has been and is made solely for the benefit of the Underwriters and the Company and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares merely because of such purchase. -20- 21 13. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery and payment for the Shares under this Agreement. This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior understandings, negotiations and agreements of such parties, oral or written. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, TEKELEC By: --------------------------------------- President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written: ALEX. BROWN & SONS INCORPORATED VOLPE, WELTY & COMPANY CRUTTENDEN ROTH INCORPORATED By ALEX. BROWN & SONS INCORPORATED By: ---------------------------------- Authorized Officer -21- 22 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased ----------------------------------------------------- --------------------- Alex. Brown & Sons Incorporated Volpe, Welty & Company Cruttenden Roth Incorporated --------- Total 1,750,000 =========
EX-23.2 3 CONSENT OF COOPERS & LYBRAND L.L.P. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-3 (File No. 33- ) of our report dated February 3, 1995, except for note P, as to which the date is March 17, 1995, on our audits of the consolidated financial statements of Tekelec. We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Sherman Oaks, California April 12, 1995 -----END PRIVACY-ENHANCED MESSAGE-----