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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 0-15135
Tekelec
(Exact name of registrant as specified in its charter)
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California
(State or other jurisdiction of
incorporation or organization) |
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95-2746131
(I.R.S. Employer
Identification No.) |
26580 West Agoura Road,
Calabasas, California
(Address of principal executive offices) |
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91302
(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
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 þ No o
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. o
Indicate by check mark whether the registrant is an accelerated
filer. Yes þ No o
The aggregate market value of the voting stock held by
non-affiliates of the registrant as of December 31, 2004,
based upon the last reported sale price of the Common Stock on
June 30, 2004 as reported on The Nasdaq Stock Market, was
approximately $957,171,852.
The number of shares outstanding of the registrant’s Common
Stock on March 1, 2005 was 65,644,863.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to
be delivered to shareholders in connection with their Annual
Meeting of Shareholders to be held on May 13, 2005 are
incorporated by reference into Part III of this Annual
Report.
TEKELEC
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2004
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PART I
Overview
Tekelec designs, manufactures, markets and supports network
signaling products, switching products and services and selected
service applications for telecommunications networks and contact
centers. Our customers include telecommunications carriers,
network service providers, and contact center operators.
Our network signaling products help direct and control voice and
data communications. They enable carriers to control, establish
and terminate calls. They also enable carriers to offer
intelligent services, which include any services other than the
call or data transmission itself. Examples include products such
as local number portability, virtual home location register
(“HLR”), and short message service (“SMS”)
management.
Our switching solutions products are focused primarily on
creating and enhancing next-generation voice switching products
and services for both traditional (time division multiplexing
(“TDM”)-based) and new (packet-based) Class 4,
Class 5, and wireless applications. The switching portion
of a network carries and routes the actual voice or data
comprising a “call.” We believe that voice and data
networks will increasingly interoperate, or converge. Network
convergence should provide opportunities to expand the sales of
our switching products and services which are designed
specifically for converged networks.
Our Communications Software Solutions Group offers products that
provide real time performance management capabilities, business
intelligence and revenue assurance products and services (such
as fraud management, network optimization, billing verification
and analysis) and network and security assurance products and
services (such as traffic management, surveillance and
monitoring, quality of service and lawful intercept).
Our IEX contact center products provide workforce management and
intelligent call routing systems for single and multiple-site
contact centers. We sell our contact center products primarily
to customers in industries with significant contact center
operations such as financial services, telecommunications and
retail businesses.
In August 2002, we sold our network diagnostics business and
related operations. Accordingly, our network diagnostics
business is reflected as a discontinued operation in our
consolidated financial statements.
Our internet address is www.tekelec.com. We are not including
the information contained on our website as a part of, or
incorporating it by reference into, this Annual Report on
Form 10-K. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, as soon as reasonably practicable
after we electronically file such material with, or furnish such
material to, the Securities and Exchange Commission.
Industry Background
Usage of communications networks has expanded rapidly in recent
years. Driving this trend has been the growth in demand for
voice and data communications and wireless connectivity,
deregulation and the emergence of new competitors, services and
technologies.
Growth in data traffic has been driven by the increase in the
number of businesses and consumers that use the Internet and by
the adoption of broadband access technologies. According to
International Data Corp., an independent market research firm,
the volume of Internet traffic generated by end users worldwide
will increase from 180 petabits (1 petabit = 1 million
gigabits) per day in 2002 to 5,175 petabits per day by the end
of 2007. The number of wireless subscribers has also grown
rapidly in recent years and is expected to exceed
1.75 billion subscribers by 2007, according to a study
released in September 2003 by the Yankee Group, a research
consulting firm.
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The increase in data traffic, combined with the inherent
efficiency of packet-switched networks, have led many carriers
to build new packet networks and to seek ways to enable existing
circuit switched networks to interface reliably and efficiently
with these new packet-switched networks.
Deregulation has played a key role in the emergence of new
competitive service providers in recent years. In addition,
technological developments such as DSL, cable modems and
broadband wireless have enabled alternative access technologies
and fostered new types of service providers.
As competition has grown in recent years, per-minute revenue
from basic telephony service has declined significantly. As a
result, intelligent services have become core competitive
features of a network, providing incremental revenues to service
providers and offering more service choices to subscribers. As
these services have become less expensive and more widely
accessible, customer demand for them has grown.
Deregulation has also spurred the offering of intelligent
services. The Telecommunications Act of 1996 mandates that
subscribers of U.S. telephone service be given the option
of changing their local service provider while retaining their
local phone number. Numerous countries in Europe, Latin America
and the Asia Pacific region have also recently adopted or are
considering adopting similar number portability requirements to
allow subscribers to retain their telephone numbers while
changing service providers. In November 2003, the Federal
Communications Commission (“FCC”) regulation mandating
that wireless customers in the U.S. be offered this same
option was finally implemented, after several years of delay.
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Recent Changes in Telecommunications Operating
Environment |
Throughout the late 1990’s, capital investment in
telecommunications equipment grew rapidly before experiencing
moderate growth in the second half of 2000. In 2001, telecom
capital investment declined for the first time in several years
as telecommunications industry fundamentals deteriorated. In
2002, telecom capital investment continued to decline, as
telecom service provider revenues remained under pressure,
resulting in significantly lower overall capital expenditures.
The industry’s growth prior to the second half of 2000 was
driven principally by significant capital investment by new
types of service providers, such as competitive local exchange
carriers (CLECs) formed after industry deregulation, and by
substantial growth in capital spending from wireless operators
to support the expansion of mobile networks. In addition,
capital investment from incumbent carriers, such as Regional
Bell Operating Companies (RBOCs), increased in response to the
new threat of competition from CLECs and other new entrants.
Adding to the favorable environment for telecom capital
investment prior to mid-2000, capital markets were extremely
active and institutional investors were willing to fund many new
and established telecommunications service providers alike. The
healthy capital markets and favorable valuations for
telecommunications service providers led carriers to re-invest
higher than normal percentages of their revenue into capital
equipment purchases because new capital was perceived to be
readily available.
Beginning in 2000 and increasingly in 2001 and 2002, capital
available from equity markets declined significantly and the
emerging competitive carriers began to experience difficulty
attracting new funding. In many cases, the emerging carriers had
accumulated considerable debt loads that required new capital to
service their interest payments. In addition, economic weakness,
particularly in the U.S., also impacted the market for
telecommunications services, and particularly impacted the
competitive carriers, many of which had been targeting
businesses. As a result of these trends, competitive carriers
sharply reduced their capital spending, and several filed for
bankruptcy protection as a means to restructure their debt
obligations. In addition, while the capital spending by wireless
service providers continued to increase in 2001 given the
continuing rapid growth of their businesses, capital investment
by incumbent wireline carriers declined in 2001 in part due to
the reduced threat from competitive carriers.
During this same period, many operators halted market expansion
plans. This resulted in a flattening of revenues directly
attributed to market growth and forced operators to begin
searching for revenues within the organization through process
improvement and network optimization. This spawned an entirely
new revenue assurance industry, focused on refining operations
to prevent the loss of revenues from billing and order entry
errors.
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In 2002, continued economic weakness and investor concerns over
the reliability and credibility of published financial
statements made financing through the capital markets even more
difficult. High profile bankruptcies and questionable accounting
practices by some telecom operators made investors reluctant to
provide financing to telecom operators in general. Across all
carrier types, the limited availability in the capital markets
and reduced valuations in the equity markets has heightened the
focus on operating measures such as cash flows, which has led
service providers to conserve cash and reduce capital investment
whenever possible.
In 2003 and 2004, a generally improving economy and improved
capital market conditions contributed to a broad turnaround in
the financial condition of many telecom equipment providers.
While wireline service providers generally continued to
experience access line losses and flat to declining revenues,
wireless service providers experienced strong subscriber growth
and increased end-user adoption of wireless data services and
applications. In order to improve their competitive position
relative to their wireless competitors, and in order to lower
operating costs, a number of the world’s largest carriers,
commonly referred to as Tier 1 Carriers, or carriers that
typically have operations in more than one country and own and
operate their own physical networks announced their intentions
or definitive plans to implement packet-switching technology,
generally referred to as Voice over Internet Protocol (VoIP).
These factors combined to allow equipment suppliers focused on
wireless infrastructure and VoIP infrastructure to perform
particularly well. Dell’Oro, a market research firm
specializing in Internet protocol (“IP”) telephony
market data said revenues from IP telephony carrier equipment,
including softswitches, media gateways, and hybrid media gateway
softswitches, grew to $1.6 billion in 2004, a
26 percent increase over 2003. Dell’Oro noted that the
top three vendors in 2004, in order from one to three, were
Nortel, Sonus Networks Inc. and Tekelec. Industry analysts are
projecting that implementation of packet-switching technology
will increase again in 2005.
Also showing signs of growth throughout this period was the area
of revenue assurance. Many of our customers have fully embraced
this initiative by implementing new departments, and in some
cases even new divisions, solely for the purpose of managing
revenue loss within various areas of the carriers’
organization and networks. Companies are investing capital in
revenue assurance tools and applications that automate and
expedite the process of identifying areas of revenue loss (such
as phantom traffic, defined by the National Exchange Carriers
Association or NECA as any traffic that cannot be billed due to
lack of billing data). Vendors in this space are realizing
growth attributable to this increase in spending.
While future capital spending trends are difficult to predict,
industry analysts expect capital spending on telecommunications
equipment to increase modestly in 2005 from 2004 levels across
all service provider segments.
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Challenges Service Providers Face |
To compete in today’s environment, service providers are
seeking to expand and differentiate their products and services
while lowering their costs. This has increased demand for
technologies that enable the rapid creation and delivery of
innovative services on existing and converged networks,
including the introduction of multimedia services. Some of the
key challenges that service providers face include:
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expanding and/or upgrading their signaling network to support
new and enhanced converged services and growing volumes of
signaling traffic, particularly on signaling-intensive wireless
networks which generate several times the amount of signaling
traffic as wireline networks; |
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expanding and/or upgrading their switching network to support
new and enhanced IP services, and competing with loss of lines
to wireless, cable, and broadband voice offerings; |
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building and managing networks that can cost-effectively support
circuit and packet network convergence; and |
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managing stringent network optimization, revenue assurance, and
billing practices in convergent networks to enable higher profit
margins from services provided, and remaining competitive with
new market entrants. |
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Signaling and Intelligent Services |
Traditional voice telephone networks consist of two basic
elements — switching and signaling. The switching
portion of a network carries and routes the actual voice or data
comprising a “call.” The signaling portion of a
network instructs the switching portion how to do its job.
Traditional signaling messages are carried on a different
logical transmission path than the actual call itself. Signaling
is responsible for establishing and terminating a call. The
signaling portion of the network also enables service providers
to offer intelligent services such as call waiting, caller ID
and voice messaging.
The signaling portions of existing voice telephone networks in
most of the world are based upon a set of complex standards
known as Signaling System #7, or SS7. The primary network
elements within a traditional circuit-network architecture based
on SS7 are as follows:
Signal Transfer Point (STP) — A signal transfer
point is a packet switch for the signaling portion of the
network. It controls and directs the signaling messages used to
establish and terminate telephone calls and to coordinate the
provision of intelligent services.
Service Switching Point (SSP) — A service
switching point (often called a Class 4 or Class 5
switch, depending on its location in the network) is a
carrier’s switch that connects to the SS7 network and
serves as the origination and termination points for the SS7
messages in a network. In this capacity, the service switching
point, via signaling transfer points, sends and processes the
signaling messages used to establish and terminate telephone
calls. When a service switching point identifies a call
requiring instructions for intelligent services, it sends a
signaling message to a signal transfer point and awaits further
routing or call processing instructions.
Service Control Point (SCP) — A service control
point is a specialized database containing network and customer
information. It is queried by service switching points via
signaling transfer points for information required for the
delivery of intelligent services. Different service control
points contain the information used by the SS7 network to
perform different types of functions.
Signaling Links — A signaling link is a
physical or logical connection or channel between any two
different parts of the signaling portion of the network, or a
connection or channel between the signaling portion of the
network and the switching portion of the network. To create
additional network capacity to accommodate increases in
signaling traffic, additional links must be added to signal
transfer points, or new signal transfer points must be added.
Traditionally, signaling links have operated on dedicated
circuit facilities. Newer network architectures support
signaling over packet transmission technologies such as IP or
ATM.
The market for SS7 equipment is driven by growth in network
traffic and by demand for intelligent services. Carriers and
service providers must increase the performance and capacity of
their signaling networks in order to increase call processing
capacity or to offer intelligent services. Because of its role
in providing reliability and features to a voice network, STPs
must deliver high performance and reliability. Typically, STPs
need to deliver 99.999% reliability, or less than three minutes
of unscheduled downtime per year. Service providers also require
an SS7 solution that is scalable — that is, a solution
that can initially be matched to support a carrier’s
current capacity but with the capability to have its capacity
increased to support the carrier’s growth without requiring
the replacement of certain network elements.
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Unique Signaling Requirements of Wireless Networks |
Wireless networks generate substantially more signaling traffic
than fixed line networks due to additional SS7 features inherent
in wireless telephony such as mobile registrations, roaming, and
handoffs between cellular equipment. As a result, wireless
operators generally invest in SS7-related equipment, such as
signal transfer points, more frequently than fixed line carriers
to accommodate the unique signaling demands of mobile telephony.
In addition, rapid growth in wireless minutes of use and
increased popularity of wireless services such as voice mail and
text messaging have led to a significant increase in SS7 traffic
on mobile networks in recent years, which has created a need for
high-capacity signaling infrastructure. Driving the higher usage
in wireless networks, particularly in the United States, are
flat rate pricing plans that feature no additional charges for
long distance calls. Innovative service offerings like camera
phones, the increasing
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popularity of family calling plans, and continued wireline to
wireless substitution are also contributing to renewed
subscriber growth. Wireless usage is expected to continue to
increase in the coming years, which will create further demand
for signaling infrastructure, as well as business intelligence
applications.
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Supporting Voice and Data Convergence |
Currently, virtually all networks which carry both voice and
data communications rely on a technology called circuit
switching. Another technology, packet-switching, has been used
almost exclusively for data-only networks. Circuit switching and
packet-switching are fundamentally different technologies.
Circuit-based switching is largely based upon the Time Division
Multiplexing (“TDM”) protocol, in which the electronic
signals carrying the voice message traverse the network
following a dedicated path, or circuit, from one user to the
other. Packet-based switching, however, breaks down the voice
message into packets. These packets then individually traverse
the network, often taking separate paths, and are then
reassembled on the other side of the network prior to delivery
to the recipient. Packet-based switching may utilize one of many
protocols, the most common of which are Asynchronous Transfer
Mode (“ATM”) and Internet Protocol (“IP”).
Voice transported using the IP protocol is often referred to as
Voice over IP (“VoIP”). While circuit switching has
offered reliable and high quality voice communications,
packet-switching is inherently more efficient and cost
effective. Industry sources estimate that the cost of a
transmission minute is as much as 25% to 50% less for a packet
network than for a circuit network.
The cost and performance superiority of packet-switching has led
many incumbent and new carriers to build packet networks to
handle data traffic. It has also led carriers to explore the
transmission of voice communications over packet networks. This
requires circuit networks and packet networks to seamlessly
interconnect.
To support voice and data communications, packet networks need
signaling to provide the same reliability and quality of
transmissions as circuit networks and to provide the intelligent
services consumers have come to expect and demand. Because SS7
is the global industry standard for voice networks, we believe
that, initially, SS7 signaling will continue in high demand as
circuit and packet-based networks continue to co-exist. New
carriers with packet networks will continue to interconnect with
legacy carriers using SS7, allowing incumbent carriers to
leverage their investment in their existing networks even as
they build out their data networks. Newer signaling protocols
have emerged to facilitate signaling for packet-based multimedia
services (including voice). One of these protocols, session
initiation protocol (“SIP”), has gained increasing
popularity as a protocol for signaling voice and other
multimedia sessions.
We believe that the primary network elements of converged
circuit and packet networks, including signaling, call control
and switching technologies are as follows:
Signal Transfer Point — As in the present
circuit networks, a signal transfer point relays messages needed
to establish and terminate telephone calls and to coordinate the
provision of intelligent services. It can relay messages within
the circuit network, between circuit and packet networks, and
within some forms of packet networks.
Service Control Point — As in the present
circuit networks, a service control point is a specialized
database containing information used to deliver intelligent
services. Service control points in converged networks may
support packet-based signaling interfaces.
Signaling Gateway — A signaling gateway
receives signaling messages from signal transfer points,
reformats these messages and presents them to one or more media
gateway controllers.
Media Gateway Controller — A media gateway
controller, frequently called a softswitch or call agent, is a
specialized computer that provides the intelligence, or call
control, to direct switching. It controls one or more voice/data
switches called media gateways.
Media Gateway — A media gateway is a voice/data
switch that receives the message part of a call and redirects it
as specified by the media gateway controller to a single
destination or to multiple destinations. If
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necessary, a media gateway can translate the actual call from a
packet-switching format to a circuit switching format and vice
versa.
Application Server — Similar to a service
control point, an application server is a specialized database
that contains information to deliver certain intelligent
services in packet networks, interacting with the media gateway
controller via IP-based protocols such as session initiation
protocol (SIP).
SIP Server — A SIP server is a session control
platform for voice-over-packet networks. Interoperating with
media gateway controllers, the SIP server provides the
foundation for initiating and terminating sessions as well as
service delivery within a pure-packet, signaling network.
The primary difference between the converged architecture and
the circuit architecture described above is the use of the
signaling gateway, media gateway controller and media gateway in
the converged architecture to perform the same switch functions
that are currently performed by certain service switching points
in circuit networks. However, industry experts believe it will
take decades to replace all of the existing service switching
points with packet-switching technologies.
We believe carriers are seeking fully featured packet telephony
solutions that can facilitate the convergence of circuit and
packet networks, without compromising functionality,
reliability, scalability, support and flexibility.
The Tekelec Solution
We design and develop telecommunications signaling
infrastructure, packet telephony products and services, service
applications and contact center workforce management systems.
Tekelec is a leading global provider of both signaling and
packet telephony products and services, as reported in recent
market research by independent market research firms. According
to Venture Development Corporation (VDC) in its 2004
Signaling Products & Related Equipment in
PSTN & Voice Over Packet Networks, Vol. 1 —
SS7 Related Equipment and Enabling Products report, Tekelec had
approximately 43% of the global market for STP shipments in
2004, compared with our competitors such as Alcatel, Ericsson,
Nortel, Siemens and other smaller vendors.
Tekelec has one of the most widely deployed stand-alone STPs.
Based on market data provided by VDC, Tekelec estimates our
stand-alone STP market share for North America is over 90% and
that in the India market Tekelec has 100% market share for
stand-alone STPs. Our equipment is installed in all major North
American wireless carriers and the four major carriers that
dominate India’s telecom market, Reliance, Tata, Bharti and
VSNL. Tekelec’s EAGLE 5 SAS platform is successful as we
focus on development of a competitive, highly scalable solution
that is able to meet the rigorous technological demands of
rapidly growing global carriers and subscribers increased use of
minutes and mobile application services. Our network signaling
products are widely deployed in traditional and next-
generation, or “converged”, wireline and wireless
networks and contact centers worldwide. Tekelec has
approximately 1,000 signaling systems in operation worldwide.
As a result of acquisitions completed during the past two years,
Tekelec now has over 200 switching customers worldwide.
Confirming Tekelec’s growing leadership in next-generation
switching during 2004, Dittberner, an independent telecom market
research firm, recognized Tekelec as having the third largest
global market share in voice over packet (VoP) switching
equipment ahead of many of our major competitors, including
companies such as Ericsson, Nortel, Siemens and Sonus Networks,
among others, for the third quarter of 2004. Additionally,
Tekelec was named the market-share leader for integrated media
gateway-softswitch platforms by Dittberner Associates in its
third quarter update, “Business Opportunities and Markets
for NGN Solutions”. Dittberner’s market analysis
recognizes Tekelec as having 11% market share in the third
quarter of 2004 for all global shipments of ATM, TDM and IP
carrier-grade media gateway, softswitch and integrated media
gateway-softswitch platforms. When accounting for integrated
media gateway-softswitch platforms alone, Tekelec led the
industry with a 92% market share during the third quarterof
2004. Our systems assist our customers in meeting their primary
challenges in the competitive telecommunications environment
which are differentiating their offerings and lowering network
costs. We offer signaling and
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packet-telephony systems and services to enable the delivery of
intelligent services and facilitate convergence of voice and
data networks. We believe that our open, standards-based
products and services are highly reliable and enable operators
to more cost-effectively manage their networks and offer
intelligent services that differentiate them from their
competition.
For financial information related to our operating segments,
refer to footnote T — Operating Segment Information in
our consolidated financial statements included as part of this
report.
Our EAGLE 5 Signaling Application System (“SAS”), the
latest release of our STP product, and previous versions of the
EAGLE STP, have been widely deployed and, according to market
research firms, have achieved leading market share in North
America. We are expanding our global operations to increase our
market share in international markets within Europe, Latin
America, Asia Pacific and other parts of the world. The EAGLE 5
SAS offers high capacity and throughput, reliability and
efficiency that support the growth of traffic and demand for
intelligent services in service provider networks. The
reliability of our products enables us to offer service
providers products and services that reduce their total cost of
ownership of network signaling products. Our EAGLE products,
under normal operations, meet industry standards for 99.999%
reliability and less than three minutes of unscheduled downtime
per year. We also offer a feature of EAGLE that enables our
EAGLE 5 to support SS7 signaling into Internet Protocol
(IP) networks and to realize substantial efficiencies
inherent in IP networks.
Use of our SS7-over-IP products and services results in a
substantial increase in signaling efficiency by enabling SS7
signaling over IP at faster rates than traditional SS7
signaling. Customers may choose to deploy the EAGLE 5 with
SS7-over-IP capability to gain signaling efficiencies, among
other benefits, as a precursor to deploying a complete packet
telephony switch as a circuit switch replacement. In addition,
customers of our SS7 products may upgrade their existing
infrastructure to enable SS7 signaling over IP. The upgrade
enables them to preserve the value of their existing SS7
infrastructure and makes them fully capable of facilitating
interoperability between circuit and next-generation packet
networks.
In June 2003, we acquired a controlling ownership interest in
Santera Systems, Inc. (“Santera”), a privately held
company with a core competency in packet-switching.
Santera’s principal product, SanteraOne, now the Tekelec
9000 DSS, is an integrated voice and data switching solution,
capable of simultaneously delivering full-featured IXC Tandem,
Class 4 and Class 5 functionality, as well as
additional revenue-generating data services. With both TDM and
packet fabrics, the Tekelec 9000 DSS is a cost-effective
alternative for either TDM only or TDM/data-centric
applications. The switch enables a smooth migration from
traditional circuit-based networks to next-generation
packet-based technology.
In April 2004, we acquired Taqua, Inc., a privately held
provider of next-generation packet-switching systems. Taqua
became part of our Switching Solutions Group and offers a
portfolio of circuit and IP voice switching products and
services, including next-generation packet Class 5
switches, intelligent line access gateways, application servers,
and an element management system. In addition, Taqua offers a
suite of professional services, including network design and
capacity planning, as well as installation and cutover services.
In September 2004, we completed the acquisition of privately
held VocalData. VocalData became part of our Switching Solutions
Group and is a provider of hosted IP telephony applications that
enable the delivery of advanced telecom services and
applications to business and residential customers.
In October 2004, we acquired Steleus Group Inc. and its
subsidiaries (“Steleus”), a real-time performance
management company that supplies business-related intelligence
products and services to telecommunications operators.
Steleus’ telecommunications product line was combined with
certain existing Tekelec business intelligence applications,
such as billing verification, and other network
element-independent applications during the fourth quarter of
2004 to form our new Communications Software Solutions Group.
The acquisition represented our ongoing strategy to offer more
value-added applications to our customers and to further enhance
and differentiate our switching products and services and
signaling product offerings. Steleus products enable operators
to monitor their service and network performance as they
transition from circuit to packet technology, helping to speed
up the implementation of packet networks, while lowering the
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risk. At the same time, these applications provide carriers with
the intelligence they need to quickly identify sources of
revenue loss, understand subscriber behaviors, and protect vital
network services from fraudulent abuse.
Business Strategy
Our objective is to be a premier supplier of network
infrastructure products for existing and next-generation
converged voice and data communications networks. We intend to
focus on the market opportunities arising from the convergence
of voice and data communications and to apply our technology to
develop next-generation networking products and services for
such communications networks. In order to achieve this goal we
intend to leverage our established expertise in SS7 technology
and our resultant Signaling Transfer Point (STP) market
position and customer relationships. Our strategy is to
establish and maintain technology leadership with respect to
next-generation networking, take advantage of the market
discontinuities provided for through the adoption of
next-generation networking technology, expand globally, seek
continued operating improvements, and pursue new market segments
and additional strategic relationships. Key elements of our
strategy to achieve this objective include:
Maintaining Technology Leadership. We believe that one of
our core competitive strengths is the breadth of our knowledge
and expertise in communications technologies, particularly in
voice call control, signaling and applications which utilize
real-time or near-real time data, especially that derived from
the SS7 network. We have developed this expertise over more
than a decade. We intend to enhance our existing products and to
develop new products by continuing to make significant
investments in research and development. As part of our
commitment to technology leadership, we were early leaders in
developing solutions for SS7 signaling over IP; use of real-time
database applications (including Local Number Portability and
integrated network monitoring); and packet-based voice switching
solutions. More recently, we have assumed a leadership role
within the Softswitch Consortium, an industry organization
created for global cooperation and coordination in the
development of open standards and interoperability for packet
networks, as well as announced our participation in the
MobileIgnite consortium for convergence of mobile wireless
services with Voice over IP and internet technologies.
Targeting the Convergence of Voice and Data Networks. We
are continuing to invest significantly to develop signaling and
call control products and features that enable the convergence
of voice and data communications networks. In addition to the
acquisition of a majority interest of Santera in 2003, the
acquisitions of Taqua and VocalData in 2004 allow us to offer
customers a complete next-generation switching portfolio to
address integrated or distributed switching and advanced IP
services for businesses and residential markets. Our acquisition
of Steleus in October 2004 expanded our product offerings of
intelligent network services such as personal ring-back tones,
managed roaming, least-cost routing, calling name, and number
translation. We believe our pursuit of this new market
opportunity leverages our expertise in signaling and call
control and will enhance the market potential for our
traditional products and services by ensuring that customers who
invest in our equipment can be upgraded to perform in converged
voice and data networks.
Carriers face a number of challenges in converging voice and
data networks. Packet-based networks were built to carry
non-real-time data and often need to be upgraded to be suitable
to carry voice traffic. Converged networks are more complex and
dynamic than circuit networks. The complexity results from
having to deal with both voice and data over the same network
infrastructure. Data traffic is very tolerant of delays, such as
waiting a few seconds for a web page to download. Conversely,
voice transmissions are considered poor quality with delays of
only half a second. Balancing both types of traffic on a single
network requires a well-engineered network that can guarantee
quality to both voice and data. Another challenge is to help
service providers’ transition from maintaining circuit
based networks with legacy switches to packet based networks
with switching products. The operations, maintenance, and
training costs of any technology transition are costly in the
short term with payback coming on a longer horizon. Carriers are
not implementing next-generation networks based solely on
operational savings. They are requiring new revenue generating
services to justify the business case for new technology
investment.
8
Expanding Globally. We are increasingly pursuing
international opportunities, primarily through our European
sales and support office in the United Kingdom and by opening
additional international sales offices in Asia Pacific and South
America. We have established customer service offices in Brazil,
France, India, and Mexico in addition to sales offices in Russia
and Spain. We continue to operate sales and customer service
offices in Singapore and China. Our European sales efforts have
resulted in significant expansion in our customer base,
including Orange Personal Communications Systems,
Cable & Wireless, British Telecom, and Vodafone. In
India, we have added four leading Indian operators as customers,
namely Reliance Infocomm, Tata, Bharti Enterprises and Videsh
Sanchar Nigam Limited (“VSNL”). India is one of the
fastest growing telecommunications markets in the world, more
than doubling its total number of wireless subscribers in 2003,
compared to 2002. The increasing implementation of number
portability in Europe and other regions is expected to result in
increasing demand for SS7 network elements such as Signal
Transfer Points (STPs) to accommodate the increase in signaling
traffic, and number portability products and services, such as
those offered by Tekelec, to facilitate the deployment of number
portability.
Focus on Continued Operating Improvements. We will
continue to identify and implement new ways to improve our
operating efficiency and business processes to enhance our
profitability. The use of contract manufacturing and improved
supplier relationships have helped to lower our material costs
and allowed us to improve our gross margins. We will pursue
additional such savings in the future. We will continue to
review all job openings to determine whether job functions or
business processes can be assumed by other Tekelec personnel or
reengineered, resulting in lower personnel costs. We will
continue to regularly review and evaluate all employee
performance to ensure that underperforming employees are
provided the opportunity to improve their performance or are
separated from us.
Pursuing Additional Strategic Relationships, Original
Equipment Manufacturers (OEM) Partners and
Acquisitions. We intend to seek additional strategic
relationships, including original equipment manufacturer
partners, referral arrangements, teaming agreements,
distribution agreements and acquisition candidates. Our existing
strategic relationships include technology development and OEM
relationships with Alcatel; technology development and marketing
relationships with Harris, Telcordia and Nortel; a collaboration
agreement with Alcatel; and distribution relationships with
Mercury (formerly Daewoo) and numerous other product
distributors.
Pursuing New Market Segments. We intend to continue our
strategy of internally developing and acquiring products in
order to enter new market segments. In 2004, we acquired Taqua,
VocalData and Steleus to expand our product portfolio and offer
our customers more value-added solutions. A number of products
currently under development will also enable us to better serve
new and emerging next-generation networking markets. Our
internal research and development activities include ongoing
development of technology, platform capability and feature
functionality for our products targeted for sale worldwide to
wireline and wireless telecom carriers and to enterprise
customers for our contact center products. The extent of our
research and development collaborative efforts consist primarily
of outsourcing the development of specific items to contractors
on an individual basis. We have spent $98.2 million,
$73.3 million and $59.7 million for the years ended
2004, 2003 and 2002, respectively, on research and development
activities.
Seeking Additional Opportunities to Provide Upgrades,
Extensions and Service Agreements. We intend to leverage our
strong customer relationships to seek opportunities to better
serve our customers’ needs in the future. In particular, we
will continue to develop and market software upgrades, link
extensions, extended service agreements and other enhancements
as a means to pursue repeat business opportunities. Such
products and services accounted for over 60% of revenues in our
network signaling division in 2004.
Products
We currently offer products in four broad categories: network
signaling products, switching solutions products, communications
software solutions products, and IEX contact center products.
These four categories were created principally as a result of a
product rebranding initiative underway due to recent
acquisitions. First, our network signaling product line has
become the Network Signaling Group; second, our next-generation
product line has become the Switching Solutions Group; third,
our new Communications
9
Software Solutions Group comprises Steleus products as well as
certain of our existing business intelligence applications and
other network element independent solution products that were
formally included in the network signaling product line; and
fourth, our contact center product line has become the IEX
Contact Center Group.
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Network Signaling Group Products (formerly Network
Signaling Division) |
Our principal Network Signaling Group products are described
below:
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| Product |
|
Description |
| |
|
|
|
EAGLE 5 Signaling Application System
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|
Our EAGLE 5 Signaling Application System (EAGLE 5 SAS) is a
multi-disciplined, high-capacity, highly flexible, and highly
reliable signaling platform designed to be the heart of the
mobile, fixed line and IP networks of today and tomorrow. EAGLE
5 SAS provides products and services in five functional areas:
Signal Transfer, Signaling Gateway, Number Portability, Data
Acquisition, and Integrated Applications. The Signal Transfer
Function is tailored to the global CCS7 switching needs of
wireline carriers, network service providers and wireless
operators, among others. It offers high capacity and throughput,
features a fully distributed, standards-based, open architecture
and is scalable from 2 to 2,000 links with growth up to 7,000
links. The Signaling Gateway Function can provide signaling
information to media gateway controllers and IP-signaling
enabled SCPs in multiple locations. It can deliver these
services in multi-protocol, multi-vendor converged networks or
in circuit switched networks that deploy signaling over IP
primarily to realize economic benefits. It provides the
capability for next-generation IP signaling, and bridges the gap
between legacy networks and next-generation packet telephony
capabilities. |
| |
| |
|
The EAGLE 5 SAS platform also provides a complete line of fully
integrated “EAGLE 5” database and advanced routing
applications, deployment of advanced value-added applications
and data mining capabilities as described below. |
| |
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|
The Number Portability function introduces products and services
for wireline and wireless networks worldwide with a combination
of capacity and performance. The Data Acquisition function
provides a base for Revenue Gateway, Fraud Protection and other
capabilities within a signaling network. The Integrated
Applications Function delivers mediation, mobility, and
Intelligent Network applications. |
| |
|
Tekelec 1000 APS
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|
Our Tekelec 1000 APS provides a fully integrated
application-hosting environment directly on top of the Tekelec
EAGLE 5 SAS, |
| |
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Tekelec 500 Signaling Edge
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|
Our Tekelec 500 SE is a multi-protocol link concentrator that
delivers IP connectivity to the edge of the SS7 network. |
10
|
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Switching Solutions Group Products (formerly
Next-Generation Switching) |
Our principal Switching Solutions Group products are described
below:
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| Product |
|
Description |
| |
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|
|
Tekelec 9000 DSS
|
|
Our Tekelec 9000 DSS is an integrated voice and data switching
solutions, capable of simultaneously delivering full-featured
IXC Tandem, Class 4 and Class 5 functionality. |
| |
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Tekelec 8000 WMG
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|
Our Tekelec 8000 Wireless Media Gateway is a highly flexible,
scalable and reliable mobile solution that can handle circuit
switched TDM traffic as well as packet-based voice traffic
efficiently. |
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Tekelec 7000 C5
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|
Our Tekelec 7000 C5 delivers voice switching for both circuit
and packet-based networks. |
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Tekelec 700 LAG
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|
Our Tekelec 700 Line Access Gateway is a high density, central
office line replacement platform used in conjunction with the
Tekelec 7000 C5 and the Tekelec 9000 DSS. |
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Tekelec 6000 VoIP Applications Server
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|
Our Tekelec 6000 VoIP Application Server provides IP-based
business services, such as IP Centrex, hosted PBX, and business
trunking in addition to residential broadband. |
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Communications Software Solutions Group |
Our principal Communications Software Solutions Group products
are described below:
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| Product |
|
Description |
| |
|
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|
Integrated Application Solutions (IAS)
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|
IAS is a suite of business-oriented applications designed to
provide real time performance management capabilities and
critical business intelligence used in: |
| |
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• Traffic management |
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• Roaming management |
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• Billing management |
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• Market intelligence |
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• Fraud management |
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• Security management |
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• Fault management |
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• Lawful intercept |
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|
Using data collected from the network, the IAS collects,
correlates, processes, and then stores this data into a data
warehouse, where various operations within the operators’
organization can mine this data to produce relevant reports used
for Revenue Assurance, revenue generation, and even operational
improvement. More importantly, IAS supports wireline and
wireless networks either traditional TDM-based or new generation
IP-based networks such as GPRS, UMTS, and SIP. |
11
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| Product |
|
Description |
| |
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Service Creation System (SCS)
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|
The Service Creation System (SCS) provides operators with
an alternative to traditional, legacy IN/ AIN-based platforms.
The SCS is offered with pre-packaged solutions allowing
operators to immediately launch their own services, eliminating
lengthy development cycles. |
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|
At the same time, a full creation environment is provided
allowing these customers to continue customization of the
existing services, as well as create new, competitive services
themselves. This system is based on our ASi4000 platform
previously acquired from IEX, and installed in a number of
locations. |
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|
Sentinel
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|
Sentinel is a data acquisition product capturing data from
signaling networks. Associated value-added applications provide
network maintenance, surveillance and revenue assurance products
and services that enable service providers to ensure the
reliability of telecommunication products and services
implemented across their SS7/ IP networks. Sentinel also enables
revenue assurance features such as fraud prevention, billing and
billing verification. Sentinel can be deployed on a standalone
basis or as an integrated feature of the EAGLE 5 SAS. |
|
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IEX Contact Center Group Products (formerly Contact
Center) |
Our IEX Contact Center Group products provide planning,
management and analysis tools that help contact center managers
deliver better, more consistent service to their customers while
improving employee productivity and lowering operating costs.
| |
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| Product |
|
Description |
| |
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TotalView Workforce Management
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|
Our TotalView Workforce Management product encompasses a set of
standard and advanced features for contact center planning,
management and analysis. |
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|
• TotalView Central provides core
workforce management functionality including: forecasting,
scheduling, change management, planning and performance
management. |
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• TotalView WebStation uses standard Web
browser technology to improve agent and supervisor productivity. |
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• TotalView SmartSync Suite enables
seamless, trouble-free integration with other contact center
systems and applications. |
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• TotalView Multiskill enables contact
centers to better utilize advanced contact routing technologies
and agents with multiple skill sets. |
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• TotalView Multimedia extends the
benefits of TotalView to non-telephone contact channels such as
email and chat. |
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|
• TotalView Adherence Suite provides
real-time and historical information on how well agents keep to
their assigned schedules. |
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|
• TotalView Vacation and Holiday Planner
automates the management and processing of time off requests. |
12
Product Development
The communications market is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. Standards for new technologies and services such
as 3G wireless, softswitching, signaling for packet networks,
internet protocol and asynchronous transfer mode are still
evolving. As these standards evolve and the demand for services
and applications increases, we intend to adapt and enhance our
products and develop and support new products. We solicit
product development input through discussions with our customers
and participation in various industry organizations and
standards committees, such as the Telecommunications Industry
Association, the Internet Engineering Task Force, the Softswitch
Consortium and the
3rd Generation
Partnership Project (3GPP), and by closely monitoring the
activities of the International Telecommunications Union, the
European Telecommunications Standards Institute, the
International Organization for Standardization and Alliance for
Telecommunications Industry Solutions. (ATIS).
Our network signaling product development group is principally
focused on addressing the requirements of the converged voice
and data networks and on releasing new software versions to
incorporate enhancements or new features or functionality
desired by customers. This group also focuses on compliance with
standards to enable the EAGLE products and services to address
additional domestic and international markets. In addition, we
plan continued improvement of hardware components to improve
their performance and capabilities.
Our switching solutions product development group is focused
primarily on creating and enhancing next-generation switching
solutions for both traditional (TDM-based) and new
(packet-based) Class 5 and Class 4 global
applications. The range of developments covers softswitching,
multimedia media gateways, and application servers with a focus
on compliance with national and international standards. Because
our customers’ networks often have a mix of traditional and
new technologies or because they have to interwork with a mix of
traditional and new technologies, our products and services
focus on providing a common platform for traditional TDM-voice,
Voice over ATM (VoATM), and Voice over IP (VoIP).
Our Communications Software Solutions Group product development
focuses on several areas. First, intelligent services provided
through traditional IN/ AIN platforms, enabling services such as
calling name and outbound/inbound call management. As networks
converge, the group’s focus will continue to work towards
supporting convergence of this platform to support IP-based
applications. Second, the development will continue to focus on
business intelligence software for traditional TDM networks and
wireless networks, as well as converged networks (SIP, GPRS, and
UMTS) as a priority. We will invest in adding functionality to
support our existing Sentinel customers and the migration of
those customers to the IAS platform. We also are developing the
AMT Creator product to match signaling and switching records as
a revenue assurance and billing verification product.
Our contact center group product development activities are
principally focused on expanding the capabilities of the
TotalView Workforce Management product, including continued
development of skills and multimedia scheduling capabilities,
advanced web access for supervisors and agents and its seamless
integration with associated call center routing, performance
management, strategic planning, eLearning and other products in
the industry.
Sales and Marketing
Our sales and marketing strategies include selling through our
direct sales forces, selling indirectly through distributors and
other resellers, entering into strategic alliances and targeting
certain markets and customers. To promote awareness of Tekelec
and our products, we also advertise in trade journals, exhibit
at trade shows, participate in industry forums and panels,
maintain a presence on the Internet, use direct mail, and from
time to time, our employees’ author articles for trade
journals.
Distribution. We sell our products in the United States
principally through our direct sales forces and indirectly
through strategic relationships with various third parties. Our
North America direct sales force operates out of our regional
offices located throughout the United States. Internationally,
we sell our products
13
through our direct sales force, sales agents and distribution
relationships. We also sell direct from our wholly owned
subsidiaries in the United Kingdom, Germany, France, Italy,
Singapore, India, Canada, Mexico, Brazil, Malaysia, Spain, and
Hong Kong and our sales offices in China, The Netherlands and
the Russian Federation.
Strategic Relationships. We believe that our current and
future strategic relationships with leading communications
system integrators will improve market penetration and
acceptance for our network signaling and switching products.
Many of these system integrators have long-standing
relationships with public telecommunications carriers and
provide a broad range of services to these carriers through
their existing sales and support networks. We seek strategic
relationships that:
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• |
enhance our presence and strengthen the our competitive position
in our target markets; |
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• |
offer products that complement our network signaling and
switching solutions to provide value-added networking products
and services; and |
| |
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• |
leverage our core technologies to enable communications
equipment suppliers to develop enhanced products with market
differentiation that can be integrated with Tekelec’s
products and services. |
Our strategic relationships include:
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|
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• |
an agreement with Harris whereby we will market and resell its
operations, administration and maintenance network management
system; |
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• |
an exclusive distribution and OEM agreement with Mercury under
which Mercury distributes our Eagle STP in South Korea; |
| |
| |
• |
agreements with Merced Systems and BayBridge Decision
Technologies whereby our contact center group resells these
companies’ Performance Management and Strategic Planning
products and services respectively: |
| |
| |
• |
agreements with the Call Center Professional Services groups of
SBC and Bell Canada, among others, under which those
organizations market and resell the TotalView Workforce
Management solution; and |
| |
| |
• |
an agreement with Alcatel, as a result of their acquisition of
Spatial Communications Technologies (“Spatial”),
whereby Spatial acts as a reseller of Santera’s media
gateways in the wireless market on an original equipment
manufacturer basis. |
We believe that our strategic third party relationships provide
us with additional opportunities to penetrate the network
signaling and switching markets and demonstrate our strategic
partners’ recognition of the technical advantages of our
network products. Through our relationships with, among others,
Alcatel, BroadSoft, Spatial, Harris and Mercury, we are
enhancing our market presence and the ability to access leading
network service providers. In general, these agreements can be
terminated by either party on limited notice and, except for our
agreement with Mercury, do not require minimum purchases.
Although our current sales through these relationships are not
significant, a termination of our relationship with, or the sale
of competing products by, any of these strategic partners could
adversely affect our future potential business and operating
results.
We believe that our ability to compete successfully in the
network signaling and switching markets also depends in part on
our distribution and marketing relationships with leading
communications equipment suppliers and resellers. If we cannot
successfully enter into these relationships on terms that are
favorable to us or if we cannot maintain these relationships,
our business may suffer.
Service, Support and Warranty
We believe that customer service, support and training are
important to building and maintaining strong customer
relationships. We service, repair and provide technical support
for our products. Support services include 24-hour technical
support, remote access diagnostics and servicing capabilities,
extended maintenance
14
and support programs, comprehensive technical customer training,
extensive customer documentation, field installation and
emergency replacement. We also offer to our customers and
certain resellers of our products technical training with
respect to the proper use, support and maintenance of our
products.
We maintain in-house repair facilities and provide ongoing
training and technical assistance to customers and international
distributors and other resellers at our technical assistance
centers in Morrisville, North Carolina, Plano, Texas, Egham,
United Kingdom and Singapore which also support our network
signaling and switching products on a 24 hour-a-day, seven
day-a-week basis. Our technical assistance center in Richardson,
Texas supports our contact center products. In addition, we have
invested in providing in-country service and support in Brazil,
France, India, and Mexico.
We also offer network implementation services in connection with
our effort to supply a complete solution for signaling and
switching telephony deployments, including products from our
vendor partners. In such instances, we will offer specific
service contracts to support the needs of our carrier customers
that choose to migrate their network, for example, to packet
technologies.
We typically warrant our products against defects in materials
and workmanship for one year after the sale and thereafter offer
extended service warranties.
Customers
Our customers include end users and marketing intermediaries.
End users for our Network Signaling products consist primarily
of network service providers, wireless network operators, long
distance carriers, competitive access providers, local exchange
carriers and Regional Bell Operating Companies. Wireless service
providers accounted for over 50% of our network signaling
revenue in 2004. End users for our next-generation switching
products currently consist primarily of rural service providers,
independent operating companies, competitive access providers
and large international public telephone and telegraph
companies. During 2004 we deployed our T9000 DSS at Sprint, a
Tier 1 operator and deployed our Wireless Media Gateway at
three Tier 1 wireless operators through our relationship
with Spatial Communications Technologies, now owned by Alcatel.
Customers of our Communications Software Solutions Group
products are the same as for our signaling products, but
typically a different department (finance, marketing and sales).
This broadens our offering within any one customer organization.
Our contact center products and services have been sold
primarily to Fortune 500 companies, financial services
companies and telecommunications carriers. We anticipate that
our operating results in any given period will continue to
depend to a significant extent upon revenues from a small
percentage of our customers.
Backlog
Backlog for our network signaling, switching solutions and
communications software solution products typically consists of
contracts or purchase orders for both product delivery scheduled
within the next 12 months and extended service warranty to
be provided generally over periods of up to three years. Backlog
for our contact center products typically consists of products
and services ordered for delivery within the next
12 months. Primarily because of variations in the size and
duration of orders we receive and customer delivery and
installation requirements, which may be subject to cancellation
or rescheduling by the customer, our backlog at any particular
date may not be a meaningful indicator of future financial
results.
At December 31, 2004, our backlog amounted to approximately
$385.8 million, compared to a backlog of approximately
$257.0 million at December 31, 2003.
Current backlog represents orders that are likely to convert to
revenue within the current fiscal year. We regularly review our
current backlog to ensure that our customers continue to honor
their purchase commitments and have the financial means to
purchase and deploy our products and services in accordance with
the terms of their purchase contracts. Given the number of
factors that can impact backlog, including the cancellation or
rescheduling of delivery and/or installation by a customer, we
do not believe current backlog to be a meaningful indicator of
future financial results. Accordingly, we do not disclose such
amounts.
15
Competition
Network Signaling Group Products. The market for our
network signaling products is competitive and has been highly
concentrated among a limited number of dominant suppliers. We
presently compete in the network signaling market with, among
others, Alcatel, Nortel, Ericsson, Siemens, Cisco Systems and
Huawei. We expect that competition may increase in the future
from existing and new competitors.
We believe that the principal competitive factors in the network
signaling products market are product performance, scalability
and functionality, product quality and reliability, customer
service and support, price and the supplier’s financial
resources and marketing and distribution capability. We
anticipate that responsiveness in adding new features and
functionality will become an increasingly important competitive
factor. While some of our competitors have greater financial
resources, we believe that we compete favorably in other
respects. New entrants or established competitors may, however,
offer products that are superior to our products in performance,
quality, service and support and/or are priced lower than our
products.
We believe that our ability to compete successfully in the
network signaling market also depends in part on our
distribution and marketing relationships with leading
communications equipment suppliers and resellers. If we cannot
successfully enter into these relationships on terms that are
favorable to us, or if we cannot maintain these relationships,
our business could suffer.
Switching Solutions Group Products. The market for our
switching solutions products is extremely competitive and is
highly fragmented. We presently compete in the next-generation
switching market with numerous public and private companies. The
public companies include, among others, Alcatel, Nortel, Cisco,
Lucent Technologies, Sonus Networks and Siemens. The private
companies include, among others, MetaSwitch and CopperCom. We
expect competition to remain intense, particularly until the
market matures and until the number of competitors is reduced.
We believe that the principal competitive factors in the
next-generation switching market are product performance,
scalability and functionality, product quality and reliability,
customer service and support, price and the supplier’s
financial resources and marketing and distribution capabilities.
We believe that our ability to compete successfully in the
next-generation switching market will, in part, depend in our
ability to secure Tier 1 wireline or wireless operators as
a reference account for our next-generation switching products.
A number of our competitors have existing relationships with
Tier 1 operators as their legacy switching providers. As
such, it may be difficult for us to displace these incumbent
suppliers with our next-generation gear.
Communications Software Solutions Group Products. The
market for monitoring software solutions is very competitive.
Our major competitors include INET (recently acquired by
Tektronix), Agilent and Nettest, as well as a number of smaller
competitors existing in different geographic markets. We offer
integrated data acquisition directly from network elements. The
added simplicity and reliability of our approach is a direct
benefit to our customers. We also offer a probed solution where
needed, as well as an adapter to connect to our
competitor’s probes, or other sources of information to
allow our customers to derive additional value from our
applications. Our applications offer an array of configuration
tools and a Web-based user interface and have the added benefit
of supporting many newer protocols such as SIP, GPRS, and UMTS
from a common architecture. We provide critical capabilities,
such as the ability to continuously trace a call as it traverses
traditional circuit and newer packet network domains. Smaller
companies offering business intelligence and revenue assurance
products such as Vibrant, LavaStorm, and Azure also compete with
us in this market. To compete effectively against these
companies, we will focus additional resources on the marketing,
billing, and finance organizations within our customer accounts,
while leveraging our existing contracts and relationships with
the engineering and operational organizations.
IEX Contact Center Products. The market for contact
center products is extremely competitive. We compete principally
with Aspect Communications and Blue Pumpkin Software (recently
acquired by Witness Systems) in the market for workforce
management products and services and with Cisco and Alcatel in
the market for call routing products and services. We also
compete to a lesser extent in these markets with a number of
other manufacturers, some of which have greater financial,
marketing, manufacturing and other resources than ours. We
believe that the success of our TotalView product will depend in
part on our ability to
16
offer competitive prices and to further develop our workforce
management scheduling and other technologies and our
international distribution channels.
Intellectual Property
Our success depends, to a significant degree, on our proprietary
technology and other intellectual property. We rely on a
combination of patents, copyrights, trademarks, trade secrets,
non-disclosure policies, confidentiality agreements and
contractual restrictions to establish and protect our
proprietary rights both in the United States and abroad. We have
been issued a number of patents and have a number of patent
applications pending. Patents generally have a term of
20 years. Our patent portfolio has been developed over time
and, accordingly, the remaining terms of our intellectual
patents vary. Although we believe that our patents will become
increasingly important in maintaining and improving our
competitive position, no single patent is essential to us. These
measures, however, afford only limited protection and may not
prevent third parties from misappropriating our technology or
other intellectual property. In addition, the laws of certain
foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States and thus make
the possibility of misappropriation of our technology and other
intellectual property more likely. If we fail to successfully
enforce or defend our intellectual property rights, or if we
fail to detect misappropriation of our proprietary rights, our
ability to effectively compete could be seriously impaired.
Our pending patent and trademark registration applications may
not be allowed and our competitors may challenge the validity or
scope of our patent or trademark registration applications. In
addition, we may face challenges to the validity or
enforceability of our proprietary rights and litigation may be
necessary to enforce and protect our rights, to determine the
validity and scope of our proprietary rights and the rights of
others, or to defend against claims of infringement or
invalidity. Any such litigation would be expensive and time
consuming, would divert the attention of our management and key
personnel from business operations and would likely harm our
business and operating results.
We also license software and other intellectual property from
third parties. Based on past experience, we believe that such
licenses can generally be obtained or renewed on commercially
acceptable terms. Nonetheless, there can be no assurances that
such licenses can be obtained on acceptable terms, if at all.
Our inability to obtain or renew certain licenses or to obtain
or renew such licenses on favorable terms, could have a material
adverse effect on our business, operating results and financial
condition. The communications industry is characterized by the
existence of rapidly changing technology, a large number of
patents and frequent claims and litigation based on allegations
of patent infringement. From time to time, third parties may
assert patent, copyright, trademark and other intellectual
property rights to technologies that are important to us. There
can be no assurance that our patent rights will not be
challenged, invalidated or circumvented. From time to time, we
receive notices from, or are sued by, third parties regarding
patent claims. Any claims made against us regarding patents or
other intellectual property rights could be expensive and time
consuming to resolve or defend, would divert the attention of
our management and key personnel from our business operations
and may require us to modify or cease marketing our products,
develop new technologies or products, acquire licenses to
proprietary rights that are the subject of the infringement
claim or refund to our customers all or a portion of the amounts
paid for infringing products. If such claims are asserted, there
can be no assurances that the dispute could be resolved without
litigation or that we would prevail or be able to acquire any
necessary licenses on acceptable terms, if at all. In addition,
we may be requested to defend and indemnify certain of our
customers and resellers against claims that our products
infringe the proprietary rights of others. We may also be
subject to potentially significant damages or injunctions
against the sale of certain products or use of certain
technologies. See “Legal Proceedings” in Part I,
Item 3, of our Annual Report on Form 10-K.
Employees
At March 11, 2005, we had 1,502 employees, comprising 664
in sales, marketing and support, 67 in manufacturing, 619 in
research, development and engineering and 152 in management,
administration and finance. Virtually all of our employees hold
stock options in our stock option plans. None of our employees
are
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represented by a labor union, except for certain Steleus
employees in France, and we have not experienced any work
stoppages. We believe that our employee relations are excellent.
Risk Factors
The statements that are not historical facts contained in this
Annual Report on Form 10-K are forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements reflect the current belief,
expectations, estimates, forecast or intent of our management
and are subject to and involve certain risks and uncertainties.
Many of these risks and uncertainties are outside of our control
and are difficult for us to forecast or mitigate. In addition to
the risks described elsewhere in this Annual Report on
Form 10-K and in certain of our other Securities and
Exchange Act Commission filings, the following risks and
uncertainties, among others, could cause our actual results to
differ materially from those contemplated by any forward-looking
statement contained herein.
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Because our quarterly operating results are difficult to
predict and may fluctuate, the market price for our stock may be
volatile. |
Our quarterly operating results are difficult to predict and may
fluctuate significantly. We have failed to achieve our revenue
and net income expectations for certain prior periods, and it is
possible that we will fail to achieve such expectations in the
future. Fluctuations in our quarterly operating results may
contribute to the volatility in our stock price. A number of
factors, many of which are outside our control, can cause
fluctuations in our quarterly operating results, including among
others:
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the amount of product and service revenue recognized is impacted
by our judgments as to whether an arrangement includes multiple
elements and if so, whether vendor specific objective evidence
of fair value exists for those elements; |
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the success or failure of our strategic alliances and
acquisitions; |
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the introduction and market acceptance of our and our
competitors’ new products, services and technologies; |
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the timing of the deployment by our customers of new
technologies and services, including VoIP; |
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changes in accounting rules, such as the implementation of rules
requiring the recording of employee stock option grants as
expense; |
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changes in overall telecommunications spending; |
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changes in general economic conditions and specific market
conditions in the telecommunications industry; |
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fluctuations in demand for our products and the size, timing,
terms and conditions of orders and shipments; |
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the lengthy sales cycle of our signaling, switching solutions
and communications software solutions products, especially with
respect to our international customers, and the reduced
visibility into our customers’ spending plans for those
products and associated revenue; |
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the progress and timing of the convergence of voice and data
networks and other convergence-related risks described below; |
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the ability of carriers to utilize excess capacity of signaling
infrastructure and related products in their networks; |
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the capital spending patterns of our customers, including
deferrals or cancellations of purchases by customers; |
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the trend toward industry consolidation among our customers; |
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our ability to achieve targeted cost and expense reductions; |
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our dependence on wireless carriers for a significant percentage
of our revenues; |
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unanticipated delays or problems in developing or releasing new
products or services; |
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the mix of products and services that we sell; |
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the geographic mix of our revenues and the associated impact on
gross margins; |
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foreign currency exchange rate fluctuations; |
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the ability of our customers to obtain financing or to otherwise
fund capital expenditures; |
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the timing and level of our research and development
expenditures and other expenditures; |
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the expansion of our marketing and support operations, both
domestically and internationally; |
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changes in our pricing policies and those of our competitors; |
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worldwide economic or political instability; and |
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failure of certain customers to successfully and timely
reorganize their operations, including emerging from bankruptcy. |
Our product sales in any quarter depend largely on orders booked
and shipped in that quarter. A significant portion of our
product shipments in each quarter occurs at or near the end of
the quarter. Since individual orders can represent a meaningful
percentage of our revenues and net income in any quarter, the
deferral or cancellation of or failure to close a single order
in a quarter can result in a revenue and net income shortfall
that causes us to fail to meet securities analysts’
expectations or our business plan for that period. We base our
current and future expense levels on our internal operating
plans and sales forecasts, and our operating costs are to a
large extent fixed. As a result, we may not be able to
sufficiently reduce our costs in any quarter to adequately
compensate for an unexpected near-term shortfall in revenues,
and even a small shortfall could disproportionately and
adversely affect our operating results for that quarter.
The factors described above are difficult to forecast and could
have a material adverse effect on our business, operating
results and financial condition. We may experience a shortfall
in revenues or an increase in operating expenses in the future,
which would adversely affect our operating results. The results
in any one quarter should not be relied upon as an indication of
our future performance.
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We have limited product offerings, and our revenues may
suffer if demand for any of our products declines or fails to
develop as we expect and if we are not able to develop and
market additional and enhanced product offerings. |
We derive a substantial portion of our revenues from sales of
our Network Signaling Group products. During each of 2002, 2003
and 2004, our EAGLE products and related services generated over
50% of our revenues, and we expect that these products and
services and our other Network Signaling products will continue
to account for a substantial majority of our revenues for the
foreseeable future. As a result, factors adversely affecting the
pricing of or demand for these products, such as competition,
technological change or a slower than anticipated rate of
deployment of new products and technologies, could cause a
significant decrease in our revenues and profitability.
Continued and widespread market acceptance of these products is
therefore critical to our future success. Moreover, our future
financial performance will depend in significant part on the
successful and timely development, introduction and customer
acceptance of new and enhanced versions of our EAGLE as well as
other Network Signaling products and Switching Solutions Group
products. Introducing new and enhanced products such as these
requires a significant commitment to research and development
that may not result in success. There are no assurances that we
will continue to be successful in developing and marketing our
Network Signaling Group, Switching Solutions Group, or
Communications Software Solutions Group products and related
services.
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If wireless carriers do not continue to grow and to buy
our Network Signaling products and services, our Network
Signaling business would be harmed. |
The success of our Network Signaling business will depend in
large part on the continued growth of wireless network operators
and their purchases of our products and services. We derive a
substantial portion of our revenues from the sale of our Network
Signaling products and services to wireless network operators.
In each of 2003 and 2004, sales to the wireless market accounted
for more than 50% of our Network Signaling revenues. We expect
that our sales of Network Signaling products and services to
wireless companies will continue to account for a substantial
majority of our revenues for the foreseeable future. The
continued growth of the domestic and international wireless
markets is subject to a number of risks that could adversely
affect our revenues and profitability, including:
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continuing or worsening weakness in the domestic or global
economy; |
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a slowdown in capital spending by wireless network operators; |
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adverse changes in the debt and equity markets and in the
ability of wireless carriers to obtain financing on favorable
terms; |
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delays or scaling back of plans for the deployment by wireless
network operators of new wireless broadband
technologies; and |
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slowing growth of wireless network subscribers, minutes of use
or adoption of new services. |
Consequently, there can be no assurances that the wireless
network carriers will continue to purchase our Network Signaling
products or services for the build-out or expansion of their
networks.
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Risks related to the potential convergence of voice and
data networks |
The market for our products is evolving. Currently, voice
conversations are carried primarily over circuit switched
networks. Another type of network, packet switched networks,
carries primarily data. Circuit and packet networks use
fundamentally different technologies. Although we expect a
substantial portion of any increases in our future sales of
Switching Solutions Group products to result from the
interconnection, or convergence, of circuit and packet networks,
we cannot accurately predict when such convergence will occur or
whether it will fully occur. Therefore, this convergence
presents several significant and related risks to our business.
If the convergence of circuit and packet networks does not fully
occur or takes longer than anticipated, sales of our network
infrastructure products, and our profitability, could be
adversely affected. Any factor which might prevent or slow the
convergence of circuit and packet networks could materially and
adversely affect growth opportunities for our business. Such
factors include:
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the failure to solve or difficulty in solving certain technical
obstacles to the transmission of voice conversations over a
packet network; |
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delays in the formulation of standards for the transmission of
voice conversations over a packet network; and |
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the imposition on packet network operators of access fees, which
they currently do not pay. |
It may be difficult or impossible to solve certain technical
obstacles to the transmission of voice conversations over a
packet network with the same quality and reliability of a
circuit network. For example, delays or gaps in the timing of a
message are typically not as critical to data transmissions as
they are to voice conversations. The nature of packet-switching
makes it difficult to prevent such delays or gaps as well as to
repair such defects in a way that does not degrade the quality
of a voice conversation. If this problem is not solved, the
convergence of circuit and packet networks may never fully occur
or may occur at a much slower rate than we anticipate. It may
also be difficult or time-consuming for the industry to agree to
standards incorporating any one solution to such technical
issues if such a solution does exist. Without uniform standards,
substantial convergence of circuit and packet networks may not
occur.
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We cannot accurately predict when these technical problems will
be solved, when uniform standards will be agreed upon or when
market acceptance of such products and services will occur.
Convergence may, however, take much longer than we expect or, as
noted above, not fully occur at all. Moreover, uncertainty
regarding the technology or standards to be employed in
converged networks may cause carriers to delay their purchasing
plans.
Finally, the imposition of access fees on packet networks might
slow the convergence of circuit and packet networks. Today,
federal regulation requires an operator of a long distance
circuit network to pay an access fee to the local phone company
serving the recipient of a long distance call. Packet network
operators do not currently pay such access fees. In the future,
access fees may be imposed on carriers using packet networks to
transmit voice calls. These access fees might also be imposed on
the termination of “pure” data messages by operators
of packet networks. The imposition of these access fees would
reduce the economic advantages of using packet networks for
voice and other transmissions, which may slow the convergence of
circuit and packet networks.
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The integration of the business operations of our
acquisitions may not be successful. |
Our acquisitions and any future acquisitions that we may
undertake could be difficult to integrate, disrupt our business,
dilute shareholder value and significantly harm our operating
results.
During the last two years, we have engaged in a number of
acquisitions, including our acquisition of a majority interest
in Santera and our acquisitions of Taqua, Steleus and VocalData.
Acquisitions are inherently risky and no assurance can be given
that our previous or future acquisitions will be successful or
will not materially and adversely affect our business, operating
results or financial condition. We may not realize the expected
benefits of an acquisition. We expect to continue to review
opportunities to acquire other businesses or technologies that
would complement our current products, expand the breadth of our
markets, enhance our technical capabilities or otherwise offer
growth opportunities. We may acquire additional businesses,
products or technologies in the future. If we make any further
acquisitions, we may issue stock that would dilute our existing
shareholders’ percentage ownership or our earnings per
share, incur substantial debt or assume contingent liabilities.
We have limited experience in acquiring other businesses and
technologies. Acquisitions involve numerous risks, including the
following:
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Problems or delays integrating or assimilating the acquired
operations, technologies or products; |
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Unanticipated costs associated with the acquisition; |
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Diversion of management’s attention from our core business; |
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Adverse effects on existing business relationships with
suppliers, contract manufacturers and customers; |
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Risks associated with entering markets in which we have no or
limited prior experience; and |
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Potential loss of the acquired organization’s or our own
key employees. |
We cannot assure you that we will be successful in overcoming
problems in connection with our past or future acquisitions, and
our inability to do so could significantly harm our assets
acquired in such acquisitions, revenues and results of
operations.
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We may have difficulty in identifying and executing any
acquisitions, strategic alliances and joint ventures. |
Our growth is dependent on market growth, our ability to enhance
existing products, our ability to introduce new products on a
timely basis and market acceptance of our existing and new
products. Our growth strategy includes acquiring new products
and technologies through acquisitions, strategic alliances and
joint ventures. Transactions such as these are inherently risky
because of the difficulties that may arise in integrating
people, operations, technologies and products. We may incur
significant acquisition, administrative and other costs in
connection with these transactions, including costs related to
integration of acquired
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businesses. There can be no assurance that any of the businesses
we may acquire can be successfully integrated, that they will
perform well once integrated or that they will not materially
and adversely affect our business, operating results or
financial condition. Acquisitions may also lead to potential
write-down, restructuring, or other one-time charges due to
unforeseen business developments, which charges may adversely
affect our earnings.
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If our products do not satisfy customer demand for
performance or price, our customers could purchase products from
our competitors. |
The telecommunications equipment industry in which we operate is
highly competitive, and we expect that the level of competition
on pricing and product offerings to continue to be intense. If
we are not able to compete successfully against our current and
future competitors, our current and potential customers may
choose to purchase similar products offered by our competitors,
which would negatively affect our revenues. We face formidable
competition from a number of companies offering a variety of
network signaling, next-generation switching, monitoring or
contact center products. The markets for our products are
subject to rapid technological changes, evolving industry
standards and regulatory developments. Our competitors include
many large domestic and international companies as well as many
smaller established and emerging technology companies. We
compete principally on the basis of:
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product performance and functionality; |
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product quality and reliability; |
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customer service and support; and |
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price. |
Many of our competitors have substantially greater financial and
technological resources, product development, marketing,
distribution and support capabilities, name recognition,
established relationships with telecommunications service
providers and other resources than we have. In addition, new
competitors may enter our markets as a result of shifts in
technology, and these competitors may include entrants from the
telecommunications, computer software, computer services, data
networking and semiconductor industries.
We anticipate that competition will continue to intensify with
the anticipated convergence of voice and data networks. We may
not be able to compete effectively against existing or future
competitors or to maintain or capture meaningful market share,
and our business could be harmed if our competitors’
products and services provide higher performance, offer
additional features and functionality or are more reliable or
less expensive than our products. Increased competition could
force us to lower our prices or take other actions to
differentiate our products, which could adversely affect our
operating results.
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We depend on a limited number of customers for a
substantial portion of our revenues, and the loss of one or more
of these customers could adversely affect our operating
results. |
Historically, a limited number of customers have accounted for a
significant percentage of our Network Signaling revenues in each
fiscal quarter. Less than 10% of our customers accounted for
approximately 50% of our revenues in each of 2002, 2003 and
2004. We anticipate that our operating results in any given
period will continue to depend to a significant extent upon
revenues from a small number of customers. In 2004, Cingular,
including our business with AT&T, represented approximately
17% of our annual revenues. Reductions, delays or cancellations
of orders from one or more of our significant customers,
including Cingular, or the loss of one or more of our
significant customers in any period could have a material
adverse effect on our operating results. In addition, the
telecommunications industry has recently experienced a
consolidation of both U.S. and non-U.S. companies. We also
anticipate that the mix of our customers in each fiscal period
will continue to vary. In order to increase our revenues, we
will need to attract additional significant customers on an
ongoing basis. Our failure to attract a sufficient number of
such customers during a particular period could adversely affect
our revenues, profitability and cash flow.
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If we fail to develop or introduce new products in a
timely fashion, our business will suffer. |
If we fail to develop or introduce on a timely basis new
products or product enhancements or features that achieve market
acceptance, our business will suffer. Rapidly changing
technology, frequent new product introductions and enhancements,
short product life cycles, changes in customer requirements and
evolving industry standards characterize the markets for our
network signaling and next-generation switching products. Our
success will depend to a significant extent upon our ability to
accurately anticipate the evolution of new products,
technologies and market trends and to enhance our existing
products. It will also depend on our ability to timely develop
and introduce innovative new products and enhancements that gain
market acceptance. Finally, sales of our network signaling and
next-generation switching products depend in part on the
continuing development and deployment of emerging standards and
our ability to offer new products and services that comply with
these standards. We may not be successful in forecasting future
customer requirements or in selecting, developing, manufacturing
and marketing new products or enhancing our existing products on
a timely or cost-effective basis. Moreover, we may encounter
technical problems in connection with our product development
that could result in the delayed introduction of new products or
product enhancements. We may also focus on technologies that do
not function as expected or are not widely adopted. In addition,
products or technologies developed by others may render our
products noncompetitive or obsolete and result in a significant
reduction in orders from our customers.
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Our products are complex and may have errors that are not
detected until deployment, and litigation related to warranty
and product liability claims could be expensive and could
negatively affect our reputation and profitability. |
We may be exposed to warranty and product liability claims if
our products fail to perform as expected or the use of our
products results in property damage or bodily injury. Products
as highly complex as ours may contain undetected defects or
errors when first introduced or as new versions are released,
and those defects or errors may not be detected until deployment
or long after a product has been deployed. Such defects or
errors, particularly those that result in service interruptions
or a failure of telecommunications networks or our signaling or
switching products, could harm our customer relationships,
business and reputation, and result in material warranty or
product liability losses and there can be no assurances that our
products will not have defects or errors. A warranty or product
liability claim brought against us could result in costly,
protracted, highly disruptive and time consuming litigation,
which would harm our business. In addition, we may be subject to
claims arising from our failure to properly service or maintain
our products or to adequately remedy defects in our products
once such defects have been detected. Although our agreements
with our customers typically contain provisions designed to
limit our exposure to potential warranty and product liability
claims, it is possible that these limitations may not be
effective under the laws of some jurisdictions, particularly
since we have significant international sales. Although we
maintain product liability insurance and maintain a warranty
reserve, it may not be sufficient to cover all claims to which
we may be subject. The successful assertion against us of one or
a series of large uninsured claims would harm our business.
Although we have not experienced any significant warranty or
product liability claims to date with the exception of the
claims asserted by Bouygues Telecom in its lawsuit filed in
February 2005 (see Item 3 — Legal Proceedings),
our sale and support of products entail the risk of these types
of claims and subject us to such claims in the future.
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Our relationships with strategic partners and distributors
and other resellers are important to our future growth. |
We believe that our ability to compete successfully against
other network signaling and next-generation switching product
manufacturers depends in part on distribution and marketing
relationships with leading communications equipment suppliers.
If we cannot successfully enter these types of relationships on
favorable terms to us or maintain these relationships, our
business may suffer.
In addition, we expect to increasingly rely on the deployment of
our products with those of other manufacturers, systems
integrators and resellers, both domestically and
internationally. To the extent our products are so incorporated,
we depend on the timely and successful development of those
other products.
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Our compliance with telecommunications regulations and
standards may be time consuming, difficult and costly, and if we
fail to comply, our product sales would decrease. |
In order to maintain market acceptance, our products must
continue to meet a significant number of regulations and
standards. In the United States, our products must comply with
various regulations defined by the Federal Communications
Commission and Underwriters Laboratories as well as standards
established by Telcordia (formerly Bell Telecommunications
Research). Internationally, our products must comply with
standards established by telecommunications authorities in
various countries as well as with recommendations of the
International Telecommunications Union. As these standards
evolve and if new standards are implemented, we will be required
to modify our products or develop and support new versions of
our products, and this will increase our costs. The failure of
our products to comply, or delays in compliance, with the
various existing and evolving industry standards could prevent
or delay introduction of our products, which could harm our
business.
In order to penetrate our target markets, it is important that
we ensure the interoperability of our products with the
operations, administration, maintenance and provisioning systems
used by our customers. To ensure this interoperability, we
periodically submit our products to technical audits. Our
failure or delay in obtaining favorable technical audit results
could adversely affect our ability to sell products to some
segments of the communications market.
Government regulatory policies are likely to continue to have a
major impact on the pricing of existing as well as new public
network services and, therefore, are expected to affect demand
for such services and the communications products, including our
products, which support such services. Tariff rates, whether
determined autonomously by carriers or in response to regulatory
directives, may affect cost effectiveness of deploying public
network services. Tariff policies are under continuous review
and are subject to change. User uncertainty regarding future
policies may also affect demand for communications products,
including our products. In addition, the convergence of circuit
and packet networks could be subject to governmental regulation.
Regulatory initiatives in this area could adversely affect our
business.
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We have significant international sales, and international
markets have inherent risks. |
International sales are subject to inherent risks, including
unexpected changes in regulatory requirements, tariffs and
duties, changes in a country’s political or economic
conditions including military conflicts or political or social
unrest, difficulties in staffing and managing foreign operations
and distributors, longer accounts receivable cycles, differing
technology standards and customer requirements, greater
difficulty in accounts receivable collection, trade regulations,
nationalization of business, economic instability and
potentially adverse tax consequences. Doing business overseas is
generally more costly than doing business in the United States.
We sell our products worldwide through our direct sales forces,
distributors and other resellers, wholly owned subsidiaries in
the United Kingdom, Canada, France, Hong Kong, Italy, Germany,
Brazil, Malaysia, Singapore, India, Spain, and Mexico, and
representative offices in China and the Russian Federation.
International sales of our products accounted for 18% in 2002,
17% in 2003 and 23% in 2004. Our international sales are to a
limited extent denominated in local currencies while most of our
international sales are U.S. dollar-denominated. We expect
that international sales will continue to account for a
significant portion of our revenues in future periods.
Our international sales and other activities also subject us to
the risks relating to price controls, export regulations,
restrictions on foreign currencies and trade barriers imposed by
foreign countries, exchange rate fluctuations and exchange
controls, changes in local economics, changes in laws and
regulations, unsettled potential conditions and possible
terrorist attacks against American interests. For example,
exchange rate fluctuations on foreign currency transactions and
translations arising from international operations may
contribute to fluctuations in our business and operating
results. Fluctuations in exchange rates could also affect demand
for our products. If, for any reason, exchange or price controls
or other restrictions in foreign countries are imposed, our
business and operating results could suffer. In addition, any
inability to obtain local regulatory approvals in foreign
markets on a timely basis could harm our business.
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In particular, if we are not able to manage our continuing
expansion into Europe, Asia Pacific and Latin America, our
business may suffer. In addition, we are relatively unknown in
Asia Pacific and Latin America, and we may have difficulty
establishing relationships, building name recognition or
penetrating these markets, which could adversely affect our
performance in these markets. Moreover, telecommunications
networks outside of the United States generally have a different
structure, and our products may not be completely compatible
with this different structure. As a result, our products may not
be competitive with those of our competitors.
Access to foreign markets is often difficult due to the
established relationships between a government-owned or
controlled communications operating company and its traditional
suppliers of communications equipment. These foreign
communications networks are in many cases owned or strictly
regulated by government. There can be no assurances that we will
be able to successfully penetrate these markets, particularly
for our switching products.
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Our loss of services of key personnel or failure to
attract and retain additional key personnel could adversely
affect our ability to operate our company effectively. |
We depend to a significant extent upon the continuing services
and contributions of our senior management team and other key
employees, particularly Fred Lax, our Chief Executive Officer
and President, Lori Craven, our Executive Vice President and
Chief Operating Officer, and Debra May, our Vice President and
General Manager, Contact Center Division. We generally do not
have long-term employment agreements or other arrangements with
our employees that would prevent them from leaving Tekelec. Our
future success also depends upon our ongoing ability to attract
and retain highly skilled technical, sales and marketing
personnel. Even with the continuing economic downturn,
competition for these employees remains intense. Our business
could suffer and it would be more difficult for us to meet our
business plans and key objectives, such as timely product
introductions, if we were to lose any key personnel and not be
able to find qualified replacements in a timely manner or if we
were unable to recruit and retain additional highly skilled
personnel.
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There can be no assurances that our measures to protect
our proprietary technology and other intellectual property
rights are adequate and if we fail to protect those rights, our
business would be harmed. |
Our success depends to a significant degree on our proprietary
technology and other intellectual property. Although we regard
our technology as proprietary, we have sought only limited
patent protection. We rely on a combination of patents,
copyrights, trademarks, trade secrets, confidentiality
agreements and contractual restrictions to establish and protect
our proprietary rights. These measures, however, afford only
limited protection and may not provide us with any competitive
advantage or prevent third parties from misappropriating our
technology or other intellectual property. In addition, the laws
of certain foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States,
which makes misappropriation of our technology and other
intellectual property more likely. It is possible that others
will independently develop similar products or design around our
patents and other proprietary rights. If we fail to successfully
enforce or defend our intellectual property rights or if we fail
to detect misappropriation of our proprietary rights, our
ability to effectively compete could be seriously impaired which
would limit our future revenues and harm our prospects.
Our pending patent and trademark registration applications may
not be allowed, and our competitors and others may challenge the
validity or scope of our patent or trademark registration
applications. If we do not receive the patents or trademark
registrations we seek, or if other problems arise with our
intellectual property, our competitiveness could be
significantly impaired and our business, operations and
prospects may suffer. In addition, we from time to time face
challenges to the validity or enforceability of our proprietary
rights and litigation may be necessary to enforce and protect
our rights, to determine the validity and scope of our
proprietary rights and the rights of others, or to defend
against claims of infringement or invalidity. Any such
litigation would be expensive and time consuming, would divert
the attention of our management and key personnel from business
operations and would likely harm our business and operating
results.
25
|
|
|
Because we are subject to third parties’ claims that
we are infringing their intellectual property and may become
subject to additional such claims in the future, we may be
prevented from selling certain products and we may incur
significant expenses in resolving these claims. |
We receive from time to time claims of infringement from third
parties or we otherwise become aware of relevant patents or
other intellectual property rights of third parties that may
lead to disputes and litigation. Any claims made against us
regarding patents or other intellectual property rights could be
expensive and time consuming to resolve or defend and could have
a material adverse effect on our business. In addition, any such
claims would divert the attention of our management and key
personnel from our business operations. A claim by a third party
may require us to modify or cease marketing our products,
develop new technologies or products, enter into costly royalty
or license agreements with respect to the proprietary rights
that are the subject of the infringement claim or refund to our
customers all or a portion of the amounts they have paid for
infringing products. If such claims are asserted, there can be
no assurances that we would prevail, successfully modify our
products or be able to acquire any necessary licenses on
acceptable terms, if at all. In addition, we may be requested to
defend and indemnify certain of our customers and resellers
against claims that our products infringe the proprietary rights
of others. We may also be subject to potentially significant
damages or injunctions against the sale of certain products or
use of certain technologies, and there can be no assurances that
any such litigation can be avoided or successfully concluded.
There can be no assurances that our technologies or products do
not infringe on the proprietary rights of third parties or that
such parties will not initiate infringement actions against us.
|
|
|
If we fail to accurately forecast our manufacturing
requirements or customer demand or fail to effectively manage
our contract manufacturer relationships, we could incur
additional costs or be unable to timely fulfill our customer
commitments which would adversely affect our business and
results of operations and harm our customer
relationships. |
During 2004, we outsourced a substantial portion of our
manufacturing and repair service operations to independent
contract manufacturers and other third parties. Our contract
manufacturers typically manufacture our products based on
rolling forecasts of our product needs that we provide to them
on a regular basis. The contract manufacturers are responsible
for procuring components necessary to build our products based
on our rolling forecasts, build and assemble the products, test
the products in accordance with our specifications and then ship
the products to us. We configure the products to our customer
requirements, conduct final testing and then ship the products
to our customers. Although we currently partner with multiple
major contract manufacturers, there can be no assurance that we
will not encounter problems as we become increasingly dependent
on contract manufacturers to provide these manufacturing
services.
If we fail to accurately predict our manufacturing requirements
or forecast customer demand, we may incur additional costs and
our gross margins and financial results could be adversely
affected. If we overestimate our requirements, our contract
manufacturers may experience an oversupply of components and
assess us charges for excess or obsolete components that could
adversely affect our gross margins. If we underestimate our
requirements, our contract manufacturers may have inadequate
inventory or components, which could interrupt manufacturing and
result in higher manufacturing costs, shipment delays, damage
customer relationships and/or result in our payment of penalties
to our customers.
In addition, if we fail to effectively manage our relationships
with our contract manufacturers or other service providers, or
if one or more of them should not fully comply with their
contractual obligations or should experience delays,
disruptions, component procurement problems or quality control
problems, then our ability to ship products to our customers or
otherwise fulfill our contractual obligations to our customers
could be delayed or impaired which would adversely affect our
business, financial results and customer relationships.
26
|
|
|
We rely on third parties to provide many of our subsystems
and components. If we are unable to obtain our subsystems and
components from these parties at reasonable prices or on a
timely basis, we may not be able to obtain substitute subsystems
or components on terms that are as favorable. |
Certain of our products contain subsystems or components
acquired from third parties. These products are often available
only from a limited number of manufacturers. In the event that a
product becomes unavailable from a current third party vendor,
second sourcing would be required. This sourcing may not be
available on reasonable terms, if at all, and could delay
customer deliveries, which could adversely affect our business.
|
|
|
We are exposed to the credit risk of some of our customers
and to credit exposures in weakened markets. |
We are vulnerable to downturns in the economy and the
telecommunications industry and to adverse changes in our
customers’ businesses and financial condition. The recent
slowdown in the economy in general and in the telecommunications
market in particular has weakened the financial condition of
many of our customers, which has adversely affected their
creditworthiness. Although we have programs in place to monitor
and mitigate the associated risks, there can be no assurance
that such programs will be effective in reducing our credit
risks. We also continue to monitor credit exposure from weakened
financial conditions in certain geographic regions, and the
impact that such conditions may have on the worldwide economy.
We have experienced losses due to customers’ failing to
meet their obligations. Although these losses have not been
significant, future losses, if incurred, could harm our business
and have a material adverse effect on our operating results and
financial condition.
|
|
|
Business disruptions could adversely affect our business
and financial results. |
Our operations could be subject to natural disasters and other
business disruptions, which could adversely affect our business
and financial results. Our corporate headquarters and some of
our suppliers are located in California, near major earthquake
faults. The ultimate impact on us and our significant suppliers
of being located near major earthquake faults is unknown, but
our business and financial results could suffer in the event of
a major earthquake. In addition, some areas, including
California and parts of the United States, have experienced, and
may continue to experience, major power shortages and blackouts.
These blackouts could cause disruptions to our operations or the
operations of our suppliers, distributors and resellers, or our
customers. We are predominately self-insured for losses and
interruptions caused by earthquakes, floods, and other natural
or manmade disasters.
Our executive offices are located in Calabasas, California in
facilities consisting of approximately 77,000 square feet.
The lease on these facilities expired in November 2004 and we
continue to occupy the facility on a month to month basis. We
entered into a new lease agreement in December 2004 to relocate
our corporate offices into smaller facilities as a result of our
manufacturing restructuring more fully described in Note D.
The smaller facility is approximately 38,000 square feet
and is located in Westlake Village, California. We expect to
move our executive offices into the new facility during the
first half of 2005.
We occupy a 155,000 square-foot facility in Morrisville,
North Carolina under a lease expiring in November 2009. This
facility is used primarily for engineering, product development,
and principal manufacturing operations of our Network Signaling
Group. An additional 161,000 square foot facility in
Morrisville, North Carolina is maintained under a lease expiring
in 2011. During 2004, customer service, regional sales and
certain administrative departments were moved into this
facility. Due to our planned expansion and growth, we expect to
occupy additional space within this facility during the second
half of 2005.
Our IEX subsidiary leases a facility consisting of approximately
51,000 square feet in Richardson, Texas under a lease
expiring in February 2013. The IEX facility is used for
engineering, product development, customer support, and general
administrative and sales activities for our contact center
products.
27
Our subsidiary in the United Kingdom occupies approximately
6,100 square feet in Egham under a lease expiring in March
2016.
Our majority owned subsidiary, Santera, leases a facility of
approximately 100,000 square feet in Plano, Texas under a
lease expiring in August 2005. In December 2004, we entered a
lease to occupy an additional 87,000 square feet in this
facility expiring in November 2013. During 2005, our Taqua and
Vocal Data operations will be consolidated into this facility.
Our Taqua subsidiary leases a facility of approximately
142,000 square feet in Richardson, Texas under a lease
expiring in December 2005 and a 15,000 square foot facility
in Hyannis, Massachusetts under a lease expiring in July 2007.
Our VocalData subsidiary leases a facility of approximately
20,000 square feet Richardson, Texas under a lease that
expired in January 2005. VocalData will remain in this space on
a month by month basis until they are relocated to the expanded
facility in Plano Texas described above.
Our Steleus subsidiary leases a facility of approximately
5,100 square feet in Westford, Massachusetts under a lease
expiring in October 2007. Steleus also occupies approximately
58,000 square feet in France under leases expiring in
February 2011 and September 2005.
Our international subsidiaries, sales and customer service
locations occupy an aggregate of approximately
13,000 square feet under short term leases in Sao Paulo,
Brazil; Beijing, China; Singapore; St. Petersburg, the Russian
Federation; Mexico City, Mexico; New Delhi, India; Amsterdam,
the Netherlands; Madrid, Spain; Grisheim, Germany; Rome, Italy;
Kuala Lumper, Malaysia; Trappes, France; Kowloon, Hong Kong;
Ontario, Canada; and Tapei, Taiwan.
Domestically, we have nine regional sales offices occupying an
aggregate of approximately 8,500 square feet under short
term leases in San Diego, California; Englewood, Colorado;
Lombard, Illinois; Irving, Texas; Sunset Hills, Virginia; Mount
Laurel, New Jersey; Miami, Florida and our Santera offices in
Marietta, Georgia and Overland Park, Kansas.
We believe that our existing facilities will be adequate to meet
our needs at least through 2005, and that we will be able to
obtain additional space when, where and as needed on acceptable
terms.
|
|
| Item 3. |
Legal Proceedings. |
From time to time, various claims and litigation are asserted or
commenced against us arising from or related to contractual
matters, intellectual property matters, product warranties and
personnel and employment disputes. As to such claims and
litigation, we can give no assurance that we will prevail.
However, we currently do not believe that the ultimate outcome
of any pending matters, other than possibly the Bouygues
litigation as described below, will have a material adverse
effect on our consolidated financial position, results of
operations or cash flows.
Bouygues Telecom, S.A., vs. Tekelec
On February 24, 2005, Bouygues Telecom, S.A., a French
telecommunications operator, filed a complaint against Tekelec
in the United States District Court for the Central District of
California seeking damages for economic losses caused by a
service interruption Bouygues Telecom experienced in its
cellular telephone network in November 2004. The amount of
damages sought by Bouygues Telecom is $81 million plus
unspecified punitive damages, and attorneys’ fees. In its
complaint, Bouygues Telecom alleges that the service
interruption was caused by the malfunctioning of certain virtual
home location register (HLR) servers (i.e., servers storing
information about subscribers to a mobile network) provided by
Tekelec to Bouygues Telecom.
Bouygues Telecom seeks damages against Tekelec based on causes
of action for product liability, negligence, breach of express
warranty, negligent interference with contract, interference
with economic advantage, intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, breach of
fiduciary duty, equitable indemnity, fraud in the inducement of
contract, and unfair competition under California
Business & Professionals Code section 17200.
Although Tekelec is currently evaluating the claims
28
asserted by Bouygues Telecom, Tekelec intends to defend
vigorously against the action and believes Bouygues
Telecom’s claims could not support the damage figures
alleged in the complaint. At this stage of the litigation,
management cannot assess the likely outcome of this matter and
it is possible that an unfavorable outcome could have a material
adverse effect on our consolidated financial position, results
of operations or cash flows.
IEX Corporation vs. Blue Pumpkin Software, Inc.
In January 2001, IEX Corporation, a wholly owned subsidiary of
Tekelec (“IEX”), filed suit against Blue Pumpkin
Software, Inc., in the United States District Court for the
Eastern District of Texas, Sherman Division. In its complaint,
IEX asserts that certain of Blue Pumpkin’s products and
services infringe United States Patent No. 6,044,355 held
by IEX. In the suit, IEX seeks damages and an injunction
prohibiting Blue Pumpkin’s further infringement of the
patent. In February 2001, Blue Pumpkin responded to IEX’s
suit denying that Blue Pumpkin infringes IEX’s patent and
asserting that such patent is invalid. Blue Pumpkin filed a
motion for summary judgment of non-infringement, and the
district court granted that motion. IEX appealed that ruling,
and in February 2005 the Federal Circuit Court of Appeals
reversed the decision of the district court and remanded the
case for further proceedings. A date for trial has not yet been
set. Tekelec currently believes that the ultimate outcome of the
lawsuit will not have a material adverse effect on its financial
position, results of operations or cash flows.
Lemelson Medical, Education and Research Foundation, Limited
Partnership vs. Tekelec
In March 2002, the Lemelson Medical, Education &
Research Foundation, Limited Partnership (“Lemelson”)
filed a complaint against thirty defendants, including Tekelec,
in the United States District Court for the District of Arizona.
The complaint alleges that all defendants make, offer for sale,
sell, import, or have imported products that infringe eighteen
patents assigned to Lemelson, and the complaint also alleges
that the defendants use processes that infringe the same
patents. The patents at issue relate to computer image analysis
technology and automatic identification technology.
Lemelson has not identified the specific Tekelec products or
processes that allegedly infringe the patents at issue. Several
Arizona lawsuits, including the lawsuit in which Tekelec is a
named defendant, involve the same patents and have been stayed
pending a non-appealable resolution of a lawsuit involving the
same patents in the United States District Court for the
District of Nevada. On January 23, 2004, the Court in the
District of Nevada case issued an Order finding that certain
Lemelson patents covering bar code technology and machine vision
technology were: (1) unenforceable under the doctrine of
prosecution laches; (2) not infringed by any of the accused
products sold by any of the eight plaintiffs; and
(3) invalid for lack of written description and enablement.
In September 2004, Lemelson filed its appeal brief with the
Court of Appeals for the Federal Circuit for the related Nevada
litigation, and in December 2004, the Defendants in the related
Nevada litigation filed their reply brief. Tekelec currently
believes that the ultimate outcome of the lawsuit will not have
a material adverse effect on our financial position, results of
operations or cash flows.
Syndia Corporation
In January 2002, Syndia Corporation (“Syndia”) sent a
letter to Tekelec accusing Tekelec of infringing two patents and
offering to license these and other patents to Tekelec. The
patents at issue relate to integrated circuit technology. Syndia
has not identified the specific Tekelec products or processes
that allegedly infringe the patents at issue, and Tekelec is
currently investigating which products and/or processes might be
subject to Syndia’s claims. Tekelec currently believes that
the ultimate outcome of the lawsuit will not have a material
adverse effect on our financial position, results of operations
or cash flows.
|
|
| Item 4. |
Submission of Matters to a Vote of Security
Holders. |
Inapplicable.
29
PART II
|
|
| Item 5. |
Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
Our common stock is traded on The Nasdaq Stock Market under the
symbol TKLC. The following table sets forth the range of high
and low closing sales prices for the common stock for the
periods indicated. As of March 1, 2005, there were 573
record shareholders of Tekelec common stock. This number does
not include shareholders for whom shares are held in
“nominee” or “street name.”
| |
|
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
12.06 |
|
|
$ |
8.04 |
|
| |
Second Quarter
|
|
|
14.29 |
|
|
|
8.72 |
|
| |
Third Quarter
|
|
|
18.08 |
|
|
|
11.34 |
|
| |
Fourth Quarter
|
|
|
18.00 |
|
|
|
14.68 |
|
|
2004
|
|
|
|
|
|
|
|
|
| |
First Quarter
|
|
$ |
21.25 |
|
|
$ |
15.46 |
|
| |
Second Quarter
|
|
|
18.65 |
|
|
|
15.30 |
|
| |
Third Quarter
|
|
|
19.86 |
|
|
|
15.90 |
|
| |
Fourth Quarter
|
|
|
25.76 |
|
|
|
17.17 |
|
We have never paid a cash dividend on our common stock. It is
our present policy to retain earnings to finance the growth and
development of our business and, therefore, we do not anticipate
paying cash dividends on our common stock in the foreseeable
future.
|
|
| Item 6. |
Selected Financial Data. |
The statement of operations data included in the selected
consolidated financial data set forth below for the years ended
December 31, 2004, 2003 and 2002 and the balance sheet data
set forth below at December 31, 2004 and 2003 are derived
from, and are qualified in their entirety by reference to, our
audited consolidated financial statements and notes thereto
included in this Annual Report on Form 10-K. The statement
of operations data set forth below for the years ended
December 31, 2001 and 2000 and the balance sheet data set
forth below at December 31, 2002, 2001 and 2000 are derived
from our audited consolidated financial statements, which are
not included herein. The statements of operations data set forth
below are adjusted to reflect the sale of our Network
Diagnostics Division (“NDD”) in August 2002, which was
accounted for as a discontinued operation. Accordingly, the
historical statements of operations data for periods prior to
the sale have been revised to reflect NDD as a discontinued
operation. For the year ended December 31, 2003, the
statement of operations data set forth below reflects the
financial results of Santera after the date of acquisition,
June 10, 2003, less minority interest. The
December 31, 2003 and 2004 balance sheet data includes the
accounts of Santera. For the year ended December 31, 2004,
the statement of operations data set forth below reflects the
financial results of Taqua after the date of acquisition,
April 8, 2004, the results of VocalData after the date of
acquisition, September 20, 2004, and the results of Steleus
30
after the date of acquisition, October 14, 2004. The
December 31, 2004 balance sheet includes the accounts of
Taqua, VocalData and Steleus.
Five-Year Selected Financial Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Thousands, except per share data) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
397,072 |
|
|
$ |
263,700 |
|
|
$ |
260,341 |
|
|
$ |
249,369 |
|
|
$ |
252,327 |
|
|
Income (Loss) from continuing operations before provision for
income taxes
|
|
|
48,979 |
|
|
|
8,967 |
|
|
|
24,054 |
|
|
|
(488 |
) |
|
|
21,754 |
|
|
Income (Loss) from continuing operations
|
|
|
36,373 |
|
|
|
15,159 |
|
|
|
15,914 |
|
|
|
(6,610 |
) |
|
|
6,228 |
|
|
Income (Loss) from discontinued operation, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(3,308 |
) |
|
|
(289 |
) |
|
|
6,668 |
|
|
Gain on sale of discontinued operation, net of income taxes
|
|
|
— |
|
|
|
3,293 |
|
|
|
28,312 |
|
|
|
— |
|
|
|
— |
|
|
Net income (loss)
|
|
|
36,373 |
|
|
|
18,452 |
|
|
|
40,918 |
|
|
|
(6,899 |
) |
|
|
12,896 |
|
|
Earnings (Loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
(0.11 |
) |
|
$ |
0.11 |
|
| |
Diluted
|
|
|
0.53 |
|
|
|
0.24 |
|
|
|
0.26 |
|
|
|
(0.11 |
) |
|
|
0.10 |
|
|
Earnings (Loss) per share from discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.11 |
|
| |
Diluted
|
|
|
— |
|
|
|
— |
|
|
|
(0.05 |
) |
|
|
(0.01 |
) |
|
|
0.10 |
|
|
Earnings per share from gain on sale of discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
— |
|
|
$ |
0.05 |
|
|
$ |
0.47 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Diluted
|
|
|
— |
|
|
|
0.05 |
|
|
|
0.46 |
|
|
|
— |
|
|
|
— |
|
|
Earnings (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.58 |
|
|
$ |
0.30 |
|
|
$ |
0.68 |
|
|
$ |
(0.12 |
) |
|
$ |
0.22 |
|
| |
Diluted
|
|
|
0.53 |
|
|
|
0.29 |
|
|
|
0.67 |
|
|
|
(0.12 |
) |
|
|
0.20 |
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
63,131 |
|
|
|
61,163 |
|
|
|
60,358 |
|
|
|
59,574 |
|
|
|
57,823 |
|
| |
Diluted
|
|
|
72,683 |
|
|
|
62,911 |
|
|
|
61,386 |
|
|
|
59,574 |
|
|
|
64,123 |
|
|
Balance Sheet Data (at December 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and liquid investments
|
|
$ |
276,982 |
|
|
$ |
339,359 |
|
|
$ |
309,830 |
|
|
$ |
225,956 |
|
|
$ |
151,308 |
|
|
Working capital
|
|
|
200,002 |
|
|
|
135,039 |
|
|
|
187,912 |
|
|
|
185,168 |
|
|
|
218,935 |
|
|
Total assets
|
|
|
781,643 |
|
|
|
614,933 |
|
|
|
525,683 |
|
|
|
484,404 |
|
|
|
458,524 |
|
|
Long-term liabilities
|
|
|
146,851 |
|
|
|
132,051 |
|
|
|
145,098 |
|
|
|
137,929 |
|
|
|
136,050 |
|
|
Shareholders’ equity
|
|
|
428,998 |
|
|
|
328,811 |
|
|
|
302,007 |
|
|
|
248,822 |
|
|
|
237,597 |
|
|
|
| Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations. |
The following discussion should be read in conjunction with, and
is qualified in its entirety by, the consolidated financial
statements and the notes thereto included in this Annual Report
on Form 10-K. Historical results and percentage
relationships among any amounts in the financial statements are
not necessarily indicative of trends in operating results for
any future periods.
31
Our logo, EAGLE,
IP7
Secure Gateway, TALI, G-Flex,
IP7,
IP7
Edge, and G-Port are registered trademarks of Tekelec. Qore,
TekWare, TekServer, ASi 4000, and VXi are
trademarks of Tekelec. IEX, Total View, TotalNet, TeleStar and
Expedite are registered trademarks of IEX. Santera, SanteraOne
and S Santera are registered trademarks of Santera, our majority
owned subsidiary. BoX, NetScan, OneReach, OFX, Open Feature
Exchange and Broadband Office Exchange are trademarks of
Santera, our majority owned subsidiary. Taqua, Taqua Systems and
OCX are registered trademarks of Taqua. Telassist, Compass, EFX,
EFX Server, Courier, Temaworks, Meritus, IX and ICOn are
trademarks of Taqua. VocalData and We Talk Data are registered
trademarks of VocalData. Steleus is a registered trademark of
Steleus.
Overview
Tekelec is a developer of next-generation switching and
signaling telecommunications products and services, network
performance management technology, business intelligence and
value-added applications. Tekelec’s innovative products and
services are widely deployed in traditional and next-generation
wireline and wireless networks and contact centers worldwide.
Our corporate headquarters are located in Calabasas, California
with research and development facilities and sales offices
throughout the world. For more information, please visit
www.tekelec.com.
Our company and products are organized according to our four
major operating groups: the Network Signaling Group, the
Switching Solutions Group, the Communications Software Solutions
Group, and the IEX Contact Center Group. These operating groups
were created principally as a result of a product rebranding
initiative and reorganization of management currently underway
following our recent acquisitions of Taqua, VocalData and
Steleus. First, our network signaling product line has become
the Network Signaling Group; second, our next-generation product
line has become the Switching Solutions Group; third, a new
Communications Software Solutions Group comprised of Steleus
products as well as certain of our existing business
intelligence applications and other network element independent
solution products that were formerly included in the network
signaling product line was created; and fourth, our contact
center product line has become the IEX Contact Center Group.
Network Signaling Group (formerly Network Signaling). Our
Network Signaling Group products help direct and control voice
and data communications. They enable carriers to control,
establish and terminate calls. They also enable carriers to
offer intelligent services, which include any services other
than the call or data transmission itself. Examples include
familiar products such as voice messaging, toll free calls
(e.g., “800” calls), prepaid calling cards,
text messaging and local number portability.
Our Network Signaling Group products include the Tekelec
EAGLE® 5 Signaling Application System, Tekelec 1000
Application Server, Tekelec 500 Signaling Edge, the Short
Message Gateway, and the SIP to SS7 Gateway. During the fourth
quarter of 2004, certain network signaling products, including
Sentinel, were combined with Steleus resources to become the
basis of our new Communications Software Solutions Group.
Switching Solutions Group (formerly Next-Generation
Switching). Our Switching Solutions Group products are
focused primarily on creating and enhancing next-generation
voice switching products and services for both traditional
(TDM-based) and new (Packet-based) Class 4, Class 5,
and wireless applications. The switching portion of a network
carries and routes the actual voice or data comprising a
“call.”
The Switching Solutions Group comprises our Santera, Taqua, and
VocalData switching solutions portfolio. Santera’s
portfolio of switching products and services allows network
service providers to migrate their network infrastructure from
circuit-based technology to packet-based technology.
Circuit-based switching is largely based upon the Time Division
Multiplexing (or “TDM”) protocol standard, in which
the electronic signals carrying the voice message traverses the
network following a dedicated path, or circuit, from one user to
the other. Packet-based switching, however, breaks down the
voice message into packets. These packets then individually
traverse the network, often taking separate paths, and are then
reassembled on the other side of the network prior to delivery
to the recipient. Packet-based switching may utilize one of many
protocols, the most common of which are Asynchronous Transfer
Mode (or “ATM”) and Internet Protocol (or
“IP”). Voice transported using the IP protocol is
often referred to as Voice over IP (or “VoIP”).
32
Over the last two years, a generally improving economy and
improved capital market conditions contributed to a broad
turnaround in the financial condition of many telecom equipment
providers. While wireline service providers generally continued
to experience access line losses and flat to declining revenues,
wireless service providers experienced strong subscriber growth
and increased end-user adoption of wireless data services and
applications. In order to improve their competitive position
relative to their wireless competitors, and in order to lower
operating costs, a number of the world’s largest carriers,
commonly referred to as Tier 1 Carriers, or carriers that
typically have operations in more than one country and own and
operate their own physical networks, announced their intentions
or definitive plans to implement packet-switching technology,
generally referred to as Voice over Internet Protocol (VoIP).
These factors combined to allow equipment suppliers focused on
wireless infrastructure and VoIP infrastructure to perform
particularly well. Dell’Oro, a market research firm
specializing in IP telephony market data said revenues from IP
telephony carrier equipment, including softswitches, media
gateways, and hybrid media gateway softswitches, grew to
$1.6 billion in 2004, a 26 percent increase over 2003.
Dell’Oro noted that the top three vendors in 2004, in order
from one to three, were Nortel, Sonus Networks Inc. and Tekelec.
Industry analysts are projecting that implementation of
packet-switching technology will increase again in 2005.
Our Switching Solutions Group products include Santera’s
product portfolio consisting of the Tekelec 3000 MGC and
the Tekelec 8000 MG, a carrier-grade, integrated voice and
data switching solutions which delivers applications like IXC
tandem, Class 4/5, PRI offload, packet/cell switching and
Voice over Broadband services. Taqua’s product portfolio,
included in the Switching Solutions Group, includes the Tekelec
200 APS, Tekelec 700 LAG, and Tekelec 7000 C5. VocalData’s
IP Centrex application server is being integrated into the
Switching Solutions Group business unit.
Communications Software Solutions Group. Our
communications software products and services provide
intelligent network services such as calling name, outbound call
management, inbound call management and a service creation
environment. Our products also enable intelligent network
services such as revenue assurance, monitoring, network
optimization, quality of service and marketing intelligence
applications. The Communications Software Solutions Group is
comprised of Steleus products as well as certain existing
business intelligence applications and other products that were
formally included in the Network Signaling Group product line.
IEX Contact Center Group (formerly Contact Center). Our
IEX Contact Center Group provides workforce management and
intelligent call routing systems for single- and multiple-site
contact centers. We sell our products primarily to customers in
industries with significant contact center operations such as
financial services, telecommunications and retail. Our IEX
Contact Center product line includes the TotalView Workforce
Management.
Our revenues are currently organized into four distinct
geographical territories: North America, EMEA, CALA and Asia/
Pacific. North America is comprised of the United States and
Canada. EMEA is comprised of Europe, the Middle East and Africa.
CALA is comprised of the Caribbean and Latin America including
Mexico. Asia Pacific is comprised of Asia and the Pacific region
including China.
In August 2002, we completed the sale of our Network Diagnostics
Division (“NDD”) to Catapult Communications
Corporation (“Catapult”) for $59.8 million,
consisting of $42.5 million in cash and convertible
subordinated promissory notes issued by Catapult’s wholly
owned Irish subsidiary and guaranteed by Catapult in the total
amount of $17.3 million, subject to certain adjustments.
The sale of NDD resulted in a pre-tax gain of approximately
$41.7 million ($28.3 million after income taxes) and
was accounted for as a discontinued operation in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” Accordingly our historical
financial results have been revised to reflect NDD as a
discontinued operation.
During the third quarter of 2003, an additional
$3.3 million gain on the sale of NDD was recognized based
on post closing adjustments, including working capital,
resulting from the final settlement with Catapult in accordance
with the asset purchase agreement. In September 2004, the notes
matured and we exercised the conversion option of the notes into
1.1 million shares of Catapult common stock at the
conversion rate of
33
62.50 shares of Catapult common stock per $1,000 principal.
In September 2004, we sold our Catapult shares resulting in a
pretax gain of approximately $2.2 million.
In April 2004, we completed our acquisition of Taqua, Inc., a
privately held provider of next-generation packet-switching
systems, located in Richardson, Texas. (See
Note B — Acquisitions). Taqua offers a portfolio
of circuit and IP voice switching products and services,
including next-generation packet Class 5 switches,
intelligent line access gateways, application servers, and an
element management system. In addition, Taqua offers a suite of
professional services including network design and capacity
planning, as well as installation and cutover services. Taqua
products became part of our Switching Solutions Group in the
second quarter of 2004.
In September 2004, we completed the acquisition of all of the
outstanding shares of capital stock of privately held VocalData.
(See Note B — Acquisitions) VocalData is a
provider of hosted Internet protocol (IP) telephony
applications that enable the delivery of advanced telecom
services and applications to business and residential customers.
As a result of the acquisition, VocalData is the surviving
corporation and a wholly owned subsidiary of Tekelec. Following
our acquisition of VocalData, its products became part of our
Switching Solutions Group.
In October 2004, we completed the acquisition of Steleus Group
Inc. (“Steleus”), a real-time performance management
company that supplies network-related intelligence to
telecommunications operators (See Note B —
Acquisitions). Steleus was combined with certain existing
Tekelec Sentinel and other business intelligence applications,
such as billing verification, and other network
element-independent applications during the fourth quarter of
2004 to form our new Communications Software Solutions Group.
The acquisition represented our ongoing strategy to offer more
value-added applications to our customers and to further enhance
and differentiate our switching products and services and
signaling product offerings. Steleus products enable operators
to monitor their service and network performance as they
transition from circuit to packet technology, helping to speed
up the implementation of packet networks, while lowering the
risk. They also enable operators to access critical business
data such as call volumes, subscriber behavior and traffic types
and volumes.
|
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|
Critical Accounting Policies and Estimates |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations are based upon our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
making estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, estimates are evaluated, including those related to
revenue recognition, allowance for doubtful accounts,
inventories, impairment of investments, notes receivable,
deferred taxes and impairment of goodwill and long —
lived assets, product warranty, and contingencies and
litigation. These estimates are based on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
We apply the following critical accounting policies in the
preparation of our consolidated financial statements:
|
|
|
| |
• |
Revenue Recognition Policy. Revenues are derived from
sales of network signaling, contact center, switching solutions
and communications software solutions products and services.
Revenues are recognized upon the transfer of title, generally at
the time of shipment to the customer’s final site and
satisfaction of related Company obligations, if any, provided
that persuasive evidence of an arrangement exists, the fee is
fixed and determinable and collectability is deemed probable.
For certain products, our sales arrangements include acceptance
provisions which are based on our published specifications.
Revenue is recognized upon shipment of these products assuming
all other revenue recognition criteria are met, provided that we
have previously demonstrated that the product meets the
specified criteria and has established a history with
substantially similar transactions. Revenue is |
34
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| |
|
deferred for sales arrangements that include customer-specific
acceptance provisions where we are unable to reliably
demonstrate that the delivered product meets all of the
specified criteria until customer acceptance is obtained.
Revenues associated with multiple-element arrangements are
allocated to each element based on vendor specific objective
evidence of fair value. The amount of product and service
revenue recognized is impacted by our judgments as to whether an
arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists for
those elements. Changes to the elements in an arrangement and
our ability to establish vendor-specific objective evidence for
those elements could affect the timing of revenue recognition.
Revenues associated with installation services, if provided, are
deferred based on the fair value of such services and are
recognized upon completion. Revenue is recognized for extended
warranty and maintenance agreements ratably over the contract
term. Significant management judgments and estimates must be
made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount
and timing of our revenue for any period if management made
different judgments or utilized different estimates. |
| |
| |
• |
Allowance for Doubtful Accounts. An allowance for
doubtful accounts is maintained for estimated losses resulting
from the inability of our customers to make required payments.
If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required. |
| |
| |
• |
Inventories. Inventory levels are based on projections of
future demand and market conditions. Any sudden decline in
demand and/or rapid product improvements and technological
changes can result in excess and/or obsolete inventories. On an
ongoing basis inventories are reviewed and written down for
estimated obsolescence or unmarketable inventories equal to the
difference between the costs of inventories and the estimated
net realizable value based upon forecasts for future demand and
market conditions. If actual market conditions are less
favorable than our forecasts, additional inventory write downs
may be required. Estimates could be influenced by sudden decline
in demand due to economic downturn, rapid product improvements
and technological changes. |
| |
| |
• |
Investments. Our marketable securities are classified as
available-for-sale securities and are accounted for at their
fair value, and unrealized gains and losses on these securities
are reported as a separate component of shareholders’
equity. When the fair value of an investment declines below its
original cost, we consider all available evidence to evaluate
whether the decline is other-than-temporary. Among other things,
we consider the duration and extent of the decline and economic
factors influencing the markets. To date, we have had no such
other-than-temporary declines below cost basis. At
December 31, 2004 and 2003, net unrealized gains or losses
on available-for-sale securities were not significant. We
utilize specific identification in computing realized gains and
losses on the sale of investments. Realized gains and losses are
reported in other income and expense, and were not significant
for 2004, 2003 and 2002. |
|
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| |
We also invest in equity instruments of privately-held companies
for business and strategic purposes. These investments are
classified as long-term assets and are accounted for under the
cost method since we do not have the ability to exercise
significant influence over their operations. We periodically
review these investments for other-than-temporary declines in
fair value and write down investments to their fair value when
an other-than-temporary decline has occurred. Fair values for
investments in privately-held companies are estimated based on
several factors including; the values for recent rounds of
financing; quoted market prices for comparable public companies
or market values for recent acquisitions of similar private
companies; and pricing models using historical and forecasted
financial information. To date, there have been no impairments
of investments in privately-held companies. |
|
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| |
• |
Convertible Notes Receivable. As a result of the
sale of our NDD business to Catapult Communications, Inc. in
August 2002, we recognized a receivable at the estimated fair
value determined with the assistance of a third party appraisal.
The fair value was computed by discounting the face value amount
to present value using a fair value rate of interest and then
determining the fair value of the conversion |
35
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option using the Black-Scholes valuation model. The fair value
was amortized to the redemption value as of the date of
maturity. See Note C — Disposition of Network
Diagnostics Business. |
| |
| |
• |
Deferred Taxes. A valuation allowance is recorded to
reduce deferred tax assets to the amount that is more likely
than not to be realized. We have provided an $82.3 million
valuation allowance against the deferred tax assets of Santera,
due to uncertainties surrounding the timing and realization of
the benefits from Santera’s tax attributes in future tax
returns. Realization of the remaining deferred tax assets of
$61.6 million is dependent on the amount of our income in
carryback years and on our generating sufficient taxable income
in the future. Should it be determined that we would not be able
to realize all or part of the net deferred tax asset in the
future, an adjustment to the deferred tax asset would reduce
income in the period such determination was made. |
| |
| |
• |
Goodwill and Purchased Intangible Assets. The purchase
method of accounting for acquisitions requires extensive use of
accounting estimates and judgments to allocate the purchase
price paid to the fair value of the net tangible assets and
intangible assets acquired, including in-process research and
development (“IPR&D”). The amounts and useful
lives assigned to identifiable intangible assets impact future
amortization and the amounts assigned to IPR&D are expensed
immediately. If the assumptions and estimates used to allocate
the purchase price are not correct, purchase price adjustments
or future asset impairment charges could be required. |
| |
| |
• |
Impairment of Goodwill and Other Long-Lived Assets.
Effective January 1, 2002, we adopted the provisions of
Statement of Financial Accounting Standards (“SFAS”)
No. 142, “Goodwill and Other Intangible Assets.”
SFAS No. 142 eliminated the amortization of goodwill.
Instead, goodwill is reviewed for impairment at least annually
thereafter. In connection with our performance of the impairment
tests, we obtained valuations of our individual reporting units
from an independent third-party valuation firm. The valuation
methodologies included, but were not limited to, estimated net
present value of the projected cash flows of these reporting
units. As a result of these impairment tests, we determined that
there was no goodwill impairment in 2003 or 2004. If actual
results are substantially lower than our projections underlying
these valuations, or if market discount rates increase, this
could adversely affect our future valuations and result in
future impairment charges. |
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We assess potential impairment of our finite lived, intangible
assets and other long-lived assets when there is evidence that
recent events or changes in circumstances indicate that their
carrying value may not be recoverable. Reviews are performed to
determine whether the carrying value of assets is impaired based
on a comparison to the undiscounted estimated future cash flows.
If the comparison indicates that there is impairment, the
impaired asset is written down to fair value, which is typically
calculated using discounted estimated future cash flows. The
amount of impairment would be recognized as the excess of the
asset’s carrying value over its fair value. Events or
changes in circumstances which may cause impairment include:
significant changes in the manner of use of the acquired asset,
negative industry or economic trends, and significant
underperformance relative to historical or projected future
operating results. |
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• |
Product Warranty. We generally warrant our products
against defects in materials and workmanship for one year after
sale and provide for estimated future warranty costs at the time
revenue is recognized. Our warranty obligation is affected by
product failure rates, material usage and service delivery costs
incurred in correcting product failures. Should actual product
failure rates, material usage or service delivery costs differ
from our estimates, revisions to the estimated warranty
liability would be required. |
| |
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• |
Leases. At the time a lease is entered, we determine the
classification of the lease as either a capital lease or an
operating lease based on the factors listed in SFAS 13. Our
lease terms generally range from one month to ten years with
rent expense recorded on a straight line basis for financial
reporting. We include all applicable rent escalations and
abatements in our deferred rent amortization. All of our
operating leases are for a fixed period of time with
pre-determined rent escalations. |
36
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• |
Leasehold Improvements. If, at any time during our
tenancy, we elect to construct or otherwise invest in leasehold
improvements to the property, we capitalize the improvements.
Leasehold improvements are amortized over the shorter of the
useful life of the improvement, or the original lease term. |
| |
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• |
Contingencies and Litigation. We evaluate contingent
liabilities including threatened or pending litigation in
accordance with SFAS No. 5, “Accounting for
Contingencies” and record accruals when the outcome of
these matters is deemed probable and the liability is reasonably
estimable. We make these assessments based on the facts and
circumstances and in some instances based in part on the advice
of outside legal counsel. |
Results of Operations
The following table sets forth, for the periods indicated, the
percentages that statement of operations items bear to total
revenues:
| |
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|
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|
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|
| |
|
Percentage of | |
| |
|
Revenues | |
| |
|
for the Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
| |
Cost of goods sold
|
|
|
25.6 |
|
|
|
22.3 |
|
|
|
25.6 |
|
| |
Amortization of purchased technology
|
|
|
2.3 |
|
|
|
4.2 |
|
|
|
3.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
72.1 |
|
|
|
73.5 |
|
|
|
70.5 |
|
| |
Research and development
|
|
|
24.7 |
|
|
|
27.8 |
|
|
|
22.9 |
|
| |
Selling, general and administrative
|
|
|
38.2 |
|
|
|
39.6 |
|
|
|
36.9 |
|
| |
Acquired in-process research and development
|
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|
3.6 |
|
|
|
1.1 |
|
|
|
— |
|
| |
Amortization of intangible assets
|
|
|
0.6 |
|
|
|
0.7 |
|
|
|
0.6 |
|
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Restructuring
|
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|
0.4 |
|
|
|
— |
|
|
|
— |
|
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|
|
|
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|
|
|
|
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|
Income from operations
|
|
|
4.6 |
|
|
|
4.3 |
|
|
|
10.1 |
|
| |
Interest and other income (expense), net
|
|
|
7.8 |
|
|
|
(1.0 |
) |
|
|
(0.9 |
) |
| |
|
|
|
|
|
|
|
|
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|
Income from continuing operations before provision for income
taxes
|
|
|
12.4 |
|
|
|
3.3 |
|
|
|
9.2 |
|
| |
|
|
Provision for income taxes
|
|
|
8.4 |
|
|
|
5.1 |
|
|
|
3.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (Loss) before minority interest
|
|
|
4.0 |
|
|
|
(1.8 |
) |
|
|
6.1 |
|
|
Minority interest
|
|
|
5.2 |
|
|
|
7.5 |
|
|
|
— |
|
| |
|
|
|
|
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|
|
|
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|
Income from continuing operations
|
|
|
9.2 |
|
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|
5.7 |
|
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6.1 |
|
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Loss from discontinued operation, net of income taxes
|
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— |
|
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— |
|
|
|
(1.3 |
) |
|
Gain on sale from discontinued operation, net of income taxes
|
|
|
— |
|
|
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1.3 |
|
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|
10.9 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
|
9.2 |
% |
|
|
7.0 |
% |
|
|
15.7 |
% |
| |
|
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|
|
|
|
|
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|
The following table sets forth, for the periods indicated, the
revenues by principal product line as a percentage of total
revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of | |
| |
|
Revenues | |
| |
|
for the Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Network Signaling Group
|
|
|
72 |
% |
|
|
77 |
% |
|
|
79 |
% |
|
Switching Solutions Group
|
|
|
14 |
|
|
|
4 |
|
|
|
— |
|
|
Communications Software Solutions Group
|
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
IEX Contact Center Group
|
|
|
10 |
|
|
|
14 |
|
|
|
15 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
37
The following table sets forth, for the periods indicated, the
revenues by geographic territory as a percentage of total
revenues:
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|
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|
|
|
|
|
|
|
|
| |
|
Percentage of | |
| |
|
Revenues | |
| |
|
for the Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
North America
|
|
|
77 |
% |
|
|
83 |
% |
|
|
82 |
% |
|
Europe, Middle East and Africa
|
|
|
10 |
|
|
|
9 |
|
|
|
12 |
|
|
Caribbean and Latin America
|
|
|
7 |
|
|
|
4 |
|
|
|
2 |
|
|
Asia Pacific
|
|
|
6 |
|
|
|
4 |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
Revenues. Our revenues increased by $133.4 million,
or 51%, during 2004 due primarily to the increased sales of
$82.1 million from our Network Signaling Group and due
secondarily to additional sales of $43.4 million from the
Switching Solutions Group.
Revenues from network signaling products and services increased
by $82.1 million, or 40%, due mainly to increased sales of
Eagle STP upgrades and extensions of $48.1 million and to
$23.6 million increased sales of Eagle STP initial systems.
Revenues from switching solutions products for 2004 increased
$43.4 million, reflecting the addition of sales of
switching solutions products for the full year in 2004 compared
to six months in 2003 following the acquisition of a majority
interest in Santera in June of 2003, $5.1 million in sales
of Taqua products and services following the April 2004
acquisition of Taqua and $1.6 million in sales of VocalData
products and services following the September 2004 acquisition
of VocalData. (See Note B — Acquisitions).
Revenues from contact center products increased by
$5.7 million, or 16%, as a result of increased sales of
$3.9 million from the TotalView product and an increase of
$2.6 million from TotalView service contracts partially
offset by lower sales of TotalNet product and services.
Revenues in North America increased by $88.5 million, or
40%, due primarily to a $41.2 million increase in revenues
from STP products and services and secondarily to a
$32.7 million increase in sales of our Santera switching
products. Revenues in the EMEA region increased by
$17.1 million, or 74%, due primarily to an
$11.5 million increase in sales of Eagle STP products and
secondarily to the addition of Steleus revenues of
$2.2 million. CALA region’s revenues increased
$17.7 million, or 164%, due primarily to $17.2 million
in higher sales of STP products. Revenues in the Asia Pacific
region increased $10.1 million, or 90%, due primarily to a
$4.8 million increase in sales of STP products and services
and secondarily to increased sales of Santera of
$3.2 million.
We believe that our future revenue growth depends in large part
upon a number of factors affecting the demand for our signaling
and switching products. Regarding our signaling products,
domestically, we derive the majority of our signaling revenue
from wireless operators, as wireless networks generate
significantly more signaling traffic than wireline networks and,
as a result, require significantly more signaling
infrastructure. Factors that increase the amount of signaling
traffic generated on a wireless network, that we believe result
in increased demand for our signaling products include; the
growth in the number of subscribers, the number of calls made
per subscriber, roaming, and the use of advance features, such
as text messaging. Internationally, in addition to the factors
affecting our domestic sales growth described above, Eagle
signaling product revenue growth depends on our ability to
successfully penetrate new international markets, which often
involves displacing an incumbent signaling vendor, and our
ongoing ability to meet the signaling requirements of the newly
acquired customers. Regarding our switching products, future
revenue growth, both domestically and internationally, depends
on the increasing adoption and deployment of packet-switching
technology. As a result of the expansion of our product
portfolio and our strategy of providing our customers with
integrated
38
products and services, the way that we recognize revenues in the
future may be impacted. In the event that we sell integrated
products and service that we cannot separate into multiple
elements due to the inability to establish vendor-specific
objective evidence, we will not be able to recognize revenue
until all of the products and services are completely delivered.
Gross Profit. Gross profit as a percentage of revenues
decreased to 72.1% in 2004 compared with 73.5% in 2003. In 2004,
the percentage of network signaling revenue decreased as a
percentage of the total revenue from 77% in 2003 to 72% in 2004.
Network signaling margins are typically higher than the other
operating segments. 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; pricing pressure as we expand internationally; and
general economic conditions.
We believe that as our product revenue mix will change to
include a higher proportion of our lower margin switching
solutions products and our geographic revenue mix may change to
include a higher proportion of lower margin international
business. If such change or changes occur, our overall margins
may decline. Pricing competition in the VoIP space has been
intense and we believe the competitive environment will impact
our margins in the next-generation switching business. In the
international markets, we face similar competitive pressures
which may also cause a decline in the overall margins.
Research and Development. Research and development
expenses increased overall by $24.9 million, or 33.9%, and
decreased as a percentage of revenues to 24.7% in 2004 from
27.8% in 2003. These dollar increases were due primarily to an
increase in salary and related expenses attributable to
increases in personnel following our acquisition of a majority
interest in Santera, our April 2004 acquisition of Taqua, our
September 2004 acquisition of VocalData, and our October 2004
acquisition of Steleus (See Note B —
Acquisitions).
We intend to continue to make substantial investments in product
and technology development, and we believe that our future
success depends in a large part upon our ability to continue to
enhance existing products and to develop or acquire new products
that maintain our technological competitiveness.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased by
$47.5 million, or 45.6%, and decreased as a percentage of
revenues to 38.2% in 2004 from 39.6% in 2003. The increases were
due primarily to additional costs related to our June 2003
acquisition of a majority interest in Santera, our April 2004
acquisition of Taqua and our September 2004 acquisition of
VocalData (See Note B — Acquisitions) and
secondarily to an increase in commission expense due to an
increase in sales.
Acquired In-Process Research and Development. Acquired
in-process research and development (“IPRD”)
represents the amount of IPRD determined with the assistance of
a third party appraiser as part of the purchase price allocation
for each acquired entity. IPRD was valued using a discounted
cash flow approach commonly known as the “excess
earnings” approach. IPRD that had not yet reached
technological feasibility and had no alternative future use was
written off at the time of acquisition. IPRD expense of
$14.2 million represents the write-off of $8.0 million
of acquired IPRD related to our Taqua acquisition,
$2.4 million related to our acquisition of VocalData and
$3.8 million related to our acquisition of Steleus.
Acquired IPRD expense of $2.9 million in 2003 represents
the write-off of IPRD related to our acquisition of majority
interest in Santera (See Note B — Acquisitions).
Restructuring Charges. In January 2004, we announced a
cost reduction initiative that resulted in restructuring charges
of $1.7 million for 2004, including $874,000 in termination
costs, $98,000 in retention bonuses, and $694,000 in relocation
costs. These charges relate to our implementation of a global
strategic manufacturing plan which includes outsourcing
substantially all of our manufacturing operations and relocating
our remaining signaling product manufacturing operations from
Calabasas, California to our facilities in Morrisville, North
Carolina. During 2004, approximately 23 positions were
eliminated as a result of this restructure. Additional
restructuring charges are likely to be incurred into the first
half of 2005, as a result of these actions and will relate to
general corporate expenses (See Note D —
Restructuring Costs).
39
Amortization of Intangible Assets. Amortization of
intangible assets in 2004 increased by $605,000 to
$2.5 million. This increase was due to the increase in
intangible assets related to our 2004 acquisitions of Taqua,
VocalData and Steleus (See Note B — Acquisitions).
Interest Income and (Expense). Interest expense decreased
by $4.3 million, or 49%, due to the June 2003 issuance of
our new convertible debt which carries a yield-to-maturity at
issue of 2.25% compared to the former convertible debt
yield-to-maturity at issue of 6.75%. The former convertible debt
was redeemed in July 2003. Interest income decreased by
$1.6 million, or 25%, due to lower cash balances due to our
recent acquisitions of Taqua, VocalData and Steleus and
additional capital contributions to Santera (See
Note B — Acquisitions) and to lower interest
rates in 2004 compared to 2003.
Gain on Sale of Catapult Stock. In 2002 we sold our NDD
division to Catapult Communications Corporation
(“Catapult”) for $59.8 million consisting
$42.5 million in cash and convertible promissory notes
(“Notes”) valued at $17.3 million. We exercised
our option to convert the Notes into Catapult common stock in
September 2004. The conversion rate was 62.50 shares of
Catapult common stock per $1,000 in principal based on the
original conversion agreement. In September 2004, we sold our
Catapult shares resulting in a pretax gain of approximately
$2.2 million.
Gain on Sale of Investment in Privately Held Company. In
August 2004 following the acquisition of Telica by Lucent
Technologies Inc. (“Lucent”), we received freely
tradable common stock of Lucent in exchange for our investment
in Telica, resulting in a pre-tax gain of $7.9 million,
which is included in other income in the accompanying
consolidated statement of operations. The $7.9 million
pre-tax gain reflects an adjustment made in the fourth quarter
ended December 31, 2004 for a $2.0 million pre-tax
decrease in the gain on sale of investment in privately held
company recorded in the third quarter ended September 30,
2004. The adjustment relates to 643,000 shares held in
escrow, which were incorrectly marked to fair value, included in
short-term investments, and included as part of the gain that
was recognized in the quarter ended September 30, 2004. As
these shares are considered contingently issuable, they should
not have been so recognized, and we have recorded a reduction in
the gain of $2.0 million, a reduction in short term
investments of $2.0 million, and the elimination of the
related tax effects of $697,000 in the quarter ended
December 31, 2004. These adjustments are reflected in the
2004 financial statements.
In September 2004, we sold 5.8 million of our shares of
Lucent stock for proceeds of approximately $17.9 million.
We can receive up to an additional 643,000 shares of Lucent
stock held in escrow pending the resolution of
acquisition-related indemnifications made by Telica to Lucent.
The shares are anticipated to be released from escrow beginning
18 months from the acquisition date. We may recognize
additional gains when and if these shares are released from
escrow.
Gain on Warrants in Privately Held Company. In December
2004, following the acquisition of Spatial Communications
Technologies (“Spatial”) by Alcatel, Santera, our
majority owned subsidiary, exercised warrants convertible into
1,363,380 shares of freely tradable Alcatel shares valued
at $14.91 per share. As a result of this transaction,
Santera recognized a gain of $20.3 million which is
included in other income in the accompanying consolidated
statement of operations. The Alcatel shares are included in
short-term investments in the accompanying consolidated balance
sheet. In addition, we can receive up to an additional
185,513 shares of Alcatel held in escrow pending the
resolution of acquisition-related indemnifications made by
Spatial to Alcatel. The shares are anticipated to be released
from escrow beginning 12 months from the acquisition date.
We may recognize additional gains when and if these shares are
released from escrow.
Provision for Income Taxes. Provisions for income taxes
for 2004 and 2003 were $33.3 million and
$13.6 million, respectively, and reflected the effect of
non-deductible acquisition-related costs and amortization,
partially offset by a benefit of $2.3 million and
$3.1 million, respectively, from the utilization of
deferred tax liabilities related to certain of these
acquisition-related costs. Our provision for income taxes does
not include any benefit from the losses generated by Santera
because it’s losses cannot be included on our consolidated
federal tax return inasmuch as our ownership interest in Santera
does not meet the threshold to consolidate under income tax
rules and regulations, and a full valuation allowance has been
established against Santera’s deferred tax assets due to
uncertainties surrounding the timing and realization of the
benefits from
40
Santera’s tax attributes in future tax returns. Our
effective tax rate was 68.0% for 2004 and 151.7% for 2003 and
includes 32.3% in 2004 and 117.7% in 2003 relating to
acquisition related items and the results of Santera. Excluding
the effect of these acquisition-related items and the operating
results of Santera, our effective tax rate was 35% and 34% in
2004 and 2003, respectively, and represented federal, state and
foreign taxes on our income, reduced primarily by research and
development credits, foreign tax credits and other benefits from
foreign sourced income. We expect that our effective tax rate,
excluding the effect of acquisition-related items and the
operating results of Santera, will remain relatively consistent
with and within the range of the effective tax rates in prior
years. Changes in the tax rate can be affected by changes in the
mix of international sales and changes in the amount of the
research and development and other credits.
Minority Interest. Minority interest represents the
losses of Santera allocable to Santera’s minority
stockholders. The net income and losses of Santera are allocated
between Tekelec and the minority interest based on their
relative interests in the equity of Santera and the related
liquidation preferences. This approach requires net losses to be
allocated first to the Series A Preferred Stock until fully
absorbed and then to the Series B Preferred Stock.
Subsequent net income will be allocated first to the
Series B Preferred Stock to the extent of previously
recognized net losses allocated to Series B Preferred
Stock. Additional net income will then be allocated to the
Series A Preferred Stock to the extent of previously
recognized losses allocated to Series A Preferred Stock and
then to common stock in proportion to their relative ownership
interests in the equity of Santera. The loss allocated to
minority interest of Santera for 2004 was computed as follows
(dollars in thousands):
| |
|
|
|
|
|
Santera net loss (includes amortization of intangibles of $4,291)
|
|
$ |
33,418 |
|
|
Percentage of losses attributable to the minority interest based
on capital structure and liquidation preferences
|
|
|
62 |
% |
| |
|
|
|
|
Net loss allocated to minority interest
|
|
$ |
20,719 |
|
| |
|
|
|
Net income. Net income of $36.4 million for the year
ended 2004 was comprised mainly of net operating income of
$18.1 million as a result of increased sales in 2004 as
compared to 2003 of $133.4 million, partially offset by
increased operating expense in 2004 as compared to 2003
resulting from our acquisitions of Santera, Taqua, VocalData and
Steleus, the add back of the losses attributed to the minority
interest of Santera of $20.7 million and gains on
investments of privately-held companies of $28.2 million.
Revenues. Our revenues increased by $3.4 million, or
1%, during 2003 due to the addition of $11.5 million of
sales from our switching solutions products partially offset by
lower sales in both our network signaling and contact center
operating segments.
Revenues from switching solutions products for 2003 were
$11.5 million, reflecting the addition of sales of
next-generation products following our June 2003 acquisition of
a majority interest in Santera. (See Note B —
Acquisitions).
Revenues from network signaling products decreased by
$2.2 million, or 1%, due primarily to lower sales of
$12.9 million from Eagle STP products, partially offset by
$10.5 million of higher revenues from service agreements.
Eagle STP product sales decreased in 2003 as a result of
customers increasing the capacity of their existing STP nodes by
purchasing extensions rather than initial systems.
Revenues from contact center products decreased by
$3.0 million, or 8%, primarily as a result of
$2.0 million in decreased sales of TotalView product and
services. The decrease in the revenues was attributable
primarily to a reduction in information technology capital
spending and increasing competition in the industry.
Revenues from Sentinel products, which became a part of our
Software Solutions Group as a result of our acquisition of
Steleus in October 2004, decreased by $2.9 million, or 18%
in 2003. We have reclassified the financial results related to
these products to the Communications Software Solutions Group.
41
Revenues in North America increased by $4.1 million, or 2%,
due primarily to increased revenues of $8.6 million from
upgrades, extension sales and revenues from service agreements
offset partially by $4.4 million of lower Eagle STP initial
systems sales. Revenues in the EMEA region decreased by
$7.2 million, or 24%, due primarily to a decrease in sales
of Eagle STP products partially offset by higher network
signaling maintenance revenue. The CALA and Asia Pacific regions
revenue increased by $6.5 million, or 41%, due primarily to
an increase in sales of our Eagle STP products.
Gross Profit. Gross profit as a percentage of revenues
increased to 73.5% in 2003 compared with 70.5% in 2002. The
increase in gross margins was due primarily to a higher
proportion of sales of Eagle STP upgrades and extensions and
service agreements, which typically carry higher margins. Sales
of Eagle STP upgrades and extensions and service agreements were
approximately 65% of network signaling revenues in 2003 as
compared to 50%, in 2002.
Research and Development. Research and development
expenses increased overall by $13.6 million, or 22.7%, and
increased as a percentage of revenues to 27.8% in 2003 from
22.9% in 2002. These increases were due primarily to an
$11.4 million of increase in salary and related expenses
attributable to additional personnel and our acquisition of a
majority interest in Santera (See Note B —
Acquisitions).
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased by
$8.3 million, or 8.6%, and increased as a percentage of
revenues to 39.6% in 2003 from 36.9% in 2002. The increases were
due primarily to the inclusion of Santera’s selling,
general and administrative expense following our acquisition of
a majority interest in Santera (See Note B —
Acquisitions), which accounted for an $11.8 million
increase, offset by a $3.4 million reduction of variable
compensation costs.
Acquired In-Process Research and Development. Acquired
in-process research and development (“IPRD”)
represents the amount of IPRD determined with the assistance of
a third party appraiser as part of the purchase price allocation
for Santera. IPRD was valued using a discounted cash flow
approach commonly known as the “excess earnings”
approach. IPRD that had not yet reached technological
feasibility and had no alternative future use was written off at
the time of acquisition. Acquired in-process research and
development expense (“IPRD”) of $2.9 million in
2003 represents the write-off in the second quarter of acquired
in-process research and development related to the Santera
acquisition (See Note B — Acquisitions).
Amortization of Intangible Assets. Amortization of
intangible assets in 2003 increased by $300,000 to
$1.9 million. This increase was due to the increase in
intangible assets related to our acquisition of a majority
interest in Santera (See Note B — Acquisitions).
Interest and Other Income (Expense), net. Interest
expense decreased by $373,000, or 4%, due primarily to the June
2003 issuance of our new convertible debt which carries a
yield-to-maturity rate of 2.25% compared to the former
convertible debt yield to maturity rate of 6.75%. The former
convertible debt was redeemed in July 2003. Interest income
decreased to $426,000, or 6%, due to lower interest rates in
2003 compared to 2002.
Provision for Income Taxes. Provisions for income taxes
for 2003 and 2002 were $13.6 million and $8.1 million,
respectively, and reflected the effect of non-deductible
acquisition-related costs and amortization, partially offset by
a benefit of $3.1 million and $4.2 million,
respectively, from the utilization of deferred tax liabilities
related to certain of these acquisition-related costs. Our
provision for income taxes does not include any benefit from the
losses generated by Santera due to the following: Santera’s
losses cannot be included on our consolidated federal tax return
because our ownership interest in Santera does not meet the
threshold to consolidate under income tax rules and regulations;
and a full valuation allowance has been established against
Santera’s deferred tax assets due to uncertainties
surrounding the timing and realization of the benefits from
Santera’s tax attributes in future tax returns. Our
effective tax rate was 151.7% for 2003 and 33.8% for 2002 and
includes 117.7% in 2003 and (1.2)% in 2002 relating to
acquisition related items and the results of Santera in 2003.
Excluding the effect of these acquisition-related items and the
operating results of Santera, our effective tax rate was 34% and
35% in 2003 and 2002, respectively and represented federal,
state and foreign
42
taxes on our income, reduced primarily by research and
development credits, foreign tax credits and other benefits from
foreign sourced income.
Minority Interest. Minority interest represents the
losses of Santera allocable to Santera’s minority
stockholders. The net income and losses of Santera are allocated
between Tekelec and the minority interest based on their
relative interests in the equity of Santera and the related
liquidation preferences. This approach requires net losses to be
allocated first to the Series A Preferred Stock until fully
absorbed and then to the Series B Preferred Stock.
Subsequent net income will be allocated first to the
Series B Preferred Stock to the extent of previously
recognized net losses allocated to Series B Preferred
Stock. Additional net income will then be allocated to the
Series A Preferred Stock to the extent of previously
recognized losses allocated to Series A Preferred Stock and
then to common stock in proportion to their relative ownership
interests in the equity of Santera. The loss allocated to
minority interest of Santera for the period of June 10,
2003 through December 31, 2003 was computed as follows
(dollars in thousands):
| |
|
|
|
|
|
Santera net loss (includes amortization of intangibles and IPRD
charges of $4,069 and $2,900, respectively)
|
|
$ |
31,922 |
|
|
Percentage of losses attributable to the minority interest based
on capital structure and liquidation preferences
|
|
|
62 |
% |
| |
|
|
|
|
Net loss allocated to minority interest
|
|
$ |
19,792 |
|
| |
|
|
|
Loss from Discontinued Operation. There was no income or
loss recorded in 2003 relating to our discontinued operation
compared to a loss from discontinued operation of
$3.3 million for 2002.
Gain on Disposal of Discontinued Operation. Gain on
disposal of our discontinued operation represents the gain
recognized, net of income taxes, on the sale of the Network
Diagnostics Division sold in August 2002 as discussed above in
the “Overview” section. In 2003, we recognized a gain
of $3.3 million as a result of the final resolution of
contingencies under the sale agreement.
Net income. Net income of $18.5 million for the year
ended 2003 was comprised mainly of a net operating loss of
$4.6 million as a result of increased operating expense in
2003 primarily resulting from our June 2003 acquisition of a
majority interest in Santera, offset by the losses attributed to
the minority interest of Santera of $19.8 million and a
gain on the sale of NDD of $3.3 million.
|
|
|
Liquidity and Capital Resources |
During 2004, cash and cash equivalents increased by
$3.7 million to $48.9 million. Operating activities,
net of the effects of exchange rate changes on cash, provided
$21.6 million, compared to $27.7 million in 2003 and
$46.5 million in 2002 primarily as a result of changes in
working capital. Cash flows from operating activities were
comprised mainly of net income adjusted for minority interest,
the gains on the warrants in and sale of our investments in
privately-held companies, depreciation and amortization, and
increases in accounts receivable and deferred revenue. Accounts
receivable increased 104% during 2004 due primarily to the 51%
increase in sales in 2004 compared to 2003 and secondarily to
the addition of receivables from the three acquisitions in 2004.
The net accounts receivable amounts for these acquisitions were
approximately $14.4 million at December 31, 2004.
Deferred revenue increased by 75% in 2004 compared to 2003 due
primarily to an increase in revenue not recognizable for
transactions with acceptance or delivery requirements that had
not been completed. In 2002, cash flows from operations were
impacted by similar changes in working capital as noted above.
Investing activities used $44.8 million and was comprised
primarily of $152.7 million used in the acquisition of
Taqua, VocalData and Steleus, net of $37.4 million provided
from the sales of privately-held companies and Catapult stock
and $91.3 million in net proceeds derived from the sale of
short-term and long-term investments and $18.3 million for
capital expenditures in 2004. Cash used in investing activities
in 2003 was $100.7 million and included net purchases of
investments of $105.3 million offset by $3.3 million
of proceeds from the sale of NDD. Cash used in investing
activities in 2002 was $17.9 million and included net
43
purchase of investments of $49.4 million and net purchases
of property and equipment of $5.5 million, partially offset
by $37.9 million of proceeds from the sale of NDD.
Financing activities provided $27.0 million in 2004
compared to a use of $3.4 million in 2003 which was a
result of approximately $8.1 million used to replace our
higher yield-to-maturity convertible debt with lower
yield-to-maturity convertible debt offset by $6.0 million
related to proceeds from the issuance of common stock. Financing
activities provided $3.9 million from the issuance of
common stock in 2002.
On October 14, 2004, we completed the acquisition of
Steleus Group Inc. (“Steleus”). We paid cash in the
aggregate amount of approximately $53.6 million for 100% of
Steleus’ outstanding stock. In addition, we have incurred
approximately $5.0 million in direct acquisition-related
costs. In September and April of 2004 we completed our
acquisitions of VocalData and Taqua with cash consideration of
$14.5 million and $86.0 million, respectively.
Under terms of the original Santera purchase agreement, during
2004 we made additional cash investments in Santera aggregating
$12.0 million in exchange for 12,000 shares of Santera
Series B Preferred Stock. As a result of our
$12.0 million cash investment, our ownership percentage
increased to 55.7% (62.5% on an as converted basis). In addition
to this $12.0 million additional investment, we have funded
substantially all of Santera’s operating losses and working
capital requirements since the acquisition. In accordance with
generally accepted accounting principles, the capital structure
of Santera has been eliminated in consolidation and the minority
stockholders’ interest in Santera is reflected on our
consolidated balance sheet as minority interest. The minority
stockholders’ interest in Santera is reflected at the fair
value of the Santera assets on the date of acquisition. (See
Note B — Acquisitions).
We have funded and expect to continue to fund the operations of
Santera, Taqua, VocalData, and Steleus throughout 2005. We
believe that our historical sources of cash like existing
working capital, funds generated through operations, proceeds
from the issuance of stock upon the exercise of options, and our
current bank credit facility will be sufficient to offset the
uses of cash from our recent acquisitions and to satisfy
operating requirements for at least the next twelve months.
Nonetheless, we may seek additional sources of capital as
necessary or appropriate to fund acquisitions or to otherwise
finance our growth or operations; however, there can be no
assurance that such funds, if needed, will be available on
favorable terms, if at all.
We have a number of credit facilities with various financial
institutions. As of December 31, 2004 we had a
$20.0 million line of credit which was collateralized by a
stock pledge of our holdings in Santera, bore interest at or, in
some cases, below the lender’s prime rate (5.25% at
December 31, 2004), which expired on February 15,
2005. There were no borrowings under this credit facility. The
commitment fees paid on the unused line of credit were not
significant. In December 2004, we secured a $30.0 million
line of credit collateralized by a pledged account where our
investments are held with an intermediary financial institution.
This line is intended to replace our $20.0 million line
that expired in February. The new credit facility bears interest
at, or in some cases below, the lender’s prime rate (5.25%
at December 31, 2004), and expires on December 15,
2005, if not renewed. In the event that we borrow against this
line, we will maintain collateral in the amount of the borrowing
in the pledged account. There have been no borrowings under this
facility. The commitment fees paid on the unused line of credit
were not significant. Under the terms of each of these credit
facilities, we are required to maintain certain financial
covenants. We were in compliance with these covenant
requirements as of December 31, 2004.
As of December 31, 2004, Santera had two notes payable: one
note had an outstanding balance of $100,000 and was
collateralized by the assets purchased thereunder, bore interest
at 10% and was paid in full upon maturity in February 2005; the
second note for $2.5 million was collateralized by the
assets purchased under the note and substantially all of
Santera’s assets, excluding the assets collaterized under
the $100,000 note, bears interest at 6.36%, and matures in
November 2005. Taqua has a $1.0 million credit facility,
which is collateralized by substantially all assets of Taqua,
Inc., bears interest at 1.0% above the lenders prime rate (5.25%
at December 31, 2004) and expires in April 2005. Under the
terms of each of these credit facilities, we are required to
maintain certain financial covenants. We are in compliance with
these covenant requirements as of December 31, 2004, except
for the Taqua facility. Taqua was not in compliance with these
covenants as of December 31, 2004, due to the failure of
Taqua to meet certain financial reporting requirements to the
44
financial institution. As a result of our acquisition of Taqua,
the line will not be renewed upon expiration and Taqua’s
financing needs will be met with our new consolidated credit
facility. There are no outstanding borrowings on the Taqua
facility.
In June 2003, we completed the private placement of
$125.0 million principal amount of 2.25% Senior
Subordinated Convertible Notes (“Notes”) due in 2008.
There are no financial covenants related to the notes and there
are no restrictions on us paying dividends, incurring debt or
issuing or repurchasing securities. Following the issuance of
the notes in 2003, we called our previously issued
3.25% convertible subordinated discounted notes.
The following table summarizes our contractual obligations at
December 31, 2004, and the effect such obligations are
expected to have on our liquidity and cash flows in future
periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less Than | |
|
|
|
|
|
More Than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Notes Payable
|
|
$ |
3,021 |
|
|
$ |
3,021 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Long-term convertible debt
|
|
|
125,000 |
|
|
|
— |
|
|
|
— |
|
|
|
125,000 |
|
|
|
— |
|
|
Interest due on long-term convertible debt
|
|
|
9,843 |
|
|
|
2,812 |
|
|
|
5,625 |
|
|
|
1,406 |
|
|
|
— |
|
|
Capital lease obligations
|
|
|
323 |
|
|
|
245 |
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
58,679 |
|
|
|
9,284 |
|
|
|
16,432 |
|
|
|
14,221 |
|
|
|
18,742 |
|
|
Purchase obligations(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
196,866 |
|
|
$ |
15,362 |
|
|
$ |
22,135 |
|
|
$ |
140,627 |
|
|
$ |
18,742 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
From time to time in the normal course of business we may enter
into purchasing agreements with our suppliers that require us to
accept delivery of, and remit full payment for, finished
products that we have ordered, finished products that we
requested be held as safety stock, and work in process started
on our behalf in the event we cancel or terminate the purchasing
agreement. It is not our intent, nor is it reasonably likely,
that we would cancel a purchase order which we have executed.
Because these agreements do not specify fixed or minimum
quantities, do not specify minimum or variable price provisions,
and do not specify the approximate timing of the transaction, we
have no basis to estimate any future liability. |
We lease a number of facilities throughout the United States and
internationally under operating leases that range from one month
to ten years. We believe that our existing facilities will be
adequate to meet our needs at least through 2005, and that we
will be able to obtain additional space when, where and as
needed on acceptable terms.
Our Steleus subsidiary leases office equipment in France under
two capital leases that are in effect through July 2005 and July
2006 and require minimum lease payments of $245,000 in 2005 and
$78,000 in 2006.
|
|
|
Litigation with Bouygues Telecom |
As further described in Item 3 — Legal
Proceedings, Bouygues Telecom, S.A., a French telecommunications
operator filed a legal complaint against us seeking damages for
economic losses caused by a service interruption Bouygues
Telecom experienced. The amount of damages sought by Bouygues
Telecom is $81 million plus unspecified punitive damages
and attorneys’ fees. At this stage of the litigation, we
cannot assess the likely outcome of this matter and it is
possible that an unfavorable outcome could have a material
adverse effect on our consolidated financial position, results
of operations or cash flows.
45
We conduct business in a number of foreign countries, with
certain transactions denominated in local currencies,
principally Euros and British Pounds. In certain instances where
we have entered into contracts that are denominated in foreign
currencies, we have obtained foreign currency forward contracts
to offset the impact of currency rate fluctuations on accounts
receivable. These contracts are used to reduce our risk
associated with exchange rate movements, as gains and losses on
these contracts are intended to offset exchange losses and gains
on underlying exposures. Changes in the fair value of these
forward contracts are recorded immediately in earnings.
As of December 31, 2004, we had three foreign currency
forward contracts outstanding, explained in more detail in
Note I, which did not meet specific hedge accounting
requirements. As of December 31, 2003, we had one foreign
currency forward contract outstanding to sell approximately
1,700,000 Euros in order to hedge certain receivables
denominated in that currency. This contract had an expiration
date of January 7, 2004 and did not meet specific hedge
accounting requirements.
We do not enter into derivative instrument transactions for
trading or speculative purposes. The purpose of our foreign
currency management policy is to minimize the effect of exchange
rate fluctuations on certain foreign denominated anticipated
cash flows. The terms of currency instruments used for hedging
purposes are consistent with the timing of the transactions
being hedged. We expect to continue to use foreign currency
forward contracts to manage foreign currency exchange risks in
the future.
Fixed income securities are subject to interest rate risk. The
fair value of our investment portfolio would not be
significantly impacted by either a 100 basis point increase
or decrease in interest rates due mainly to the short-term
nature of the major portion of our investment portfolio. The
portfolio is diversified and consists primarily of investment
grade securities to minimize credit risk.
There have been no borrowings under our variable rate credit
facilities. All of our outstanding long-term debt is fixed rate
and not subject to interest rate fluctuations.
With respect to trade receivables, we design, manufacture,
market and support network signaling products and selected
service applications for telecommunications networks and contact
centers. Our customers include telecommunications carriers,
network providers, and contact center operators. Credit is
extended based on an evaluation of each customer’s
financial condition, and generally collateral is not required.
Generally, payment terms stipulate payment within 90 days
of shipment and currently, we do not engage in leasing or other
customer financing arrangements. Many of our international sales
are secured with import insurance or letters of credit to
mitigate credit risk. Although we have processes in place to
monitor and mitigate credit risk, there can be no assurance that
such programs will be effective in eliminating such risk.
Historically, credit losses have been within management’s
expectations. Our exposure to credit risk has increased as a
result of weakened financial conditions in certain market
segments such as the competitive local exchange carrier segment.
Credit losses for such customers have been provided for in the
financial statements. Future losses, if incurred, could harm our
business and have a material adverse effect on our financial
position, results of operations or cash flows.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (Revised 2004)
“Share-Based Payment”
(“SFAS No. 123R”) that addresses the
accounting for share-based payment transactions in which a
Company receives employee services in exchange for
(a) equity instruments of the Company or
(b) liabilities that are based on the fair value of the
Company’s equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R
addresses all forms of share-based payment awards, including
shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights.
SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using APB Opinion
No. 25, “Accounting for Stock Issued to
Employees”, that was provided in SFAS No. 123 as
originally issued. Under SFAS No. 123R companies are
required to record compensation expense for all share based
payment award transactions
46
measured at fair value. This statement is effective for quarters
beginning after June 15, 2005. We are currently in the
process of reviewing SFAS No. 123R and have not
determined the impact this will have on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153
“Exchanges of Nonmonetary Assets — an amendment
of APB Opinion No. 29”. This Statement amended APB
Opinion 29 to eliminate the exception for non-monetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement
is effective for fiscal years beginning after June 15,
2005. We do not expect the adoption of SFAS No. 153 to
have a material impact on our financial position, results of
operations or cash flows.
In November 2004, FASB issued SFAS No, 151 “Inventory
Costs”. This Statement amends the guidance in ARB
No. 43, Chapter 4, “Inventory Pricing,” to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). In addition, this Statement requires that allocation
of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after
June 15, 2005. We do not expect the adoption of
SFAS 151 to have a material impact on our financial
position, results of operations or cash flows.
In October 2004, the Emerging Issues Task Force
(“EITF”) reached final consensuses on Issue 04-8
“Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings
per Share” (“EITF No. 04-8”). EITF
No. 04-8 requires the dilutive effect of contingently
convertible debt investments (“Co-Cos”) to be included
in diluted earnings per share computations regardless of whether
the market price trigger (or other contingent feature) has been
met. The scope of EITF No. 04-8 includes all securities
issued with embedded contingently convertible features that are
based on a market price contingency involving an entity’s
own stock. EITF No. 04-8 is effective for fiscal periods ending
after December 15, 2004, and prior period earnings per
share amounts presented for comparative purposes should be
restated to conform to the consensus guidance. Because our Notes
are not contingently convertible, this pronouncement does not
impact our earnings per share calculation.
In September 2004, the FASB reached consensus on EITF
Issue 04-10, “Determining Whether to Aggregate
Operating Segments that Do Not Meet the Quantitative
Thresholds.” EITF No. 04-10 provides guidance for how
companies should evaluate the aggregation criteria of
Statement 131, Disclosures about Segments of an Enterprise
and Related Information, when determining whether operating
segments that do not meet the quantitative thresholds may be
aggregated in accordance with Statement 131. The effective
date of this issue has been delayed until a related FASB Staff
Position is issued. We continue to assess the potential impact
that the adoption of the proposed issues could have on our
consolidated financial statements.
In September 2004, the FASB reached consensus on EITF
Issue 04-01, “Accounting for Pre-existing
Relationships between the Parties to a Business
Combination.” EITF No. 04-01 addresses whether a
business combination between two parties that have a
pre-existing contractual relationship should be evaluated to
determine if a settlement of a pre-existing contractual
relationship exists, thus requiring accounting separate from the
business combination. Recognition and measurement of a
settlement of a preexisting relationship in a business
combination should be applied prospectively to business
combinations completed in reporting periods after
October 13, 2004. An entity should apply the consensus
prospectively to business combinations and goodwill impairment
tests completed in reporting periods beginning after
October 13, 2004. The adoption of EITF 04-01 did not
have a material impact on our financial position, results of
operations or cash flows.
In March 2004, the FASB issued EITF Issue 03-1, “The
Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments.” EITF No. 03-1 provides new
guidance for assessing impairment losses on investments and
includes new disclosure requirements for investments that are
deemed to be temporarily impaired. In September 2004, the FASB
issued FASB Staff Position (“FSP”) EITF
Issue 03-1-1, Effective Date of Paragraphs 10-20 of
EITF Issue No. 03-1, which delays the effective date for
the recognition and measurement guidance in EITF Issue
No. 03-1. In addition, the FASB has issued a proposed FSP
to consider whether further application guidance is necessary
for securities analyzed for
47
impairment under EITF Issue No. 03-1. We continue to assess
the potential impact that the adoption of the proposed FSP could
have on our financial statements.
|
|
| Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
We conduct business in a number of foreign countries, with
certain transactions denominated in local currencies,
principally Euros and British Pounds. In certain instances where
we have entered into contracts that are denominated in foreign
currencies, we have obtained foreign currency forward contracts
to offset the impact of currency rates on accounts receivable.
These contracts are used to reduce our risk associated with
exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying
exposures. Changes in the fair value of these forward contracts
are recorded immediately in earnings.
As of December 31, 2004, we had three foreign currency
transactions outstanding that are described more fully in
Note I. As of December 31, 2003, we had one foreign
currency forward contract outstanding to sell approximately
1,700,000 Euros in order to hedge certain receivables
denominated in that currency. This contract had an expiration
date of January 7, 2004 and did not meet specific hedge
accounting requirements.
We do not enter into derivative instrument transactions for
trading or speculative purposes. The purpose of our foreign
currency management policy is to minimize the effect of exchange
rate fluctuations on certain foreign denominated anticipated
cash flows. The terms of currency instruments used for hedging
purposes are consistent with the timing of the transactions
being hedged. We expect to continue to use foreign currency
forward contracts to manage foreign currency exchange risks in
the future.
Fixed income securities are subject to interest rate risk. The
fair value of our investment portfolio would not be
significantly impacted by either a 100 basis point increase
or decrease in interest rates due mainly to the short-term
nature of the major portion of our investment portfolio. The
portfolio is diversified and consists primarily of investment
grade securities to minimize credit risk.
There have been no borrowings under our variable rate credit
facilities. All of our outstanding long-term debt is fixed rate
and not subject to interest rate fluctuation. The fair value of
the long-term debt will increase or decrease as interest rates
decrease or increase, respectively.
|
|
| Item 8. |
Financial Statements and Supplementary Data. |
See the consolidated financial statements of Tekelec and our
subsidiaries included herein and listed in Item 15(a) of
this Annual Report on Form 10-K.
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None.
|
|
| Item 9A. |
Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as
such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”), that are
designed to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time
periods specified in Securities and Exchange Commission rules
and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Acting Principal Financial Officer, to allow timely
decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply judgment in evaluating the cost-benefit
relationship of those disclosure controls and procedures. The
design of any
48
disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based on his evaluation as of the end of the period covered by
this Annual Report on Form 10-K, our Chief Executive
Officer and Acting Principal Financial Officer has concluded
that our disclosure controls and procedures were effective in
providing reasonable assurance that the objectives of the
disclosure controls and procedures are met.
(b) Management’s Report on Internal Control Over
Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this
assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) in Internal Control — Integrated
Framework. Based on our assessment using those criteria, we
concluded that our internal control over financial reporting was
effective as of December 31, 2004.
In conducting our evaluation of the effectiveness of our
internal control over financial reporting, management has
excluded Taqua Inc., VocalData, and Steleus Group Inc. from its
assessment of internal control over financial reporting as of
December 31, 2004 because they were acquired by us in
purchase business combinations during 2004. Taqua Inc.,
VocalData and Steleus Group Inc. are wholly-owned subsidiaries
whose total assets represent 14%, 4%, and 9%, respectively and
whose total revenues represent 1%, 0.4%, and 0.6%, respectively,
of the related consolidated financial statement amounts as of
and for the year ended December 31, 2004.
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears on page
F-2 of this Annual Report on Form 10-K.
(c) Attestation Report of the Independent Registered Public
Accounting Firm
Our management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
(d) Changes in Internal Controls over Financial Reporting
There was no change in our internal control over financial
reporting that occurred during the quarterly period ended
December 31, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
| Item 9B. |
Other Information |
Not applicable
49
PART III
|
|
| Item 10. |
Directors and Executive Officers of the Registrant. |
Certain information required by this Item is incorporated by
reference to the sections of our definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders to be held on
May 13, 2005, entitled “Election of Directors,”
“Executive Officers” and “Section 16(a)
Beneficial Ownership Reporting Compliance” to be filed with
the Commission. The Proxy Statement will be filed within
120 days after the date of our fiscal year-end which was
December 31, 2004. We have adopted a Code of Ethics that
applies to our Chief Executive Officer, Acting Principal
Financial Officer, and Controller and the Chief Financial
Officer of Santera. A copy of the Code of Ethics is included as
Exhibit 14.1 to this Annual Report on Form 10-K.
|
|
| Item 11. |
Executive Compensation. |
The information required by this Item is incorporated by
reference to the sections of our definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders to be held on
May 13, 2005, entitled “Election of
Directors — Compensation of Directors,”
“Executive Compensation and Other Information,”
“Board of Directors and Compensation Committee Reports on
Executive Compensation” and “Performance Graph,”
to be filed with the Commission.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The information required by this item is incorporated herein by
reference to the section of our definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders to be held on
May 13, 2005, entitled “Common Stock Ownership of
Principal Shareholders and Management,” to be filed with
the Commission.
The equity compensation plan information required to be provided
in this Annual Report on Form 10-K is incorporated by
reference to the section of our definitive Proxy Statement for
our Annual Meeting of Shareholders to be held on May 13,
2005, entitled “Executive Compensation and Other
Information — Equity Compensation Plan
Information,” to be filed with the Commission.
|
|
| Item 13. |
Certain Relationships and Related Transactions. |
The information required by this Item is incorporated herein by
reference to the section of our definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders to be held on
May 13, 2005, entitled “Certain Relationships and
Related Transactions,” to be filed with the Commission.
|
|
| Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by
reference to the section of our definitive Proxy Statement for
our 2005 Annual Meeting of Shareholders to be held on
May 13, 2005, entitled “Principal Accountant Fees and
Services.”
50
PART IV
|
|
| Item 15. |
Exhibits and Financial Statement Schedules |
(a) The following documents are filed as part of this
Report:
1. Consolidated Financial Statements
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-1 |
|
|
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2004
|
|
|
F-3 |
|
|
Consolidated Statements of Comprehensive Income for each of the
three years in the period ended December 31, 2004
|
|
|
F-4 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
F-5 |
|
|
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004
|
|
|
F-6 |
|
|
Consolidated Statements of Shareholders’ Equity for each of
the three years in the period ended December 31, 2004
|
|
|
F-8 |
|
|
Notes to Consolidated Financial Statements
|
|
|
F-9 |
|
2. Consolidated Financial Statement Schedule
| |
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts and Reserves
for each of the three years in the period ended
December 31, 2004
|
|
|
F-47 |
|
Schedules that 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
| |
|
|
|
|
| Number |
|
Exhibit |
| |
|
|
| |
2 |
.1 |
|
Agreement and Plan of Merger dated April 30, 2003 by and
among Tekelec, Luke Acquisition Corp., Certain Stockholders of
Santera Systems Inc., Santera Systems Inc. and Austin Ventures
VI, L.P., as the Representative, including form of Certificate
of Merger and of Amended and Restated Certificate of
Incorporation of Santera Systems Inc. (schedules and certain
exhibits are omitted from this agreement and from the other
agreements filed herewith as Exhibits 2.5, 2.8 and 2.10,
and Tekelec agrees to furnish supplementally a copy of any such
schedule or exhibit to the Commission upon request)(1) |
| |
| |
2 |
.2 |
|
Escrow Agreement dated as of April 30, 2003 by and among
Tekelec, Santera Systems Inc., Certain Stockholders of Santera
Systems Inc., Austin Ventures VI, L.P., as the Representative,
and J.P. Morgan Trust Company, National Association, as
Escrow Agent(1) |
| |
| |
2 |
.3 |
|
Stockholders Agreement dated as of April 30, 2003 between
Tekelec and Santera Systems Inc.(1) |
| |
| |
2 |
.4 |
|
Registration Rights Agreement dated as of April 30, 2003 by
and among Tekelec, Santera Systems Inc., Certain Stockholders of
Santera Systems Inc. and Austin Ventures VI, L.P., as the
Representative(1) |
| |
| |
2 |
.5 |
|
Agreement and Plan of Merger dated as of February 25, 2004
by and among Tekelec, Buckaroo, Inc., Taqua, Inc. and, as
representatives of the stockholders of Taqua, Inc., Bessemer
Venture Partners V L.P. and Columbia Capital, L.L.C.(2) as
amended by First Amendment thereto dated as of February 26,
2004(3) |
| |
| |
2 |
.6 |
|
Indemnification Agreement dated as of February 25, 2004 and
among Tekelec, Buckaroo, Inc., Taqua, Inc. and certain
stockholders of Taqua, Inc.(2) |
| |
| |
2 |
.7 |
|
Escrow Agreement dated as of April 8, 2004 by and among
Tekelec, Taqua, Inc. and, as representatives of the stockholders
of Taqua, Inc., Bessemer Venture Paratners V L. P. and Columbia
Capital, L.L.C. and U.S. Bank Association(3) |
51
| |
|
|
|
|
| Number | |
|
Exhibit |
| | |
|
|
| |
| |
2 |
.8 |
|
Agreement and Plan of Merger dated as of September 14, 2004
by and among Tekelec, Punkydoo Inc., VocalData, Inc. and Core
Capital Partners, L.P., as Representative(4) |
| |
| |
2 |
.9 |
|
Escrow Agreement dated as of September 20, 2004 by and
among Tekelec, Core Capital Partners, L.P., as Representative,
and U.S. Bank National Association(4) |
| |
| |
2 |
.10 |
|
Agreement and Plan of Merger dated as of August 19, 2004 by
and among Tekelec, Buckdanger, Inc., Steleus Group, Inc. and
certain stockholders of Steleus Group, Inc.(5), as amended by
Amendment thereto dated as of October 1, 2004(6) |
| |
| |
2 |
.11 |
|
Escrow Agreement dated as of October 1, 2004 by and among
Tekelec, U.S. Bank National Association and the former
preferred stockholders of Steleus Group, Inc.(6) |
| |
| |
3 |
.1 |
|
Amended and Restated Articles of Incorporation(7) |
| |
| |
3 |
.2 |
|
Bylaws, as amended(8) |
| |
| |
4 |
.1 |
|
Rights Agreement dated as of August 25, 1997 between the
Registrant and U.S. Stock Transfer Corporation as Rights
Agent(9) |
| |
| |
4 |
.2 |
|
Indenture dated as of June 17, 2003 between Registrant and
Deutsche Bank Trust Company Americas, including form of
Registrant’s 2.25% Senior Subordinated Convertible
Notes due 2008(10) |
| |
| |
4 |
.3 |
|
Registration Rights Agreement dated as of June 17, 2003
between Registrant and Morgan Stanley & Co.
Incorporated(10) |
| |
| |
10 |
.1 |
|
Amended and Restated Non-Employee Director Equity Incentive
Plan(11), as amended by Amendment No. 1 thereto dated
February 21, 1996(12)(13) |
| |
| |
10 |
.2 |
|
Form of Indemnification Agreement between the Registrant and all
directors of the Registrant(12)(14) |
| |
| |
10 |
.3 |
|
Amended and Restated 1994 Stock Option Plan, including form of
stock option agreement(15), as amended by Amendment 1 thereto
dated May 8, 2003(10)(12) |
| |
| |
10 |
.4 |
|
Lease Agreement 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 our principal
facilities in Calabasas, California(16) |
| |
| |
10 |
.5 |
|
Officer Severance Plan, including form of Employment Separation
Agreement(14), as amended March 8, 1999(18) and
February 4, 2000(12)(19) |
| |
| |
10 |
.6 |
|
Amended and Restated Employee Stock Purchase Plan, including
form of subscription agreement(12)(20) |
| |
| |
10 |
.7 |
|
Lease Agreement dated as of November 6, 1998 between the
Registrant and Weeks Realty, L.P., covering certain of the
Registrant’s facilities in Morrisville, North Carolina(18)
as amended by First Amendment thereto dated May 27, 1999,
Second Amendment thereto dated October 1, 1999, Third
Amendment thereto dated November 30, 1999, and Fourth
Amendment thereto dated July 19, 2000(21) |
| |
| |
10 |
.8 |
|
Lease Agreement as of July 19, 2000 between the Registrant
and Duke Construction Limited Partnership covering certain of
our facilities in Morrisville, North Carolina(21) |
| |
| |
10 |
.9 |
|
Nonstatutory Stock Option Agreement dated February 1, 2001
between the Registrant and Frederick M. Lax(12)(22) |
| |
| |
10 |
.10 |
|
Stock Award Agreement dated February 1, 2001 between the
Registrant and Frederick M. Lax(12)(21) |
| |
| |
10 |
.11 |
|
Amended and Restated Non-Employee Director Stock Option Plan,
including form of stock option agreement(12)(23) |
| |
| |
10 |
.12 |
|
Nonstatutory Stock Option Agreement dated January 18, 2002
between the Registrant and Lori A. Craven(12)(24) |
| |
| |
10 |
.13 |
|
Amended and Restated 2003 Stock Option Plan(12)(25) |
52
| |
|
|
|
|
| Number | |
|
Exhibit |
| | |
|
|
| |
| |
10 |
.14 |
|
Consulting Agreement dated June 25, 2003 between Santera
Systems Inc. and Martin A. Kaplan(10)(12) |
| |
| |
10 |
.15 |
|
Indemnification Agreement dated as of June 27, 2003 between
Registrant and Martin A. Kaplan(10)(12) |
| |
| |
10 |
.16 |
|
2004 Equity Incentive Plan for New Employees(8)(12), as amended
by Amendment No. 1 thereto dated September 13, 2004
and Amendment No. 2 thereto dated March 18,
2005.(12)(26) |
| |
| |
10 |
.17 |
|
2004 Executive Officer Bonus Plan(12) |
| |
| |
10 |
.18 |
|
Credit Agreement dated December 15, 2004 between the
Registrant and Wells Fargo Bank, National Association |
| |
| |
10 |
.19 |
|
Office Lease dated as of December 14, 2004 between Grenhill
Development Corporation and the Registrant covering our proposed
new facility in Westlake Village, California. |
| |
| |
14 |
.1 |
|
Code of Ethics for Chief Executive and Senior Financial
Officers(25) |
| |
| |
21 |
.1 |
|
Subsidiaries of the Registrant |
| |
| |
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP |
| |
| |
31 |
.1 |
|
Certification of President, Chief Executive Officer and Acting
Principal Financial Officer of Registrant pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| |
32 |
.1 |
|
Certification of Chief Executive Officer and Acting Principal
Financial Officer of Tekelec pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
| |
(1) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K (File No. 0-15135) filed with the
Commission on May 7, 2003. |
| |
| |
(2) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K (File No. 0-15135) filed with the
Commission on March 4, 2004. |
| |
| |
(3) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on
April 23, 2004 (File No. 0-15135) |
| |
| |
(4) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on
September 24, 2004 (File No. 0-15135) |
| |
| |
(5) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on
September 2, 2004 (File No. 0-15135) |
| |
| |
(6) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on
October 21, 2004 (File No. 0-15135) |
| |
| |
(7) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended June 30, 1998. |
| |
| |
(8) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended September 30, 2004. |
| |
| |
(9) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended September 30, 1997. |
|
|
| (10) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended June 30, 2003 |
| |
| (11) |
Incorporated by reference to the Registrant’s Registration
Statement on Form S-8 (Registration Statement
No. 33-82124) filed with the Commission on July 28,
1994. |
| |
| (12) |
Constitutes a management contract or compensatory plan, contract
or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K. |
| |
| (13) |
Incorporated by reference to the Registrant’s Registration
Statement on Form S-8 (Registration No. 333-05933)
filed with the Commission on June 13, 1996. |
53
|
|
| (14) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 1987. |
| |
| (15) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 2002. |
| |
| (16) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended June 30, 1988. |
| |
| (17) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 1993. |
| |
| (18) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 1998. |
| |
| (19) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 1999. |
| |
| (20) |
Incorporated by reference to the Registrant’s Registration
Statement on Form S-8 (Registration Statement
No. 333-105879) filed with the Commission on June 5,
2003. |
| |
| (21) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 2000. |
| |
| (22) |
Incorporated by reference to the Registrant’s Quarterly
Report on 10-Q (File No. 0-15135) for the quarter
ended March 31, 2001. |
| |
| (23) |
Incorporated by reference to the Registrant’s Quarterly
Report on Form 10-Q (File No. 0-15135) for the quarter
ended June 30, 2004. |
| |
| (24) |
Incorporated by reference to the Registrant’s Quarterly
Report on 10-Q (File No. 0-15135) for the quarter
ended March 31, 2002. |
| |
| (25) |
Incorporated by reference to the Registrant’s Annual Report
on Form 10-K (File No. 0-15135) for the year ended
December 31, 2003. |
| |
| (26) |
Incorporated by reference to the Registrant’s Current
Report on Form 8-K filed with the Commission on
March 24, 2005. |
(c) Exhibits
|
|
| |
See the list of Exhibits under Item 15(a) 3 of this Annual
Report on Form 10-K. |
(d) Financial Statement Schedules
|
|
| |
See the Schedule under Item 15(a) 2 of this Annual Report
on Form 10-K. |
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
|
| |
Frederick M. Lax |
| |
President and Chief Executive Officer |
Dated: March 30, 2005
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates
indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ JEAN-CLAUDE ASSCHER
Jean-Claude
Asscher |
|
Chairman of the Board |
|
March 30, 2005 |
| |
/s/ FREDERICK M. LAX
Frederick
M. Lax |
|
President, Chief Executive
Officer and Director
(Acting Principal Financial Officer) |
|
March 30, 2005 |
| |
/s/ ROBERT V. ADAMS
Robert
V. Adams |
|
Director |
|
March 30, 2005 |
| |
/s/ DANIEL L. BRENNER
Daniel
L. Brenner |
|
Director |
|
March 30, 2005 |
| |
/s/ MARTIN A. KAPLAN
Martin
A. Kaplan |
|
Director |
|
March 30, 2005 |
| |
/s/ MARK A. FLOYD
Mark
A. Floyd |
|
Director |
|
March 30, 2005 |
| |
/s/ JON F. RAGER
Jon
F. Rager |
|
Director |
|
March 30, 2005 |
| |
/s/ CHRISTINA N. GIBSON
Christina
N. Gibson |
|
Assistant Vice President and Corporate Controller
(Acting Principal Accounting Officer) |
|
March 30, 2005 |
55
Index to Consolidated Financial Statements
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
|
|
|
F-1 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-8 |
|
|
|
|
|
F-9 |
|
|
|
|
|
F-47 |
|
56
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Tekelec:
We have completed an integrated audit of Tekelec’s 2004
consolidated financial statements and of its internal control
over financial reporting as of December 31, 2004 and audits
of its 2003 and 2002 consolidated financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statement of operations, comprehensive
income, shareholders’ equity and cash flows present fairly,
in all material respects, the financial position of Tekelec and
its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed on the index and appearing
on page F-47 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note A to the consolidated financial
statements, effective January 1, 2002, the Company adopted
Statement of Financial Accounting Standards No. 142,
“Goodwill and other Intangible Assets.”
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that,
F-1
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control
Over Financial Reporting, management has excluded Taqua Inc.,
VocalData, and Steleus Group Inc. from its assessment of
internal control over financial reporting as of
December 31, 2004 because they were acquired by the Company
in purchase business combinations during 2004. We have also
excluded Taqua Inc., VocalData, and Steleus Group Inc. from our
audit of internal control over financial reporting. Taqua Inc.,
VocalData and Steleus Group Inc. are wholly-owned subsidiaries
whose total assets represent 14%, 4%, and 9%, respectively and
whose total revenues represent 1%, 0.4%, and 0.6%, respectively,
of the related consolidated financial statement amounts as of
and for the year ended December 31, 2004.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 29, 2005
F-2
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands, except per-share data) | |
|
Revenues
|
|
$ |
397,072 |
|
|
$ |
263,700 |
|
|
$ |
260,341 |
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of goods sold
|
|
|
101,451 |
|
|
|
58,697 |
|
|
|
66,536 |
|
| |
Amortization of purchased technology
|
|
|
9,128 |
|
|
|
11,178 |
|
|
|
10,169 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total cost of sales
|
|
|
110,579 |
|
|
|
69,875 |
|
|
|
76,705 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Gross profit
|
|
|
286,493 |
|
|
|
193,825 |
|
|
|
183,636 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development
|
|
|
98,192 |
|
|
|
73,328 |
|
|
|
59,746 |
|
| |
Selling, general and administrative
|
|
|
151,796 |
|
|
|
104,247 |
|
|
|
95,973 |
|
| |
Acquired in-process research and development
|
|
|
14,200 |
|
|
|
2,900 |
|
|
|
— |
|
| |
Restructuring
|
|
|
1,666 |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of intangible assets
|
|
|
2,505 |
|
|
|
1,900 |
|
|
|
1,600 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
268,359 |
|
|
|
182,375 |
|
|
|
157,319 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income from operations
|
|
|
18,134 |
|
|
|
11,450 |
|
|
|
26,317 |
|
|
Interest and other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
|
4,697 |
|
|
|
6,259 |
|
|
|
6,685 |
|
| |
Interest expense
|
|
|
(4,519 |
) |
|
|
(8,828 |
) |
|
|
(9,201 |
) |
| |
Gain on sale of Catapult Stock
|
|
|
2,186 |
|
|
|
— |
|
|
|
— |
|
| |
Gain on sale of investment in privately held company
|
|
|
7,877 |
|
|
|
— |
|
|
|
— |
|
| |
Gain on warrants in privately held company
|
|
|
20,321 |
|
|
|
— |
|
|
|
— |
|
| |
Other, net
|
|
|
283 |
|
|
|
86 |
|
|
|
253 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total other income (expense)
|
|
|
30,845 |
|
|
|
(2,483 |
) |
|
|
(2,263 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
48,979 |
|
|
|
8,967 |
|
|
|
24,054 |
|
| |
Provision for income taxes
|
|
|
33,325 |
|
|
|
13,600 |
|
|
|
8,140 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest
|
|
|
15,654 |
|
|
|
(4,633 |
) |
|
|
15,914 |
|
|
Minority interest
|
|
|
20,719 |
|
|
|
19,792 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
36,373 |
|
|
|
15,159 |
|
|
|
15,914 |
|
|
Loss from discontinued operation, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(3,308 |
) |
|
Gain on sale of discontinued operation, net of income taxes
|
|
|
— |
|
|
|
3,293 |
|
|
|
28,312 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
36,373 |
|
|
$ |
18,452 |
|
|
$ |
40,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.58 |
|
|
$ |
0.25 |
|
|
$ |
0.26 |
|
| |
Diluted
|
|
|
0.53 |
|
|
|
0.24 |
|
|
|
0.26 |
|
|
Loss per share from discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(0.05 |
) |
| |
Diluted
|
|
|
— |
|
|
|
— |
|
|
|
(0.05 |
) |
|
Earnings per share from gain on sale of discontinued
operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
— |
|
|
$ |
0.05 |
|
|
$ |
0.47 |
|
| |
Diluted
|
|
|
— |
|
|
|
0.05 |
|
|
|
0.46 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.58 |
|
|
$ |
0.30 |
|
|
$ |
0.68 |
|
| |
Diluted
|
|
|
0.53 |
|
|
|
0.29 |
|
|
|
0.67 |
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
63,131 |
|
|
|
61,163 |
|
|
|
60,358 |
|
| |
Diluted
|
|
|
72,683 |
|
|
|
62,911 |
|
|
|
61,386 |
|
See notes to consolidated financial statements.
F-3
TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Net income
|
|
$ |
36,373 |
|
|
$ |
18,452 |
|
|
$ |
40,918 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Foreign currency translation adjustments
|
|
|
18 |
|
|
|
78 |
|
|
|
1,836 |
|
| |
Net unrealized (loss) gain on available-for-sale securities
|
|
|
(472 |
) |
|
|
643 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
35,919 |
|
|
$ |
19,173 |
|
|
$ |
42,754 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
TEKELEC
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands, except | |
| |
|
share data) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
48,925 |
|
|
$ |
45,261 |
|
| |
Short-term investments, at fair value
|
|
|
134,435 |
|
|
|
83,800 |
|
| |
Accounts receivable, less allowances of $4,847 and
$2,619, respectively
|
|
|
107,850 |
|
|
|
52,781 |
|
| |
Convertible notes receivable ($17,300 principal amount)
|
|
|
— |
|
|
|
17,580 |
|
| |
Inventories
|
|
|
33,654 |
|
|
|
21,434 |
|
| |
Deferred income taxes, net
|
|
|
15,804 |
|
|
|
4,958 |
|
| |
Prepaid expenses and other current assets
|
|
|
44,639 |
|
|
|
22,088 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
385,307 |
|
|
|
247,902 |
|
|
Long-term investments, at fair value
|
|
|
93,622 |
|
|
|
210,298 |
|
|
Property and equipment, net
|
|
|
30,617 |
|
|
|
22,172 |
|
|
Investments in privately-held companies
|
|
|
7,322 |
|
|
|
17,322 |
|
|
Deferred income taxes
|
|
|
45,748 |
|
|
|
7,876 |
|
|
Other assets
|
|
|
6,757 |
|
|
|
6,342 |
|
|
Goodwill
|
|
|
128,732 |
|
|
|
68,903 |
|
|
Intangible assets, net
|
|
|
83,538 |
|
|
|
34,118 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
781,643 |
|
|
$ |
614,933 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Trade accounts payable
|
|
$ |
35,316 |
|
|
$ |
8,974 |
|
| |
Accrued expenses
|
|
|
30,417 |
|
|
|
30,812 |
|
| |
Accrued payroll and related expenses
|
|
|
23,478 |
|
|
|
17,967 |
|
| |
Short-term notes and current portion of notes payable
|
|
|
3,266 |
|
|
|
3,934 |
|
| |
Current portion of deferred revenues
|
|
|
92,182 |
|
|
|
50,105 |
|
| |
Income taxes payable
|
|
|
646 |
|
|
|
1,071 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
185,305 |
|
|
|
112,863 |
|
|
Notes payable
|
|
|
78 |
|
|
|
2,574 |
|
|
Long-term convertible debt
|
|
|
125,000 |
|
|
|
125,000 |
|
|
Deferred income taxes
|
|
|
19,586 |
|
|
|
790 |
|
|
Long-term portion of deferred revenues
|
|
|
2,187 |
|
|
|
3,687 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
332,156 |
|
|
|
244,914 |
|
| |
|
|
|
|
|
|
|
Minority interest
|
|
|
20,489 |
|
|
|
41,208 |
|
| |
|
|
|
|
|
|
|
Commitments and Contingencies (Note Q)
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Common stock, without par value, 200,000,000 shares
authorized; 65,543,767 and 61,625,518 shares issued and
outstanding, respectively
|
|
|
258,656 |
|
|
|
189,908 |
|
| |
Deferred stock-based compensation
|
|
|
(4,480 |
) |
|
|
— |
|
| |
Retained earnings
|
|
|
174,268 |
|
|
|
137,895 |
|
| |
Accumulated other comprehensive income
|
|
|
554 |
|
|
|
1,008 |
|
| |
|
|
|
|
|
|
| |
|
Total shareholders’ equity
|
|
|
428,998 |
|
|
|
328,811 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and shareholders’ equity
|
|
$ |
781,643 |
|
|
$ |
614,933 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
36,373 |
|
|
$ |
18,452 |
|
|
$ |
40,918 |
|
| |
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gain on sale of Catapult Stock
|
|
|
(2,186 |
) |
|
|
— |
|
|
|
— |
|
| |
Gain on warrants in privately-held company
|
|
|
(20,321 |
) |
|
|
— |
|
|
|
— |
|
| |
Gain on sale of investments in privately-held company
|
|
|
(7,877 |
) |
|
|
— |
|
|
|
— |
|
| |
Minority interest
|
|
|
(20,719 |
) |
|
|
(19,792 |
) |
|
|
— |
|
| |
Restructuring accrual
|
|
|
(271 |
) |
|
|
— |
|
|
|
— |
|
| |
Net gain on sale of discontinued operation
|
|
|
— |
|
|
|
(3,293 |
) |
|
|
(28,312 |
) |
| |
Net loss from discontinued operation
|
|
|
— |
|
|
|
— |
|
|
|
3,308 |
|
| |
Allowance for doubtful accounts
|
|
|
820 |
|
|
|
415 |
|
|
|
950 |
|
| |
Inventory write downs
|
|
|
2,249 |
|
|
|
1,558 |
|
|
|
6,177 |
|
| |
Depreciation
|
|
|
14,986 |
|
|
|
14,493 |
|
|
|
15,618 |
|
| |
Amortization
|
|
|
12,460 |
|
|
|
14,147 |
|
|
|
11,661 |
|
| |
Acquired in-process research and development
|
|
|
14,200 |
|
|
|
2,900 |
|
|
|
— |
|
| |
Amortization of deferred financing costs
|
|
|
1,112 |
|
|
|
2,121 |
|
|
|
819 |
|
| |
Convertible debt accretion
|
|
|
279 |
|
|
|
2,335 |
|
|
|
3,981 |
|
| |
Deferred income taxes
|
|
|
274 |
|
|
|
501 |
|
|
|
(3,908 |
) |
| |
Stock-based compensation
|
|
|
2,143 |
|
|
|
459 |
|
|
|
5,612 |
|
| |
Tax benefit related to stock options exercised
|
|
|
9,750 |
|
|
|
1,213 |
|
|
|
929 |
|
| |
Changes in operating assets and liabilities (net of business
disposal and acquisitions):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts and notes receivable
|
|
|
(42,521 |
) |
|
|
(7,342 |
) |
|
|
10,188 |
|
| |
|
Inventories
|
|
|
(11,510 |
) |
|
|
(7,027 |
) |
|
|
(1,955 |
) |
| |
|
Prepaid expenses and other current assets
|
|
|
(19,855 |
) |
|
|
(9,644 |
) |
|
|
3,315 |
|
| |
|
Trade accounts payable
|
|
|
20,676 |
|
|
|
(957 |
) |
|
|
(7,890 |
) |
| |
|
Accrued expenses
|
|
|
(17,728 |
) |
|
|
(5,908 |
) |
|
|
8,311 |
|
| |
|
Accrued payroll and related expenses
|
|
|
4,139 |
|
|
|
6,600 |
|
|
|
3,311 |
|
| |
|
Deferred revenues
|
|
|
36,525 |
|
|
|
16,192 |
|
|
|
(13,861 |
) |
| |
|
Income taxes payable
|
|
|
8,160 |
|
|
|
(115 |
) |
|
|
(12,791 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total adjustments
|
|
|
(15,215 |
) |
|
|
8,856 |
|
|
|
5,463 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
21,158 |
|
|
|
27,308 |
|
|
|
46,381 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from maturity of available-for-sale securities
|
|
|
498,024 |
|
|
|
302,036 |
|
|
|
437,067 |
|
| |
Purchase of available-for-sale securities
|
|
|
(406,712 |
) |
|
|
(407,297 |
) |
|
|
(486,453 |
) |
| |
Purchase of property and equipment
|
|
|
(18,278 |
) |
|
|
(6,509 |
) |
|
|
(5,500 |
) |
| |
Net cash acquired from acquisition of majority interest in
Santera
|
|
|
— |
|
|
|
12,335 |
|
|
|
— |
|
| |
Cash paid for Taqua, net of cash acquired
|
|
|
(86,994 |
) |
|
|
— |
|
|
|
— |
|
| |
Cash paid for VocalData, net of cash acquired
|
|
|
(13,222 |
) |
|
|
— |
|
|
|
— |
|
| |
Cash paid for Steleus, net of cash acquired
|
|
|
(52,484 |
) |
|
|
— |
|
|
|
— |
|
| |
Investments in privately-held companies
|
|
|
— |
|
|
|
(797 |
) |
|
|
— |
|
| |
Proceeds from sale of Catapult stock
|
|
|
19,486 |
|
|
|
— |
|
|
|
— |
|
| |
Purchase of technology
|
|
|
(662 |
) |
|
|
(3,166 |
) |
|
|
(1,089 |
) |
| |
Proceeds from sale and warrants of privately-held companies
|
|
|
17,877 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds from sale of discontinued operation
|
|
|
— |
|
|
|
3,293 |
|
|
|
37,883 |
|
| |
Decrease (Increase) in other assets
|
|
|
(1,878 |
) |
|
|
(602 |
) |
|
|
177 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(44,843 |
) |
|
|
(100,707 |
) |
|
|
(17,915 |
) |
| |
|
|
|
|
|
|
|
|
|
F-6
TEKELEC
CONSOLIDATED STATEMENTS OF CASH
FLOWS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on retirement of convertible debt
|
|
|
— |
|
|
|
(129,307 |
) |
|
|
— |
|
| |
Proceeds from issuance of convertible debt
|
|
|
— |
|
|
|
125,000 |
|
|
|
— |
|
| |
Debt issuance costs
|
|
|
— |
|
|
|
(3,816 |
) |
|
|
— |
|
| |
Payments on notes payable
|
|
|
(8,894 |
) |
|
|
(1,224 |
) |
|
|
— |
|
| |
Proceeds from issuance of common stock
|
|
|
35,851 |
|
|
|
5,959 |
|
|
|
3,890 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) financing activities
|
|
|
26,957 |
|
|
|
(3,388 |
) |
|
|
3,890 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
392 |
|
|
|
412 |
|
|
|
125 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash flows from discontinued operation
|
|
|
— |
|
|
|
— |
|
|
|
2,007 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net increase (decrease) in cash and cash equivalents
|
|
|
3,664 |
|
|
|
(76,375 |
) |
|
|
34,488 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of the year
|
|
|
45,261 |
|
|
|
121,636 |
|
|
|
87,148 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$ |
48,925 |
|
|
$ |
45,261 |
|
|
$ |
121,636 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
3,115 |
|
|
$ |
17,417 |
|
|
$ |
4,396 |
|
| |
Income taxes
|
|
|
22,294 |
|
|
|
11,034 |
|
|
|
15,093 |
|
|
Assets and Liabilities recognized in connection with
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts receivable
|
|
$ |
14,237 |
|
|
$ |
2,173 |
|
|
|
— |
|
| |
Other current assets
|
|
|
12,443 |
|
|
|
18,239 |
|
|
|
— |
|
| |
Investments
|
|
|
485 |
|
|
|
— |
|
|
|
— |
|
| |
Property and Equipment
|
|
|
6,051 |
|
|
|
8,754 |
|
|
|
— |
|
| |
Other Assets
|
|
|
476 |
|
|
|
1,861 |
|
|
|
— |
|
| |
Deferred income tax asset
|
|
|
59,098 |
|
|
|
1,731 |
|
|
|
— |
|
| |
Intangibles
|
|
|
74,590 |
|
|
|
30,600 |
|
|
|
— |
|
| |
Goodwill
|
|
|
60,460 |
|
|
|
24,104 |
|
|
|
— |
|
| |
Accounts payable
|
|
|
5,644 |
|
|
|
3,250 |
|
|
|
— |
|
| |
Other current liabilities
|
|
|
24,651 |
|
|
|
18,602 |
|
|
|
— |
|
| |
Other liabilities
|
|
|
1,301 |
|
|
|
5,115 |
|
|
|
— |
|
| |
Deferred income tax liability
|
|
|
21,601 |
|
|
|
505 |
|
|
|
— |
|
See notes to consolidated financial statements.
F-7
TEKELEC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
Accumulated | |
|
|
| |
|
| |
|
Deferred | |
|
|
|
Other | |
|
Total | |
| |
|
Number | |
|
|
|
Stock-Based | |
|
Retained | |
|
Comprehensive | |
|
Shareholders’ | |
| |
|
of Shares | |
|
Amount | |
|
Compensation | |
|
Earnings | |
|
Income (Loss) | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Thousands, except share data) | |
|
Balance, December 31, 2001
|
|
|
60,107 |
|
|
$ |
171,846 |
|
|
$ |
— |
|
|
$ |
78,525 |
|
|
$ |
(1,549 |
) |
|
$ |
248,822 |
|
| |
Exercise of stock options and warrants and issuance of shares
under employee stock purchase plan
|
|
|
786 |
|
|
|
3,890 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,890 |
|
| |
Compensation related to vesting of restricted stock
|
|
|
— |
|
|
|
328 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
328 |
|
| |
Stock-based compensation charge for stock option modification
|
|
|
— |
|
|
|
5,284 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,284 |
|
| |
Stock option tax benefits
|
|
|
— |
|
|
|
929 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
929 |
|
| |
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,836 |
|
|
|
1,836 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
40,918 |
|
|
|
— |
|
|
|
40,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
60,893 |
|
|
$ |
182,277 |
|
|
$ |
— |
|
|
$ |
119,443 |
|
|
$ |
287 |
|
|
$ |
302,007 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Exercise of stock options and warrants and issuance of shares
under employee stock purchase plan
|
|
|
733 |
|
|
|
5,959 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,959 |
|
| |
Compensation related to vesting of restricted stock
|
|
|
— |
|
|
|
459 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
459 |
|
| |
Stock option tax benefits
|
|
|
— |
|
|
|
1,213 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,213 |
|
| |
Net unrealized gain on available-for-sale securities, net of tax
benefit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
643 |
|
|
|
643 |
|
| |
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
78 |
|
|
|
78 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,452 |
|
|
|
— |
|
|
|
18,452 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
61,626 |
|
|
$ |
189,908 |
|
|
$ |
— |
|
|
$ |
137,895 |
|
|
$ |
1,008 |
|
|
$ |
328,811 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Exercise of stock options and warrants and issuance of shares
under employee stock purchase plan
|
|
|
3,131 |
|
|
|
35,851 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35,851 |
|
| |
Deferred stock-based compensation on stock options assumed in
acquisitions and issuance of restricted stock
|
|
|
— |
|
|
|
6,244 |
|
|
|
(6,244 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of deferred stock-based compensation related to
vesting of restricted stock and stock options
|
|
|
— |
|
|
|
286 |
|
|
|
1,764 |
|
|
|
— |
|
|
|
— |
|
|
|
2,050 |
|
| |
Stock option tax benefits
|
|
|
— |
|
|
|
9,750 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,750 |
|
| |
Vested stock options assumed in the Taqua acquisition
|
|
|
— |
|
|
|
3,524 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,524 |
|
| |
Stock options granted to Santera advisory board
|
|
|
7 |
|
|
|
93 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
93 |
|
| |
Shares issued related to VocalData acquisition
|
|
|
780 |
|
|
|
13,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,000 |
|
| |
Net unrealized loss on available-for-sale securities, net of tax
benefit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(472 |
) |
|
|
(472 |
) |
| |
Translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
18 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36,373 |
|
|
|
— |
|
|
|
36,373 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
65,544 |
|
|
$ |
258,656 |
|
|
$ |
(4,480 |
) |
|
$ |
174,268 |
|
|
$ |
554 |
|
|
$ |
428,998 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-8
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A — Summary of Significant Accounting
Policies
We design, manufacture, market and support network signaling
products, switching solutions, and communications software
solutions for telecommunications networks and contact centers.
Our customers include telecommunications carriers, network
service providers and contact center operators.
|
|
|
Principles of Consolidation and Presentation |
The consolidated financial statements include the accounts and
operating results of Tekelec, our wholly owned subsidiaries, and
our majority owned subsidiary, Santera, less minority interest
from the acquisition date of June 10, 2003. All significant
intercompany accounts and transactions have been eliminated.
Certain items shown in the December 31, 2003 and 2002
financial statements have been reclassified to conform to the
current period presentation. As more fully discussed in
Note C, we sold our Network Diagnostics Division
(“NDD”) effective August 30, 2002. Accordingly,
comparative historical financial results and notes have been
revised to reflect the Network Diagnostics Division as a
discontinued operation.
|
|
|
Use of Estimates and Critical Accounting Policies |
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and
revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
The most significant areas that require management judgment are
revenue recognition, allowance for doubtful accounts,
inventories, impairment of investments and notes receivable,
deferred taxes, impairment of goodwill and long-lived assets,
product warranty and contingencies and litigation. The
accounting policies for these areas are discussed in this or
other footnotes to these consolidated financial statements.
|
|
|
Cash and Cash Equivalents |
We consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
We invoice our customers at shipment for the value of the
related products delivered. Accounts receivable are recorded at
the invoiced amount, net of any amounts that are in deferred
revenue that are not yet due based on the payment terms and do
not bear interest. The allowance for doubtful accounts is our
best estimate of the amount of probable credit losses in our
existing accounts receivable. We determine the allowance based
on historical write-off experience as well as specific
identification of credit issues with invoices. We review our
allowance for doubtful accounts quarterly. Past due balances
over 90 days and over a specified amount are reviewed
individually for collectability. All other balances are reviewed
on a aggregate basis. Account balances are charged off against
the allowance when we believe it is probable the receivable will
not be collected. We do not have any off-balance sheet credit
exposure related to our customers.
Net trade receivables were $108 million and
$53 million as of December 31, 2004 and 2003,
respectively. Following are the changes in the allowance for
doubtful accounts during the years ended December 31, 2004,
2003 and 2002.
F-9
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Balance at beginning of period
|
|
$ |
2,619 |
|
|
$ |
4,860 |
|
|
$ |
5,349 |
|
|
Current year provision
|
|
|
820 |
|
|
|
415 |
|
|
|
950 |
|
|
Write-offs net of recoveries(1)
|
|
|
1,408 |
|
|
|
(2,656 |
) |
|
|
(1,439 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
4,847 |
|
|
$ |
2,619 |
|
|
$ |
4,860 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
2004 includes increases in the allowance for doubtful accounts
of $1,389, $430 and $607 as a result of the acquisitions of
Taqua, VocalData, and Steleus respectively. 2003 includes an
increase in the allowance for doubtful accounts of $527 as a
result of the acquisition of a majority interest in Santera.
2002 includes a decrease in the allowance for doubtful accounts
of $782 related to the disposition of NDD. |
Marketable securities are classified as available-for-sale
securities and are accounted for at their fair value, and
unrealized gains and losses on these securities are reported as
a separate component of shareholders’ equity. When the fair
value of an investment declines below its original cost, we
consider all available evidence to evaluate whether the decline
is other-than-temporary. Among other things, we consider the
duration and extent of the decline and economic factors
influencing the markets. To date, we have had no such
other-than-temporary declines below cost basis. At
December 31, 2004 and 2003, net unrealized gains or losses
on available-for-sale securities were not significant. We
utilize specific identification in computing realized gains and
losses on the sale of investments. Realized gains and losses are
reported in other income and expense, and were not significant
for 2004, 2003 and 2002.
We also invest in equity instruments of privately-held companies
for business and strategic purposes. These investments are
classified as long-term assets and are accounted for under the
cost method since we do not have the ability to exercise
significant influence over their operations. We periodically
review these investments for other-than-temporary declines in
their value and write down investments to their fair value when
an other-than-temporary decline has occurred. Fair values for
investments in privately-held companies are estimated based on
several factors including; the values for recent rounds of
financing; quoted market prices for comparable public companies
or market values for recent acquisitions of similar private
companies; and pricing models using historical and forecasted
financial information. To date, there have been no impairments
of investments in privately-held companies.
Inventories are stated at the lower of cost (first in, first
out) or market.
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 approximately:
| |
|
|
|
|
|
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 |
|
F-10
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Software Developed for Internal Use |
We capitalize costs of software, consulting services, hardware
and payroll-related costs incurred to purchase or develop
internal-use software. We expense costs incurred during
preliminary project assessment, research and development,
re-engineering, training and application maintenance.
|
|
|
Software Development Costs |
We provide for capitalization of certain software development
costs once technological feasibility is established. The costs
capitalized are amortized on a straight-line basis over the
estimated product life (generally eighteen months to three
years), or on the ratio of current revenue to total projected
product revenues, whichever is greater. To date, the
establishment of technological feasibility of our products and
general release has substantially coincided. As a result, we
have not capitalized any internal software development costs as
costs qualifying for such capitalization have not been
significant.
|
|
|
Goodwill, Intangible Assets and Other Long-Lived
Assets |
Goodwill represents the excess of purchase price over the fair
value of the identifiable net assets acquired in an acquisition
accounted for using the purchase method. Effective the first
quarter of 2002, we adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”. SFAS 142
eliminates the amortization of goodwill.
We record the assets acquired and liabilities assumed in
business combinations at their respective fair values at the
date of acquisition, with any excess purchase price recorded as
goodwill. Because of the expertise required to value intangible
assets and in-process research and development, we typically
engage independent valuation specialists to assist in
determining those values. Valuation of intangible assets and
in-process research and development entails significant
estimates and assumptions including, but not limited to,
determining the timing and expected costs to complete
development projects, estimating future cash flows from product
sales, developing appropriate discount rates, estimating
probability rates for the successful completion of development
projects, continuation of customer relationships and renewal of
customer contracts, and approximating the useful lives of the
intangible assets acquired.
Purchased intangible assets with determinable useful lives are
carried at cost less accumulated amortization, and are amortized
using the straight-line method over their estimated useful
lives. We review the recoverability of the carrying value of
identified intangibles and other long-lived assets, including
fixed assets, on an annual basis or whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of these assets is
determined based upon the forecasted undiscounted future net
cash flows expected to result from the use of such assets and
their eventual disposition. Our estimate of future cash flows is
based upon, among other things, certain assumptions about
expected future operating performance, growth rates and other
factors. The actual cash flows realized from these assets may
vary significantly from our estimates due to increased
competition, changes in technology, fluctuations in demand,
consolidation of our customers and reductions in average selling
prices. If the carrying value of an asset is determined not to
be recoverable from future operating cash flows, the asset is
deemed impaired and an impairment loss is recognized to the
extent the carrying value exceeds the estimated fair market
value of the asset.
We review the recoverability of the carrying value of goodwill
on an annual basis or more frequently when an event occurs or
circumstances change to indicate that an impairment of goodwill
has possibly occurred. The determination of whether any
potential impairment of goodwill exists is based upon a
comparison of the fair value of each of our four reporting units
to the accounting value of the underlying net assets of each
such reporting unit. To determine the fair value of a reporting
unit, we review subjective valuations for the reporting unit
based on valuation techniques. If the fair value of the
reporting unit is less than the accounting value of
F-11
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the underlying net assets, goodwill is deemed impaired and an
impairment loss is recorded to the extent that the carrying
value of goodwill exceeds the difference between the fair value
of the reporting unit and the fair value of all its underlying
identifiable assets and liabilities.
We generally warrant our products against defects in materials
and workmanship for one year after sale and provide for
estimated future warranty costs at the time revenue is
recognized. At December 31, 2004 and 2003, accrued product
warranty costs amounted to $4.0 million and
$5.1 million, respectively, and are included in accrued
expenses.
An analysis of changes in the liability for product warranty
costs is as follows (In thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance at beginning of period
|
|
$ |
5,059 |
|
|
$ |
5,271 |
|
|
$ |
5,462 |
|
|
Current year provision
|
|
|
618 |
|
|
|
1,396 |
|
|
|
3,617 |
|
|
Expenditures and other adjustments(1)
|
|
|
(1,648 |
) |
|
|
(1,608 |
) |
|
|
(3,808 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$ |
4,029 |
|
|
$ |
5,059 |
|
|
$ |
5,271 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
2004 includes an increase in warranty reserve of $1,121 and $50
as a result of the acquisitions of Taqua and VocalData,
respectively. 2003 includes an increase in warranty reserve of
$438 as a result of the acquisition of a majority interest in
Santera. 2002 includes a decrease in warranty reserves of $442
related to the disposition of NDD. |
Revenues from sales of network signaling, switching solutions,
contact center and communication software solutions products are
recognized upon the transfer of title, generally at the time of
shipment to the customer’s final site and satisfaction of
related obligations, if any, provided that persuasive evidence
of an arrangement exists, the fee is fixed and determinable and
collectability is deemed probable. For certain products, our
sales arrangements include acceptance provisions which are based
on our published specifications. Revenue is recognized when
these products are shipped assuming all other revenue
recognition criteria are met, provided that we have previously
demonstrated that the product meets the specified criteria and
has established a history with substantially similar
transactions. Revenue is deferred for sales arrangements that
include customer-specific acceptance provisions where we are
unable to reliably demonstrate that the delivered product meets
all of the specified criteria until customer acceptance is
obtained. Revenues associated with multiple-element arrangements
are allocated to each element based on vendor specific objective
evidence of fair value. The amount of product and service
revenue recognized is impacted by our judgments as to whether an
arrangement includes multiple elements and, if so, whether
vendor-specific objective evidence of fair value exists for
those elements. Changes to the elements in an arrangement and
our ability to establish vendor-specific objective evidence for
those elements could affect the timing of revenue recognition.
Revenues associated with installation services, if provided, are
deferred based on the fair value of such services and are
recognized upon completion. Installation services are accounted
for as a separate element based on the customer’s
obligation to pay the contract price upon shipment of the
related equipment and the fact that such services are not
essential to the functionality of the related equipment, are
available from other vendors and can be purchased unaccompanied
by other elements. Extended warranty service and maintenance
revenues are recognized ratably over the warranty or maintenance
period. Professional service revenues are recognized on delivery
or as the services are performed. Development contract revenues
are
F-12
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recognized using the percentage-of-completion method based on
the costs incurred relative to total estimated costs. Provisions
for anticipated losses, if any, on development contracts are
recognized in income currently.
Income tax expense is the sum of taxes payable for the period
net of any change during the period in non-capital-related
deferred tax assets and liabilities. Deferred income taxes are
determined based on the difference between the financial
reporting and tax bases of assets and liabilities using enacted
rates in effect during the year in which the differences are
expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected
to be realized.
Advertising costs are expensed as incurred and amounted to
approximately $1,364,000, $842,000 and $421,000 for 2004, 2003
and 2002, respectively.
At December 31, 2004, we have six stock-based employee
compensation plans which are described more fully in
Note R. We account for employee stock option plans in
accordance with the provisions of Accounting Principals Board
(“APB”) Opinion No. 25, “Accounting for
Stock Issued to Employees” and the related interpretations
of FASB Interpretation (“FIN”) No. 44,
“Accounting for Certain Transactions Involving Stock
Compensation.” Accordingly, compensation expense related to
employee stock options is recorded, if on the date of the grant,
the fair value of the underlying stock exceeds the exercise
price.
We also have an Employee Stock Purchase Plan (ESPP), with a term
of ten years, which expires in the year 2006, and under which
1.8 million shares of our common stock have been authorized
and reserved for issuance. Eligible employees may authorize
payroll deductions of up to 10% of their compensation to
purchase shares of common stock at 85% of the lower of the
market price per share at the beginning or end of each six-month
offering period.
To date, options under our stock options plans have been granted
at exercise prices that equal, exceed or are less than market
value of the underlying common stock on the grant date. However,
during the year 2001, we modified certain option grants that
required remeasurement on the modification date and accordingly
resulted in stock-based compensation as the exercise prices were
below the fair market value on the date of the modification. We
account for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and EITF Issue
No. 96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods and Services.”
SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), encourages but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value for awards granted
subsequent to December 31, 1995. We have chosen to continue
to account for stock-based compensation using the intrinsic
value method prescribed in related interpretations. However, in
accordance with the disclosure only requirements of
SFAS 123, we have computed the fair value of our stock
option grants using the Black-Scholes option-pricing model.
F-13
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table illustrates the effect on stock-based
compensation, net income in total, and per share if we had
applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands, except per share data) | |
|
Stock-based compensation, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
1,404 |
|
|
$ |
303 |
|
|
$ |
3,648 |
|
| |
Additional stock-based compensation expense determined under the
fair value method, net of tax
|
|
|
18,181 |
|
|
|
16,810 |
|
|
|
14,891 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
19,585 |
|
|
$ |
17,113 |
|
|
$ |
18,539 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
36,373 |
|
|
$ |
18,452 |
|
|
$ |
40,918 |
|
| |
Less: additional stock-based compensation expense determined
under the fair value method, net of tax
|
|
|
(18,181 |
) |
|
|
(16,810 |
) |
|
|
(14,891 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
18,192 |
|
|
$ |
1,642 |
|
|
$ |
26,027 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share-basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.58 |
|
|
$ |
0.30 |
|
|
$ |
0.68 |
|
| |
Less: per share effect of additional stock-based compensation
expense determined under the fair value method, net of tax
|
|
|
(0.29 |
) |
|
|
(0.28 |
) |
|
|
(0.25 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
0.29 |
|
|
$ |
0.02 |
|
|
$ |
0.43 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings per share-diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.53 |
|
|
$ |
0.29 |
|
|
$ |
0.67 |
|
| |
Less: per share effect of additional stock-based compensation
expense determined under the fair value method, net of tax
|
|
|
(0.26 |
) |
|
|
(0.27 |
) |
|
|
(0.25 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
$ |
0.27 |
|
|
$ |
0.02 |
|
|
$ |
0.42 |
|
| |
|
|
|
|
|
|
|
|
|
The key assumptions used for the determination of the fair value
are further described in Note R.
In accordance with Statement of Financial Accounting Standards
No. 52, Foreign Currency Translation
(“SFAS 52”), one of our international
operations uses the respective local currency as their
functional currency while other international operations use the
U.S. Dollar as their functional currency. Gains and losses
from foreign currency transactions are recorded in other income,
net and have historically not been significant. Revenue and
expenses from our international subsidiaries are translated
using the monthly average exchange rates in effect for the
period in which they occur. Our international subsidiaries that
have the U.S. Dollar as their functional currency translate
monetary assets and liabilities using current rates of exchange
at the balance sheet date and translate non-monetary assets and
liabilities using historical rates of exchange. Gains and losses
from remeasurement for such subsidiaries are included in other
income, net and have historically not been significant. Our
international subsidiary that does not have the U.S. Dollar
as its functional currency translates assets and liabilities at
current rates of exchange in effect at the balance sheet date.
The resulting gains and losses from translation of this
subsidiary are included as a component of shareholders’
equity.
F-14
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Earnings per share are computed using the weighted average
number of shares outstanding and potentially dilutive shares
(options and warrants), in accordance with
SFAS No. 128, “Earnings per Share.”
Comprehensive income generally represents all changes in
shareholders’ equity during the period except those
resulting from investments by, or distributions to, shareholders.
Segment Information
We use the “management approach” in determining
reportable business segments. The management approach designates
the internal organization that is used by management for making
operating decisions and assessing performance as the source of
our reportable segments. We currently have four reportable
segments: Network Signaling Group; Switching Solutions Group,
Communications Software Solutions Group and IEX Contact Center
Group. During 2004, certain network signaling products,
including Sentinel, were combined with Steleus resources to
become the basis of our new Communications Software Solutions
Group.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123 (Revised 2004)
“Share-Based Payment”
(“SFAS No. 123R”) that addresses the
accounting for share-based payment transactions in which a
Company receives employee services in exchange for
(a) equity instruments of the Company or
(b) liabilities that are based on the fair value of the
Company’s equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123R
addresses all forms of share-based payment awards, including
shares issued under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights.
SFAS No. 123R eliminates the ability to account for
share-based compensation transactions using APB Opinion
No. 25, “Accounting for Stock Issued to
Employees”, that was provided in SFAS No. 123 as
originally issued. Under SFAS No. 123R companies are
required to record compensation expense for all share based
payment award transactions measured at fair value. This
statement is effective for quarters beginning after
June 15, 2005. We are currently in the process of reviewing
SFAS No. 123R and have not determined the impact this
will have on our financial position, results of operations or
cash flows.
In December 2004, the FASB issued SFAS No. 153
“Exchanges of Nonmonetary Assets — an amendment
of APB Opinion No. 29”. This Statement amended APB
Opinion 29 to eliminate the exception for non-monetary exchanges
of similar productive assets and replaces it with a general
exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. This statement
is effective for fiscal years beginning after June 15,
2005. We do not expect the adoption of SFAS No. 153 to
have a material impact on our financial position, results of
operations or cash flows.
In November 2004, FASB issued SFAS No, 151 “Inventory
Costs”. This Statement amends the guidance in ARB
No. 43, Chapter 4, “Inventory Pricing,” to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). In addition, this Statement requires that allocation
of fixed production overhead to the costs of conversion be based
on the normal capacity of the production facilities. This
statement is effective for fiscal years beginning after
June 15, 2005.
F-15
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We do not expect the adoption of SFAS 151 to have a
material impact on our financial position, results of operations
or cash flows.
In October 2004, the Emerging Issues Task Force
(“EITF”) reached final consensuses on Issue 04-8
“Accounting Issues Related to Certain Features of
Contingently Convertible Debt and the Effect on Diluted Earnings
per Share” (“EITF No. 04-8”). EITF
No. 04-8 requires the dilutive effect of contingently
convertible debt investments (“Co-Cos”) to be included
in diluted earnings per share computations regardless of whether
the market price trigger (or other contingent feature) has been
met. The scope of EITF No. 04-8 includes all securities
issued with embedded contingently convertible features that are
based on a market price contingency involving an entity’s
own stock. EITF No. 04-8 is effective for fiscal periods
ending after December 15, 2004, and prior period earnings
per share amounts presented for comparative purposes should be
restated to conform to the consensus guidance. Because our Notes
are not contingently convertible, this pronouncement does not
impact our earnings per share calculation.
In September 2004, the FASB reached consensus on EITF
Issue 04-10, “Determining Whether to Aggregate
Operating Segments that Do Not Meet the Quantitative
Thresholds.” EITF No. 04-10 provides guidance for how
companies should evaluate the aggregation criteria of
Statement 131, Disclosures about Segments of an Enterprise
and Related Information, when determining whether operating
segments that do not meet the quantitative thresholds may be
aggregated in accordance with Statement 131. The effective
date of this issue has been delayed until a related FASB Staff
Position is issued. We continue to assess the potential impact
that the adoption of the proposed issues could have on our
consolidated financial statements.
In September 2004, the FASB reached consensus on EITF
Issue 04-01, “Accounting for Pre-existing
Relationships between the Parties to a Business
Combination.” EITF No. 04-01 addresses whether a
business combination between two parties that have a
pre-existing contractual relationship should be evaluated to
determine if a settlement of a pre-existing contractual
relationship exists, thus requiring accounting separate from the
business combination. Recognition and measurement of a
settlement of a preexisting relationship in a business
combination should be applied prospectively to business
combinations completed in reporting periods after
October 13, 2004. An entity should apply the consensus
prospectively to business combinations and goodwill impairment
tests completed in reporting periods beginning after
October 13, 2004. The adoption of EITF 04-01 did not
have a material impact on our financial position, results of
operations or cash flows.
In March 2004, the FASB issued EITF Issue 03-1, “The
Meaning of Other-Than-Temporary Impairment and its Application
to Certain Investments.” EITF No. 03-1 provides new
guidance for assessing impairment losses on investments and
includes new disclosure requirements for investments that are
deemed to be temporarily impaired. In September 2004, the FASB
issued FASB Staff Position (“FSP”) EITF
Issue 03-1-1, Effective Date of Paragraphs 10-20 of
EITF Issue No. 03-1, which delays the effective date for
the recognition and measurement guidance in EITF Issue
No. 03-1. In addition, the FASB has issued a proposed FSP
to consider whether further application guidance is necessary
for securities analyzed for impairment under EITF Issue
No. 03-1. We continue to assess the potential impact that
the adoption of the proposed FSP could have on our financial
statements.
Note B — Acquisitions
During the years ended December 31, 2004 and 2003, we
completed several acquisitions in order to expand our product
lines and offer our customers a complete next-generation
switching portfolio as well as an expanded product offering of
intelligent network services. With each acquisition, we used a
third party appraiser to assist with the determination of the
fair value of the assets acquired. Fair value is defined as the
amount for which an asset or liability could be exchanged in a
current transaction between knowledgeable, unrelated willing
parties when neither party is acting under compulsion. The fair
value was determined for each entity at the time of the business
combination, exclusive of any buyer specific post-combination
synergies.
F-16
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Using generally accepted valuation practice principles, we, with
the assistance of a third-party appraiser, valued the assets of
each entity by applying three valuation methodologies, which
themselves are inter-related: the Cost approach; the Market
approach; and the Income approach. These approaches are based
upon market exchanges for comparable business interests or
assets, the capitalization of income, and the cost to reproduce
assets. Each asset was valued by applying these approaches as
deemed most appropriate given the nature of each asset and the
specific facts and circumstances as represented by management.
The methodologies were applied under the premise of value to a
prudent investor contemplating retention and use of the assets
on an ongoing basis.
As the basis of identifying the in-process research and
development (“IPRD”), the development projects of each
acquired entity were evaluated in the context of Interpretation
4 of FASB Statement No. 2. In accordance with these
provisions, the development projects were examined to determine
if there were any alternative future uses. Such evaluation
consisted of a review of the efforts, including the overall
objectives of the project, progress toward the objectives, and
the uniqueness of the developments of these objectives. Further,
each IPRD project was reviewed to determine if technological
feasibility had been achieved.
Steleus Group Inc.
On October 14, 2004, we completed the acquisition of
Steleus Group Inc. (“Steleus”), a real-time
performance management company that supplies network-related
intelligence products and services to telecom operators. We paid
an aggregate cash amount of approximately $53.6 million for
100% of Steleus’ outstanding stock. In addition, we
incurred approximately $5.0 million in direct
acquisition-related costs. The acquisition was accomplished by
means of a reverse triangular merger of a new wholly owned
subsidiary of Tekelec.
Subsequent to the acquisition, 119 Steleus officers and
employees were granted options as of October 14, 2004, to
purchase a total of 881,550 shares of Tekelec common stock,
of which options to purchase 200,000 shares were
granted to Rick Mace, president and CEO of Steleus. In addition,
seven Steleus officers and key employees were granted Restricted
Stock Units (“RSU’s”) representing the right to
receive a total of 98,510 shares of Tekelec common stock,
of which RSUs covering 34,478 shares of Tekelec common
stock were granted to Mr. Mace. The RSU’s, valued at
$1.7 million, are reflected in deferred stock-based
compensation and will vest on October 14, 2005 with
periodic charges to expense related to the amortization of
stock-based compensation over the vesting period.
The number of shares subject to such options and RSUs amounts to
less than 2% of the outstanding shares of Tekelec common stock.
The option and RSU grants were made under Tekelec’s 2004
Equity Incentive Plan for New Employees and met the
“employee inducement” exception to the Nasdaq rules
requiring shareholder approval of equity-based incentive plans.
The acquisition has been accounted for using the purchase method
of accounting with the Steleus assets acquired and the
liabilities assumed reflected at their estimated fair values.
Steleus and our existing business intelligence applications,
such as billing verification and other network
element-independent applications, form our new Communications
Software Solutions Group (CSSG), that is reported as an
operating segment as of the fourth quarter of 2004.
The acquisition of Steleus resulted in the recognition of
deferred tax assets of approximately $15.6 million
primarily related to acquired temporary differences and net
operating loss carryforwards and deferred tax liabilities of
approximately $8.6 million related to acquired intangible
assets. The Steleus acquired deferred tax assets are based on a
preliminary purchase price allocation and may be adjusted upon
completion of the final Steleus tax returns through the
acquisition date. Steleus’s operating results are included
in our consolidated results since the date of acquisition.
F-17
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The transaction resulted in a step-up of approximately
$49.8 million of Steleus’ assets and liabilities to
fair value as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
Total cash paid or held in escrow
|
|
$ |
53,600 |
|
|
Direct transaction costs
|
|
|
5,003 |
|
| |
|
|
|
| |
Total fair value of consideration paid and direct transaction
costs
|
|
|
58,603 |
|
|
Less: Steleus’ tangible net assets acquired
|
|
|
(1,757 |
) |
|
Add: Estimated deferred tax liability
|
|
|
8,599 |
|
|
Less: Estimated deferred tax assets
|
|
|
(15,641 |
) |
| |
|
|
|
| |
Total fair value step-up in Steleus
|
|
$ |
49,804 |
|
| |
|
|
|
Through this acquisition, we gained an expanded portfolio of
value-added applications with real-time monitoring and
management capabilities for legacy and next-generation networks.
This is consistent with our strategy focused on next-generation
switching and signaling products and services, and value-added
applications. We believe the combination of our signaling
products and expertise, combined with the acquired Steleus
assets, provide a unique value-proposition to our customers.
These factors contributed to a purchase price in excess of fair
market value of Steleus’s net tangible and intangible
assets acquired, and as a result, we have recorded goodwill in
connection with the transaction.
The total purchase price step-up was allocated among the Steleus
assets acquired and liabilities assumed based on their estimated
fair values determined with the assistance of a third party
appraisal as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
In-process research and development
|
|
$ |
3,800 |
|
|
Goodwill
|
|
|
21,434 |
|
|
Identifiable intangible assets
|
|
|
24,570 |
|
| |
|
|
|
| |
Total purchase price allocation
|
|
$ |
49,804 |
|
| |
|
|
|
Based on the purchase price allocation, $3.8 million of the
purchase price represented acquired in-process research and
development (“IPRD”) that had not yet reached
technological feasibility and had no alternative future use.
IPRD was valued using a discounted cash flow approach commonly
known as the “excess earnings” approach. The IPRD
amount was recorded as an expense in the fourth quarter of 2004.
The identifiable assets created as a result of the acquisition
will be amortized over their respective estimated useful lives
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Asset | |
|
Estimated Life | |
| |
|
Amount | |
|
in Years | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
|
|
Acquired technology
|
|
$ |
19,300 |
|
|
|
10 |
|
|
Acquired backlog
|
|
|
800 |
|
|
|
1.2 |
|
|
Trade names and marks
|
|
|
150 |
|
|
|
1.2 |
|
|
Existing customer relationships
|
|
|
1,030 |
|
|
|
10 |
|
|
Service contracts
|
|
|
2,890 |
|
|
|
2 |
|
|
Non-compete agreements
|
|
|
400 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
| |
|
$ |
24,570 |
|
|
|
|
|
| |
|
|
|
|
|
|
F-18
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense of purchased technology and other
intangible assets amounted to $931,000 for the year ended
December 31, 2004.
VocalData, Inc.
On September 20, 2004, we completed the acquisition of all
of the outstanding shares of capital stock of privately held
VocalData, Inc. (“VocalData”). VocalData is a provider
of hosted Internet protocol (IP) telephony applications
that enable the delivery of advanced telecom services and
applications to business and residential customers. The
acquisition was accomplished by means of a reverse triangular
merger of a new wholly owned subsidiary of Tekelec.
We paid to the preferred stockholders of VocalData, in exchange
for their interests in VocalData, consideration in the total
amount of approximately $27.5 million, consisting of
(i) an aggregate cash amount of $14.5 million, and
(ii) 779,989 shares of our common stock, of which the
number of shares is subject to reduction of a maximum of
approximately 312,000 shares for certain working capital
adjustments. The value of the 779,989 shares was equal to
approximately $13.0 million based on the closing sales
price of our common stock on the Nasdaq National Market around
the public announcement date of September 20, 2004. The
number of shares was determined pursuant to the terms of the
merger agreement by dividing $14.5 million by the average
of the closing sales price per share of our common stock on the
Nasdaq National Market for the ten trading days ending on the
second trading day prior to the closing of the merger
transaction.
Subsequent to the acquisition, 69 VocalData officers and
employees were granted options as of September 20, 2004, to
purchase a total of 1,083,400 shares of Tekelec common
stock. In addition, eight VocalData officers and key
employees were granted Restricted Stock Units
(“RSU’s”) representing the right to receive a
total of 18,000 shares of Tekelec common stock. The
RSU’s, valued at $301,000, are reflected in deferred
stock-based compensation and will vest on September 20,
2005 with periodic charges to expense related to the
amortization of stock-based compensation over the vesting period.
The number of shares subject to such options and RSUs amounts to
less than 2% of the outstanding shares of Tekelec common stock.
The option and RSU grants were made under Tekelec’s 2004
Equity Incentive Plan for New Employees and met the
“employee inducement” exception to the Nasdaq rules
requiring shareholder approval of equity-based incentive plans.
The transaction has been accounted for as an acquisition by us
under the purchase method of accounting, with the VocalData
assets acquired and the liabilities assumed reflected at their
estimated fair values. The acquisition of VocalData resulted in
the recognition of deferred tax assets of approximately
$12.3 million primarily related to acquired temporary
differences and net operating loss carryforwards and deferred
tax liabilities of approximately $2.3 million related to
acquired intangible assets. The VocalData acquired deferred tax
assets are based on a preliminary purchase price allocation and
may be adjusted upon completion of the final VocalData tax
returns through the acquisition date. VocalData’s operating
results are included in our consolidated results since the date
of acquisition.
F-19
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The transaction resulted in a step-up of approximately
$15.3 million of VocalData’s assets and liabilities to
fair value as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
Total cash paid
|
|
$ |
14,500 |
|
|
Fair value of stock issued
|
|
|
13,000 |
|
|
Direct transaction costs
|
|
|
354 |
|
| |
|
|
|
| |
Total fair value of consideration paid and direct transaction
costs
|
|
|
27,854 |
|
|
Less: VocalData’s tangible net assets acquired
|
|
|
(2,585 |
) |
|
Add: Estimated deferred tax liability
|
|
|
2,278 |
|
|
Less: Estimated deferred tax assets
|
|
|
(12,253 |
) |
| |
|
|
|
| |
Total fair value step-up in VocalData
|
|
$ |
15,294 |
|
| |
|
|
|
Through this acquisition, we gained a meaningful presence in the
next-generation switching space, specifically for IP Centrex
applications. This is consistent with our strategy focused on
next-generation switching and signaling products and services,
and value-added applications. We believe the combination of our
signaling products and expertise, combined with the acquired
VocalData assets, provide a unique value-proposition to our
customers. These factors contributed to a purchase price in
excess of fair market value of VocalData’s net tangible and
intangible assets acquired, and as a result, we have recorded
goodwill in connection with the transaction.
The total purchase price step-up was allocated among the
VocalData assets acquired and liabilities assumed based on their
estimated fair values determined with the assistance of a third
party appraisal as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
In-process research and development
|
|
$ |
2,400 |
|
|
Goodwill
|
|
|
6,384 |
|
|
Identifiable intangible assets
|
|
|
6,510 |
|
| |
|
|
|
| |
Total purchase price allocation
|
|
$ |
15,294 |
|
| |
|
|
|
Based on the purchase price allocation, $2.4 million of the
purchase price represented acquired in-process research and
development (“IPRD”) that had not yet reached
technological feasibility and had no alternative future use.
IPRD was valued using a discounted cash flow approach commonly
known as the “excess earnings” approach. The IPRD
amount was recorded as an expense in the third quarter of 2004.
The identifiable assets created as a result of the acquisition
will be amortized over their respective estimated useful lives
which are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Asset | |
|
Estimated Life | |
| |
|
Amount | |
|
in Years | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
|
|
Acquired technology
|
|
$ |
5,200 |
|
|
|
10 |
|
|
Acquired backlog
|
|
|
100 |
|
|
|
1 |
|
|
Trade names and marks
|
|
|
10 |
|
|
|
1 |
|
|
Existing customer relationships
|
|
|
500 |
|
|
|
10 |
|
|
Service contracts
|
|
|
500 |
|
|
|
1 |
|
|
Non-compete agreements
|
|
|
200 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
| |
|
$ |
6,510 |
|
|
|
|
|
| |
|
|
|
|
|
|
F-20
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense of purchased technology and other
intangible assets amounted to $403,000 for the year ended
December 31, 2004.
Taqua, Inc.
On April 8, 2004, we completed the acquisition of all of
the outstanding shares of capital stock of privately held Taqua,
Inc., (“Taqua”). Taqua develops, markets and sells
products and services for next-generation switches optimized for
the small switch service provider market. The acquisition was
accomplished by means of a reverse triangular merger of a new
wholly owned subsidiary of Tekelec (“Merger Sub”),
with and into Taqua.
We paid an aggregate cash amount of approximately
$86.0 million to the common and preferred stockholders and
warrant holders of Taqua in exchange for their interests in
Taqua. In addition, we incurred approximately $2.8 million
in direct acquisition-related costs. As part of the acquisition,
we assumed all unexercised outstanding options to purchase
shares of common stock of Taqua. The assumed options were
converted, based on exchange ratios specified in the merger
agreement, into options to purchase an aggregate of
approximately 500,000 shares of Tekelec common stock with
an estimated fair value of $7.8 million using the
Black-Scholes option-pricing model. This amount includes
approximately $4.2 million related to the intrinsic value
of unvested stock options recorded as deferred stock-based
compensation, which will be amortized over the vesting period of
the assumed options. The transaction has been accounted for as
an acquisition by us under the purchase method of accounting,
with the Taqua assets acquired and the liabilities assumed
reflected at their estimated fair values. The acquisition of
Taqua resulted in the recognition of deferred tax assets of
approximately $31.2 million primarily related to acquired
temporary differences and net operating loss carryforwards and
deferred tax liabilities of approximately $10.7 million
related to acquired intangible assets. The Taqua acquired
deferred tax assets are based on a preliminary purchase price
allocation and may be adjusted upon completion of the final
Taqua tax returns through the acquisition date. Taqua’s
operating results are included in our consolidated results since
the date of acquisition.
The transaction resulted in a step-up of approximately
$70.0 million of Taqua’s assets and liabilities to
fair value as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
Total cash paid
|
|
$ |
85,966 |
|
|
Fair value of stock options assumed
|
|
|
7,755 |
|
|
Deferred compensation adjustment for unvested stock options
|
|
|
(4,231 |
) |
|
Direct transaction costs
|
|
|
2,751 |
|
| |
|
|
|
| |
Total fair value of consideration paid and direct transaction
costs
|
|
|
92,241 |
|
|
Less: Taqua’s tangible net assets acquired
|
|
|
(1,422 |
) |
|
Add: Estimated deferred tax liability
|
|
|
10,724 |
|
|
Less: Estimated deferred tax assets
|
|
|
(31,204 |
) |
|
Less: Other adjustments to tangible assets and liabilities
|
|
|
(387 |
) |
| |
|
|
|
| |
Total fair value step-up in Taqua
|
|
$ |
69,952 |
|
| |
|
|
|
Through this acquisition, we gained a meaningful presence in the
next-generation switching space, specifically for the small size
wireline switching market. This is consistent with our strategy
focused on next-generation switching and signaling products and
services, and value-added applications. We believe the
combination of our signaling products and expertise, combined
with the acquired Taqua switching assets, provide a unique
value-proposition to our customers. These factors contributed to
a purchase price in excess of
F-21
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
fair market value of Taqua’s net tangible and intangible
assets acquired, and as a result, we have recorded goodwill in
connection with the transaction.
The total purchase price step-up was allocated among the Taqua
assets acquired and liabilities assumed based on their estimated
fair values determined with the assistance of a third party
appraisal as follows:
| |
|
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
In-process research and development
|
|
$ |
8,000 |
|
|
Goodwill
|
|
|
32,642 |
|
|
Identifiable intangible assets
|
|
|
29,310 |
|
| |
|
|
|
| |
Total purchase price allocation
|
|
$ |
69,952 |
|
| |
|
|
|
Based on the purchase price allocation, $8.0 million of the
purchase price represented acquired in-process research and
development (“IPRD”) that had not yet reached
technological feasibility and had no alternative future use.
IPRD was valued using a discounted cash flow approach commonly
known as the “excess earnings” approach. The IPRD
amount was recorded as an expense in the second quarter of 2004.
The identifiable assets created as a result of the acquisition
will be amortized over their respective estimated useful lives
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Asset | |
|
Estimated Life | |
| |
|
Amount | |
|
in Years | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
|
|
Acquired technology
|
|
$ |
26,400 |
|
|
|
15 |
|
|
Acquired backlog
|
|
|
1,500 |
|
|
|
1 |
|
|
Trade names and marks
|
|
|
60 |
|
|
|
1 |
|
|
Existing customer relationships
|
|
|
10 |
|
|
|
12 |
|
|
Service contracts
|
|
|
630 |
|
|
|
5 |
|
|
Non-compete agreements
|
|
|
710 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
| |
|
$ |
29,310 |
|
|
|
|
|
| |
|
|
|
|
|
|
Amortization expense of purchased technology and other
intangible assets of Taqua amounted to $3.1 million for the
year ended December 31, 2004.
Majority Interest in Santera
On June 10, 2003, we acquired a 51.6% controlling voting
ownership interest (57.5% on an as converted basis) in Santera
in exchange for a cash contribution of $28.0 million and
the contribution of the business operations and certain assets
and liabilities of our Packet Telephony Business Unit
(“PTBU”). Santera develops, markets and sells products
and services for carrier-class, next-generation switches. As
part of the acquisition and combination, Santera was
recapitalized and we contributed the $28.0 million in cash
to Santera in exchange for 28,000 shares of Santera
Series B Preferred Stock. In addition, we received
38,000 shares of Santera Series A Preferred Stock and
one share of Santera common stock in exchange for the PTBU.
Santera’s existing stockholders received 62,000 shares
of Series A Preferred Stock in exchange for their existing
shares in Santera and a cash contribution to Santera of
$12.0 million. Each share of Santera’s Series B
Preferred Stock has a liquidation preference equal to $2,000 and
is convertible into 1.63 shares of Santera common stock.
Each share of Santera’s Series A Preferred Stock has a
liquidation preference equal to $1,000 and is convertible into
one share of Santera common stock.
Under terms of the original purchase agreement, we made
additional cash investments of $12.0 million in Santera,
comprised of $6.0 million in March 2004 and
$6.0 million in May 2004, in exchange for 12,000
F-22
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
additional shares of Santera Series B Preferred Stock. As a
result of this cash investment, our ownership percentage
increased to 55.7% (62.5% on an as converted basis). In
accordance with generally accepted accounting principles, the
capital structure of Santera has been eliminated in
consolidation and the minority stockholders’ interest in
Santera is reflected in our consolidated balance sheet as
minority interest. The minority stockholders’ interest in
Santera is reflected at the fair value of the Santera assets
acquired on the date of acquisition. In addition to the
$12 million additional investment noted above, we have
funded substantially all of Santera’s operating losses and
working capital requirements since the acquisition.
The transaction has been accounted for using the purchase method
of accounting, and resulted in a step-up of approximately
$56.9 million of Santera’s assets and liabilities to
fair value as follows:
| |
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
Fair value of Santera
|
|
$ |
61,000 |
|
|
Direct acquisition costs
|
|
|
3,700 |
|
|
Less: Santera tangible net assets acquired
|
|
|
(7,767 |
) |
| |
|
|
|
|
Fair value step-up
|
|
$ |
56,933 |
|
| |
|
|
|
Through this acquisition we gained a meaningful presence in the
next-generation switching space, specifically for medium to
large size wireline switching markets and wireless markets. This
is consistent with our strategy focused on next-generation
switching and signaling products and services, and value-added
applications. We believe the combination of our signaling
products and expertise, combined with the acquired Santera
switching assets, provides a unique value-proposition to our
customers. These factors contributed to a purchase price in
excess of fair market value of Santera’s net tangible and
intangible assets acquired, and as a result, we have recorded
goodwill in connection with the transaction.
The total purchase price step-up was allocated among the Santera
assets acquired and liabilities assumed based on their estimated
fair values determined with the assistance of a third party
appraisal as follows:
| |
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
In-process research and development
|
|
$ |
2,900 |
|
|
Goodwill
|
|
|
25,835 |
|
|
Identifiable intangible assets
|
|
|
27,200 |
|
|
Acquired backlog
|
|
|
500 |
|
|
Inventory fair value step-up
|
|
|
498 |
|
| |
|
|
|
| |
|
$ |
56,933 |
|
| |
|
|
|
The PTBU assets and liabilities contributed remain at historical
cost.
Based on the purchase price allocation, $2.9 million of the
purchase price represented acquired in-process research and
development (“IPRD”) that had not yet reached
technological feasibility and had no alternative future use.
IPRD was valued using a discounted cash flow approach commonly
known as the “excess earnings” approach. The IPRD
amount was recorded as an expense in the second quarter of 2003.
The identifiable assets created as a result of the acquisition
will be amortized over their estimated useful lives of
15 years, with the exception of acquired backlog, which has
an estimated life of one year. Amortization expense of purchased
technology and other intangible assets of Santera, including the
intangible assets contributed by PTBU, amounted to
$4.3 million and $4.1 million for the years ended
December 31, 2004 and 2003, respectively.
The net income and losses of Santera are allocated between
Tekelec and the minority stockholders based on their relative
interests in the equity of Santera and the related liquidation
preferences. This approach
F-23
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
requires net losses to be allocated first to the Series A
Preferred Stock until fully absorbed and then to the
Series B Preferred Stock. Subsequent net income will be
allocated first to the Series B Preferred Stock to the
extent of previously recognized net losses allocated to
Series B Preferred Stock. Additional net income will then
be allocated to the Series A Preferred Stock to the extent
of previously recognized losses allocated to Series A
Preferred Stock and then to common stock in proportion to their
relative ownership interests in the equity of Santera. The loss
allocated to minority interest of Santera for the year ended
December 31, 2004 was computed as follows (dollars in
thousands):
| |
|
|
|
|
| |
|
(Thousands) | |
| |
|
| |
|
Santera net loss (includes amortization of intangibles of $4,291)
|
|
$ |
33,418 |
|
|
Percentage of losses attributable to the minority interest based
on capital structure and liquidation preferences
|
|
|
62 |
% |
| |
|
|
|
|
Minority interest losses
|
|
$ |
20,719 |
|
| |
|
|
|
Since our acquisition of a majority interest in Santera, the
total net losses that are allocable to the Series A
Preferred Stock are $65.3 million, leaving
$33.0 million of losses to be allocated to the
Series A Preferred Stock until fully absorbed. After the
Series A Preferred Stock is fully absorbed, all subsequent
net losses of Santera will be allocated to the Series B
Preferred Stock, of which we own 100%.
In addition to our current ownership interest, we have the right
(the “Call”), exercisable during the period from
July 1, 2005 through December 31, 2007, to acquire the
remaining outstanding shares of Santera from the holders thereof
at a price determined in accordance with the terms of the
definitive agreements (the “Tekelec Option Price”).
The Tekelec Option Price is calculated as the product of
(1) the aggregate percentage of Santera common stock not
owned by Tekelec (assuming the conversion of the all then issued
and outstanding shares of Santera Preferred Stock) calculated at
the end of the Call Measurement Period (as defined below) and
(2) the “assumed fair market value” of Santera.
The “assumed fair market value” of Santera is equal to
the product of (1) Santera’s revenues during the
one-year period beginning on the first day of the sixth calendar
month prior to Tekelec’s exercise of its Option and ending
12 months thereafter (the 12-month period is referred to as
the “Call Measurement Period”) and (2) 2.0;
provided, however, that the “assumed fair market
value” shall not exceed $350 million.
In addition, the other stockholders of Santera will have the
right (the “Put”), exercisable during the period from
January 2006 through February 2008, to require us to purchase
their shares at a price equal to 80% of the Tekelec Option
Price, provided Santera has been profitable for the two calendar
quarters preceding such exercise.
In the event that we exercise the Call, we will reflect purchase
accounting for the price paid to acquire the interest held by
the minority stockholders. The Put is contingently exercisable
only if Santera meets certain net income requirements and its
strike price is expected to approximate 80% of fair value based
on a 2x multiple of revenue. Since industry market multiples
have not decreased, it indicates that there is little value to
the Put and therefore, it is not reflected as a liability on our
balance sheet. In the event that industry market multiples
decrease significantly, the Put may have value which would
require us to record the liability and charge the increased
value to the income statement. Upon exercise of the Put, we will
reflect purchase accounting equal to the Put price, net of the
then recorded liability, if any.
F-24
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table shows our pro forma revenue, net income
(loss) and net income (loss)per share giving effect to the
Santera, Taqua, VocalData and Steleus acquisitions as of the
beginning of 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands, except | |
| |
|
per-share data) | |
|
Revenues
|
|
$ |
420,501 |
|
|
$ |
304,713 |
|
|
Net income (loss)(1)
|
|
|
7,103 |
|
|
|
(25,140 |
) |
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.11 |
|
|
$ |
(0.41 |
) |
| |
Diluted
|
|
|
0.11 |
|
|
|
(0.41 |
) |
|
|
| (1) |
Excludes one-time IPRD charges of $14.2 million and
$2.9 million for the years ended December 31, 2004 and
2003, respectively. |
Note C — Disposition of Network Diagnostics
Business
On August 30, 2002, we completed the sale of NDD to
Catapult Communications Corporation (“Catapult”) for
$59.8 million, consisting of cash in the amount of
$42.5 million and convertible subordinated promissory notes
(the “Notes”) issued by Catapult’s wholly owned
Irish subsidiary and guaranteed by Catapult in the total
principal amount of $17.3 million. The sale resulted in a
pre-tax gain of approximately $41.7 million
($28.3 million after taxes) in 2002. During the third
quarter of 2003, an additional $3.3 million gain on the
sale was recognized based on post closing adjustments, including
working capital, resulting from the final settlement with
Catapult in accordance with the asset purchase agreement. In
accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the sale of
the NDD business segment has been presented as a discontinued
business and our historical financial results for periods prior
to disposition have been revised to reflect NDD as a
discontinued operation. Accordingly, the revenues, costs and
expenses, assets and liabilities, and cash flows of NDD have
been condensed in the accompanying consolidated statements of
operations, balance sheets and cash flows.
Revenues and loss from our discontinued operation were as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 |
|
2003 |
|
2002 | |
| |
|
|
|
|
|
| |
| |
|
(Thousands) | |
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(26,556 |
) |
|
Pre-tax loss from discontinued operation
|
|
|
— |
|
|
|
— |
|
|
|
(6,015 |
) |
|
Benefit from income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(2,707 |
) |
|
Loss from discontinued operation
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(3,308 |
) |
The Notes had a principal amount of $17.3 million bearing
interest at 2% annum and were due on August 30, 2004, which
was extended in August 2004 to September 30, 2004. We had
the option of converting the Notes into Catapult common stock
after August 30, 2003 through maturity at a conversion rate
(subject to certain adjustments) of 62.50 share of Catapult
common stock per $1,000 in principal (approximately
1.1 million shares for full conversion of the Notes).
The Notes were initially reflected in the consolidated balance
sheet at their estimated fair value with the assistance of a
third party appraisal. The fair value was computed by
discounting the face value amount to present value using a fair
value rate of interest and then determining the fair value of
the conversion option
F-25
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
using the Black-Scholes valuation model. The carrying value of
the Notes was adjusted to the redemption amount at maturity
based on an effective interest amortization method, with
periodic charges to interest. The carrying values of the Notes
and the conversion option were as follows:
| |
|
|
|
|
|
| |
|
December 31, | |
| |
|
2003 | |
| |
|
| |
| |
|
(Thousands) | |
|
Notes: face value at $17,300
|
|
$ |
14,869 |
|
|
Fair value of conversion option feature
|
|
|
3,246 |
|
| |
|
|
|
| |
Fair value of Notes at August 30, 2002
|
|
|
18,115 |
|
|
Less, accumulated amortization
|
|
|
(535 |
) |
| |
|
|
|
| |
Carrying value of Notes
|
|
$ |
17,580 |
|
| |
|
|
|
We exercised our option to convert the Notes into Catapult
common stock in September 2004. The conversion rate was
62.50 shares of Catapult common stock per $1,000 in
principal based on the original conversion agreement. In
September 2004, we sold our Catapult shares resulting in a
pretax gain of approximately $2.2 million, which is
included in other income in the accompanying consolidated
statement of operations.
Note D — Restructuring Costs
In January 2004, we announced a cost reduction initiative that
resulted in employee terminations and relocations. The cost
reduction initiative resulted in restructuring charges of
$339,000 and $1.7 million for the three months and year
ended December 31, 2004. These restructuring costs related
to the implementation of a global strategic manufacturing plan
which included the outsourcing of the majority of our
manufacturing operations and the relocation of our remaining
signaling product manufacturing operations from Calabasas,
California to our facilities in Morrisville, North Carolina
which was completed during 2004. We expect to incur additional
costs throughout the first half of 2005 related to relocating
our corporate offices into a smaller facility without
manufacturing facilities. During 2004, approximately 23
positions were eliminated as a result of our restructuring.
For the restructuring charges related to relocation costs and
retention bonuses, we applied the provisions of
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” The principal difference
between SFAS No. 146 and previous accounting standards
relates to the timing of when restructuring charges are
recorded. Under SFAS No. 146, restructuring charges
are recorded as liabilities are incurred. Under prior accounting
standards, restructuring related liabilities were recorded at
the time we committed to a restructuring plan. Retention bonuses
are being recognized proratably over the service period. We
applied the provisions of SFAS 112, “Employers’
Accounting for Postemployment Benefits” for severance costs
because the severance benefits provided as part of this
restructuring were part of an ongoing benefit arrangement and we
accrued a liability for the severance costs.
The costs related to the restructuring were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Costs Incurred | |
|
Cumulative | |
| |
|
Total Costs | |
|
for the | |
|
Costs Incurred | |
| |
|
Expected to be | |
|
Three Months Ended | |
|
through | |
| |
|
Incurred | |
|
December 31, 2004 | |
|
December 31, 2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Severance costs and retention bonuses
|
|
$ |
972 |
|
|
$ |
24 |
|
|
$ |
972 |
|
|
Employee relocation costs
|
|
|
550 |
|
|
|
265 |
|
|
|
498 |
|
|
Facility relocation costs
|
|
|
320 |
|
|
|
50 |
|
|
|
196 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,842 |
|
|
$ |
339 |
|
|
$ |
1,666 |
|
| |
|
|
|
|
|
|
|
|
|
F-26
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The restructuring activity has resulted in the following accrual
as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Restructuring | |
|
Payments as of | |
|
Balance at | |
| |
|
Charges Accrued, Net | |
|
December 31, 2004 | |
|
December 31, 2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Severance costs and retention bonuses
|
|
$ |
972 |
|
|
$ |
(896 |
) |
|
$ |
76 |
|
|
Employee relocation costs
|
|
|
43 |
|
|
|
(43 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,015 |
|
|
$ |
(939 |
) |
|
$ |
76 |
|
| |
|
|
|
|
|
|
|
|
|
As a result of outsourcing a majority of our manufacturing
operations, we transferred raw material inventory of
$1.8 million to contract manufacturers under consignment
agreements during 2004. Based on the application of lower of
cost or market principle, an adjustment of approximately
$337,000 was charged to cost of goods sold during 2004.
Additionally, fully reserved inventory valued at approximately
$225,000 was not moved from California to North Carolina. This
fully reserved inventory was later sold to a California buyer
for less than $200. We do not expect the sale of fully reserved
inventory to continue.
As of December 31, 2004, total restructuring liabilities
amounted to $76,000 and are included in accrued expenses and
accrued payroll and related expenses in the accompanying balance
sheet. We are likely to incur future restructuring charges
throughout the first half of 2005, as a result of the global
strategic manufacturing plan and other consolidation activities.
Note E — Sale of Investment in Privately Held
Company and Gain on Warrants in Privately Held Company
In December 2004, following the acquisition of Spatial
Communications Technologies (“Spatial”) by Alcatel,
Santera, our majority owned subsidiary, exercised warrants
convertible into 1,363,380 shares of freely tradable
Alcatel shares valued at $14.91 per share. As a result of
this transaction, Santera recognized a gain of
$20.3 million which is included in other income in the
accompanying consolidated statement of operations. The Alcatel
shares are included in short-term investments in the
accompanying consolidated balance sheet. In addition, we can
receive up to 185,513 additional shares of Alcatel held in
escrow pending the resolution of acquisition-related
indemnifications made by Spatial to Alcatel. These shares are
anticipated to be released from escrow beginning 12 months
from the acquisition date. We may recognize additional gains
when and if these shares are released from escrow.
In August 2004 following the acquisition of Telica by Lucent
Technologies Inc. (“Lucent”), we received freely
tradable common stock of Lucent in exchange for our investment
in Telica, resulting in a pre-tax gain of $7.9 million,
which is included in other income in the accompanying
consolidated statement of operations. As further described in
Note B, the $7.9 million pre-tax gain reflects an
adjustment made in the fourth quarter ended December 31,
2004 for a $2.0 million pre-tax decrease of the gain on
sale of investment in privately held company recorded in the
third quarter ended September 30, 2004. The adjustment was
related to 643,000 shares held in escrow, which were
incorrectly marked to fair value, included in short-term
investments, and included as part of the gain that was
recognized in the quarter ended September 30, 2004. As
these shares are considered contingently issuable, they should
not have been so recognized, and we have recorded a reduction in
the gain of $2.0 million, a reduction in short term
investments of $2.0 million, and the elimination of the
related tax effects of $697,000 in the quarter ended
December 31, 2004. These adjustments are reflected in the
2004 financial statements.
In September 2004, we sold 5.8 million of our shares of
Lucent stock for proceeds of approximately $17.9 million.
We can receive up to an additional 643,000 shares of Lucent
stock held in escrow pending the resolution of
acquisition-related indemnifications made by Telica to Lucent.
The shares are anticipated to be released from escrow beginning
18 months from the acquisition date. We may recognize
additional gains when and if these shares are released from
escrow.
F-27
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note F — Fair Value of Investments
We had short-term investments in commercial paper, municipals
and money market accounts with original maturities of less than
90 days whose carrying amounts approximate their fair
values because of their short maturities. These investments are
included in cash and cash equivalents and amounted to $445,000
and $10.8 million at December 31, 2004 and 2003,
respectively.
We also had investments classified as available-for-sale
securities included in short-term and long-term investments,
categorized as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Type of Security:
|
|
|
|
|
|
|
|
|
|
Corporate debt securities with maturities of less than one year
|
|
$ |
40,967 |
|
|
$ |
15,050 |
|
|
State securities with maturities of less than one year
|
|
|
93,468 |
|
|
|
68,750 |
|
| |
|
|
|
|
|
|
| |
Total short-term investments
|
|
|
134,435 |
|
|
|
83,800 |
|
|
Corporate debt securities with maturities of between one and
three years
|
|
|
34,138 |
|
|
|
57,887 |
|
|
State securities with maturity between one and three years
|
|
|
32,717 |
|
|
|
8,094 |
|
|
U.S. government securities with maturities of between one
and three years
|
|
|
26,767 |
|
|
|
144,317 |
|
| |
|
|
|
|
|
|
| |
Total long-term investments
|
|
|
93,622 |
|
|
|
210,298 |
|
| |
|
|
|
|
|
|
| |
|
$ |
228,057 |
|
|
$ |
294,098 |
|
| |
|
|
|
|
|
|
These available-for-sale securities are accounted for at their
fair value, and unrealized gains and losses on these securities
are reported as a separate component of shareholders’
equity. At December 31, 2004, the unrealized gain on
available-for-sale securities amounted to approximately
$171,000. At December 31, 2003, the unrealized gain on
available-for-sale securities amounted to approximately
$643,000. We utilized specific identification in computing
realized gains and losses on the sale of investments. Realized
gains and losses are reported in other income and expense, and
were not significant for the years ended December 31, 2004,
2003 or 2002.
Note G — Business and Credit Risk
Financial instruments, which potentially subject us to
concentration of credit risk, consist principally of cash,
investments and trade receivables. We invest our excess cash in
interest-bearing deposits with major banks, United States
government securities, high-quality commercial paper and money
market funds. At times our cash balances may be in excess of the
FDIC insurance limits.
With respect to trade receivables, we sell network signaling,
switching solutions, communications software solutions, and
contact center systems worldwide primarily to telephone
operating companies, equipment manufacturers and corporations
that use our 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.
Generally, payment terms stipulate payment within 90 days
of shipment and currently, we do not engage in leasing or other
customer financing arrangements. Many of our international sales
are secured with import insurance or letters of credit to
mitigate credit risk. Although we have processes in place to
monitor and mitigate credit risk, there can be no assurance that
such programs will be effective in eliminating such risk.
Historically, credit losses have been within management’s
expectations. Our exposure to credit risk has increased as a
result of weakened financial conditions in certain market
segments such as the Competitive Local Exchange Carrier segment.
Credit losses for such customers
F-28
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
have been provided for in the financial statements. Future
losses, if incurred, could harm our business and have a material
adverse effect on our financial position, results of operations
or cash flows.
Historically, a limited number of customers have accounted for a
significant percentage of our network signaling revenues in each
fiscal quarter. We anticipate that our operating results in any
given period will continue to depend upon revenues from a small
number of customers.
Sales to the wireless market have accounted for over 50% of our
network signaling revenues. We expect that our sales of network
signaling products and services will continue to account for a
substantial majority of our revenues.
We conduct business in a number of foreign countries, with
certain transactions denominated in local currencies,
principally Euros and British Pounds. In certain instances where
we have entered into contracts that are denominated in foreign
currencies, we have obtained foreign currency forward contracts
to offset the impact of currency rates on accounts receivable.
These contracts are used to reduce our risk associated with
exchange rate movements, as gains and losses on these contracts
are intended to offset exchange losses and gains on underlying
exposures. Changes in the fair value of these forward contracts
are recorded immediately in earnings. See
Note I — Financial Instruments.
We do not enter into derivative instrument transactions for
trading or speculative purposes. The purpose of our foreign
currency management policy is to minimize the effect of exchange
rate fluctuations on certain foreign denominated anticipated
cash flows. The terms of currency instruments used for hedging
purposes are consistent with the timing of the transactions
being hedged. We may continue to use foreign currency forward
contracts to manage foreign currency exchange risks in the
future.
There have been no borrowings under our variable rate credit
facilities. All of our outstanding long-term debt is fixed rate
and not subject to interest rate fluctuation.
Note H — Related Party Transactions
As of December 31, 2004, our principal shareholder and our
Chairman of the Board of Directors (the “Chairman”)
and his family owned an aggregate of approximately 17% of our
outstanding stock. We paid director’s fees and expenses to
the Chairman of $51,000, $59,000 and $55,000 in 2004, 2003 and
2002, respectively.
During 2003, we entered into a consulting agreement through our
majority owned subsidiary, Santera, with Marty Kaplan, formerly
a Director and Chairman of the Board of Santera and currently a
director of both Santera and Tekelec. Under the terms of the
agreement, Mr. Kaplan receives cash compensation of
$75,000 per annum through June 2005 and one-time
non-statutory options (the “Options”) to
purchase 50,000 shares of our common stock under our
2003 Stock Option Plan. The Options vested cumulatively in
quarterly installments. During 2004 and 2003 we paid directors
fees and expenses to Mr. Kaplan of $134,000 and $13,000,
respectively.
Our Japanese subsidiary purchased, for resale, products totaling
approximately $1.5 million under a distribution arrangement
with an affiliate in which two of our directors are directors
and shareholders. In August 2002, the Japanese subsidiary was
sold as part of the disposition of NDD (see Note C). There
were no significant transactions with respect to affiliates
during 2004 or 2003.
Note I — Financial Instruments
As discussed in Note G, we use derivative instruments, such
as forward contracts, to manage our exposure to market risks
such as interest rate and foreign exchange risks. In accordance
with the provisions of SFAS No. 133, “Accounting
for Derivative Instruments and Hedging Activities” (adopted
in fiscal 2001) and Statement of Financial Accounting Standards
No. 138, “Accounting for Certain Derivative
Instruments and
F-29
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Certain Hedging Activities — an amendment of FASB
Statement No. 133,” we record derivative instruments
as assets or liabilities on the Consolidated Balance Sheet,
measured at fair value.
Corresponding gains and losses on these contracts, as well as
gains and losses on the items being hedged, are included as a
component of other income and expense in our consolidated
statement of operations. When we elect not to designate a
derivative instrument and hedged item as a fair value hedge at
inception of the hedge, or the relationship does not qualify for
fair value hedge accounting treatment under SFAS Nos.
133/138, the full amount of changes in the fair value of the
derivative instrument will be recognized in the consolidated
financial statements.
As of December 31, 2004, we had three foreign currency
contracts outstanding; one to sell approximately 14,400,000
Euros, a second to sell approximately 400,000 GBP, and a third
to sell approximately 1,000,000 CAD. Each of these three
contracts had an expiration date of February 1, 2005, and
were purchased in order to hedge certain receivables denominated
in those currencies. As of December 31, 2003, we had one
foreign currency forward contract outstanding to sell
approximately 1,700,000 Euros in order to hedge certain
receivables denominated in that currency. This contract had an
expiration date of January 7, 2004 and did not meet
specific hedge accounting requirements. At December 31,
2004 and 2003, our loss from foreign currency forward contracts
was $2,568,000 and $624,000, respectively, which was generally
offset by the remeasurement gain on the underlying receivables.
We may continue to use foreign currency forward contracts to
manage foreign currency exchange risks in the future.
F-30
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note J — Income Taxes
The provision (benefit) for income taxes consists of the
following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
$ |
26,062 |
|
|
$ |
10,112 |
|
|
$ |
8,124 |
|
| |
|
State
|
|
|
3,062 |
|
|
|
1,771 |
|
|
|
3,100 |
|
| |
|
Foreign
|
|
|
1,039 |
|
|
|
1,216 |
|
|
|
824 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal
|
|
|
3,505 |
|
|
|
278 |
|
|
|
(4,410 |
) |
| |
|
State
|
|
|
(343 |
) |
|
|
223 |
|
|
|
502 |
|
| |
|
Foreign
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total Continuing Operations
|
|
|
33,325 |
|
|
|
13,600 |
|
|
|
8,140 |
|
| |
|
|
|
|
|
|
|
|
|
|
Discontinued Operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current income taxes
|
|
|
— |
|
|
|
— |
|
|
|
(2,920 |
) |
| |
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
213 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total Discontinued Operation
|
|
|
— |
|
|
|
— |
|
|
|
(2,707 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Disposal of Discontinued Operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current income taxes
|
|
|
— |
|
|
|
— |
|
|
|
11,043 |
|
| |
Deferred income taxes
|
|
|
— |
|
|
|
— |
|
|
|
2,302 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total Disposal of Discontinued Operation
|
|
|
— |
|
|
|
— |
|
|
|
13,345 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total
|
|
$ |
33,325 |
|
|
$ |
13,600 |
|
|
$ |
18,778 |
|
| |
|
|
|
|
|
|
|
|
|
Income before income tax provision is principally comprised of
domestic operations and less than 5% for foreign operations for
periods presented.
F-31
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of temporary differences that gave rise to
deferred taxes at December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,876 |
|
|
$ |
994 |
|
| |
Inventory write downs
|
|
|
2,158 |
|
|
|
3,885 |
|
| |
Capitalized organization charges
|
|
|
4,134 |
|
|
|
3,492 |
|
| |
Depreciation and amortization
|
|
|
5,122 |
|
|
|
(1,558 |
) |
| |
Research and development credit carry forward
|
|
|
4,512 |
|
|
|
1,231 |
|
| |
Foreign tax credit carry forward
|
|
|
— |
|
|
|
5,693 |
|
| |
Accrued liabilities
|
|
|
2,029 |
|
|
|
10,442 |
|
| |
Warranty accrual
|
|
|
1,571 |
|
|
|
1,948 |
|
| |
Installment sale
|
|
|
— |
|
|
|
(7,569 |
) |
| |
Other
|
|
|
1,581 |
|
|
|
2,594 |
|
| |
Net operating loss carry forward
|
|
|
120,885 |
|
|
|
63,413 |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax assets
|
|
|
143,868 |
|
|
|
84,565 |
|
| |
|
|
|
|
|
|
| |
Valuation allowance for deferred tax assets
|
|
|
(82,316 |
) |
|
|
(71,731 |
) |
| |
|
|
|
|
|
|
| |
Total net deferred tax asset
|
|
$ |
61,552 |
|
|
$ |
12,834 |
|
| |
|
|
|
|
|
|
|
Deferred tax assets of continuing operations:
|
|
|
|
|
|
|
|
|
| |
Current portion
|
|
$ |
15,804 |
|
|
$ |
4,958 |
|
| |
Long-term portion
|
|
|
45,748 |
|
|
|
7,876 |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax assets of continuing operations
|
|
|
61,552 |
|
|
|
12,834 |
|
| |
|
|
|
|
|
|
| |
|
Total net deferred tax assets
|
|
$ |
61,552 |
|
|
$ |
12,834 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Acquisition-related intangible assets
|
|
$ |
19,586 |
|
|
$ |
790 |
|
| |
Current portion
|
|
|
— |
|
|
|
— |
|
| |
Long term portion
|
|
|
19,586 |
|
|
|
790 |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax liability
|
|
$ |
19,586 |
|
|
$ |
790 |
|
| |
|
|
|
|
|
|
The provision for income taxes does not include any benefit from
the losses generated by Santera because its losses cannot be
included on our consolidated federal tax return inasmuch as our
ownership interest in Santera does not meet the threshold to
consolidate under income tax rules and regulations, and a full
valuation allowance has been established against Santera’s
deferred tax assets due to uncertainties surrounding the timing
and realization of the benefits from Santera’s tax
attributes in future tax returns. Accordingly, we have provided
an $82.3 million valuation allowance against the deferred
tax assets of Santera as of December 31, 2004. Realization
of the remaining deferred tax assets of $61.6 million is
dependent on our generating sufficient taxable income in the
future. Although realization is not assured, we believe it is
more likely than not that the net deferred tax assets will be
realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates
of future taxable income are reduced. In connection with the
acquisition of Taqua, VocalData and Steleus in 2004, we recorded
deferred income tax liabilities of $21.6 million associated
with certain intangible assets. These deferred income tax
liabilities are amortized on a
F-32
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
straight-line basis and amounted to $19.6 million at
December 31, 2004. In addition, the acquisitions of Taqua,
VocalData and Steleus resulted in deferred tax assets of
approximately $59.1 million related primarily to acquired
net operating loss carryforwards. The deferred tax assets
related to these acquisitions are based on the purchase price
allocation and may be adjusted upon completion of final tax
returns through the acquisition dates.
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, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Federal statutory provision
|
|
$ |
17,142 |
|
|
|
|
|
|
$ |
3,139 |
|
|
|
|
|
|
$ |
8,418 |
|
|
|
|
|
|
State taxes, net of federal benefit
|
|
|
2,848 |
|
|
|
|
|
|
|
1,372 |
|
|
|
|
|
|
|
1,259 |
|
|
|
|
|
|
Research and development credits
|
|
|
(2,286 |
) |
|
|
|
|
|
|
(406 |
) |
|
|
|
|
|
|
(999 |
) |
|
|
|
|
|
Nontaxable foreign source income
|
|
|
(1,583 |
) |
|
|
|
|
|
|
(441 |
) |
|
|
|
|
|
|
(231 |
) |
|
|
|
|
|
Acquisition-related intangible assets, net of related deferred
income tax liability
|
|
|
5,297 |
|
|
|
|
|
|
|
2,231 |
|
|
|
|
|
|
|
(280 |
) |
|
|
|
|
|
Foreign taxes and other
|
|
|
1,322 |
|
|
|
|
|
|
|
(646 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
|
|
|
Increase in valuation allowance for Santera
|
|
|
10,585 |
|
|
|
|
|
|
|
8,351 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total income tax provision for continuing operations
|
|
|
33,325 |
|
|
|
68.0 |
% |
|
|
13,600 |
|
|
|
151.7 |
% |
|
|
8,140 |
|
|
|
33.8 |
% |
|
Income tax benefit (expense) for discontinued operation
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(2,707 |
) |
|
|
|
|
|
Income tax provision for disposal of discontinued operation
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
13,345 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total income tax provision
|
|
$ |
33,325 |
|
|
|
68.0 |
% |
|
$ |
13,600 |
|
|
|
151.7 |
% |
|
$ |
18,778 |
|
|
|
31.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2004, we had available $2.0 million of
state research and development credit carryforwards which will
expire, if unused, beginning in 2005. We also had
$292.5 million of Federal, State, and Foreign net operating
loss carryforwards. The amount of net operating loss
carryforwards related to foreign jurisdictions is
$17.6 million. Our net operating losses will expire, if
unused, beginning in 2010.
We have not provided for federal income taxes on
$2.8 million of undistributed earnings of our foreign
subsidiaries that have been reinvested in their operations.
Note K — Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Raw materials
|
|
$ |
20,972 |
|
|
$ |
15,810 |
|
|
Work in process
|
|
|
4,147 |
|
|
|
128 |
|
|
Finished goods
|
|
|
8,535 |
|
|
|
5,496 |
|
| |
|
|
|
|
|
|
| |
|
$ |
33,654 |
|
|
$ |
21,434 |
|
| |
|
|
|
|
|
|
F-33
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note L — Property and Equipment
Property and equipment consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Manufacturing and development equipment
|
|
$ |
82,120 |
|
|
$ |
61,400 |
|
|
Furniture and office equipment
|
|
|
44,599 |
|
|
|
29,464 |
|
|
Demonstration equipment
|
|
|
4,016 |
|
|
|
2,465 |
|
|
Leasehold improvements
|
|
|
10,992 |
|
|
|
8,989 |
|
| |
|
|
|
|
|
|
| |
|
|
141,727 |
|
|
|
102,318 |
|
| |
Less, accumulated depreciation and amortization
|
|
|
(111,110 |
) |
|
|
(80,146 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
30,617 |
|
|
$ |
22,172 |
|
| |
|
|
|
|
|
|
Note M — Goodwill
The changes in the carrying amount of goodwill for the year
ended December 31, 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Switching | |
|
Communications | |
|
|
|
|
| |
|
Solutions | |
|
Software | |
|
Contact | |
|
|
| |
|
Group | |
|
Solutions Group | |
|
Center | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Balance at December 31, 2003
|
|
$ |
59,205 |
|
|
$ |
— |
|
|
$ |
9,698 |
|
|
$ |
68,903 |
|
|
Addition due to the acquisition of Taqua
|
|
|
32,642 |
|
|
|
— |
|
|
|
— |
|
|
|
32,642 |
|
|
Addition due to the acquisition of VocalData
|
|
|
6,384 |
|
|
|
— |
|
|
|
— |
|
|
|
6,384 |
|
|
Addition due to the acquisition of Steleus
|
|
|
— |
|
|
|
21,434 |
|
|
|
— |
|
|
|
21,434 |
|
|
Revaluation of goodwill based on actual transaction related costs
|
|
|
(631 |
) |
|
|
— |
|
|
|
— |
|
|
|
(631 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
97,600 |
|
|
$ |
21,434 |
|
|
$ |
9,698 |
|
|
$ |
128,732 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Note N — Intangible Assets
Intangible assets consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Purchased technology
|
|
$ |
133,124 |
|
|
$ |
79,162 |
|
|
Other
|
|
|
18,790 |
|
|
|
11,700 |
|
| |
|
|
|
|
|
|
| |
|
|
151,914 |
|
|
|
90,862 |
|
| |
Less, accumulated amortization
|
|
|
(68,376 |
) |
|
|
(56,744 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
83,538 |
|
|
$ |
34,118 |
|
| |
|
|
|
|
|
|
F-34
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The identifiable intangible assets are amortized over their
estimated useful lives. The estimated aggregate amortization
expense for intangibles for the subsequent years is:
| |
|
|
|
|
| For the Years Ending December 31, |
|
(Thousands) | |
| |
|
| |
|
2005
|
|
$ |
10,929 |
|
|
2006
|
|
|
8,301 |
|
|
2007
|
|
|
6,999 |
|
|
2008
|
|
|
6,670 |
|
|
2009
|
|
|
6,575 |
|
|
Thereafter
|
|
|
44,064 |
|
| |
|
|
|
|
Total
|
|
$ |
83,538 |
|
| |
|
|
|
Note O — Lines of Credit and Borrowings
We have a number of credit facilities with various financial
institutions. As of December 31, 2004 we had a
$20.0 million line of credit which was collateralized by a
stock pledge of our holdings in Santera, bore interest at or, in
some cases, below the lender’s prime rate (5.25% at
December 31, 2004), which expired on February 15,
2005. There were no borrowings under this credit facility. The
commitment fees paid on the unused line of credit were not
significant. In December 2004, we secured a $30.0 million
line of credit collateralized by a pledged account where our
investments are held with an intermediary financial institution.
This line is intended to replace our $20.0 million line
that expired in February. The new credit facility bears interest
at, or in some cases below, the lender’s prime rate (5.25%
at December 31, 2004), and expires on December 15,
2005, if not renewed. In the event that we borrow against this
line, we will maintain collateral in the amount of the borrowing
in the pledged account. There have been no borrowings under this
facility. The commitment fees paid on the unused line of credit
were not significant. Under the terms of each of these credit
facilities, we are required to maintain certain financial
covenants. We were in compliance with these covenant
requirements as of December 31, 2004.
As of December 31, 2004, Santera had two notes payable: one
note had an outstanding balance of $100,000 and was
collateralized by the assets purchased thereunder, bore interest
at 10% and was paid in full upon maturity in February 2005; the
second note for $2.5 million was collateralized by the
assets purchased under the note and substantially all of
Santera’s assets, excluding the assets collateralized under
the $100,000 note, bears interest at 6.36%, and matures in
November 2005. Under the terms of each of these credit
facilities, we are required to maintain certain financial
covenants. We were in compliance with these covenant
requirements as of December 31, 2004.
Taqua has a $1.0 million credit facility, which is
collateralized by substantially all assets of Taqua, bears
interest at 1.0% above the lenders prime rate (5.25% at
December 31, 2004) and expires in April 2005. Under the
terms of this credit facility, we are required to maintain
certain financial covenants. Taqua was not in compliance with
these covenants as of December 31, 2004, due to the failure
of Taqua to meet certain financial reporting requirements to the
financial institution. As a result of our acquisition of Taqua,
the line will not be renewed upon expiration and Taqua’s
financing needs will be met with our new consolidated credit
facility. There are no outstanding borrowings on the Taqua
credit facility.
Note P — Long-Term Convertible Debt
On November 2, 1999 we completed a private placement of
$135.0 million aggregate principal amount at maturity of
3.25% convertible subordinated discounted notes due in
2004. The notes were issued at 85.35% of their face amount
(equivalent to gross proceeds at issuance of approximately
$115.2 million before discounts and expenses). The gross
proceeds at issuance before discounts and expenses also included
approximately
F-35
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$15.2 million from the sale of notes issued upon the
initial purchasers’ exercise in full of their
over-allotment option.
The notes were issued with a 14.65% discount and carried a cash
interest (coupon) rate of 3.25%, payable on May 2 and
November 2 of each year, commencing on May 2, 2000. The
payment of the principal amount of the notes at maturity
together with cash interest paid over the term of the notes
represents a yield-to-maturity of 6.75% per year, computed
on a semi-annual bond equivalent basis. Interest expense was
computed based on the accretion of the discount, the accrual of
the cash interest payment and the amortization of expenses
related to the offering of these notes on a straight-line basis,
and amounted to $6.2 million and $9.2 million for 2003
and 2002, respectively.
The discounted notes were called and subsequently redeemed on
July 19, 2003.
In June 2003, we issued and sold $125 million aggregate
principal amount of our 2.25% Senior Subordinated
Convertible Notes due 2008 (the “Notes”). The Notes
were issued in a private offering in reliance on
Section 4(2) of the Securities Act of 1933, as amended. The
initial purchaser of the Notes was Morgan Stanley & Co.
Incorporated, which resold the Notes to qualified institutional
buyers pursuant to Rule 144A promulgated under the
Securities Act. The aggregate offering price of the Notes was
$125 million and the aggregate proceeds to Tekelec were
approximately $121,184,000, after expenses. The Notes mature on
June 15, 2008, and are convertible prior to the close of
business on their maturity date into shares of our common stock
at a conversion rate of 50.8906 shares per $1,000 principal
amount of the Notes, subject to adjustment in certain
circumstances. There are no financial covenants related to the
Notes and there are no restrictions on us paying dividends,
incurring debt or issuing or repurchasing securities.
The Notes carry a cash interest (coupon) rate of 2.25%,
payable on June 15 and December 15 of each year, commencing on
December 15, 2003. Interest expense was $2.8 million
and $1.5 million for 2004 and 2003, respectively.
Note Q — Commitments and Contingencies
We lease our office and manufacturing facilities together with
certain office equipment under operating lease agreements. Lease
terms generally range from one month to ten years; certain
building leases contain options for renewal for additional
periods and are subject to increases up to 10% every
24 months.
Our Steleus France subsidiary leases office equipment under two
capital leases that are in effect through July 2005 and July
2006 and require minimum lease payments of $245,000 in 2005 and
$78,000 in 2006.
Rent expense, including any applicable rent escalations and rent
abatements, is recognized on a straight line basis. Total rent
expense was $10.2 million, $8.6 million and
$7.1 million for 2004, 2003 and 2002, respectively.
Minimum annual non-cancelable lease commitments at
December 31, 2004 are:
| |
|
|
|
|
| For the Years Ending December 31, |
|
(Thousands) | |
| |
|
| |
|
2005
|
|
$ |
9,529 |
|
|
2006
|
|
|
8,295 |
|
|
2007
|
|
|
8,215 |
|
|
2008
|
|
|
7,908 |
|
|
2009
|
|
|
6,313 |
|
|
Thereafter
|
|
|
18,742 |
|
| |
|
|
|
| |
|
$ |
59,002 |
|
| |
|
|
|
F-36
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| |
Indemnities, Commitments and Guarantees |
In the normal course of our business, we make certain
indemnities, commitments and guarantees under which we may be
required to make payments in relation to certain transactions.
These indemnities, commitments and guarantees include, among
others, intellectual property indemnities to our customers in
connection with the sale of our products and licensing of our
technology, indemnities for liabilities associated with the
infringement of other parties’ technology based upon our
products and technology, guarantees of timely performance of our
obligations, indemnities related to the reliability of our
equipment, and indemnities to our directors and officers to the
maximum extent permitted by law. The duration of these
indemnities, commitments and guarantees varies, and, in certain
cases, is indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of
the maximum potential future payments that we could be obligated
to make. We have not recorded a liability for these indemnities,
commitments or guarantees in the accompanying balance sheets
because future payment is not probable.
From time to time, various claims and litigation are asserted or
commenced against us arising from or related to contractual
matters, intellectual property matters, product warranties and
personnel and employment disputes. As to such claims and
litigation, we can give no assurance that we will prevail.
However, we currently do not believe that the ultimate outcome
of any pending matters, other than possibly the Bouygues
litigation as described below, will have a material adverse
effect on our consolidated financial position, results of
operations or cash flows.
Bouygues Telecom, S.A. vs. Tekelec
On February 24, 2005, Bouygues Telecom, S.A., a French
telecommunications operator, filed a complaint against Tekelec
in the United States District Court for the Central District of
California seeking damages for economic losses caused by a
service interruption Bouygues Telecom experienced in its
cellular telephone network in November 2004. The amount of
damages sought by Bouygues Telecom is $81 million plus
unspecified punitive damages, and attorneys’ fees. In its
complaint, Bouygues Telecom alleges that the service
interruption was caused by the malfunctioning of certain virtual
home location register (HLR) servers (i.e., servers storing
information about subscribers to a mobile network) provided by
Tekelec to Bouygues Telecom.
Bouygues Telecom seeks damages against Tekelec based on causes
of action for product liability, negligence, breach of express
warranty, negligent interference with contract, interference
with economic advantage, intentional misrepresentation,
negligent misrepresentation, fraudulent concealment, breach of
fiduciary duty, equitable indemnity, fraud in the inducement of
contract, and unfair competition under California
Business & Professionals Code section 17200.
Although Tekelec is currently evaluating the claims asserted by
Bouygues Telecom, Tekelec intends to defend vigorously against
the action and believes Bouygues Telecom’s claims could not
support the damage figures alleged in the complaint. At this
stage of the litigation, management cannot assess the likely
outcome of this matter and it is possible that an unfavorable
outcome could have a material adverse effect on our consolidated
financial position, results of operations or cash flows.
Lemelson Medical, Education and Research Foundation, Limited
Partnership vs. Tekelec
In March 2002, the Lemelson Medical, Education &
Research Foundation, Limited Partnership (“Lemelson”)
filed a complaint against thirty defendants, including Tekelec,
in the United States District Court for the District of Arizona.
The complaint alleges that all defendants make, offer for sale,
sell, import, or have imported products that infringe eighteen
patents assigned to Lemelson, and the complaint also alleges
that the defendants use processes that infringe the same
patents. The patents at issue relate to computer image analysis
technology and automatic identification technology.
F-37
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Lemelson has not identified the specific Tekelec products or
processes that allegedly infringe the patents at issue. Several
Arizona lawsuits, including the lawsuit in which Tekelec is a
named defendant, involve the same patents and have been stayed
pending a non-appealable resolution of a lawsuit involving the
same patents in the United States District Court for the
District of Nevada. On January 23, 2004, the Court in the
District of Nevada case issued an Order finding that certain
Lemelson patents covering bar code technology and machine vision
technology were: (1) unenforceable under the doctrine of
prosecution laches; (2) not infringed by any of the accused
products sold by any of the eight plaintiffs; and
(3) invalid for lack of written description and enablement.
In September 2004, Lemelson filed its appeal brief with the
Court of Appeals for the Federal Circuit for the related Nevada
litigation, and in December 2004, the Defendants in the related
Nevada litigation filed their reply brief. Tekelec currently
believes that the ultimate outcome of the lawsuit will not have
a material adverse effect on our financial position, results of
operations or cash flows.
Syndia Corporation
In January 2002, Syndia Corporation (“Syndia”) sent a
letter to Tekelec accusing Tekelec of infringing two patents and
offering to license these and other patents to Tekelec. The
patents at issue relate to integrated circuit technology. Syndia
has not identified the specific Tekelec products or processes
that allegedly infringe the patents at issue, and Tekelec is
currently investigating which products and/or processes might be
subject to Syndia’s claims. Tekelec currently believes that
the ultimate outcome of the lawsuit will not have a material
adverse effect on our financial position, results of operations
or cash flows.
Note R — Stock Options, Restricted Stock Units
and Employee Benefit Plans
As of December 31, 2004, we have six stock-based employee
compensation plans. Under five of the stock option plans with
maximum terms of ten years there are 45.6 million shares of
our common stock authorized and reserved for issuance. The terms
of options granted under these option plans are determined at
the time of grant, the options generally vest ratably over a
one- to five-year period, and in any case the option price may
not be less than the fair market value per share on the date of
grant. Both incentive stock options and nonstatutory stock
options can be issued under the option plans. Two of the plans
allow for restricted stock and restricted stock units to be
issued.
On July 21, 2004, seventy-two new Tekelec employees hired
throughout the second quarter of 2004 were granted employment
inducement stock options to purchase a total of
437,950 shares of Tekelec common stock, pursuant to NASDAQ
Marketplace Rule 4350(i)(1)(A)(iv). The number of shares
involved in these grants amounts to less than 1% of the
outstanding common shares of Tekelec. All option grants have an
exercise price equal to Tekelec’s closing price on
July 21, 2004 of $16.32, and will vest over a four-year
period. The option grants were made under Tekelec’s 2004
Equity Incentive Plan for New Employees and met the
“employee inducement” exception to the Nasdaq rules
requiring shareholder approval of equity-based incentive plans.
On October 25, 2004, eighty-five new Tekelec employees
hired throughout the third quarter of 2004 were granted
employment inducement stock options to purchase a total of
537,550 shares of Tekelec common stock, pursuant to NASDAQ
Marketplace Rule 4350(i)(1)(A)(iv). The number of shares
involved in these grants amounts to less than 1% of the
outstanding common shares of Tekelec. All option grants have an
exercise price equal to Tekelec’s closing price on
October 25, 2004 of $18.76, and will vest over a four-year
period. The option grants were made under Tekelec’s 2004
Equity Incentive Plan for New Employees and met the
“employee inducement” exception to the Nasdaq rules
requiring shareholder approval of equity-based incentive plans
As further described in Note B, during 2004 we issued
restricted stock units (“RSUs”) for
116,510 shares to employees of VocalData and Steleus
resulting in deferred stock-based compensation of approximately
$2.0 million. These RSUs vest over a one-year period and
are being expensed as compensation
F-38
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expense over the vesting period. For the year ended
December 31, 2004, we had $432,000 of compensation expense
related to the amortization of deferred stock-based compensation
for RSUs.
In connection with the acquisition of Taqua (see
Note B — Acquisitions), we assumed unvested
options resulting in deferred stock-based compensation of
$4.2 million. For the year ended December 31, 2004, we
had amortization of deferred stock based compensation amounting
to $1.3 million.
We formed a Santera Advisory Board in 2004 with three
non-employee members. As part of this arrangement, we issued
7,500 options to these advisors. These options vest over one
year and are being accounted for under FIN 28,
“Accounting for Stock Appreciation Rights and Other
Variable Stock Option Award Plans.” We value the options
using the Black-Scholes model and expense the vested amounts
over the vesting period. For the year ended December 31,
2004, our consulting expense related to the options was
approximately $93,000 and the options were fully vested.
We also have an Employee Stock Purchase Plan (ESPP), with a term
of ten years, which expires in the year 2006, and under which
1.8 million shares of our common stock have been authorized
and reserved for issuance. Eligible employees may authorize
payroll deductions of up to 10% of their compensation to
purchase shares of common stock at 85% of the lower of the
market price per share at the beginning or end of each six-month
offering period.
A summary of the status of our stock options, as of
December 31, 2004, 2003 and 2002, and the changes during
the year ended on those dates are presented below (shares in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Wgtd. Avg. | |
|
|
|
Wgtd. Avg. | |
|
|
|
Wgtd. Avg. | |
| |
|
Shares | |
|
Exer. Price | |
|
Shares | |
|
Exer. Price | |
|
Shares | |
|
Exer. Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at beginning of year
|
|
|
18,054 |
|
|
$ |
15.91 |
|
|
|
14,551 |
|
|
$ |
20.18 |
|
|
|
14,355 |
|
|
$ |
21.17 |
|
|
Granted — price equals fair value
|
|
|
8,870 |
|
|
|
18.14 |
|
|
|
7,221 |
|
|
|
11.20 |
|
|
|
4,046 |
|
|
|
17.15 |
|
|
Granted — price greater than fair value
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
|
|
19.21 |
|
|
Granted — price less than fair value
|
|
|
492 |
|
|
|
9.42 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercised
|
|
|
(2,776 |
) |
|
|
11.30 |
|
|
|
(644 |
) |
|
|
7.92 |
|
|
|
(635 |
) |
|
|
4.51 |
|
|
Cancelled
|
|
|
(1,593 |
) |
|
|
16.04 |
|
|
|
(3,074 |
) |
|
|
26.76 |
|
|
|
(3,335 |
) |
|
|
23.61 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year-end
|
|
|
23,047 |
|
|
|
17.20 |
|
|
|
18,054 |
|
|
|
15.91 |
|
|
|
14,551 |
|
|
|
20.18 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
|
11,004 |
|
|
|
|
|
|
|
9,411 |
|
|
|
|
|
|
|
7,830 |
|
|
|
|
|
|
Options available for future grant
|
|
|
2,434 |
|
|
|
|
|
|
|
5,406 |
|
|
|
|
|
|
|
6,539 |
|
|
|
|
|
|
Weighted average fair value of options granted during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Exercise price equals fair value at grant date
|
|
$ |
8.38 |
|
|
|
|
|
|
$ |
7.48 |
|
|
|
|
|
|
$ |
12.16 |
|
|
|
|
|
| |
Exercise price greater than fair value at grant date
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
10.07 |
|
|
|
|
|
F-39
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2004 (shares in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
Number | |
|
Wgtd. Avg. | |
|
|
|
Number | |
|
|
| |
|
Outstanding as of | |
|
Remaining | |
|
Wgtd. Avg. | |
|
Exercisable as of | |
|
Wgtd. Avg. | |
| |
|
December 31, | |
|
Contractual | |
|
Exercise | |
|
December 31, | |
|
Exercise | |
| Range of Exercise Price |
|
2004 | |
|
Life | |
|
Price | |
|
2004 | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 2.32 to $ 4.66
|
|
|
624 |
|
|
|
3.36 |
|
|
$ |
3.61 |
|
|
|
505 |
|
|
$ |
3.73 |
|
|
4.94 to 9.35
|
|
|
2,458 |
|
|
|
4.91 |
|
|
|
8.48 |
|
|
|
931 |
|
|
|
8.35 |
|
|
9.56 to 12.70
|
|
|
3,759 |
|
|
|
5.01 |
|
|
|
11.97 |
|
|
|
1,745 |
|
|
|
11.43 |
|
|
12.94 to 17.94
|
|
|
4,108 |
|
|
|
5.41 |
|
|
|
16.40 |
|
|
|
1,101 |
|
|
|
15.54 |
|
|
18.08 to 18.80
|
|
|
5,288 |
|
|
|
5.46 |
|
|
|
18.59 |
|
|
|
975 |
|
|
|
18.62 |
|
|
19.21 to 25.19
|
|
|
4,267 |
|
|
|
5.70 |
|
|
|
21.08 |
|
|
|
3,322 |
|
|
|
21.31 |
|
|
25.31 to 2,739
|
|
|
2,543 |
|
|
|
5.97 |
|
|
|
28.56 |
|
|
|
2,425 |
|
|
|
28.64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
23,047 |
|
|
|
|
|
|
|
|
|
|
|
11,004 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123, “Accounting for Stock-Based
Compensation” (SFAS 123), encourages but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value for awards granted
subsequent to December 31, 1995. We have chosen to continue
to account for stock-based compensation using the intrinsic
value method prescribed in related interpretations. However, in
accordance with the disclosure only requirements of
SFAS 123, we have computed the fair value of our stock
option grants using the modified Black-Scholes American Option
Pricing Model (“the “Black-Scholes Model”) with
the following assumptions: (i) dividend yield of 0%,
(ii) expected volatility of 60%, 82% and 92%, respectively,
for 2004, 2003 and 2002, (iii) weighted average risk-free
interest rates of 2.8%, 2.2% and 3.7% for 2004, 2003 and 2002,
respectively, (iv) average time to exercise of 3.3, 4.1 and
4.9 years for 2004, 2003 and 2002, respectively, and
(v) assumed forfeiture rate of 32%, 52% and 50% for 2004,
2003 and 2002, respectively.
The Black-Scholes Model input assumptions included: (a) an
average time to exercise determined by an outside consultant by
(1) measuring the long-run average annual exercise rate
based on our employee stock option exercise data for all
employee stock options granted between 1984 and 2004 and
(2) calculating the average time to exercise implied by
this average annual exercise rate; (b) an interest rate
equal to the interest rate on U.S. government debt
instruments with maturities approximately equal to the
options’ expected time to exercise; (c) an expected
dividend yield of 0%; and (d) a volatility estimate based
on an outside consultant’s analysis of (1) the
standard deviation of the historical rates of return on our
common stock during the 3-year and 5-year periods ending
December 31, 2004, (2) a forward forecast of our
volatility assuming a continuation of the historical pattern of
our stock’s monthly stock price volatility during the
3-year and 5-year periods and (3) the volatility of our
stock implied by the prices of publicly traded call options on
our stock in January 2005. The forfeiture assumption is based on
an outside consultant’s analysis of the monthly forfeiture
rates for our employee stock options granted between January
2000 and June 2003. There can be no assurance that the value
realized by an optionee will be at or near the value estimated
by the Black-Scholes Model. See Note A —
“Stock-Based Compensation” for the pro-forma impacts
of applying SFAS 123.
In May 2001, we amended the original terms of the stock option
grants of our former Chief Executive Officer to provide that in
the event of his Qualifying Retirement (as defined in the 1994
Stock Option Plan then in effect) the exercise period of his
stock options following his termination of employment would be
extended from 90 days (as provided in the original stock
option grant), to the remaining contractual term of the stock
options. In November 2002, the Chief Executive Officer announced
his plans to retire in February 2003 which met the requirement
for a Qualifying Retirement. In accordance with FIN 44, we
recorded a $5.3 million non-cash stock-based compensation
charge to selling, general and administrative expense for the
F-40
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
year ended December 31, 2002 to reflect the difference
between the stock option exercise price (average of $21.43) and
the fair market value of our common stock of $32.46 on the date
of the May 2001 modification. In addition to the stock option
amendment, we agreed to pay to the former Chief Executive
Officer a one-time cash severance payment of $300,000 upon his
retirement and post-retirement health benefits for life with an
estimated present value of $304,000. These amounts have been
fully accrued for and reflected in selling, general and
administrative expense for the year ended December 31, 2003.
During 2004, 2003 and 2002, approximately 160,000, 89,000 and
150,000 shares, respectively, were purchased under our ESPP
at weighted average exercise prices of $14.26, $9.64, and $6.83,
respectively. At December 31, 2004, 2003 and 2002, there
were approximately 552,000, 712,000, and 200 shares,
respectively, available for future grants. The weighted average
fair values of ESPP shares granted in 2004, 2003 and 2002 were
$5.40, $4.37, and $3.30 per share, respectively. In
accordance with the disclosure only requirements of
SFAS 123, we have computed the fair value of our ESPP
shares using the Black-Scholes Model with the following
assumptions: (i) dividend yield of 0%, (ii) expected
volatility of 60%, 84% and 90% respectively for 2004, 2003 and
2002, (iii) weighted average risk-free interest rates of
3.2%, 2.1% and 4.1% for 2004, 2003 and 2002, respectively, and
(iv) expected term of 0.5 years.
We have a 401(k) tax-deferred savings plan under which eligible
employees may authorize from 2% to 50% of their compensation to
be invested in employee-elected investment funds managed by an
independent trustee and under which we may contribute matching
funds of up to 50% of the employees’ first 12% of payroll
deductions. During 2004, 2003 and 2002, our contributions
amounted to $4.4 million, $2.9 million and
$3.1 million, respectively.
Note S — Earnings Per Share
The following table provides a reconciliation of the numerators
and denominators of the basic and diluted per-share computations
for the years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Income | |
|
Shares | |
|
Per-Share | |
| |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| |
|
| |
|
| |
|
| |
| |
|
(Thousands except per-share amounts) | |
|
For the Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
36,373 |
|
|
|
63,131 |
|
|
$ |
0.58 |
|
|
Effect of Dilutive Securities — Stock Options,
Warrants and Convertible notes
|
|
|
2,324 |
|
|
|
9,552 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
38,697 |
|
|
|
72,683 |
|
|
$ |
0.53 |
|
| |
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
18,452 |
|
|
|
61,163 |
|
|
$ |
0.30 |
|
|
Effect of Dilutive Securities — Stock Options and
Warrants
|
|
|
— |
|
|
|
1,748 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
18,452 |
|
|
|
62,911 |
|
|
$ |
0.29 |
|
| |
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
40,918 |
|
|
|
60,358 |
|
|
$ |
0.68 |
|
|
Effect of Dilutive Securities — Stock Options and
Warrants
|
|
|
— |
|
|
|
1,028 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
40,918 |
|
|
|
61,386 |
|
|
$ |
0.67 |
|
| |
|
|
|
|
|
|
|
|
|
The computation of the diluted number of shares excludes
unexercised stock options and warrants and potential shares
issuable upon conversion of our convertible subordinated
discounted notes and senior
F-41
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
subordinated convertible notes that are anti-dilutive. The
numbers of such shares excluded were 9.2 million,
16.9 million, and 22.3 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
There were no transactions subsequent to December 31, 2004,
which, had they occurred prior to January 1, 2005, would
have changed materially the number of shares in the basic or
diluted earnings per share computations.
Note T — Operating Segment Information
Network Signaling Group (formerly Network Signaling). Our
Network Signaling Group develops and sells our Tekelec
EAGLE® 5 Signaling Application System, Tekelec 1000
Application Server, Tekelec 500 Signaling Edge, the Short
Message Gateway, and the SIP to SS7 Gateway. During 2004,
certain network signaling products, including Sentinel, were
combined with Steleus operations acquired in October 2004 to
form our new Communications Software Solutions Group.
Switching Solutions Group (formerly Next-Generation
Switching). Our Switching Solutions Group comprises our
Santera, Taqua, and VocalData switching solutions portfolio. Our
Switching Solutions Group products include Santera’s
product portfolio consisting of the Tekelec 3000 MGC, and
the Tekelec 8000 MG, a carrier-grade, integrated voice and
data switching solutions which delivers applications like IXC
tandem, Class 4/5, PRI offload, packet/cell switching and
Voice over Broadband services. Taqua’s product portfolio
includes the Tekelec 200 APS, Tekelec 700 LAG, and Tekelec 7000
C5. VocalData’s IP Centrex application server is being
integrated into the Switching Solutions Group business unit.
Communications Software Solutions Group. Our
Communications Software Solutions Group is comprised of Steleus
products as well as certain business intelligence applications
and other products that were formerly included in the network
signaling product line.
IEX Contact Center Group (formerly Contact Center). Our
IEX Contact Center Group provides workforce management and
intelligent call routing systems for single- and multiple-site
contact centers. Our IEX Contact Center product line includes
the TotalView Workforce Management and TotalNet Call Routing
products and services.
As discussed in Note C — Disposition of Business,
in 2002 we sold NDD which was comprised of the Network
Diagnostics and the Japan Diagnostics operating segments. NDD is
reflected as a discontinued operation and accordingly the
historical operating segment data has been restated to exclude
the discontinued operation.
Transfers between operating segments are made at prices
reflecting market conditions. The allocation of revenues from
external customers by geographical area is determined by the
destination of the sale.
F-42
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our operating segments and geographical information are as
follows (in thousands):
Operating Segments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Revenues | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Thousands | |
|
Network Signaling Group
|
|
$ |
285,447 |
|
|
$ |
203,339 |
|
|
$ |
205,511 |
|
|
Switching Solutions Group
|
|
|
54,889 |
|
|
|
11,450 |
|
|
|
— |
|
|
Communications Software Solutions Group
|
|
|
18,805 |
|
|
|
13,091 |
|
|
|
15,981 |
|
|
IEX Contact Center Group
|
|
|
41,547 |
|
|
|
35,820 |
|
|
|
38,849 |
|
|
Intercompany Eliminations
|
|
|
(3,616 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total net revenues
|
|
$ |
397,072 |
|
|
$ |
263,700 |
|
|
$ |
260,341 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Income (Loss) from Operations | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Thousands | |
|
Network Signaling Group
|
|
$ |
132,597 |
|
|
$ |
72,569 |
|
|
$ |
57,508 |
|
|
Switching Solutions Group
|
|
|
(66,899 |
) |
|
|
(22,831 |
) |
|
|
— |
|
|
Communications Software Solutions Group
|
|
|
133 |
|
|
|
(1,915 |
) |
|
|
1,595 |
|
|
IEX Contact Center Group
|
|
|
16,040 |
|
|
|
11,959 |
|
|
|
15,213 |
|
|
General Corporate(1)
|
|
|
(63,737 |
) |
|
|
(48,332 |
) |
|
|
(47,999 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total income (loss) from operations
|
|
$ |
18,134 |
|
|
$ |
11,450 |
|
|
$ |
26,317 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
General Corporate includes acquisition-related charges and
amortization of $25,027, $15,325, and $11,200 for 2004, 2003 and
2002, respectively, and other corporate expenses that are not
specifically allocated to the operating segments or used by
operating segment management to evaluate their segment
performance. |
Enterprise Wide Disclosures
The following table sets forth, for the periods indicated,
revenues from external customers by principal product line (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revenues from External Customers | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Thousands | |
|
Network Signaling Group
|
|
$ |
285,447 |
|
|
$ |
203,339 |
|
|
$ |
205,511 |
|
|
Switching Solutions Group
|
|
|
54,889 |
|
|
|
11,450 |
|
|
|
— |
|
|
Communications Software Solutions Group
|
|
|
15,189 |
|
|
|
13,091 |
|
|
|
15,981 |
|
|
IEX Contact Center Group
|
|
|
41,547 |
|
|
|
35,820 |
|
|
|
38,849 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total net revenues
|
|
$ |
397,072 |
|
|
$ |
263,700 |
|
|
$ |
260,341 |
|
| |
|
|
|
|
|
|
|
|
|
F-43
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth, for the periods indicated,
revenues from external customers by geographic territory (in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Thousands | |
|
North America(1)
|
|
$ |
306,999 |
|
|
$ |
218,540 |
|
|
$ |
214,493 |
|
|
Europe, Middle East and Africa
|
|
|
40,154 |
|
|
|
23,091 |
|
|
|
30,244 |
|
|
Caribbean and Latin America
|
|
|
28,552 |
|
|
|
10,831 |
|
|
|
5,565 |
|
|
Asia Pacific
|
|
|
21,367 |
|
|
|
11,238 |
|
|
|
10,039 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenues from external customers
|
|
$ |
397,072 |
|
|
$ |
263,700 |
|
|
$ |
260,341 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
North America includes revenues in the United States of
$290,918, $209,251 and $199,369, for the years ended
December 31, 2004, 2003 and 2002, respectively. |
The following table sets forth, for the periods indicated,
long-lived assets excluding goodwill and intangibles by
geographic area in which we hold assets (in thousands):
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Thousands | |
|
United States
|
|
$ |
45,810 |
|
|
$ |
48,441 |
|
|
Other
|
|
|
2,509 |
|
|
|
1,161 |
|
| |
|
|
|
|
|
|
| |
Total long-lived assets
|
|
$ |
48,319 |
|
|
$ |
49,602 |
|
| |
|
|
|
|
|
|
For the year ended December 31, 2004, sales to Cingular,
including AT&T, accounted for 17% of our revenue and
included sales from our Network Signaling Group, IEX Contact
Center Group and Communications Software Solutions Group. For
the year ended December 31, 2003, sales to Verizon
accounted for 10% of our revenue and included sales from all
operating segments. There were no customers accounting for 10%
or more of the revenues in 2002.
Note U — Common Stock
Warrants: In July 1997, we issued warrants to purchase a
total of 360,000 shares of our common stock to five
directors and one corporate officer at $14.08 per share.
These warrants vested and became exercisable in 12 equal
quarterly installments beginning on September 30, 1997.
During 2003, none of these warrants were exercised and as of
December 31, 2003, we had warrants outstanding to purchase
an aggregate of 195,000 shares of our common stock. During
2004, all then remaining warrants were exercised and no warrants
were outstanding as of December 31, 2004.
Restricted Stock: In February 2001, we granted a
restricted stock award of 30,000 shares of our common stock
to a corporate officer in connection with the commencement of
his employment. The restricted shares vested in four equal
annual installments beginning in February 2002. This award was
valued at $827,000, which is being recognized as stock-based
compensation expense over the term of the award.
In May 2003, we granted restricted stock awards of
25,000 shares of our common stock to five directors in
connection with additional compensation for services rendered to
us. The restricted shares vested in four equal quarterly
installments over one year beginning in May 2003. This award was
valued at $319,000, which was recognized as stock-based
compensation expense over the term of the award.
During 2004, we issued restricted stock units (“RSUs”)
for 116,510 shares to employees of VocalData and Steleus.
These awards were valued at approximately $2.0 million and
vest over a one-year period, with charges to compensation
expense. For the year ended December 31, 2004, we had
$432,000 of compensation expense related to the RSUs.
F-44
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note V — Quarterly Financial Summary
(Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarters | |
| |
|
| |
| For the Years Ended December 31, |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Thousands, except per-share data) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
78,870 |
|
|
$ |
95,618 |
|
|
$ |
106,636 |
|
|
$ |
115,948 |
|
|
Gross profit
|
|
|
56,421 |
|
|
|
69,273 |
|
|
|
79,455 |
|
|
|
81,344 |
|
|
Income (Loss) from continuing operations before provision for
income taxes(1)
|
|
|
2,525 |
|
|
|
(1,933 |
) |
|
|
25,045 |
|
|
|
23,342 |
|
|
Minority interest
|
|
|
9,577 |
|
|
|
8,581 |
|
|
|
7,565 |
|
|
|
(5,004 |
)(2) |
|
Net income (loss)
|
|
|
5,849 |
|
|
|
(304 |
) |
|
|
18,737 |
|
|
|
12,091 |
(2) |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.09 |
|
|
$ |
0.00 |
|
|
$ |
0.30 |
|
|
$ |
0.19 |
(2) |
| |
Diluted
|
|
|
0.09 |
|
|
|
0.00 |
|
|
|
0.27 |
|
|
|
0.17 |
(2) |
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
62,034 |
|
|
|
62,458 |
|
|
|
63,172 |
|
|
|
64,861 |
|
| |
Diluted
|
|
|
65,194 |
|
|
|
62,458 |
|
|
|
72,332 |
|
|
|
75,331 |
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
55,006 |
|
|
$ |
62,922 |
|
|
$ |
70,747 |
|
|
$ |
75,025 |
|
|
Gross profit
|
|
|
39,394 |
|
|
|
43,875 |
|
|
|
53,295 |
|
|
|
57,261 |
|
|
Income (Loss) from continuing operations before provision for
income taxes
|
|
|
2,146 |
|
|
|
(1,280 |
) |
|
|
2,129 |
|
|
|
5,972 |
|
|
Minority interest
|
|
|
— |
|
|
|
4,505 |
|
|
|
8,015 |
|
|
|
7,272 |
|
|
Income (Loss) from continuing operations
|
|
|
1,514 |
|
|
|
1,210 |
|
|
|
5,157 |
|
|
|
7,278 |
|
|
Gain on sale of discontinued operation, net of income taxes
|
|
|
— |
|
|
|
— |
|
|
|
3,293 |
|
|
|
— |
|
|
Net income
|
|
|
1,514 |
|
|
|
1,210 |
|
|
|
8,450 |
|
|
|
7,278 |
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.09 |
|
|
$ |
0.12 |
|
| |
Diluted
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.08 |
|
|
|
0.11 |
|
|
Earnings per share from gain on sale of discontinued operation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.05 |
|
|
$ |
— |
|
| |
Diluted
|
|
|
— |
|
|
|
— |
|
|
|
0.05 |
|
|
|
— |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.02 |
|
|
$ |
0.02 |
|
|
$ |
0.14 |
|
|
$ |
0.12 |
|
| |
Diluted
|
|
|
0.02 |
|
|
|
0.02 |
|
|
|
0.13 |
|
|
|
0.11 |
|
|
Weighted average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
60,934 |
|
|
|
61,032 |
|
|
|
61,206 |
|
|
|
61,481 |
|
| |
Diluted
|
|
|
61,632 |
|
|
|
62,276 |
|
|
|
69,915 |
|
|
|
70,544 |
|
|
|
| (1) |
Restructuring charges for each of the three months ended
March 31, 2004, June 30, 2004, September 30, 2004
and December 31, 2004 were $942,000, $110,000, $275,000 and
$339,000, respectively. One-time IPRD charges resulting from
acquisitions (see Note B — Acquistions) were
$8.0 million, $2.4 million, |
F-45
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
and $3.8 million for each of the three months ended
June 30, 2004, September 30, 2004, and
December 31, 2004, respectively compared to
$2.9 million for the three months ended June 30, 2003.
Other income for the three months ended June 30, 2004,
included $2.2 million from our gain on sale of Catapult
stock and $7.9 million from our sale of an investment in a
privately held company (see note 2 below). Other income for
the three months ended December 31, 2004, includes
$20.3 million from our exercise of warrants in a privately
held company. |
|
|
| (2) |
The financial results indicated reflect an adjustment made in
the fourth quarter ended December 31, 2004, to reduce the
gain on sale of investment in privately held company previously
recorded in the third quarter ended September 30, 2004, by
$1.3 million, net of tax. The adjustment relates to
643,000 shares held in escrow as part of the acquisition of
Telica by Lucent as described in Note E — Sale of
Investment in Privately Held Company and Gain on Warrants in
Privately Held Company. The shares held in escrow related to
this transaction were incorrectly marked to fair value, included
in short-term investments, and included as part of the gain that
was recognized in the quarter ended September 30, 2004. As
these shares are considered contingently issuable, they should
not have been so recognized, and we have recorded a reduction in
the gain of $2.0 million, a reduction in short term
investments of $2.0 million, and the elimination of the
related tax effects of $697,000 in the quarter ended
December 31, 2004. These adjustments are reflected in the
2004 financial statements. |
For each of the three months ended September 30, 2004 and
December 31, 2004, the calculation of earnings per share
includes, for the purposes of the calculation, the add-back to
net income of $581,000, for assumed after-tax interest cost
related to the convertible debt using the
“if-converted” method of accounting for diluted
earnings per share. The weighted average number of shares
outstanding for each of the three months ended
September 30, 2004, and December 31, 2004 includes
6.4 million shares related to the convertible debt using
the “if-converted” method. These were the only periods
in which the dilution applied.
For each of the three months ended September 30, 2003 and
December 31, 2003, the calculation of earnings per share
includes, for the purposes of the calculation, the add-back to
net income of $591,000 and $590,000, respectively, for assumed
after-tax interest cost related to the convertible debt using
the “if-converted” method of accounting for diluted
earnings per share. The weighted average number of shares
outstanding for each of the three months ended
September 30, 2003, and December 31, 2003 includes
6.4 million shares related to the convertible debt using
the “if-converted” method. These were the only periods
in which the dilution applied.
Typically a substantial portion of our revenues in each quarter
result from orders received in that quarter. Further, we
typically generate a significant portion of our revenues for
each quarter in the last month of the quarter. We establish our
expenditure levels based on our 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 a disproportionate reduction in profits or
even losses in a quarter. Our quarterly operating results may
fluctuate as a result of a number of factors, including general
economic and political conditions (such as recessions in the
U.S. or EMEA), capital spending patterns of our customers,
increased competition, variations in the mix of sales,
fluctuation in proportion of foreign sales, and announcements of
new products by us or our competitors.
F-46
Schedule II.
TEKELEC
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Column A |
|
Column B | |
|
Column C | |
|
Column D | |
|
Column E | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
Additions | |
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
Deductions | |
|
Balance at | |
| |
|
Beginning | |
|
Costs and | |
|
and Other | |
|
End of | |
| Description |
|
of Period | |
|
Expenses | |
|
Adjustments | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Thousands) | |
|
Year ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
5,349 |
|
|
$ |
950 |
|
|
$ |
(1,439 |
)(1) |
|
$ |
4,860 |
|
|
Product warranty
|
|
|
5,462 |
|
|
|
3,617 |
|
|
|
(3,808 |
)(2) |
|
|
5,271 |
|
|
Deferred tax valuation allowance
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
4,860 |
|
|
$ |
415 |
|
|
$ |
(2,656 |
)(3) |
|
$ |
2,619 |
|
|
Product warranty
|
|
|
5,271 |
|
|
|
1,396 |
|
|
|
(1,608 |
)(4) |
|
|
5,059 |
|
|
Deferred tax valuation allowance
|
|
|
— |
|
|
|
71,731 |
|
|
|
— |
|
|
|
71,731 |
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
2,619 |
|
|
$ |
820 |
|
|
$ |
1,408 |
(5) |
|
$ |
4,847 |
|
|
Product warranty
|
|
|
5,059 |
|
|
|
618 |
|
|
|
(1,648 |
)(6) |
|
|
4,029 |
|
|
Deferred tax valuation allowance
|
|
|
71,731 |
|
|
|
10,585 |
|
|
|
— |
|
|
|
82,316 |
|
|
|
| (1) |
Includes $782 as a result of the disposition of NDD. |
| |
| (2) |
Includes $442 as a result of the disposition of NDD. |
| |
| (3) |
Includes $527 as a result of the acquisition of a majority
interest in Santera. |
| |
| (4) |
Includes $438 as a result of the acquisition of a majority
interest in Santera. |
| |
| (5) |
Includes $1,389, $430 and $607 as a result of the acquisitions
of Taqua, VocalData and Steleus, respectively. |
| |
| (6) |
Includes $1,121 and $50 as a result of the acquisitions of Taqua
and VocalData, respectively. |
F-47
EXHIBIT INDEX
| |
|
|
|
|
|
|
|
|
| |
|
|
|
Sequentially | |
| Exhibit | |
|
|
|
Numbered | |
| Number | |
|
Description |
|
Page | |
| | |
|
|
|
| |
| |
10 |
.17 |
|
2004 Executive Officer Bonus Plan |
|
|
|
|
| |
10 |
.18 |
|
Credit Agreement dated December 15, 2004 between the
Registrant and Wells Fargo Bank, National Association |
|
|
|
|
| |
| |
10 |
.19 |
|
Office Lease dated as of December 14, 2004 between Grenhill
Development Corporation and the Registrant covering our proposed
new facility in Westlake Village, California. |
|
|
|
|
| |
| |
21 |
.1 |
|
Subsidiaries of the Registrant |
|
|
|
|
| |
| |
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm |
|
|
|
|
| |
| |
31 |
.1 |
|
Certification of President, Chief Executive Officer and Acting
Chief Financial Officer of Registrant pursuant to
Rule 13a-14(a) under the Exchange Act, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
| |
| |
32 |
.1 |
|
Certification of Chief Executive Officer and Acting Chief
Financial Officer of Tekelec pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002. |
|
|
|
|