-----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, JNcH4dOecL/UCZQPDr+fmTdCalokvbA1VH2IKsvD0QMARQRfGK3y2XitG7mVdBnZ riPhBfkSD3B49mXzTS3rKg== 0000950138-97-000101.txt : 19970401 0000950138-97-000101.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950138-97-000101 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEKELEC CENTRAL INDEX KEY: 0000790705 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 952746131 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15135 FILM NUMBER: 97571124 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-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-15135 TEKELEC (Exact name of registrant as specified in its charter) CALIFORNIA (State or other jurisdiction of incorporation or organization) 95-2746131 (I.R.S.Employer Identification Number) 26580 WEST AGOURA ROAD, CALABASAS, CALIFORNIA 91302 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 880-5656 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, WITHOUT PAR VALUE (Title of class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last reported sale price of the Common Stock on March 3, 1997 as reported on the Nasdaq National Market, was approximately $161,000,000. The number of shares outstanding of the registrant's Common Stock on March 3, 1997, was 12,325,793. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement to be delivered to shareholders in connection with their Annual Meeting of Shareholders to be held on May 21, 1997 are incorporated by reference into Part III of this Annual Report. TEKELEC INDEX TO ANNUAL REPORT ON FORM 10-K For the fiscal year ended December 31, 1996 Page ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 23 Item 3. Legal Proceedings........................................... 23 Item 4. Submission of Matters to a Vote of Security Holders......... 23 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 24 Item 6. Selected Consolidated Financial Data........................ 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 26 Item 8. Financial Statements and Supplementary Data................. 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 33 PART III Item 10. Directors and Executive Officers of the Registrant.......... 34 Item 11. Executive Compensation...................................... 34 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 34 Item 13. Certain Relationships and Related Transactions.............. 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 35 2 PART I ITEM 1. BUSINESS. Tekelec (the "Company") designs, manufactures and markets innovative diagnostic systems and network switching solutions for the global communications marketplace. Tekelec's products enable communications infrastructure suppliers and network providers to rapidly deliver advanced communications products and services. The Company's diagnostic systems are used in the design, installation and maintenance of a broad range of communications equipment and networks. Tekelec's EAGLE(R) STP switching platform enables operators of wireline and wireless networks to deliver Advanced Intelligent Network (AIN) services such as Caller ID, voice messaging, personal number calling, Service Provider Local Number Portability (SP-LNP) and customized routing and billing as well as digital wireless services such as Personal Communications Systems (PCS) and Global Systems for Mobile (GSM). The Company sells its diagnostic systems worldwide to long distance carriers, telephone operating companies, communications equipment manufacturers, wireless and cellular network operators and government agencies. The Company's switching products have been sold primarily to U.S. independent telephone companies (ITCs), PCS and cellular operators, interexchange carriers (IXCs), competitive access providers (CAPs) and local exchange carriers through the Company's direct sales force and distribution and marketing relationships with Lucent Technologies, Inc. and Stratus Computer, Inc. (Stratus). INDUSTRY BACKGROUND Deregulation and privatization worldwide have intensified competition among existing operators of public communications networks and encouraged the entrance of new service providers. At the same time, the convergence of telephony and computing is resulting in end users demanding new and enhanced high quality communications services at lower cost. As a result, network operators are increasingly pressured to reduce the time and expense required to introduce such services. Together, these forces are creating the need for new equipment and infrastructure for both wireline and wireless networks. PUBLIC NETWORKS: INCREASED COMPETITION AND COMPLEXITY In the U.S., long distance carriers, Regional Bell Operating Companies (RBOCs) and new competitive service providers that have entered the local and long distance markets are competing with one another to offer enhanced products and services to their customers. The passage of the Telecommunications Act of 1996 in early 1996 has increased competition among telephone operating companies, cable companies and long distance carriers. The rapid growth of cellular and wireless networks has also further increased the number of communications alternatives offered to end users. In response to this environment, operators of public networks are seeking to lower their costs and differentiate themselves by rapidly introducing new services. 3 These include high-speed data services such as Asynchronous Transfer Mode (ATM) and Frame Relay, AIN services such as Caller ID, voice messaging, Service Provider Local Number Portability and customized routing and billing as well as digital wireless services such as PCS and GSM. While communications markets are becoming increasingly competitive, a proliferation of standards and protocols is making the design and operation of communications networks more complex. Demand for high speed communications integrating voice, data and video is growing rapidly. Services based on emerging technologies, such as ATM, Frame Relay, xDSL, digital video and Fast Ethernet are being deployed while Integrated Services Digital Network (ISDN) is increasingly available to provide end-user access to combined voice and data services, particularly for Internet services. With the explosive growth of the Internet comes the need for high-capacity, high-speed, flexible data products and services. In addition, network operators must also support these standards and protocols in an increasing number of Local Area Networks (LANs), Metropolitan Area Networks (MANs), Wide Area Networks (WANs) and Global Area Networks (GANs). As a result, network operators have become more demanding of communications equipment suppliers to provide cost effective solutions that enable them to increase the overall capabilities of their networks while maintaining the highest network integrity. DIAGNOSTIC TOOLS The proliferation of standards and protocols, growth of the Internet and Intranet and the increasing complexity of communications equipment and networks are creating a need for new, more sophisticated diagnostic systems capable of simultaneously testing multiple existing and emerging technologies. Network operators use diagnostic tools to efficiently monitor network performance, simulate network services and test interoperability of equipment. In an increasingly competitive environment, network operators need diagnostic systems that can reduce time to market by shortening the testing cycles necessary to model and implement new services. In addition, network operators require advanced diagnostic solutions that verify reliability of network elements, offer flexibility to support new standards and protocols as they emerge and enable them to centralize the testing expertise within their organizations. Equipment manufacturers use diagnostic tools to design and test their products, such as switches, hubs and routers, for conformance to new and existing standards and to simulate network operating conditions. Manufacturers seek diagnostic tools that enable them to shorten their product development cycles and reduce their testing costs as these elements are principal contributors to product development time and expense. Furthermore, diagnostic tools with a flexible architecture are necessary to accommodate the rapid changes in technology. 4 INTELLIGENT NETWORK AND ADVANCED INTELLIGENT NETWORK (AIN) SWITCHING The Intelligent Network (IN) utilizes a highly complex protocol called Common Channel Signalling System No. 7 (SS7) to provide the basis for virtually all new telecommunications services. The IN architecture uses two separate but parallel paths; one to handle the voice or data traffic and a second to carry the signalling information for call set up and routing. Network operators utilize the IN architecture to increase the efficiency of their network by offloading signalling traffic onto the SS7 network, thus freeing up trunk line capacity needed for revenue generating traffic. A second generation Intelligent Network called the Advanced Intelligent Network (AIN) is used by carriers and service providers seeking to differentiate themselves by offering advanced voice and data communications services. The AIN is a network architecture and a set of standards designed to allow network operators to create, deploy and modify these services quickly and economically. AIN services represent the merging of telephony with database information through SS7 signalling. Such services include Caller ID, voice messaging, personal number calling, Service Provider Local Number Portability and customized routing and billing as well as digital wireless services such as PCS and GSM. Network operators are increasingly using SS7 networks as a source of competitive advantage to introduce new services through software changes in IN network elements rather than in central office switches. The key network elements in the IN and AIN architecture are as follows: Signal Transfer Point (STP) - An STP is a switch that handles the signalling messages used to set up telephone calls, queries external databases for routing and processing information and dispatches call handling instructions. Service Switching Point (SSP) - An SSP is a component of the central office switch that sets up trunk connections. When an SSP identifies an AIN call, it routes a signalling message to the STP and awaits further instructions for call processing. Service Control Point (SCP) - An SCP is a computer database that is accessed by STPs for customer call routing and other special information required for AIN services. Additional components of the AIN architecture include Service Creation Environments (SCE) used to create new software-based services and Service Management Systems (SMS) used for billing and administration. While SS7 has been available since the 1980s, to date it has been used principally to support intelligent services such as call set-up, 800 number calling and calling card verification. AIN standards and services have only recently emerged and the number and complexity of these 5 services continue to grow. Services such as Caller ID, voice messaging, personal number calling, Service Provider Local Number Portability and customized routing and billing as well as digital wireless services such as PCS and GSM all require SS7 networking technology. ISDN, driven by the growth of the Internet and telecommuting, is also increasing the need for SS7 to provide the signalling connectivity for ISDN applications. The accelerating rate of introduction of these new enhanced services enabled by SS7 has placed increasing demand for functionality and capacity on the installed base of older generation STPs. These devices are, in most cases, modified central office digital switches that fundamentally were not optimized for AIN purposes. In addition, the telecommunications industry is evolving towards an architecture of more intelligent distributed switching in which software will allow for third party developers to be involved in creating applications. The Federal Communications Commission's June 1996 order requiring that Incumbent Local Exchange Carriers (ILECs) provide competitors with the ability to transition customers to their networks without changing the customer's existing telephone number (i.e., Service Provider Local Number Portability) will have a dramatic impact upon the SS7 network and all ILECs. With competition among network operators accelerating the deployment of AIN services, the strategic and economic value of sophisticated switching equipment optimized for SS7 applications is rapidly increasing. In addition, the importance of SS7 network-to-network operators mandates extremely high reliability and fault tolerance from the equipment as well as higher throughput and scalability to support the rapid and unpredictable growth in enhanced AIN services. Companies that offer SS7-based products that are built on scalable, open distributed architectures and enable AIN applications can benefit from this industry shift. PRODUCTS NETWORK DIAGNOSTICS PRODUCTS Equipment manufacturers and network operators use the Company's diagnostic products to perform a wide variety of simulation and analysis to detect, diagnose and isolate communications problems. The Company's proprietary simulation language enables the controlled imitation of communications devices, traffic loads and networks. Its analysis software helps monitor, selectively capture and interpret digitized pulses transmitted through a network. Uses of the Company's products include the following: o Designing Communications Equipment. By simulating existing and emerging communications devices (e.g., digital switches, STPs, SCPs, routers and hubs) and protocols (e.g., ATM, Frame Relay, SS7, ISDN, FDDI, Ethernet and Fast Ethernet), the Company's products enable engineers to more rapidly design communications devices that will be 6 compatible with, and minimize potential breakdowns of, the networks in which the devices will be deployed. o Ensuring Product Reliability. By simulating a wide range of operating situations, including protocol errors and other network failures, the Company's products can help ensure that communications equipment manufacturers produce devices that will operate error-free, thereby accelerating time to market and potentially reducing costly failures after installation. o Verifying Certification. By executing certain standard tests, network operators and manufacturers use the Company's products to rapidly verify that communications devices meet specified standards (e.g., X.25, ISDN and SS7). o Monitoring Networks. By collecting and analyzing traffic, the Company's products can monitor networks on a continuous basis and provide advance notice of potential system failures, allowing faster service restoration or even service failure prevention. o Troubleshooting. By identifying the specific location and type of communication error, the Company's products can isolate which network device has failed (e.g., channel bank or PBX). The Company's products help technicians and engineers repair devices and networks promptly and minimize expensive downtime associated with service failure. The Company's principal data network diagnostics products are: Chameleon(R) Open. The Chameleon Open is a multiprotocol analyzer that features a flexible open architecture for a family of applications that provide simultaneous full bandwidth testing of broadband, LAN, GAN, MAN and WAN equipment and networks. It can perform tests at speeds up to 155 Mbps and currently supports a number of protocols and interfaces including ATM, SMDS, FDDI, Frame Relay, ISDN, TCP/IP, X.25, T1, E1, Fast Ethernet, Ethernet and Token Ring. The Chameleon Open is based on an Intel x86-based pentium hardware platform and a UNIX operating system incorporating an X-Windows, Motif graphical user interface. Tekelec's proprietary programming tool, Protocol Adaptable State Machine (PASM), was added to the Chameleon Open platform in 1995 to enable ATM signalling and Frame Relay simulation. Each Chameleon Open supports, depending on its configuration, up to 12 network interfaces simultaneously and can be configured as either a portable or rack mount system. Multiple systems can be networked in a LAN or WAN configuration. Chameleon 32 Plus. The Chameleon 32 Plus is a sophisticated diagnostic system that simulates and analyzes multiple types of communications devices and networks. Research and development users utilize the Chameleon 32 to comprehensively test ISDN primary and basic rate interfaces, SS7 and data protocols such as Frame Relay and X.25. 7 The Company's principal intelligent network diagnostics product is: MGTS/GSMT. The MGTS/GSMT system is used primarily for SS7-based device simulation, load generation and network monitoring. In its fully configured form, the system includes Tekelec's proprietary programming tool, PASM, that can be used to design customized testing scenarios. The MGTS/GSMT software runs on Sun Microsystems and Hewlett-Packard UNIX operating systems with an X-Windows, Motif graphical user interface. The MGTS/GSMT system supports a number of protocols, including SS7, AIN, GSM, IS.41 and personal digital communications (PDC) networks. Each system can simulate up to 32 SS7 links or 16 network nodes simultaneously, and a number of MGTS/GSMT systems may be networked together. List prices for the Company's principal diagnostic products range from approximately $35,000 to $150,000 depending on configuration. NETWORK SWITCHING PRODUCTS EAGLE STP. The Company introduced the EAGLE STP in early 1992. The EAGLE STP is designed to meet the demands of SS7 switching and features a fully distributed, standards-based open architecture. Its distributed open architecture, high capacity and throughput are tailored to the SS7 switching needs of common carriers, local exchange carriers and PCS and cellular operators. The EAGLE STP is economically scaleable in configurations from 2 to 500 links. On-going software releases provide continual product improvement to meet the evolving needs of end users. As is required in SS7 networks, the EAGLE is sold and deployed in pairs, for redundancy. The EAGLE has the following features: Designed for SS7 Standards. The EAGLE STP is designed to exceed the requirements for STPs as defined by Bell Communications Research (Bellcore) and presently supports both American National Standards Institute (ANSI) and International Telephone and Telegraph Consultative Commission (CCITT) SS7 standards. Bellcore defines the standards used primarily by the RBOCs for equipment used in their networks. See "-- Sales, Marketing and Support." Powerful, Distributed Architecture. The EAGLE STP features a fully distributed, open architecture, utilizing Intel x86 microprocessors. The performance of the product results from its uniquely distributed architecture and the elimination of central processors. In the EAGLE STP, all SS7 network intelligence, including SS7 routing information, is distributed among up to 250 signalling interface processors. Each interface is interconnected via a high speed, redundant bus subsystem. The bus subsystem utilizes two, counter-rotating 125 Mbps busses and features proprietary switching and buffering algorithms, which minimize collision and guarantee message delivery between all attached interfaces. All interfaces attached to the bus subsystem are hot-swappable, so that interface repair or replacement does not affect system operation. 8 Software Architecture. The EAGLE STP's software is fully modular and written entirely in industry-standard programming languages. All software is released in complete versions, eliminating the need for interim patching, minimizing the potential for errors. EAGLE STP software is optimized for the capacity and redundancy features of the host hardware. Open Software Interfaces. Users of the EAGLE STP can rapidly add new functionality and value-added services to their network, utilizing the EAGLE STP's open software interfaces. Major new features enabling these open interfaces include the STP LAN feature, which allows users to attach inexpensive general purpose computers to the EAGLE for network analysis; the Database Transport Access feature, which allows users to change the behavior of protocols in their network without relying on the vendor's development cycles; and the X.25 to SS7/IS.41 Protocol Conversion feature which allows first-generation legacy cellular switches to interwork with the more advanced SS7 cellular network. A significant new capability enabling Service Provider Local Number Portability on the EAGLE allows carriers to eliminate significant numbers of dedicated Service Control Point (SCP) general purpose computers. Ease of Operation and Maintenance. EAGLE STP installations generally do not require any enhancements to the central office's power supply, cooling system or flooring and require less than 36 square feet of space. An EAGLE STP can usually be installed in less than one week. No scheduled maintenance is required to support the EAGLE STP, eliminating the requirement for on-site personnel. Prices for a pair of EAGLE STPs typically range from approximately $250,000 to $5,000,000, depending on configuration and associated software applications. COMPLIANCE WITH INDUSTRY STANDARDS The Company's products are designed to meet a significant number of standards and regulations, some of which are evolving as new technologies are deployed. In the United States, the Company's products must comply with various regulations defined by the Federal Communications Commission (FCC) and Underwriters Laboratories as well as standards established by Bellcore and the ANSI. Internationally, the Company's products must comply with standards established by telecommunications authorities in various countries as well as with recommendations of the CCITT and the International Standards Organization (ISO). The failure of the Company's products to comply, or delays in compliance, with the various existing and evolving standards could have a material adverse effect on the Company's business and operating results. PRODUCT DEVELOPMENT The communications market is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Standards for new services such as ATM, AIN and PCS are still evolving. As these standards and the demand for services and 9 applications evolve, the Company intends to adapt its products or develop and support new products. The Company solicits product development input through discussions with users of the Company's products and participation in industry organizations and international standards committees, such as the ATM Forum and Telecommunications Industry Association (TIA), and by closely monitoring the activities of the ITU, ETSI, ISO and Bellcore. The Company's diagnostic product development activities are principally focused on expanding the capabilities of the Chameleon Open and MGTS, including their interfaces, software modules and protocol capabilities for emerging technologies such as ATM and AIN, and adapting these products for the emerging Network Operations market. From time to time the Company engages in development projects for special applications for customers. The Company is usually free to use such technology in future products which are not competitive with the specific application for which the development work was performed. The Company's network switching product development group has as its priority the release of new software versions to incorporate enhancements desired by customers and compliance with standards to enable EAGLE to address additional domestic and international markets. In addition, the Company plans continued improvement of hardware components to improve performance and capability. The Company utilizes a common standards-based open architecture approach in the design of its products. This approach facilitates and accelerates the development of new applications and products and permits the Company to enhance existing products by substituting new hardware or software modules. This modular approach also helps to extend the life cycles of the Company's products, ensure compatibility among successive generations of products and simplify manufacturing. The Company's success depends, to a substantial degree, upon its ability to respond rapidly to changes in technology, industry standards and customer requirements. This requires the timely selection, development and marketing of enhancements and new products on a cost-effective basis. The Company has invested and expects to continue to invest substantial resources in the development of new products and technology and product enhancements. There can be no assurance that the Company's product development efforts will result in commercially successful new or enhanced products or that the Company's products will not be rendered obsolete or noncompetitive by changing technology or new competitive products. Products as complex as those offered by the Company may contain undetected errors or failures when first introduced or as new versions are released. Such errors have occurred in the past. Although the Company's products have not experienced any significant errors, such errors, particularly those that result in a failure of the Company's switching products, could have a material adverse effect on the Company's customer relationships, business and operating results. There can be no assurance that, despite thorough testing by the Company and by customers, errors will not be found in the Company's products. 10 Product development includes expenditures for research and development, new product design, enhancement of existing products and selective acquisition of technology. Research and development expenses amounted to approximately $17.1 million, $15.1 million, and $12.0 million in 1996, 1995 and 1994, respectively. There were no capitalized software development costs in 1996, 1995 and 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note A to Consolidated Financial Statements. The Company's development facilities are located in California, North Carolina, Japan and India. As of March 1, 1997, the Company had 141 persons engaged full time in product development. The Company believes that recruiting and retaining highly skilled engineering personnel is essential to its success. To the extent that the Company is not successful in attracting and retaining its technical staff, its business and operating results would be adversely affected. SALES, MARKETING AND SUPPORT The Company's sales and marketing strategy for its diagnostic products is to initially target customers' research and development departments designing the next generation of communications equipment and then to target the manufacturing groups and ultimate users in network operations as equipment is manufactured, certified and installed. This strategy permits the Company to gain expertise in testing emerging technologies in the early stages of their life cycles. The Company's sales and marketing strategy for its EAGLE switching product is to continue to focus on sales to the U.S. ITC and cellular markets and to pursue new customer relationships including RBOCs and selected international opportunities. Current and future strategic alliances will continue to be an integral component of the strategy to reach broader markets and attain greater market presence. The network switching sales cycle typically ranges from three to 18 months depending on the complexity of a customer's planning, bidding and implementation requirements. RBOCs and other large service providers require their suppliers to continuously participate in Bellcore Technical Auditing programs as new hardware and software features are introduced. Bellcore provides Technical Auditing Services ("technical audits") to suppliers of network equipment assessing the supplier's conformance to certain Bellcore standards which have been adopted by RBOCs and other service providers. Ongoing technical audits of the EAGLE STP are conducted by Bellcore and the results of these audits are available to the Company and its customers. Bellcore does not endorse or certify any product or service or guarantee its performance. Failure or delay in obtaining favorable technical audit results could have a material adverse effect on the Company's ability to sell EAGLE STP to this large segment of the communications carrier market. 11 Domestic Distribution. The Company sells its diagnostic and switching products in the U.S. principally through separate direct sales forces and, for the EAGLE STP, also through strategic relationships with Lucent Technologies, Inc. (formerly AT&T Network Systems) and Stratus. The Company's direct sales forces operate out of the Company's headquarters in Calabasas, California and its regional offices located in Colorado, Illinois, Missouri, New Jersey, North Carolina, Northern California, Texas and Virginia. International Distribution. The Company sells its diagnostic products internationally through a network of 26 distributors and two wholly owned subsidiaries in Japan and Canada. The Company's Japanese subsidiary, which presently sells only diagnostic products, generated approximately 22%, 22% and 20% of the Company's revenues for 1996, 1995 and 1994, respectively. In 1997, the Company intends to transition its sales in Canada to its direct sales force. The Company currently sells its switching products internationally through its direct sales force. Tekelec-Airtronic, S.A., an affiliate of the Company, and its wholly owned subsidiaries are the distributors of the Company's diagnostic products in France, Italy, Germany, the Netherlands, Belgium, Luxembourg, Portugal, Spain and China. Twenty additional independent companies distribute the Company's products in other Western European countries, the Far East (other than Japan), Australia, New Zealand, the Middle East, South America and South Africa. Distributors typically purchase products directly from the Company pursuant to agreements that are exclusive for a particular territory and are cancelable by either party upon 90 days notice. Export sales to international distributors accounted for approximately 13%, 17% and 14% of revenues in 1996, 1995 and 1994, respectively. The Company typically invoices export sales in U.S. dollars and its foreign subsidiaries invoice sales in their respective local currency. International sales are subject to inherent risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, difficulties in staffing and managing foreign operations and distributors, greater difficulty in accounts receivable collection and potentially adverse tax consequences. Additionally, exchange rate fluctuations on foreign currency transactions and translations arising from international operations may contribute to fluctuations in the Company's business and operating results. Fluctuations in exchange rates could also affect demand for the Company's products. In addition, due to the technical nature of the Company's products, certain of the Company's export sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. The Company's products are subject, in certain international jurisdictions, to reduced protection for the Company's copyrights and trademarks. See Notes A, E and M to Consolidated Financial Statements. Strategic Relationships. The Company believes that it can improve market penetration and acceptance for its EAGLE products through strategic relationships with leading communications equipment suppliers. These suppliers have long-standing relationships with 12 public carriers and provide a broad range of services to these carriers through their existing sales and support networks. Tekelec seeks strategic relationships that (i) enhance the Company's presence in its target markets, (ii) offer products that complement the EAGLE to provide value-added networking solutions and (iii) leverage the Company's core technologies enabling the communications equipment suppliers to develop enhanced products with market differentiation that can be integrated with the EAGLE platform. The Company has a non-exclusive distribution agreement with Lucent Technologies, Inc. and a marketing agreement with Stratus for the EAGLE STP. The Company believes that its relationships with Lucent and Stratus demonstrate recognition of the technical advantages of the EAGLE STP. The Company believes that these agreements provide the Company with additional opportunities to penetrate the SS7 network switching marketplace. Through the Company's relationships with Lucent and Stratus, the Company has enhanced its market presence and its ability to access leading telephone companies such as the RBOCs. In general, these agreements can be terminated by either party on limited notice and do not require minimum purchases. Furthermore, Lucent is not precluded from selling products that are competitive with the Company's products. A termination of the Company's relationship with Lucent or the sale of competing products by Lucent could materially and adversely affect the Company's business and operating results. Advertising and Promotion. The Company uses advertising in trade journals, exhibitions at trade shows, a presence on the Internet via the World Wide Web and direct mail to promote awareness of the Company and its products. The Company has been most successful in generating sales through demonstrations of its products and, therefore, focuses its advertising and promotional activities on generating opportunities for demonstrations. The Company also provides extensive training for, and merchandising aids to, its direct sales force and distributors. These include sales brochures, demonstration systems and promotional product literature. In order to support the Company's marketing efforts, the Company also publishes a newsletter for its customers and distributors, as well as maintains a presence on the Internet. Services, Support and Warranty. The Company believes that customer service, support and training are important to building and maintaining strong customer relationships. The Company services, repairs and provides technical support for its products. The Company maintains an in-house repair facility and provides ongoing training and telephone assistance to customers and international distributors from its headquarters in Calabasas, California, certain U.S. regional offices and its Japanese subsidiary. The Company's Technical Assistance Center in Morrisville, North Carolina supports the Company's switching products on a 24 hour-a-day, seven day-a-week basis. Support services include 24-hour technical support, remote access diagnostic and servicing capabilities, extended maintenance and support programs, comprehensive technical customer training, extensive customer documentation, field installation and emergency replacement. The Company typically warrants its products against defects in materials and workmanship for one year after the sale and thereafter offers extended service 13 warranties. To date, warranty expenses have been consistently within management's expectations. CUSTOMERS During 1996, the Company shipped approximately 600 units of its diagnostic products to over 250 customers worldwide and 26 pairs of EAGLE STPs to 21 customers. The Company's customers include end users and marketing intermediaries. End users for the Company's diagnostic products include long distance carriers, telephone operating companies, communications equipment manufacturers, wireless and cellular network operators and government agencies. End users for the Company's EAGLE STP consist primarily of U.S. ITCs, PCS and cellular operators, interexchange carriers, competitive access providers and local exchange carriers. The Company's diagnostic business is substantially dependent on repeat business and, therefore, customer satisfaction and loyalty are crucial to its long-term success. Many of the Company's largest customers in 1996 were purchasers of the Company's diagnostic systems in prior years. Sales of diagnostic products to Nippon Telegraph & Telephone (NTT) accounted for 12% of the Company's 1996 revenues. No other customer accounted for more than 10% of the Company's revenues in 1996. Federal and state agencies, including the FCC, regulate many of the Company's domestic customers. The FCC and a majority of the states have enacted or are considering regulations based upon alternative pricing methods. Uncertainty regarding future pricing policies and the cost effectiveness of deploying public network services may affect demand for communications products, including the Company's products. However, the Company believes that deregulation of the telecommunications market and new methods of price regulation as evidenced by the passage of the Telecommunications Act of 1996 in early 1996 could increase the demand for products such as those offered by the Company which enhance the efficiency of the network or allow the expedited introduction of new revenue-producing services. BACKLOG Orders for the Company's diagnostic products are usually placed by customers on an as-needed basis, and the Company has typically been able to ship these products in 15 to 30 days after the acceptance of the purchase order. Backlog for switching products typically consists of contracts or purchase orders for both product delivery scheduled within the next 12 months and EAGLE STP extended service warranty to be provided over the next five years. Because of variations in the magnitude and duration of orders received by the Company, and customer delivery requirements, which may be subject to cancellation or rescheduling, the Company's backlog at any particular date may not be a meaningful indicator of future financial results. At 14 December 31, 1996, the Company's backlog amounted to approximately $28.0 million, of which $16.6 million related to EAGLE STP service warranty. This compared to $23.3 million at December 31, 1995, of which $12.3 million related to EAGLE STP service warranty. MANUFACTURING The Company's manufacturing operations consist of the procurement and inspection of components, final assembly, burn-in, quality control testing and packaging. Printed circuit boards, chassis and most of the other major components used in the Company's products are subassembled to the Company's specifications by independent contractors with whom the Company generally has had long-standing working relationships. The assembled components are then delivered to the Company's production facilities for final assembly, quality control testing and product configuration, including software installation. The Company's products incorporate the Company's proprietary software as well as software licensed from third parties. The Company believes that its use of independent contractors for subassembly coupled with in-house final assembly improves production planning, increases efficiency, reduces costs and improves quality. The Company has a computerized manufacturing inventory control system which integrates and monitors purchasing, inventory control and production. The Company's quality control process tests for reliability and conformance with product specifications and utilizes certain automated software test procedures. The Company received ISO 9002 certification from Bellcore in 1995, ISO 9001 certification from Bellcore for its network switching operation in 1996 and is currently undergoing the processes for ISO 9001 certification for its remaining operations and expects to obtain such certification in 1997. The Company is in the process of obtaining CE Mark registration for certain of its diagnostic products to meet EC regulations for shipment of products into Europe. The Company has already obtained CE Mark registration for those products with significant demand in Europe in 1996 and currently expects to be compliant for all remaining products before the end of the second quarter of 1997. Although delays in the Company's ability to obtain CE Mark registration for all of its products did not have a material impact on European sales in 1996, further delays or failure to obtain such registration could have a material impact on future sales in Europe. The Company generally uses industry standard components for its products which are available from multiple sources; however, a few key components, such as certain microprocessors, video displays and power supplies, are currently only available from single suppliers. Vendor supply agreements often include provisions requiring the vendor to maintain a specified level of key components. The Company believes that inventory levels of key components, including those maintained by vendors, are adequate. In addition, should any components become unavailable the Company believes that functionally similar, if not identical, components could be obtained, and any necessary internal redesign accomplished, without 15 materially adversely impacting the Company. To date, the Company has not experienced any significant delays in obtaining components from its suppliers and independent contractors. However, the electronics industry is subject to rapid technological change. Components become obsolete and are discontinued by manufacturers as new succeeding generations are introduced. An inability to obtain essential components, if prolonged, could materially adversely affect the Company's business and operating results and damage customer relationships. COMPETITION Diagnostic Products. The communications diagnostic market is intensely competitive and subject to rapid technological change and evolving industry standards. The Company primarily competes in the high performance segment of the market. Its principal competitor is Hewlett-Packard. The Company also competes with a number of other manufacturers, some of which have greater financial, marketing, manufacturing and technological resources than the Company. The Company believes that its long-term success will depend in part on its ability to be a leader in offering products that address new emerging industry standards and to offer a broad line of integrated applications. The Company believes that the principal competitive factors in the communications diagnostic market in which the Company competes are product/price performance, functionality and reliability, timely introduction of new products, breadth of integrated product applications, marketing and distribution capability and customer service and support. The Company believes that it competes favorably, although there can be no assurance that new or established competitors will not offer products superior to or lower in price than those of the Company. Network Switching Products. The market for STPs is highly competitive and has been highly concentrated among a limited number of dominant suppliers. The Company expects competition to increase in the future from existing and new competitors. The Company presently competes with DSC and to a lesser extent with a limited number of other manufacturers, all of which have significantly greater financial, marketing, manufacturing and other resources and larger installed customer bases than the Company. The Company believes that its long-term success will depend on its ability to further penetrate the major telephone companies, including the RBOCs, offer products with the best price/performance profile and be responsive to customers' needs for new features and services. The Company believes that the principal competitive factors in the network switching products market are product price/performance characteristics and reliability, customer service and support and the supplier's financial resources, marketing and distribution capability. The Company anticipates that responsiveness in adding new features will become an increasingly important competitive factor. While the Company's competitors have greater financial resources, the Company believes it competes favorably in other respects. However, there can be no assurance that new entrants or established competitors with greater financial resources have not 16 or will not offer products superior in performance, quality, service and support to, and/or lower in price than, those of the Company. INTELLECTUAL PROPERTY The Company relies on a combination of trade secret, copyright and trademark laws and contractual restrictions to establish and protect proprietary rights in its products. The Company does not hold any patents with respect to its products. The Company has entered into confidentiality and invention assignment agreements with its employees, and enters into non-disclosure agreements with its suppliers, distributors and appropriate customers among others so as to limit access to and disclosure of its proprietary information. There can be no assurance that these statutory and contractual arrangements will prove sufficient to deter misappropriation of the Company's technologies or independent third-party development of similar technologies. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. The Company believes that, because of the rapid pace of technological change in the communications market, legal protections for its products are less significant factors in the Company's success than the knowledge, ability and experience of the Company's employees, the frequency and timely introduction of product enhancements and the quality of support services provided by the Company. The communications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies that are important to the Company. There are no currently pending material claims that the Company's products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, there can be no assurance that the Company will not receive communications from third parties in the future asserting that the Company's products infringe or may infringe the proprietary rights of third parties. In its distribution agreements and certain of its major customer agreements, the Company agrees to indemnify its customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company and the failure of the Company to 17 develop or license a substitute technology, the Company's business and operating results would be materially adversely affected. EMPLOYEES At March 1, 1997, the Company had 367 employees, comprising 131 in sales, marketing and support, 51 in manufacturing, 141 in research, development and engineering and 44 in management, administration and finance. The Company believes that its future success will depend in part on its ability to attract, motivate and retain highly qualified personnel. Many employees hold stock options and/or participate in an employee stock purchase plan. None of the Company's employees is represented by a labor union, and the Company has not experienced any work stoppages. The Company believes that its employee relations are excellent. 18 GLOSSARY AIN (Advanced Intelligent Network)...... Bellcore's set of standards for advanced intelligent services for the telephone networks of Regional Bell Operating Companies. ANSI (American National Standards Institute)........................... The coordinating body for voluntary standards groups within the United States. ANSI is a member of the International Organization for Standardization (ISO). ATM (Asynchronous Transfer Mode)........ A broadband, low-delay, packet-based switching and multiplexing technique. Usable capacity is segmented into fixed-size cells, consisting of header and information fields, allocated to services on demand. BRI (Basic Rate Interface).............. One interface type used to access the Integrated Services Digital Network. The BRI allows two simultaneous calls across a single pair of copper wires. CCITT (International Telephone and Telegraph Consultative Committee).... A United Nations organization which establishes international telecommunications standards. El ..................................... The European telecommunications standard defining circuits that operate at speeds of 2.048 Mbps, similar to T1 lines in the United States. Ethernet................................ A standard set of specifications for a particular type of LAN that employs baseband signalling (single signal on a cable) and has a transmission rate of 10 Mbps. Fast Ethernet........................... 100 Mbps' technology for workstation LANs from the eponymous Fast Ethernet Alliance, which includes 3Com and SynOptics. It has been adopted by the IEEE as the basis for the 100BaseT Ethernet standard. FDDI (Fiber Distributed Data Interface)........................... A standard for operating fiber optic-based LANs at 110 Mbps used for high speed and backbone applications. Frame Relay............................. A variable length packet-based transmission technology that is used to transmit data at speeds up to 2 Mbps. 19 GAN (Global Area Network)............... A network of computers connected across countries. GSM (Global Systems for Mobile)......... The standard for a set of protocols for digital wireless initially deployed in Europe. IN (Intelligent Network)................ An out-of-band, packet switched overlay network to the in-band Public Switched Telephone Network (PSTN). The Intelligent Network minimally consists of SS7-equipped Central Offices (Service Switching Points, or SSPs), packet switches (Signal Transfer Points, or STPs) and databases (Service Control Points, or SCPs). Internet................................ The worldwide system of linked networks that is capable of exchanging mail and data through a common addressing and naming system based on TCP/IP protocols. Intranet................................ A private network that uses Internet software and standards. ISDN (Integrated Services Digital Network)............................. Public digital communications services supporting a wide range of data, voice and image services accessed by standard interfaces integrated with customer control. IS.41................................... One of the Interim Standards for North American mobile applications for digital cellular. LAN (Local Area Network)................ A type of high-speed data communications arrangement in which multiple computer and related products in an office or campus environment are connected by means of a standard transmission medium (typically coaxial cable, twisted-pair wire or optical fiber). MAN (Metropolitan Area Network)......... A high-speed network designed to link together sites in a metropolitan or campus area. The IEEE has defined its 802.6 standard for MANs based on the Distributed Queue Dual Bus technology. Mbps (Megabits per second).............. A measurement unit, equal to 1,048,576 bits per second, used to describe data transfer rates as a function of time. MSC (Mobile Switching Center)........... A switch that coordinates trunk call set-up to and from users in a digital cellular network. 20 Packet Switching........................ A data transmission technique whereby user information is segmented and routed in discrete data envelopes called packets, each with its own appended control information for routing, sequencing and error checking. PCS (Personal Communications Systems)............................. A set of evolving standards and protocols providing for the concept of one number per user and associated advanced intelligent services regardless of location primarily involving mobile communications. PDC (Personal Digital Communications)...................... A set of protocol standards for Japanese digital cellular mobile network promulgated by NEC. Primary Rate Interface (PRI)............ A T1 or E1 circuit used to carry 23 or 30 ISDN calls, respectively. In an ISDN PRI, a single channel is used for signalling for calls placed on all of the other channels in the T1 or E1 circuit. protocol................................ A formal set of standards governing the establishment of a communications link and controlling the format and timing of transmissions between two devices. RBOCs (Regional Bell Operating Companies)........................... (1) One of seven telephone companies created by the AT&T divestiture. (2) The acronym for the local telephone companies created in 1984 as part of the break-up of AT&T. signalling.............................. The process by which digital information is exchanged to establish, control and manage connections in a network. SCE (Service Creation Environments)..... An application in the Advanced Intelligent Network which allows for the development and customization of new telephone services, utilizing Advanced Intelligent Network (AIN) "building blocks". Using customized Service Information Blocks (SIBs) and "triggers", users describe services such as time-of-day routing. These descriptions are loaded into Service Control Points (SCPs) or Service Nodes (SNs) for execution in the network. SCP (Service Control Point)............. A computer database that is accessed by STPs for customer call routing information and other special information required for AIN services. SMDS (Switched Multi-megabit Data Service)............................. A communications service providing high speed, connectionless data transport. 21 SMS (Service Management System)......... A proprietary application which provides the user a maintenance and administration interface to various IN and AIN network elements. SP-LNP (Service Provider Local Number Portability).................. A capability mandated by the Federal Communications Commission in June, 1996 which allows telephone customers to change their local service provider without changing their telephone number. Adding SP-LNP capabilities to the Public Switched Telephone Network requires the introduction of three new network elements and new software capabilities in virtually every existing network element. SS7 (Common Channel Signalling System No. 7)........................ A complex protocol which governs signalling between certain devices in a digital telephone network. SSP (Service Switching Point)........... An SSP is a component of the central office switch that sets up trunk connections. When an SSP identifies an AIN call, it routes a signalling message to the STP and awaits further instructions for call processing. STP (Signal Transfer Point)............. An STP is a switch that handles the signalling messages used to set up telephone calls, queries external databases for routing and processing information and dispatches call handling instructions. T1 ..................................... The North American telecommunications standard defining a circuit that multiplexes and switches 24 channels and operates at speeds of 1.544 Mbps (T3 is the equivalent of 27 T1 circuits). TCP/IP (Transmission Control Protocol/Internet Protocol).......... The common name for the suite of protocols developed by the U.S. Department of Defense in the 1970s to support the construction of world- wide internetworks. TCP and IP are the two best- known protocols in the suite. TCP corresponds to Layer 4 (the transport layer) of the OSI reference model. It provides reliable transmission of data. IP corresponds to layer 3 (the network layer) of the OSI reference model and provides connectionless datagram service. WAN (Wide Area Network)................. A network that extends beyond the distance that can be accommodated by local cabling methods. A WAN typically utilizes public carrier services to connect sites, which may span a city, state, country or the world. 22 xDSL.................................... Another name for an ISDN BRI channel. Operated at the Basic Rate Interface (with two 64 kbps circuit switched channel), the DSL can carry both voice and data signal at the same time, in both directions, as well as the signaling data used for call information and customer data. X.25..................................... A protocol for transfer of information across packet data networks. X.25 was the first packet data technology to be widely implemented. ITEM 2. PROPERTIES. The Company's executive offices, as well as its principal manufacturing and data network diagnostics product engineering and marketing operations, are located in an approximate 58,000 square-foot facility in Calabasas, California under a lease which expires in November 2004 with an option to extend for an additional five years. The Company also occupies a 68,000 square-foot facility in Morrisville, North Carolina under a lease expiring in March 2003, primarily for engineering, product development, customer support and regional sales activities for its network switching and intelligent network diagnostics products. The Company also has eight regional sales offices occupying an aggregate of approximately 10,600 square feet under leases expiring between 1997 and 1998 in Milbrae, California; Boulder, Colorado; Lombard, Illinois; Kansas City, Missouri; Iselin, New Jersey; Irving, Texas; Arlington, Virginia; and Ottawa, Canada. The Company's Japanese subsidiary occupies approximately 10,600 square feet in Tokyo under leases expiring between April 1997 and November 1997, and the Company's India subsidiary occupies approximately 3,500 square feet under a lease expiring in December 1999. The Company believes that its existing facilities will be adequate to meet its needs at least through 1997. The Company believes it will be able to obtain additional space when and as needed on acceptable terms. ITEM 3. LEGAL PROCEEDINGS. Inapplicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded over-the-counter on the Nasdaq National Market under the symbol TKLC. The following table sets forth the high and low closing sales prices for the Common Stock, as reported on the Nasdaq National Market. As of March 3, 1997, there were 197 record holders of the Company's Common Stock based on information provided by the Company's transfer agent. High Low --------- ---------- 1995 ---- First Quarter......................... $ 23.13 $ 15.50 Second Quarter........................ 24.50 18.25 Third Quarter......................... 26.75 21.50 Fourth Quarter........................ 22.50 10.25 1996 ---- First Quarter......................... $ 14.38 $ 9.50 Second Quarter........................ 17.50 12.63 Third Quarter......................... 14.75 9.00 Fourth Quarter........................ 17.25 12.00 The Company has never paid a cash dividend. It is the present policy of the Company to retain earnings to finance the growth and development of its business and, therefore, the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 24 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The statement of operations data included in the selected consolidated financial data set forth below for the years ended December 31, 1996, 1995 and 1994 and the balance sheet data set forth below as of December 31, 1996 and 1995 are derived from, and are qualified in their entirety by reference to, the Company's audited consolidated financial statements and notes thereto. The statement of operations data set forth below for the years ended December 31, 1993 and 1992 and the balance sheet data set forth below as of December 31, 1994, 1993 and 1992 are derived from audited consolidated financial statements of the Company which are not included herein. FIVE-YEAR SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994 1993 1992 ------------------------------------------------------------ (thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues ............................................................ $ 72,126 $ 75,276 $ 61,189 $ 46,856 $ 58,090 Income (Loss) before provision for income taxes ................................................. (284) 8,450 5,711 (17,101) (6,693) Net income (loss) ................................................... (2,511) 6,311 4,460 (18,543) (8,296) Earnings (Loss) per share:(1) Primary ........................................................ $ (0.21) $ 0.52 $ 0.47 $ (2.23) $ (1.01) Fully diluted .................................................. (0.21) 0.52 0.43 (2.23) (1.01) Weighted average number of shares outstanding:(1) Primary ........................................................ 11,775 12,060 9,550 8,314 8,178 Fully diluted .................................................. 11,775 12,063 10,360 8,314 8,178 BALANCE SHEET DATA (at December 31): Cash and investments ................................................ $ 44,244 $ 43,609 $ 7,653 $ 3,669 $ 10,067 Working capital ..................................................... 43,627 56,983 13,466 3,215 15,471 Total assets ........................................................ 82,518 80,488 34,409 28,139 38,403 Long-term obligations ............................................... -- 380 654 323 204 Shareholders' equity ................................................ 61,751 63,607 18,720 11,693 28,751 - --------------- (1) Earnings (Loss) per share and weighted average number of shares outstanding have been retroactively adjusted to reflect the two-for-one stock split effected March 17, 1995.
25 ITEM 7. 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 this Annual Report on Form 10-K. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods. CORPORATE ORGANIZATION The Company is organized into three divisions: Data Network Diagnostics, Intelligent Network Diagnostics and Network Switching. The Data Network Diagnostics Division and Intelligent Network Diagnostics Division develop and supply diagnostic products for the communications marketplace. These products, primarily the Chameleon family of products for the Data Network Diagnostics Division and the MGTS products for the Intelligent Network Diagnostics Division, are the foundation of the Company's business and the source of the technology and expertise that has facilitated the Company's entry into other markets. The Network Switching Division capitalized on the Company's expertise in SS7 to develop the EAGLE, a high-capacity packet switching platform. 26 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that statement of operations items bear to total revenues: PERCENTAGE OF REVENUES ------------------------------------------------------ FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 --------------- --------------- --------------- Revenues ................................................................. 100.0% 100.0% 100.0% Cost of goods sold .................................................. 37.0 33.3 33.3 --------------- --------------- --------------- Gross profit ............................................................. 63.0 66.7 66.7 Research and development ............................................ 23.7 20.0 19.6 Selling, general and administrative ................................. 41.4 36.7 36.7 Restructuring ....................................................... 0.4 -- -- --------------- --------------- --------------- Income (Loss) from operations ............................................ (2.5) 10.0 10.4 Interest and other income (expense), net ............................ 2.1 1.2 (1.1) --------------- --------------- --------------- Income (Loss) before provision for income taxes .......................... (0.4) 11.2 9.3 Provision for income taxes .......................................... 3.1 2.8 2.0 --------------- --------------- --------------- Net income (loss) ................................................. (3.5)% 8.4% 7.3% =============== =============== ===============
The following table sets forth, for the periods indicated, the revenues by principal product line as a percentage of total revenues:
PERCENTAGE OF REVENUES ----------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- Data network diagnostics .................................................. 29% 41% 50% Intelligent network diagnostics ........................................... 33 27 22 Network switching ......................................................... 38 32 28 --------------- --------------- --------------- Total .............................................................. 100% 100% 100% =============== =============== ===============
The following table sets forth, for the periods indicated, the revenues by geographic territory as a percentage of total revenues:
PERCENTAGE OF REVENUES ----------------------------------------------------- FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- North America ............................................................. 59% 59% 59% Japan ..................................................................... 22 22 20 Europe .................................................................... 9 9 9 Rest of World ............................................................. 10 10 12 --------------- --------------- --------------- Total .............................................................. 100% 100% 100% =============== =============== ===============
27 1996 COMPARED WITH 1995 Revenues The Company's revenues decreased by $3.2 million, or 4%, during 1996 due to lower sales of data network diagnostics products, partially offset by higher sales of switching and intelligent network diagnostics products. Revenues from data network diagnostics products decreased by 32%, or $9.8 million, to $21.2 million, primarily due to lower sales in all markets for both the Chameleon Open and the Company's older Chameleon products. Revenues from intelligent network diagnostics products increased by 15%, or $3.1 million, to $23.7 million. This increase was primarily driven by strong demand for the Company's MGTS products in the domestic and Japanese markets. Revenues from switching products increased by 15%, or $3.5 million, to $27.2 million due primarily to increased EAGLE STP sales worldwide, particularly internationally. This increase was lower than anticipated principally due to delays in Regional Bell Operating Companies' SS7 network replacement and expansion. In 1996, 26 pairs of EAGLE STPs were sold compared with 28 in 1995. The increased revenues despite lower unit sales reflect a trend towards larger average system sizes, combined with increased service revenues as the EAGLE installed base grows. Revenues in North America decreased by $1.4 million, or 3%, as a result of lower Chameleon product sales, partially offset by higher MGTS and switching product sales. Revenues in Japan decreased by $938,000, or 6%, due to lower sales of Chameleon products and the impact of exchange rate fluctuations on currency translations in 1996, partially offset by strong MGTS product sales. Other international revenues decreased by $862,000, or 6%, primarily due to lower sales of both diagnostic product lines, partially offset by higher switching product sales. The impact of exchange rate fluctuations on currency translations decreased revenues by approximately $2.4 million, or 3%, and increased net loss by $257,000, or 11%. Gross Profit Gross profit as a percentage of revenues decreased from 67% in 1995 to 63% in 1996, due primarily to increased competition in the EAGLE product market and lower sales of higher margin diagnostic products. Changes in the following factors, among others, may affect gross profit: product and distribution channel mix, competition, customer discounts, supply and demand conditions in the electronic components industry, internal manufacturing capabilities and efficiencies, foreign currency fluctuations and general economic conditions. 28 Research And Development Research and development expenses increased by $2.0 million, or 13%, and represented 24% of revenues in 1996, compared to 20% in 1995. The increase was attributable primarily to the hiring of additional personnel in the Network Switching Division, expenses incurred in connection with the Bellcore technical audits of the Company's EAGLE product and higher depreciation expense as a result of equipment acquisitions for EAGLE research and development. 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 develop new products that maintain its technological competitiveness. Selling, General And Administrative Selling, general and administrative expenses increased by $2.2 million, or 8%, and represented 41% of revenues in 1996, compared to 37% in 1995. The increase was attributable primarily to severance charges, recruiting activity and relocation expenses incurred in connection with personnel changes. Restructuring During the third quarter of 1996, the Company recorded restructuring charges amounting to $327,000 which represent severance pay, benefit costs and other costs related to the consolidation of the Company's Ohio research facility into the Company's North Carolina facility. See Note F to Consolidated Financial Statements. Income Taxes Although the Company's pre-tax results showed a loss in 1996, the Company had a tax provision of $2.2 million, compared to $2.1 million and an effective tax rate of 25% in 1995. The provisions for both periods were principally foreign taxes on the income of the Company's Japanese subsidiary. The 1996 provision was impacted by the Company's inability to currently recognize a benefit for its U.S. loss and credits carryforwards, which remain available to reduce future U.S. taxes. In 1995, the Company was able to utilize a portion of its prior years' U.S. loss carryforwards, and consequently provided for taxes on its U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. The Company anticipates that it has sufficient loss and credits carryforwards available in 1997 to offset most of its expected U.S. taxes. However, the Company's overall tax rate is significantly influenced by the level of income derived from its Japanese subsidiary. 29 Interest, Net Net interest income increased by $554,000 primarily as a result of higher average investment balances in 1996. 1995 COMPARED WITH 1994 Revenues The Company's revenues increased by $14.1 million, or 23%, during 1995 due to higher sales of both switching and intelligent network diagnostics products. Revenues from switching products increased by 41% in 1995 to $23.8 million due to growing market acceptance of the Company's EAGLE STP product, particularly in the cellular market. In 1995, 28 pairs of EAGLE STPs were sold compared with 25 in 1994. Revenues from intelligent network diagnostics products increased by 53%, or $7.2 million, to $20.6 million due to higher sales in all markets as a result of increased demand and market acceptance of the Company's MGTS products, particularly internationally. Revenues from data network diagnostics products were flat due to increased Chameleon Open sales offset by lower sales of the Company's older Chameleon products. Revenues in North America increased by $7.7 million, or 21%, as a result of higher switching and MGTS product sales, partially offset by lower Chameleon product sales as a result of slower spending by large equipment suppliers and major carriers in the third and fourth quarters. Revenues in Japan increased by $4.4 million, or 36%, due to higher sales of both diagnostic product lines and the impact of exchange rate fluctuations on currency translations in 1995. Other international revenues grew $2.0 million, or 16%, primarily due to higher sales of both diagnostic product lines, partially offset by lower switching product sales. The impact of exchange rate fluctuations on currency translations increased revenues by approximately $1.5 million, or 2%, and increased net income by $139,000, or 2%. Gross Profit Gross profit as a percentage of revenues was 67% for both 1995 and 1994. Although margins on EAGLE sales were slightly higher than in 1994, this increase was offset by the higher proportion of EAGLE sales as a percentage of total Company sales, as the gross profit percentage on switching products is generally lower than on diagnostic products. Research And Development Research and development expenses increased by $3.1 million, or 26%, in 1995 and represented 20% of revenues for both 1995 and 1994. The dollar increase was attributable 30 primarily to increased headcount, including contractors, and included costs to accelerate certain development programs and the Bellcore audits of the EAGLE product. Selling, General And Administrative Selling, general and administrative expenses increased by $5.2 million, or 23%, in 1995 primarily as a result of increased headcount in customer service, increased sales commissions due to higher revenues, and higher tradeshow and travel expenses to support the increased revenues. Income Taxes In 1995, the Company had an effective tax rate of 25% compared to 22% in 1994. The provisions for both years were principally foreign taxes on the income of the Company's Japanese subsidiary. In both years, the Company was able to utilize a portion of its prior years' U.S. loss carryforwards, and consequently provided for taxes on its U.S. taxable income at the federal alternative minimum tax rate and applicable state tax rates. Interest, Net Net interest income increased by $1.5 million as a result of interest earned on short-term cash investments resulting primarily from proceeds of the Company's public stock offering in 1995. LIQUIDITY AND CAPITAL RESOURCES During 1996, cash and cash equivalents decreased by $26.4 million to $17.2 million, primarily due to a net transfer of approximately $27.0 million to short-term and long-term investments. Operating activities, net of the effects of exchange rate changes on cash, provided $5.5 million, financing activities provided $1.1 million and $6.0 million was used for capital expenditures. Accounts receivable, including amounts due from related parties, decreased by 13% during 1996. The decrease was due primarily to a reduced level of receivables with extended terms at December 31, 1996 compared to December 31, 1995 and a lower concentration of sales in the last month of the year in 1996 compared to 1995. Inventories increased by 26% during 1996 primarily to support increased fourth quarter sales volume. Capital expenditures were $6.0 million during 1996 and represented the planned replacement and addition of equipment principally for research and development, the Company's new facility in North Carolina and sales demonstration. There are currently no significant commitments for capital expenditures; however, the Company expects that its capital expenditures will be at a similar level in 1997, principally for the acquisition of equipment for research and development, sales demonstration and manufacturing operations. 31 Net cash provided by financing activities in 1996 was $1.1 million, which represented $2.1 million in proceeds from the issuance of Common Stock upon the exercise of options and warrants, partially offset by debt and other obligation repayments amounting to $981,000. In September 1996, the Company repaid all of the outstanding borrowings on its $7.5 million line of credit and terminated the credit facility. In October 1996, the Company agreed to terms for a $10 million line of credit with a U.S. bank, collateralized by substantially all of the Company's assets and bearing interest at, or in some cases below, the U.S. prime rate (8.25% at December 31, 1996). There have been no borrowings under this credit facility, which expires June 30, 1998 if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $3.0 million with interest at the Japanese prime rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between May 29, 1997, and March 31, 1998, if not renewed. There have been no borrowings under these lines of credit. The Company's weighted average short-term borrowing rates were 11.6% and 11.5% in 1996 and 1995, respectively. The Company believes that existing working capital, funds generated from operations and its current bank lines of credit are sufficient to satisfy anticipated operating requirements at least through 1997. Foreign Exchange International operations are subject to certain opportunities and risks, including currency fluctuations. In 1996, 1995 and 1994, the percentages by which weighted average exchange rates for the currencies indicated below strengthened (weakened) against the U.S. dollar were as follows: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 --------- --------- --------- Japanese yen................................ (18)% 9% 9 % Canadian dollar............................. 1 % 0% (9)% The change in cumulative translation adjustment in 1996 was due primarily to the weakening of the Japanese yen against the U.S. dollar when comparing the exchange rate at December 31, 1996 to that of December 31, 1995. Exchange gains (losses) are recorded in the period when incurred, and amounted to $(180,000), $(210,000) and $(235,000) in 1996, 1995 and 1994, respectively. Exchange gains and losses include the remeasurement of certain currencies into functional currencies and the settlement of intercompany balances. 32 "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 The statements which are not historical facts contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report on Form 10-K are forward-looking statements that involve certain risks and uncertainties including, but not limited to, competition in the data network diagnostics, intelligent network diagnostics and network switching markets, capital spending patterns of the Company's customers, foreign currency fluctuations, general economic and political conditions, announcements of new products by Tekelec or its competitors, and other risks described in this Annual Report on Form 10-K and in the Company's other Securities and Exchange Commission filings. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the consolidated financial statements of the Company and its subsidiaries included herein and listed in Item 14 (a) of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. 33 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 1997, entitled "Election of Directors" and "Executive Officers" to be filed with the Commission. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 1997, entitled "Election of Directors - Compensation of Directors," "Executive Compensation and Other Information," "Board of Directors and Compensation Committee Reports on Executive Compensation" and "Performance Graph," to be filed with the Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 1997, entitled "Common Stock Ownership of Principal Shareholders and Management," to be filed with the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the section of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 1997, entitled "Certain Relationships and Related Transactions," to be filed with the Commission. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: CONSOLIDATED FINANCIAL STATEMENTS PAGE o Report of Independent Accountants F-1 o Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996 F-2 o Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3 o Consolidated Statements of Cash Flow for each of the three years in the period ended December 31, 1996 F-4 o Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1996 F-5 o Notes to Consolidated Financial Statements F-6 - --------------- PAGE CONSOLIDATED FINANCIAL STATEMENT SCHEDULE o Schedule II Valuation and Qualifying Accounts and Reserves for each of the three years in the period ended December 31, 1996 S-1 Schedules which are not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. LIST OF EXHIBITS 3.1 Amended and Restated Articles of Incorporation(1) 3.2 Bylaws, as amended 35 10.1 Amended and Restated 1984 Stock Option Plan, including forms of stock option agreements(2)(3) 10.2 Amended and Restated Non-Employee Director Equity Incentive Plan, including forms of stock award certificate and nonstatutory stock option agreements(4), as amended February 21, 1996(3) (5) 10.3 1994 Stock Option Plan, including forms of stock option agreements(4), as amended February 4, 1995(6), March 3, 1995 (6) and January 27, 1996(3)(5) 10.4 Retirement Pension Rules of Tekelec Ltd.(1)(3) 10.5 Form of Indemnification Agreement between the Registrant and all directors of the Registrant(3)(7) 10.6 Lease dated as of February 8, 1988 between the Registrant and State Street Bank and Trust Company of California, N.A., not individually, but solely as an Ancillary Trustee for State Street Bank and Trust Company, a Massachusetts banking corporation, not individually, but solely as Trustee for the AT&T Master Pension Trust, covering the Company's principal facilities in Calabasas, California(8) 10.7 Form of International Distributor Agreement(9) and Schedule of Distributors 10.8 Officer Severance Plan, including form of Employment Separation Agreement(3)(10) 10.9* Distributorship Agreement dated September 16, 1994 between the Registrant and AT&T Corp.(11) 10.10* Compensation agreement dated November 22, 1995 between the Registrant and Allan Toomer(3)(12) 10.11 Agreement dated March 26, 1997 between the Registrant and Allan Toomer(3) 10.12 Employee Stock Purchase Plan, including form of subscription agreement(3)(5) 10.13 Consulting Agreement dated August 1, 1996 between the Registrant and Howard Oringer, including forms of Warrant and Confidentiality Agreement(13), and Amendment No. 1 thereto dated November 30, 1996 10.14 Credit Agreement dated October 22, 1996 between the Registrant and Imperial Bank, together with Promissory Note of the Registrant dated October 22, 1996 36 10.15 General Security Agreement dated October 22, 1996 between the Registrant and Imperial Bank 11.1 Statement of Computation of Earnings Per Share 21.1 Subsidiaries of the Registrant 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule - --------------- * Confidential treatment has been granted with respect to portions of this exhibit, and such confidential portions have been deleted and filed with the Commission pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934. (1) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1994. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-48079) filed with the Commission on May 22, 1992. (3) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-82124) filed with the Commission on July 28, 1994. (5) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-05933) filed with the Commission on June 13, 1996. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-60611) filed with the Commission on June 27, 1995. (7) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1987. (8) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for the quarter ended June 30, 1988. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-4123) filed with the Commission on March 19, 1986. 37 (10) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1993. (11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for the quarter ended September 30, 1994. (12) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-15135) for the year ended December 31, 1995. (13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-15135) for the quarter ended September 30, 1996. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed or required to be filed by the Registrant during the quarter ended December 31, 1996. (c) EXHIBITS See the list of Exhibits under Item 14(a)3 of this Annual Report on Form 10-K. (d) FINANCIAL STATEMENT SCHEDULES See the Schedule under Item 14(a)2 of this Annual Report on Form 10-K. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ Allan J. Toomer ------------------------------------ Allan J. Toomer, President Dated: March 31, 1997 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------------------------------- ----------------------------- -------------- /s/ Jean-Claude Asscher Chairman of the Board March 31, 1997 - --------------------------------- Jean-Claude Asscher /s/ Allan J. Toomer President and Director March 31, 1997 - --------------------------------- Allan J. Toomer /s/ Robert V. Adams Director March 31, 1997 - --------------------------------- Robert V. Adams /s/ Daniel L. Brenner Director March 31, 1997 - --------------------------------- Daniel L. Brenner /s/ Howard Oringer Director March 31, 1997 - --------------------------------- Howard Oringer /s/ Jon F. Rager Director March 31, 1997 - --------------------------------- Jon F. Rager /s/ Gilles C. Godin Vice President, Finance and March 31, 1997 - --------------------------------- Chief Financial Officer Gilles C. Godin REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC We have audited the accompanying consolidated balance sheets of Tekelec and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flow, and the financial statement schedule for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tekelec and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents, in all material respects the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Sherman Oaks, California February 5, 1997 F-1 TEKELEC CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- (thousands, except per share data) REVENUES (including sales to related parties of 1996 - $4,130; 1995 - $5,305; 1994 - $3,809) ......................... $ 72,126 $ 75,276 $ 61,189 COSTS AND EXPENSES: Cost of goods sold ................................................... 26,682 25,035 20,388 Research and development ............................................. 17,076 15,054 11,962 Selling, general and administrative .................................. 29,842 27,653 22,466 Restructuring ........................................................ 327 -- -- --------------- --------------- --------------- Total costs and expenses ........................................... 73,927 67,742 54,816 Income (Loss) from operations ............................................. (1,801) 7,534 6,373 Other income (expense): Interest, net ........................................................ 1,693 1,139 (327) Other, net ........................................................... (176) (223) (335) --------------- --------------- --------------- Total other income (expense) ....................................... 1,517 916 (662) --------------- --------------- --------------- Income (Loss) before provision for income taxes ........................... (284) 8,450 5,711 Provision for income taxes ........................................... 2,227 2,139 1,251 --------------- --------------- --------------- NET INCOME (LOSS) .................................................. $ (2,511) $ 6,311 $ 4,460 =============== =============== =============== EARNINGS (LOSS) PER SHARE: Primary ............................................................ $ (0.21) $ 0.52 $ 0.47 Fully diluted ...................................................... (0.21) 0.52 0.43 WEIGHTED AVERAGE NUMBER OF SHARES: Primary ............................................................ 11,775 12,060 9,550 Fully diluted ...................................................... 11,775 12,063 10,360 See notes to consolidated financial statements.
F-2 TEKELEC CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------------- 1996 1995 --------------- --------------- (thousands, except share data) ASSETS CURRENT ASSETS: Cash and cash equivalents ................................................................. $ 17,211 $ 43,609 Short-term investments, at fair value ..................................................... 17,913 -- Accounts and notes receivable, less allowances 1996-- $368; 1995-- $391 .............................................................. 17,026 19,167 Inventories ............................................................................... 8,116 6,423 Amounts due from related parties .......................................................... 2,381 3,053 Prepaid expenses and other current assets ................................................. 1,747 1,232 --------------- --------------- Total current assets .................................................................... 64,394 73,484 Long-term investments, at fair value ........................................................... 9,120 -- Property and equipment, net .................................................................... 8,174 6,107 Other assets ................................................................................... 830 897 --------------- --------------- Total assets ............................................................................ $ 82,518 $ 80,488 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term debt ............................... $ -- $ 570 Trade accounts payable .................................................................... 5,631 3,960 Accrued expenses .......................................................................... 5,989 4,404 Accrued payroll and related expenses ...................................................... 4,027 3,294 Deferred revenues ......................................................................... 3,778 2,908 Current portion of other obligations ...................................................... -- 31 Income taxes payable ...................................................................... 1,342 1,334 --------------- --------------- Total current liabilities ............................................................... 20,767 16,501 Long-term debt ................................................................................. -- 380 --------------- --------------- Total liabilities ....................................................................... 20,767 16,881 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, without par value, 50,000,000 shares authorized; issued and outstanding 1996--12,010,099; 1995-- 11,599,073 .............................. 57,049 54,936 Retained earnings ......................................................................... 3,879 6,390 Cumulative translation adjustments ........................................................ 823 2,281 --------------- --------------- Total shareholders' equity .............................................................. 61,751 63,607 --------------- --------------- Total liabilities and shareholders' equity .............................................. $ 82,518 $ 80,488 =============== =============== See notes to consolidated financial statements.
F-3 TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 --------------- --------------- --------------- (thousands) CASH FLOW FROM OPERATING ACTIVITIES: Net income (loss) .................................................... $ (2,511) $ 6,311 $ 4,460 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................................ 3,842 3,643 4,406 Changes in current assets and liabilities: Accounts and notes receivable ...................................... 1,810 (5,022) (5,522) Inventories ........................................................ (1,840) (2,079) 400 Amounts due from related parties ................................... 672 (1,515) (294) Income taxes receivable ............................................ -- -- 216 Prepaid expenses and other current assets .......................... (564) (567) 427 Trade accounts payable ............................................. 1,776 (188) (304) Accrued expenses ................................................... 1,645 1,346 (703) Accrued payroll and related expenses ............................... 755 (865) 559 Deferred revenues .................................................. 870 1,496 932 Income taxes payable ............................................... 307 810 (150) --------------- --------------- --------------- Total adjustments ................................................ 9,273 (2,941) (33) --------------- --------------- --------------- Net cash provided by operating activities ............................................ 6,762 3,370 4,427 --------------- --------------- --------------- CASH FLOW FROM INVESTING ACTIVITIES: (Increase) Decrease in restricted cash ............................... -- 1,000 (1,000) Purchase of available-for-sale securities ............................ (45,033) -- -- Proceeds from maturity of available-for-sale securities ....................................................... 18,000 -- -- Purchase of property and equipment ................................... (6,008) (4,530) (1,508) (Increase) Decrease in other assets .................................. (17) (305) 222 --------------- --------------- --------------- Net cash (used in) investing activities .......................... (33,058) (3,835) (2,286) --------------- --------------- --------------- CASH FLOW FROM FINANCING ACTIVITIES: Repayments of short-term borrowings ....................................................... (570) (796) (1,878) Proceeds from long-term debt ......................................... -- -- 1,000 Repayment of long-term debt .......................................... (380) (240) (140) Repayments of other obligations ...................................... (31) (323) (235) Proceeds from issuance of common stock and stock option tax benefits ................................................ 2,113 38,996 1,591 --------------- --------------- --------------- Net cash provided by financing activities ........................ 1,132 37,637 338 --------------- --------------- --------------- Effect of exchange rate changes on cash ................................... (1,234) (216) 505 --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents .................................................... (26,398) 36,956 2,984 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR ........................ 43,609 6,653 3,669 --------------- --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF THE YEAR .............................. $ 17,211 $ 43,609 $ 6,653 =============== =============== =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: Interest ........................................................... $ 98 $ 231 $ 343 Income taxes ....................................................... 1,970 1,543 1,131 See notes to consolidated financial statements.
F-4 TEKELEC CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK --------------------------------- RETAINED CUMULATIVE TOTAL NUMBER EARNINGS TRANSLATION SHAREHOLDERS' OF SHARES AMOUNT (DEFICIT) ADJUSTMENTS EQUITY --------------- --------------- --------------- --------------- --------------- (thousands) BALANCE, DECEMBER 31, 1993 ................ 8,530 $ 14,349 $ (4,381) $ 1,725 $ 11,693 Exercise of stock options ............ 493 1,591 -- -- 1,591 Translation adjustment ............... -- -- -- 976 976 Net income ........................... -- -- 4,460 -- 4,460 --------------- --------------- --------------- --------------- --------------- BALANCE, DECEMBER 31, 1994 ................ 9,023 15,940 79 2,701 18,720 Issuance of common stock ............. 2,013 36,520 -- -- 36,520 Exercise of stock options and warrants ....................... 563 2,374 -- -- 2,374 Stock option tax benefits ............ -- 102 -- -- 102 Translation adjustment ............... -- -- -- (420) (420) Net income ........................... -- -- 6,311 -- 6,311 --------------- --------------- --------------- --------------- --------------- BALANCE, DECEMBER 31, 1995 ................ 11,599 54,936 6,390 2,281 63,607 Exercise of stock options and warrants ....................... 411 2,050 -- -- 2,050 Stock option tax benefits ............ -- 63 -- -- 63 Translation adjustment ............... -- -- -- (1,458) (1,458) Net loss ............................. -- -- (2,511) -- (2,511) --------------- --------------- --------------- --------------- --------------- BALANCE, DECEMBER 31, 1996 ................. 12,010 $ 57,049 $ 3,879 $ 823 $ 61,751 =============== =============== =============== =============== =============== See notes to consolidated financial statements.
F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions are eliminated. Certain items shown in the December 31, 1995 and 1994 financial statements have been reclassified to conform with the current period presentation. ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost (first in, first out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method. The estimated useful lives are: Manufacturing and development equipment 3-5 years Furniture and office equipment 5 years Demonstration equipment 3 years Leasehold improvements The shorter of useful life or lease term TECHNOLOGY Product development costs, including costs of purchased and licensed technology incurred to enhance significantly a product that results in the creation and sales of a new generation of products, are capitalized; costs incurred in conceptualization and design of new products are expensed as incurred. F-6 Amortization is based on the greater of related net shipments made during the period to total anticipated net shipments, or the three-year straight-line method. There were no capitalized internally developed software costs in 1996 and 1995. LONG-TERM ASSETS The carrying value of long-term assets is periodically reviewed by management, and impairment losses, if any, are recognized when the expected nondiscounted future operating cash flows derived from such assets are less than their carrying value. PRODUCT WARRANTY COSTS The Company generally warrants its products for one year after sale and provides for estimated future warranty costs at the time revenue is recognized. At December 31, 1996 and 1995, accrued product warranty costs amounted to $1.6 million and $879,000, respectively, and are included in accrued expenses. REVENUE RECOGNITION Revenues from sales of diagnostic products are generally recognized when products are shipped. Revenues from sales of switching products are recognized upon shipment to the customer's final site and satisfaction of related significant Company obligations, if any. Revenues associated with installation are realized upon completion. Extended warranty service revenues are recognized ratably over the warranty period. Engineering service revenues are recognized on delivery or as the services are performed. INCOME TAXES Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Deferred income taxes are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted rates in effect during the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. ADVERTISING Advertising costs are expensed as incurred, and amounted to $620,000, $625,000 and $305,000 for 1996, 1995 and 1994, respectively. TRANSLATION OF FOREIGN CURRENCIES Translation of foreign currencies is accounted for using the local currency as the functional currency of the Company's foreign subsidiaries. All assets and liabilities are translated at current exchange rates while revenues and expenses are translated at average rates in effect for the period. The resulting gains and losses are included in a separate component of shareholders' equity. Gains (losses) on foreign currency transactions are reflected in net income (loss) and amounted to $(180,000), $(210,000) and $(235,000) for 1996, 1995 and 1994, respectively. F-7 STOCK-BASED COMPENSATION In 1996 the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This standard establishes a fair value method for accounting for stock-based compensation plans either through recognition or disclosure. The Company adopted this standard by disclosing the pro forma net income and earnings per share amounts assuming the fair value method was adopted on January 1, 1995. See Note L. EARNINGS (LOSS) PER SHARE Earnings (Loss) per share are computed using the weighted average number of shares outstanding and dilutive common stock equivalents (options and warrants). NOTE B -- RESTRICTED CASH At December 31, 1994, the Company's Japanese subsidiary had $1.0 million of restricted cash included in current assets, which represented cash on deposit at a bank in Japan as collateral for outstanding short-term borrowings in the U.S. under a $2.0 million line of credit. Upon expiration of this facility during 1995, the outstanding loan balance of $1.0 million was paid in full and the line of credit was not renewed. NOTE C -- FAIR VALUE OF INVESTMENTS The Company has short-term investments in corporate debt securities with original maturities of less than 90 days whose carrying amounts approximate their fair values because of their short maturities. These short-term investments are included in cash and cash equivalents, are classified as held-to-maturity securities and amounted to $3.0 million and $35.9 million at December 31, 1996 and December 31, 1995, respectively. At December 31, 1996, the Company also had investments classified as available-for-sale securities included in short-term and long-term investments, consisting of $6.0 million of United States Treasury Notes with maturities of less than one year, $9.1 million of United States Treasury Notes with maturities of between one and two years, and $11.9 million of corporate debt securities with maturities of less than one year. These available-for-sale securities are accounted for at their fair value, and unrealized gains and losses on these securities are reported as a separate component of shareholders' equity. At December 31, 1996, unrealized gains or losses on available-for-sale securities were not significant. NOTE D -- BUSINESS AND CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash, investments and trade receivables. The Company invests its excess cash in interest-bearing deposits with major banks, United States government securities, high-quality commercial paper and money market funds. At times the Company's cash balances may be in excess of the FDIC insurance limits. With respect to trade receivables, the Company sells communications diagnostic and network switching systems worldwide primarily to telephone operating companies, equipment manufacturers and corporations that use its systems to design, install, maintain, test and operate communications equipment and networks. Credit is extended based on an evaluation of each customer's financial condition, and generally collateral F-8 is not required. Credit losses, if any, have been provided for in the financial statements and have been consistently within management's expectations. NOTE E -- RELATED PARTY TRANSACTIONS As of December 31, 1996, the Company's principal shareholder, a director and his family, and a foreign-affiliated company controlled by the director owned an aggregate of approximately 33% of the Company's outstanding stock. The following is a summary of transactions and balances with these affiliates: 1996 1995 1994 ---- ---- ---- (thousands) Product sales ....................................... $4,130 $5,305 $3,809 Purchases of inventory .............................. 125 321 49 Director's fees and expenses ........................ 59 32 15 Due from affiliates ................................. 2,381 3,053 1,538 Due to affiliates ................................... 145 254 41 The amounts due from and to the affiliates are non-interest bearing. In August 1996, the Company entered into a consulting agreement with a director, pursuant to which such director earned $30,000 and received a warrant to purchase 30,000 shares of the Company's Common Stock. This agreement terminated December 31, 1996. See Note P. In January 1994, the Company entered into a six-month consulting agreement with a director pursuant to which such director received $52,000 and a warrant to purchase 20,000 shares of the Company's Common Stock. NOTE F -- RESTRUCTURING During the third quarter of 1996, the Company recorded restructuring charges amounting to $327,000 which represent severance pay and benefit costs for eight terminated employees in research and development and support functions, and other costs related to the consolidation of the Company's Ohio research facility into the Company's North Carolina facility. The costs consisted of the following: (thousands) Severance pay..................................................... $ 250 Other accrued expenses............................................ 57 Property and equipment write-down................................. 20 --------- $ 327 ========= At December 31, 1996, all identified employees had been terminated, and approximately $200,000 of the severance costs and other accrued expenses had been paid. F-9 NOTE G -- INCOME TAXES The provision for income taxes consists of the following: FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------------------------------------- (thousands) CURRENTLY PAYABLE: Federal ....................... $ -- $ 88 $ 133 State ......................... 1 228 202 Foreign ....................... 2,392 2,258 916 DEFERRED: Federal ....................... -- -- -- State ......................... -- -- -- Foreign ....................... (166) (435) -- ----------- ----------- ----------- $ 2,227 $ 2,139 $ 1,251 =========== =========== =========== The primary components of temporary differences which gave rise to deferred taxes at December 31, 1996 and 1995 are: DECEMBER 31, --------------------- 1996 1995 --------------------- (thousands) DEFERRED TAX ASSETS: Net operating loss carryforward ................... $ 9,174 $ 5,191 Foreign tax credit carryforward ................... 918 918 Allowance for doubtful accounts ................... 126 141 Inventory adjustments ............................. 1,029 883 Depreciation and amortization ..................... 205 392 Deferred product development costs ................ 100 -- Research and development credit carryforward ............................. 2,033 1,901 Accrued liabilities ............................... 1,059 681 Warranty accrual .................................. 629 358 Other ............................................. 166 323 -------- -------- Total deferred tax asset .......................... 15,439 10,788 Less, valuation allowance ......................... (14,990) (10,271) -------- -------- Total net deferred tax asset ...................... 449 517 -------- -------- DEFERRED TAX LIABILITIES: Deferred product development costs ................ -- 45 Other ............................................. -- 103 -------- -------- Total deferred tax liability ...................... -- 148 -------- -------- NET DEFERRED TAX ASSET ................................. 449 369 CURRENT PORTION ........................................ 242 224 -------- -------- LONG-TERM PORTION ...................................... $ 207 $ 145 ======== ======== F-10 The valuation allowance for deferred taxes is based on the Company's operating history and management's assessment of various uncertainties related to their future realization. Because realization of deferred tax benefits is dependent upon generating sufficient U.S. taxable income in future years, the amount of the valuation allowance for deferred taxes may be reduced in the near term if sustainable positive U.S. taxable income trends develop. The provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows: FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 --------------------------------------- Federal statutory provision (benefit) at 34% ................ $ (97) $ 2,873 $ 1,942 State taxes, net of federal benefit .......... -- 152 348 Foreign taxes ........................ 785 465 394 Utilization of operating loss carryforwards .............. -- (1,437) (1,571) Loss for which no tax benefit was recorded .................... 1,182 -- -- Temporary differences for which no tax benefit was recorded ..... 252 -- -- Other ................................ 105 86 138 ---------- ---------- ---------- Actual income tax provision .......... $ 2,227 $ 2,139 $ 1,251 ---------- ---------- ---------- Effective tax rate ................... 784.0% 25.3% 21.9% At December 31, 1996, the Company had available federal net operating loss carryforwards of $24.7 million, of which $4.5 million, if utilized, will result in a credit to Common Stock, foreign tax credit carryforwards of $918,000 and research and development credit carryforwards of $2.0 million which will generally expire beginning in the years 2007, 1997 and 2007, respectively. The Company has not provided for federal income taxes on $11.6 million of undistributed earnings of its foreign subsidiaries which have been reinvested in their operations. If these earnings were distributed, net operating loss carryforwards and foreign tax credits available under current law would eliminate the resulting federal income tax liability. F-11 NOTE H -- INVENTORIES The components of inventories are: DECEMBER 31, ------------------------- 1996 1995 ------------------------- (thousands) Raw materials...................................... $ 2,825 $ 3,109 Work in process.................................... 1,869 1,653 Finished goods..................................... 3,422 1,661 --------- ---------- $ 8,116 $ 6,423 ========= ========== NOTE I -- PROPERTY AND EQUIPMENT Property and equipment consist of the following: DECEMBER 31, ------------------------- 1996 1995 ------------------------- (thousands) Manufacturing and development equipment......................... $ 13,520 $ 10,823 Furniture and office equipment..................... 7,300 5,651 Demonstration equipment............................ 4,055 3,406 Leasehold improvements............................. 1,118 1,232 --------- ---------- 25,993 21,112 Less, accumulated depreciation and amortization................... ........... (17,819) (15,005) --------- ---------- $ 8,174 $ 6,107 ========= ========= NOTE J -- BORROWINGS In September 1996, the Company repaid all of the outstanding borrowings on its $7.5 million line of credit and terminated the credit facility. In October 1996, the Company agreed to terms for a $10 million line of credit with a U.S. bank, collateralized by substantially all of the Company's assets and bearing interest at, or in some cases below, the U.S. prime rate (8.25% at December 31, 1996). There have been no borrowings under this credit facility, which expires June 30, 1998 if not renewed. Under the terms of this facility, the Company is required to maintain certain financial ratios and meet certain net worth and indebtedness tests for which the Company is in compliance. The Company's Japanese subsidiary has collateralized yen-denominated lines of credit with Japan-based banks, primarily available for use in Japan, amounting to the equivalent of $3.0 million with interest at the Japanese prime rate (1.625% at December 31, 1996) plus 0.125% per annum which expire between May 31, 1997 and March 31, 1998, if not renewed. There have been no borrowings under these lines of credit. The Company's weighted average short-term borrowing rates were 11.6% and 11.5% in 1996 and 1995, respectively. F-12 NOTE K -- COMMITMENTS AND CONTINGENCIES The Company leases its office and manufacturing facilities together with certain office equipment under operating lease agreements. Lease terms generally range from one to ten years; certain building leases contain options for renewal for additional periods and are subject to increases up to 10% every 24 months. Total rent expense was $2.4 million, $2.4 million and $2.2 million, for 1996, 1995 and 1994, respectively. Minimum annual noncancelable lease commitments at December 31, 1996 are: For The Years Ending December 31, --------------------------------- (thousands) 1997.............................................. $ 1,989 1998.............................................. 1,635 1999.............................................. 1,613 2000.............................................. 1,552 2001.............................................. 1,020 Thereafter........................................ 3,359 ------- $11,168 ======= NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has various stock option plans with maximum terms of ten years under which 5.8 million shares of the Company's Common Stock have been issued or reserved for issuance. The terms of options granted under these Option Plans are determined at the time of grant, generally vest ratably over a three- to five-year period, and in any case the option price may not be less than the fair market value per share on the date of grant. Both incentive stock options and nonstatutory stock options can be issued under the Option Plans. The Company also has Employee Stock Purchase Plans ("ESPP"), with maximum terms of ten years, the latest of which expires in the year 2006 and under which 200,000 shares of the Company's Common Stock have been reserved for issuance. Eligible employees may authorize payroll deductions of up to 10% of their compensation to purchase shares of Common Stock at 85% of the lower of the market price per share at the beginning or end of each six-month offering period. F-13 Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans. Had compensation costs for the Company's stock option and purchase plans been determined based upon the methodology prescribed under SFAS 123, the Company's net income (loss) and earnings (loss) per share would approximate the pro forma amounts below (in thousands except per share data): As Reported Pro forma ------------ --------- Year Ended December 31, 1996: Net loss............................... $ (2,511) $ (3,777) Loss per share......................... (0.21) (0.32) Year Ended December 31, 1995: Net income............................. $ 6,311 $ 5,672 Earnings per share..................... 0.52 0.47 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards in future years are anticipated. A summary of the status of the Company's stock options, as of December 31, 1996, 1995 and 1994, and the changes during the year ended on those dates is presented below (shares in thousands):
1996 1995 1994 --------------------------------------------------------------------------- Wgtd. Avg. Wgtd. Avg. Wgtd. Avg. Shares Exer. Price Shares Exer. Price Shares Exer. Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year .................... 2,338 $ 8.29 2,248 $ 4.32 1,947 $ 3.68 Granted - price equals fair value ................... 612 13.43 635 18.47 1,102 5.20 Granted - price greater than fair value ............. 685 14.22 12 22.50 191 3.68 Exercised ........................................... 345 3.98 470 3.76 408 3.24 Cancelled ........................................... 872 14.22 87 5.78 584 4.39 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at year-end ............................. 2,418 9.74 2,338 8.29 2,248 4.32 ========== ========== ========== ========== ========== ========== Options exercisable at year-end ..................... 980 706 584 Options available for future grant .................. 498 1,088 1,698 Weighted average fair value of options granted during the year: Exercise price equals fair value at grant date .... $ 9.67 $ 13.30 Exercise price greater than fair value at grant date ...................................... $ 4.33 $ 13.05
F-14 The following table summarizes information about stock options outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable ---------------------------------- ----------------------- Wgtd. Avg. Wgtd. Number Remaining Avg. Number Wgtd. Avg. Outstanding Contractual Exercise Outstanding Exercise Range of Exercise Price at 12/31/96 Life Price at 12/31/96 Price - ------------------------------------------------------------------------------------ $1.88 to $ 4.99 969 5.90 $ 3.46 654 $ 3.45 5.00 to 9.99 47 7.06 8.74 18 7.60 10.00 to 14.99 819 8.64 12.60 132 12.65 15.00 to 17.50 583 8.58 16.23 176 16.51 ----------- ----------- 1.88 to 17.50 2,418 7.50 9.74 980 7.12 =========== ===========
The fair value of options granted during 1996 and 1995 is estimated as $3.6 million and $3.3 million, respectively, on the dates of grants using the Black-Scholes option-pricing model with the following assumptions: (i) dividend yield of 0%, (ii) expected volatility of 87% and 85%, respectively, for 1996 and 1995, (iii) weighted average risk-free interest rates of 6.2% and 6.9% for 1996 and 1995, respectively, (iv) weighted average expected life of 4.8 years and 5.1 years for 1996 and 1995, respectively, and (v) assumed forfeiture rate of 64%. During 1996, 1995 and 1994, approximately 62,000, 34,000 and 85,000 shares, respectively, were purchased under the Company's ESPP at weighted average exercise prices of $9.59, $10.95 and $3.07, respectively. At December 31, 1996 and 1995, there were approximately 138,000 and 116,000 shares, respectively, available for future grants, and none available at December 31, 1994. The weighted average fair value of ESPP options granted in 1996 and 1995 were $4.71 and $6.03 per share, respectively. In 1996, the Company granted warrants to purchase 30,000 shares of common stock. The grant date fair value of these warrants was $9.80 per share. See Note P. The Company has a 401(k) tax-deferred savings plan under which eligible employees may authorize from 2% to 12% of their compensation to be invested in employee-elected investment funds managed by an independent trustee. As determined annually by the Board of Directors, the Company may contribute matching funds of up to 50% of the employees' payroll deductions. During 1996, 1995 and 1994, the Company's contributions amounted to $187,000, $167,000 and $122,000, respectively. F-15 NOTE M --GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS The Company operates in one business segment. Transfers between geographic areas are made at prices reflecting market conditions. Geographic segment information including sales and transfers between geographic areas is presented below: FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------------------------------- (thousands) Revenues from unaffiliated customers United States ........................ $ 55,040 $ 55,801 $ 47,722 Japan ................................ 15,773 16,684 12,269 Other ................................ 1,313 2,791 1,198 -------- -------- -------- Total ............................ $ 72,126 $ 75,276 $ 61,189 ======== ======== ======== Transfers between geographic areas United States ........................ $ 5,197 $ 6,060 $ 4,993 Japan ................................ -- -- -- Other ................................ -- -- -- -------- -------- -------- Total ............................ $ 5,197 $ 6,060 $ 4,993 ======== ======== ======== Total revenues United States ........................ $ 60,237 $ 61,861 $ 52,715 Japan ................................ 15,773 16,684 12,269 Other ................................ 1,313 2,791 1,198 Intersegment eliminations ............ (5,197) (6,060) (4,993) -------- -------- -------- Total ............................ $ 72,126 $ 75,276 $ 61,189 ======== ======== ======== Income (Loss) from operations United States ........................ $ (6,437) $ 3,441 $ 4,561 Japan ................................ 4,340 3,395 1,930 Other ................................ 296 698 (118) -------- -------- -------- Total ............................ $ (1,801) $ 7,534 $ 6,373 ======== ======== ======== Identifiable assets United States ........................ $ 67,275 $ 69,741 $ 24,905 Japan ................................ 14,948 10,019 9,056 Other ................................ 295 728 448 -------- -------- -------- Total ............................ $ 82,518 $ 80,488 $ 34,409 ======== ======== ======== U.S. export sales to unaffiliated customers by destination of sale Europe ............................... $ 6,498 $ 7,097 $ 5,636 Other ................................ 8,029 8,184 7,284 -------- -------- -------- Total ............................ $ 14,527 $ 15,281 $ 12,920 ======== ======== ======== NOTE N -- MAJOR CUSTOMERS Sales to Nippon Telegraph and Telephone amounted to 12%, 14% and 13% of revenues in 1996, 1995 and 1994, respectively. Sales to AT&T amounted to 12% of revenues in 1995. F-16 NOTE O -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTERS ------------------------------------------- First Second Third Fourth ------------------------------------------- (thousands, except per share data) For the Years Ended December 31, - ----------------------------------------- 1996 - ----------------------------------------- Revenues ................................ $ 11,860 $ 16,864 $ 19,396 $ 24,006 Gross profit ............................ 7,265 10,123 11,986 16,070 Income (Loss) before provision for income taxes .................................. (3,540) (1,151) 819 3,588 Net income (loss) ....................... (3,968) (1,412) 275 2,594 Earnings (Loss) per share: Primary ............................ $ (0.34) $ (0.12) $ 0.02 $ 0.20 Fully diluted ...................... (0.34) (0.12) 0.02 0.20 1995 - ----------------------------------------- Revenues ................................ $ 18,630 $ 19,500 $ 19,947 $ 17,199 Gross profit ............................ 12,423 12,843 13,796 11,179 Income before provision for income taxes 2,120 2,820 3,252 258 Net income .............................. 1,468 2,050 2,560 233 Earnings per share: Primary ............................ $ 0.14 $ 0.18 $ 0.20 $ 0.02 Fully diluted ...................... 0.13 0.18 0.20 0.02
Tekelec typically operates with a limited backlog, and most of its revenues in each quarter result from orders received in that quarter. Further, Tekelec typically generates one-half or more of its revenues for each quarter in the last month of the quarter. Tekelec establishes its expenditure levels based on its expectations as to future revenues, and if revenue levels were to fall below expectations this would cause expenses to be disproportionately high. Therefore, a drop in near term demand would significantly affect revenues, causing disproportionate reduction in profits or even losses in a quarter. Tekelec's operating results may fluctuate for this reason or as a result of a number of other factors, including general economic and political conditions (such as recessions in the U.S. and Japan), capital spending patterns of Tekelec's customers, F-17 increased competition, variations in the mix of sales, fluctuation in proportion of foreign sales, and announcements of new products by Tekelec or its competitors. NOTE P -- COMMON STOCK At December 31, 1996 and 1995, the Company had warrants outstanding to purchase an aggregate of 40,000 and 20,000 shares of its Common Stock, respectively, as more fully discussed below. In August 1996, pursuant to a consulting agreement between the Company and a director, the Company issued warrants to purchase 30,000 shares of its Common Stock at $9.50 per share to such director. These warrants vested during 1996, and were all outstanding at December 31, 1996. In April 1994, the Company issued warrants to purchase 10,000 shares of its Common Stock at $3.375 per share to one director, all of which were outstanding at December 31, 1995. During 1996, 4,500 of these shares were exercised and the remaining 5,500 were cancelled. In 1992, the Company issued warrants to purchase a total of 20,000 shares of its Common Stock to two directors at $7.5625 per share. These warrants were re-priced to $3.595 per share in 1993, and were exercisable in full at any time prior to January 17, 1997. During 1995, 10,000 of these warrants were exercised, and 10,000 remained outstanding at December 31, 1995 and December 31, 1996. F-18 TEKELEC VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E - -------------------------------------------------------------------------------------------------------------------------- Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period - -------------------------------- --------------- --------------- --------------- --------------- --------------- (thousands) Year ended December 31, 1994: Allowance for doubtful accounts $ 221 $ -- $ 161 $ 64 $ 318 Product warranty ............... 280 819 -- 272 827 Inventory provision ............ 1,089 315 -- 239 1,165 Deferred tax valuation allowance 11,958 -- -- 2,462 9,496 Year ended December 31, 1995: Allowance for doubtful accounts $ 318 $ 120 $ -- $ 47 $ 391 Product warranty ............... 827 581 -- 529 879 Inventory provision ............ 1,165 391 -- 241 1,315 Deferred tax valuation allowance 9,496 775 -- -- 10,271 Year ended December 31, 1996: Allowance for doubtful accounts $ 391 $ -- $ -- $ 23 $ 368 Product warranty ............... 879 1,083 -- 407 1,555 Inventory provision ............ 1,315 704 -- 329 1,690 Deferred tax valuation allowance 10,271 4,719 -- -- 14,990
SCHEDULE II S-1 EXHIBIT INDEX Exhibit Number Description - -------------- ---------------------------------------------------------------- 3.2 Bylaws, as amended 10.7 Schedule of Distributors 10.11 Agreement dated March 26, 1997 between the Registrant and Allan Toomer 10.13 Amendment No. 1 dated November 30, 1996 to Consulting Agreement between the Registrant and Howard Oringer 10.14 Credit Agreement dated October 22, 1996 between the Registrant and Imperial Bank, together with Promissory Note of the Registrant dated October 22, 1996 10.15 General Security Agreement dated October 22, 1996 between the Registrant and Imperial Bank 11.1 Statement of Computation of Earnings Per Share 21.1 Subsidiaries of the Registrant 23.1 Consent of Coopers & Lybrand L.L.P. 27.1 Financial Data Schedule EX-3.2 2 AMENDED BYLAWS EXHIBIT 3.2 BYLAWS for the regulation, except as otherwise provided by statute or the Articles of Incorporation, of TEKELEC a California corporation TABLE OF CONTENTS Section Title Page ARTICLE I. CORPORATE OFFICES 1.1 Principal Office 1 1.2 Other Offices 1 ARTICLE II. SHARES AND SHAREHOLDERS 2.1 Meetings of Shareholders 1 (a) Place of Meetings 1 (b) Annual Meetings 1 (c) Special Meetings 1 (d) Notice of Meetings 2 (e) Adjourned Meeting and Notice Thereof 2 (f) Waiver of Notice 3 (g) Quorum 3 2.2 Action Without a Meeting 3 2.3 Voting of Shares 4 (a) In General 4 (b) Cumulative Voting 4 (c) Election by Ballot 4 2.4 Proxies 4 2.5 Inspectors of Election 5 (a) Appointment 5 (b) Duties 5 2.6 Record Date 5 2.7 Share Certificates 6 (a) In General 6 (b) Two or More Classes or Series 6 (c) Special Restrictions 7 2.8 Lost, Stolen or Destroyed Certificates 7 ARTICLE III. DIRECTORS 3.1 Powers 7 3.2 Number and Qualification of Directors 7 3.3 Election and Term of Office 8 3.4 Removal 8 (a) Removal for Cause 8 (b) Removal without Cause 8 3.5 Vacancies 8 3.6 Resignation 8 3.7 Meetings of the Board of Directors 9 ii Section Title Page (a) Regular Meetings 9 (b) Annual Meeting 9 (c) Special Meetings; Notices; Waiver of Notice 9 (d) Notice of Adjournment 9 (e) Place of Meeting 9 (f) Presence by Conference Telephone Call 9 (g) Quorum 9 3.8 Action Without Meeting 10 3.9 Committees of the Board 10 (a) Membership and Authority 10 (b) Meetings and Action 10 3.10 Fees and Compensation of Directors 11 3.11 Corporate Loans and Guaranties to Directors, Officers and Others 11 ARTICLE IV. OFFICERS 4.1 Officers 12 4.2 Elections 12 4.3 Other Officers 12 4.4 Removal 12 4.5 Resignation 12 4.6 Vacancies 12 4.7 Chairman of the Board 13 4.8 President 13 4.9 Vice Presidents 13 4.10 Secretary 13 4.11 Chief Financial Officer 13 ARTICLE V. RECORDS AND REPORTS 5.1 Books, Records and Reports 14 (a) Books of Account and Reports 14 (b) Annual Report 14 (c) Shareholders' Requests for Financial Reports 14 5.2 Rights of Inspection 15 (a) By Shareholders 15 (b) By Directors 16 ARTICLE VI. MISCELLANEOUS 6.1 Checks, Drafts, Etc. 16 6.2 Authority to Execute Contracts 16 iii Section Title Page 6.3 Representation of Shares of Other Corporations 16 6.4 Indemnification and Insurance 17 6.5 Employee Stock Purchase Plans 18 6.6 Construction and Definitions 19 6.7 Reimbursement of Disallowed Compensation 19 ARTICLE VII. AMENDMENTS 7.1 Power of Shareholders 19 7.2 Power of Directors 19 iv BYLAWS for the regulation, except as otherwise provided by statute or the Articles of Incorporation of TEKELEC Article I. General Provisions. Section 1.1. Principal Office. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside of such state and the corporation has one or more business offices in such state, then the Board of Directors shall fix and designate a principal business office in the State of California. Section 1.2. Other Offices. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. Article II. Shares and Shareholders. Section 2.l. Meetings of Shareholders. (a) Place of Meetings. Meetings of shareholders shall be held at any place within or without the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. (b) Annual Meetings. An annual meeting of the shareholders of the corporation shall be held on the second Thursday in June of each year or at such other date and time as may be designated by the Board of Directors; provided, however, that should said day fall upon a legal holiday, the annual meeting of shareholders shall be held at the same time on the next day thereafter ensuing which is a full business day. At each annual meeting directors shall be elected, and any other proper business may be transacted. (c) Special Meetings. Special meetings of the shareholders may be called by the Board of Directors, the chairman of the board or the president, or by the holders of shares entitled to cast not less than 10% of the votes at the meeting. Upon request in writing to the chairman of the board, the president, any vice president or the secretary by any person (other than the Board) entitled to call a special meeting of shareholders, such officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, which time shall be not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the persons entitled to call the meeting may give the notice. (d) Notice of Meetings. Notice of any shareholders' meeting shall be given not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote at such meeting. Such notice shall state the place, date and hour of the meeting and (i), in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii), in the case of an annual meeting, those matters which the Board, at the time of the giving of the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. If any action within the scope of Section 310 (entitled "Transactions Between Corporations and Directors or Corporations Having Interrelated Directors"), 902 (entitled "Amendments After Issuance of Shares"), 1201 (entitled "Shareholder Approval -- Abandonment -- Attack on Validity of Reorganization"), 1900 (entitled "Authorization for Voluntary Dissolution") or 2007 (entitled "Plan of Distribution -- Demand for Cash Payment") of the California General Corporation Law is proposed to be taken at any meeting, the notice shall also state the general nature of such action. Notice of a shareholders' meeting or any report shall be given to each shareholder either personally or by first-class mail, or, in the case of a corporation with outstanding shares held of record by 500 or more persons on the record date for the shareholders' meeting, notice may be sent by third-class mail, or other means of written communication, addressed to such shareholder at the address of such shareholder appearing on the books of the corporation or given by such shareholder to the corporation for the purpose of notice. If no such address appears or is given, notice shall and will be deemed to be given at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice executed by the secretary, assistant secretary or any transfer agent shall be prima facie evidence of the giving of such notice or report. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. (e) Adjourned Meeting and Notice Thereof. Any annual or special meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy whether or not a quorum is present. When a shareholders' meeting is adjourned to another time or place, except as provided below, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. No other business may be transacted at the adjourned meeting other than as set forth in this paragraph. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. (f) Waiver of Notice. The transactions of any annual or special meeting of shareholders, however called and noticed and wherever held, are as valid as though had at a meeting duly held 2 after regular call and notice, if a quorum is present either in person or by proxy and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Such waiver of notice, consent or approval need not specify the nature of any action proposed to be taken or taken at the meeting other than action within the scope of Section 310 (entitled "Transactions Between Corporations and Directors or Corporations Having Interrelated Directors"), 902 (entitled "Amendments After Issuance of Shares"), 1201 (entitled "Shareholder Approval -- Abandonment -- Attack on Validity of Reorganization"), 1900 (entitled "Authorization for Voluntary Dissolution") or 2007 (entitled "Plan of Distribution -- Demand for Cash Payment") of the California General Corporation Law, unless such action was unanimously approved by the shareholders entitled to vote. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting also shall constitute a waiver of notice of, and presence, at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the General Corporation Law to be included in the notice but not so included, if such objection is expressly made at the meeting. (g) Quorum. The presence in person or by proxy of the persons entitled to vote a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business at such meeting. Except as provided herein, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation of the corporation. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, provided that any action taken (other than adjournment) must be approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted other than as set forth in this paragraph. Section 2.2. Action Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Notwithstanding the foregoing and subject to Section 3.5 hereof, directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Unless the consents of all shareholders entitled to vote have been solicited in writing, (a) notice of any shareholder approval pursuant to Section 310 (entitled "Transactions Between Corporations and Directors or Corporations Having Interrelated Directors"), 902 (entitled "Amendments After Issuance of Shares"), 1201 (entitled "Shareholder Approval -- Abandonment -- Attack on Validity of Reorganization"), 1900 (entitled "Authorization for Voluntary Dissolutions") or 2007 (entitled "Plan of Distribution -- Demand for Cash Payment") of the California General 3 Corporation Law without a meeting by less than unanimous written consent shall be given at least 10 days before the consummation of the action authorized by such approval, and (b) prompt notice shall be given of any other corporate action approved by the shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the same manner as notice of a shareholders' meeting. Section 2.3. Voting of Shares. (a) In General. Except as otherwise provided in the Articles of Incorporation and subject to Subparagraph (b) hereof, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Except as provided herein, the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation of the corporation. (b) Cumulative Voting. At any shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such the shareholder normally is entitled to cast) unless such candidate or candidates' names have been placed in nomination prior to the voting and a shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders entitled to vote may cumulate their votes for candidates in nomination and give any candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. In any election of directors, the candidates receiving the highest number of affirmative votes up to the number of directors to be elected are elected. (c) Election by Ballot. The shareholders' vote may be by voice vote or ballot; provided, however, that any election for directors must be by ballot if a shareholder demands election by ballot at the meeting and before the voting begins. Section 2.4. Proxies. Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares by a written proxy signed by such person and filed with the secretary of the corporation. A proxy shall be deemed signed by such person if such person's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by such person or such person's attorney in fact. No proxy shall be valid after the expiration of 11 months from the date of the proxy unless otherwise provided in the proxy. A valid proxy which does not state that it is irrevocable shall continue in full force and effect until revoked by the person executing it before the vote pursuant to that proxy or unless written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted. Such revocation of a revocable proxy may be effected by a writing delivered 4 to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the California General Corporation Law. Section 2.5. Inspectors of Election. (a) Appointment. In advance of any meeting of shareholders the Board of Directors may appoint inspector(s) of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If inspectors are to be appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) Duties. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; receive votes, ballots or consents; hear and determine all challenges and questions in any way arising in connection with the right to vote; count and tabulate all votes or consents; determine when the polls shall close; determine the result; and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. Section 2.6. Record Date. In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. If no record date is fixed: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any 5 adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. Shareholders at the close of business on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or by agreement or in the California General Corporation Law. Section 2.7. Share Certificates. (a) In General. The corporation shall issue a certificate or certificates representing shares of its capital stock. A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. Each certificate so issued shall be signed in the name of the corporation by the chairman or vice chairman of the Board of Directors or the president or a vice president and by the chief financial officer or the treasurer or an assistant treasurer or the secretary or an assistant secretary, shall state the name of the record owner thereof and shall certify the number of shares and the class or series of shares represented thereby. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer,, transfer agent or registrar at the date of issue. (b) Two or More Classes or Series. If the shares of the corporation are classified or if any class of shares has two or more series, there shall appear on the certificate one of the following: (1) A statement of the rights, preferences, privileges and restrictions granted to or imposed upon each class or series of shares authorized to be issued and upon the holders thereof; (2) A summary of such rights, preferences, privileges and restrictions with reference to the provisions of the Articles of Incorporation and any certificates of determination establishing same; or (3) A statement setting forth the office or agency of the corporation from which shareholders may obtain, upon request and without charge, a copy of the statement mentioned in Subparagraph (1) above. (c) Special Restrictions. There shall also appear on the certificate (unless stated or summarized under Subparagraph (1) or (2) of Subparagraph (b) above) the statements required by all of the following clauses to the extent applicable: (1) The fact that the shares are subject to restrictions upon transfer; (2) If the shares are assessable, a statement that they are assessable; 6 (3) If the shares are not fully paid, a statement of the total consideration to be paid therefor and the amount paid thereon; (4) The fact that the shares are subject to a voting agreement or an irrevocable proxy or restrictions upon voting rights contractually imposed by the corporation; (5) The fact that the shares are redeemable; and (6) The fact that the shares are convertible and the period for conversion. Section 2.8. Lost, Stolen or Destroyed Certificates. Where a certificate has been lost, destroyed or wrongfully taken, the corporation may issue a new certificate in place of the original if the owner: (i) so requests before the corporation has notice that the certificate has been acquired by a bona fide purchaser; and (ii) files with the corporation, if so requested by the Board of Directors, a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of loss, theft or destruction of any such certificate or the issuance of such new certificate. Except as above provided, no new certificate for shares shall be issued in lieu of an old certificate unless the corporation is ordered to do so by the superior court in an action brought under Section 419(b) of the California General Corporation Law. Article III. Directors. Section 3.1. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Section 3.2. Number and Qualification of Directors. The number of directors of this corporation shall not be less than five (5) nor more than nine (9). The exact number of directors shall be five (5) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the Board of Directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of two-thirds (2/3) of the outstanding shares entitled to vote; provided however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds (16 2/3) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). Section 3.3. Election and Term of Office. The directors shall be elected at each annual meeting of shareholders. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 7 Section 3.4. Removal. (a) Removal for Cause. The Board of Directors shall have the power to declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. (b) Removal without Cause. Any or all of the directors may be removed without cause if such removal is approved by the vote of a majority of the outstanding shares entitled to vote, except that no director may be removed (unless the entire board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the directors' most recent election were then being elected. Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term of office. Section 3.5. Vacancies. A vacancy or vacancies in the Board of Directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. Except for a vacancy created by the removal of a director, which vacancy may be filled only by approval of the shareholders, vacancies on the Board of Directors may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the expiration of the term for which elected and until his successor is elected and qualified. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. If any such election is by written consent, other than to fill a vacancy created by removal, the consent of a majority of the outstanding shares entitled to vote is required. If any such election is by written consent to fill a vacancy created by removal, the unanimous consent of all shares entitled to vote for the election of directors is required. Section 3.6. Resignation. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such registration. If the registration is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 3.7. Meetings of the Board of Directors. (a) Regular Meetings. Regular meetings of the Board of Directors may be held without notice if the time and place of such meetings are fixed by these bylaws or the Board of Directors. (b) Annual Meeting. Immediately following each annual meeting of shareholders the Board of Directors shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Notice of such meetings is hereby dispensed with. (c) Special Meetings; Notices; Waiver of Notice. Special meetings of the Board of Directors may be called at any time by the chairman of the board or the president or by any vice president, 8 the secretary or any two directors. Special meetings shall be held upon ten days' notice by first class mail or 72 hours' notice delivered personally or by telephone or telegraph. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A notice, or waiver of notice, need not specify the purpose of any regular or special meeting of the Board of Directors. (d) Notice of Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than 24 hours, in which case notice of such adjournment to another time and place shall be given as provided herein prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. (e) Place of Meeting. Meetings of the Board may be held at any place within or without the State of California which has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, then such meeting shall be held at the principal executive office of the corporation or such other place designated by resolution of the Board of Directors. (f) Presence by Conference Telephone Call. Any meeting, regular or special, of the Board of directors may be held through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Such participation constitutes presence in person at such meeting. (g) Quorum. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business except to adjourn. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, subject to the provisions of Sections 310 (entitled "Transactions Between Corporations and Directors or Corporations Having Interrelated Directors"), 311 (entitled "Executive Committees") and 317(e) (relating to indemnification of corporate agents) of the California General Corporation Law, other applicable law and the Articles of Incorporation. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 3.8. Action Without Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all members of the Board of Directors shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. 9 Section 3.9. Committees of the Board. (a) Membership and Authority. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each constituting of two or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of any committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors, except with respect to: (1) The approval of any action which also requires, under the California General Corporation Law, shareholders' approval or approval of the outstanding shares; (2) The filling of vacancies on the Board of Directors or in any committee; (3) The fixing of compensation of the directors for serving on the Board of Directors or on any committee; (4) The amendment or repeal of bylaws or the adoption of new bylaws; (5) The amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable; (6) A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range set forth in the corporation's Articles of Incorporation or determined by the Board of Directors; and (7) The appointment of other committees of the Board of Directors or the members thereof. (b) Meetings and Action. The provisions of Section 3.7 shall apply also to committees of the Board of Directors and action by such committees, with such changes as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee; and notice of special committee meetings shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the governing of any committee not inconsistent with these bylaws. Section 3.10. Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 3.10 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. 10 Section 3.11. Corporate Loans and Guaranties to Directors, Officers and Others. (a) The corporation may make a loan of money or property to, or guarantee the obligation of, any director or officer of the corporation or of its parent if the transaction, or an employee benefit plan authorizing the loans or guaranties after disclosure of the right under such a plan to include officers or directors, is approved by a majority of the shareholders entitled to act thereon. (b) The corporation may make loans of money or property to, or guarantee the obligations of, any officer of the corporation, whether or not a director, or an employee benefit plan authorizing the loan or guaranty provided that (1) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (2) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the Board of Directors, and (3) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. (c) The corporation shall not make any loan of money or property to, or guarantee the obligation of, any person upon the security of shares of the corporation or of its parent if the corporation's recourse in the event of default is limited to the security for the loan or guaranty, unless the loan or guaranty is adequately secured without considering these shares, or the loan or guaranty is approved by a majority of the shareholders entitled to act thereon. (d) Notwithstanding Subparagraph (a) above, a corporation may advance money to a director or officer of the corporation or of its parent for any expenses reasonably anticipated to be incurred in the performance of the duties of the director or officer, provided that in the absence of the advance the director or officer would be entitled to be reimbursed for the expenses by the corporation, its parent, or any subsidiary. (e) The provisions of Subparagraph (a) above do not apply to the payment of premiums in whole or in part by a corporation on a life insurance policy on the life of a director or officer so long as repayment to the corporation of the amount paid by it is secured by the proceeds of the policy and its cash surrender value. (f) This Section 3.11 does not apply to any of the following: (1) any transaction, plan or agreement permitted under Section 408 of the California General Corporation Law; or (2) any loan or guaranty made by a corporation that makes loans or guaranties in the ordinary course of its business if statutes or regulations pertaining to the corporation expressly regulate the making by the corporation of loans to its officers or directors or the undertaking of guaranties of the obligations of its officers or directors. (g) For the purposes of Subparagraph (a) and (c) of this Section 3.11, "approval by a majority of the shareholders entitled to act" means either (1) written consent of a majority of the outstanding shares without counting as outstanding or consenting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to this approval, (2) the affirmative vote of a majority of the shares present and voting at a duly held meeting at which a quorum is otherwise present, without counting for purposes of the vote as either present or voting any shares owned by any officer or director eligible to participate in the plan or transaction that is subject to the approval, or (3) the unanimous vote or written consent of the shareholders. In the case of a corporation which has more than one class or series of shares outstanding, the "shareholders entitled 11 to act" within the meaning of this section includes only holders of those classes or series entitled under the Articles of Incorporation to vote on all matters before the shareholders or to vote on the subject matter of this section, and includes a requirement for separate class or series voting, or for more or less than one vote per share, only to the extent required by the Articles of Incorporation. Article IV. Officers. Section 4.1. Officers. The officers of the corporation shall consist of a chairman of the board or a president, or both, a secretary, a chief financial officer and such additional officers as stated in these bylaws or determined by the Board of Directors in accordance with Section 4.3 of these bylaws and as may be necessary to enable the corporation to sign instruments and share certificates. Any number of offices may be held by the same person. Section 4.2. Elections. All officers of the corporation, except such officers as may be otherwise appointed in accordance with Section 4.3, shall be chosen by the Board of Directors, and serve at the pleasure of the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. Section 4.3. Other Officers. The Board of Directors, at its discretion, may appoint, or empower the president to appoint, one or more vice presidents, one or more assistant secretaries, a treasurer, one or more assistant treasurers or such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as provided in these bylaws or as the Board of Directors may from time to time determine. Section 4.4. Removal. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors or, except in the case of an officer chosen by the Board of Directors, by an officer upon whom such power of removal may be conferred by the Board of Directors. Section 4.5. Resignation. Any officer may resign at any time by giving written notice to the Board of Directors or to the president or the secretary of the corporation without prejudice to the rights, if any, of the corporation under any contract to which such officer is a party. Any such resignation shall take effect on the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.6. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office. Section 4.7. Chairman of the Board. The chairman of the board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors. If there is no president, the chairman of the board shall in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 4.8 below. 12 Section 4.8. President. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if there be such an officer, the president shall be chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and affairs of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the Board of Directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. Section 4.9. Vice Presidents. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these bylaws, the president or chairman of the board. Section 4.10. Secretary. The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses,, the number of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody. The secretary shall not be deemed an executive officer of the corporation and shall be limited in his responsibilities and authority to the types of ministerial acts described in this Section 4.10 and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these bylaws. Section 4.11. Chief Financial Officer. The chief financial officer shall have general supervision, direction and control of the financial affairs of the corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these bylaws. In the absence of a named treasurer, the chief financial officer shall be authorized and empowered to sign as treasurer in any case where such officer's signature is required. The chief financial officer shall keep or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the corporation, including its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. 13 The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these bylaws. Article V. Records and Reports. Section 5.1. Books, Records and Reports. (a) Books of Account and Records. The corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, the Board and committees of the Board and shall keep at its principal executive office, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each. Such minutes shall be kept in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form. (b) Annual Report. The annual report to shareholders referred to in Section 1501(a) of the California General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the shareholders of the corporation as the Board considers appropriate. In conformity with Section 1501 of the California General Corporation Law, if this corporation has 100 or more shareholders of record, an annual report shall be sent to the shareholders of this corporation not later than 120 days after the close of the fiscal year and at least 15 (or, if sent by third-class mail, 35) days prior to the annual meeting of shareholders to be held during the next fiscal year. This report shall contain a balance sheet as of the end of that fiscal year and an income statement and statement of changes in financial position for that fiscal year, accompanied by a report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall also include such further statements required by law applicable to the corporation from time to time. (c) Shareholders' Requests for Financial Reports. If no annual report for the last fiscal year has been sent to the shareholders, the corporation shall, upon the written request of any shareholder made more than 120 days after the close of such fiscal year, deliver or mail to the shareholder making the request within 30 days thereafter the same financial statements required by Section 1501(a) of the California General Corporation Law for that year. Any shareholder or shareholders holding at least five percent of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than 30 days prior to the date of the request and a balance sheet of the corporation as of the end of the period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in Section 1501(a) of the California General Corporation Law for the last fiscal year. The statements shall be delivered or mailed to the person making the request within 30 days after receipt thereof. A copy of the statements shall be kept on file in the principal office of the corporation for 12 months 14 and it shall be exhibited at all reasonable times to any shareholder demanding an examination of the statements or a copy shall be mailed to such shareholder upon demand. The quarterly income statements and balance sheets referred to in this Section 5.1(c) shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. The corporation also shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semiannual or quarterly income statement which it has prepared and a balance sheet as of the end of the period. Section 5.2. Rights of Inspection. (a) By Shareholders. (1) Record of Shareholders. Any shareholder or shareholders holding at least five percent in the aggregate of the outstanding voting shares of the corporation or who hold at least one percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the corporation shall have an absolute right to do either or both of the following: (i) inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the corporation or (ii) obtain from the transfer agent for the corporation, upon written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the names and addresses of the shareholders, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five business days after demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection and copying by a shareholder or holder of a voting trust certificate at any time during usual business hours, upon written demand on the corporation, for a purpose reasonably related to such holder's interests as a shareholder or holder of a voting trust certificate. Any inspection and copying under Section 5.2(a) may be made in person or by agent or attorney. (2) Accounting Books and Records. The accounting books and records and minutes of proceedings of the shareholders, the Board of Directors and the committees of the Board of Directors shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. This right of inspection shall also extend to the records of each subsidiary of the corporation. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. 15 (3) Bylaws. The corporation shall keep at its principal executive office in this state, or if its principal executive office is not in this state at its principal business office in this state, the original or a copy of its bylaws, as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state the corporation shall upon the written request of any shareholder furnish to such shareholder a copy of the bylaws as amended to date. (b) By Directors. Every director of the corporation shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Article VI. Miscellaneous. Section 6.1. Checks, Drafts, Etc. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the corporation shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 6.2. Authority to Execute Contracts. The Board of Directors may authorize any officer or officers or agent or agents to enter into any contract or execute any instrument in the name of or on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 6.3. Representation of Shares of Other Corporations. The chairman of the board, if any, the president or any vice president and the secretary or assistant secretary of the corporation are authorized to vote, represent and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 6.4. Indemnification and Insurance. (a) For the purposes of this Section 6.4, "director" means any person who is or was a director of the corporation, or is or was serving at the request of the corporation as a director of another foreign or domestic corporation, or was a director of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Subparagraph (d) or (e)(3) of this Section 6.4. 16 (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was a director of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and with such care, including reasonable inquiry, as an ordinary prudent person in a like position would use under similar circumstances. No indemnification shall be made under this Subparagraph (c): (1) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for the expenses which such court shall determine; (2) Of amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval; or (3) Of expenses incurred in defending a threatened or pending action which is settled or otherwise disposed of without court approval. (d) To the extent that a director of the corporation has been successful on the merits on defense of any proceeding referred to in Subsection (b) or (c) above or in defense of any claim, issue or matter therein, the director shall be indemnified against expenses actually and reasonably incurred by the director in connection therewith. (e) Except as provided in Subsection (d) above, any indemnification shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the director is proper in the circumstances because the director has met the applicable standard of conduct set forth in Subsection (b) or (c) above, by: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (2) Approval of the shareholders, with the shares owned by the person to be 17 indemnified not being entitled to vote thereon; or (3) The court in which such proceeding is or was pending upon application made by the corporation or the director or the attorney or other person rendering services in connection with the defense, whether or not such application by the director, attorney or other person is opposed by the corporation. Upon request by a director for indemnification, the Board of Directors shall undertake to make a reasonable and prompt determination concerning the propriety of indemnification of the director and, in the event no quorum of disinterested directors is available, shall direct that the matter be considered at the next duly held meeting of shareholders at which a quorum is present. (f) Expenses incurred in defending any proceeding shall be advanced by the corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount unless it shall be determined ultimately that the director is entitled to be indemnified as authorized in this section. Notwithstanding the foregoing, no advance shall be made by this corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors that, based upon the facts known to the Board at the time such determination is made, such person acted in bad faith and in a manner that such person did not believe to be in the best interest of the corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Board reasonably determines that such person deliberately breached his duty to the corporation or its shareholders. (g) The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of this section. Section 6.5. Employee Stock Purchase Plans. The corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the corporation or a subsidiary or parent thereof or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. A stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment, an option or obligation on the part of the corporation to repurchase the shares upon termination of employment, subject to the provisions of the California General Corporation Law, restrictions upon transfer of the shares and the time limits of and termination of the plan. Section 6.6. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law 18 shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. Section 6.7. Reimbursement of Disallowed Compensation. Any payments made to an officer or director of the corporation including, but not limited to, payments of compensation, interest, rent or reimbursement for expenses, which payments are disallowed to the corporation in whole or in part by the Internal Revenue Service as a deductible business expense, shall at the option of the corporation, be reimbursed by such officer or director to the corporation to the full extent of the amount so disallowed. Any officer or director of the corporation who shall have received payment of any such amounts so disallowed shall promptly, on demand, reimburse the corporation for the same. The corporation may withhold the amount of any such disallowance from the future compensation or other payments which may be due or become due to such officer or director if he does not reimburse the corporation on demand. Article VII. Amendments. Section 7.1. Power of Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote or by the written consent of such shareholders, except as otherwise provided by law or by the Articles of Incorporation. Section 7.2. Power of Directors. Subject to the right of shareholders as provided in Section 7.1 to adopt, amend or repeal bylaws, any bylaw may be adopted, amended or repealed by the Board of Directors other than a bylaw or amendment thereof changing the authorized number of directors, if such number is fixed, or the maximum-minimum limits thereof, if an indefinite number. 19 CERTIFICATE OF SECRETARY THIS IS TO CERTIFY: That I am the duly elected, qualified and acting Secretary of Tekelec, and that the foregoing bylaws, comprising nineteen (19) pages, were adopted as the bylaws of said corporation as of the lst day of February, 1987, by the Board of Directors of said corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 30th day of November, 1987. /s/ RONALD W. BUCKLY ---------------------------------------- Ronald W. Buckly, Secretary [SEAL] TEKELEC CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected, qualified and acting Secretary of Tekelec, a California corporation (the "Company"), and that, pursuant to resolutions of the Board of Directors of the Company at a meeting duly held on December 6, 1987, the following amendment to the Bylaws of the Company was adopted: Section 6.4. of Article VI was amended to read in its entirety as follows: Section 6.4. Indemnification and Insurance. (a) For the purposes of this Section 6.4, "director" means any person who is or was a director of the corporation, or is or was serving at the request of the corporation as a director of another foreign or domestic corporation, or was a director of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under Subparagraph (d) or (e)(3) of this Section 6.4. (b) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that such person is or was a director of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of the corporation and its shareholders. No indemnification shall be made under this Subparagraph (c): (1) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation in the performance of such person's duty to the corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. (d) To the extent that a director of the corporation has been successful on the merits in defense of any proceeding referred to in Subsection (b) or (c) above or in defense of any claim, issue or matter therein, the director shall be indemnified against expenses actually and reasonably incurred by the director in connection therewith. (e) Except as provided in Subsection (d) above, any indemnification shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the director is proper in the circumstances because the director has met the applicable standard of conduct set forth in Subsection (b) or (c) above, by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding. (2) If such quorum of directors is not obtainable, by inde- pendent legal counsel in a written opinion. (3) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon. (4) The court in which such proceeding is or was pending upon application made by the corporation or the director or the attorney or other person rendering services in connection with the 2 defense, whether or not such application by the director, attorney or other person is opposed by the corporation. Upon request by a director for indemnification, the Board of Directors shall undertake to make a reasonable and prompt determination concerning the propriety of indemnification of the director and, in the event no quorum of disinterested directors is available, shall direct that the matter be either determined by independent legal counsel in a written opinion or considered at the next duly held meeting of shareholders at which a quorum is present. (f) Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount if it shall be determined ultimately that the director is not entitled to be indemnified as authorized in this section. Notwithstanding the foregoing, no advance shall be made by this corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors that, based upon the facts known to the Board at the time such determination is made, such person acted in bad faith or in a manner that such person did not believe to be in the best interests of the corporation, or, with respect to any action by or in the right of the corporation to procure a judgment in its favor, that such person acted in bad faith or in a manner such person did not believe to be in the best interests of the corporation and its shareholders, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Board reasonably determines that such person deliberately breached his duty to the corporation or its shareholders; (g) The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of this section. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal this 2nd day of February, 1988. [SEAL] /s/ RONALD W. BUCKLY ---------------------------------------- Ronald W. Buckly, Secretary 3 TEKELEC CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected, qualified and acting Secretary of Tekelec, a California corporation (the "Company"), and that, pursuant to resolutions of the Board of Directors of the Company at a meeting duly held on February 19, 1994, the following amendment to the Bylaws of the Company was adopted: Section 3.2 of Article III was amended to read in its entirety as follows: Section 3.2. Number and Qualification of Directors. The number of directors of this corporation shall not be less than five (5) nor more than nine (9). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the Board of Directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of two-thirds (2/3) of the outstanding shares entitled to vote; provided however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds (16 2/3) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal this 3rd day of May, 1995. /s/ RONALD W. BUCKLY ---------------------------------------- Ronald W. Buckly, Secretary TEKELEC CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected, qualified and acting Secretary of Tekelec, a California corporation (the "Company"), and that, pursuant to resolutions duly adopted (i) by the Board of Directors of the Company at a meeting held on February 4, 1995, and (ii) by the shareholders of the Company at a meeting held on May 12, 1995, Section 3.11(b) of Article III of the Bylaws of the Company was amended to read in its entirety as follows: (b) The Board of Directors alone may approve loans of money or property to, or the guarantee of obligations of, any officer of the corporation, whether or not a director, or an employee benefit plan authorizing such a loan or guaranty to an officer provided that (1) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (2) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the date of approval by the Board of Directors, and (3) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal this 15th day of May, 1995. /s/ RONALD W. BUCKLY ---------------------------------------- Ronald W. Buckly, Secretary TEKELEC CERTIFICATE OF SECRETARY I hereby certify that I am the duly elected, qualified and acting Secretary of Tekelec, a California corporation (the "Company"), and that pursuant to a resolution of the Board of Directors of the Company adopted at a meeting duly held on March 19, 1996, the following amendment to the Bylaws of the Company was adopted effective as of May 10, 1996: Section 3.2 of Article III was amended to read in its entirety as follows: Section 3.2. Number and Qualification of Directors. The number of directors of this corporation shall not be less than five (5) nor more than nine (9). The exact number of directors shall be six (6) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the Board of Directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of two-thirds (2/3) of the outstanding shares entitled to vote; provided however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds (16 2/3) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal as of the 10th day of May, 1996. /s/ RONALD W. BUCKLY ---------------------------------------- Ronald W. Buckly, Secretary EX-10.7 3 SCHEDULE OF DISTRIBUTORS EXHIBIT 10.7 TEKELEC SCHEDULE OF DISTRIBUTORS DISTRIBUTOR TERRITORY Altech Instruments Pty, Ltd. South Africa Bynet Israel Eagle Telecom Puerto Rico Euro Tech Far East, Ltd. Hong Kong Grupo Ingedigit Venezuela Heli-Ocean Technology Taiwan Hitech Brazil Industrial Electro-Communications, Inc. Philippines KDC Corporation South Korea Lagercrantz Communication Sweden MEDCOM Mexico MIBO Integra Slovenia Nichecom New Zealand Oy Alkas AB Finland, Baltics Reycom Electronica SRL Argentina Sintel Norway, Denmark ST Computer Systems Singapore Trend Communications Limited United Kingdom Tekelec Australia Australia Tekelec China China Tekelec Espana, SA Spain and Portugal Tekelec Airtronic SPA Italy Tekelec Airtronic B.V. The Netherlands,Luxembourg,Belgium Tekelec Airtronic GMBH Germany Tekelec-Airtronic, S.A. France Twintech Design Co. Ltd. Thailand EX-10.11 4 AGREEMENT -- ALLAN TOOMER EXHIBIT 10.11 [ON TEKELEC LETTERHEAD] March 26, 1997 Allan J. Toomer President Tekelec 5151 McCrimmon Parkway Suite 216 Morrisville, NC 27560 Dear Allan: This letter confirms the principal terms of your employment with Tekelec for 1997 which were approved by the Board of Directors of Tekelec and which, upon your acceptance, will replace the executory obligations of Tekelec under that certain letter agreement dated November 22, 1995 between you and the Company. The principal terms of your employment are as follows: 1. Title. You will serve as President of Tekelec through December 31, 1997. In addition, subject to your reelection to the Board of Directors at the Company's Annual Shareholders Meeting in May 1997, you will serve as a member of the Board of Directors at least through December 31, 1997. 2. Annual Base Salary. Your annual base salary for 1997 will be $250,000. 3. 1997 Officer Bonus Plan. You will be eligible to participate in the 1997 Officer Bonus Plan in accordance with the terms thereof. 4. Warrant. At its meeting on January 25, 1997, the Board granted to you a warrant to purchase 40,300 shares of Tekelec Common Stock at $18.625 per share, vesting in three equal installments on June 30, 1997, September 30, 1997 and December 31, 1997 as long as you remain an employee of the Company. The warrant will vest in full and become immediately exercisable upon the termination of your employment prior to December 31, 1997 for any reason other than (i) your voluntary termination without "good reason" as such term is defined in the Company's Officer Severance Plan or (ii) "for cause" as such term is defined in the Officer Severance Plan. 5. Severance Payment. Upon the termination of your employment with the Company (i) after June 30, 1997 for any reason or (ii) upon your death or disability at any time, and in lieu of any severance benefits that you may be entitled to under the Company's Officer Severance Plan, the Company will pay to you or your estate, as the case may be, a severance payment in the amount of $400,000, payable within 30 days following your termination in one lump sum or at such times and in such installments as you or your estate elect. If your Allan J. Toomer March 26, 1997 Page 2 employment with the Company terminates prior to July 1, 1997 under circumstances not entitling you to receive the above-described $400,000 severance payment, you will be eligible to receive severance benefits in accordance with the terms of the Company's Officer Severance Plan. 6. Acceleration of Outstanding Options. Provided that you remain as an officer of the Company through December 31, 1997, all installments of stock options granted to you under the Company's 1994 Stock Option Plan that are scheduled to vest after December 31, 1997, will vest in full and become immediately exercisable at the close of business on December 31, 1997. If the foregoing meets with your approval, then please so indicate by signing the enclosed copy of this letter and returning it to me. The Company greatly appreciates the contributions that you have made to the Company's success and believes that you will provide Tekelec with the leadership and the management expertise and experience needed to continue Tekelec's growth in 1997. Very truly yours, /s/ JON F. RAGER Jon F. Rager on behalf of the Tekelec Compensation Committee Enclosure cc: Tekelec Board of Directors ACCEPTED AND AGREED. /s/ ALLAN J. TOOMER - ------------------------------- Allan J. Toomer Dated: March 27, 1997 EX-10.13 5 CONSULTING AGREEMENT -- HOWARD ORINGER EXHIBIT 10.13 AMENDMENT NO. 1 TO CONSULTING AGREEMENT THIS AMENDMENT NO. 1 TO CONSULTING AGREEMENT (this "Amendment") amends that certain Consulting Agreement effective as of August 1, 1996 (the "Agreement") between TEKELEC, a California corporation (the "Company"), and HOWARD ORINGER, a California resident ("Consultant"). Capitalized terms used herein shall have the meanings set forth in the Agreement, unless otherwise defined herein. WHEREAS, the parties wish to amend the Agreement to extend the term thereof; NOW, THEREFORE, in consideration of the foregoing recital and of the premises and the covenants, warranties and agreements set forth below, and for other valuable consideration received, the parties hereby agree as follows: 1. Consultancy. Section 1 of the Agreement is hereby amended to read in its entirety as follows: "1. CONSULTANCY. The Company hereby retains Consultants, and Consultant hereby accepts such retention, to consult for the Company upon the terms and subject to the conditions set forth herein, commencing as of the Effective Date and continuing until January 1, 1997 or until this Agreement is sooner terminated in accordance with Section 5 hereof (the "Term"). Consultant shall render such consulting services to the Company as an independent contractor and not as an employee, agent, joint venturer or otherwise." 2. Termination. Section 5 of the Agreement is hereby amended to read in its entirety as follows: "5. TERMINATION. This Agreement and Consultant's retention hereunder shall continue until the earlier to occur of (a) January 1, 1997 or (b) the death or disability of Consultant." 3. No Other Amendments. The Agreement, except as expressly amended by this Amendment, shall continue in full force and effect. 4. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed an original and which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment effective as of November 30, 1996. TEKELEC HOWARD ORINGER By: /s/ Allan J. Toomer Signature: /s/ Howard Oringer -------------------------- ------------------------- Allan J. Toomer, President EX-10.14 6 CREDIT AGREEMENT EXHIBIT 10.14 [IMPERIAL BANK LOGO] CREDIT AGREEMENT This Credit Agreement (the "Agreement") is made and entered into on October 22, 1996, by and between Tekelec, a California corporation, ("Borrower") and Imperial Bank, a California banking corporation, ("Bank"). Borrower wishes to secure certain credit accommodations from Bank and Bank is willing to provide credit accommodations all as provided in this Agreement. In consideration of mutual covenants and conditions hereof, the parties hereto agree as follows: 1. AMOUNT AND TERMS OF CREDIT 1.01 REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of this Agreement, between the date of this Agreement and June 30, 1998 (the "Commitment Termination Date"), provided that no event of default then has occurred and is continuing, Bank will provide the Revolving Credit Commitment of Ten Million Dollars ($10,000,000) for (a) the issuance of Letters of Credit ("Letters of Credit") and (b) loans for general working capital purposes provided, however, that the aggregate of the Letters of Credit and Loans at any one time shall not exceed the Revolving Credit Commitment. No Letter of Credit shall expire beyond the Commitment Termination Date. Borrower's obligation to repay the Revolving Credit Commitment, together with accrued interest thereon, shall be evidenced by a promissory note issued by Borrower in favor of Bank on the standard form used by Bank to evidence its commercial loans. Prior to the Commitment Termination Date, Borrower may borrow, repay and reborrow loans under the Revolving Credit Commitment. 1.02 INTEREST RATE(S). All principal amounts owing under the Line will bear interest, as elected by the Borrower, at either: (i) Bank's announced prime rate as it may vary from time to time, calculated on a 360 day(s) basis, or (ii) Reserve adjusted LIBOR for any interest period of 1, 2, or 3 months plus 1.90%, with minimum borrowings of $1,000,000, and $500,000 increments, or (iii) Bank's prevailing domestic Bankers Acceptance ("BA") rate plus 1.65% on a 30, 60, 90 day basis with minimum borrowings of $500,000, and $500,000 increments. 1.03 FEES. Borrower shall pay to Bank a Commitment Fee, due and payable at closing, equal to one-half of one percent (0.50%) per annum, calculated on a 360 day(s) basis. 2. COLLATERAL 2.01 SECURITY PROVIDED BY BORROWER. To secure the payment and performance of all obligations of Borrower to Bank, Borrower shall have granted a first priority security interest in all of Borrower's accounts, deposit accounts, instruments, chattel paper, documents, general intangibles, inventory, equipment, furniture and fixtures, now owned or hereafter acquired by Borrower, all proceeds and insurance proceeds of the foregoing, all guarantees and other security therefor, and all of Borrower's books and records relating thereto (including computer-stored information and all software relating thereto) and all contract rights with third parties relating to the maintenance of any such books, records and information. 3. REPRESENTATIONS OF BORROWER Borrower represents and warrants that: 3.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing and in good standing under the laws of California, without limit as to the duration of its existence and is authorized and in good standing to do business in the State of California; Borrower has corporate powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each State in which the character of the properties owned by it therein or the conduct of its business makes such qualification necessary; and Borrower has the power and adequate authority to make and carry out this Agreement. Borrower has no investment in any other business entity. 3.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this Agreement are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's articles of incorporation, by-laws, as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms; subject only to bankruptcy, insolvency or similar laws affecting creditors rights generally. 3.03 NO CONFLICT. The execution, delivery and performance of this Agreement are not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrower is a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 3.04 LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrower which if determined adversely to Borrower or its interest would have a material adverse effect on the financial condition of Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. 3.05 FINANCIAL CONDITION. The balance sheet of borrower as of June 30, 1996 a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with any credit extended pursuant to this Agreement are true and correct, and said balance sheet truly presents the financial condition of Borrower as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no material adverse changes in the financial condition or business of Borrower. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. 2 3.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are not subject to any liens or encumbrances other than those permitted by Section 5.03 hereof. 3.07 TAX STATUS. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any governmental agency, Borrower has no liability for renegotiation of profits. 3.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. 3.09 REGULATION U. The proceeds of the Loan shall not be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). 4. AFFIRMATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, under borrowings, or other indebtedness, it will, unless Bank shall otherwise consent in writing: 4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve its existence. 4.02 INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment. 4.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against it or any of its properties, and all its other liabilities at any time existing, except to the extent and so long as: a. The same are being contested in good faith and by appropriate proceedings in such manner as not to cause materially adverse affect upon its financial condition or the loss of any right of redemption from any sale thereunder; and b. It shall have set aside on its books reserves (segregated to the extent required by generally accepted accounting practice) deemed by it adequate with respect thereto. 4.04 QUICK ASSETS. Maintain a minimum ratio of cash, short term and long term investments in securities, accounts receivable divided by total current liabilities of 1.50 to 1.0, all as computed and determined in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower. 4.05 CURRENT RATIO. Maintain a ratio of current assets, including long term investments, to current liabilities of not less than 2.0 to 1.00; all as computed and determined in accordance to generally accepted accounting principles on a basis consistently maintained by Borrower. 4.06 NET WORTH. Maintain Tangible Net Worth [meaning the excess of all assets, excluding any value for good will, trademarks, patents, copyrights, leaseholds, organization expense, amounts due from officers, shareholders and affiliates, and other similar intangible items, over its liabilities] of not less than $40,000,000. 3 4.07 DEBT TO NET WORTH. Maintain a ratio of total liabilities to Tangible Net Worth not greater than 0.75 to 1.00. 4.09 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times and upon reasonable notice during normal business hours; and furnish Bank: a. QUARTERLY FINANCIAL STATEMENT. Within forty-five (45) days after the close of each quarter of each fiscal year of Borrower, commencing with the quarter next ending, a balance sheet, profit and loss statement and reconciliation of Borrower's fund balance accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event within ninety (90) days after the close of each fiscal year of Borrower, a report of audit of Company as of the close of and for such fiscal year, all in reasonable detail, prepared on an AUDITED basis by an independent certified public accountant selected by Borrower and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; c. At Bank's written request, within ninety (90) days after the end of Borrower's fiscal year, a certificate of the chief financial officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof; d. Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim audit of the accounts of Borrower made by such accountants; e. Such other information relating to the affairs of Borrower as the Bank reasonably may request from time to time; f. Within thirty (30) days after and as of the end of each month, copies of Borrower's summary accounts payable and accounts receivable agings. g. In connection with each fiscal year end financial statement furnished to Bank hereunder, any management letter of Borrower's independent certified public accountant. 5. NEGATIVE COVENANTS OF BORROWER Borrower agrees that so long as it is indebted to Bank, it will not, without Bank's written consent, which consent will not be unreasonably withheld: 5.01 TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the character of its business; or make any substantial change in its executive management. 4 5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from the Bank except obligations now existing as shown in the financial statement dated June 30, 1996, in excess of $1,000,000; 5.03 LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned, other than liens for taxes not delinquent and liens in Bank's favor except for those already existing as of June 30, 1996, in excess of $1,000,000. 5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make, in excess of $1,000,000, any loans or advances to any person or other entity, other than in the ordinary and normal course of its business as now conducted or any investment in the securities of any person or other entity other than shown on Exhibit "A" attached hereto and made a part hereof by this reference; or guarantee or otherwise become liable, in excess of $1,000,000 upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business, excluding advances to and/or accounts receivable from its affiliates. 5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity, in excess of $1,000,000; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. 6. EVENTS OF DEFAULT The occurrence of any of the following events of default shall, at Bank's option, terminate Bank's commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrower's indebtedness to Bank immediately due and payable, all without demand, presentment or notice, all of which are hereby expressly waived; 6.01 FAILURE TO PAY NOTE. Failure to pay any installment of principal or interest on any indebtedness of Borrower to Bank, ten (10) days after its due date, and notice of non-payment from Bank. 6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or condition of this Agreement binding upon Borrower. 6.03 BREACH OF WARRANTY. Any of borrower's representations or warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any respect. 6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit its inability to pay its debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business. 6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $1,000,000, writ or warrant of attachment, or similar process shall be entered or filed against Borrower or any of its assets and shall remain unvacated, unbonded or unstayed for a period later than five days prior to the date of any proposed sale thereunder. 5 6.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrower and, if instituted against it, shall be consented to. 7. MISCELLANEOUS PROVISIONS 7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing under this Agreement or any note issued in connection with a loan that Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 7.02 NOTICE OF DEFAULT. Borrower shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and/or the lapse of time would be an event of default. 7.03 OPERATING ACCOUNTS. Borrower shall maintain all significant business deposit accounts at Bank. 7.04 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after notice, with interest thereon from the date of expenditure at the rate applicable to the Loan, reasonable attorneys' fees and all costs and expenses paid or incurred by Bank in collecting or compromising the Loan after the occurrence of an event of default, whether or not suit is filed. If it is brought to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and court costs in addition to any other remedy or recovery awarded by the court. 7.05 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank hereunder shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Bank by law against Borrower or any other person, including but not limited to Bank's rights of setoff or banker's lien. 7.06 INUREMENT. The benefits of this Agreement shall inure to the successors and assigns of Bank and the permitted successors and assigns of Borrower. 7.07 APPLICABLE LAW. This Agreement and all other agreements and instruments required by Bank in connection therewith shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby agree to submit. 7.08 OFFSET. In addition to and not in limitation of all rights of offset that Bank or other holder of the Loan may have under applicable law, Bank or other holder of the Notes shall, upon the occurrence of any Event of Default or any event which with the passage of time and/or notice would constitute such an Event of Default, have the right to appropriate and apply to the payment of the Loan any and all balances, credits, deposits, accounts or monies of Borrower then or thereafter with Bank or other holder, within ten (10) days after the Event of Default, and notice of the occurrence of any Event of Default by Bank to Borrower. 7.09 SEVERABILITY. Should any one or more provisions of the Agreement be determined to be illegal or unenforceable, all other provisions nevertheless shall be effective. 7.10 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this Agreement and of every part hereof. 6 7.11 INTEGRATION CLAUSES. Except for documents and instruments specifically referenced herein, the Agreement constitutes the entire agreement between Bank and Borrower regarding the Loan and all prior communications verbal or written between Borrower and Bank shall be of no further effect or evidentiary value. In the event of a conflict or inconsistency among any other documents and instruments and this Agreement, the provisions of this Agreement shall prevail. 7.12 ACCOUNTING. All accounting terms shall have the meanings applied under generally accepted accounting principles unless otherwise specified. 7.13 This Agreement may be modified only by a writing signed by both parties hereto. This Agreement is executed on behalf of the parties by duly authorized officers as of the date first above written. IMPERIAL BANK ("BANK") By: /s/ NUNILO SOLER ------------------------- Nunilo Soler Vice President TEKELEC ("BORROWER") By: /s/ GILLES GODIN ------------------------- Gilles Godin Chief Financial Officer 7 Exhibit "A" ELIGIBLE INVESTMENTS I. Taxable Investments 1. U.S. Treasuries and agencies of the U.S. Government 2. Negotiable certificates of deposits, time deposits, and banker's acceptances of the top 50 banks in the world. 3. Commercial paper, rated no less than A-1*/P-1 or Aa/AA*. 4. Medium term notes within allowable maturity range, rated no less than Aa3/AA-*. 5. Investments in Money Market Preferred Stocks rated no less than Aa/AA*. II. Tax-Exempt Investments 1. Short term municipal securities (one year or less) will be MIG-1 or SP-1*. 2. Investments in Municipal Floating Rate Securities will be rated at least Mig-1. 3. Variable rate demand notes and tax-exempt commercial paper rated Aaa or MIG-1. 4. Tax-exempt municipal preferred rated As/AA*. 5. Tax-exempt notes/bonds regardless of maturity date shall: A. Have credit rating of Aa3/AA-*, if no insurance, letter of credit, or credit enhancement is present. B. Have underlying credit rating of A/A* if credit enhancements are present. C. Have minimum credit enhancement quality such as insurance by the Municipal Bonds Investors Assurance Corps. (MBIA) or by the Financial Guarantees Insurance Corp. (FGIC) or by AMRAC Indemnity Corp. (AMBAC), or letters of credit by a top 50 worldwide bank. III. Investments by Borrower's Japanese subsidiary 1. In addition to investments permitted under I and II Borrower's Japanese subsidiary may make investments in Japanese instruments having, at a minimum, the same financial quality characteristics as outlined in I and II. * Asterisk indicates the "Standard & Poor's" ratings. All other ratings are "Moody's" ratings. [IMPERIAL BANK LOGO] NOTE $10,000,000.00 Los Angeles, California, October 22, 1996 On June 30, 1998, and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking corporation, or order, at its Los Angeles Regional office, the principal sum of $10,000,000.00 maximum or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance [ ] at the rate of ___% per year [X] at the rate of 0.000%* per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal [ ] in addition to principal [ ] __________, beginning November 30, 1996, and if not so paid shall become a part of the principal. All payments shall be applied first to interest, and the remainder, if any, on principal. [ ] (If checked), Principal shall be payable in installments of $_______________, or more, each installment on the ____ day of each ______________, beginning _______________________. Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of Bank. Any partial prepayment shall be applied to the installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor; or any deterioration of the financial condition of any Obligor which results in the holder hereof considering itself, in good faith, insecure. [ ] If any installment payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any installment of any payment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costs and expenses of collection and reasonable attorneys fees incurred by the holder hereof on account of such collection, plus interest at the rate applicable to principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at, or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protest and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. [Initial * Subject to the conditions and limitations contained Here] in the Credit Agreement dated 10/22/96. TEKELEC By: /s/ GILLES C. GODIN - -------------------------------------- ---------------------------------- Vice President Finance & CFO By: /s/ DOUGLAS W. MOXLEY - -------------------------------------- ---------------------------------- Corporate Controller LIBOR ADDENDUM [IMPERIAL BANK LOGO] TO NOTE This Libor Addendum ("Addendum") is dated as of October 22, 1996, and is by and between TEKELEC ("Borrower") and Imperial Bank ("Bank"). This Addendum amends and supplements the Note to which it is attached (the "Note") and forms a part of and is incorporated into the Note. In the event of any inconsistency between the terms herein and the terms of the Note, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meanings set forth in the Note. 1. ADVANCES. 1.1 Prime Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to Bank's Prime Rate shall be referred to herein as "Prime Loans" and each such advance shall be a "Prime Loan." Each Prime Loan shall bear interest at an annual rate equal to the sum of 0.000% plus the Bank's Prime Rate. "Prime Rate" shall mean the rate of interest publicly announced by Bank from time to time in Inglewood, California, as its prime rate for lending. The Prime Rate is not intended to be the lowest rate of interest charged by Bank in connection with extensions of credit to borrowers. 1.2 Libor Loans. Advances permitted pursuant to the terms of the Note or this Addendum which bear interest in relation to the Libor Rate shall be referred to herein as "Libor Loans" and each such advance shall be a "Libor Loan." Each Libor Loan shall bear interest at the Libor Rate, as defined below. A Libor Loan shall be in the minimum amount of One Million Dollars ($1,000,000) or such greater amount which is an integral multiple of Five hundred thousand Dollars ($500,000.00). No Libor Loan shall be made after the last Business Day that is at least three (3) months prior to the Maturity Date described in the Note. 2. INTEREST ON LIBOR LOANS. 2.1 Rate of Interest. Each Libor Loan shall bear interest on the unpaid principal amount thereof from the Loan Date through the date paid (whether by acceleration or otherwise) at a rate equal to the sum of 1.900% per annum plus the Libor Rate for the Interest Period. (a) "Loan Date" shall mean the date on which (i) a Libor Loan is made, a Libor Loan is continued, or a Prime Loan is converted to a Libor Loan. (b) "Interest Period" shall mean a period of one, two or three months, commencing on the applicable Loan Date, as selected by Borrower pursuant to Section 2.2; provided, however, that Borrower may not select an Interest Period that would otherwise extend beyond the Maturity Date of the Loan. Borrower may also select a twelve (12) month Interest Period if and when Bank notifies Borrower that such Interest Period is available, as determined by Bank in its sole discretion. (c) "Libor Rate" shall mean, for the applicable Interest Period for a Libor Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the Libor Base Rate for such Interest Period divided by (ii) 1.00 minus the Reserve Requirement Rate (expressed as a decimal fraction) for such Interest Period. (d) "Libor Base Rate" shall mean with respect to any Interest Period, the rate equal to the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of: (i) the offered rates per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears at 11:00 a.m., London time, on the Reuters Screen LIBOR Page on the Business Day that is two (2) Business Days before the first day of such Interest Period, in each case if at least four (4) such offered rates appear on such page, or (ii) if clause (i) is inapplicable, (x) the offered rate per annum for deposits in U.S. Dollars for a period equal to such Interest Period which appears as of 11:00 a.m., London time on the Telerate Monitor on Telerate Screen 3750 on the Business Day which is two (2) Business Days before the first day of such Interest Period; or (y) if clause (x) above is inapplicable, the arithmetic mean (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the interest rates per annum offered by at least three (3) prime banks selected by Bank at approximately 11:00 a.m. London time, on the Business Day which is two (2) Business Days before such date for deposits in U.S. Dollars to prime banks in the London interbank market, in each case for a period equal to such Interest Period in an amount equal to the amount to which the Libor Rate applies. Page 1 of 4 (e) "Business Day" means any day on which Bank is open for business in the State of California. (f) "Reuters Screen LIBOR Page" means the display designated as page LIBOR on the Reuters Monitor Money Rates Service or such other page as may replace the LIBOR page on that service for the purpose of displaying London interbank offered rates of major banks. (g) "Reserve Requirement Rate" means, for any Interest Period, the aggregate of the rates, effective as of the Business Day which is two (2) Business Days before the first day of the Interest Period, at which: (i) reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System; and (ii) any additional reserves as required to be maintained by Bank by reason of any Regulatory Change against (x) any category of liabilities which includes deposits by reference to which the Libor Rate is to be determined as provided in the definition of "Libor Base Rate;" or (y) any category or extensions of credit or other assets which include Libor Loans. (h) "Regulatory Change" means, with respect to Bank, any change on or after the date of the Note and this Addendum in any Governmental Regulation, including the introduction of any new Governmental Regulation or the rescission of any existing Governmental Regulation. (i) "Governmental Regulation" means any (i) United States Federal, state or foreign law or regulation (including without limitation Regulation D); and (ii) the adoption or making of any interpretation, application, directive or request applying to a class of lenders, including Bank, of or under any United States Federal, state, or any foreign law or regulation (whether or not having the force of law) by any court or by any governmental, central banking, monetary or taxing authority charged with the interpretation or administration of such law or regulation. 2.2 Determination of Interest Rates. Subject to the terms and conditions of the Note and this Addendum, Borrower, at its option may request an advance in the form of a Libor Loan, a continuation of a Libor Loan, or a conversion of a Prime Loan into a Libor Loan, only upon delivery to Bank of an irrevocable written notice received by Bank at least three (3) Business Days prior to the requested Loan Date, specifying (i) the principal amount of such Libor Loan, (ii) the requested Loan Date, and (iii) the selected Interest Period. Upon receiving such notice, Bank shall determine (which determination shall be in accordance with Section 2.1 and shall, absent manifest error, be final, conclusive and binding upon all parties hereto) the Libor Rate applicable to such Libor Loan two (2) Business Days prior to the Loan Date, and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Borrower. If Borrower shall fail to notify Bank of its selected Interest Period for a Libor Loan (including the continuation of an existing Libor Loan or the conversion or a Prime Loan into a Libor Loan), the Borrower shall be deemed to have selected an Interest Period of three (3) months. 2.3 Computation of Interest and Fees. All computations of interest and fees payable pursuant to the Note shall be calculated on the basis of a three hundred sixty (360) day year for the actual number of days elapsed (less the date of repayment). 2.4 Recordation by Bank. Bank is hereby authorized to record the Loan Date, the applicable Interest Period, the principal amount, and the interest rate or each Libor Loan made (or continued or converted) by Bank, and the date and amount of each payment or prepayment of principal thereof, in Bank's records. Any such recordation shall constitute prima facie evidence of the accuracy of the information recorded; provided that the failure to make any such recordation shall not in any way affect the Borrower's obligations hereunder. 3. CONVERSION TO PRIME LOANS. 3.1 Election by Borrower. Subject to all the terms and conditions of this Addendum, Borrower may elect from time to time to convert a Libor Loan to a Prime Loan by giving Bank at least three (3) Business Days' prior irrevocable notice of such election, and any such conversion of a Libor Loan shall be made on the last day of the Interest Period with respect thereto. 3.2 Failure of Notice by Borrower. If Borrower otherwise fails to give notice specifying its requests with respect to any Libor Loans that are scheduled to become due, such failure shall be deemed, in the absence of any notice from Borrower to the contrary, to be notice of a requested advance in the form of a Prime Loan in a principal amount equal to the amount of said Libor Loan. 4. PREPAYMENTS. 4.1 Voluntary Prepayment by Borrower. Subject to the terms and conditions of the Note and this Addendum, Borrower may, upon at least three (3) Business Days' irrevocable notice to Bank as provided herein, at any time and from time to time on any Business Day prepay any Prime Loan or Libor Loan in whole or in part, without penalty or premium, other than customary actual "Breakage Fees" and "Prepayment Costs" as defined below, resulting from prepayment of any Libor Loan prior to the expiration of the Interest Period relating thereto. The notice of prepayment shall specify the date and amount of the prepayment, and the Loan to which the Page 2 of 4 prepayment applies. Each partial prepayment of a Libor Loan shall be in an amount not less than Fifty Thousand Dollars ($50,000) or such greater amount which is an integral multiple of Fifty Thousand Dollars ($50,000); provided, that unless a Libor Loan is prepaid in full, no prepayment shall be made if, after giving effect to such prepayment, the aggregate principal amount of Libor Loans having the same Interest Period shall be less than One Million Dollars ($1,000,000). Notice of prepayment having been delivered as aforesaid, the principal amount of the prepayment specified in such notice shall become due and payable on the prepayment date set forth in such notice. All payments of principal under this Section 4 shall be accompanied by accrued but unpaid interest on the amount being prepaid through the date of such prepayment. 4.2 Breakage Fees. If for any reason (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or acceleration), Bank receives all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the Breakage Fees, defined as the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank (without regard to whether Bank actually so invests said funds) by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive and final, absent manifest error. 4.3 Prepayment Costs. Borrower shall pay to Bank, upon the demand of Bank, such other amount or amounts as shall be sufficient (in the sole good faith opinion of Bank) to compensate it for any loss, costs or expense incurred by it as a result of any prepayment by Borrower (including voluntary or mandatory prepayment, voluntary or mandatory conversion of a Libor Loan into a Prime Loan, or prepayment due to acceleration) of all or part of the principal amount of a Libor Loan prior to the last day of the Interest Period for such Loan (including without limitation any failure by Borrower to borrow a Libor Loan on the Loan Date for such borrowing specified in the relevant notice of borrowing hereunder). Such costs shall include, without limitation, any interest or fees payable by Bank to lenders of funds obtained by it in order to make or maintain its loans based on the London interbank eurodollar market. Bank's determination as to such costs shall be conclusive and final, absent manifest error. 5. REMEDIES UPON EVENTS OF DEFAULT. 5.1 Conversion to Prime Loans. If any Event of Default has occurred and is continuing under the Note or this Addendum, then in addition to all other remedies available to Bank under the Note, at the option of Bank and without demand or notice, all Libor Loans then outstanding shall be automatically converted to Prime Loans on the last day of each respective Interest Period for each Libor Loan. 5.2 Indemnity. Borrower agrees to pay and indemnify Bank for, and to hold Bank harmless from, any and all cost, loss or expense (including without limitation any such cost, loss or expense arising from interest or fees payable by Bank to lenders of funds obtained by it in order to maintain its Libor Loans hereunder, or in its reemployment of funds obtained in connection with the making or maintaining of Libor Loans) which Bank may sustain or incur as a consequence of any default by Borrower in connection with or related to: (a) payment of the principal amount of or interest on Libor Loans, (b) making a borrowing or conversion of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or (c) making a prepayment of a Libor Loan after Borrower has given a notice thereof in accordance with this Addendum, or any prepayment (whether optional or mandatory) of any Libor Loan prior to the end of the applicable Interest Period for such Loan. 6. ADDITIONAL PROVISIONS REGARDING LIBOR LOANS. 6.1 Libor Rate Taxes. All payments of principal, interest, fees, costs, expenses and all other amounts payable to Borrower pursuant to the Note and this Addendum shall be made free and clear of and without reduction by reason of all present and future income, stamp and other taxes or other charges whatsoever imposed, assessed, levied or collected by any national government or any political subdivision or taxing authority thereof or any organization of which it is a member (excluding (i) any taxes imposed on or measured by the overall net income or gross receipts of Bank by any such entity, and (ii) any taxes which would have been imposed even if no provisions for Libor Loans had appeared in this Addendum) (collectively, "Libor Taxes"). If any Libor Taxes are required to be withheld from any amounts payable to Bank, Borrower shall pay such additional amounts as may be necessary so as to yield to Bank a net amount equal to the total amount of the payments provided for in this Addendum or under the Note which Bank would have received if such amounts had not been subject to Libor Taxes. If any Libor Taxes are payable directly by Borrower, they shall be paid by Borrower prior to the date on which penalties attach for failure to timely pay such Libor Taxes. Within forty five (45) days after the date on which payment of any such Libor Taxes is due pursuant to applicable law, Borrower will furnish Bank the original receipt for the full payment of such Libor Taxes or, if such is not available, evidence of such payment satisfactory in form and substance to Bank. Borrower shall indemnify and hold Bank harmless against, and will reimburse to Bank, upon demand, any incremental taxes, interest or penalties that may become payable by Bank as a result of any failure by Borrower to pay any Libor Taxes when due. Page 3 of 4 6.2 Inability to Determine Fair Interest Rate. If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the Libor Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, (ii) the Libor Rate does not accurately reflect the cost to Bank of lending the Libor Loan, or (iii) by reason of any changes arising after the date of the Note affecting the London interbank eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in Sections 2.1 and 2.2 above, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to Libor Loans, or until such time as Bank notifies Borrower that the circumstances giving rise to Bank's notice no longer exist. While such circumstances continue to exist, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.3 Illegality or Impracticability. If (i) due to any Governmental Regulation it shall become unlawful for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, or (ii) due to any contingency occurring after the date of the Note which has a material adverse effect on the London interbank eurodollar market, it has become impracticable for Bank to continue to fund or maintain any Libor Loans, or to perform its obligations hereunder, then Bank shall promptly give notice thereof to Borrower. Upon the giving of such notice, Bank's obligation to make Libor Loans shall terminate, and in such event, (x) any requested Libor Loan shall be treated as a request for a Prime Loan, (y) any Prime Loan that was to have been converted to a Libor Loan shall be continued as a Prime Loan, and (z) any outstanding Libor Loan shall be converted retroactively, on the first day of the then current Interest Period with respect thereto, to a Prime Loan. 6.4 Governmental Regulations; Increased Costs. Borrower shall pay to Bank, within 15 days after demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any increased costs incurred by Bank that Bank determines are attributable to its making or maintaining of any Libor Loans to Borrower (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (a) imposes a new tax or changes the basis of taxation of any amounts payable to Bank under the Note or this Addendum in respect of any Libor Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or (b) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits or other liabilities with or for the account of Bank (including any Libor Loans or any deposits referred to in the definition of Libor Base Rate); or (c) imposes any other condition affecting the Note (or any of such extensions of credit or liabilities); or (d) imposes or modifies a Governmental Regulation regarding capital adequacy which has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank ("Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material. Bank will notify Borrower of any event occurring after the date of the Note which will entitle Bank to Additional Costs pursuant to this Section 6.4 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for Additional Costs under this Section 6.4. Determinations and allocations by Bank for purposes of this Section 6.4 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Libor Loans or of making or maintaining Libor Loans or on amounts receivable by it in respect of Libor Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive and final, absent manifest error. This Addendum is executed as of the date first written above. BORROWER BANK TEKELEC IMPERIAL BANK, - -------------------------------------- a California banking corporation a Corporation ------------------------------------ By /s/ NUNILO SOLER ----------------------------------- By /s/ GILLES C. GODIN Nunilo Soler ------------------------------------ Its Vice President ------------------------------- Its V.P. Finance and CFO ----------------------------------- By /s/ DOUGLAS W. MOXLEY ----------------------------------- Its Corporate Controller ----------------------------------- Page 4 of 4 EX-10.15 7 GENERAL SECURITY AGREEMENT EXHIBIT 10.15 [IMPERIAL BANK LOGO] Member FDIC GENERAL SECURITY AGREEMENT (TANGIBLE AND INTANGIBLE PERSONAL PROPERTY) This Agreement is executed on October 22, 1996, by TEKELEC (hereinafter called "Obligor"). In consideration of financial accommodations given, to be given or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall be in Bank's possession or control in any matter or for any purpose, (iii) described below, (iv) now owned or hereafter acquired by Obligor of the type or class described below and/or in any supplementary schedule hereto, or in any financing statement filed by Bank and executed by or on behalf of Obligor; (b) the proceeds, increase and products of such property, all accessions thereto, and all property which Obligor may receive on account of such collateral which Obligor will immediately deliver to Bank (collectively referred to as "Collateral") to secure payment and performance of all of Obligor's present or future debts or obligations to Bank, whether absolute or contingent (hereafter referred to as "Debt"). Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. Collateral: A. VEHICLE, VESSEL, AIRCRAFT:
- ---------------------------------------------------------------------------------------- Identification License or Year Make/Manufacturer Model and Serial No. Registration No. New or Used - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Engine or other equipment: _____________________________________________________________ (For aircraft - original ink signature on copy to FAA) B. DEPOSIT ACCOUNTS: Type ________________________ Account Number ___________________ Amount $ ______________ In name of ______________________________________ Depository ___________________________ AND ALL EXTENSIONS OR RENEWALS THEREOF.
C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe) All personal property, whether presently existing or hereafter created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, deposit accounts and general intangibles including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor. The collateral not in Bank's possession will be located at: 26580 West Agoura Rd, Calabasas, CA 91302 5151 McCrimmon Pkwy, Ste. 216, Morrisville, NC [ ] If checked, the Obligor is executing this Agreement as an Accommodation Debtor only and the Obligor's liability is limited to the security interest granted in the Collateral described herein. The party being accommodated is ___________________ ("Borrower"). All the terms and provisions on the reverse side hereof are incorporated herein as though set forth in full, and constitute a part of this Agreement. Signature Name (indicate title, if applicable) Address TEKELEC BY /s/ GILLES C. GODIN 26580 West Agoura Road - -------------------------- -------------------------- -------------------------- V.P. Finance & CFO BY /s/ DOUGLAS W. MOXLEY Calabasas, CA 91302- - -------------------------- -------------------------- -------------------------- Corporate Controller COPY FOR YOUR INFORMATION - -------------------------- -------------------------- -------------------------- Page 2 of 2 SECURITY AGREEMENT (CONTINUED) Obligor represents, warrants and agrees: 1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of collecting the Debt, of protecting, insuring or realizing on Collateral, and any expenditure of Bank pursuant hereto, including attorneys' fees and expenses, with interest at the rate of 24% per year, or the rate applicable to the Debt, whichever is less, from the date of expenditure, and (c) any deficiency after realization of Collateral. 2. Obligor will use the proceeds of any loan that becomes Debt hereunder for the purpose indicated on the application therefore, and will promptly contract to purchase and pay the purchase price of any property which becomes Collateral hereunder from the proceeds of any loan made for that purpose. 3. As to all Collateral in Obligor's possession (unless specifically otherwise agreed to by Bank in writing), Obligor will: (a) Have, or has, possession of the Collateral at the location disclosed to Bank and will not remove the Collateral from the location. (b) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all such ways as are considered good practice by owners of like property, use it lawfully and only as permitted by insurance policies, and permit Bank to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral) until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral. 4. As to Collateral which is inventory and accounts, Obligor: (a) May, until notice from Bank, sell, lease or otherwise dispose of inventory Collateral in the ordinary course of business only, and collect the cash proceeds thereof. (b) Will, upon notice from Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which gave rise to proceeds, and all acquisitions and returns of inventory as required by Bank. (c) Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. (d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units as shown on any Collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof. 5. As to Collateral which are accounts, chattel paper, general intangibles and proceeds described in 4(c) above, Obligor warrants, represents and agrees: (a) All such Collateral is genuine, enforceable in accordance with its terms, free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (b) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (c) All chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; (d) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on an account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (e) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent. 6. Obligor owns all Collateral absolutely, and no other person has or claims any interest in any Collateral, except as disclosed to and accepted by Bank in writing. Obligor will defend any proceeding which may affect title to or Bank's security interest in any Collateral, and will indemnify and hold Bank free and harmless from all costs and expenses of Bank's defense. 7. Obligor will pay when due all existing or future charges, liens or encumbrances on and all taxes and assessments now or hereafter imposed on or affecting the Collateral and, if the Collateral is in Obligor's possession, the realty on which the Collateral is located. 8. Obligor will insure the Collateral with Bank as loss payee in form and amounts with companies, and against risks and liability satisfactory to Bank, and hereby assigns such policies to Bank, agrees to deliver them to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Obligor's default, and to receive payment of and endorse any instrument in payment of any loss or return premium. If Obligor should fail to deliver the required policy or policies to the Bank, Bank may, at Obligor's cost and expense, without any duty to do so, get and pay for insurance naming as the insured, at Bank's option, either both Obligor and Bank, or only Bank, and the cost thereof shall be secured by this Security Agreement, and shall be repayable as provided in Paragraph 1 above. 9. Obligor will give Bank any information it requires. All information at any time supplied to Bank by Obligor (including, but not limited to, the value and condition of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is correct and complete, and Obligor will notify Bank of any adverse change in such information. Obligor will promptly notify Bank of any change of Obligor's residence, chief executive office or mailing address. 10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which Obligor is obligated hereby to do, to exercise such rights as Obligor may exercise, to use such equipment as Obligor might use, to enter Obligor's premises to give notice of Bank's security interest, and to collect Collateral and proceeds and to execute and file in Obligor's name any financing statements and amendments thereto required to perfect Bank's security interest hereunder, all to protect and preserve the Collateral and Bank's rights hereunder. Bank may: (a) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (b) Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (c) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral. 11. If more than one Obligor signs this Agreement, their liability is joint and several. Any Obligor who is married agrees that recourse may be had against separate property for the Debt. Discharge of any Obligor except for full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of Collateral or any impairment or suspension of Bank's rights against an Obligor, or any transfer of an Obligor's interest to another shall not affect the liability of any other Obligor. Until the Debt shall have been paid or performed in full, Bank's rights shall continue even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank to proceed against any Obligor before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until the Debt shall have been paid; (d) and any right of subrogation to Bank until Debt shall have been paid or performed in full. 12. Upon default, at Bank's option, without demand or notice, all or any part of the Debt shall immediately become due. Bank shall have all rights given by law, and may sell, in one or more sales, Collateral in any county where Bank has an office, Bank may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer or user of the Collateral, or at public or private auction, are all to be considered commercially reasonable. Bank may require Obligor to assemble the Collateral and make it available to Bank at the entrance to the location of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (b) Any change in Obligor's or Borrower's financial condition which in Bank's judgment impairs the prospect of Borrower's payment or performance. (c) Any actual or reasonably anticipated deterioration of the Collateral or in the market price thereof which causes it, in Bank's judgment, to become unsatisfactory as security. (d) Any levy or seizure against Borrower or any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor or Borrower or any guarantor of the Debt. (f) Any warranty or representation which is false or is believed in good faith by Bank to be false. 13. Bank's acceptance of partial or delinquent payments or the failure of Bank to exercise any right or remedy shall not waive any obligation of Obligor or Borrower or right of Bank to modify this Agreement, or waive any other similar default. 14. On transfer of all or any part of the Debt, Bank may transfer all or any part of the Collateral. Bank may deliver all or any part of the Collateral to any Obligor at any time. Any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This Agreement benefits Bank's successors and assigns and binds Obligor's heirs, legatees, personal representatives, successors and assigns. Obligor agrees not to assert against any assignee of Bank any claim or defense that may exist against Bank. Time is of the essence. This Agreement and supplementary schedules hereto contain the entire security agreement between Bank and Obligor. Obligor will execute any additional agreements, assignments or documents reasonably required by Bank to carry this Agreement into effect. 15. This Agreement shall be governed by and construed in accordance with the laws of the State of California, to the jurisdiction of whose courts the Obligor hereby agrees to submit. Obligor agrees that service of process may be accomplished by any means authorized by California law. All words used herein in the singular shall be considered to have been used in the plural where the context and construction so require. Page 2 of 2 EX-11.1 8 STATEMENT OF COMPUTATION EXHIBIT 11.1 TEKELEC STATEMENT OF COMPUTATION OF EARNINGS PER SHARE (thousands, except per share data)
PRIMARY YEAR ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Net income (loss) ............................. $ (2,511) $ 6,311 $ 4,460 ============ ============ ============ Basis for computation of primary earnings per common and common equivalent share: Weighted average number of shares outstanding during period ..................... 11,775 10,529 8,684 Weighted average (incremental) common share equivalent after considering the effects of options exercised and canceled during the period and after assumed repurchase of treasury shares -- treasury stock method .................................. -- 1,531 866 ------------ ------------ ------------ 11,775 12,060 9,550 ============ ============ ============ Earnings (Loss) per share ..................... $ (0.21) $ 0.52 $ 0.47 ============ ============ ============ FULLY DILUTED YEAR ENDED DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Net income (loss) ............................. $ (2,511) $ 6,311 $ 4,460 ============ ============ ============ Basis for computation of fully diluted earnings per common and common equivalent share: Weighted average number of shares outstanding during period ..................... 11,775 10,529 8,684 Weighted average (incremental) common share equivalent after considering the effects of options exercised and canceled during the period and after assumed repurchase of treasury shares -- treasury stock method .................................. -- 1,534 1,676 ------------ ------------ ------------ 11,775 12,063 10,360 ============ ============ ============ Earnings (Loss) per share ..................... $ (0.21) $ 0.52 $ 0.43 ============ ============ ============
EX-21.1 9 SUBSIDIARIES EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT STATE OR OTHER JURISDICTION OF NAME OF SUBSIDIARY INCORPORATION OR ORGANIZATION - ---------------------------------------------- ------------------------------ Tekex Corporation California Tekex Limited U.S. Virgin Islands Tekelec Ltd. Japan Tekelec Canada Inc. Canada Tekelec India Private Limited India Chameleon Network Systems, Limited United Kingdom Protocol Technologies, Inc. California Chameleon Network Systems California - -------------------------------- * The subsidiaries of the Registrant do not do business under any name other than as listed above. EX-23.1 10 CONSENT OF COOPERS & LYBRAND L.L.P. EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Tekelec on Form S-8 (Registration Nos. 33-48079, 33-82124, 33-60611 and 333-05933) and on Form S-3 (Registration Nos. 33-34835 and 33-62035) of our report dated February 5, 1997, on our audits of the consolidated financial statements and financial statement schedule of Tekelec as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Sherman Oaks, California March 27, 1997 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 0000790705 TEKELEC 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 17,211 17,913 19,775 368 8,116 64,394 25,993 17,819 82,518 20,767 0 0 0 57,049 4,702 82,518 72,126 72,126 26,682 26,682 47,245 0 98 (284) 2,227 (2,511) 0 0 0 (2,511) (0.21) (0.21)
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