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 SEPTEMBER 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 November 3, 2000, there were 58,712,520 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 September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three and nine months ended September 30, 2000 and 1999 4 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2000 and 1999 5 Consolidated Statements of Cash Flow for the nine months 6 ended September 30, 2000 and 1999 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 1. Legal Proceedings 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 SEPTEMBER 30, December 31, 2000 1999 ---------------- -------------- (thousands, except share data) (UNAUDITED) (audited) ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 84,789 $ 46,671 Short-term investments, at fair value.................. 37,454 37,997 Accounts and notes receivable, less allowances of $1,272 and $1,478, respectively........ 87,524 83,649 Inventories............................................ 24,620 24,310 Amounts due from related parties....................... -- 1,847 Income taxes receivable................................ 8,324 -- Deferred income taxes, net............................. 9,666 8,365 Prepaid expenses and other current assets.............. 15,927 5,150 --------------- -------------- Total current assets............................... 268,304 207,989 Long-term investments, at fair value........................ 35,000 21,996 Property and equipment, net................................. 28,661 21,667 Intangible assets, net...................................... 111,777 135,706 Deferred income taxes, net.................................. 2,825 2,780 Other assets................................................ 4,011 4,296 --------------- -------------- Total assets....................................... $ 450,578 $ 394,434 =============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable................................. $ 17,883 $ 16,249 Accrued expenses....................................... 17,757 19,196 Accrued payroll and related expenses................... 10,752 8,937 Current portion of deferred revenues................... 40,730 35,330 Income taxes payable................................... -- 575 --------------- -------------- Total current liabilities.......................... 87,122 80,287 Long-term convertible debt.................................. 118,376 115,786 Long-term portion of deferred revenues...................... 1,985 2,537 Long-term deferred income tax liability..................... 15,702 19,229 --------------- -------------- Total liabilities.................................. 223,185 217,839 --------------- -------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, without par value, 200,000,000 shares authorized; 58,521,797 and 55,713,127 shares issued and outstanding, respectively....................................... 146,836 101,385 Retained earnings...................................... 78,920 72,528 Accumulated other comprehensive income................. 1,637 2,682 --------------- -------------- Total shareholders' equity......................... 227,393 176,595 --------------- -------------- Total liabilities and shareholders' equity......... $ 450,578 $ 394,434 =============== ==============
See notes to consolidated financial statements. 3
TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- (thousands, except per share data) REVENUES.......................................... $ 83,755 $ 64,743 $ 217,965 $ 149,156 COSTS AND EXPENSES: Cost of goods sold........................... 27,313 22,978 72,089 52,285 Amortization of purchased technology......... 2,530 2,464 7,601 3,978 Research and development .................... 14,380 10,881 39,519 30,274 Selling, general and administrative ......... 22,036 17,438 63,428 44,395 Amortization of goodwill and other intangible assets .................................... 5,416 6,055 16,504 9,781 Acquired in-process research and development and other acquisition-related charges ..... -- -- -- 6,830 Restructuring ............................... -- -- -- 1,800 --------- --------- ---------- ---------- Total costs and expenses ................ 71,675 59,816 199,141 149,343 --------- --------- ---------- ---------- Income (Loss) from operations..................... 12,080 4,927 18,824 (187) Interest and other income (expense): Interest income.............................. 2,303 935 5,654 3,288 Interest expense............................. (2,181) (1,765) (6,539) (2,858) Other, net................................... 28 (67) (132) (69) --------- --------- ---------- ---------- Total other income (expense)............. 150 (897) (1,017) 361 --------- --------- ---------- ---------- Income before provision for income taxes 12,230 4,030 17,807 174 Provision for income taxes .................. 6,072 3,110 11,415 4,898 --------- --------- ---------- ---------- NET INCOME (LOSS)........................ $ 6,158 $ 920 $ 6,392 $ (4,724) ========= ========= ========== ========== EARNINGS (LOSS) PER SHARE: Basic ....................................... $ 0.11 $ 0.02 $ 0.11 $ (0.09) Diluted ..................................... 0.10 0.02 0.10 (0.09) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ....................................... 58,322 55,094 57,777 54,776 Diluted ..................................... 64,542 58,864 64,429 54,776
See notes to consolidated financial statements. 4
TEKELEC CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- (thousands) NET INCOME (LOSS)................................. $ 6,158 $ 920 $ 6,392 $ (4,724) Other comprehensive income (expense): Foreign currency translation adjustments..... (478) 1,847 (1,045) 1,260 --------- --------- --------- --------- COMPREHENSIVE INCOME (LOSS)....................... $ 5,680 $ 2,767 $ 5,347 $ (3,464) ========= ========= ========= =========
See notes to consolidated financial statements. 5
TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (unaudited) Nine Months Ended September 30, ------------------------------- 2000 1999 ---- ---- (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss)................................................... $ 6,392 $ (4,724) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation................................................... 8,567 5,960 Amortization................................................... 24,106 14,289 Amortization of deferred financing costs....................... 608 -- Write-off of acquired in-process research and development...... -- 6,000 Non-cash portion of restructuring charge....................... -- 800 Convertible debt accretion .................................... 2,590 -- Deferred income taxes.......................................... (4,913) (3,653) Tax benefit related to stock options exercised................. 22,317 1,830 Changes in assets and liabilities (excluding the effect of acquisition): Accounts and notes receivable................................ (4,176) (6,934) Inventories.................................................. (368) (2,758) Amounts due from related parties............................. 1,847 931 Income taxes receivable...................................... (8,324) (781) Prepaid expenses and other current assets.................... (10,785) (1,635) Trade accounts payable....................................... 1,898 2,899 Accrued expenses............................................. (1,421) 1,436 Accrued payroll and related expenses......................... 1,851 (4,881) Deferred revenues............................................ 4,859 3,011 Income taxes payable......................................... (575) 1,542 ----------- ----------- Total adjustments.......................................... 38,081 18,056 ----------- ----------- Net cash provided by operating activities.................. 44,473 13,332 ----------- ----------- CASH FLOW FROM INVESTING ACTIVITIES: Proceeds from maturity of available-for-sale securities........ 56,525 58,682 Purchase of available-for-sale securities...................... (68,986) (25,740) Payments in connection with acquisition, net of cash acquired.. -- (49,087) Purchase of property and equipment............................. (15,631) (8,463) Purchase of technology......................................... (177) (1,774) Decrease (Increase) in other assets............................ (354) 111 ----------- ----------- Net cash used in investing activities...................... (28,623) (26,271) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock......................... 23,133 3,694 ----------- ----------- Net cash provided by financing activities.................. 23,133 3,694 Effect of exchange rate changes on cash............................. (865) 957 ----------- ----------- Net change in cash and cash equivalents........................ 38,118 (8,288) Cash and cash equivalents at beginning of period.................... 46,671 31,932 ----------- ----------- Cash and cash equivalents at end of period.......................... $ 84,789 $ 23,644 =========== ===========
See notes to consolidated financial statements. 6
TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW (CONT'D) (unaudited) Nine Months Ended September 30, ------------------------------ 2000 1999 ---- ---- (thousands) SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW INFORMATION: 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 CONSOLIDATED 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 presented. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year. Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation. 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 nine months ended September 30, 2000 and 1999 are for the thirteen and thirty-nine weeks ended September 29, 2000 and October 1, 1999, respectively. These interim 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. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") 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 SEC has recently issued additional guidance on SAB 101 in the form of a frequently asked questions document issued on October 13, 2000. The Company is currently evaluating the provisions of SAB 101 and this recently issued guidance and its potential impact on the Company's revenue recognition policy. 8 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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, 1998. 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 adoption of FIN 44 did not have a material impact on its financial statements. In June 1998, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133" Accounting for Derivative Instruments and Hedging Activities." The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the derivative and the resulting designation. Because the Company does not currently hold any derivative instruments and only engages in limited hedging activities, the impact of the adoption of SFAS No. 133 is not currently expected to have a material impact on financial position, results of operations or cash flows. The Company is currently evaluating the provisions of SFAS No.133 and its potential impact on the Company's financial statements. The Company will be required to implement SFAS No. 133 in the first quarter of fiscal 2001. 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 intangible assets................................................ (22,875) Liabilities assumed.................................................. (24,444) ------- $ 165,000 =======
9 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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 $20.2 million, net of amortization of associated deferred income tax liabilities of $1.1 million and $3.5 million, for the three and nine months ended September 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 Nine Months Ended September 30, 2000 1999 ---- ---- (thousands, except per share amounts) Revenues........................................................ $ 217,965 $ 162,915 Net income (loss)............................................... 6,392 (15,824) Net income (loss) per share..................................... 0.10 (0.29)
C. CERTAIN BALANCE SHEET ITEMS
SEPTEMBER 30, December 31, 2000 1999 ---------- ------------ The components of inventories are: (thousands) Raw materials ........................................... $ 10,187 $ 7,490 Work in process ......................................... 1,860 2,366 Finished goods .......................................... 12,573 14,454 ----------- ----------- $ 24,620 $ 24,310 Property and equipment consist of the following: Manufacturing and development equipment ................. $ 39,666 $ 31,124 Furniture and office equipment .......................... 19,695 16,007 Demonstration equipment ................................. 3,194 3,207 Leasehold improvements .................................. 6,140 4,105 ----------- ----------- 68,695 54,443 Less, accumulated depreciation and amortization.......... (40,034) (32,776) ----------- ----------- Property and equipment, net ........................ $ 28,661 $ 21,667 =========== =========== Intangible assets consist of the following: Goodwill................................................. $ 95,274 $ 95,274 Purchased technology..................................... 49,889 49,712 Other.................................................... 13,000 13,000 ----------- ----------- 158,163 157,986 Less accumulated amortization............................ (46,386) (22,280) ----------- ----------- Intangible assets, net.............................. $ 111,777 $ 135,706 =========== ===========
10 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) D. RELATED PARTY TRANSACTIONS Sales to related parties consisted 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 $779,000 and $1.7 million for the nine months ended September 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 $561,000 and $1.2 million for the three and nine months ended September 30, 2000, respectively. Amounts due to the related party at September 30, 2000 were $194,000. 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 nine month periods ended September 30, 2000 were $6.1 million and $11.4 million, respectively, and reflected the effect of non-deductible acquisition-related costs, partially offset by benefits of $1.1 million and $3.5 million, respectively from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the three and nine month periods ended September 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. 11 TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 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. 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 September 30, 2000), and expires on July 31, 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 (1.5% at September 30, 2000) plus 0.125% per annum which expire between November 2000 and August 2001, if not renewed. There have been no borrowings under these lines of credit. In November 1999, the Company completed the private placement of $135.0 million principal amount at maturity of 3.25% convertible subordinated discount notes due in 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/IP gateway for signaling in converged networks, and other IP7 convergence products; and network systems products resulting from the Company's acquisition of IEX, including ASi 4000 Service Control Point, an advanced database server used for the provisioning of telephony applications, and VXi Media Gateway Controller, a controller for converged networks. 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 and third generation wireless 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 CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The Company's operating segments and geographical information are as follows (in thousands): OPERATING SEGMENTS
Net Sales --------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Network Systems................................... $ 56,121 $ 41,712 $ 140,277 $ 92,821 Network Diagnostics............................... 13,809 12,162 40,645 32,708 Call Center Products.............................. 8,447 7,189 23,153 12,067 Japan Diagnostics ................................ 7,802 4,608 18,896 13,113 Intercompany Eliminations......................... (2,424) (928) (5,006) (1,553) --------- --------- --------- -------- Total net sales.............................. $ 83,755 $ 64,743 $ 217,965 $ 149,156 ========= ========= ========= ======== Operating Income (Loss) ----------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Network Systems................................... $ 18,976 $ 11,441 $ 43,322 $ 20,045 Network Diagnostics (1)........................... 2,837 3,450 7,771 4,751 Call Center Products.............................. 3,393 3,012 8,296 5,363 Japan Diagnostics................................. 331 250 1,074 441 Intercompany Eliminations ........................ 108 (567) (751) (414) General Corporate(2).............................. (13,565) (12,659) (40,888) (30,373) ------------ ----------- ---------- ---------- Total operating income (loss)................ $ 12,080 $ 4,927 $ 18,824 $ (187) ============ =========== ========== ==========
-------------------------------- (1) Network Diagnostics operating segment reflects the $1,800 restructuring charge recorded in the nine months ended September 30, 1999 (see Note E). (2) General Corporate includes acquisition-related charges and amortization of $7,816 and $8,455 for the three months ended September 30, 2000 and 1999, respectively, and $23,704 and $20,488 for the nine months ended September 30, 2000 and 1999, respectively. 13 TEKELEC NOTES TO CONSOLIDATED 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 Nine Months Ended September 30, September 30, ------------------------ ----------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Network Systems................................... $ 56,121 $ 41,712 $ 140,277 $ 92,821 Network Diagnostics............................... 19,187 15,842 54,535 44,268 Call Center Products.............................. 8,447 7,189 23,153 12,067 --------- --------- ---------- --------- Total revenues from external customers....... $ 83,755 $ 64,743 $ 217,965 $ 149,156 ========= ========= ========== =========
The following table sets forth, for the periods indicated, revenues from external customers by geographic territory:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ----------------------- 2000 1999 2000 1999 ---- ---- ---- ---- North America..................................... $ 60,829 $ 53,261 $ 161,709 $ 114,569 Japan............................................. 7,828 4,657 18,952 13,162 Europe............................................ 4,351 3,095 10,791 7,822 Rest of World..................................... 10,747 3,730 26,513 13,603 --------- --------- ---------- --------- Total revenues from external customers....... $ 83,755 $ 64,743 $ 217,965 $ 149,156 ========= ========= ========== =========
The following table sets forth, for the periods indicated, long-lived assets by geographic area in which the Company holds assets:
September 30, December 31, 2000 1999 ---- ---- United States..................................... $ 143,039 $ 160,109 Japan............................................. 1,078 1,175 Other............................................. 332 385 ---------- ---------- Total long-lived assets...................... $ 144,449 $ 161,669 ========== ==========
Sales to one customer accounted for 10% and 12% of revenues for the three and nine months ended September 30, 2000, respectively, and included sales from network systems and call center operating segments. Sales to one customer accounted for 10% of revenues for the three months ended September 30, 1999 and included sales from network systems, network diagnostics and call center operating segments. There were no customers accounting for 10% or more of revenues for the nine months ended September 30, 1999. 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 nine month periods ended September 30, 2000 and 1999:
NET INCOME (LOSS) SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------------------------------------------------- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000: (thousands, except per share amount) Basic EPS........................................ $ 6,158 58,322 $ 0.11 Effect of Dilutive Securities - Stock Options and Warrants........................ -- 6,220 ------ ------ Diluted EPS...................................... $ 6,158 64,542 $ 0.10 ====== ====== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999: Basic EPS........................................ $ 920 55,094 $ 0.02 Effect of Dilutive Securities - Stock Options and Warrants........................ -- 3,770 ------ ------ Diluted EPS...................................... $ 920 58,864 $ 0.02 ====== ====== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000: Basic EPS........................................ $ 6,392 57,777 $ 0.11 Effect of Dilutive Securities - Stock Options and Warrants........................ -- 6,652 ------ ------ Diluted EPS...................................... $ 6,392 64,429 $ 0.10 ====== ====== FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999: Basic EPS........................................ $ (4,724) 54,776 $ (0.09) Effect of Dilutive Securities - Stock Options and Warrants........................ -- -- ------ ------ Diluted EPS...................................... $ (4,724) 54,776 $ (0.09) ======= ======
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 CONSOLIDATED 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, Service Node, Service Control Point, VXi Media Gateway Controller, 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. 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. 17 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, percentages that certain income statement items bear to total revenues:
PERCENTAGE OF REVENUES Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ----------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues.............................................. 100.0% 100.0% 100.0% 100.0% Cost of goods sold.................................... 32.6 35.5 33.1 35.0 Amortization of purchased technology.................. 3.0 3.8 3.5 2.7 ------------ -------------- ------------ ------------- Gross profit.......................................... 64.4 60.7 63.4 62.3 Research and development.............................. 17.2 16.8 18.1 20.3 Selling, general and administrative................... 26.3 26.9 29.1 29.8 Amortization of goodwill and other purchased intangibles............................... 6.5 9.4 7.6 6.6 Non-recurring acquisition-related charges............. -- -- -- 4.6 Restructuring......................................... -- -- -- 1.2 ------------ -------------- ------------ ------------- Total operating expenses.............................. 50.0 53.1 54.8 62.5 ------------ -------------- ------------ ------------- Income (loss) from operations......................... 14.4 7.6 8.6 (0.1) Interest and other income (expense), net.............. 0.2 (1.4) (0.4) 0.2 ------------ -------------- ------------ ------------- Income before provision for income taxes.............. 14.6 6.2 8.2 0.1 Provision for income taxes............................ 7.2 4.8 5.3 3.3 ------------ -------------- ------------ ------------- Net income (loss)..................................... 7.4% 1.4% 2.9% (3.2)% ============ ============== ============ =============
The following table sets forth, for the periods indicated, revenues by principal product line as a percentage of total revenues:
PERCENTAGE OF REVENUES Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- Network Systems................................... 67% 64% 64% 62% Network Diagnostics............................... 23 25 25 30 Call Center Products.............................. 10 11 11 8 --------- ---------- ----------- --------- Total........................................ 100% 100% 100% 100% ========= ========== =========== =========
18 The following table sets forth, for the periods indicated, revenues by geographic territories as a percentage of total revenues:
PERCENTAGE OF REVENUES ---------------------- Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------ 2000 1999 2000 1999 ---- ---- ---- ---- North America..................................... 73% 82% 74% 77% Japan............................................. 9 7 9 9 Europe............................................ 5 5 5 5 Rest of World..................................... 13 6 12 9 --------- --------- ---------- ---------- Total........................................ 100% 100% 100% 100% ========= ========= ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES. The Company's revenues increased by $19.0 million, or 29%, during the third quarter of 2000 due primarily to higher sales of network systems products and services and secondarily to increased sales of MGTS diagnostics and call center products. Revenues from network systems products increased by $14.4 million, or 35%, to $56.1 million due primarily to higher sales of the Company's IP7 and local number portability products, and secondarily to increased sales of extensions and upgrades. Revenues from network diagnostics products increased by $3.3 million, or 21%, due principally to higher sales of the Company's MGTS diagnostics products. Revenues from call center products increased by $1.3 million, or 17%, primarily as a result of higher TotalView product sales. Revenues in North America increased by $7.6 million, or 14%, due primarily to higher sales of network systems products. Sales in Japan increased by $3.2 million, or 68%, as a result of higher sales of MGTS and third-party data diagnostics products. Revenues in Europe increased by $1.3 million, or 41%, due principally to higher network diagnostic product sales. Rest of world revenues increased by $7.0 million, or 188%, due primarily to higher network systems product sales. The impact of exchange rate fluctuations on currency translations increased revenues by $84,000, or less than 1%, and did not have a material effect on net income in the third 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 could 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 as well as the Company's suite of products for converged circuit and packet networks, including the IP7 Secure Gateway and VXi Gateway network systems products and the i3000. GROSS PROFIT. Gross profit as a percentage of revenue increased to 64.4% in the third quarter of 2000 compared to 60.7% in 1999. The increase in gross margin was primarily due to proportionately greater sales of higher margin upgrade and extension sales. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of revenues for the three months ended September 30, 2000 was 67.2% compared to 64.5% for the three months ended September 30, 1999. RESEARCH AND DEVELOPMENT. Research and development expenses increased overall by $3.5 million, or 32%, and increased as a percentage of revenues to 17.2% in the third quarter of 2000 from 16.8% in the third quarter of 1999. The 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") and Media Gateway Controller, or "Softswitch," markets. 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 $4.6 million, or 26%, and decreased as a percentage of revenues to 26.3% in the third quarter of 2000 from 26.9% in the third quarter of 1999. The dollar increase was primarily due to increased personnel and infrastructure-related expenses incurred to support the Company's 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. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of goodwill and intangible assets decreased by $639,000, and decreased as a percentage of revenue to 6.5% for the three months ended September 30, 2000 as compared to 9.4% for the three months ended September 30, 1999. 20 INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by $416,000, or 24%, as a result of the higher principal amount, $135 million, of the convertible debt issued in November 1999 to retire the notes issued in connection with the acquisition of IEX, which had a lower principal amount, $100 million. Interest income increased $1.4 million, or 146%, 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 third quarter of 2000 was $6.1 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. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the three month periods ended September 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. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1999 REVENUES. The Company's revenues increased by $68.8 million, or 46.1%, during the nine months ended September 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 $47.5 million, or 51%, to $140.2 million due primarily to higher sales of Eagle STP products and the Company's local number portability and IP7 products. Revenues from network diagnostics products increased by $10.3 million, or 23%, due principally to higher sales of the Company's Sentinel and MGTS diagnostics products. Revenues from call center products increased by $11.1 million, or 92%, as a result of revenues for the nine months ended September 30, 2000 reflecting sales for the entire nine months compared to the nine months ended September 30, 1999, which only included sales following the May 1999 acquisition. Revenues in North America increased by $47.1 million, or 41%, due primarily to higher sales of Eagle STP products and the inclusion of IEX product sales. Sales in Japan increased $5.8 million, or 44%, as a result of higher sales of MGTS and third-party data diagnostics products. Revenues in Europe increased by $3.0 million, or 38%, due to higher network diagnostic product sales. Rest of world revenues increased by $12.9 million, or 95%, due to increased Eagle STP sales. The impact of exchange rate fluctuations on currency translations increased revenues by $1.3 million, or 1%, and did not have a material effect on net income in the nine months ended September 30, 2000. 21 GROSS PROFIT. Gross profit as a percentage of revenues increased to 63.4% in the nine months ended September 30, 2000 compared with 62.3% in the nine months ended September 30, 1999. The increase in gross margin was primarily due to higher network systems margins related to proportionally higher upgrade and extension sales, partially offset by higher amortization of purchased technology, primarily in connection with the acquisition of IEX for the entire nine months ended September 30, 2000 compared to five months of amortization during the nine months ended September 30, 1999. Excluding the amortization of purchased technology related to the IEX acquisition, gross profit as a percentage of sales improved to 66.7% for the nine months ended September 30, 2000 compared to 65.0% for the nine months ended September 30, 1999. RESEARCH AND DEVELOPMENT. Research and development expenses increased overall by $9.2 million, or 30.5%, and decreased as a percentage of revenues to 18.1% in the nine months ended September 30, 2000 from 20.3% in the nine months ended September 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 $19.0 million, or 42.9%, and decreased as a percentage of revenues to 29.1% in the nine months ended September 30, 2000 from 29.8% in the nine months ended September 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. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization of goodwill and intangible assets increased by $6.7 million, or 69%, and increased as a percentage of revenue to 7.6% in the nine months ended September 30, 2000 as compared to 6.6% in the nine months ended September 30, 1999. The increase was due to amortization of goodwill and intangible assets primarily resulting from the acquisition of IEX for the entire nine months during the nine months ended September 30, 2000 compared to five months of amortization incurred during the nine months ended September 30, 1999. INTEREST AND OTHER INCOME (EXPENSE), NET. Interest expense increased by $3.7 million, or 129%, primarily as a result of interest incurred for convertible debt issued to retire the notes issued in connection with the acquisition of IEX for the nine months ended September 30, 2000 compared to five months of interest incurred during the nine months ended September 30, 1999 for notes issued in connection with the acquisition of IEX. Interest income increased $2.4 million, or 72.0%, due to higher invested cash balances in 2000 compared to the same period in 1999 when the Company's cash balances were lower due to cash payments made in connection with the May 1999 acquisition of IEX. INCOME TAXES. The income tax provision for the nine months ended September 30, 2000 was $11.4 million and reflected the effect of non-deductible acquisition-related costs, partially offset by a benefit of $3.5 million from the utilization of deferred tax liabilities related to certain of these acquisition-related costs. Excluding the effect of acquisition-related items, an estimated effective tax rate of 36% was applied for the nine month periods ended September 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. 22 LIQUIDITY AND CAPITAL RESOURCES During the nine-month period ended September 30, 2000, cash and cash equivalents increased by $38.1 million to $84.8 million, after $12.5 million net purchases of short-term and long-term investments. Operating activities, net of the effects of exchange rate changes on cash, provided $43.6 million. Financing activities, which represented proceeds from the issuance of Common Stock upon the exercise of options and warrants, provided $23.1 million, and investing activities, excluding net purchases of short-term and long-term investments, used $16.2 million primarily for capital expenditures. Accounts receivable, including amounts due from related parties, increased by 2% during the first nine months of 2000 due to increased sales, partially offset by strong collections activity. Income taxes receivable increased by $8.3 million in the first nine months of 2000 due primarily to the effect of tax benefits related to the exercise of stock options. Prepaid expenses and other current assets increased by $10.8 million in the first nine months of 2000 due primarily to costs of sales that were deferred pending the completion of certain large systems projects. Deferred revenues increased by 13% due to the deferral of revenue related to these large systems projects. Capital expenditures of $15.6 million during the first nine 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 July 31, 2000 on substantially the same terms and conditions as the expired line of credit. 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 September 30, 2000), and expires on July 31, 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 (1.5% at September 30, 2000) plus 0.125% per annum which expire between November 2000 and August 2001, if not renewed. There have been no borrowings under these lines of credit. In November 1999, the Company completed the private placement of $135.0 million principal amount at maturity of 3.25% convertible subordinated discount notes due in 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 million in short-term notes issued in May 1999 in connection with the acquisition of IEX Corporation. 23 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. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") 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 SEC has recently issued additional guidance on SAB 101 in the form of a frequently asked questions document issued on October 13, 2000. The Company is currently evaluating the provisions of SAB 101 and this recently issued guidance 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, 1998. 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 adoption of FIN 44 did not have a material impact on its financial statements. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." The statement requires the recognition of all derivatives as either assets or liabilities in the balance sheet and the measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the planned use of the derivative and the resulting designation. Because the Company does not currently hold any derivative instruments and only engages in limited hedging activities, the impact of the adoption of SFAS No. 133 is not currently expected to have a material impact on financial position, results of operations or cash flows. The Company is currently evaluating the provisions of SFAS No. 133 and its potential impact on the Company's financial statements. The Company will be required to implement SFAS No. 133 in the first quarter of fiscal 2001. 24 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; 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 1. LEGAL PROCEEDINGS On August 18, 2000, Alcatel USA, Inc. and Alcatel USA Sourcing, L.P. (collectively, "Alcatel") filed a complaint against Tekelec in the United States District Court for the Eastern District of Texas, Sherman Division. The complaint alleges that Tekelec makes and sells products that infringe two patents owned by Alcatel Sourcing. The patents at issue relate to a system and method for application location register routing in a telecommunications network. Although Alcatel does not identify in its complaint the specific Tekelec products that purportedly infringe the patents at issue, Tekelec believes that Alcatel's allegations relate to a particular software application offered by Tekelec as a feature on its EAGLE STP for routing query messages in wireless networks. Alcatel seeks a permanent injunction enjoining the Company from infringing the patents at issue, unspecified general and exemplary damages, and an award of costs. On September 26, 2000, Tekelec filed its answer and counterclaim to Alcatel's complaint denying Alcatel's claims of infringement and raising several affirmative defenses. Tekelec has also asserted several counterclaims against Alcatel seeking declaratory relief that Tekelec has not infringed the Alcatel patents and that such patents are invalid and unenforceable. Tekelec believes that it has strong defenses to Alcatel's claims on the grounds of invalidity, noninfringement and inequitable conduct by Alcatel, and is defending the action vigorously. The litigation is currently in the early stages of discovery and has not yet been set for trial. 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Loan Agreement and Promissory Note dated July 31, 2000 between the Registrant and Union Bank of California 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only) (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended September 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 November 13, 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 Loan Agreement, dated July 31, 2000, between the Registrant and Union Bank of California, together with Promissory Note of the Registrant dated July 31, 2000. 27.1 Financial Data Schedule (provided for the information of the Securities and Exchange Commission only) 30