-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A7H6x8mhshQhzWDLJAUhkgzFIrVYdewx0Rnl6v16aDH4dmknZSz7oB9+Gb3fvtQG lgLlA6h0iAkIRA7pTKjvng== 0000950148-98-002006.txt : 19980817 0000950148-98-002006.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950148-98-002006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKELEC CENTRAL INDEX KEY: 0000790705 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 952746131 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15135 FILM NUMBER: 98688821 BUSINESS ADDRESS: STREET 1: 26580 W AGOURA RD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188805656 MAIL ADDRESS: STREET 1: 26580 W AGOURA RD CITY: CALABASAS STATE: CA ZIP: 91302 10-Q 1 FORM 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-15135 TEKELEC (Exact name of registrant as specified in its charter) CALIFORNIA 95-2746131 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26580 W. AGOURA ROAD, CALABASAS, CALIFORNIA 91302 (Address and zip code of principal executive offices) (818) 880-5656 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 3, 1998, there were 53,798,655 shares of the registrant's common stock, without par value, outstanding. 2 TEKELEC FORM 10-Q INDEX
PART I -- FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 3 Consolidated Income Statements for the three and six months ended June 30, 1998 and 1997 4 Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 1998 and 1997 5 Consolidated Statements of Cash Flow for the six months ended June 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TEKELEC CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, 1998 1997 ------------- ------------- (thousands, except share data) ASSETS (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents .......................... $ 53,200 $ 38,748 Short-term investments, at fair value .............. 26,435 19,773 Accounts and notes receivable, less allowances of $634 and $469, respectively ........ 37,569 29,141 Inventories ........................................ 10,822 11,281 Amounts due from related parties ................... 1,844 2,286 Income taxes receivable ............................ 58 805 Deferred income taxes, net ......................... 8,352 8,309 Prepaid expenses and other current assets .......... 2,175 1,760 ------------- ------------- Total current assets ........................... 140,455 112,103 Long-term investments, at fair value ................... 13,744 11,997 Property and equipment, net ............................ 9,770 9,841 Deferred income taxes, net ............................. 2,164 1,999 Other assets ........................................... 555 525 ------------- ------------- Total assets ................................... $ 166,688 $ 136,465 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable ............................. $ 6,976 $ 4,919 Accrued expenses ................................... 8,258 5,862 Accrued payroll and related expenses ............... 3,802 6,846 Current portion of deferred revenues ............... 9,572 7,693 Income taxes payable ............................... 1,778 429 ------------- ------------- Total current liabilities ...................... 30,386 25,749 Long-term portion of deferred revenues ............. 2,325 2,839 ------------- ------------- Total liabilities .............................. $ 32,711 $ 28,588 ------------- ------------- SHAREHOLDERS' EQUITY: Common stock, without par value, 200,000,000 shares authorized; 53,717,339 and 52,252,086 shares issued and outstanding, respectively ................................... 87,616 75,627 Retained earnings .................................. 47,896 32,875 Cumulative translation adjustment .................. (1,535) (625) ------------- ------------- Total shareholders' equity ..................... 133,977 107,877 ------------- ------------- Total liabilities and shareholders' equity ..... $ 166,688 $ 136,465 ============= =============
See notes to consolidated financial statements. 3 4 TEKELEC CONSOLIDATED INCOME STATEMENTS (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (thousands, except per share data) REVENUES: Sales to third parties ....................... $ 41,669 $ 24,279 $ 75,367 $ 43,619 Sales to related parties ..................... 1,280 798 2,490 2,035 ------------- ------------- ------------- ------------- Total revenues ........................... 42,949 25,077 77,857 45,654 COSTS AND EXPENSES: Cost of goods sold ........................... 14,131 9,012 25,536 15,690 Research and development ..................... 5,783 4,789 11,351 9,257 Selling, general and administrative .......... 10,659 7,914 20,292 15,481 Insurance recovery ........................... -- -- (1,663) -- ------------- ------------- ------------- ------------- Total costs and expenses ................. 30,573 21,715 55,516 40,428 ------------- ------------- ------------- ------------- Income from operations ........................... 12,376 3,362 22,341 5,226 Other income (expense): Interest, net ................................ 1,150 513 2,129 1,029 Other, net ................................... (38) (29) (247) (12) ------------- ------------- ------------- ------------- Total other income ....................... 1,112 484 1,882 1,017 ------------- ------------- ------------- ------------- Income before provision for income taxes ......... 13,488 3,846 24,223 6,243 Provision for income taxes ................... 5,123 476 9,202 1,245 ------------- ------------- ------------- ------------- NET INCOME ............................... $ 8,365 $ 3,370 $ 15,021 $ 4,998 ============= ============= ============= ============= EARNINGS PER SHARE: Basic ........................................ $ 0.16 $ 0.07 $ 0.28 $ 0.10 Diluted ...................................... 0.14 0.06 0.26 0.09 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ........................................ 53,434 49,856 53,043 49,353 Diluted ...................................... 59,049 55,176 58,760 54,257
See notes to consolidated financial statements. 4 5 TEKELEC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (thousands) NET INCOME ....................................... $ 8,365 $ 3,370 $ 15,021 $ 4,998 Other comprehensive income: Foreign currency translation adjustments ..... (607) 1,128 (910) 331 ------------- ------------- ------------- ------------- COMPREHENSIVE INCOME ............................. $ 7,758 $ 4,498 $ 14,111 $ 5,329 ============= ============= ============= =============
See notes to consolidated financial statements. 5 6 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
Six Months Ended June 30, -------------------------------- 1998 1997 ------------- ------------- (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income .................................................. $ 15,021 $ 4,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................... 2,722 2,228 Deferred income taxes ....................................... (245) -- Changes in current assets and liabilities: Accounts and notes receivable ........................... (8,705) (6,509) Inventories ............................................. 384 (4,784) Amounts due from related parties ........................ 441 7 Income taxes receivable ................................. 733 -- Prepaid expenses and other current assets ............... (422) (1,836) Trade accounts payable .................................. 2,254 186 Accrued expenses ........................................ 2,449 1 Accrued payroll and related expenses .................... (3,026) (26) Deferred revenues ....................................... 1,401 6,694 Income taxes payable .................................... 8,170 (192) ------------- ------------- Total adjustments ....................................... 6,156 (4,231) ------------- ------------- Net cash provided by operating activities .............. 21,177 767 ------------- ------------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from maturity of available-for-sale securities ..... 17,000 15,000 Purchase of available-for-sale securities ................... (25,409) (8,051) Purchase of property and equipment .......................... (2,704) (3,304) (Increase) Decrease in other assets ......................... (64) 11 ------------- ------------- Net cash provided by (used in) investing activities ..... (11,177) 3,656 ------------- ------------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ...................... 5,219 3,337 ------------- ------------- Net cash provided by financing activities ............... 5,219 3,337 ------------- ------------- Effect of exchange rate changes on cash ......................... (767) 293 ------------- ------------- Net change in cash and cash equivalents ..................... 14,452 8,053 Cash and cash equivalents at beginning of period ................ 38,748 17,211 ------------- ------------- Cash and cash equivalents at end of period ...................... $ 53,200 $ 25,264 ============= ============= SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITY: Tax benefit related to stock options ........................ $ 6,770 $ --
See notes to consolidated financial statements. 6 7 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) A. BASIS OF PRESENTATION The consolidated financial statements are unaudited, other than the consolidated balance sheet at December 31, 1997, and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the Company's financial condition, operating results and cash flows for the interim periods. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year. Certain items shown in the prior financial statements have been reclassified to conform with the presentation of the current period. The Company operates under a thirteen-week calendar quarter. For financial statement presentation purposes, however, the reporting periods are referred to as ended on the last calendar day of the quarter. The accompanying financial statements for the three and six months ended June 30, 1998 and 1997 are for the thirteen and twenty-six weeks ended July 3, 1998 and June 27, 1997, respectively. In 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition," which addresses software revenue recognition under generally accepted accounting principles. The adoption of SOP 97-2 did not result in a significant change in the Company's revenue recognition practices. In 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," and accordingly has included a separate Statement of Comprehensive Income. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1997 and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 7 8 B. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for public enterprises' reporting of information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented; however, the interim reporting provisions of SFAS No. 131 are not required to be applied in the initial year of adoption. Management is currently evaluating the requirements of SFAS No. 131. C. CERTAIN BALANCE SHEET ITEMS The components of inventories are:
JUNE 30, December 31, 1998 1997 ------------- ------------- (thousands) Raw materials ......................................... $ 3,915 $ 3,738 Work in process ....................................... 1,593 2,448 Finished goods ........................................ 5,314 5,095 ------------- ------------- $ 10,822 $ 11,281 ============= ============= Property and equipment consist of the following: Manufacturing and development equipment ............... $ 19,157 $ 17,645 Furniture and office equipment ........................ 8,413 7,773 Demonstration equipment ............................... 3,755 3,964 Leasehold improvements ................................ 1,471 1,397 ------------- ------------- 32,796 30,779 Less, accumulated depreciation and amortization ....... (23,026) (20,938) ------------- ------------- Property and equipment, net ........................... $ 9,770 $ 9,841 ============= =============
D. RELATED PARTY TRANSACTIONS Sales to related parties consist of, and amounts due from related parties are, the result of transactions between the Company and foreign affiliates controlled by the Company's Chairman of the Board. E. INCOME TAXES For the three- and six-month periods ended June 30, 1998, an estimated effective tax rate of 38% was applied as compared with effective tax rates of 12% and 20% for the three- and six-month periods ended June 30, 1997, respectively, and represented federal, state and foreign taxes on the Company's income reduced primarily by research and development and foreign tax credits. The provision for the three- and six-month periods ended June 30, 1997 were principally foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. 8 9 taxable income at the federal alternative minimum tax rate and applicable state taxes, and reflected the Company's ability to utilize a portion of its prior years' U.S. loss carryforwards. F. BORROWINGS In July 1998, the Company renewed its line of credit with a U.S. bank and increased the maximum credit available under this line to $15.0 million. The company also has lines of credit aggregating $2.5 million available to its Japanese subsidiary from various Japan-based banks. The Company's $15.0 million line of credit is collateralized by substantially all of the Company's assets, bears interest at, or in some cases below, the U.S. prime rate (8.5% at June 30, 1998), and expires June 30, 2000 if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance. There have been no borrowings under this credit facility. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $2.5 million with interest at the Japanese prime rate (1.625% at June 30, 1998) plus 0.125% per annum which expire between November 20, 1998, and March 31, 1999, if not renewed. There have been no borrowings under these lines of credit. G. MAJOR CUSTOMERS Sales to Telkom SA Limited represented 14% and 16% of revenues for the three- and six-month periods ended June 30, 1998, respectively, and sales to Nextel represented 12% of revenues for the three-month period ended June 30, 1998. Sales to Bell Atlantic Corporation represented 15% and 13% of revenues for the three- and six-month periods ended June 30, 1997, respectively, and sales to Nippon Telegraph & Telephone represented 11% of revenues for the six-month period ended June 30, 1997. 9 10 H. EARNINGS PER SHARE The following table provides a reconciliation of the numerators and denominators of the basic and diluted earnings per-share computations for the three- and six-month periods ended June 30, 1998 and 1997:
NET INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ------------- ------------- --------- FOR THE THREE MONTHS ENDED JUNE 30, 1998: (thousands except per share amount) Basic EPS ................................... $ 8,365 53,434 $ 0.16 Effect of Dilutive Securities - Stock Options and Warrants .................... -- 5,615 ------------- ------------- Diluted EPS ................................. $ 8,365 59,049 $ 0.14 ============= ============= FOR THE THREE MONTHS ENDED JUNE 30, 1997: Basic EPS ................................... $ 3,370 49,856 $ 0.07 Effect of Dilutive Securities - Stock Options and Warrants .................... -- 5,320 ------------- ------------- Diluted EPS ................................. $ 3,370 55,176 $ 0.06 ============= ============= FOR THE SIX MONTHS ENDED JUNE 30, 1998: Basic EPS ................................... $ 15,021 53,043 $ 0.28 Effect of Dilutive Securities - Stock Options and Warrants .................... -- 5,717 ------------- ------------- Diluted EPS ................................. $ 15,021 58,760 $ 0.26 ============= ============= FOR THE SIX MONTHS ENDED JUNE 30, 1997: Basic EPS ................................... $ 4,998 49,353 $ 0.10 Effect of Dilutive Securities - Stock Options and Warrants .................... -- 4,904 ------------- ------------- Diluted EPS ................................. $ 4,998 54,257 $ 0.09 ============= =============
I. COMMON STOCK All references to numbers of shares and per share amounts have been retroactively adjusted to reflect the two-for-one split of the Company's common stock distributed July 6, 1998 to all shareholders of record on June 19, 1998. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto included in Item 1 of this Quarterly Report and the Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that certain consolidated income statement items bear to total revenues:
Percentage of Revenues -------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ------------------------------ 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenues ............................ 100.0% 100.0% 100.0% 100.0% Cost of goods sold .................. 32.9 35.9 32.8 34.4 ------------- ------------- ------------- ------------- Gross profit ........................ 67.1 64.1 67.2 65.6 Research and development ............ 13.5 19.1 14.6 20.3 Selling, general & administrative ... 24.8 31.6 26.0 33.9 Insurance recovery .................. -- -- (2.1) -- ------------- ------------- ------------- ------------- Total operating expenses ............ 38.3 50.7 38.5 54.2 ------------- ------------- ------------- ------------- Income from operations .............. 28.8 13.4 28.7 11.4 Interest and other income, net ...... 2.6 1.9 2.4 2.2 ------------- ------------- ------------- ------------- Income before provision for income taxes ...................... 31.4 15.3 31.1 13.6 Provision for income taxes .......... 11.9 1.9 11.8 2.7 ------------- ------------- ------------- ------------- Net income .......................... 19.5% 13.4% 19.3% 10.9% ============= ============= ============= =============
11 12 The following table sets forth, for the periods indicated, the revenues by principal product line as a percentage of total revenues:
Percentage of Revenues ------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Network switching ................. 65% 52% 63% 47% Intelligent network diagnostics ... 28 31 28 35 Data network diagnostics .......... 7 17 9 18 ------------- ------------- ------------- ------------- Total ......................... 100% 100% 100% 100% ============= ============= ============= =============
The following table sets forth, for the periods indicated, the revenues by geographic territory as a percentage of total revenues:
Percentage of Revenues ----------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- North America .......... 62% 73% 59% 69% Japan .................. 12 13 14 18 Europe ................. 6 5 5 5 Rest of the World ...... 20 9 22 8 ----------- ----------- ----------- ----------- Total ............. 100% 100% 100% 100% =========== =========== =========== ===========
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1997 Revenues. The Company's revenues increased by $17.9 million, or 71%, during the second quarter of 1998 due primarily to higher sales of network switching products and intelligent network diagnostics products, partially offset by lower sales of data network diagnostics products. Revenues from switching products increased by $15.1 million, or 116%, to $28.1 million due primarily to increased EAGLE STP market acceptance worldwide and secondarily to higher sales of software enhancements and upgrades to the Company's larger EAGLE STP installed base. Revenues from intelligent network diagnostics products increased by $4.0 million, or 51%, due primarily to higher sales of the Company's MGTS products internationally and sales of MGTS-related development services in Japan. 12 13 Revenues from data network diagnostics products decreased by $1.2 million, or 30%, due to lower sales of the Company's Chameleon products, particularly in Japan, partially offset by increased sales of third-party data diagnostics products in Japan by the Company's Japanese subsidiary. Revenues in North America increased by $8.4 million, or 46%, primarily as a result of higher EAGLE STP sales. Sales in Japan increased by $1.9 million, or 59%, due to higher sales of MGTS-related development services and third-party data diagnostics products, partially offset by lower Chameleon product sales. Revenues in Europe increased by $1.2 million, or 102%, due to higher EAGLE STP and MGTS product sales. Other international revenues increased by $6.3 million, or 279%, due primarily to a large EAGLE STP sale in South Africa. The impact of exchange rate fluctuations on currency translations decreased revenues by $826,000, or 2%, and decreased net income by $13,000, or less than 1%, in the second quarter of 1998. The Company believes that its future revenue growth depends in large part upon a number of factors, including the continued market acceptance of the Company's switching and intelligent network diagnostics products, particularly the EAGLE STP product, and new applications for the EAGLE STP. The Company expects that switching product sales will continue to grow in 1998 both in dollars and as a percentage of total revenues, although at a lower rate of growth than in 1997. Gross Profit. Gross profit as a percentage of revenues increased to 67.1% in the second quarter of 1998 compared with 64.1% in the second quarter of 1997. Overall gross profit percentage benefited from higher switching product margins due to sales of larger EAGLE STP systems combined with increased revenues from STP software and upgrades, and improved manufacturing efficiencies as a result of higher sales volumes. Research and Development. Research and development expenses increased overall by $1.0 million, or 21%, and decreased as a percentage of revenue to 14% in the second quarter of 1998 from 19% in the second quarter of 1997. The dollar increase was attributable principally to increased expenses incurred in connection with the hiring of additional personnel for product development and enhancements primarily for switching and intelligent network diagnostics products. Based on expected revenues and expense levels, the Company believes that research and development expenses will continue to be higher in dollars and lower as a percentage of total revenues for the remainder of 1998 when compared with 1997. Selling, General and Administrative Expenses. Although selling, general and administrative expenses increased by $2.7 million, or 35%, such expenses decreased as a percentage of revenues to 25% in the second quarter of 1998 from 32% in the second quarter of 1997. The dollar increase was primarily due to increased personnel and commission expenses incurred as a result of the higher sales levels. Based on expected revenues and expense levels, the Company believes that selling, general and administrative expenses will continue to be higher in dollars and lower as a percentage of total revenues for the remainder of 1998 when compared with 1997. 13 14 Interest Income. Interest income increased by $637,000, or 124%, during the second quarter of 1998 due primarily to higher cash and investment balances compared to the second quarter of 1997. Income Taxes. For the second quarter of 1998, an estimated effective tax rate of 38% was applied as compared with an effective tax rate of 12% for the second quarter of 1997, and represented federal, state and foreign taxes on the Company's income reduced primarily by research and development and foreign tax credits. The provision for the second quarter of 1997 was principally foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. taxable income at the federal alternative minimum tax rate and applicable state taxes, and reflected the Company's ability to utilize a portion of its prior years' U.S. loss carryforwards. The Company expects that its effective tax rate for the remainder of 1998 should approximate 38%; however, changes in assumptions regarding the Company's ability to utilize its deferred income tax assets and the level of various tax credits generated during 1998 may cause the effective tax rate to vary. SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1997 Revenues. The Company's revenues increased by $32.2 million, or 71%, during the first six months of 1998 due to higher sales primarily of network switching products and secondarily of intelligent network diagnostics products. Revenues from switching products increased by $27.7 million, or 128%, to $49.4 million primarily due to increased EAGLE STP market acceptance worldwide including substantially higher international sales and higher sales of EAGLE STP features, software enhancements and upgrades to the Company's larger EAGLE STP installed base. Revenues from intelligent network diagnostics products increased by $5.8 million, or 36%, to $21.7 million, due primarily to sales of MGTS-related development services in Japan and continued strong demand for the Company's MGTS products worldwide. Revenues from data network diagnostics products decreased by $1.3 million, or 16%, due primarily to lower second quarter sales of the Company's Chameleon products, particularly in Japan, partially offset by increased sales of third party data diagnostics products in Japan by the Company's Japanese subsidiary. 14 15 Revenues in North America increased by $14.6 million, or 46%, primarily as a result of higher EAGLE STP sales. Sales in Japan increased by $2.9 million, or 36%, due to higher sales of MGTS-related development services and third party data diagnostics products, partially offset by lower Chameleon product sales. Revenues in Europe increased by $1.6 million, or 66%, due primarily to higher MGTS and EAGLE STP product sales. Other international revenues increased by $13.2 million, or 368%, due primarily to large EAGLE STP sales in South Africa. The impact of exchange rate fluctuations on currency translations decreased revenues by $1.2 million, or 1%, and decreased net income by $39,000, or less than 1%, in the first six months of 1998. Gross Profit. Gross profit as a percentage of revenues increased to 67.2% in the first six months of 1998 compared with 65.6% in the first six months of 1997, due to higher switching product margins attributable primarily to sales of larger EAGLE STP systems and increased revenues from STP software and upgrades, and improved manufacturing efficiencies due to higher sales volumes. Research and Development. Although research and development expenses increased overall by $2.1 million, or 23%, such expenses decreased as a percentage of revenue to 15% in the first six months of 1998 from 20% in the first six months of 1997. The dollar increase was attributable principally to increased expenses incurred in connection with the hiring of additional personnel for product development and enhancements primarily for switching and intelligent network diagnostics products. Selling, General and Administrative Expenses. Although selling, general and administrative expenses increased by $4.8 million, or 31%, such expenses decreased as a percentage of revenues to 26% in the first six months of 1998 from 34% in the first six months of 1997. The dollar increase was due primarily to increased personnel and commission expenses incurred as a result of the higher sales levels. Insurance Recovery. During the first quarter of 1998, the Company recorded the proceeds from the settlement of an insurance claim in the amount of approximately $1.7 million, net of applicable costs. The net proceeds were recorded as a decrease in operating expenses in the first quarter of 1998. Interest Income. Interest income increased by $1.1 million, or 107%, during the first six months of 1998 due primarily to higher cash and investment balances compared to the first six months of 1997. Income Taxes. For the first six months of 1998, an estimated effective tax rate of 38% was applied as compared with an effective tax rate of 20% for the first six months of 1997, and represented federal, state and foreign taxes on the Company's income reduced primarily by research and development and foreign tax credits. The provision for 1997 was principally foreign taxes on the income of the Company's Japanese subsidiary and the provision for taxes on the Company's U.S. 15 16 taxable income at the federal alternative minimum tax rate and applicable state taxes, and reflected the Company's ability to utilize a portion of its prior years' U.S. loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended June 30, 1998, cash and cash equivalents increased by $14.5 million to $53.2 million, after a net transfer of approximately $8.4 million to short-term and long-term investments. Operating activities, net of the effects of exchange rate changes on cash, provided $20.4 million. Financing activities, which represented proceeds from the issuance of Common Stock upon the exercise of options and warrants, provided $5.2 million, and $2.7 million was used for capital expenditures. Accounts receivable, including amounts due from related parties, increased by 25% during the first six months of 1998 due primarily to higher international sales in the second quarter of 1998 compared to the fourth quarter of 1997, which typically carry longer payment terms. Trade accounts payable and accrued expenses increased by 42% and 41%, respectively, during the first six months of 1998, primarily due to the timing of purchases, and accrued payroll decreased by 44% primarily due to the payment in 1998 of 1997 employee bonuses. Deferred revenues increased by 13% during the first six months of 1998 primarily as a result of the timing of EAGLE STP installations and related revenues. Capital expenditures of $2.7 million during the first six months of 1998 represented the planned addition of equipment principally for research and development, manufacturing operations and facility expansion. In July 1998, the Company renewed its line of credit with a U.S. bank and increased the maximum credit available under this line to $15.0 million. The company also has lines of credit aggregating $2.5 million available to its Japanese subsidiary from various Japan-based banks. The Company's $15.0 million line of credit is collateralized by substantially all of the Company's assets, bears interest at, or in some cases below, the U.S. prime rate (8.5% at June 30, 1998), and expires June 30, 2000 if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance. There have been no borrowings under this credit facility. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $2.5 million with interest at the Japanese prime rate (1.625% at June 30, 1998) plus 0.125% per annum which expire between November 20, 1998 and March 31, 1999, 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. 16 17 The Company believes that existing working capital, funds generated from operations and current bank lines of credit should be sufficient to satisfy anticipated operating requirements at least through 1998. Nonetheless, the Company may seek additional sources of capital as necessary or appropriate to fund acquisitions or to otherwise finance the Company's growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for public enterprises' reporting of information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented; however, the interim reporting provisions of SFAS No. 131 are not required to be applied in the initial year of adoption. Management is currently evaluating the requirements of SFAS No. 131. READINESS FOR YEAR 2000 As the year 2000 approaches, a critical industry-wide issue has emerged regarding how existing application software programs and operating systems can accommodate the year 2000 date value. The Company is currently conducting a comprehensive review of its computer systems, products and significant vendors to identify the systems and products which could be affected by this issue. Based on the results of the review conducted to date, management does not anticipate that the Company will incur significant remediation expenses or be required to invest heavily in computer system or product improvements in order to be year 2000 compliant. To the extent the Company's products, systems or significant vendors are not fully year 2000 compliant, there can be no assurance that such noncompliance will not result in product failures, systems interruptions or significant costs necessary to update software that, alone or in the aggregate, would not have a material adverse effect on the Company's business, financial condition, results of operations, cash flows or business prospects. 17 18 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements which are not historical facts contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the current belief, expectations or intent of the Company's management. These statements are subject to and involve certain risks and uncertainties including, but not limited to, timing of significant orders and shipments, product mix, customer acceptance of the Company's products, capital spending patterns of customers, competition and pricing, new product introductions by the Company or its competitors, carrier deployment of intelligent network services, the timing of research and development expenditures, regulatory changes, general economic conditions and other risks described in the Company's Annual Report on Form 10-K and in certain of the Company's other Securities and Exchange Commission filings. Actual results may differ materially from those expressed or implied in such forward-looking statements. 18 19 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 15, 1998, the Company held its 1998 Annual Meeting of Shareholders (the "Annual Meeting"). (b) At the Annual Meeting, the following persons were elected as directors of the Company. The number of votes cast for each director, as well as the number of votes withheld, are listed opposite each director's name.
NAME OF DIRECTOR VOTES CAST FOR DIRECTOR VOTES WITHHELD - ---------------- ----------------------- -------------- Robert V. Adams 42,651,260 1,432,774 Jean-Claude Asscher 43,628,580 455,454 Daniel L. Brenner 43,628,580 455,454 Michael L. Margolis 43,628,580 455,454 Howard Oringer 43,628,580 455,454 Jon F. Rager 43,628,580 455,454
(c) At the Annual Meeting, the shareholders approved, with 35,775,316 votes cast in favor and 8,266,742 votes cast against, an amendment to the Company's 1994 Stock Option Plan increasing the aggregate number of shares of Common Stock authorized for issuance thereunder from 12,000,000 to 14,000,000. There were 41,976 abstentions and no broker nonvotes with respect to this matter. (d) At the Annual Meeting, with 44,013,812 votes cast in favor, the shareholders ratified the appointment of Coopers & Lybrand L.L.P. (now known as PricewaterhouseCoopers LLP) as independent accountants of the Company for the year ending December 31, 1998. 20,778 votes were cast against such ratification, and there were 49,444 abstentions with respect to this matter. All share numbers referenced above have been retroactively adjusted to reflect the two-for-one stock split of the Company's common stock distributed July 6, 1998 to shareholders of record on June 19, 1998. ITEM 5. OTHER INFORMATION Notice of any shareholder proposal to be presented at the Company's Annual Meeting of Shareholders to be held in 1999 that is not submitted to the Company pursuant to SEC Rule 14a-8 will be considered untimely if not received by the Company on or before February 20, 1999. 19 20 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Registrant 10.1 Employment Offer Letter dated April 1, 1998 between the Registrant and Ronald W. Buckly 10.2 Credit Agreement dated October 22, 1996 between the Registrant and Imperial Bank (1), as amended by First Amendment to Credit Agreement dated July 15, 1998, together with Promissory Note of the Registrant dated July 15, 1998 10.3 1994 Stock Option Plan, including forms of stock option agreements(2), as amended February 4, 1995(3), March 3, 1995(3), January 27, 1996(4), February 26, 1997(5), March 19, 1997(5) and March 20, 1998 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only) - ----------------------------- (1) Incorporated by reference to the Registrants Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1997. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-82124) filed with the Commission on July 28, 1994. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-60611) filed with the Commission on June 27, 1995. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-05933) filed with the Commission on June 13, 1996. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-28887) filed with the Commission on June 10, 1997. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKELEC August 13, 1998 /s/ Michael L. Margolis ------------------------------------- Michael L. Margolis President and Chief Executive Officer (Duly authorized officer) /s/ Gilles C. Godin ------------------------------------- Gilles C. Godin Chief Financial Officer and Vice President, Finance (Principal financial and chief accounting officer) 22 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Description Page - ------ ----------- ------------ 3.1 Amended and Restated Articles of Incorporation of the Registrant 10.1 Employment Offer Letter dated April 1, 1998 between the Registrant and Ronald W. Buckly 10.2 First Amendment to Credit Agreement dated July 15, 1998, between the Registrant and Imperial Bank, together with Promissory Note of the Registrant dated July 15, 1998 10.3 Amendment to 1994 Stock Option Plan dated March 20, 1998 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only)
EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION OF TEKELEC I. The name of the corporation is Tekelec. II. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California General Corporation Law. III. The corporation is authorized to issue only one class of shares of stock, designated "Common Stock," and the total number of shares which this corporation is authorized to issue is two hundred million (200,000,000). Upon amendment of this Article III, each outstanding share of Common Stock is split up and converted into two (2) shares of Common Stock. IV. This corporation elects to be governed by all of the provisions of the General Corporation Law of 1977, as amended, not otherwise applicable to it under Chapter 23 thereof. V. (a) Limitations of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (b) Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of its agents (as defined in Section 317 of the California General Corporation Law) for breach of duty to this corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by such Section 317, subject to the limits on such excess indemnification set forth in Section 204 of the California General Corporation Law. (c) Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article V by the shareholders of this corporation shall not adversely affect any right or protection of a director or agent of this corporation existing at the time of such repeal or modification. EX-10.1 3 EXHIBIT 10.1 1 April 1, 1998 PERSONAL AND CONFIDENTIAL Ronald W. Buckly 470 22nd Street Santa Monica, CA 90402 Dear Ron: On behalf of Tekelec, I am pleased to offer you employment as Vice President and General Counsel of Tekelec, on the terms and conditions set forth in this letter. As Vice President and General Counsel, you will report directly to Tekelec's Chief Executive Officer, will be principally responsible for Tekelec's legal matters and will have such other duties and responsibilities as may be delegated to you from time to time by the Chief Executive Officer and the Board of Directors. You may select your start date so long as it is on or before April 15, 1998. Your compensation and benefits will be as follows: 1. Your starting annual base salary will be $200,000 (i.e., $7,692.31 per bi-weekly period). 2. You will be eligible to participate in Tekelec's 1998 Officer Bonus Plan, with your participation to be calculated as if you were a full time employee as of January 1, 1998 and determined in accordance with a percentage of your 1998 base salary. Under the terms of the 1998 Officer Bonus Plan, you will be eligible to receive up to 50% of your annual base salary as a cash bonus if Tekelec achieves certain financial milestones in 1998. 3. You will be entitled to take four weeks personal time annually. 4. You will receive applicable benefits, including health, dental, vision, long-term disability and life insurance, as are generally provided to Tekelec's executive officers. 5. You will be offered the opportunity to participate in Tekelec's Employee Stock Purchase Plan and 401(k) Plan upon your satisfaction of the eligibility requirements for such plans. 6. You will be covered by Tekelec's Officer Severance Plan (a copy of which has been previously provided to you). 2 Ronald W. Buckly April 1, 1998 Page 2 7. The Compensation Committee of Tekelec will grant to you stock options (incentive stock options to the maximum extent permitted under law, with the balance being nonstatutory stock options) under Tekelec's 1994 Stock Option Plan (the "Plan") to purchase 90,000 shares of Tekelec Common Stock ("Options"), effective as of the later of your start date or the date of the Compensation Committee's action granting such options (the "grant date"). The exercise price of your Options will be equal to the closing price of Tekelec's Common Stock on the grant date (as reported in The Wall Street Journal on the first business day following the grant date). Your Options will vest to the extent of 18,000 shares on the one-year anniversary of your start date. The remaining 72,000 shares will vest and become exercisable cumulatively in 16 equal quarterly installments of 4,500 shares each, with the first installment vesting on September 30, 1999 and one additional installment vesting on the last day of each calendar quarter thereafter as long as you remain an employee of Tekelec. Your Options will expire, to the extent previously unexercised, upon the earlier of ten years from the date of grant or a date not less than three months after you cease to be a Tekelec employee as determined in accordance with the terms of the Plan. The Options will in all respects be subject to the terms and provisions of the Plan and the stock option agreement evidencing the grant of the Options. In addition to the foregoing grant, it is anticipated that the Compensation Committee will periodically, typically annually, consider whether additional options should be granted to you while you remain an officer of the Company. 8. You may serve as "of counsel" to Bryan Cave LLP through December 31, 1998, on such terms and conditions upon which you and Bryan Cave may mutually agree; provided, that (i) your performance of your "of counsel" responsibilities and duties does not materially interfere with the discharge of your duties and responsibilities as Vice President and General Counsel of the Company; and (ii) you agree to terminate such "of counsel" relationship or modify the terms of such relationship upon 30 days notice if I determine, in my sole discretion, that such termination or modification would be in the best interests of the Company. Unless I advise you otherwise, you may continue your "of counsel" relationship commencing January 1, 1999 subject to the conditions (i) and (ii) in the immediately preceding sentence. You are aware that Tekelec prohibits employees from unlawfully using confidential or proprietary information belonging to any other person or entity. By signing the enclosed copy of this letter, you agree not to disclose or use or induce Tekelec or any of its employees to use any trade secrets or confidential or proprietary information belonging to any of your former employers. As a condition of commencing your employment with Tekelec, you will be required to sign Tekelec's standard "Confidentiality and Non-Disclosure Agreement and Assignment of Rights" (a copy of which will be provided to you under separate cover). As with every Tekelec employee, you reserve the right to terminate your employment at any time, and we 3 Ronald W. Buckly April 1, 1998 Page 3 reserve the right to terminate your employment at will. We hope and expect, however, that this will be a long and mutually beneficial relationship. This letter agreement contains our entire understanding with respect to your employment with Tekelec. The provisions of this letter may be amended only by a writing signed by you and Tekelec. If you have any questions about the meaning of any of the terms or provisions included herein, please let me know at your earliest convenience. This letter agreement shall be construed under the laws of California. Ron, we believe that Tekelec can provide you with opportunities for professional growth and financial return. We look forward to working with you and to a mutually fulfilling and rewarding relationship. If this letter agreement is acceptable to you, then please acknowledge your acceptance by signing and dating the enclosed copy of this letter agreement where indicated below and faxing and returning such signed copy to me for receipt no later than April 6, 1998. Sincerely, /s/ MICHAEL L. MARGOLIS ------------------------------------ Michael L. Margolis Chief Executive Officer and President Acknowledged and Accepted: /s/ RONALD W. BUCKLY - -------------------------------------- Date: April 1, 1998 Ronald W. Buckly EX-10.2 4 EXHIBIT 10.2 1 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment ("Amendment") is made as of July 15, 1998 by and between Tekelec, a California corporation ("Borrower") and Imperial Bank, a California banking corporation ("Bank") and amends that certain Credit Agreement ("Agreement") dated as of October 22, 1996, by and between Borrower and Bank as follows: 1. Section 1.01 is hereby amended and restated in its entirety to read as follows: 1.01 REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of this Agreement, between the date of this Agreement and June 30, 2000 (the "Commitment Termination Date"), provided that no event of default then has occurred and is continuing, Bank will provide the Revolving Credit Commitment of Fifteen Million Dollars ($15,000,000) for (a) the issuance of Letters of Credit ("Letters of Credit") and (b) loans ("Loans") for general working capital purposes provided, however, that the aggregate of the Letters of Credit and Loans at any one time shall not exceed the Revolving Credit Commitment. No Letter of Credit shall expire beyond the Commitment Termination Date. Borrower's obligation to repay the Revolving Credit Commitment, together with accrued interest thereon, shall be evidenced by a promissory note issued by Borrower in favor of Bank on the standard form used by Bank to evidence its commercial loans. Prior to the Commitment Date, Borrower may borrow, repay and reborrow loans under the Revolving Credit Commitment. 2. Section 4.06 is hereby amended and restated in its entirety to provide as follows: 4.06 NET WORTH. Maintain Tangible Net Worth [meaning the excess of all assets, excluding any value for good will, trademarks, patents, copyrights, leaseholds, organization expense, amounts due from officers, shareholders and affiliates, and other similar intangible items, over its liabilities] of not less than 60,000,000. 3. Section 4.09(f) is hereby amended and restated in its entirety to provide as follows: f. Within sixty (60) days after and as of the last day of December of each year, and the last day of June of each year, copies of Borrower's summary accounts payable and accounts receivable agings. FIRST AMENDMENT-TEKELEC PAGE 1 2 4. Borrower shall pay to Bank a Commitment Fee, due and payable upon Borrower's execution and delivery to Bank of this Amendment, equal to $120,000 ($60,000 for each year by which Bank's commitment is extended by this Amendment). 5. Judicial Reference. (a) Other than (i) nonjudicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Agreement, any security agreement, any note or any other agreement or document executed by Borrower in connection with this transaction ("Loan Documents"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to any Loan Document gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et. seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning any Loan Document, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the date of selection of the referee and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes FIRST AMENDMENT-TEKELEC PAGE 2 3 relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of facts, conclusions of laws, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 6. Except as provided above, the Agreement remains unchanged. FIRST AMENDMENT-TEKELEC PAGE 3 4 7. This Amendment is effective as of the date first written above and the parties hereby confirm that the Agreement as amended is in full force and effect. TEKELEC ("Borrower") IMPERIAL BANK ("Bank") By: /s/ GILLES C. GODIN By: /s/ NUNILO B. SOLER --------------------------- ----------------------------- Name: Gilles C. Godin Name: Nunilo B. Soler Title: V.P. Finance & CFO Title: Vice President By: /s/ DOUGLAS W. MOXLEY --------------------------- Name: Douglas W. Moxley Title: Corporate Controller FIRST AMENDMENT-TEKELEC PAGE 4 5 [LOGO] IMPERIAL BANK LIBOR ADDENDUM Member FDIC TO NOTE This Libor Addendum ("Addendum") is dated as of July 15, 1998, and is by and between TEKELEC ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and supplements the Note to which it is attached (the "Note") and forms a part of and is incorporated into the Note. In the event of any inconsistency between the terms herein and the terms of the Note, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meanings set forth in the Note. 1. ADVANCES. 1.1 Prime Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to Bank's Prime Rate shall be referred to herein as "Prime Loans" and each such advance shall be a "Prime Loan." Each Prime Loan shall bear interest at an annual rate equal to the sum of 0.00% plus the Bank's Prime Rate. "Prime Rate" shall mean the rate of interest publicly announced by Bank from time to time in Inglewood, California, as its prime rate for lending. The Prime Rate is not intended to be the lowest rate of interest charged by Bank in connection with extensions of credit to borrowers. 1.2 Libor Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to the Libor Rate shall be referred to herein as "Libor Loans" and each such advance shall be a "Libor Loan." Each Libor Loan shall bear at the Libor Rate, as defined below. A Libor Loan shall be in the minimum amount of One Million Dollars ($1,000,000) or such greater amount which is an integral multiple of Five Hundred Thousand Dollars*. No Libor Loan shall be made after the last Business Day that is at least three (3) months prior to the Maturity Date described in the Note. *$500,000.00 2. INTEREST ON LIBOR LOANS. 2.1 Rate of Interest. Each Libor Loan shall bear interest on the unpaid principal amount thereof from the Loan Date through the date paid (whether by acceleration or otherwise) at a rate equal to the sum of 1.90% per annum plus the Libor Rate for the Interest Period. (a) "Loan Date" shall mean the date on which (i) a Libor Loan is made, a Libor Loan is continued, or a Prime Loan is converted to a Libor Loan. (b) "Interest Period" shall mean a period of One (1), two (2) or three (3) months, commencing on the applicable Loan Date, as selected by Borrower pursuant to Section 2.2; provided, however, that Borrower may not select an Interest Period that would otherwise extend beyond the Maturity Date of the Loan. Borrower may also select a twelve (12) month Interest Period if and when Bank notifies Borrower that such Interest Period is available, as determined by Bank in its sole discretion. (c) "Libor Rate" shall mean, for the applicable Interest Period for a Libor Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the Libor Base Rate for such Interest Period divided by (ii) 1.00 minus the Reserve Requirement Rate (expressed as a decimal fraction) for such Interest Period. (d) "Libor Base Rate" shall mean with respect to any Interest Period, the rate equal to the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of: (i) the offered rates per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears at 11:00 a.m., London time, on the Reuters Screen LIBOR Page on the Business Day that is two (2) Business Days before the first day of such Interest Period, in each case if at least four (4) such offered rates appear on such page, or (ii) if clause (i) is inapplicable, (x) the offered rate per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears as of 11:00 a.m., London time on the Telerate Monitor on Telerate Screen 3750 on the Business Day which is two (2) Business Days before the first day of such Interest Period; or (y) if clause (x) above is inapplicable, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest rates per annum offered by at least three (3) prime banks selected by Bank at approximately 11:00 a.m. London time, on the Business Day which is two (2) Business Days before such date for deposits in U.S. Dollars to prime banks in the London interbank market, in each case for a period equal to such Interest Period in an amount equal to the amount to which the Libor Rate applies. Page 1 of 4 6 (e) "Business Day" means any day on which Bank is open for business in the State of California. (f) "Reuters Screen LIBOR Page" means the display designated as page LIBOR on the Reuters Monitor Money Rates Service or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks. (g) "Reserve Requirement Rate" means, for any Interest Period, the aggregate of the rates, effective as of the Business Day which is two (2) Business Days before the first day of the Interest Period, at which: (i) reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System; and (ii) any additional reserves are required to be maintained by Bank by reason of any Regulatory Change against (x) any category of liabilities which includes deposits by reference to which the Libor Rate is to be determined as provided in the definition of "Libor Base Rate;" or (y) any category of extensions of credit or other assets which include Libor Loans. (h) "Regulatory Change" means, with respect to Bank, any change on or after the date of the Note and this Addendum in any Governmental Regulation, including the introduction of any new Governmental Regulation or the rescission of any existing Governmental Regulation. (i) "Governmental Regulation" means any (i) United States Federal, state or foreign law or regulation (including without limitation Regulation D); and (ii) the adoption or making of any interpretation, application, directive or request applying to a class of lenders, including Bank, of or under any United States Federal, state, or any foreign law or regulation (whether or not having the force of law) by any court or by any governmental, central banking, monetary or taxing authority charged with the interpretation or administration of such law or regulation. 2.2 Determination of Interest Rates. Subject to the terms and conditions of the Note and this Addendum, Borrower, at its option, may request an advance in the form of a Libor Loan, a continuation of a Libor Loan, or a conversion of a Prime Loan into a Libor Loan, only upon delivery to Bank of an irrevocable written notice received by Bank at least three (3) Business Days prior to the requested Loan Date, specifying (i) the principal amount of such Libor Loan, (ii) the requested Loan Date, and (iii) the selected Interest Period. Upon receiving such notice, Bank shall determine (which determination shall be in accordance with Section 2.1 and shall, absent manifest error, be final, conclusive and binding upon all parties hereto) the Libor Rate applicable to such Libor Loan two (2) Business Days prior to the Loan Date, and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower. If Borrower shall fail to notify Bank of its selected Interest Period for a Libor Loan (including the continuation of an existing Libor Loan or the conversion of a Prime Loan into a Libor Loan), the Borrower shall be deemed to have selected an Interest Period of three (3) months. 2.3 Computation of Interest and Fees. All computations of interest and fees payable pursuant to the Note shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed (less the date of repayment). 2.4 Recordation by Bank. Bank is hereby authorized to record the Loan Date, the applicable Interest Period, the principal amount, and the interest rate of each Libor Loan made (or continued or converted) by Bank, and the date and amount of each payment or prepayment of principal thereof, in Bank's records. Any such recordation shall constitute prima facie evidence of the accuracy of the information recorded; provided that the failure to make any such recordation shall not in any way affect the Borrower's obligations hereunder. 3. CONVERSION TO PRIME LOANS. 3.1 Election by Borrower. Subject to all the terms and conditions of this Addendum, Borrower may elect from time to time to convert a Libor Loan to a Prime Loan by giving Bank at least three (3) Business Days' prior irrevocable notice of such election, and any such conversion of a Libor Loan shall be made on the last day of the Interest Period with respect thereto. 3.2 Failure of Notice by Borrower. If Borrower otherwise fails to give notice specifying its requests with respect to any Libor Loans that are scheduled to become due, such failure shall be deemed, in the absence of any notice from Borrower to the contrary, to be notice of a requested advance in the form of a Prime Loan in a principal amount equal to the amount of said Libor Loan. 4. PREPAYMENTS. 4.1 Voluntary Prepayment by Borrower. Subject to the terms and conditions of the Note and this Addendum, Borrower may, upon at least three (3) Business Days' irrevocable notice to Bank as provided herein, at any time and from time to time on any Business Day prepay any Prime Loan or Libor Loan in whole or in part, without penalty or premium, other than customary actual "Breakage Fees" and "Prepayment Costs" as defined below, resulting from prepayment of any Libor Loan prior to the expiration of the Interest Period relating thereto. The notice of prepayment shall specify the date and amount of the prepayment, and the Loan to which the Page 2 of 4 7 prepayment applies. Each partial prepayment of a Libor Loan shall be in an amount not less than Five Hundred Thousand Dollars ($500,000.00) or such greater amount which is an integral multiple of Five Hundred Thousand Dollars* provided, that unless a Libor Loan is prepaid in full, no prepayment shall be made if, after giving effect to such prepayment, the aggregate principal amount of Libor Loans having the same Interest Period shall be less than One Million Dollars ($1,000,000). Notice of prepayment having been delivered as aforesaid, the principal amount of the prepayment specified in such notice shall become due and payable on the prepayment date set forth in such notice. All payments of principal under this Section 4 shall be accompanied by accrued but unpaid interest on the amount being prepaid through the date of such prepayment. *500,000.00 4.2 Breakage Fees. If for any reason (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or acceleration), Bank receives all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the Breakage Fees, defined as the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank (without regard to whether Bank actually so invests said funds) by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive and final, absent manifest error. 4.3 Prepayment Costs. Borrower shall pay to Bank, upon the demand of Bank, such other amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any loss, costs or expense incurred by it as a result of any prepayment by Borrower (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or prepayment due to acceleration) of all or part of the principal amount of a Libor Loan prior to the last day of the Interest period for such Loan (including without limitation any failure by Borrower to borrow a Libor Loan on the Loan Date for such borrowing specified in the relevant notice of borrowing hereunder). Such costs shall include, without limitation, any interest or fees payable by Bank to lenders of funds obtained by it in order to make or maintain its loans based on the London interbank eurodollar market. Bank's determination as to such costs shall be conclusive and final, absent manifest error. 5. REMEDIES UPON EVENTS OF DEFAULT. 5.1 Conversion to Prime Loans. If any Event of Default has occurred and is continuing under the Note or this Addendum, then in addition to all other remedies available to Bank under the Note, at the option of Bank and without demand or notice, all Libor Loans then outstanding shall be automatically converted to Prime Loans on the last day of each respective Interest Period for each Libor Loan. 5.2 Indemnity. Borrower agrees to pay and indemnify Bank for, and to hold Bank harmless from, any and all cost, loss or expense (including without limitation any such cost, loss or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its Libor Loans hereunder, or in its reemployment of funds obtained in connection with the making or maintaining of Libor Loans) which Bank may sustain or incur as a consequence of any default by Borrower in connection with or related to: (a) payment of the principal amount of or interest on Libor Loans, (b) making a borrowing or conversion of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or (c) making a prepayment of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or any prepayment (whether optional or mandatory) of any Libor Loan prior to the end of the applicable Interest Period for such Loan. 6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS. 6.1 Libor Rate Taxes. All payments of principal, interest, fees, costs, expenses and all other amounts payable to Borrower pursuant to the Note and this Addendum shall be made free and clear of and without reduction by reason of all present and future income, stamp and other taxes or other charges whatsoever imposed, assessed, levied or collected by any national government or any political subdivision or taxing authority thereof or any organization of which it is a member (excluding (i) any taxes imposed on or measured by the overall net income or gross receipts of Bank by any such entity, and (ii) any taxes which would have been imposed even if no provisions for Libor Loans had appeared in this Addendum) (collectively, "Libor Taxes"). If any Libor Taxes are required to be withheld from any amounts payable to Bank, Borrower shall pay such additional amounts as may be necessary so as to yield to Bank a net amount equal to the total amount of the payments provided for in this Addendum or under the Note which Bank would have received if such amounts had not been subject to Libor Taxes. If any Libor Taxes are payable directly by Borrower, they shall be paid by Borrower prior to the date on which penalties attach for failure to timely pay such Libor Taxes. Within forty five (45) days after the date on which payment of any such Libor Taxes is due pursuant to applicable law, Borrower will furnish Bank the original receipt for the full payment of such Libor Taxes or, if such is not available, evidence of such payment satisfactory in form and substance to Bank. Borrower shall indemnify and hold Bank harmless against, and will reimburse to Bank, upon demand, any incremental taxes, interest or penalties that may become payable by Bank as a result of any failure by Borrower to pay any Libor Taxes when due. Page 3 of 4 8 6.2 Inability to Determine Fair Interest Rate. If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the Libor Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, (ii) the Libor Rate does not accurately reflect the cost to Bank of lending the Libor Loan, or (iii) by reason of any changes arising after the date of the Note affecting the London interbank eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in Sections 2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to Libor Loans, or until such time as Bank notifies Borrower that the circumstances giving rise to Bank's notice no longer exist. While such circumstances continue to exist, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.3 Illegality or Impracticability. If (i) due to any Governmental Regulation it shall become unlawful for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, or (ii) due to any contingency occurring after the date of the Note which has a material adverse effect on the London interbank eurodollar market, it has become impracticable for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, and in such event, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.4 Governmental Regulations; Increased Costs. Borrower shall pay to Bank, within 15 days after demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any increased costs incurred by Bank that Bank determines are attributable to its making or maintaining of any Libor Loans to Borrower (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (a) imposes a new tax or changes the basis of taxation of any amounts payable to Bank under the Note or this Addendum in respect on any Libor Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or (b) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits or other liabilities with or for the account of Bank (including any Libor Loans or any deposits referred to in the definition of Libor Base Rate); or (c) imposes any other condition affecting the Note (or any of such extensions of credit or liabilities); or (d) imposes or modifies a Governmental Regulation regarding capital adequacy which has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank ("Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material. Bank will notify Borrower of any event occurring after the date of the Note which will entitle Bank to Additional Costs pursuant to this Section 6.4 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for Additional Costs under this Section 6.4. Determinations and allocations by Bank for purposes of this Section 6.4 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Libor Loans or of making or maintaining Libor Loans or on amounts receivable by it in respect of Libor Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive and final, absent manifest error. This Addendum is executed as of the date first written above. BORROWER BANK TEKELEC , IMPERIAL BANK - ---------------------------------- a California banking corporation a Corporation -------------------------------- By /s/ GILLES C. GODIN , By /s/ NILO B. SOLER -------------------------------- ------------------------------ Nilo Soler Its V.P. Finance & CFO Its Vice President By /s/ DOUGLAS W. MOXLEY --------------------------------' Its Corporate Controller -------------------------------- Page 4 of 4 9 [IMPERIAL BANK LOGO] PROMISSORY NOTE
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS $15,000,000.00 07-15-1998 06-30-2000 BS
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. BORROWER: TEKELEC LENDER: IMPERIAL BANK 26580 W. AGOURA ROAD LOS ANGELES REGIONAL OFFICE CALABASAS, CA 91302 201 N. FIGUEROA STREET LOS ANGELES, CA 90012-2623 ================================================================================ PRINCIPAL AMOUNT: $15,000,000.00 INITIAL RATE; 8.500% DATE OF NOTE: JULY 15, 1998
PROMISE TO PAY, TEKELEC ("BORROWER") PROMISES TO PAY TO IMPERIAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIFTEEN MILLION & 00/100 DOLLARS ($15,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 2000. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING AUGUST 15, 1998, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. Subject to designation of a different interest rate index by Borrower as provided below, the interest rate on this Note is subject to change from time to time based on changes in an Index which is the Imperial Bank Prime Rate (the "Index"). The Prime Rate is the rate announced by Lender as its Prime Rate of interest from time to time. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 8.500%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL RATE OF 8.500%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. INTEREST RATE OPTIONS. The following interest rate options are available under this Note: (a) DEFAULT OPTION. The interest rate margin and index described in the "VARIABLE INTEREST RATE" paragraph above (the "Default Option"). (b) LIBOR. A margin of 1.900 percentage points over LIBOR. For purposes of this Note, LIBOR shall mean London Inter-Bank Offered Rate as provided in the LIBOR ADDENDUM TO NOTE attached hereto and made a part hereof. When the interest rate is based on a fixed rate, the rate shall be in effect for a period of the number of days or months as indicated in the rate option description (the "Interest Period"), in any case extended to the next succeeding business day when necessary, beginning on a borrowing date, conversion date or expiration date of the then current Interest Period. Adjustments in the interest rate due to changes in the maximum nonusurious interest rate allowed (the "Highest Lawful Rate") shall be made on the effective day of any change in the Highest Lawful Rate. Provided Borrower is not in default under this Note, Borrower may designate in advance which of the above interest rate indexes shall be applicable to any loan advance under this Note and shall designate any optional Interest Period applicable to any fixed rate loan or advance. In the absence of any such designation the interest rate option shall be the Default Option. Thereafter unpaid principal balances under this Note may be converted (at the end of an Interest Period if the index used to determine the interest rate therefore is a fixed rate) to another of the above interest rate options, or continued for an additional interest period, when applicable, as designated by Borrower in advance; and in the absence of sufficient advance designation as to conversion to or continuation of a fixed rate index, the index shall be converted to the Default Option. Notwithstanding the foregoing, a fixed rate index may not be elected for a loan or advance under this Note, nor any conversion to or continuation of a fixed rate index be elected, if the Interest Period thereof would extend beyond the maturity of this Note. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged 5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default; (a) cures the default within ten (10) days; or (b) if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 5.000 percentage points over the index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated, post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. (INITIAL HERE [INITIAL]). THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested orally by Borrower or by an authorized 10 07-15-1998 PROMISSORY NOTE PAGE 2 (Continued) ================================================================================ person. All oral requests shall be confirmed in writing on the day of the request. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: GILLES C. GODIN, VICE PRESIDENT/CFO; and DOUGLAS W. MOXLEY, AVP/CONTROLLER. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. REFERENCE PROVISION. 1. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this document ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section "CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. 2. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. 3. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 4. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. CREDIT AGREEMENT. This Note is subject to the provisions of the Credit Agreement dated October 22, 1996 and all amendments thereto and replacements therefor. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: TEKELEC By: /s/ GILLES C. GODIN By: /s/ DOUGLAS W. MOXLEY ----------------------------------- -------------------------------- GILLES C. GODIN, VICE PRESIDENT/CFO DOUGLAS W. MOXLEY,AVP/CONTROLLER ================================================================================ Variable Rate, Line of Credit. 11 SIGNATURE AUTHORIZATION ================================================================================ BORROWER: TEKELEC LENDER: Imperial Bank 26580 W. AGOURA ROAD Los Angeles Regional Office CALABASAS, CA 91302 201 N. Figueroa Street Los Angeles, CA 90012-2623 ================================================================================ THIS SIGNATURE AUTHORIZATION IS ATTACHED TO AND BY THIS REFERENCE IS MADE A PART OF EACH BORROWING RESOLUTION, DATED JULY 15, 1998, AND EXECUTED IN CONNECTION WITH A LOAN OR OTHER FINANCIAL ACCOMMODATIONS BETWEEN IMPERIAL BANK AND TEKELEC. The individuals named below, any one acting alone, are hereby authorized and appointed for and on behalf of Borrower from time to time to do any of the following: (1) To request advances of credit under the Agreement and to effect repayment of any credit outstanding under the Agreement; (2) To execute and deliver assignments, borrowing certificates, instruments, schedules, reports, invoices, bills, shipping documents and such other documents or certificates as may be necessary or appropriate under the Agreement or any other agreement or instrument relating thereto or delivered in connection therewith; (3) To transfer and endorse to Bank in payment of Borrower's obligations to Bank any checks, drafts, notes or other instruments payable to Borrower; and (4) To do or perform any and all other acts or matters in any way relating to any or all of the foregoing. The undersigned individuals each further certifies that the specimen signatures below are the genuine signatures of the individuals designated herein and that their signatures shall be binding on Borrower until Bank receives written notice of termination of the authority of any such designated individuals. Signature: /s/ GILLES C. GODIN -------------------------------- Name: -------------------------------------- Signature: /s/ DOUGLAS W. MOXLEY -------------------------------- Name: -------------------------------------- Signature: -------------------------------- Name: -------------------------------------- THIS SIGNATURE AUTHORIZATION IS EXECUTED ON JULY 15, 1998. BORROWER: TEKELEC By: /s/ GILLES C. GODIN --------------------------------------- GILLES C. GODIN, VICE PRESIDENT/CFO By: /s/ DOUGLAS W. MOXLEY --------------------------------------- DOUGLAS W. MOXLEY, AVP/CONTROLLER LENDER: Imperial Bank By: /s/ NILO B. SOLER -------------------------------------- Authorized Officer ================================================================================ 12 DISBURSEMENT REQUEST AND AUTHORIZATION - ----------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $15,000,000.00 07-15-1998 06-30-2000 [Initial] - ----------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -----------------------------------------------------------------------------------------------------
Borrower: TEKELEC LENDER: Imperial Bank 26580 W. AGOURA ROAD Los Angeles Regional Office CALABASAS, CA 91302 201 N. Figueroa Street Los Angeles, CA 90012-2623
=============================================================================== LOAN TYPE. This is a Variable Rate (at Imperial Bank Prime Rate, making an initial rate of 8.500%), Revolving Line of Credit Loan to a Corporation for $15,000,000.00 due on June 30, 2000. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please initial): [ ] _______ Personal, Family, or Household Purposes or Personal Investment. [X] _______ Business (including Real Estate Investment). SPECIFIC PURPOSE. The specific purpose of this loan is: GENERAL OPERATING NEEDS AND OCCASIONAL SIGHT OR STANDBY LETTERS OF CREDIT. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $15,000,000.00 as follows: Amount paid to Borrower directly: $15,000,000.00 $15,000,000.00 Deposited to Account #07-110-464* -------------- Note Principal: $15,000,000.00
AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower's account numbered 07-110-464 the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate Automatic Payments. INTERNATIONAL SUB-LIMITS. Subject to conditions and limitations as specified in the Credit Agreement dated October 22, 1996, as it may be revised from time to time. Proceeds are to be available and applied as required for International transactions. DISBURSEMENT PROVISION. *or by Cashier's Check or by wire transfer when advances are requested. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JULY 15, 1998. BORROWER: TEKELEC By: /s/ GILLES C. GODIN By: /s/ DOUGLAS W. MOXLEY ------------------------------------ ---------------------------------- GILLES C. GODIN, VICE PRESIDENT/CFO DOUGLAS W. MOXLEY, AVP/CONTROLLER
=============================================================================== EX-10.3 5 EXHIBIT 10.3 1 EXHIBIT 10.3 AMENDMENT NO. 6 TO TEKELEC 1994 STOCK OPTION PLAN Section 3 of the Tekelec 1994 Stock Option Plan is hereby amended to read in its entirety as follows: "3. SHARES RESERVED. The maximum aggregate number of Shares reserved for issuance pursuant to the Plan shall be Seven Million (7,000,000) Shares or the number of shares of stock to which such Shares shall be adjusted as provided in Section 10 of the Plan. Such number of Shares may be set aside out of authorized but unissued Shares not reserved for any other purpose, or out of issued Shares acquired for and held in the treasury of the Company from time to time. Shares subject to, but not sold or issued under, any Option terminating, expiring or canceled for any reason prior to its exercise in full, shall again become available for Options thereafter granted under the Plan, and the same shall not be deemed an increase in the number of Shares reserved for issuance under the Plan." Dated: March 20, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 53,200 26,435 40,137 634 10,822 140,455 32,796 23,026 166,688 30,386 0 0 0 87,616 46,361 166,688 42,949 42,949 14,131 14,131 16,442 0 0 13,488 5,123 8,365 0 0 0 8,365 0.16 0.14 DATA LISTED FOR "EPS-PRIMARY" IS THE NEWLY DEFINED "BASIC EPS" EPS DATA REFLECTS TWO-FOR-ONE SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED JULY 6, 1998.
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