-----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, DS3KMPwPH7GZKNPLmH2MUbOCSa1kEj1lcq8UMGYreZqqh0Am6jeSeGqBxWtldQ56 MaN1FluFo73MzyB/3majfQ== /in/edgar/work/20000814/0001104659-00-000428/0001104659-00-000428.txt : 20000921 0001104659-00-000428.hdr.sgml : 20000921 ACCESSION NUMBER: 0001104659-00-000428 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKELEC CENTRAL INDEX KEY: 0000790705 STANDARD INDUSTRIAL CLASSIFICATION: [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: 696293 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 0001.txt QUARTERLY REPORT 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, 2000 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, 2000, there were 58,289,604 shares of the registrant's common stock, without par value, outstanding. TEKELEC FORM 10-Q INDEX PART I -- FINANCIAL INFORMATION PAGE - ------------------------------- ---- Item 1. Consolidated Financial Statements Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 4 Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2000 and 1999 5 Consolidated Statements of Cash Flow for the six months ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 PART II -- OTHER INFORMATION - ---------------------------- Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 28 SIGNATURES - ---------- 2 PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS TEKELEC CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31, 2000 1999 ----------- ------------ (thousands, except share data) (UNAUDITED) (audited) ASSETS CURRENT ASSETS: Cash and cash equivalents............. $ 89,635 $ 46,671 Short-term investments, at fair value. 12,675 37,997 Accounts and notes receivable, less allowances of $1,413 and $1,478, respectively.......................... 75,883 83,649 Inventories........................... 23,691 24,310 Amounts due from related parties...... -- 1,847 Income taxes receivable............... 9,891 -- Deferred income taxes, net............ 9,711 8,365 Prepaid expenses and other current assets................................ 13,850 5,150 ---------- ---------- Total current assets............... 235,336 207,989 Long-term investments, at fair value..... 39,153 21,996 Property and equipment, net.............. 25,158 21,667 Intangible assets, net................... 119,572 135,706 Deferred income taxes, net............... 2,821 2,780 Other assets............................. 4,111 4,296 ---------- ---------- Total assets....................... $ 426,151 $ 394,434 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable................ $ 13,220 $ 16,249 Accrued expenses...................... 14,030 19,196 Accrued payroll and related expenses.. 7,946 8,937 Current portion of deferred revenues.. 40,319 35,330 Income taxes payable.................. -- 575 ---------- ---------- Total current liabilities.......... 75,515 80,287 Long-term convertible debt............... 117,498 115,786 Long-term portion of deferred revenues... 2,518 2,537 Long-term deferred income tax liability.. 16,846 19,229 ---------- ---------- Total liabilities.................. 212,377 217,839 ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, without par value, 200,000,000 shares authorized; 58,055,937 and 55,713,127 shares issued and outstanding, respectively........ 138,897 101,385 Retained earnings..................... 72,762 72,528 Accumulated other comprehensive income 2,115 2,682 ---------- ---------- Total shareholders' equity......... 213,774 176,595 ---------- ---------- Total liabilities and shareholders' equity........................... $ 426,151 $ 394,434 ========== ==========
See notes to consolidated financial statements. 3 TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (thousands except per share data) REVENUES ............................ $ 74,148 $ 51,728 $ 134,210 $ 84,413 COSTS AND EXPENSES: Cost of goods sold ............... 25,024 17,976 44,776 29,307 Amortization of purchased technology ...................... 2,530 1,496 5,071 1,514 Research and development ......... 12,900 10,525 25,139 19,393 Selling, general and administrative .................. 22,030 15,582 41,392 26,957 Amortization of goodwill and other intangible assets................ 5,416 3,726 11,088 3,726 Acquired in-process research and development and other acquisition- related charges.................. -- 6,830 -- 6,830 Restructuring .................... -- -- -- 1,800 --------- --------- --------- --------- Total costs and expenses ...... 67,900 56,135 127,466 89,527 --------- --------- --------- --------- Income (Loss) from operations ....... 6,248 (4,407) 6,744 (5,114) Other income (expense): Interest income .................. 1,839 882 3,351 2,353 Interest expense ................. (2,165) (1,093) (4,358) (1,093) Other, net ....................... (132) (6) (160) (2) --------- --------- --------- --------- Total other income (expense)... (458) (217) (1,167) 1,258 --------- --------- --------- --------- Income (Loss) before provision for income taxes....................... 5,790 (4,624) 5,577 (3,856) Provision for income taxes ....... 3,754 1,512 5,343 1,788 --------- --------- --------- --------- NET INCOME (LOSS) ............. $ 2,036 $ (6,136) $ 234 $ (5,644) ========= ========= ========= ========= EARNINGS (LOSS) PER SHARE: Basic ............................ $ 0.04 $ (0.11) 0.00 $ (0.10) Diluted .......................... 0.03 (0.11) 0.00 (0.10) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ............................ 57,710 54,766 57,124 54,618 Diluted .......................... 64,129 54,766 63,992 54,618
See notes to consolidated financial statements. 4 TEKELEC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (thousands) NET INCOME (LOSS)................. $ 2,036 $ (6,136) $ 234 $ (5,644) -------- -------- -------- -------- Other comprehensive expense: Foreign currency translation adjustments................... (5) (39) (567) (587) ------- ------ ------- ------- COMPREHENSIVE INCOME (LOSS)....... $ 2,031 $ (6,175) $ (333) $ (6,231) ======= ====== ======= =======
See notes to consolidated financial statements. 5 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited)
Six Months Ended June 30, ------------------------ 2000 1999 --------- --------- (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)................................. $ 234 $ (5,644) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................... 5,586 3,705 Amortization................................... 16,159 5,770 Amortization of deferred financing costs....... 403 -- Write-off of acquired in-process research and development............................... -- 6,000 Non-cash portion of restructuring charge....... -- 800 Convertible debt accretion .................... 1,712 -- Deferred income taxes.......................... (2,199) (538) Changes in assets and liabilities (excluding the effect of acquisition): Accounts and notes receivable................ 7,543 5,172 Inventories.................................. 608 (1,337) Amounts due from related parties............. 1,847 102 Income taxes receivable...................... 6,961 (445) Prepaid expenses and other current assets.... (8,703) (3,226) Trade accounts payable....................... (2,755) 1,138 Accrued expenses............................. (5,144) 2,630 Accrued payroll and related expenses......... (972) (6,198) Deferred revenues............................ 4,965 1,843 Income taxes payable......................... (575) (1,390) -------- -------- Total adjustments........................... 25,436 14,026 -------- -------- Net cash provided by operating activities... 25,670 8,382 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from maturity of available-for-sale securities.................................... 42,397 80,916 Purchase of available-for-sale securities...... (34,232) (26,157) Payments in connection with acquisition, net of cash acquired.............................. -- (49,087) Purchase of property and equipment............. (9,122) (5,482) Purchase of technology......................... (25) (1,629) Decrease (Increase) in other assets............ (239) 71 -------- -------- Net cash (used in) investing activities..... (1,221) (1,368) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock......... 19,070 2,371 -------- -------- Net cash provided by financing activities... 19,070 2,371 Effect of exchange rate changes on cash........... (555) (501) -------- -------- Net change in cash and cash equivalents........ 42,964 8,884 Cash and cash equivalents at beginning of period.. 46,671 31,932 -------- -------- Cash and cash equivalents at end of period........ $ 89,635 $ 40,816 ======== ========
See notes to consolidated financial statements. 6 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D) (unaudited)
Six Months Ended June 30, ----------------------- 2000 1999 --------- --------- (thousands) SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION: Tax benefit related to stock options........ $ 18,442 $ 1,181 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 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) A. BASIS OF PRESENTATION The consolidated financial statements are unaudited, other than the consolidated balance sheet at December 31, 1999, 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, 2000 and 1999 are for the thirteen and twenty-six weeks ended June 30, 2000 and July 2, 1999,respectively. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 1999, and the notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 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. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. Adoption of SAB 101 is required in the fourth quarter of 2000. The Company is currently evaluating the provisions of SAB 101 and its potential impact on the Company's revenue recognition policy. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 applied prospectively to new awards in a business combination, modifications to outstanding awards, and changes to grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee, which apply to awards after December 15, 1999. Additional provisions of FIN 44 related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The Company believes that the adoption of FIN 44 will not have a material impact on its financial statements. 8 TEKELEC NOTES TO 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 that were refinanced with convertible notes in November 1999 (See Note G). 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 $133.4 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....................................... 95,274 Tangible assets acquired....................... 50,045 Deferred income tax liabilities associated with certain tangible assets..................... (22,875) Liabilities assumed............................ (24,444) -------- $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 $6.7 million and $13.5 million, net of amortization of associated deferred income tax liabilities of $1.1 million and $2.4 million, for the three and six months ended June 30, 2000. The following table shows pro forma revenue, net income (loss) and net income (loss) per share of the Company giving effect to the IEX acquisition as of the beginning of 1999, excluding the impact of one-time charges.
For the Six Months Ended June 30, 2000 1999 ------------------ ---------------- (thousands, except per share amounts) Revenues................................ $ 134,210 $ 98,172 Net income (loss)....................... 234 (13,132) Net income (loss) per share............. 0.00 (0.24)
9 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) C. CERTAIN BALANCE SHEET ITEMS
JUNE 30, December 31, 2000 1999 ---------- ------------ The components of inventories are: (thousands) Raw materials ......................... $ 9,556 $ 7,490 Work in process ....................... 1,940 2,366 Finished goods ........................ 12,195 14,454 --------- -------- $ 23,691 $ 24,310 ========= ======== Property and equipment consist of the following: Manufacturing and development equipment $ 35,437 $ 31,124 Furniture and office equipment ........ 18,054 16,007 Demonstration equipment ............... 3,200 3,207 Leasehold improvements ................ 5,522 4,105 --------- -------- 62,213 54,443 Less, accumulated depreciation and amortization......................... (37,055) (32,776) --------- -------- Property and equipment, net ........ $ 25,158 $ 21,667 ========= ======== Intangible assets consist of the following: Goodwill............................... $ 95,274 $ 95,274 Purchased technology................... 49,737 49,712 Other.................................. 13,000 13,000 --------- -------- 158,011 157,986 Less accumulated amortization.......... (38,439) (22,280) --------- -------- Intangible assets, net.............. $ 119,572 $135,706 ========= ========
D. RELATED PARTY TRANSACTIONS Sales to related parties consisted of, and amounts due from related parties were the result of, transactions between the Company and foreign affiliates controlled by the Company's Chairman of the Board. In April 2000, these foreign affiliates were sold to an unrelated company. Sales transacted subsequent to the sale of the former affiliates and amounts due are no longer considered related party transactions. Sales to related parties through the date of the sale amounted to $51,000 and $739,000 for the three months ended June 30, 2000 and 1999, respectively, and $779,000 and $1.3 million for the six months ended June 30, 2000 and 1999, respectively. The Company's Japanese subsidiary purchases, for resale, products from an affiliate controlled by the Company's Chairman under a distribution arrangement. These purchases from the related party were $365,000 and $555,000 for the three and six months ended June 30, 2000, respectively. Amounts due to the related party at June 30, 2000 were $106,000. 10 TEKELEC NOTES TO 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:
PROVISION RECORDED ----------- (thousands) Severance pay.................... $ 700 Other accrued expenses........... 300 Inventory........................ 350 Fixed assets..................... 200 Other assets..................... 250 ------- $ 1,800
At December 31, 1999, all 27 employees had been terminated, and all of the severance costs and other accrued expenses had been paid. F. INCOME TAXES The income tax provisions for the three and six month periods ended June 30, 2000 were $3.8 million and $5.3 million, respectively, and reflected the effect of non-deductible acquisition-related costs, partially offset by benefits of $1.1 million and $2.4 million, respectively from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Although the Company had a loss for the three and six month periods ended June 30, 1999, income tax provisions of $1.5 million and $1.8 million, respectively, were recorded, reflecting the effect of the non-deductible items described above, partially offset by a benefit of $858,000 from the utilization of deferred tax benefits related to certain of these items. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the three and six month periods ended June 30, 2000 and 1999 and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits G. LINES OF CREDIT AND BORROWINGS The Company had a $15.0 million line of credit that expired on June 30, 2000 and was replaced by a $20.0 million line of credit on July 31, 2000 on substantially the same terms and conditions as the expired line of credit. 11 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) The Company's $20.0 million credit facility is collateralized by substantially all of the Company's assets, bears interest at or, in some cases, below the lender's prime rate (9.5% at June 30, 2000), and expires on July 30, 2001, 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. 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 $2.8 million with interest at the Japanese prime rate (1.375% at June 30, 2000) plus 0.125% per annum which expire between August and November 2000, if not renewed. There have been no borrowings under these lines of credit. In November 1999, the Company completed its private placement of $135.0 million principal amount at maturity of its 3.25% convertible subordinated discount notes due 2004 (the "Notes"), issued at 85.35% of their face amount (equivalent to gross proceeds of approximately $115.2 million at issuance before discounts and expenses). The Notes are callable after the first three years. H. SEGMENT INFORMATION The Network Systems 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 network systems products resulting from the Company's acquisition of IEX, including Service Control Point, an advanced database server used for the provisioning of telephony applications, VoX Gateway Controller, a media gateway controller for converged networks, and 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, Sentinel, a diagnostic tool used primarily by network operators for testing and surveillance within telecommunications networks and i3000, a diagnostic tool for converged networks. The Japan Diagnostics operating segment sells the Company's and third parties' diagnostic products to customers in Japan. The Call Center operating segment develops, markets and sells 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 geographical area is determined by the destination of the sale. 12 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) 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, ------------------ -------------------- 2000 1999 2000 1999 --------- -------- --------- --------- Network Systems................... $ 47,638 $ 30,744 $ 84,156 $ 51,109 Network Diagnostics............... 14,158 12,664 26,836 20,546 Call Center Products.............. 8,019 4,878 14,706 4,878 Japan Diagnostics................. 6,295 3,672 11,094 8,505 Intercompany Eliminations......... (1,962) (230) (2,582) (625) -------- ------- -------- -------- Total net sales................ 74,148 $ 51,728 $ 134,210 $ 84,413 ======== ======== ========= ========
OPERATING INCOME (LOSS) -------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------- -------------------- 2000 1999 2000 1999 ---------- ---------- --------- --------- Network Systems................... $ 14,558 $ 5,293 $ 24,346 $ 8,605 Network Diagnostics(1)............ 2,859 3,282 4,934 1,301 Call Center Products.............. 2,987 2,351 4,903 2,351 Japan Diagnostics................. 528 (109) 743 191 Intercompany Eliminations ........ (723) (8) (859) 153 General Corporate(2).............. (13,961) (15,216) (27,323) (17,715) --------- --------- -------- -------- Total operating income (loss).. $ 6,248 $ (4,407) $ 6,744 $ (5,114) ========= ========= ======== ========
- -------------------------------- (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 $7,816 and $12,033 for the three months ended June 30, 2000 and 1999, respectively, and $15,888 and $12,033 for the six months ended June 30, 2000 and 1999, respectively. 13 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) 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, --------------------- ---------------------- 2000 1999 2000 1999 -------- --------- --------- --------- Network Systems................... $ 47,638 $ 30,744 $ 84,156 $ 51,109 Network Diagnostics............... 18,491 16,106 35,348 28,426 Call Center Products.............. 8,019 4,878 14,706 4,878 -------- -------- --------- -------- Total revenues from external customers.................... $ 74,148 $ 51,728 $ 134,210 $ 84,413 ======== ======== ========= ========
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, --------------------- ---------------------- 2000 1999 2000 1999 -------- --------- --------- --------- North America..................... $ 53,306 $ 40,178 $ 100,880 $ 61,308 Japan............................. 6,320 3,672 11,124 8,505 Europe............................ 3,797 2,925 6,440 4,727 Rest of World..................... 10,725 4,953 15,766 9,873 ------- ------- -------- ------- Total revenues from external customers...................... $ 74,148 $ 51,728 $ 134,210 $ 84,413 ======== ======== ========= ========
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, 2000 1999 --------- ------------ United States..................... $ 147,393 $ 160,109 Japan............................. 1,095 1,175 Other............................. 353 385 --------- --------- Total long-lived assets........ $ 148,841 $ 161,669 ========= =========
14 TEKELEC NOTES TO 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, 2000 and 1999:
NET INCOME (LOSS) SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ---------------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 2000: (thousands, except per share amount) Basic EPS................................ $ 2,036 57,710 $ 0.04 Effect of Dilutive Securities - Stock Options and Warrants.................. -- 6,419 -------- ------ Diluted EPS.............................. $ 2,036 64,129 $ 0.03 ======== ====== FOR THE THREE MONTHS ENDED JUNE 30, 1999: 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 SIX MONTHS ENDED JUNE 30, 2000: Basic EPS................................ $ 234 57,124 $ 0.00 Effect of Dilutive Securities - Stock Options and Warrants.................. -- 6,868 -------- ------ Diluted EPS.............................. $ 234 63,992 $ 0.00 ======== ====== 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) ======== ======
J. COMMON STOCK On August 25, 1997, the Company adopted a shareholder rights plan to protect shareholders against unsolicited attempts to acquire control of the Company where such transactions do not offer what the Company believes to be an adequate price to all shareholders. Under the plan, a dividend distribution of one right for each outstanding share of Tekelec Common Stock was made to shareholders of record on September 5, 1997, and such rights expire on September 5, 2007. As adjusted to take into account the Company's 1998 two-for-one stock split, each right, when exercisable, entitles the registered holder to purchase from the Company one share of Common Stock at a price of $90 per share, subject to adjustment (the "Purchase Price"). 15 TEKELEC NOTES TO FINANCIAL STATEMENTS (unaudited) The rights will be exercisable only if a person or group (except for certain exempted persons or groups, including those shareholders of the Company who at the time of adoption of the plan beneficially owned more than 15% of the Company's Common Stock) acquires 15% or more of Tekelec's Common Stock or announces a tender offer which would result in ownership of 15% or more of the Common Stock. Under the plan, if any person or group (other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or any exempted person or group) acquires 15% or more of the Company's outstanding voting stock without the prior written consent of the Company's Board of Directors, each right, except those held by such acquiring persons or group, would entitle the holder of the right to acquire, by paying to the Company the then current Purchase Price, such number of shares of the Company's Common Stock as would equal the result obtained by multiplying the then current Purchase Price by the number of shares of Common Stock for which the right is then exercisable and then dividing the product by 50% of the then current per-share market price of the Company's Common Stock. The Company may redeem the rights at a redemption price of $0.005 per right at any time until ten business days after a person or group acquires 15% or more of the Company's outstanding shares of voting stock. At any time after a person or group acquires 15% or more, but less than 50%, of the Company's outstanding shares of voting stock, the Company may also exchange each right for one share of Common Stock. 16 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, 1999. 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. OVERVIEW In May 1999, the Company acquired all of the outstanding stock of IEX Corporation ("IEX"), which develops, markets and sells solutions for intelligent networks, call centers and other telecommunications markets. The Company accounted for the IEX acquisition under the purchase method of accounting, and the results of operations of IEX are included in the results of operations beginning May 1999. In connection with the acquisition, the Company also recorded approximately $133.4 million of goodwill and other intangible assets, net of related deferred income tax liabilities, and $6.0 million of acquired in-process research and development that had not yet reached technological feasibility and had no alternative future use that was recorded as a non-recurring expense in the second quarter of 1999. The Company's product offerings are currently organized along three distinct product lines: network systems, network diagnostics and call center. NETWORK SYSTEMS PRODUCTS. Prior to the Company's May 1999 acquisition of IEX, the Company's network systems product line was known as the network switching product line and consisted principally of the Eagle STP and products, features and applications based on the Eagle platform, including the IP7 Secure Gateway and the Company's local number portability solution. As a result of the acquisition of IEX, the network systems product line has been expanded to include IEX's network products, including, among others, Network Switch, Service Node, Service Control Point, VoX Gateway Controller, Prepaid Services and other convergence products. NETWORK DIAGNOSTICS PRODUCTS. In January 1999, the Company scaled back its data network diagnostics product line and integrated it into its intelligent network diagnostics product line. Prior to that time, the Company treated these product lines separately for organizational and financial reporting purposes. Since that time, the Company has reported these products together as the network diagnostics product line. This product line consists principally of the MGTS family of diagnostics products, the Sentinel and the i3000. 17 CALL CENTER PRODUCTS. The Company's IEX call center business develops and supplies software-based solutions for call centers, and its products include the TotalView workforce management and TotalNet call routing solutions. 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, ------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues .............................. 100.0% 100.0% 100.0% 100.0% Cost of goods sold .................... 33.7 34.8 33.4 34.7 Amortization of purchased technology .. 3.5 2.9 3.7 1.8 ----- ----- ----- ----- Gross profit .......................... 62.8 62.3 62.9 63.5 Research and development .............. 17.4 20.3 18.7 23.0 Selling, general and administrative ... 29.7 30.1 30.8 32.0 Amortization of goodwill and other purchased intangibles ................. 7.3 7.2 8.4 4.4 Non-recurring acquisition-related charges ............................... -- 13.2 -- 8.1 Restructuring ......................... -- -- -- 2.1 ----- ----- ----- ----- Total operating expenses .............. 54.4 70.8 57.9 69.6 ----- ----- ----- ----- Income (loss) from operations ......... 8.4 (8.5) 5.0 (6.1) Interest and other income (expense), net ................................... (0.6) (0.4) (0.8) 1.5 ----- ----- ----- ----- Income (loss) before provision for income taxes .......................... 7.8 (8.9) 4.2 (4.6) Provision for income taxes ............ 5.1 2.9 4.0 2.1 ----- ----- ----- ----- Net income (loss) ..................... 2.7% (11.8)% 0.2% (6.7)% ===== ===== ===== =====
The following table sets forth, for the periods indicated, the revenues by principal product line as a percentage of total revenues: PERCENTAGE OF REVENUES
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- Network Systems................... 64% 59% 63% 61% Network Diagnostics............... 25 32 26 33 Call Center Products.............. 11 9 11 6 ---- ---- ---- ---- Total.......................... 100% 100% 100% 100% ==== ==== ==== ====
18 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, ------------------ ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- North America..................... 72% 78% 75% 73% Japan............................. 9 7 8 10 Europe............................ 5 6 5 5 Rest of World..................... 14 9 12 12 --- --- --- --- Total.......................... 100% 100% 100% 100% === === === ===
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1999 REVENUES. The Company's revenues increased by $22.4 million, or 43%, during the second quarter of 2000 due primarily to higher sales of network systems products and services and secondarily to increased sales of MGTS and call center products. Revenues from network systems products increased by $16.9 million, or 55%, to $47.6 million due primarily to higher sales of Eagle STP products, increased sales for the Company's local number portability product and the addition of sales of the Company's IP7 products, partially offset by lower sales of extensions and upgrades. Revenues from network diagnostics products increased by $2.4 million, or 15%, due principally to higher sales of the Company's MGTS diagnostics products. Revenues from call center products increased by $3.1 million, or 64%, as a result of revenues for the second quarter of 2000 reflecting sales for three months compared to the inclusion in the second quarter of 1999 of only those sales following the May 1999 acquisition of IEX. Revenues in North America increased by $13.1 million, or 33%, due primarily to higher sales of Eagle STP and call center products. Sales in Japan increased by $2.6 million or 72% as a result of higher sales of MGTS and third-party data diagnostics products. Revenues in Europe increased by $872,000, or 30%, due to higher network systems and network diagnostic product sales. Rest of world revenues increased by $5.8 million or 117% due primarily to higher Eagle STP product sales. The impact of exchange rate fluctuations on currency translations increased revenues by $757,000, or 1%, and did not have a material effect on net income in the second quarter of 2000. 19 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 Sentinel diagnostic products, and market acceptance of the Company's suite of products for converged circuit and packet networks, including the IP7 Secure Gateway and VoX Gateway network systems products and the i3000 and IP7 Sentinel diagnostics products. GROSS PROFIT. Gross profit as a percentage of revenues was essentially flat at 62.8% in 2000 compared to 62.3% in 1999. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of revenues for the three months ended June 30, 2000 was 66.1% compared to 65.2% for the three months ended June 30, 1999. RESEARCH AND DEVELOPMENT. Research and development expenses increased overall by $2.4 million, or 23%, and decreased as a percentage of revenues to 17.4% in the second quarter of 2000 from 20.3% in the second quarter of 1999. The dollar increase was attributable principally to increased expenses incurred in connection with the hiring of additional personnel for product development and enhancements for both network systems and network diagnostics products, primarily related to the Company's continued development of products to address the Internet Protocol ("IP")/Signaling System #7 ("SS7") market. Based on the Company's present product development plans, the Company expects that its research and development expenses for the remainder of 2000 will increase in dollars when compared to prior periods in 1999. The Company intends to continue to make substantial investments in product and technology development and believes that its future success depends in large part upon its ability to continue to enhance existing products and to develop or acquire new products that maintain the Company's technological competitiveness. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $6.4 million, or 41%, and decreased as a percentage of revenues to 29.7% in the second quarter of 2000 from 30.1% in the second quarter of 1999. The dollar increase was primarily due to 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 2000 will increase in dollars when compared to prior periods. 20 INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by $1.1 million or 98% primarily as a result of interest incurred for convertible debt issued in connection with the acquisition of IEX for the entire quarter compared to two months of interest incurred during the quarter ended June 30, 1999 for notes issued in connection with the acquisition of IEX. Interest income increased $957,000 or 108% due to higher invested cash balances in 2000 compared to 1999 due to cash payments made in connection with the acquisition of IEX in 1999. INCOME TAXES. The income tax provision for the second quarter of 2000 was $3.8 million and reflected the effect of non-deductible acquisition-related costs, partially offset by a benefit of $1.1 million from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Although the Company had a loss for the three month period ended June 30, 1999, an income tax provision of $1.5 million was recorded reflecting the effect of the non-deductible items described above, partially offset by a benefit of $858,000 for the utilization of deferred tax benefits related to certain of these items. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the three month periods ended June 30, 2000 and 1999 and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits. SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1999 REVENUES. The Company's revenues increased by $49.8 million, or 59%, during the six months ended June 30, 2000 due primarily to higher sales of network systems products and services and secondarily to the inclusion of post-acquisition sales of IEX call center products following the acquisition of IEX and higher sales of network diagnostics products. Revenues from network systems products increased by $33.0 million, or 65%, to $84.2 million due primarily to higher sales of Eagle STP products and the addition of sales of the Company's IP7 products. Revenues from network diagnostics products increased by $6.9 million, or 24%, due principally to higher sales of the Company's Sentinel and MGTS diagnostics products. Revenues from call center products increased by $9.8 million, or 201%, as a result of revenues for the first half of 2000 reflecting sales for six months compared to the inclusion in the first half of 1999 of only those sales following the May 1999 acquisition. Revenues in North America increased by $39.6 million, or 65%, due primarily to higher sales of Eagle STP products and the inclusion of IEX product sales. Sales in Japan increased $2.6 million or 31% as a result of higher sales of MGTS and third-party data diagnostics products. Revenues in Europe increased by $1.7 million, or 36%, due to higher network diagnostic product sales. Rest of world revenues increased by $5.9 million or 60% due to increased Eagle STP sales. 21 The impact of exchange rate fluctuations on currency translations increased revenues by $1.2 million, or 1%, and did not have a material effect on net income in the six months ended June 30, 2000. GROSS PROFIT. Gross profit as a percentage of revenues decreased to 62.9% in the six months ended June 30, 2000 compared with 63.5% in the six months ended June 30, 1999. The decrease in gross margins was primarily due to the inclusion of amortization of purchased technology, principally in connection with the acquisition of IEX, as the amortization of purchased technology was for a six month period in 2000 as compared to a two month period of amortization in the six months ended June 30, 1999. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of sales was 66.4% for the six months ended June 30, 2000 compared to 65.3% for the six months ended June 30, 1999, due primarily to higher network system margins. RESEARCH AND DEVELOPMENT. Research and development expenses increased overall by $5.7 million, or 30%, and decreased as a percentage of revenues to 18.7% in the six months ended June 30, 2000 from 23% in the six months ended June 30, 1999. 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 systems and 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 $14.4 million, or 54%, and decreased as a percentage of revenues to 30.8% in the six months ended June 30, 2000 from 31.9% in the six months ended June 30, 1999. 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. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by $3.3 million, or 299%, primarily as a result of interest incurred for convertible debt issued in connection with the acquisition of IEX for the entire six months compared to two months of interest incurred during the six months ended June 30, 1999 for notes issued in connection with the acquisition of IEX. Interest income increased $998,000 or 42% due to higher invested cash balances in 2000 compared to 1999 due to cash payments made in connection with the acquisition of IEX in 1999. 22 INCOME TAXES. The income tax provision for the six months ended June 30, 2000 was $5.3 million and reflected the effect of non-deductible acquisition-related costs, partially offset by a benefit of $2.4 million from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Although the Company had a loss for the six month period ended June 30, 1999, an income tax provision $1.8 million was recorded, reflecting the effect of the non-deductible items described above, partially offset by a benefit of $858,000 from the utilization of deferred tax benefits related to certain of these items. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the six month periods ended June 30, 2000 and 1999 and represented federal, state and foreign taxes on the Company's income, reduced primarily by research and development and foreign tax credits LIQUIDITY AND CAPITAL RESOURCES During the six month period ended June 30, 2000, cash and cash equivalents increased by $43.0 million to $89.6 million, after net proceeds of $8.2 million from the sale of short-term and long-term investments. Operating activities, net of the effects of exchange rate changes on cash, provided $25.1 million. Financing activities, which represented proceeds from the issuance of Common Stock upon the exercise of options and warrants, provided $19.1 million, and investing activities, excluding the net proceeds from the sale of short-term and long-term investments, used $9.4 million primarily due to capital expenditures. Accounts receivable, including amounts due from related parties, decreased by 11% during the first six months of 2000 due to improvement in the linearity of sales in the second quarter of 2000 compared to the fourth quarter of 1999 and strong collections activity. Prepaid expenses and other current assets increased by $8.7 million in the first six months of 2000 due to costs of sales that were deferred pending the completion of certain large systems projects. Deferred revenue increased by 13% due to the deferral of revenue related to these large systems projects. Trade accounts payable and accrued expenses decreased by 19% and 27%, respectively, during the first six months of 2000 due primarily to the timing of inventory purchases and sales tax payments. Capital expenditures of $9.1 million during the first six months of 2000 represented the planned addition of equipment principally for research and development, manufacturing operations and facility expansion. The Company had a $15.0 million line of credit that expired on June 30, 2000 which was replaced by a $20.0 million line of credit on August 2, 2000 on substantially the same terms and conditions as the expired line of credit. 23 The Company's $20.0 million credit facility is collateralized by substantially all of the Company's assets, bears interest at or, in some cases, below the lender's prime rate (9.5% at June 30, 2000), and expires on July 15, 2001, 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. 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 $2.8 million with interest at the Japanese prime rate (1.375% at June 30, 2000) plus 0.125% per annum which expire between August and November 2000, if not renewed. There have been no borrowings under these lines of credit. In November 1999, the Company completed its private placement of $135.0 million principal amount at maturity of its 3.25% convertible subordinated discount notes due 2004 (the "Notes"), issued at 85.35% of their face amount (equivalent to gross proceeds of approximately $115.2 million at issuance before discounts and expenses). The Notes are callable after the first three years. On November 4, 1999, the Company used a portion of the net proceeds from the Notes to retire all of the $100.0 million in short-term notes, which had been issued in May 1999 in connection with the acquisition of IEX Corporation. The Company believes 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. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides additional guidance in applying generally accepted accounting principles to revenue recognition in the financial statements. Adoption of SAB 101 is required in the fourth quarter of 2000. The Company is currently evaluating the provisions of SAB 101 and its potential impact on the Company's revenue recognition policy. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 applied prospectively to new awards in a business combination, modifications to outstanding awards, and changes to grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an 24 employee, which apply to awards after December 15, 1999. Additional provisions of FIN 44 related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The Company believes that the adoption of FIN 44 will not have a material impact on its financial statements. YEAR 2000 COMPLIANCE The Company has not experienced, and does not expect to experience, any significant problems associated with year 2000 issues. Similarly, to the Company's knowledge, distributors, suppliers, and other third parties with which the Company conducts business have not experienced material year 2000 problems to date. The Company did not incur material expenditures to test, repair, or replace equipment in connection with year 2000 issues. 25 "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 and other sections of this Quarterly Report 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 and the resulting fluctuation of the Company's operating results; changes in customer product mix; customer acceptance of the Company's products; capital spending patterns of customers; the Company's limited product offerings; risks relating to the convergence of voice and data networks; competition and pricing; the Company's relatively limited number of customers; new product introductions by the Company or its competitors; risks related to the Company's acquisition of IEX; product liability risks; the continued growth in third party purchases of diagnostics systems; customer acceptance of the Company's products; uncertainties relating to the Company's international operations; intellectual property protection; carrier deployment of intelligent network services; the level and timing of research and development expenditures; regulatory changes; general economic conditions; and other risks described in this Quarterly Report, the Company's Annual Report on Form 10-K for 1999 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 or mitigate. Actual results may differ materially from those expressed or implied in such forward-looking statements. 26 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On May 12, 2000, the Company held its 2000 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 44,369,315 350,414 Jean-Claude Asscher 44,274,005 445,724 Daniel L. Brenner 44,372,215 347,514 Michael L. Margolis 44,277,205 442,524 Howard Oringer 44,367,886 351,843 Jon F. Rager 44,272,176 447,553
(c) At the Annual Meeting, the shareholders approved, with 32,959,583 votes cast in favor and 11,685,169 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 2,800,000. There were 74,977 abstentions and no broker nonvotes with respect to this matter. (d) At the Annual Meeting, with 44,661,437 votes cast in favor, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as independent accountants of the Company for the year ending December 31, 2000. 27,953 votes were cast against such ratification, and there were 30,339 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 2001 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 1, 2000. 27 PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Bonus Plan for the year ended December 31, 2000 10.2 Employment Offer Letter dated May 22, 2000 between the Registrant and Paul J. Pucino 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only) (c) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 2000. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEKELEC August 14, 2000 /s/ Michael L. Margolis -------------------------------- Michael L. Margolis President and Chief Executive Officer (Duly authorized officer) /s/ Paul J. Pucino -------------------------------- Paul J. Pucino Chief Financial Officer and Vice President (Principal financial and chief accounting officer) 29 INDEX TO EXHIBITS SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 10.1 Bonus Plan for the year ended December 31, 2000 10.2 Employment Offer Letter dated May 22, 2000 between the Registrant and Paul J. Pucino 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only.) EX-10.1 2 0002.txt BONUS PLAN EXHIBIT 10.1 TEKELEC 2000 BONUS PLAN PHILOSOPHY: The Company believes that a portion of each employee's annual compensation should be directly related to the Company's financial performance. The 2000 Bonus Plan is designed to motivate and reward employees for achieving certain key financial results and, in the case of the Company's senior management, certain business and strategic objectives. The Company believes that the achievement of these goals and objectives is essential for the Company's success and for the continued growth in shareholder value. FINANCIAL MEASURE: Operating income for 2000 determined in accordance with GAAP will be the sole financial measure for the 2000 Bonus Plan for employees other than executive officers of the Company. Executive officers will have operating income as a financial measure for 75% of their bonus and other objectives for the remaining 25%. Minimum operating income before bonus of $70M will produce 25% of the maximum bonus. Maximum operating income before bonus of $85M will produce 100% of the bonus. There will be a linear increase in bonus between minimum and maximum operating income. ELIGIBILITY: All employees of Tekelec and its subsidiaries during 2000 are eligible to participate in the 2000 Bonus Plan with the following exclusions: 1. Commissioned employees 2. Employees hired in 4Q of 2000 Employees must be employed by Tekelec or one of its subsidiaries on the date of bonus payment to be eligible to receive a bonus payment under this Plan. PARTICIPATION LEVELS: The bonus payable to an eligible employee under the 2000 Bonus Plan is based on a percentage of his/her calendar year 2000 actual earnings, excluding certain payments (e.g., reimbursement for moving expenses, bonus payments from prior year, stock option gains and similar payments). The maximum bonus percentage is based on the position as listed below in the table. EXHIBIT 10.1 PARTICIPATION LEVELS FOR EMPLOYEES OTHER THAN EXECUTIVE OFFICERS:
POSITION U.S. JAPAN - ------------ ------- ----- Assistant VP 30% 15% Director 25 15 Sr. Manager 20 12 Manager 20 12 Professional 10 - 15 6 - 9 Nonexempt 10 6
PARTICIPATION LEVELS FOR EXECUTIVE OFFICERS: POSITION U.S. JAPAN UK - --------------------------------- ----- ----- ----- CEO 125% COO* 90 GM NSD 75 CFO, General Counsel, GM NDD 70 CEO-IEX (CTO), VP Strategy 60 VP HR, VP Ops, GM-IEX Call Center 50 President - Japan 20% Managing Director 25%
* Final number to be established upon hiring. MBO COMPONENT: Twenty-five percent of the bonus for executive officers of the Company and the Managing Director, Tekelec Limited (UK), will be linked to MBOs. The CEO and officer will jointly set objectives at the beginning of the year. Evaluation of these objectives will be made by the CEO by January 31, 2001. Twenty-five percent of the bonus for the CEO will be linked to MBOs which will be jointly set by the CEO and the Board of Directors. Evaluation of these objectives will be made by the Board by February 15, 2001. DISCRETIONARY BONUSES: Discretionary bonuses may also be paid under the Plan but only if, in management's view, the Company is able to pay a discretionary bonus without materially adversely affecting the Company's financial results and special circumstances exist. Consideration for such bonuses would be given for special circumstances or achievements by a division, group, individual or perhaps company-wide. With the advice and counsel of the Board of Directors, the CEO has the authority to award discretionary bonuses to non-executive officer employees. With regard to discretionary bonuses for executive officers, express approval of the Board of Directors is required. * * * EX-10.2 3 0003.txt EMPLOYMENT OFFER LETTER EXHIBIT 10.2 May 22, 2000 PERSONAL AND CONFIDENTIAL VIA HAND Paul J. Pucino 3654 Barham Blvd. Los Angeles, CA 90068 Dear Paul: On behalf of Tekelec, I am pleased to offer you employment as Vice President and Chief Financial Officer, on the terms and conditions set forth in this letter. As Vice President and Chief Financial Officer you will report directly to Tekelec's Chief Executive Officer, will be principally responsible for Tekelec's financial 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/or the Board of Directors. You may choose your employment start date so long as it is on or before June 5, 2000. Your compensation and benefits will be as follows: 1. Your starting annual base salary will be $230,000 (i.e., $8,846.15 per bi-weekly period). 2. You will be eligible to participate in Tekelec's 2000 Officer Bonus Plan, under which you will be eligible to receive up to 70% of your annual base salary earned during 2000 as a cash bonus if Tekelec achieves certain financial milestones in 2000. For 2000, you will be guaranteed a minimum bonus of $50,000 which will be paid during the first quarter of 2001. This represents half of the bonus for which you would be eligible based on your participation in the Plan for seven months of 2000. 3. You will be entitled to a $20,000 report to work bonus payable on your first check. 4. You will be entitled to take four weeks personal time annually. EXHIBIT 10.2 5. You will receive applicable benefits, including health, dental, vision, long-term disability and life insurance, as are generally provided to Tekelec's executive officers. 6. 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. 7. You will be covered by Tekelec's Officer Severance Plan (a copy of which is enclosed). 8. 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 225,000 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 56,250 shares on the one-year anniversary of your start date. The remaining 168,750 shares will vest and become exercisable cumulatively in 12 equal quarterly installments of 14,062.5 shares each, with the first installment vesting on September 30, 2001 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. 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 is enclosed). As with every Tekelec employee, you EXHIBIT 10.2 reserve the right to terminate your employment at any time for any reason, and we similarly reserve the right to terminate your employment at any time, with or without cause. 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 and supercedes and replaces in its entirety that certain employment offer letter dated May 9, 2000 previously sent to you. 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. Paul, 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 then faxing (fax number: 818.880.0176) and returning such signed copy to me for receipt no later than May 24, 2000. Sincerely, Michael L. Margolis Chief Executive Officer and President Acknowledged and Accepted: ____________________________________ Date: May ___, 2000 Paul Pucino EX-27.1 4 0004.txt FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 89,635 12,675 77,296 1,413 23,691 235,336 62,213 37,055 426,151 75,515 0 0 0 138,897 74,877 426,151 134,210 134,210 49,847 127,466 77,619 0 4,358 5,577 5,343 234 0 0 0 234 0.00 0.00
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