-----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, U6jihLhF1iQ6x3JC2CDvW0eGK8McLdfm3uj/hYOTlU7b1rDqz/hC6vOumORiryK9 l8v36aNRMZR9F5CV/xE2Lw== 0000950148-99-001877.txt : 19990817 0000950148-99-001877.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950148-99-001877 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99693964 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, 1999 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 2, 1999, there were 55,040,762 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, 1999 3 and December 31, 1998 Consolidated Statements of Operations for the three and six 4 months ended June 30, 1999 and 1998 Consolidated Statements of Comprehensive Income for the 5 three and six months ended June 30, 1999 and 1998 Consolidated Statements of Cash Flow for the six months 6 ended June 30, 1999 and 1998 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURES
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TEKELEC CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, 1999 1998 ----------- ----------- (thousands, except share data) ASSETS (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents .................... $ 40,816 $ 31,932 Short-term investments, at fair value ........ 13,358 37,704 Accounts and notes receivable, less allowances of $1,219 and $763, respectively 59,171 54,606 Inventories .................................. 20,207 12,872 Amounts due from related parties ............. 1,794 1,896 Income taxes receivable ...................... 4,397 32 Deferred income taxes, net ................... 10,951 8,616 Prepaid expenses and other current assets .... 5,766 3,317 ----------- ----------- Total current assets ..................... 156,460 150,975 Long-term investments, at fair value ............. 20,981 44,138 Property and equipment, net ...................... 17,888 12,859 Intangible assets, net ........................... 151,765 131 Deferred income taxes, net ....................... 1,652 1,514 Other assets ..................................... 532 625 ----------- ----------- Total assets ............................. $ 349,278 $ 210,242 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term notes payable ..................... $ 100,000 $ -- Trade accounts payable ....................... 13,416 10,904 Accrued expenses ............................. 13,586 10,932 Accrued payroll and related expenses ......... 7,109 5,660 Current portion of deferred revenues ......... 26,276 10,480 Income taxes payable ......................... 1,678 4,237 ----------- ----------- Total current liabilities ................ 162,065 42,213 Long-term portion of deferred revenues ........... 2,097 2,252 Long-term deferred income tax liability .......... 22,017 -- ----------- ----------- Total liabilities ........................ 186,179 44,465 ----------- ----------- SHAREHOLDERS' EQUITY: Common stock, without par value, 200,000,000 shares authorized; 54,952,559 and 54,328,512 shares issued and outstanding, Respectively ............ 96,356 92,803 Retained earnings ............................ 66,440 72,084 Accumulated other comprehensive income ....... 303 890 ----------- ----------- Total shareholders' equity ............... 163,099 165,777 ----------- ----------- Total liabilities and shareholders' equity $ 349,278 $ 210,242 =========== ===========
See notes to consolidated financial statements. 3 4 TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (thousands, except per share data) REVENUES ...................................... $ 51,728 $ 42,949 $ $84,413 77,857 COSTS AND EXPENSES: Cost of goods sold ........................ 17,976 14,131 29,307 25,536 Amortization of purchased technology ...... 1,496 -- 1,514 -- Research and development .................. 10,525 5,783 19,393 11,351 Selling, general and administrative ....... 15,582 10,659 26,957 18,629 Amortization of goodwill and other intangible assets ........................ 3,726 -- 3,726 -- Acquired in-process research and development and other acquisition-related charges .............. 6,830 -- 6,830 -- Restructuring ............................. -- -- 1,800 -- ----------- ----------- ----------- ----------- Total costs and expenses .............. 56,135 30,573 89,527 55,516 ----------- ----------- ----------- ----------- Income (Loss) from operations ................. (4,407) 12,376 (5,114) 22,341 Other income (expense): Interest income ........................... 882 1,150 2,353 2,129 Interest expense .......................... (1,093) -- (1,093) -- Other, net ................................ (6) (38) (2) (247) ----------- ----------- ----------- ----------- Total other income (expense) .......... (217) 1,112 1,258 1,882 ----------- ----------- ----------- ----------- Income (Loss) before provision for income taxes (4,624) 13,488 (3,856) 24,223 Provision for income taxes ................ 1,512 5,123 1,788 9,202 ----------- ----------- ----------- ----------- NET INCOME (LOSS) ..................... $ (6,136) $ 8,365 $ (5,644) $ 15,021 =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE: Basic ..................................... $ (0.11) $ 0.16 $ (0.10) $ 0.28 Diluted ................................... (0.11) 0.14 (0.10) 0.26 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ..................................... 54,766 53,434 54,618 53,043 Diluted ................................... 54,766 59,049 54,618 58,760
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, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (thousands) NET INCOME (LOSS) .......................... $ (6,136) $ 8,365 $ (5,644) $ 15,021 Other comprehensive income (expense): Foreign currency translation adjustments (39) (607) (587) (910) -------- -------- -------- -------- COMPREHENSIVE INCOME (LOSS) ................ $ (6,175) $ 7,758 $ (6,231) $ 14,111 ======== ======== ======== ========
See notes to consolidated financial statements. 5 6 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
Six Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) ........................................... $ (5,644) $ 15,021 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation ................................................ 3,705 2,722 Amortization of intangible assets ........................... 5,770 -- Write-off of acquired in-process research and development ... 6,000 -- Non-cash portion of restructuring charge .................... 800 -- Deferred income taxes ....................................... (538) (245) Changes in current assets and liabilities (excluding the effect of acquisition): Accounts and notes receivable ............................. 5,172 (8,705) Inventories ............................................... (1,337) 384 Amounts due from related parties .......................... 102 441 Income taxes receivable ................................... (445) 733 Prepaid expenses and other current assets ................. (3,226) (422) Trade accounts payable .................................... 1,138 2,254 Accrued expenses .......................................... 2,630 2,449 Accrued payroll and related expenses ...................... (6,198) (3,026) Deferred revenues ......................................... 1,843 1,401 Income taxes payable ...................................... (1,390) 8,170 ----------- ----------- Total adjustments ....................................... 14,026 6,156 ----------- ----------- Net cash provided by operating activities ............... 8,382 21,177 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from maturity of available-for-sale securities ..... 80,916 17,000 Purchase of available-for-sale securities ................... (26,157) (25,409) Payments in connection with acquisition, net of cash acquired (49,087) -- Purchase of property and equipment .......................... (5,482) (2,704) Purchase of technology ...................................... (1,629) -- Decrease (Increase) in other assets ......................... 71 (64) ----------- ----------- Net cash (used in) investing activities ................. (1,368) (11,177) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ...................... 2,371 5,219 ----------- ----------- Net cash provided by financing activities ............... 2,371 5,219 Effect of exchange rate changes on cash ......................... (501) (767) ----------- ----------- Net change in cash and cash equivalents ..................... 8,884 14,452 Cash and cash equivalents at beginning of period ................ 31,932 38,748 ----------- ----------- Cash and cash equivalents at end of period ...................... $ 40,816 $ 53,200 =========== ===========
See notes to consolidated financial statements. 6 7 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D) (unaudited)
Six Months Ended June 30, ------------------------ 1999 1998 ----------- ----------- (thousands) SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION: Tax benefit related to stock options ....................... $ 1,181 $ 6,770 Note payable in connection with acquisition ................ 100,000 -- Assets and liabilities recognized in connection with acquisition: Accounts receivable .................................... 9,957 -- Other current assets ................................... 13,261 -- Investments ............................................ 7,255 -- Property and equipment ................................. 3,490 -- Other Assets ........................................... 169 -- Intangibles ............................................ 61,000 -- Goodwill ............................................... 94,774 -- Accounts payable ....................................... 1,515 -- Other current liabilities .............................. 22,429 -- Deferred income tax liability .......................... 21,545 --
See notes to consolidated financial statements. 7 8 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, 1998, 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, 1999 and 1998 are for the thirteen and twenty-six weeks ended July 2, 1999 and July 3, 1998, respectively. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1998, and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. On May 7, 1999, the Company purchased all of the outstanding stock of IEX Corporation ("IEX"). The acquisition has been accounted for under the purchase method of accounting, and accordingly, the consolidated financial statements include the results and financial position of IEX beginning as of May 7, 1999. See Note B. 8 9 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) B. ACQUISITION OF IEX CORPORATION On May 7, 1999, the Company acquired all of the outstanding stock of IEX Corporation ("IEX") for $163 million, consisting of $63 million in cash and $100 million in short-term notes maturing on November 7, 1999. IEX develops, markets and sells solutions for intelligent networks, call centers and other telecommunications markets. The transaction has been accounted for under the purchase method of accounting, and resulted in net goodwill and other intangibles of approximately $132.9 million, with an average amortization period of five years. The total purchase price, including acquisition expenses of $2.0 million, was allocated among the assets acquired and liabilities assumed based on their estimated fair values as follows:
(thousands) In-process research and development .................................. $ 6,000 Developed and existing technology .................................... 48,000 Other intangibles .................................................... 13,000 Goodwill ............................................................. 94,774 Tangible assets acquired ............................................. 50,045 Deferred income tax liabilities associated with certain intangible assets ................................................. (22,875) Liabilities assumed .................................................. (23,944) ----------- $ 165,000 ===========
Based on a third party appraisal, management determined that $6.0 million of the purchase price represented acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use. This amount was recorded as a non-recurring expense in the second quarter of 1999. Amortization expense of purchased technology and other intangible assets resulting from the acquisition amounted to $4.3 million, net of amortization of associated deferred income tax liabilities of $858,000, for the three and six months ended June 30, 1999. The following table shows pro forma revenue, net loss and net loss per share of the Company giving effect to the IEX acquisition as of the beginning of 1998 and 1999, excluding the impact of the one-time charges noted above.
For the Six Months Ended June 30, --------------------------------- 1999 1998 -------------- --------------- (thousands, except per share amounts) Revenues .................................................. $ 98,172 $ 99,898 Net loss .................................................. (13,132) (512) Net loss per share ........................................ (0.24) (0.01)
9 10 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) C. CERTAIN BALANCE SHEET ITEMS The components of inventories are:
JUNE 30, December 31, 1999 1998 ----------- ----------- (thousands) Raw materials .................................. $ 7,579 $ 3,830 Work in process ................................ 1,765 2,064 Finished goods ................................. 10,863 6,978 ----------- ----------- $ 20,207 $ 12,872 =========== =========== Property and equipment consist of the following: Manufacturing and development equipment ........ $ 23,285 $ 23,024 Furniture and office equipment ................. 16,557 9,677 Demonstration equipment ........................ 2,651 4,038 Leasehold improvements ......................... 3,724 1,953 ----------- ----------- 46,217 38,692 Less, accumulated depreciation and amortization (28,329) (25,833) ----------- ----------- Property and equipment, net ................ $ 17,888 $ 12,859 =========== =========== Intangible assets consist of the following: Goodwill ....................................... $ 94,774 $ -- Purchased technology ........................... 49,840 150 Other .......................................... 13,000 -- ----------- ----------- 157,614 150 Less accumulated amortization .................. (5,849) (19) ----------- ----------- Intangible assets, net ..................... $ 151,765 $ 131 =========== ===========
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. Sales to related parties amounted to $739,000 and $1.3 million for the three months ended June 30, 1999 and 1998, respectively, and $1.3 million and $2.5 million for the six months ended June 30, 1999 and 1998, respectively. 10 11 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) E. RESTRUCTURING During the first quarter of 1999, the Company announced a plan to scale down its Data Network Diagnostics Division and integrate the division into its Intelligent Network Diagnostics Division. In connection with this activity, the Company recorded a restructuring charge of $1.8 million consisting of cash severance costs for 27 terminated employees in management, research and development, support and administrative functions, and non-cash charges consisting of the write-down of certain assets to their net realizable value. The costs consisted of the following:
Accrual as Provision Costs of June 30, Recorded Incurred 1999 ----------- -------- ----------- (thousands) Severance pay ................................ $ 700 $ 700 $ -- Other accrued expenses ....................... 300 300 -- Inventory .................................... 350 150 200 Fixed assets ................................. 200 169 31 Other assets ................................. 250 91 159 ------ ------ ---- $1,800 $1,410 $390 ====== ====== ====
At June 30, 1999, all 27 employees had been terminated, and all of the severance costs and other accrued expenses had been paid. F. INCOME TAXES Although the Company had a loss for the three- and six-month periods ended June 30, 1999, tax provisions of $1.5 million and $1.8 million, respectively, were recorded, reflecting the effect of nondeductible acquisition-related costs, partially offset by a benefit of $858,000 from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Excluding the effect of these acquisition-related costs, an estimated effective tax rate of 36% was applied and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits, compared to an effective tax rate of 38% for the three- and six-month periods ended June 30, 1998. G. LINES OF CREDIT AND BORROWINGS The Company has a $15.0 million line of credit with a U.S. bank and lines of credit aggregating $2.5 million available to the Company's Japanese subsidiary from various Japan-based banks. The Company's $15.0 million credit facility is collateralized by substantially all of the Company's assets, bears interest at the lender's prime rate (7.75% at June 30, 1999), and expires on 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. In connection with the Company's May 1999 acquisition of IEX Corporation, the Company renegotiated certain terms under this credit facility, including various financial ratios and net worth and indebtedness tests. The Company believes it is in compliance with these requirements. 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 (1.375% at June 30, 1999) plus 0.125% per annum which expire between November 20, 1999, and August 5, 2000, if not renewed. There have been no borrowings under these lines of credit. In connection with the Company's acquisition of IEX, the Company issued $100 million in short-term notes secured by substantially all of the assets of IEX. These notes bear interest at 7% per annum, payable quarterly, and mature on November 7, 1999 (the "Original Maturity Date.") The maturity date may be extended by the Company (the "Extended Maturity Date") for successive three-month periods, subject to principal payments of at least $20 million prior to the Initial Maturity Date and each successive Extended Maturity Date, and provided that in any event, the maturity date can not be extended beyond December 31, 2000. Immediately following the Initial Maturity Date, the interest rate increases to 12%, and increases by an additional 2% at each successive Extended Maturity Date. 11 12 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) H. OPERATING SEGMENT INFORMATION The Company's reportable operating segments are strategic operating units that are managed separately due to their different products or geographic location. Operating segment information for 1999 includes the post-acquisition results on IEX (see note B). The Network Infrastructure operating segment develops, markets and sells the Company's EAGLE STP products based on the Company's high capacity packet switching platform; the IP7 Secure Gateway, an SS7 gateway for signaling in converged networks, and other IP7 convergence products; and DaVinci Network Products, which includes, among others, the DaVinci Service Control Point, an advanced database server used for the provisioning of telephony applications, DaVinci VoX Gateway Controller, a media gateway controller for converged networks, and DaVinci Prepaid Services, a prepaid calling platform. The Network Diagnostics operating segment develops, markets and sells diagnostic products, including MGTS a diagnostic tool used primarily by equipment suppliers for research and development; MGTS Sentinel, used for testing within telecommunications networks; MGTS i3000, used to perform diagnostics in converged networks; and Chameleon data diagnostics performance analyzers. The Japan Diagnostics operating segment sells the Company's and third parties' diagnostic products to customers in Japan. The Call Center operating segment develops and supplies software-based solutions for Call Centers, including TotalView Workforce Management and TotalNet Call Routing. Transfers between operating segments are made at prices reflecting market conditions. The allocation of revenues from external customers by geographic area is determined by the destination of the sale. The Company's operating segments and geographical information are as follows (in thousands): OPERATING SEGMENTS
Net Sales -------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Network Infrastructure ..... $ 30,497 $ 28,137 $ 50,862 $ 49,425 Network Diagnostics ........ 12,664 10,144 20,546 19,445 Call Center Products ....... 3,574 -- 3,574 -- Japan Diagnostics .......... 3,672 5,230 8,505 10,876 Other products ............. 1,551 -- 1,551 -- Intercompany Eliminations .. (230) (562) (625) (1,889) ----------- ----------- ----------- ----------- Total net sales ........ $ 51,728 $ 42,949 $ 84,413 $ 77,857 =========== =========== =========== ===========
Operating Income (Loss) -------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Network Infrastructure .......... $ 5,614 $ 11,385 $ 8,926 $ 19,410 Network Diagnostics(1) .......... 3,282 1,845 1,301 3,426 Call Center Products ............ 1,377 -- 1,377 -- Japan Diagnostics ............... (109) 1,135 191 2,578 Other products .................. 675 -- 675 -- Intercompany Eliminations ....... (8) 344 153 129 General Corporate(2) ............ (15,238) (2,333) (17,737) (3,202) ----------- ----------- ----------- ----------- Total operating income (loss) $ (4,407) $ 12,376 $ (5,114) $ 22,341 =========== =========== =========== ===========
(1) Network Diagnostics operating segment reflects the $1,800 restructuring charge recorded in the six months ended June 30, 1999 (see Note E). (2) General Corporate includes acquisition-related charges and amortization of $12,033 for the three and six months ended June 30, 1999, and a benefit of $1,663 for the settlement of an insurance claim in the six months ended June 30, 1998. 12 13 ENTERPRISE-WIDE DISCLOSURES The following table sets forth, for the periods indicated, revenues from external customers by principal product line:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Network Infrastructure ............... $ 30,497 $ 28,137 $ 50,824 $ 49,425 Network Diagnostics .................. 16,106 14,812 28,426 28,432 Call Center Products ................. 3,574 -- 3,574 -- Other Products ....................... 1,551 -- 1,551 -- ----------- ----------- ----------- ----------- Total revenues from external customers ...................... $ 51,728 $ 42,949 $ 84,413 $ 77,857 =========== =========== =========== ===========
The following table sets forth, for the periods indicated, revenues from external customers by geographic territory:
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- North America ........................ $ 40,178 $ 26,683 $ 61,308 $ 46,274 Japan ................................ 3,672 5,230 8,505 10,876 Europe ............................... 2,925 2,456 4,727 3,943 Rest of World ........................ 4,953 8,580 9,873 16,764 ----------- ----------- ----------- ----------- Total revenues from external customers ...................... $ 51,728 $ 42,949 $ 84,413 $ 77,857 =========== =========== =========== ===========
The following table sets forth, for the periods indicated, long-lived assets by geographic area in which the Company holds assets:
JUNE 30, December 31, 1999 1998 ----------- ----------- United States ............. $ 18,502 $ 12,348 Japan ..................... 1,066 1,216 Other ..................... 46 51 ----------- ----------- Total long-lived assets $ 19,614 $ 13,615 =========== ===========
13 14 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) I. 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, 1999 and 1998:
NET INCOME (LOSS) SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------------------------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 1999: (thousands except per share amount) Basic EPS ............................... $ (6,136) 54,766 $ (0.11) Effect of Dilutive Securities - Stock Options and Warrants ................ -- -- ----------- ----------- Diluted EPS ............................. $ (6,136) 54,766 $ (0.11) =========== =========== FOR THE THREE MONTHS ENDED JUNE 30, 1998: 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 SIX MONTHS ENDED JUNE 30, 1999: Basic EPS ............................... $ (5,644) 54,618 $ (0.10) Effect of Dilutive Securities - Stock Options and Warrants ................ -- -- ----------- ----------- Diluted EPS ............................. $ (5,644) 54,618 $ (0.10) =========== =========== 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 =========== ===========
14 15 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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, 1998. 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. In January 1999, the Company scaled down its Data Network Diagnostics Division and integrated this division into its Intelligent Network Diagnostics Division. (See Note E to Consolidated Financial Statements.) In May 1999, the Company acquired all of the outstanding stock of IEX Corporation, which develops, markets and sells solutions for intelligent networks, call centers and other telecommunications markets. The acquisition was accounted for under the purchase method of accounting, and accordingly, the Company's results of operations include the results of IEX beginning as of May 7, 1999. In connection with the acquisition, the Company recorded approximately $132.9 million of goodwill and other intangible assets, net of related deferred income tax liabilities. During the second quarter of 1999, the Company recorded a charge of $6.0 million related to the write-off of purchased in-process research and development in connection with the acquisition of IEX, and an additional $830,000 charge for the write-off of certain assets made redundant by the acquisition. 15 16 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that certain income statement items bear to total revenues:
PERCENTAGE OF REVENUES ---------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues ...................................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold ............................ 34.8 32.9 34.7 32.8 Amortization of purchased technology .......... 2.9 -- 1.8 -- ----------- ----------- ----------- ----------- Gross profit .................................. 62.3 67.1 63.5 67.2 Research and development ...................... 20.3 13.5 23.0 14.6 Selling, general and administrative ........... 30.1 24.8 32.0 23.9 Amortization of goodwill and other purchased intangibles ................................... 7.2 -- 4.4 -- Non-recurring acquisition-related charges ..... 13.2 -- 8.1 -- Restructuring ................................. -- -- 2.1 -- ----------- ----------- ----------- ----------- Total operating expenses ...................... 70.8 38.3 69.6 38.5 ----------- ----------- ----------- ----------- Income (loss) from operations ................. (8.5) 28.8 (6.1) 28.7 Interest and other income (expense), net ...... (0.4) 2.6 1.5 2.4 ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes (8.9) 31.4 (4.6) 31.1 Provision for income taxes .................... 2.9 11.9 2.1 11.8 ----------- ----------- ----------- ----------- Net income (loss) ............................. (11.8)% 19.5% (6.7)% 19.3% =========== =========== =========== ===========
16 17 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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, ------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Network Infrastructure 59% 65% 60% 63% Network Diagnostics .. 31 35 34 37 Call Center .......... 7 -- 4 -- Other ................ 3 -- 2 -- -------- -------- -------- -------- Total ............ 100% 100% 100% 100% ======== ======== ======== ========
The following table sets forth, for the periods indicated, the revenues by geographic territories as a percentage of total revenues:
PERCENTAGE OF REVENUES ----------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- -------- -------- North America 78% 62% 73% 59% Japan ....... 7 12 10 14 Europe ...... 6 6 5 5 Rest of World 9 20 12 22 -------- -------- -------- -------- Total ... 100% 100% 100% 100% ======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1998 Revenues. The Company's revenues increased by $8.8 million, or 20%, during the second quarter of 1999 due to the inclusion of post-acquisition sales of IEX products following the Company's acquisition of IEX during the quarter. Revenues from Network Infrastructure products increased by $2.4 million, or 8%, to $30.5 million due to the inclusion of post-acquisition sales of IEX's Intelligent Network products, partially offset by lower EAGLE STP revenues as a result of lower unit sales and lower average STP system prices. The lower average STP system prices were due to the continued trend towards smaller average system sizes, and were partially offset by higher sales of upgrades and software enhancements to the Company's larger installed base of EAGLE STP systems. 17 18 Revenues from network diagnostics products increased by $1.3 million, or 9%, due principally to higher sales of MGTS diagnostics products, primarily as a result of increased market acceptance of the Company's MGTS Sentinel product, partially offset by lower sales of the Company's traditional MGTS products, particularly in Japan. Revenues in North America increased by $13.5 million, or 51%, due primarily to the inclusion of post-acquisition IEX product sales. Sales in Japan decreased by $1.6 million, or 30%, due to lower Chameleon and MGTS product sales, partially offset by higher sales of MGTS-related development services. Revenues in Europe increased by $469,000, or 19%, due to higher EAGLE STP product sales. Rest of world revenues decreased by $3.6 million, or 42%, due primarily to lower EAGLE STP product sales. The impact of exchange rate fluctuations on currency translations increased revenues by $500,000, or 1%, and did not have a material effect on net loss in the second quarter of 1999. A significant portion of the Company's revenues in each quarter results from orders that are received in that quarter, and are difficult to predict. Further, the Company typically generates a significant portion of its revenues for each quarter in the last month of the quarter. The Company establishes its expenditure levels based on its expectations as to future revenues, and if revenue levels were to fall below expectations, then such shortfall would cause expenses to be disproportionately high. Therefore, a drop in near-term demand would significantly affect revenues, causing a disproportionate reduction in profits or even losses in a quarter. The Company believes that its future revenue growth depends in large part upon a number of factors, including the continued market acceptance of the Company's products, particularly the EAGLE products and related applications and the MGTS Sentinel; market acceptance of the Company's recently introduced IP7 and DaVinci VoX products, as well as future products; growth in the markets for the Company's products; and the Company's ability to address other existing and new markets for its products. Gross Profit. Gross profit as a percentage of revenues decreased to 62.3% in the second quarter of 1999 compared with 67.1% in the second quarter of 1998. The decrease in gross margins was principally due to the amortization of purchased technology, principally in connection with the acquisition of IEX, and lower margins in Japan due to a higher percentage of lower margin sales, primarily development services. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of revenue for the three months ended June 30, 1999 was 65.2%. Research and Development. Research and development expenses increased overall by $4.7 million, or 82%, and increased as a percentage of revenues to 20% in the second quarter of 1999 from 13% in the second quarter of 1998. The dollar increase was attributable principally to the inclusion of post-acquisition IEX research and development expenses, and increased expenses incurred in connection with the hiring of additional personnel for product development and enhancements for both network infrastructure and intelligent network diagnostics products, primarily related to the Company's continued development of products to address the IP/SS7 market. Based on the Company's present product development plans, the Company expects that its research and development expenses for the remainder of 1999 will increase in dollars when compared to prior periods in 1998. 18 19 Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $4.9 million, or 46%, and increased as a percentage of revenues to 30% in the second quarter of 1999 from 25% in the second quarter of 1998. The dollar increase was primarily due to the inclusion of post-acquisition IEX selling, general and administrative expenses, and increased personnel and infrastructure-related expenses incurred to support the growing EAGLE STP installed base and anticipated higher sales levels. The Company expects that selling, general and administrative expenses for the remainder of 1999 will increase in dollars when compared to prior periods. Interest and Other Income (Expense), Net. Net interest expense was $211,000 for the second quarter of 1999 compared to net interest income of $1.2 million in the second quarter of 1998. The net expense reflected interest expense incurred for notes issued in connection with the acquisition of IEX, and lower invested cash balances due to cash payments made in connection with the acquisition of IEX. Income Taxes. Although the Company had a loss for the three-month period ended June 30, 1999, a tax provision of $1.5 million was recorded, reflecting the effect of nondeductible acquisition-related costs, partially offset by a benefit of $858,000 from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Excluding the effect of these acquisition-related costs, an estimated effective tax rate of 36% was applied and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits, compared to an effective tax rate of 38% for the three months ended June 30, 1998. SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1998 Revenues. The Company's revenues increased by $6.6 million, or 8%, during the six months ended June 30, 1999 due primarily to the inclusion of post-acquisition IEX product sales following the Company's acquisition of IEX in May 1999. Revenues from network infrastructure products increased by $1.4 million, or 3%, to $50.9 million due primarily to the addition of sales of IEX's Intelligent Network Products, partially offset by lower EAGLE STP revenues as a result of lower unit sales and lower average STP system prices. The lower average STP system prices were due to smaller average system sizes sold in 1999, and were partially offset by higher sales of upgrades and software enhancements to the Company's larger installed base of EAGLE STP systems. Revenues from network diagnostics products were flat. Higher sales of intelligent network diagnostic products were partially offset by lower sales of data network diagnostic products. Revenues in North America increased by $15.0 million, or 32%, primarily as a result of the inclusion of post-acquisition IEX product sales and higher EAGLE STP sales. Sales in Japan decreased by $2.4 million, or 22%, due to lower Chameleon and MGTS product sales, partially offset by higher sales of MGTS-related development services. Revenues in Europe increased by $784,000, or 20%, due to higher EAGLE STP product sales. Rest of world revenues decreased by $6.9 million, or 41%, due primarily to lower EAGLE STP product sales. 19 20 The impact of exchange rate fluctuations on currency translations increased revenues by $898,000, or 1%, and did not have a material effect on net income in the six months ended June 30, 1999. Gross Profit. Gross profit as a percentage of revenues decreased to 63.5% in the six months ended June 30, 1999 compared with 67.2% in the six months ended June 30, 1998. The decrease in gross margins was primarily due to the amortization of purchased technology, primarily in connection with the acquisition of IEX, and lower margins in Japan due to a higher percentage of lower margin sales, primarily development services. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of sales was 65.3%. Research and Development. Research and development expenses increased overall by $8.0 million, or 71%, and increased as a percentage of revenues to 23% in the six months ended June 30, 1999 from 15% in the six months ended June 30, 1998. The dollar increase was attributable principally to the inclusion of post-acquisition IEX research and development expenses and increased expenses incurred in connection with the hiring of additional personnel for product development and enhancements for both network infrastructure and intelligent network diagnostics products, primarily related to the Company's continued development of products to address the IP/SS7 market. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $8.3 million, or 45%, and increased as a percentage of revenues to 32% in the six months ended June 30, 1999 from 24% in the six months ended June 30, 1998. The dollar increase was primarily due to the inclusion of post-acquisition IEX selling, general and administrative expenses and increased personnel and infrastructure-related expenses incurred to support the growing EAGLE STP installed base and anticipated higher sales levels. The increase compared to 1998 was also due to a $1.6 million insurance settlement which benefited the 1998 expenses. Interest and Other Income (Expense), Net. Net interest income decreased by $869,000, or 41%, during the six months ended June 30, 1999 due primarily to interest expense incurred for notes issued in connection with the acquisition of IEX, and lower invested cash balances due to cash payments made in connection with the acquisition of IEX. Income Taxes. Although the Company had a loss for the six-month period ended June 30, 1999, a tax provision of $1.8 million was recorded reflecting the effect of nondeductible acquisition-related costs partially offset by a benefit of $858,000 from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Excluding the effect of these acquisition-related costs, an estimated effective tax rate of 36% was applied and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits, compared to an effective tax rate of 38% for the six months ended June 30, 1998. 20 21 LIQUIDITY AND CAPITAL RESOURCES During the six-month period ended June 30, 1999, cash and cash equivalents increased by $8.9 million to $40.8 million, after net proceeds of $54.8 million from the sale of short-term and long-term investments. Operating activities, net of the effects of exchange rate changes on cash, provided $7.9 million. Financing activities, which represented proceeds from the issuance of Common Stock upon the exercise of options and warrants, provided $2.4 million, and investing activities, excluding the net proceeds from the sale of short-term and long-term investments, used $56.1 million primarily due to cash paid in connection with the acquisition of IEX. Accounts receivable, including amounts due from related parties, increased by 8% during the first six months of 1999 due primarily to the inclusion of IEX receivables partially offset by strong collections activity. Inventory levels increased by 57% primarily due to IEX inventory requirements. Trade accounts payable increased by 23% during the first six months of 1999, primarily due to the inclusion of IEX payables and the increased level of operating expenses incurred by the Company primarily to support the Company's product development programs and anticipated higher sales levels. Deferred revenues increased 123% during the first six months of 1999 primarily as a result of the inclusion of IEX deferred revenues and increased extended warranty service revenues which are deferred and recognized ratably over the warranty period. Capital expenditures of $5.5 million during the first six months of 1999 represented the planned addition of equipment principally for research and development, manufacturing operations and facility expansion. Technology purchases, excluding purchased technology recorded in connection with the acquisition of IEX, amounted to $1.6 million, and consisted primarily of software licenses purchased for use in switching and diagnostics product applications. The Company has a $15.0 million line of credit with a U.S. bank and lines of credit aggregating $2.5 million available to the Company's Japanese subsidiary from various Japan-based banks. The Company's $15.0 million credit facility is collateralized by substantially all of the Company's assets, bears interest at the lender's prime rate (7.75% at June 30, 1999), and expires on 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. In connection with the Company's May 1999 acquisition of IEX Corporation, the Company renegotiated certain terms of this credit facility, including various financial ratios and net worth and indebtedness tests, and believes that the Company is in compliance with these requirements. 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 (1.375% at June 30, 1999) plus 0.125% per annum which expire between November 20, 1999, and August 5, 2000, if not renewed. There have been no borrowings under these lines of credit. 21 22 In connection with the Company's acquisition of IEX, the Company issued $100 million in short-term notes secured by substantially all of the assets of IEX. These notes bear interest at 7% per annum, payable quarterly, and mature on November 7, 1999 (the "Original Maturity Date.") The maturity date may be extended by the Company (the "Extended Maturity Date") for successive three-month periods, subject to principal payments of at least $20 million prior to the Initial Maturity Date and each successive Extended Maturity Date, and provided that, in any event, the maturity date cannot be extended beyond December 31, 2000. Immediately following the Initial Maturity date, the interest rate increases to 12%, and increases by an additional 2% at each successive Extended Maturity Date. Although the short-term notes assumed in connection with the acquisition of IEX Corporation include provisions allowing for the extension of the maturity date, the Company intends to refinance the short-term notes with long-term debt during 1999. The Company believes that it will be successful in its efforts to refinance the short-term notes, and that its existing working capital, funds generated through operations, and its current bank lines of credit will be sufficient to satisfy operating requirements for at least the next twelve months. 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. READINESS FOR YEAR 2000 Background. As the year 2000 approaches, a critical issue has emerged regarding how existing application software programs, operating systems and embedded computer chips can accommodate the year 2000 date value. The Company has a year 2000 project team in place with overall responsibility for the Company's year 2000 compliance programs. In addition, executive management regularly monitors the status of the Company's year 2000 remediation plans. Project. The Company has identified potential year 2000 risks in four categories: software and system products the Company sells to customers; internal business software and information technology systems; systems other than information technology systems ("Non-IT systems"); and third-party suppliers to the Company. The Company's year 2000 project includes the following phases for the first three categories above: (1) identifying year 2000 risks; (2) assigning priorities to identified risks; (3) testing year 2000 compliance for risks determined to be material to the Company; (4) correcting problems determined to be material and not year 2000 compliant; (5) retesting corrections that have been implemented and (6) developing contingency plans. With respect to the Company's third-party suppliers, the Company's year 2000 project consists of the following phases: (1) contacting suppliers for information concerning their year 2000 readiness; (2) prioritizing suppliers as to relative importance; (3) validating supplier responses regarding year 2000 compliance and (4) developing contingency plans in the event that one or more suppliers fails to achieve year 2000 compliance. 22 23 Assessment. The software and systems products that the Company sells to customers consist of internally developed software, third-party software licensed by the Company for use in or with the Company's products, hardware systems designed and manufactured by the Company and hardware systems designed and manufactured by third parties. The Company has identified priorities, completed the initial testing phase and begun offering solutions to its customers. The Company believes that its current product offerings are year 2000 compliant. For past product offerings that the Company is still supporting, the Company is offering releases that should make such products year 2000 compliant. However, failure to achieve year 2000 compliance for any products could materially adversely affect sales in 1999. Additionally, if any of the Company's mission critical products were to fail in the field as a result of year 2000 noncompliance, such failure could result in substantial liability to the Company and have a material adverse effect on the Company's financial results, business, market position, reputation and prospects. Internal business software and systems consists primarily of the Company's business information systems in the United States and at the Company's Japanese subsidiary. The Company has implemented and tested the necessary modifications to make its significant internal business systems year 2000 compliant, and the Company believes that such internal business software and systems are year 2000 compliant. However, if the Company's business systems are not year 2000 compliant, the Company could experience interruptions to its production process, development programs and general business operations. The Company has been advised by the suppliers of its Non-IT systems, which consist primarily of environmental systems such as fire suppression and security systems at the various buildings the Company occupies, that such systems are currently year 2000 compliant. Third-party suppliers provide component parts, purchased assemblies and contract manufacturing services incorporated by the Company into the products and systems it sells. The Company is requiring that each of its key suppliers certify whether they are year 2000 compliant. The Company has also prioritized its suppliers by level of criticality to the Company's business. Based on information received from the Company's critical suppliers, the Company estimates that approximately 70% of its critical suppliers are presently year 2000 compliant. The Company plans to monitor its critical suppliers and either develop alternate sources or increase inventory levels prior to the year 2000 for those vendors considered to be at risk of not achieving year 2000 compliance. However, there can be no assurance that such alternate sources will be available or that adequate inventory levels will be attainable if necessary, and the Company could experience parts shortages and production interruptions if one or more key third-party suppliers experience year 2000 problems. Costs. Incremental costs of the Company's year 2000 project have consisted of the hiring of two contractors to assist with administrative duties related to the year 2000 project, consulting by PricewaterhouseCoopers LLP at the initial stages of the project and a third-party audit team, which provides year 2000 compliance test audit reports. Such costs in the aggregate have not been material to the Company's financial position, results of operations or cash flows. The balance of the effort for the Company's year 2000 project has been by employees whose costs for this project are not tracked separately. The Company believes that costs for the remainder of the year 2000 project will not be material to the Company's financial position, results of operations or cash flows. 23 24 Risks. The Company's results of operations, financial condition and cash flows could be materially adversely affected if the Company or any of its key suppliers or customers do not achieve year 2000 compliance. Although the Company's year 2000 project is expected to minimize the Company's risks of experiencing a year 2000 problem, inherent risks and uncertainties exist despite the Company's efforts. There can be no assurance that a failure on the part of the Company, its products, its key suppliers or its customers will not be disruptive to the Company's business. As a result of these uncertainties the Company is unable to determine at this time whether the consequences of year 2000 failures will have a material effect on the Company's results of operations, financial condition or cash flows. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements that 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, changes in customer product mix, customer acceptance of the Company's products, capital spending patterns of customers, including shifts in such patterns as a result of customers' deferral of product purchases until the year 2000, competition and pricing, new product introductions by the Company or its competitors, carrier deployment of intelligent network services, the level and timing of research and development expenditures, regulatory changes, readiness for the year 2000 by the Company, its customers and its suppliers, general economic conditions and other risks described in this Annual Report and in certain of the Company's Securities and Exchange Commission filings. Many of these risks and uncertainties are outside of the Company's control and are difficult for the Company to forecast. Actual results may differ materially from those expressed or implied in such forward-looking statements. 24 25 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 14, 1999, the Company held its 1999 Annual Meeting of Shareholders (the "Annual Meeting"). (b) At the Annual Meeting, the following persons were elected as directors of the Company. The numbers 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 50,407,324 483,629 Jean-Claude Asscher 50,414,182 476,771 Daniel L. Brenner 50,409,109 481,844 Michael L. Margolis 50,357,120 533,833 Howard Oringer 50,408,922 481,031 Jon F. Rager 50,419,092 471,861
(c) At the Annual Meeting, the shareholders approved, with 22,892,413 votes cast in favor and 16,756,218 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 by 5,000,000. There were 173,537 abstentions and 11,068,785 broker nonvotes with respect to this matter. (d) At the Annual Meeting, with 50,791,915 votes cast in favor, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the year ending December 31, 1999. 59,986 votes were cast against such ratification, and there were 39,052 abstentions with respect to this matter. ITEM 5. OTHER INFORMATION Notice of any shareholder proposal to be presented at the Company's Annual Meeting of Shareholders to be held in 2000 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 December 6, 1999. 25 26 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 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(2), together with Promissory Note of the Registrant dated July 15, 1998(2), as amended April 18, 1999. 10.2 Amendment No. 1 dated March 8, 1999 to Tekelec Officer Severance Plan. 10.3 1994 Stock Option Plan, including forms of stock option agreements(3), as amended February 4, 1995(4), March 3, 1995(4), January 27, 1996(5), February 26, 1997(6), March 19, 1997(6), March 20, 1998(2) and March 19, 1999. 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 Quarterly Report on Form 10-Q (File No. 0-15135) for the quarter ended June 30, 1998. (3) 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. (4) 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. (5) 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. (6) 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. 26 27 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 16, 1999 /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) 28 INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Description Page - ------ ----------- ---- 10.1 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(2), together with Promissory Note of the Registrant dated July 15, 1998(2), as amended April 18, 1999. 10.2 Amendment No. 1 dated March 8, 1999 to Tekelec Officer Severance Plan. 10.3 1994 Stock Option Plan, including forms of stock option agreements(3), as amended February 4, 1995(4), March 3, 1995(4), January 27, 1996(5), February 26, 1997(6), March 19, 1997(6), March 20, 1998(2) and March 19, 1999. 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only.)
EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 FIRST AMENDMENT TO CREDIT AGREEMENT This First Amendment ("Amendment") amends that certain Credit Agreement ("Agreement") dated April 18, 1999 by and between Tekelec ("Borrower") and Imperial Bank ("Bank") as follows: 1. Section 4.9 of the Agreement is hereby amended in its entirety to read as follows: DEBT TO NET WORTH. Maintain on a quarterly basis a consolidated ratio of total liabilities to Net Worth of not greater than 2.00:1.00 Except as provided above, the Agreement remains unchanged. 5. This Amendment is effective as of July 30, 1999, and the parties hereby confirm that the Agreement as amended is in full force and effect. TEKELEC IMPERIAL BANK "BORROWER" "BANK" By: /s/ GILLES C. GODIN By: /s/ NILO SOLER -------------------------- ------------------------- Its: V.P. Finance and CFO Its: Vice President By: /s/ MICHAEL L. MARGOLIS -------------------------- Its: President and CEO EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF TEKELEC TO ACTION TAKEN WITHOUT A MEETING Pursuant to the authority granted to the directors of Tekelec, a California corporation (the "Company"), to take action by unanimous written consent without a meeting by the California Corporations Code and the Company's Bylaws, the undersigned, each being a duly elected director and together constituting all of the directors of the Company, upon due consideration and consultation, do hereby each and all consent to the adoption of the following preamble and resolutions: Amendment to Officer Severance Plan WHEREAS, the Compensation Committee of the Company's Board of Directors has recommended to the Board of Directors that the Company's Officer Severance Plan be amended to provide for the accelerated vesting of an eligible officer's options and rights to purchase securities of the Company under certain circumstances in connection with a "Change in Control" of the Company (as such term as defined in the Company's Officer Severance Plan); NOW, THEREFORE, BE IT RESOLVED, that the Officer Severance Plan ("Severance Plan") be, and hereby is, amended, effective immediately, to add Section 6(d) to the Severance Plan to read in its entirely as follows: "(d) (i) If in connection with, or within two yeas following, a Change in Control of the Company, (A) an Eligible Officer's employment with the Company (or the Acquiror) is terminated by the Company (or the Acquiror) without Cause or (B) an Eligible Officer terminates his/her employment with the Company (or the Acquiror) for "Good Reason," then all of such Eligible Officer's then unvested options and other rights to purchase or acquire securities or other property of the Company or the Acquiror (including but not limited to any options or rights assumed by the Acquiror in connection with the Change in Control), other than any such options or rights that were granted after the effective date of the Change in Control, shall automatically vest and become immediately exercisable in full and all of such Eligible Officer's options and rights to purchase securities or other property of the Company and/or the Acquiror (other than any such options and rights that are granted after the effective date of the Change in Control, which options and rights shall be governed by the terms thereof) shall be exercisable for a period of one year following the effective date of such Eligible Officer's termination of employment with the Company or the 2 Acquiror, as the case may be (notwithstanding any terms or provisions to the contrary in any applicable stock option plan, stock option agreement or other plan or agreement); provided, however, that any such option or other right shall not be exercisable after the expiration of the term of such option or other right set forth in the option agreement or other agreement evidencing such right. (ii) If in connection with a Change in Control of the Company described in Section 2(e)(iii) of this Plan, an Eligible Officer is not offered, at least ten days prior to the effective date of such Change in Control, employment with the Acquiror after the effective date of the Change in Control on terms and conditions generally no less favorable to the Eligible Officer than the terms and conditions of his/her employment in effect with the Company immediately prior to the effective date of the Change in Control, then all of such Eligible Officer's unvested options and other rights to purchase or acquire the Company's securities that are outstanding immediately prior to the effective date of the Change in Control shall automatically vest and become immediately exercisable in full and all of such Eligible Officer's options and rights to purchase or acquire the Company's securities that are outstanding immediately prior to the effective date of the Change in Control shall be exercisable for a period of one year following the effective date of such Change in Control (notwithstanding any terms or provisions to the contrary in any applicable stock option plan, stock option agreement or other plan or agreement); provided, however, that any such option or other right shall not be exercisable after the expiration of the term of such option or other right set forth in the option agreement or other agreement evidencing such right.'' General Resolution - ------------------ RESOLVED, that any and all actions taken by persons who are or have been officers or directors of the Company, which would have been in conformity with the above resolution if such resolution had been in effect at the time of such action, be, and hereby are, ratified, approved and confirmed in all respects; and RESOLVED FURTHER, that the officers of the Company, or any of them, be, and they hereby are, authorized to perform any acts, including the payment of any and all expenses, and to execute and deliver any and all documents, that any or all of them deem necessary or appropriate in their opinion to carry out any or all of the foregoing resolutions. 3 This Consent may be signed in counterparts, all of which together shall constitute one and the same instrument. This Consent is executed effective as of March 8, 1999. - ----------------------------------- ----------------------------------- Jean-Claude Asscher, Chairman Robert V. Adams - ----------------------------------- ----------------------------------- Daniel L. Brenner Michael L. Margolis - ----------------------------------- ----------------------------------- Howard Oringer Jon F. Rager EX-10.3 4 EXHIBIT 10.3 1 Exhibit 10.3 TEKELEC 1994 STOCK OPTION PLAN 1. Section 3. 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 Nineteen Million (19,000,000) 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." 2. Section 7.e. Section 7.e. of the 1994 Stock Option Plan is hereby amended to read in its entirety as follows: "Termination of Eligibility. If an Optionee ceases to serve as an Employee for any reason other than death or permanent and total disability (within the meaning of Section 22(e)(3) of the Code) and thereby terminates his or her Continuous Status as an Employee, he or she may, but only within three (3) months following the date he or she ceases his or her Continuous Status as an Employee (subject to any earlier termination of the Option as provided by its terms), exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise the Option at the date of such termination, or if he or she does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. Notwithstanding anything to the contrary herein, the Committee may at any time and from time to time prior to the termination of an Option, with the consent of the Optionee, extend the period of time during 2 which the Optionee may exercise his or her Option following the date he or she ceases his or her Continuous Status as an Employee; provided, however, that the maximum period of time during which an Option shall be exercisable following the date on which an Optionee terminates his or her Continuous Status as an Employee shall not exceed an aggregate of one (1) year, that the Option shall not be, or as a result of such extension become, exercisable after the expiration of the term of such Option as set forth in the Option Agreement and, notwithstanding any extension of time during which the Option may be exercised, that such Option, unless otherwise amended by the Committee, shall only be exercisable to the extent the Optionee was entitled to exercise it on the date he or she ceased his or her Continuous Status as an Employee." Dated: March 19, 1999 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 40,816 13,358 62,184 1,219 20,207 156,460 46,217 28,329 349,278 162,065 0 0 0 96,356 66,743 349,278 84,413 84,413 30,821 30,821 58,706 0 1,093 (3,856) 1,788 (5,644) 0 0 0 (5,644) (0.10) (0.10) DATA LISTED FOR "EPS-PRIMARY" IS THE NEWLY DEFINED "BASIC EPS".
-----END PRIVACY-ENHANCED MESSAGE-----