10-K405
1
FORM 10-K
1
________________________________________________________________________________
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMMISSION FILE NUMBER 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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 1, 1995 as reported on the Nasdaq National Market, was approximately
$85,067,012.
The number of shares outstanding of the registrant's Common Stock on
March 1, 1995, as retroactively adjusted to reflect the registrant's March 1995
two-for-one stock split, was 9,177,696.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1994 are incorporated by reference into Parts II and IV of
this Annual Report. 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 12, 1995 are incorporated by reference into Part
III of this Annual Report.
Item 1 of this Annual Report has been omitted pursuant to Rule 12b-25
under the Securities Exchange Act of 1934 and will be filed with the Commission
on or before April 14, 1995.
2
PART I
ITEM 1. BUSINESS.
The information required by this Item has been omitted pursuant to Rule
12b-25 of the Securities Exchange Act of 1934 and will be filed by amendment.
ITEM 2. PROPERTIES.
The Company's executive offices, as well as its principal
manufacturing and diagnostic product engineering and marketing operations, are
located in an approximate 58,200 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 aggregate monthly rental under this lease is
approximately $59,700, subject to certain periodic increases.
The Company also occupies a 21,600 square-foot facility in Morrisville,
North Carolina (the "Morrisville Facility") under a lease expiring in July
1996, and a 6,800 square-foot facility in Columbus, Ohio under a lease expiring
in March 1999, primarily for engineering, product development, customer support
and regional sales activities. The Company recently signed two leases for two
additional facilities in Morrisville, North Carolina to provide for anticipated
growth. The first is a five-year lease (cancelable by the Company under
certain circumstances) for an 8,800 square-foot facility to which the Network
Diagnostic Division employees of the Morrisville Facility will relocate in
April 1995. The second is a seven-year lease for a 40,000 square-foot facility
to which the Network Switching Division employees of the Morrisville Facility
will relocate during the fourth quarter of 1995. The aggregate monthly rental
under the two new leases will be approximately $32,500, subject to certain
periodic increases. The Company also has eight regional sales offices
occupying an aggregate of approximately 14,500 square feet under leases
expiring between 1995 and 1997 in Milbrae, California; Boulder, Colorado;
Lombard, Illinois; Nashville, Tennessee; Iselin, New Jersey; Irving, Texas;
Reston, Virginia; and Whitby, Canada. The Company's Japanese subsidiary
occupies, at a monthly rental of approximately $37,000, approximately 10,600
square feet in Tokyo under leases expiring between August 1995 and November
1996. The Company believes that its existing facilities, together with the
additional facilities it has leased in Morrisville, North Carolina, will be
adequate to meet its needs at least through 1995. 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock has traded on the Nasdaq National Market
under the symbol "TKLC." The following table sets forth, for the periods
indicated, the high and low last reported sale prices for the Common Stock,
giving effect to the March 1995 two-for-one stock split. As of March 1, 1995,
there were approximately 203 record holders of the Company's Common Stock.
High Low
------ ------
1993
----
First Quarter . . . . . . . . . . . . . . . . . $ 5.25 $ 3.375
Second Quarter . . . . . . . . . . . . . . . . 3.75 2.563
Third Quarter . . . . . . . . . . . . . . . . . 6.00 2.438
Fourth Quarter . . . . . . . . . . . . . . . . 6.125 2.875
High Low
------ ------
1994
----
First Quarter . . . . . . . . . . . . . . . . . 4.375 3.00
Second Quarter . . . . . . . . . . . . . . . . 5.00 2.875
Third Quarter . . . . . . . . . . . . . . . . . 6.75 3.75
Fourth Quarter . . . . . . . . . . . . . . . . 17.00 6.00
The Company has never paid a cash dividend. It is the present policy
of the Company to retain earnings to finance the future growth and development
of its business and, therefore, the Company does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Certain financial
covenants in one of the Company's bank line of credit agreements restrict the
Company's ability to pay dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below as of and for
the years ended December 31, 1994, 1993 and 1992 are derived from, and are
qualified in their entirety by reference to, the Company's audited consolidated
financial statements and notes thereto which are incorporated herein by
reference. The selected consolidated financial data set forth below as of and
for the years ended year December 31, 1991 and 1990 are derived from audited
consolidated financial statements of the Company which are not included herein.
STATEMENT OF OPERATIONS DATA Year Ended December 31,
--------------------------------------------------------
(in thousands, except per share data) 1994 1993 1992 1991 1990
--------- -------- -------- --------- ---------
Revenues . . . . . . . . . . . . . . . . . . . . $ 61,189 $ 46,856 $ 58,090 $ 52,449 $ 42,148
Income (Loss) before provision for
income taxes . . . . . . . . . . . . . . . . 5,711 (17,101) (6,693) 6,740 8,228
Net income (loss) . . . . . . . . . . . . . . . . 4,460 (18,543) (8,296) 4,581 5,040
Earnings (Loss) per share*:
Primary . . . . . . . . . . . . . . . . . . . $ 0.47 $ (2.23) $ (1.01) $ 0.53 $ 0.61
Fully diluted . . . . . . . . . . . . . . . 0.43 (2.23) (1.01) 0.53 0.61
Weighted average number of shares
outstanding*:
Primary . . . . . . . . . . . . . . . . . . . 9,550 8,314 8,178 8,576 8,244
Fully diluted . . . . . . . . . . . . . . . . 10,360 8,314 8,178 8,576 8,244
BALANCE SHEET DATA December 31,
--------------------------------------------------------
(in thousands) 1994 1993 1992 1991 1990
--------- -------- -------- --------- ---------
Cash, cash equivalents and restricted cash . . . $ 7,653 $ 3,669 $ 10,067 $ 17,282 $ 16,397
Working capital . . . . . . . . . . . . . . . . . 13,466 3,215 15,471 26,443 22,418
Total assets . . . . . . . . . . . . . . . . . . 34,409 28,139 38,403 43,893 37,455
Long-term obligations . . . . . . . . . . . . . . 654 323 204 437 680
Shareholders' equity . . . . . . . . . . . . . . 18,720 11,693 28,751 36,345 30,316
_____________________________
* Weighted average number of shares outstanding and earnings (loss) per share
have been retroactively adjusted to reflect the two-for-one stock split
effected March 17, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this Item is incorporated by reference to
the section of the Company's Annual Report to Shareholders entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing at pages 9-13 thereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is (i) incorporated by reference
to the Consolidated Financial Statements and the notes thereto and the Report
of Independent Accountants appearing at pages 15-26 of the Company's Annual
Report to Shareholders or (ii) filed as Financial Statement Schedules pursuant
to Item 14 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Inapplicable.
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 12, 1995, entitled "Election of Directors,"
"Executive Officers" and "Common Stock Ownership of Principal Shareholders and
Management - Compliance with Section 16(a) of the Securities Exchange Act of
1934," 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 12, 1995, 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 PRINCIPAL SHAREHOLDERS 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 12, 1995, entitled "Common Stock Ownership of
Principal Shareholders and Management," to be filed with the Commission.
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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 12, 1995, entitled "Certain Relationships and
Related Transactions," to be filed with the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)
1. CONSOLIDATED FINANCIAL STATEMENTS*
. Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1994
. Consolidated Balance Sheets as of December 31, 1994 and 1993
. Consolidated Statements of Cash Flow for each of the
three years in the period ended December 31, 1994
. Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1994
. Notes to Consolidated Financial Statements
. Report of Independent Accountants
----------
*Incorporated in Item 8 hereof by reference to pages 15-26 of the Company's Annual
Report to Shareholders for the year ended December 31, 1994, filed as part of
Exhibit 13.1 hereto.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES PAGE
----
. Report of Independent Accountants S-1
. Schedule II Valuation and Qualifying Accounts and Reserves
for each of the three years in the period ended
December 31, 1994 S-2
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.
3. LIST OF EXHIBITS
3.1 Amended and Restated Articles of Incorporation
3.2 Bylaws, as amended(1)
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10.1 Amended and Restated 1984 Stock Option Plan, including forms of stock option agreements(2), as amended February 1,
1987(3), December 6, 1987(3), January 28, 1989(4), March 15, 1991(5) and December 1, 1991(6)(7)
10.2 Employee Stock Purchase Plan and form of subscription agreement(8), as amended January 29, 1988(3), January 28,
1989(4), March 15, 1991(5), May 15, 1992(9), December 8, 1992(9), March 24, 1993(9) and October 29, 1994(7)(10)
10.3 Amended and Restated Non-Employee Director Equity Incentive Plan, including forms of stock award certificate and
nonstatutory stock option agreements(7)(11)
10.4 1994 Stock Option Plan, including forms of stock option agreements(7)(11)
10.5 Retirement Pension Rules of Tekelec Ltd.(7)
10.6 Form of Indemnification Agreement between the Registrant and all directors of the Registrant(1)(7)
10.7 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(12)
10.8 Form of International Distributor Agreement(13) and Schedule of Distributors
10.9 Loan and Security Agreement dated September 14, 1993 between the Registrant and CoastFed Business Credit
Corporation(14), as amended by Amendment to Loan Documents dated May 18, 1994(15)
10.10 Accounts Collateral Security Agreement dated September 14, 1993 between the Registrant and CoastFed Business Credit
Corporation(14)
10.11 Equipment Collateral Security Agreement dated May 18, 1994 between the Registrant and CoastFed Business Credit
Corporation(15)
10.12 Officer Severance Plan, including form of Employment Separation Agreement(7)(16)
10.13 Consulting Agreement dated as of January 20, 1994 between the Registrant and Howard Oringer, including warrant and
confidentiality agreement(7)(16)
10.14 Warrant issued to Robert V. Adams on January 16, 1992, as amended by Amendment No. 1 dated July 24, 1993(7)(16)
10.15 Warrant issued to Howard Oringer on January 16, 1992, as amended by Amendment No. 1 dated July 24, 1993(7)(16)
10.16 Warrant issued to Philip Black on April 16, 1994(7)(10)
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10.17 Revolving Line of Credit Agreement dated February 10, 1994 between the Registrant and The Sumitomo Bank,
Limited(17)
10.18 Distributorship Agreement dated September 16, 1994 between the Registrant and AT&T Corp.(18)
10.19 Memo of Understanding dated October 27, 1994 between the Registrant and Stratus Computers
11.1 Statement of Computation of Earnings per Share
13.1 Portions of Annual Report to Shareholders for the year ended December 31, 1994
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
-----------------------------
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1987.
(2) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1986.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-22370) filed with the Commission on
June 8, 1988.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-30475) filed with the Commission on
August 11, 1989.
(5) Incorporated by reference to the Registrant's Statement on Form S-8
(Registration No. 33-40612) filed with the Commission on May 16, 1991.
(6) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1991.
(7) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report.
(8) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-16094) filed with the Commission on
December 9, 1986.
(9) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-63102) filed with the Commission on
May 24, 1993.
(10) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-87558) filed with the Commission on
December 19, 1994.
(11) 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.
(12) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended June 30, 1988.
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(13) 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.
(14) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended September 30, 1993.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended June 30, 1994.
(16) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1993.
(17) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended March 31, 1994.
(18) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended September 30, 1994.
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.
(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, 1994.
(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 list of Schedules under Item 14(a)2 of this Annual Report on
Form 10-K.
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SIGNATURE
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, in the City of
Calabasas, California.
TEKELEC
By: PHILIP J. ALFORD
-------------------------------
Philip J. Alford, President
Dated: March 31, 1995
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
--------- ----- ----
Chairman of the Board March , 1995
-------------------------------------------
Jean-Claude Asscher
PHILIP J. ALFORD President and Director March 31, 1995
-------------------------------------------
Philip J. Alford
ROBERT V. ADAMS Director March 31, 1995
-------------------------------------------
Robert V. Adams
Director March , 1995
-------------------------------------------
Philip Black
DANIEL L. BRENNER Director March 31, 1995
-------------------------------------------
Daniel L. Brenner
HOWARD ORINGER Director March 31, 1995
-------------------------------------------
Howard Oringer
JON F. RAGER Director March 31, 1995
-------------------------------------------
Jon F. Rager
GILLES C. GODIN Vice President, Finance and March 31, 1995
------------------------------------------- Chief Financial Officer
Gilles C. Godin
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REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Tekelec has been
incorporated by reference in this Form 10-K from page 26 of the 1994 Annual
Report to Shareholders. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule
listed under PART IV, Item 14(a)2 on page 6 of this Form 10-K.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Sherman Oaks, California
February 3, 1995
S-1
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SCHEDULE II
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, 1992:
----------------------------
Allowance for doubtful accounts $ 243 $ 43 $ -- $ 45 $ 241
Product warranty 241 430 -- 372 299
Inventory provision 189 463 -- 184 468
Deferred tax valuation allowance -- 3,955 -- -- 3,955
Year ended December 31, 1993:
----------------------------
Allowance for doubtful accounts $ 241 $ -- $ 14 $ 34 $ 221
Product warranty 299 254 -- 273 280
Inventory provision 468 763 -- 142 1,089
Deferred tax valuation allowance 3,955 8,003 -- -- 11,958
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
S-2
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EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
3.1 Amended and Restated Articles of Incorporation . . . . . . . . . . . . . . . . . . .
10.5 Retirement Pension Rules of Tekelec Ltd. . . . . . . . . . . . . . . . . . . . . . .
10.8 Schedule of Distributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.19 Memo of Understanding dated October 27, 1994 between the Registrant
and Stratus Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Statement of Computation of Earnings Per Share . . . . . . . . . . . . . . . . . . .
13.1 Portions of Annual Report to Shareholders for the year ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.1 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.1 Consent of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EX-3.1
2
AMENDED AND RESTATED ARTICLES OF INCORPORATION
1
EXHIBIT 3.1
CERTIFICATE
OF
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
PHILIP J. ALFORD AND RONALD W. BUCKLY certify that:
1. They are the president and secretary, respectively, of TEKELEC, a California
corporation.
2. The articles of incorporation of this corporation are amended and restated
in their entirety to read as is set forth in Exhibit A attached hereto.
3. The foregoing amendment and restatement of articles of incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment of articles of incorporation was one which may be
adopted with approval by the Board of Directors alone in accordance with
Section 902(c) of the California Corporations Code. The amendment effects
only a stock split.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Date: March 14, 1995
Philip J. Alford
----------------------------------
Philip J. Alford, President
Ronald W. Buckly
----------------------------------
Ronald W. Buckly, Secretary
2
EXHIBIT A
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
TEKELEC
I.
The name of the corporation is Tekelec.
II.
The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
General Corporation Law.
III.
The corporation is authorized to issue only one class of shares of
stock, designated "Common Stock," and the total number of shares which this
corporation is authorized to issue is fifty million (50,000,000).
Upon amendment of this Article III, each outstanding share of Common
Stock is split up and converted into two shares of Common Stock.
IV.
This corporation elects to be governed by all of the provisions of the
General Corporation Law of 1977, as amended, not otherwise applicable to it
under Chapter 23 thereof.
V.
(a) Limitations of Directors' Liability. The liability of the
directors of this corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
(b) Indemnification of Corporate Agents. This corporation is
authorized to provide indemnification of its agents (as defined in Section 317
of the California General Corporation Law) for breach of duty to this
corporation and its shareholders through bylaw provisions or through agreements
with the agents, or both, in excess of the indemnification otherwise permitted
by such Section 317, subject to the limits on such excess indemnification set
forth in Section 204 of the California General Corporation Law.
(c) Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article V by the shareholders of this corporation
shall not adversely affect any right or protection of a director or agent of
this corporation existing at the time of such repeal or modification.
EX-10.5
3
RETIREMENT PENSION RULES OF TEKELEC LTD
1
EXHIBIT 10.5
(Translation)
Retirement Pension Rules
of
TEKELEC LTD.
- Main Provisions -
Chapter 1. General Provisions
(Purpose)
Article 1. The purpose of Main Provisions (hereinafter "this rule") is to
establish the pension plan (hereinafter called "the Plan") for
the regular employees (hereinafter called "the employees") of
TEKELEC Ltd. (hereinafter called the "Company") and to
contribute to stabilization of their or their bereaved family
members' livelihoods.
(Prohibition of Discriminative Treatment)
Article 2. Under the Plan, the Company shall not discriminate against any
employees improperly.
Chapter 2. Participation
(Range of Application)
Article 3. This rule shall be applicable to all the employees except;
(1) Directors;
(2) Supernumerary employees;
(3) Day Laborers;
(4) Temporary employees who are employed temporarily for
a fixed period;
(5) Employees whose number of expected service years
until normal retirement is less than three years;
(6) Part-time workers.
2
(Eligibility)
Article 4. The employees who fall under the preceding Article 3 except
these listed (1)-(6) shall be entitled to participate in the
Plan when their period of service have reached six full
months.
(Time of Participation)
Article 5. The eligible employees shall participate in the Plan from
January 1 next following the date when they become eligible.
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Chapter 3. Benefits
Section 1. General Provisions
(Types of Benefits)
Article 6. The types of benefits available under the Plan are as follows:
(1) Retirement Annuity;
(2) Retirement Lump Sum; and
(3) Survivor's Lump Sum
(Date of Benefit Payment)
Article 7. 1. The annuity shall be paid on the 10th of February,
May, August and November, covering annuities of the
respective previous months.
2. Any lump-sum benefit shall be paid by the end of the
month next following the month when the Company
receives the documents stipulated in Article 26.
(Method of Benefit Payment)
Article 8. The annuity and lump-sum benefits shall be remitted to the
financial institution designated by the beneficiary in advance.
(Payment of Unpaid Benefit)
Article 9. If an annuitant dies and there is a benefit which should have
been paid but not yet paid, it shall be paid to his/her
bereaved family member. (If the bereaved family member dies,
it will be paid to the next-order bereaved family member. The
same shall apply so on.)
(Adjustment of Overpayment)
Article 10. If an annuitant dies and the annuity is overpaid because of a
bereaved family member's delay of procedures etc., the
overpayment shall be adjusted by subtracting the overpaid
amount from the annuity payable to the bereaved family member.
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4
(Range of Bereaved Family Members and Order for Benefit Payment)
Article 11. The range of bereaved family members and the order for benefit
payments in this rule shall conform to Article 42 through
Article 45 of the Labor Standards Law Enforcement Rule. If
the number of heirs in the same order is plural, the
retirement benefit shall be paid to the eldest heir as a
representative.
(Restriction of Payment)
Article 12. The benefit stipulated in this rule shall not be paid to
participants dismissed in disgrace.
(Disposal of Fraction)
Article 13. If there is any fraction less than 100 yen in the amount of
benefits stipulated in this rule, the fraction shall be
regarded as 100 yen.
- 4 -
5
(Lump-Sum Payment of Annuity)
Article 14. 1. If a participant who is entitled to receive a
retirement annuity or an annuitant who is receiving
an annuity (hereinafter jointly called "the vested
person") wishes a lump-sum payment of the retirement
annuity for one of the following reasons and if the
Company approves it, a lump sum shall be paid in
place of the retirement annuity.
Provided that, except the following items (1) and
(2), the request for a lump-sum payment shall be
available within 3 years of the commencement of
annuity payments.
(1) Disaster and/or natural calamity;
(2) Serious disease, or serious mental or bodily
injury accompanied by after-effects
(including those which occur with the
relative living together, or the relative's
death);
(3) Acquisition of a dwelling house;
(4) Marriage or education of a relative (except
a spouse) living together;
(5) Repayment of debt; and
(6) Reasons comparable to any of the above-
mentioned items (1) through (5).
2. If the vested person dies and his/her bereaved family
member wishes a lump-sum payment of the retirement
annuity, a lump sum shall be paid in place of annuity
payments.
3. If the monthly amount of the annuity is 10,000 yen or
less, a lump-sum shall be paid in place of annuity
payments.
4. The amount of lump-sum for any of the above mentioned
purpose in this article shall be equivalent to the
present value of the annuity which shall be
determined by the number of years and months
remaining in the annuity payment - period.
- 5 -
6
Section 2. Retirement Annuity
(Qualification for Benefit)
Article 15. If a participant with 20 years or more of service retires due
to age limit, a retirement annuity shall be paid.
(Amount of Benefit)
Article 16. The monthly amount of the retirement annuity shall be as
follows:
(Base earnings) x (Benefit rate of table 1)
(Period of Benefit Payment)
Article 17. 1. The period of benefit payments shall be 10 years from
the month of retirement.
2. If the vested person dies prior to the expiration of
the benefit payment period provided in the preceding
paragraph, his/her bereaved family member shall
receive the same amount of annuities for the
remaining period.
Section 3. Retirement Lump Sum
(Qualification for Benefit)
Article 18. If a participant falls under one of the following items, a
retirement lump sum shall be paid to him/her. Provided that
the participant who falls under a retirement annuity shall be
excluded.
(1) Age limit retirement with 3 years or more of service.
(2) Termination on the Company's request with 3 years or
more of service.
(3) Voluntary termination with 3 years or more of service.
- 6 -
7
(Amount of Benefit)
Article 19. The amount of the retirement lump sum shall be as follows:
(1) In case of Article 18 - (1) or (2)
(Base earnings) x (Benefit rate of table 2)
(2) In case of Article 18 - (3)
(Base earnings) x (Benefit rate of table 3)
Section 4. Survivor's Lump Sum
(Qualification for Benefit)
Article 20. If a participant with 3 years or more of service dies before
age limit, a survivor's lump sum shall be paid to his/her
bereaved family member.
(Amount of Benefit)
Article 21. The amount of the survivor's lump sum shall be as follows:
(Base earnings) x (Benefit rate of table 2)
- 7 -
8
Chapter 4. Contribution
(Payment of Premium)
Article 22. In order to reserve the funds for benefit payments stipulated
in this rule, the Company shall pay all the premiums computed
on the proper actuarial basis for group annuity mathematics.
(Discontinuance of Payment)
Article 23. If a participant is ordered to be suspended from his/her
duties, the Company shall discontinue the premium payment for
the said participant (excluding the premiums for amortizing
the past service liabilities etc., and those survivor's
lump-sum benefits stipulated in Article 21) from the month
next following his/her suspension to the month of his/her
reinstatement to the Company.
- 8 -
9
Chapter 5. Operation of Plan
(Operation of Plan)
Article 24. In order to operate the Plan, the Company shall conclude a
qualified group annuity insurance contract which meets the
requirements stipulated in Article 159 of Enforcement
Ordinance for Corporate Tax Law with the following
corporation:
The Meiji Mutual Life Insurance Company
- 9 -
10
Chapter 6. Miscellaneous Rules
(Prohibition of Transfer of Vested Right)
Article 25. The vested right under the Plan shall not be transferred nor
be put up as security.
(Report)
Article 26. 1. A participant who is entitled to receive a benefit
under the Plan shall submit the following documents.
(1) Report on address, name and seal impression;
(2) Report on method of receiving annuity or lump
sum;
(3) Certificate for the vested person;
(4) Necessary documents stipulated in Income Tax
Law; and
(5) Any documents which the Company considers
necessary.
2. In the case where there are any changes in reports or
documents submitted according to the preceding
paragraph, any change shall be immediately made
known.
(Computation of Service Years)
Article 27. 1. The method to compute service years under this rule
shall be as follows:
(1) The service years by which to determine the
qualification to receive the benefit shall be
the total number of years from the date of
employment until the date of retirement,
termination or death. If there should be any
fraction less than one year, the fraction
shall be discarded.
(2) The service years by which to determine the
amount of benefits shall be the total number
of years and months from the date of
employment until the date of retirement,
termination or death. If there should be any
fraction less than one month, the fraction
shall be discarded.
- 10 -
11
2. The following period shall not be totalled into the
service years provided in the preceding paragraph:
(1) Service years after normal retirement age.
(2) Suspended period from the office
3. The following period shall be totalled into the
service years provided in the first paragraph of this
Article.
(1) The period of probation
(Base Earnings)
Article 28. 1. The base earnings under this rule shall be the
regular salary (Honkyu) in the basis salary
(Kihonkyu) stipulated in Article 12 of the salary
rules of the Company.
2. The base earnings which is the basis of premium
computation shall be the basic salary as of every
January 1, and shall be applicable until next
January.
The base earnings to compute the amount of benefits
shall be the one at the time of retirement,
termination or death.
(Amendment or Termination of the Plan)
Article 29. 1. The Plan can be partially/totally amended or
terminated according to the changes in economic
conditions, developments in social security system or
other reasons.
2. If the Plan is terminated, the premium reserve under
the group annuity insurance contract shall be
distributed to each participant on the day of
termination of the Plan. Provided that the premium
reserve necessary for benefit payments to the
annuitants shall not be distributed, and the annuity
shall be paid continuously to the said annuitants.
--- Supplementary Provisions 1 ---
(Effective Date)
Article 1. The Main Provisions of the Plan shall be effective as of
January 1, 1990.
- 11 -
12
(Interim Measures)
Article 2. Notwithstanding Article 5 of the Main Provisions, all the
employees who are eligible on the effective date under Article
4 of the Main Provisions shall participate in the Plan on the
effective date.
--- Supplementary Provisions 2 ---
Director's Pension Provisions
(Purpose)
Article 1. Notwithstanding Article 3 item (1) of the Main Provisions, the
purpose of these Director's Pension Provisions is to establish
the Director's Pension Plan for the retired full-time
directors of Tekelec Ltd. in order to contribute to their and
their bereaved family members' financial security.
(Operation of the Plan)
Article 2. In order to operate the Director's Pension Plan, the Company
shall conclude a New Corporate Annuity Contract with the
legally-approved fiduciary institution for a corporate
annuity insurance, in addition to the qualified group annuity
insurance contract for regular employees stipulated in Article
24 of the Main Provisions.
(Survivor's Lump Sum)
Article 3. Notwithstanding the preceding Article, Survivor's Lump Sum for
the director's survivors shall be paid by the Company in
accordance with the Main Provisions. (The New Corporate
Annuity Insurance Contract with the legally-approved fiduciary
institution for a corporate annuity insurance shall not
provide the Survivor's Lump Sum.)
(Base Earnings)
Article 4. Notwithstanding Article 28 of the Main Provisions, the base
earnings for a Director shall equal the highest amount of
monthly remuneration received during his or her term in office
as a director, except when the monthly remuneration of a
Director has been reduced by a resolution of the Board of
Directors as a result of the adjudged performance of such
Director, in which case such lower monthly remuneration shall
be the base earnings of such Director for the purposes of this
Article. Monthly remuneration is defined as the sum of all
types of fixed monthly compensation paid to a Director by
Tekelec Ltd.
- 12 -
13
(Effective Date)
Article 5. The Director's Pension Provisions shall be effective as of
January 1, 1994.
- 13 -
14
Benefit Rate Table
Service Table 1 Table 2 Table 3
Years
------- --------- --------- ---------
1
2
3 3.15 0.945
4 4.20 1.260
5 5.25 2.625
6 6.30 3.150
7 7.35 3.675
8 8.40 4.200
9 9.45 4.725
10 12.00 7.200
11 13.20 7.920
12 14.40 8.640
13 15.60 9.360
14 16.80 10.080
15 18.00 12.600
16 19.20 13.440
17 20.40 14.280
18 21.60 15.120
19 22.80 15.960
20 0.2575 24.00 19.200
21 0.2720 25.35 20.280
22 0.2865 26.70 21.360
23 0.3010 28.05 22.440
24 0.3154 29.40 23.520
25 0.3299 30.75 27.675
26 0.3444 32.10 28.890
27 0.3589 33.45 30.105
28 0.3734 34.80 31.320
29 0.3878 36.15 32.535
30 0.4023 37.50 33.750
31 0.4184 39.00 39.000
32 0.4345 40.50 40.500
33 0.4506 42.00 42.000
34 0.4667 43.50 43.500
35 0.4828 45.00 45.000
36 0.4881 45.50 45.500
37 0.4935 46.00 46.000
38 0.4989 46.50 46.500
39 0.5042 47.00 47.000
40 0.5096 47.50 47.500
-14-
15
Note
Computation method of benefit rate in case that there should be any fractional
months less than 1 year is as follows;
Benefit rate for the participant with A years and B months of service
= (Benefit rate corresponding to A years of service)
+ (Benefit rate corresponding to (A+1) years of service
- Benefit rate corresponding to A years of service) x B/12
(Table 1)
If there is any fraction in five or more decimal places, the fraction of 5 or
more in five decimal places shall be counted as 10, and the fraction of less
than 5 shall be disregarded. Therefore, the benefit rate shall be computed
down to four decimal places.
(Table 2)
If there is any fraction in three or more decimal places, the fraction of 5 or
more in three decimal places shall be counted as 10, and the fraction of less
than 5 shall be disregarded. Therefore, the benefit rate shall be computed
down to two decimal places.
(Table 3)
If there is any fraction in four or more decimal places, the fraction of 5 or
more in four decimal places shall be counted as 10, and the fraction of less
than 5 shall be disregarded. Therefore, the benefit rate shall be computed
down to three decimal places.
-15-
16
Appendix
Rate of Present Value to Compute Lump-Sum Settlement in Lieu of Annuity Payment
No. of Months
0 1 2 3 4 5
No. of Years
0 0 0.9966 1.9931 2.9897 3.9730 4.9564
1 11.7225 12.6671 13.6117 14.5563 15.4883 16.4204
2 22.8338 23.7292 24.6245 25.5199 26.4034 27.2868
3 33.3658 34.2145 35.0632 35.9119 36.7493 37.5867
4 43.3488 44.1533 44.9577 45.7622 46.5559 47.3497
5 52.8114 53.5740 54.3365 55.0990 55.8513 56.6037
6 61.7807 62.5034 63.2261 63.9489 64.6621 65.3752
7 70.2823 70.9674 71.6525 72.3376 73.0135 73.6895
8 78.3408 78.9901 79.6394 80.2889 80.9296 81.5703
9 85.9791 86.5946 87.2101 87.8256 88.4330 89.0403
10 93.2192
6 7 8 9 10 11
No. of Years
0 5.9397 6.9099 7.8802 8.8504 9.8078 10.7651
1 17.3525 18.2722 19.1918 20.1115 21.0189 21.9264
2 28.1703 29.0420 29.9138 30.7855 31.6456 32.5057
3 38.4241 39.2504 40.0767 40.9030 41.7183 42.5335
4 48.1434 48.9266 49.7098 50.4930 51.2658 52.1366
5 57.3561 58.0984 58.8408 59.5832 60.3157 61.0482
6 66.0884 66.7921 67.4957 68.1994 68.8937 69.5880
7 74.3655 75.0324 75.6994 76.3664 77.0246 77.6827
8 82.2110 82.8432 83.4755 84.1077 84.7315 85.3553
9 89.6476 90.2469 90.8461 91.4453 92.0367 92.6279
10
-16-
EX-10.8
4
SCHEDULE OF DISTRIBUTORS
1
EXHIBIT 10.8
SCHEDULE TO FORM OF INTERNATIONAL DISTRIBUTOR AGREEMENT
DISTRIBUTOR TERRITORY
Altech Instruments (Pty.) Ltd. South Africa
Avantec Chile
Bynet Israel
Communications Instruments, Ltd. New Zealand
Eagle Telecom Puerto Rico, Virgin Islands
Euro Tech Far East, Ltd. Hong Kong
Heli-Ocean Technology Taiwan
Industrial Electro-Communications, Inc. Philippines
Lagercrantz Communication Sweden
Oy Alkas AB Finland, Baltics
Sintel Norway, Denmark
Sistronics Brazil
Trend Communications Limited United Kingdom
Tekelec Espana, SA Spain and Portugal
Tekelec Airtronic SPA Italy
Tekelec Airtronic B.V. Luxembourg, Belgium
Tekelec Airtronic GMBH Germany, Switzerland
Tekelec-Airtronic, S.A. France
Mekaster Telecom Pvt. Ltd. India
Galactica Telecom Venezuela
Infonet International Singapore
KDC Corporation South Korea
MEDCOM Mexico
PERNEC Malaysia
Reycom Electronica SRL Argentina
Twin Tech Thailand
EX-10.19
5
MEMO OF UNDERSTANDING
1
EXHIBIT 10.19
MEMO OF UNDERSTANDING
This memo of understanding between Stratus Computers and Tekelec signals the
introduction of a unique and valuable partnership to the AIN marketplace. The
combination of Tekelec's proven SS7 and STP knowledge and expertise and
Stratus' industry proven SINAP product and application solutions will bring to
the targeted market(s) integrated "total" AIN solutions. In addition, a
"single point of contact" multivendor environment will be offered to the
targeted market(s).
In is envisioned that over time the relationship will evolve from an initial
marketing alliance to one undertaking joint product development and
integration. For example, a product offering the features and functions of
both an STP and SCP in a single, fault tolerant, scalable system combined with
the benefits of a single Service Creation Environment could result and be
brought to the market.
TARGET MARKET(S)
One of the first objectives of the alliance will be the joint definition and
identification of the target market(s). This activity will include the
quantification of the number of accounts targeted by year as well as the
specific applications to be offered. In general, the early targets of the
alliance are believed to be the smaller Local Exchange Carriers (LEC) and
Independent Telephone Companies (ITC) as well as alliances involving multiple
LECs and ITCs. Included in this effort will be the following activities and
objectives.
1. Applications required The specific applications and services required by the targeted market(s) will be
identified. This will include an estimate of the number of licenses of each application
and/or service to be sold by year by target market.
2. Market Segmentation The classification of the total possible market into market segments based upon such
variables as number of access lines served, construction budget funds, performance
requirements, motivation, state of SS7 deployment, expected in-service dates, etc.
3. Target Market Req. A definition of the requirements for each of the target market segments identified in
item 2.
4. Solution Packaging How the alliance "solution" will be packaged and presented to each of the targeted markets.
5. Competition The identification of the competition, positioning alliance against, strengths and
weaknesses, etc.
October 19, 1994
1 of 3
2
6. Qualification profile For each of the target market segments a profile
will be developed. It is intended that this
profile will be used as a tool to qualify each
specific opportunity presented to the alliance
and to identify the appropriate solution approach.
MARKETING COMMUNICATIONS
It is the intent of the alliance to present to the marketplace the
establishment and ongoing evolution of the alliance via several mediums which
include
o Joint press releases
o Brochures
o Trade/Industry/Market forums, tradeshows, seminars, etc.
o Industry association contacts (Comptel, OPASTCO, USTA, etc.)
Representatives from Stratus and Tekelec will jointly determine the content of
these items and events.
MARKETING AND SALES ACTIVITIES
It is expected that sales opportunities will be introduced to the alliance by
both Stratus and Tekelec sales personnel. Over a period of time, each sales
organization will become proficient in the presentation of each other's
products so that each sales group can present the total solution independently,
but for the first several opportunities joint sales call participation is
anticipated. In addition, joint sales calls when appropriate will always be an
option.
For those accounts target by the alliance, Stratus and Tekelec will act as a
single team to the customer. Prime point-of-contact will be determined on a
case-by-case basis as determined by Stratus and Tekelec marketing.
Coordination and logistics of sales presentations, the generation of quotations
and pricing and discount strategies will be the mutual responsibility of
Stratus and Tekelec marketing.
SUPPORT
The alliance must continue to be flexible in its approach to the market place
in the area of product support. To a large degree, the needs and requirements
of the customer will dictate the appropriate approach to be used in providing
product support. It is the intent of the alliance to allow the continued
provision of each parties' current methods and options of providing support to
customers. This philosophy includes but is not limited to extended warranty
packages, system acceptance assistance and network interoperability activities
support. Stratus and Tekelec will continue discussions exploring strategies
and approaches to providing post-sales support.
October 19, 1994
2 of 3
3
PRODUCT STRATEGY PLANNING
As mentioned previously, Stratus and Tekelec will commit to explore the market
opportunities and requirements which may be addressable by the development of
an integrated AIN platform(s) utilizing Tekelec and Stratus technologies.
Network elements may include Service Nodes/Intelligent Peripherals, Service
Control Points, etc.
NONEXCLUSIVITY
Neither party grants or accepts any exclusivity arrangements to or with the
other party.
TERM OF AGREEMENT
This agreement shall be for a term of 1 year from date of signing. The
agreement shall automatically renew at its 1 year anniversary date unless
terminated by either party, such termination having been executed by written
notice to the other party at least 120 days prior to requested date of
termination. No cause by the requesting party is required for the termination
to be effective.
Signed this 27 day of October, 1994.
-- ------- -
Tekelec: Allan Toomer
-----------------------------------
Allan Toomer, Senior Vice President
Stratus: William D. Hays
-----------------------------------
for Bill Elliott, Vice President
October 25, 1994
3 of 3
EX-11.1
6
STATEMENT OF COMPUTATION OF EARNINGS
1
EXHIBIT 11.1
TEKELEC
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(thousands, except per share data)
YEAR ENDED DECEMBER 31,
PRIMARY
1994 1993 1992
---- ---- ----
Net income (loss) . . . . . . . . . . . . . $ 4,460 $ (18,543) $ (8,296)
========= ========== ==========
Basis for computation of primary earnings
per common and common equivalent share:
Weighted average number of shares
outstanding during period . . . . . . . . . 8,684 8,314 8,178
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 . . . . . . . . . . . . . . . . 866 ------ ------
--------- --------- ---------
9,550 8,314 8,178
========= ========= =========
Earnings (Loss) per share . . . . . . . . . $ 0.47 $ (2.23) $ (1.01)
========= ========= =========
YEAR ENDED DECEMBER 31,
FULLY DILUTED
1994 1993 1992
---- ---- ----
Net income (loss) . . . . . . . . . . . . . $ 4,460 $ (18,543) $ (8,296)
========= ========== ==========
Basis for computation of fully diluted earnings
per common and common equivalent share:
Weighted average number of shares
outstanding during period . . . . . . . . . 8,684 8,314 8,178
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 . . . . . . . . . . . . . . . . 1,676 ------ ------
--------- --------- ---------
10,360 8,314 8,178
========= ========= =========
Earnings (Loss) per share . . . . . . . . . $ 0.43 $ (2.23) $ (1.01)
========= ========= =========
EX-13.1
7
ANNUAL REPORT TO SHAREHOLDERS
1
EXHIBIT 13.1
TEKELEC 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. 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 two divisions: Network Diagnostic and Network
Switching.
The Network Diagnostic Division supplies diagnostic products and systems for
the communications marketplace. Its products 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
diagnostic systems for SS7 to develop the EAGLE, a high-capacity,
fault-tolerant data communications switching platform first
introduced in 1992.
As more fully described below, the Company experienced significant losses in
1992 and 1993 but returned to profitability in 1994 as a result of actions
taken in connection with its December 1993 restructuring and increased market
acceptance of its products, particularly the EAGLE STP and the Chameleon Open.
The cost savings realized in connection with such restructuring were consistent
with those anticipated. See Note E to Consolidated Financial Statements.
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, 1994 1993 1992
-------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of goods sold 33.3 35.9 32.5
-------------------------------------------------------------------------------------------------------
Gross profit 66.7 64.1 67.5
Research and development 19.6 37.5 27.9
Selling, general and administrative 36.7 50.7 47.2
Restructuring -- 12.8 4.8
-------------------------------------------------------------------------------------------------------
Income (Loss) from operations 10.4 (36.9) (12.4)
Interest and other income (expense), net (1.1) 0.4 0.8
-------------------------------------------------------------------------------------------------------
Income (Loss) before provision for income taxes 9.3 (36.5) (11.6)
Provision for income taxes 2.0 3.1 2.8
-------------------------------------------------------------------------------------------------------
Net income (loss) 7.3% (39.6)% (14.4)%
=======================================================================================================
9
2
TEKELEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 1994 1993 1992
----------------------------------------------------------------------------------------------
Network diagnostic products 72% 82% 93%
Network switching products 28 18 7
----------------------------------------------------------------------------------------------
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, 1994 1993 1992
----------------------------------------------------------------------------------------------
North America 59% 54% 59%
Japan 20 25 22
Europe 9 11 10
Rest of the World 12 10 9
----------------------------------------------------------------------------------------------
Total 100% 100% 100%
==============================================================================================
1994 COMPARED WITH 1993
REVENUES
The Company's revenues increased by $14.3 million or 31% during 1994 due to
higher sales of both switching and diagnostic products.
Revenues from switching products doubled in 1994 to $16.8 million due to
growing market acceptance of the Company's EAGLE STP product, particularly in
the cellular market. In 1994, 23 pairs of EAGLE STPs were sold (including one
pair sold under the Company's September 1994 distribution agreement with AT&T)
compared with 13 in 1993. The Company expects that 1995 sales of its network
switching products will continue to grow both in dollars and as a percentage of
total revenues although at a reduced percentage rate of growth compared with
1994.
Revenues from diagnostic products increased by 15%, or $5.8 million, to $44.3
million. This increase was primarily driven by an $8.8 million increase in
worldwide sales of the Chameleon Open (which was first shipped in the second
quarter of 1993) and the September 1994 introduction of the Company's ATM
Application Module for this product. Sales of the Chameleon Open represented
26% of 1994 total diagnostic product sales compared with 7% in 1993. These
increases were partially offset by lower worldwide sales of certain older
diagnostic products as the Company continued its product evolution to the
Chameleon Open platform supporting multiple protocol diagnostics. The Company
expects that 1995 sales of its Chameleon Open will continue to grow both in
dollars and as a percentage of diagnostic product revenues although at a
reduced percentage rate of growth compared with 1994.
Revenues in North America increased by $10.8 million or 43% as a result of
higher switching and diagnostic product sales. Despite slightly lower sales of
diagnostic products, revenues in Japan increased by $520,000 or 4% due to the
impact of favorable exchange rates in 1994. Other international revenues grew
$3.0 million or 31% primarily due to higher switching product sales.
The impact of exchange rate fluctuations on currency translations increased
revenues by approximately $1.0 million or 2% and increased net income by
$86,000 or 2%.
GROSS PROFIT
Gross profit as a percentage of revenues improved from 64% in 1993 to 67% in
1994 principally due to lower per unit manufacturing overhead costs and higher
margins on EAGLE sales due to shipments of larger systems and reduced sales
discounts. The gross profit percentage on switching products is generally lower
than on 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.
RESEARCH AND DEVELOPMENT
Research and development expenses in 1994 decreased by $5.6 million or 32% and
from 38% to 20% as a percentage of revenues. These decreases were attributable
primarily to reduced headcount in research and development and termination of
certain projects following the December 1993 restructuring in which certain
product lines were discontinued. Expenses related to EAGLE also declined due to
completion of its initial development.
The Company 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. The Company intends to continue to
make substantial investments in product and technology development, and
believes that total research and development expenses will not change
significantly as a percentage of revenues in 1995.
10
3
TEKELEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in 1994 decreased by $1.3 million
or 5% primarily as a result of the December 1993 restructuring. The decline
due to the restructuring was partially offset by employee bonuses and
increased sales commissions based upon the achievement in 1994 of certain
business performance targets.
INCOME TAXES
In 1994, the Company had an effective tax rate of 22%, compared to 8% in 1993.
The provisions for both years were principally foreign taxes on the income of
the Company's Japanese subsidiary. In 1994, 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 1993 provision was impacted by the Company's inability to recognize a
benefit for its U.S. loss and credits carryforwards, which remain available to
reduce future U.S. taxes.
The Company anticipates that it has sufficient loss and credits carryforwards
available in 1995 to offset its expected U.S. taxes, and therefore its federal
and state effective tax rates should be similar in 1995 to those in 1994.
However, the Company's overall tax rate is significantly influenced by the
level of income derived from its Japanese subsidiary.
BACKLOG
Orders for the Company's diagnostic division 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 receipt of the purchase order.
Backlog for the switching division typically consists of contracts or purchase
orders for both product delivery scheduled within the next 12 months and EAGLE
extended service warranty to be provided over the next three 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 December 31, 1994, the
Company's backlog amounted to approximately $18.1 million, of which $8.6
million related to EAGLE service warranty, compared to $9.9 million at
December 31, 1993, of which $3.1 million related to EAGLE service warranty.
1993 COMPARED WITH 1992
REVENUES
The Company's revenues declined by $11.2 million or 19% during 1993 primarily
due to lower sales of diagnostic products, partially offset by increased sales
of switching products.
The decrease in revenues was primarily due to delayed product introductions and
difficult economic conditions worldwide. As part of its restructuring, the
Company further rationalized its business lines to enhance its ability to be
successful within its resource constraints for 1994 and thereafter. See
"Restructurings."
Revenues from diagnostic products decreased by $15.7 million or 29%.
Of this amount, sales of the signalling/wireless diagnostic products decreased
by $9.3 million or 43% primarily due to lower sales in the U.S. following an
unusually high level of sales during the first nine months of 1992, which was
primarily related to the significant SS7 deployment by the Regional Bell
Operating Companies (RBOCs). In addition, sales of diagnostic products for LAN
and WAN applications decreased by $5.8 million or 20% due primarily to lower
worldwide sales of LAN and field service protocol analyzers. This decrease
was partially offset by sales of the Chameleon Open which first shipped in the
second quarter of 1993. Sales of LAN protocol analyzers declined due to a
slowed market for FDDI research and development, the emergence of competing
technologies such as ATM and increased competition.
Revenues from switching products increased by $4.5 million or 115%
primarily due to higher sales of EAGLE products in the U.S., higher sales of
other switching products in Canada, and the first international EAGLE STP sale
in New Zealand.
Revenues in North America decreased by $9.1 million or 27% primarily as a result
of lower sales of diagnostic products partially offset by higher switching
product sales. Sales in Japan decreased by $782,000 or 6% due to lower field
service diagnostic product sales. Other international sales decreased by $1.3
million or 12% primarily due to lower sales of LAN/WAN and field service
diagnostic products, partially offset by the first international EAGLE STP sale.
The impact of exchange rates fluctuations on currency translations increased
revenues by $1.4 million or 3% and decreased net loss by $100,000 or 1%.
11
4
TEKELEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GROSS PROFIT
Gross profit as a percentage of revenues decreased from 68% in 1992 to 64% in
1993 principally due to changes in the product mix of the Company's sales and a
higher percentage of fixed overhead costs due to lower revenues. The changes in
the product mix reflected a shift in the Company's sales to a lower proportion
of sales of higher margin signalling/wireless diagnostic products and a higher
proportion of EAGLE products which carried lower margins than the Company's
traditional diagnostic business due to marketing strategies to gain market
position.
RESEARCH AND DEVELOPMENT
Research and development expenses increased by $1.4 million or 9% in 1993. This
increase was due primarily to the hiring of additional engineering personnel
and increased third-party contractor costs incurred in connection with the
ongoing development of EAGLE, which was in the early stages of its product life
cycle.
Research and development expenses increased as a percentage of revenues
primarily due to lower than anticipated overall revenues and increased expenses
as described above. Research and development expenses for the EAGLE product
accounted for approximately 36% of the total research and development expenses
for 1993.
The Company also capitalized software development costs totaling $165,000
in 1993 related principally to SMDS, the Company's new broadband WAN
application, as compared to $2.6 million in 1992.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased by 13% in 1993. Selling
expenses decreased by $2.3 million and general and administrative expenses
decreased by $1.3 million, primarily as a result of the expense reduction
measures implemented as part of the December 1992 restructuring and lower legal
expenses, partially offset by a currency translation effect of approximately
$450,000 on the Company's foreign operations.
RESTRUCTURINGS
During 1993 and 1992 the Company recorded restructuring charges of $6.0 million
and $2.8 million, respectively. See Note E to Consolidated Financial
Statements.
INCOME TAXES
Although the Company's pre-tax results showed a loss for the years ended
December 31, 1993 and 1992, the effective tax rates were 8% and 24%,
respectively. The provisions principally consisted of foreign taxes on the
income of the Company's Japanese subsidiary and reflected the Company's
inability to recognize any benefit for its U.S. loss and credits carryforwards,
which remain available to reduce future U.S. taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its net working capital and capital expenditure
requirements principally from operations, available cash, and utilization from
time to time of its U.S. credit facilities. At December 31, 1994, the Company
had $6.7 million of cash and cash equivalents, representing an increase of $3.0
million from December 31, 1993 primarily attributable to net cash provided by
operating activities.
Accounts receivable, including amounts due from related parties, increased by
63% during 1994 due primarily to a 61% increase in sales for the fourth quarter
of 1994 over 1993 fourth quarter sales. A significant portion of the Company's
quarterly sales are concentrated in the last month of each quarter. Inventories
decreased by 7% during 1994 primarily due to continued efforts to maximize
inventory efficiency.
Capital expenditures were reduced to $1.5 million during 1994 in connection
with steps taken to improve the Company's liquidity following the December 1993
restructuring. Although there are currently no significant commitments for
capital expenditures, the Company expects that its capital expenditures will
increase significantly in 1995, primarily in connection with the planned
acquisition of equipment for research and development and sales demonstration.
The net cash provided by financing activities in 1994 was $338,000 which
represented $1.6 million in proceeds from the issuance of Common Stock
resulting from the exercise of options and warrants, and $860,000 in net
proceeds from the issuance of long-term debt, offset primarily by repayments of
short-term borrowings.
The Company has a $7.5 million line of credit and a $2.0 million line of credit
with U.S. banks and lines of credit aggregating $3.5 million available to the
Company's Japanese subsidiary from various Japan-based banks.
12
5
TEKELEC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's $7.5 million line of credit with a U.S. bank is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.5% at December 31, 1994) plus 2.5% per annum and expires September 30,
1995, if not renewed. Maximum borrowings available under the line of credit are
based on eligible accounts receivable and amounted to $6.6 million at December
31, 1994, of which $126,000 was then outstanding. This line of credit includes
a $1.0 million long- term credit facility payable in monthly installments
through May 1998 or upon the expiration of the underlying $7.5 million line
of credit, if not renewed. At December 31, 1994, $860,000 was outstanding
under this long-term facility, of which $620,000 was included under long-term
debt.
In February 1994, the Company established a $2.0 million line of credit with a
U.S. bank collateralized by restricted cash deposits in Japan, with interest at
the U.S. prime rate plus 0.375% per annum. This line of credit expires May 31,
1995, if not renewed. Borrowings at any time may not exceed the cash amount on
deposit. At December 31, 1994, $1.0 million was outstanding under this line of
credit.
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 $3.5 million with interest at the Japanese prime
rate (3% at December 31, 1994) plus 0.125% per annum which expire between May
29, 1995 and March 31, 1996, if not renewed. There have been no borrowings
under these lines of credit.
Upon the expiration of the above-described credit facilities, the Company
believes that, if necessary, it would be able to arrange for credit facilities
on terms generally no less favorable than those described above.
The Company believes that funds generated from operations, existing working
capital and current bank lines of credit should be sufficient to satisfy
anticipated operating requirements for 1995. Nonetheless, the Company may seek
additional sources of capital, including a possible public offering of its
Common Stock, as necessary or appropriate to finance its operations and growth;
however, there can be no assurance that such funds will be available on
favorable terms, if at all.
FOREIGN EXCHANGE
International operations are subject to certain opportunities and risks,
including currency fluctuations. In 1994, 1993, and 1992, weighted average
exchange rates for certain key currencies strengthened (weakened) against the
U.S. dollar as follows:
For The Years
Ended December 31, 1994 1993 1992
------------------------------------------------------------------------------------------------------
Japanese yen 9% 13% 6%
Canadian dollar (9%) (4%) NA(1)
======================================================================================================
(1) 1992 not applicable as the Company's Canadian operations did not begin
operation until 1993.
The change in cumulative translation adjustment in 1994 was due primarily to
the strengthening of the Japanese yen against the U.S. dollar. Exchange gains
(losses) are recorded in interest and other income (expense), net and amounted
to $(235,000), $253,000, and $(132,000) in 1994, 1993, and 1992, respectively.
Exchange gains and losses include the remeasurement of certain currencies into
functional currencies and the settlement of intercompany balances.
13
6
TEKELEC CONSOLIDATED STATEMENT OF OPERATIONS
For The Years Ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(thousands, except per share data)
REVENUES (including sales to related parties of
1994 -- $3,809; 1993 -- $3,972; 1992 -- $3,881) $ 61,189 $ 46,856 $ 58,090
-----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 20,388 16,836 18,864
Research and development 11,962 17,570 16,181
Selling, general and administrative 22,466 23,756 27,413
Restructuring -- 5,988 2,767
-----------------------------------------------------------------------------------------------------------------
Total costs and expenses 54,816 64,150 65,225
-----------------------------------------------------------------------------------------------------------------
Income (Loss) from operations 6,373 (17,294) (7,135)
Interest and other income (expense), net (662) 193 442
-----------------------------------------------------------------------------------------------------------------
Income (Loss) before provision for income taxes 5,711 (17,101) (6,693)
Provision for income taxes 1,251 1,442 1,603
-----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,460 $(18,543) $(8,296)
=================================================================================================================
EARNINGS (LOSS) PER SHARE: (NOTE P)
Primary $ 0.47 $ (2.23) $ (1.01)
Fully diluted 0.43 (2.23) (1.01)
=================================================================================================================
WEIGHTED AVERAGE NUMBER OF SHARES: (NOTE P)
Primary 9,550 8,314 8,178
Fully diluted 10,360 8,314 8,178
=================================================================================================================
See notes to consolidated financial statements
15
7
TEKELEC CONSOLIDATED BALANCE SHEETS
December 31, 1994 1993
------------------------------------------------------------------------------------------------------------------------
(thousands except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,653 $ 3,669
Restricted cash 1,000 --
Accounts and notes receivable, less allowances
1994 -- $318; 1993 -- $221 14,215 8,446
Inventories 4,391 4,715
Amounts due from related parties 1,538 1,244
Income taxes receivable -- 216
Prepaid expenses 704 1,048
----------------------------------------------------------------------------------------------------------------------
Total current assets 28,501 19,338
Property and equipment, net 4,794 6,769
Technology, net 423 1,156
Other assets 691 876
----------------------------------------------------------------------------------------------------------------------
Total assets $34,409 $28,139
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt $ 1,366 $ 3,004
Trade accounts payable 4,005 4,289
Accrued expenses 3,213 3,859
Accrued payroll and related expenses 4,132 3,557
Deferred revenues 1,412 480
Current portion of other obligations 312 265
Income taxes payable 595 669
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 15,035 16,123
Long-term debt 620 --
Long-term portion of other obligations 34 323
----------------------------------------------------------------------------------------------------------------------
Total liabilities 15,689 16,446
----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY: (NOTE P)
Common stock, without par value, 50,000,000 shares authorized; issued
and outstanding 1994 -- 9,022,612; 1993 -- 8,529,454 15,940 14,349
Retained earnings (deficit) 79 (4,381)
Cumulative translation adjustments 2,701 1,725
----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 18,720 11,693
----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $34,409 $28,139
======================================================================================================================
See notes to consolidated financial statements
16
8
TEKELEC CONSOLIDATED STATEMENTS OF CASH FLOW
For The Years Ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------------
(thousands)
Cash flow from operating activities:
Net income (loss) $ 4,460 $(18,543) $(8,296)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,406 5,522 4,999
Deferred income taxes -- 145 465
Non-cash component of restructuring charge -- 2,969 1,710
Changes in current assets and liabilities:
Accounts and notes receivable (5,522) (1,150) 996
Inventories 400 (370) (1,053)
Amounts due from related parties (294) (23) 199
Income taxes receivable 216 530 379
Prepaid expenses 427 (242) 212
Trade accounts payable (304) 2,369 410
Accrued expenses (703) (449) 1,685
Accrued payroll and related expenses 559 1,569 590
Deferred revenues 932 (208) 286
Income taxes payable (150) 372 (450)
-----------------------------------------------------------------------------------------------------------------
Total adjustments (33) 11,034 10,428
-----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,427 (7,509) 2,132
-----------------------------------------------------------------------------------------------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Increase in restricted cash (1,000) -- --
Purchase of property and equipment (1,508) (2,476) (6,929)
Investments in technology -- (165) (2,596)
Decrease (Increase) in other assets 222 (681) (202)
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,286) (3,322) (9,727)
-----------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (payments of) short-term borrowings (1,878) 3,004 --
Proceeds from long-term debt 1,000 -- --
Repayment of long-term debt (140) -- --
Proceeds from (payments of) other obligations (235) 184 (313)
Proceeds from issuance of common stock 1,591 662 644
-----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 338 3,850 331
-----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 505 583 49
-----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,984 (6,398) (7,215)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 3,669 10,067 17,282
-----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 6,653 $ 3,669 $10,067
=================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest $ 343 $ 327 $ 59
Income taxes $ 1,131 $ 439 $ 1,406
=================================================================================================================
See notes to consolidated financial statements
17
9
TEKELEC CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
--------------------------- RETAINED CUMULATIVE TOTAL
NUMBER AMOUNT EARNINGS TRANSLATION SHAREHOLDERS'
OF SHARES (DEFICIT) ADJUSTMENTS EQUITY
----------------------------------------------------------------------------------------------------------------------
(thousands)
BALANCE, DECEMBER 31, 1991 8,096 $13,043 $ 22,458 $ 844 $ 36,345
Exercise of stock options 168 644 -- -- 644
Translation adjustment -- -- -- 58 58
Net loss -- -- (8,296) -- (8,296)
----------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 8,264 13,687 14,162 902 28,751
Exercise of stock options 266 662 -- -- 662
Translation adjustment -- -- -- 823 823
Net loss -- -- (18,543) -- (18,543)
----------------------------------------------------------------------------------------------------------------------
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
======================================================================================================================
See notes to consolidated financial statements
18
10
TEKELEC 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, 1993 and 1992 financial
statements have been reclassified to conform with the current period
presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
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.
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 1994
and 1993. Capitalized internally developed software costs for 1992 were
$472,000.
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, 1994 and 1993, accrued product warranty costs amounted to
$827,000 and $280,000, 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 for installation and satisfaction
of any related significant Company obligations. 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.
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 $(235,000), $253,000, and
$(132,000) for 1994, 1993, and 1992, respectively.
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 represents 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. See Note J.
19
11
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C -- CONCENTRATION OF CREDIT RISK
The Company sells communications diagnostic and network 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 is
not required. Credit losses, if any, have been provided for in the financial
statements and have been consistently within management's expectations.
The Company places its temporary cash investments in high credit quality
financial instruments and limits the amount of credit exposure to any one
issuer. Generally, the investments made mature within 90 days.
NOTE D -- RELATED PARTY TRANSACTIONS
As of December 31, 1994, the Company's principal shareholder, a director and
his family, and a foreign-affiliated company controlled by the director owned
an aggregate of approximately 47% of the Company's outstanding stock.
The following is a summary of transactions and balances with these affiliates:
1994 1993 1992
----------------------------------------------------------------------------------------------------------
(thousands)
Product sales $3,809 $3,972 $3,881
Purchases of inventory 49 42 83
Director's fees and expenses 15 24 24
Due from affiliates 1,538 1,244 1,222
Due to affiliates 41 14 33
==========================================================================================================
The amounts due from and to the affiliates are non-interest bearing.
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. See Note P.
NOTE E -- RESTRUCTURINGS
During the fourth quarter of 1992, the Company announced a restructuring plan
designed to reduce operating expenses and scale back product lines that had
not met profitability expectations and that were not anticipated to contribute
to the Company's long-term strategy. In connection with this restructuring, the
Company recorded a $2.8 million charge consisting of severance costs for 33
terminated employees in management, research and development, support and
administrative functions and the write-down of technology and other assets
associated with the scaled back product lines.
During the second quarter of 1993, management reorganized the Company into a
divisional structure and in connection with such reorganization, the Company
recorded a $400,000 restructuring charge consisting of severance costs
associated with the related termination of employees and closure of the
Company's Alabama facility.
After incurring continued losses, the Company implemented in the fourth quarter
of 1993, an organizational and strategic restructuring aimed at returning the
Company to profitability by significantly reducing overhead expenses and
improving cash flow and further rationalizing the Company's business lines. In
connection with this restructuring, the Company discontinued its network
monitoring and field service product lines. A restructuring charge of $5.6
million was recorded representing severance pay for 65 terminated employees in
management, research and development, support and administrative functions, the
write-down of technology and other assets associated with the discontinued
product lines, the write-off of a management information system project which
the Company terminated and the accrual of other exit costs associated with the
restructuring, including costs related to the sale of the Company's Australian
subsidiary.
Restructuring charges consisted of the following:
For The Years Ended December 31, 1993 1992
----------------------------------------------------------------------------------------
(thousands)
Severance pay $2,256 $ 937
Inventory write-down 438 185
Property and equipment write-down 1,175 --
Technology write-down 613 1,415
Other assets write-down 743 110
Other expenses 763 120
----------------------------------------------------------------------------------------
$5,988 $2,767
========================================================================================
At December 31, 1994, all identified employees had been terminated and all the
severance costs and accrued expenses had been paid.
20
12
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- INCOME TAXES
The provision for income taxes consists of the following:
For The Years Ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------------
(thousands)
CURRENTLY PAYABLE (RECEIVABLE):
Federal $ 133 $ (159) $ (147)
State 202 39 --
Foreign 916 1,311 1,183
DEFERRED:
Federal -- 314 424
State -- -- 32
Foreign -- (63) 111
----------------------------------------------------------------------------------------------------------
$1,251 $1,442 $1,603
==========================================================================================================
The primary components of temporary differences which gave rise to deferred
taxes at December 31, 1994 and 1993 are:
December 31, 1994 1993
----------------------------------------------------------------------------------------
(thousands)
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 5,565 $ 8,112
Foreign tax credit carryforward 918 811
Allowance for doubtful accounts 117 138
Inventory adjustments 775 677
Depreciation and amortization 323 260
Research and development credit carryforward 1,141 865
Accrued liabilities 264 618
Warranty accrual 325 113
Other 230 448
----------------------------------------------------------------------------------------
Total deferred tax asset 9,658 12,042
Less, valuation allowance (9,496) (11,958)
----------------------------------------------------------------------------------------
Total net deferred tax asset 162 84
----------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Depreciation and amortization -- --
Deferred product development costs 84 --
Other 78 84
----------------------------------------------------------------------------------------
Total deferred tax liability 162 84
----------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET -- --
CURRENT PORTION -- --
----------------------------------------------------------------------------------------
LONG-TERM PORTION (INCLUDED IN OTHER ASSETS) $ -- $ --
========================================================================================
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, 1994 1993 1992
----------------------------------------------------------------------------------------------------------
Federal statutory provision (benefit) rate 34.0% (35.0)% (34.0)%
Research and development credits -- -- (0.7)
State taxes, net of federal benefit 6.1 0.2 0.7
Foreign taxes 6.9 2.9 16.6
Utilization of operating loss carryforwards (27.5) -- --
Loss for which no tax benefit was recorded -- 32.3 35.8
Temporary differences for which no tax benefit was recorded -- 7.9 6.0
Other 2.4 0.1 (0.4)
----------------------------------------------------------------------------------------------------------
21.9% 8.4% 24.0%
==========================================================================================================
At December 31, 1994, the Company had available federal net operating loss
carryforwards of $14.8 million, foreign tax credit carryforwards of $918,000
and research and development credit carryforwards of $1.1 million which will
generally expire beginning in the years 2007, 1997 and 2007, respectively.
The Company has not provided for federal income taxes on $8.0 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.
NOTE G -- INVENTORIES
The components of inventories are:
December 31, 1994 1993
----------------------------------------------------------------------------------------
(thousands)
Raw materials $2,197 $2,283
Work in process 1,246 1,465
Finished goods 948 967
----------------------------------------------------------------------------------------
$4,391 $4,715
========================================================================================
21
13
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, 1994 1993
----------------------------------------------------------------------------------------
(thousands)
Manufacturing and development equipment $ 8,567 $ 9,594
Furniture and office equipment 5,022 6,948
Demonstration equipment 3,249 3,868
Leasehold improvements 1,257 1,224
----------------------------------------------------------------------------------------
18,095 21,634
Less, accumulated depreciation and amortization (13,301) (14,865)
----------------------------------------------------------------------------------------
$ 4,794 $ 6,769
========================================================================================
NOTE I -- TECHNOLOGY
Technology consists of capitalized product development costs, net of
accumulated amortization of $1.2 million and $1.1 million at December 31, 1994
and 1993 respectively.
NOTE J -- BORROWINGS
The Company has a $7.5 million line of credit and a $2.0 million line of credit
with U.S. banks and lines of credit aggregating $3.5 million available to the
Company's Japanese subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit with a U.S. bank is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.5% at December 31, 1994) plus 2.5% per annum and expires September 30,
1995, if not renewed. Maximum borrowings available under the line of credit are
based on eligible accounts receivable and amounted to $6.6 million at December
31, 1994, of which $126,000 was then outstanding. This line of credit includes
a $1.0 million long-term credit facility payable in 47 monthly installments
of $20,000 each which began in June 1994 and a final installment of $60,000 due
in May 1998 or upon the expiration of the underlying $7.5 million line of
credit, if not renewed. At December 31, 1994, $860,000 was outstanding under
this long-term facility, of which $620,000 was included under long-term debt.
In February 1994, the Company established a $2.0 million line of credit with a
U.S. bank, collateralized by restricted cash deposits in Japan, with interest
at the U.S. prime rate plus 0.375% per annum. This line of credit expires May
31, 1995, if not renewed. Borrowings at any time may not exceed the cash amount
on deposit. At December 31, 1994, $1.0 million was outstanding under this line
of credit.
The Company's Japanese subsidiary has collateralized yen-denominated lines of
credit with Japanese-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.5 million with interest at the Japanese
prime rate (3% at December 31, 1994) plus 0.125% per annum which expire
between May 29, 1995 and March 31, 1996, if not renewed. There have been no
borrowings under these lines of credit.
The Company's weighted average short term borrowing rates were 8.8% and 7.2% in
1994 and 1993, respectively.
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 $2.0 million, $2.1 million, and $1.8 million, for 1994,
1993, and 1992, respectively.
Minimum annual non-cancelable lease commitments at December 31, 1994, are:
For The Years Ending December 31,
-----------------------------------------------------------------------
(thousands)
1995 $1,595
1996 1,242
1997 799
1998 747
1999 807
Thereafter 4,234
-----------------------------------------------------------------------
$9,424
=======================================================================
During 1992, the Company recorded legal expenses and costs for the defense and
settlement of certain litigation against the Company and its then President
that was initiated by a former officer of the Company. The terms of the
settlement are subject to a confidentiality clause.
22
14
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has various stock option plans with maximum terms of 10 years. Two
million five hundred twenty five thousand shares of the Company's Common
Stock have been issued or reserved for issuance under these plans.
The terms of options granted under these Option Plans are determined at the
time of grant. 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.
Combined stock option activity under the Option Plans is as follows:
For The Years Ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
Number of option shares:
Granted 1,292,348 1,947,502 626,530
Exercised 407,982 150,126 102,272
Cancelled 583,632 1,865,548 232,840
Outstanding at end of year 2,247,772 1,947,038 2,015,210
Option price range:
Granted $3.00 -- $16.38 $2.63 -- $5.63 $5.25 -- $8.63
Exercised 1.88 -- 6.13 1.88 -- 4.38 1.88 -- 6.25
Cancelled 3.00 -- 13.63 3.25 -- 9.25 1.88 -- 9.25
Outstanding at end of year 1.88 -- 16.38 1.88 -- 6.25 1.88 -- 9.25
======================================================================================================================
23
15
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994, options for 575,514 shares were exercisable at exercise
prices ranging from $1.875 to $7.75 per share and have exercise periods of up
to ten years.
The Company has an Employee Stock Purchase Plan (the "ESPP") with a maximum
term of ten years. Four hundred fifty thousand shares of the Company's Common
Stock have been reserved for issuance under the ESPP. 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 at the beginning
or end of each six-month offering period. During 1994, 1993, and 1992, 85,176,
114,824, and 65,866 shares, respectively, were purchased under the ESPP at
average prices of $3.07, $2.34, and $4.72, respectively.
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. The
Company may contribute matching funds of up to 50%, as determined annually by
the Board of Directors, of the employees' payroll deductions. During 1994,
1993, and 1992, the Company's contributions amounted to $122,000, none, and
$352,000, respectively.
NOTE M -- INTERNATIONAL SALES AND FOREIGN OPERATIONS
International sales, including foreign operations, primarily in Japan, Western
Europe, and the Far East, amounted to 43%, 51%, and 43% of revenues in 1994,
1993, and 1992, respectively.
The following table sets forth financial data of the Company's foreign
operations:
1994 1993 1992
----------------------------------------------------------------------------------------------------------
(thousands)
Revenues $13,467 $14,784 $15,132
Income before provision for income taxes 1,659 2,156 2,036
Total assets 13,651 11,400 10,059
==========================================================================================================
NOTE N -- MAJOR CUSTOMERS
Sales to Nippon Telegraph and Telephone amounted to 13%, 16%, and 13% of
revenues in 1994, 1993, and 1992, respectively.
NOTE O -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
For The Years Ended December 31, Quarters
----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
----------------------------------------------------------------------------------------------------------------
(thousands, except per share data)
1994
Revenues $12,986 $13,810 $15,638 $18,755
Gross profit 8,246 9,494 10,606 12,455
Income before provision for income taxes 243 1,216 1,880 2,372
Net income 126 877 1,357 2,100
Earnings per share:
Primary $ 0.01 $ 0.10 $ 0.15 $ 0.20
Fully diluted $ 0.01 $ 0.10 $ 0.14 $ 0.20
================================================================================================================
1993
Revenues $11,157 $11,425 $12,658 $11,616
Gross profit 7,309 7,498 7,622 7,591
Loss before provision for income taxes (3,015) (3,503) (2,561) (8,022)
Net loss (3,334) (3,823) (2,804) (8,582)
Loss per share:
Primary $ (0.40) $ (0.46) $ (0.34) $ (1.02)
Fully Diluted $ (0.40) $ (0.46) $ (0.34) $ (1.02)
================================================================================================================
24
16
TEKELEC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tekelec typically operates with a limited backlog, and most of its revenues in
each quarter result from orders booked in that quarter. Further, Tekelec
typically generates up to one-half 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 any 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, increased competition, variations in the mix of sales,
fluctuation in proportion of foreign sales and announcements of new products by
Tekelec or its competitors. In 1994, Tekelec's quarterly revenues increased by
up to 61% as compared to prior year's quarters. The Company believes these
increases resulted from increased market acceptance of its products. The
Company's results for 1993 include pre-tax restructuring charges amounting to
$400,000 in the second quarter and $5.6 million in the fourth quarter and the
effect of the Company's inability throughout the year to currently recognize
benefits amounting to $8.0 million for its tax loss and credits carryforwards.
The Company's results for 1994 include the effect of the Company's ability to
recognize benefits amounting to $1.6 million for its tax loss carryforwards.
NOTE P -- COMMON STOCK
At December 31, 1994 and 1993, the Company had warrants outstanding to purchase
an aggregate of 80,000 and 20,000 shares of its Common Stock, respectively, as
more fully discussed below.
In July 1994, the Company issued warrants to purchase 30,000 shares of its
Common Stock at $2.875 per share, exercisable in full at any time prior to July
21, 1999, all of which were outstanding at December 31, 1994.
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, 1994. These warrants vest and become exercisable in 20 equal
quarterly installments beginning on April 19, 1994.
In January 1994, pursuant to a consulting agreement between the Company and a
director, the Company issued warrants to purchase 20,000 shares of its Common
Stock at $3.4375 per share to such director, all of which were outstanding at
December 31, 1994. These warrants vested during 1994, and are exercisable in
full at any time prior to January 20, 1999.
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, are exercisable in full at any time
prior to January 17, 1997, and were outstanding at December 31, 1994 and 1993.
On March 17, 1995, the Company effected a two-for-one stock split. All
references to numbers of shares and related prices, per share amounts, and
stock option plan data have been restated to reflect the stock split.
25
17
TEKELEC REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC
We have audited the accompanying consolidated balance sheets of Tekelec as of
December 31, 1994 and 1993, and the related consolidated statements of
operations, shareholders' equity, and cash flow for each of the three years in
the period ended December 31, 1994. These financial statements 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 financial position of Tekelec as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Sherman Oaks, California
February 3, 1995, except for Note P,
as to which the date is March 17, 1995
[COOPERS & LYBRAND LOGO]
26
EX-21.1
8
SUBSIDIARIES OF THE REGISTRANT
1
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
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
9
CONSENT OF COOPERS & LYBRAND LLP
1
DRAFT
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Tekelec on Form S-8 (Registration Nos. 33-30475, 33-8368, 33-16094, 33-22370,
33-40612, 33-48079, 33-63102, 33-82124 and 33-87558) of our report dated
February 3, 1995, except for Note P, as to which the date is March 17, 1995,
on our audits of the consolidated financial statements and consolidated
financial statement schedules of Tekelec as of December 31, 1994 and 1993
and for each of the three years in the period ended December 31, 1994,
which report is included or incorporated by reference in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Sherman Oaks, California
March 29, 1995
EX-27.1
10
FINANCIAL DATA SCHEDULE
5
1,000
U.S. DOLLARS
YEAR
DEC-31-1994
JAN-01-1994
DEC-31-1994
1
6,653
0
16,071
318
4,391
28,501
18,095
13,301
34,409
15,035
0
15,940
0
0
2,780
34,409
61,189
61,189
20,388
20,388
34,428
0
410
5,711
1,251
4,460
0
0
0
4,460
0.47
0.43
EARNINGS PER SHARE HAVE BEEN RETROACTIVELY ADJUSTED TO REFLECT THE TWO-FOR-ONE
STOCK SPLIT EFFECTIVE MARCH 17, 1995.