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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26580 WEST AGOURA ROAD, CALABASAS, CALIFORNIA 91302
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 880-5656
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sale price of the Common Stock
on March 1, 1996 as reported on the Nasdaq National Market, was approximately
$92,500,000.
The number of shares outstanding of the registrant's Common Stock on
March 1, 1996, was 11,655,189.
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 10, 1996 are incorporated by reference into Part III of this Annual
Report.
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TEKELEC
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 1995
Page
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 33
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 33
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . 34
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PART I
ITEM 1. BUSINESS
Tekelec designs, manufactures and markets innovative diagnostic
systems and network switching solutions for the global communications
marketplace. Tekelec's products enable communications infrastructure suppliers
and network providers to rapidly deliver advanced communications products and
services. The Company's diagnostic systems are used in the design,
installation and maintenance of a broad range of communications equipment and
networks. Tekelec's EAGLE(R) STP switching platform enables operators of
wireline and wireless networks to deliver Advanced Intelligent Network (AIN)
services such as Caller ID and personal number calling as well as digital
wireless services such as Personal Communications Systems (PCS) and Global
Systems for Mobile (GSM). The Company sells its diagnostic systems worldwide to
long distance carriers, telephone operating companies, communications equipment
manufacturers, wireless and cellular network operators and government agencies.
The Company's switching products have been sold primarily to U.S. independent
telephone companies (ITCs), cellular providers, interexchange carriers (IXCs)
and competitive access providers (CAPs) through the Company's direct sales
force and distribution and marketing relationships with Lucent Technologies,
Inc. (formerly AT&T Network Systems) and Stratus Computer, Inc. (Stratus).
INDUSTRY BACKGROUND
Deregulation and privatization worldwide have intensified competition
among existing operators of public communications networks and encouraged the
entrance of new service providers. At the same time, the convergence of
telephony and computing is resulting in end users demanding new and enhanced
high quality communications services at lower cost. As a result, network
operators are increasingly pressured to reduce the time and expense required to
introduce such services. Together, these forces are creating the need for new
equipment and infrastructure for both wireline and wireless networks.
Public Networks: Increased Competition and Complexity
In the U.S., long distance carriers, Regional Bell Operating Companies
(RBOCs) and new competitive service providers that have entered the local and
long distance markets are competing with one another to offer enhanced products
and services to their customers. The passage of the Telecommunications Act of
1996 in early 1996 is expected over time to increase competition among
telephone operating companies, cable companies and long distance carriers. The
rapid growth of cellular and wireless networks has also further increased the
number of communications alternatives offered to end users. In response to
this environment, operators of public networks are seeking to lower their costs
and differentiate themselves by rapidly introducing new services. These
include high-speed data services such as Asynchronous
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Transfer Mode (ATM) and Frame Relay, AIN services such as Caller ID, voice
messaging, personal number calling (i.e., the assignment of a number to a user
rather than a location), and customized routing and billing as well as digital
wireless services such as PCS and GSM.
While communications markets are becoming increasingly competitive, a
proliferation of standards and protocols is making the design and operation of
communications networks more complex. Demand for high speed communications
integrating voice, data and video is growing rapidly. Services based on
emerging technologies, such as ATM, Frame Relay and SMDS, are being deployed
while Integrated Services Digital Network (ISDN) is increasingly available to
provide end-user access to combined voice and data services, particularly over
the Internet. With the explosive growth of the Internet comes the need for
high-capacity, high-speed, flexible data products and services. In addition,
network operators must also support protocols such as FDDI and Ethernet as an
increasing number of Local Area Networks (LANs) are being interconnected across
their Wide Area Networks (WANs).
As a result, network operators have become more demanding of
communications equipment suppliers to provide solutions that enable them to
increase the overall functionality and flexibility of their networks at a lower
cost.
Diagnostic Tools
The proliferation of standards and protocols, the growth of the
Internet and the increasing complexity of communications equipment and networks
are creating a need for new, more sophisticated diagnostic systems capable of
simultaneously testing multiple existing and emerging technologies. Network
operators use diagnostic tools to efficiently monitor network performance,
simulate network services and test interoperability of equipment. In an
increasingly competitive environment, network operators need diagnostic systems
that can reduce time to market by shortening the testing cycles necessary to
model and implement new services. In addition, network operators require
advanced diagnostic solutions that verify reliability of network elements,
offer flexibility to support new standards and protocols as they emerge and
enable them to centralize the testing expertise within their organizations.
Equipment manufacturers use diagnostic tools to design and test their
products, such as switches, hubs and routers, for conformance to new and
existing standards and to simulate network operating conditions. Manufacturers
seek diagnostic tools that enable them to shorten their product development
cycles and reduce their testing costs as these elements are principal
contributors to product development time and expense. Furthermore, diagnostic
tools with a flexible architecture are necessary to accommodate the rapid
changes in technology.
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Advanced Intelligent Network (AIN) Switching
In response to competition, network operators are seeking to
differentiate themselves by offering advanced voice and data communications
services. The AIN is a network architecture and a set of standards designed to
allow network operators to create, deploy and modify these services quickly and
economically. AIN services represent the merging of telephony with database
information through signalling. Such services include Caller ID, voice
messaging, personal number calling and customized routing and billing as well
as digital wireless services such as PCS and GSM.
The enabler of AIN is a highly complex protocol called the Common
Channel Signalling System No. 7 (SS7). The AIN architecture uses two separate
but parallel paths: one to handle the voice or data traffic and a second to
carry the signalling information for call set-up and routing. Network
operators utilize the AIN architecture to increase the efficiency of their
network by offloading signalling traffic onto the SS7 network. This frees up
trunk line capacity needed for revenue generating traffic. Network operators
are increasingly using SS7 networks as a source of competitive advantage to
introduce new services through software changes in AIN network elements rather
than in central office switches. The key network elements in the AIN
architecture are as follows:
Signal Transfer Point (STP) - An STP is a switch that handles
the signalling messages used to set up telephone calls, queries external
databases for routing and processing information and dispatches call handling
instructions.
Service Switching Point (SSP) - An SSP is a component of the
central office switch that sets up trunk connections. When an SSP identifies
an AIN call, it routes a signalling message to the STP and awaits further
instructions for call processing.
Service Control Point (SCP) - An SCP is a computer database
that is accessed by STPs for customer call routing and other special
information required for AIN services.
Additional components of the AIN architecture include Service Creation
Environments (SCE) used to create new software-based services and Service
Management Systems (SMS) used for billing and administration.
While SS7 has been available since the 1980s, to date it has been used
principally to support intelligent services such as call set-up, 800 number
calling and calling card verification. AIN standards and services have only
recently emerged and the number and complexity of these services continue to
grow. Services such as Caller ID, voice messaging, personal number calling and
customized routing and billing as well as digital wireless services such as PCS
and GSM all require SS7 networking technology. ISDN, driven by the growth of
the Internet and telecommuting, is also increasing the need for SS7 to provide
the signalling connectivity for ISDN applications.
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The accelerating rate of introduction of these new enhanced services
enabled by SS7 has placed increasing demand for functionality and capacity on
the installed base of older generation STPs. These devices are, in most cases,
modified central office digital switches that fundamentally were not optimized
for AIN purposes. In addition, the telecommunications industry is evolving
towards an architecture of more intelligent distributed switching in which
software will allow for third party developers to be involved in creating
applications.
With competition among network operators accelerating the deployment
of AIN services, the strategic and economic value of sophisticated switching
equipment optimized for SS7 applications is rapidly increasing. In addition,
the importance of SS7 network-to-network operators mandates extremely high
reliability and fault tolerance from the equipment as well as higher throughput
and scaleability to support the rapid and unpredictable growth in enhanced AIN
services. Companies that offer SS7-based products that are built on scalable,
open distributed architectures and enable AIN applications can benefit from
this industry shift.
PRODUCTS
Network Diagnostic Systems
Equipment manufacturers and network operators use the Company's
diagnostic systems to perform a wide variety of simulation and analysis to
detect, diagnose and isolate communications problems. The Company's
proprietary simulation language enables the controlled imitation of
communications devices, traffic loads and networks. Its analysis software
helps monitor, selectively capture and interpret digitized pulses transmitted
through a network. Uses of the Company's products include the following:
o Designing Communications Equipment. By simulating existing and
emerging communications devices (e.g., digital switches, STPs, SCPs, routers
and hubs) and protocols (e.g., ATM, SS7, ISDN, FDDI and Ethernet), the
Company's products enable engineers to more rapidly design communications
devices that will be compatible with, and minimize potential breakdowns of, the
networks in which the devices will be deployed.
o Ensuring Product Reliability. By simulating a wide range of
operating situations, including protocol errors and other network failures, the
Company's products can help ensure that communications equipment manufacturers
produce devices that will operate error-free, thereby accelerating time to
market and potentially reducing costly failures after installation.
o Verifying Certification. By executing certain standard tests,
network operators and manufacturers use the Company's products to rapidly
verify that communications devices meet specified standards (e.g., X.25, ISDN
and SS7).
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o Monitoring Networks. By collecting and analyzing traffic, the
Company's products can monitor networks on a continuous basis and provide
advance notice of potential system failures, allowing faster service
restoration or even service failure prevention.
o Troubleshooting. By identifying the specific location and type of
communication error, the Company's products can isolate which network device
has failed (e.g., channel bank or PBX). The Company's products help
technicians and engineers repair devices and networks promptly and minimize
expensive downtime associated with service failure.
The Company's principal diagnostic systems are:
Chameleon(R) Open. The Chameleon Open is a multiprotocol analyzer
that features a flexible open architecture for a family of applications that
provide simultaneous full bandwidth testing of broadband, LAN and WAN equipment
and networks. It can perform tests at speeds up to 155 Mbps and currently
supports a number of protocols and interfaces including ATM, SMDS, FDDI, Frame
Relay, ISDN, TCP/IP, X.25, T1, E1, Ethernet and Token Ring. The Chameleon Open
is based on an Intel x86-based hardware platform and a UNIX operating system
incorporating an X-Windows, Motif graphical user interface. Tekelec's
proprietary programming tool, PASM was added to the Chameleon Open platform in
1995 to enable the use of ATM signalling and simulation. Each Chameleon Open
supports, depending on its configuration, up to 12 network interfaces
simultaneously and can be configured as either a portable or rack mount system.
Multiple systems can be networked in a LAN or WAN configuration.
MGTS/GSMT. The MGTS/GSMT system is used primarily for SS7-based
device simulation, load generation and network monitoring. In its fully
configured form, the system includes Tekelec's proprietary programming tool,
PASM, that can be used to design customized testing scenarios. The MGTS/GSMT
software runs on Sun Microsystems and Hewlett-Packard UNIX operating systems
with an X-Windows, Motif graphical user interface. The MGTS/GSMT system
supports a number of protocols, including SS7, AIN, GSM, IS.41 and personal
digital communications (PDC) networks. Each system can simulate up to 32 SS7
links or 16 network nodes simultaneously, and a number of MGTS/GSMT systems may
be networked together.
Chameleon 32 Plus. The Chameleon 32 Plus is a sophisticated
diagnostic system that simulates and analyzes multiple types of communications
devices and networks. Research and development users utilize the Chameleon 32
to comprehensively test ISDN primary and basic rate interfaces, SS7 and data
protocols such as Frame Relay and X.25.
List prices for the Company's principal diagnostic products range from
approximately $35,000 to $150,000 depending on configuration.
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Network Switching Products
EAGLE STP. The Company introduced the EAGLE STP in early 1992. The
EAGLE STP is designed to meet the demands of SS7 switching and features a fully
distributed, standards-based open architecture. Its distributed open
architecture, high capacity and throughput are tailored to the SS7 switching
needs of common carriers, local exchange carriers and PCS and cellular
operators. The EAGLE STP is economically scaleable in configurations from 8 to
500 links. On-going software releases provide continual product improvement to
meet the evolving needs of end users. As is required in SS7 networks, the
EAGLE is sold and deployed in pairs, for redundancy. The EAGLE has the
following features:
Designed for SS7 Standards. The EAGLE STP is designed to exceed the
requirements for STPs as defined by Bell Communications Research (Bellcore) and
presently supports both American National Standards Institute (ANSI) and
International Telephone and Telegraph Consultative Commission (CCITT) SS7
standards. Bellcore defines the standards used primarily by the RBOCs for
equipment used in their networks. EAGLE Release 21.0 is currently undergoing
technical audit by Bellcore which the Company expects to complete during 1996.
See "-- Sales, Marketing and Support."
Powerful, Distributed Architecture. The EAGLE STP features a fully
distributed, open architecture, utilizing Intel x86 microprocessors. The
performance of the product results from its uniquely distributed architecture
and the elimination of central processors. In the EAGLE STP, all SS7 network
intelligence, including SS7 routing information, is distributed among up to 250
signalling interfaces, each with its own dedicated processor. Each interface
is interconnected via a high speed, redundant bus subsystem. The bus subsystem
utilizes two, counter-rotating 125 Mbps busses and features proprietary
switching and buffering algorithms, which minimize collision and guarantee
message delivery between all attached interfaces. All interfaces attached to
the bus subsystem are hot-swappable, so that interface repair or replacement
does not affect system operation.
Software Architecture. The EAGLE STP's software is fully modular and
written entirely in industry-standard programming languages. All software is
released in complete versions, eliminating the need for interim patching,
minimizing the potential for errors. EAGLE STP software is optimized for the
capacity and redundancy features of the host hardware.
Open Software Interfaces. Users of the EAGLE STP can rapidly add new
functionality and value-added services to their network, utilizing the EAGLE
STP's open software interfaces. Major new features (providing these open
interfaces) include the STP LAN Interface, which allows users to attach
inexpensive general purpose computers to the EAGLE for network analysis; the
Database Transport Access Feature, which allows users to change the behavior of
protocols in their network without relying on the vendor's development cycles;
and the X.25 to SS7/IS.41 Protocol Conversion feature which allows
first-generation legacy cellular switches to interwork with the more advanced
SS7 cellular network.
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Ease of Operation and Maintenance. EAGLE STP installations generally
do not require any enhancements to the central office's power supply, cooling
system or flooring and require less than 36 square feet of space. An EAGLE STP
can usually be installed in less than one week. No scheduled maintenance is
required to support the EAGLE STP, eliminating the requirement for on-site
personnel.
Prices for a pair of EAGLE STPs typically range from approximately
$250,000 to $3,750,000, depending on configuration and associated software
applications.
Compliance with Industry Standards
The Company's products are designed to meet a significant number of
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, the Company's products must comply with
various regulations defined by the Federal Communications Commission (FCC) and
Underwriters Laboratories as well as standards established by Bellcore and the
ANSI. Internationally, the Company's products must comply with standards
established by telecommunications authorities in various countries as well as
with recommendations of the CCITT and the International Standards Organization
(ISO). The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving standards could have a
material adverse effect on the Company's business and operating results.
PRODUCT DEVELOPMENT
The communications market is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
Standards for new services such as ATM, AIN and PCS are still evolving. As
these standards and the demand for services and applications evolve, the
Company intends to adapt its products or develop and support new products. The
Company solicits product development input through discussions with users of
the Company's products, participation in industry organizations and
international standards committees such as the ATM Forum and Telecommunications
Industry Association (TIA) and by closely monitoring the activities of the ITU,
ISO and Bellcore.
The Company's diagnostic product development activities are focused on
expanding the capabilities of the Chameleon Open, including its interfaces and
software modules, and the protocol capabilities for emerging technologies such
as ATM and AIN. From time to time the Company engages in development projects
for special applications for customers. The Company is usually free to use
such technology in future products which are not competitive with the specific
application for which the development work was performed.
The Company's network switching product development group has as its
priority the release of new software versions to incorporate enhancements
desired by customers and
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compliance with standards to enable EAGLE to address additional domestic and
international markets. In addition, the Company plans continued improvement of
hardware components to improve performance and capability.
The Company utilizes a common standards-based open architecture
approach in the design of its products. This approach facilitates and
accelerates the development of new applications and products and permits the
Company to enhance existing products by substituting new hardware or software
modules. This modular approach also helps to extend the life cycles of the
Company's products, ensure compatibility among successive generations of
products and simplify manufacturing.
The Company's success depends, to a substantial degree, upon its
ability to respond rapidly to changes in technology, industry standards and
customer requirements. This requires the timely selection, development and
marketing of enhancements and new products on a cost-effective basis. The
Company has invested and expects to continue to invest substantial resources in
the development of new products and technology and product enhancements. There
can be no assurance that the Company's product development efforts will result
in commercially successful new or enhanced products or that the Company's
products will not be rendered obsolete or noncompetitive by changing technology
or new competitive products.
Products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. Such errors have occurred in the past. Although the Company's
products have not experienced any significant errors, such errors, particularly
those that result in a failure of the Company's switching products, could have
a material adverse effect on the Company's customer relationships, business and
operating results. There can be no assurance that, despite thorough testing by
the Company and by customers, errors will not be found in the Company's
products.
Product development includes expenditures for research and
development, new product design, enhancement of existing products, and
selective acquisition of technology. Research and development expenses
amounted to approximately $15.1 million, $12.0 million, and $17.6 million in
1995, 1994 and 1993, respectively. The Company has also capitalized certain
additional software development costs totaling approximately $165,000 in 1993.
These costs have been fully amortized as of December 31, 1995. There were no
capitalized software development costs in 1994 and 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Notes A, F and J to Consolidated Financial Statements.
The Company's development facilities are located in California, North
Carolina, Ohio and Japan. As of March 1, 1996, the Company had 138 persons
engaged full time in product development. The Company believes that recruiting
and retaining highly skilled engineering personnel is essential to its success.
To the extent that the Company is not successful in
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attracting and retaining its technical staff, its business and operating
results would be adversely affected.
SALES, MARKETING AND SUPPORT
The Company's strategy for its diagnostic products is initially to
target customers' research and development departments designing the next
generation of communications equipment and then to target the manufacturing
groups and ultimate users in network operations as equipment is manufactured,
certified and installed. This strategy permits the Company to gain expertise
in testing emerging technologies in the early stages of their life cycles.
The Company's sales strategy for its EAGLE switching product is to
continue to focus on sales to the U.S. ITC and cellular markets and to pursue
new customer relationships including RBOCs and selected international
opportunities. Current and future strategic alliances will continue to be an
integral component of the strategy to reach broader markets and attain greater
market presence. The network switching sales cycle ranges from three to 18
months depending on the complexity of a customer's planning, bidding and
implementation requirements.
In order to penetrate the portion of the public carrier market
dominated by the RBOCs, it is important that ongoing technical audits of the
EAGLE STP be conducted by Bellcore to help the Company ensure interoperability
with the operations, administration, maintenance and provisioning systems used
by the RBOCs to manage their networks. Bellcore is in the process of
conducting such technical audits, and upon completion, which the Company
expects to occur during 1996, a copy of the technical auditing reports will be
available to the Company. Bellcore does not endorse or certify any product or
service or guaranty its performance. Failure or delay in obtaining favorable
technical audit results could have a material adverse effect on the Company's
ability to sell EAGLE STP to this large segment of the communications carrier
market.
Domestic Distribution. The Company sells its diagnostic and switching
products in the U.S. principally through separate direct sales forces and, for
the EAGLE STP, also through strategic relationships with Lucent Technologies,
Inc. (formerly AT&T Network Systems) and Stratus. The Company's direct sales
forces operate out of the Company's headquarters in Calabasas, California and
its regional offices located in Colorado, Illinois, Missouri, New Jersey, North
Carolina, Northern California, Texas, and Virginia.
International Distribution. The Company sells its diagnostic products
internationally through a network of 23 distributors and two wholly owned
subsidiaries in Japan and Canada. The Company's Japanese subsidiary, which
presently sells only diagnostic products, generated approximately 22%, 20% and
25% of the Company's revenues for 1995, 1994 and 1993, respectively. The
Company currently sells its switching products internationally through its
direct sales force.
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Tekelec-Airtronic, S.A., an affiliate of the Company, and its wholly
owned subsidiaries are the distributors of the Company's diagnostic products in
France, Italy, Germany, The Netherlands, Belgium, Luxembourg, Portugal and
Spain. Eighteen additional independent companies distribute the Company's
products in other Western European countries, the Far East (other than Japan),
Australia, New Zealand, the Middle East, South America and South Africa.
Distributors typically purchase products directly from the Company pursuant to
agreements that are exclusive for a particular territory and are cancelable by
either party upon 90 days notice. Export sales to international distributors
accounted for approximately 17%, 14% and 19% of revenues in 1995, 1994 and
1993, respectively.
The Company typically invoices export sales in U.S. dollars and its
foreign subsidiaries invoice sales in their respective local currency.
International sales are subject to inherent risks, including longer payment
cycles, unexpected changes in regulatory requirements and tariffs, difficulties
in staffing and managing foreign operations and distributors, greater
difficulty in accounts receivable collection and potentially adverse tax
consequences. Additionally, exchange rate fluctuations on foreign currency
transactions and translations arising from international operations may
contribute to fluctuations in the Company's business and operating results.
Fluctuations in exchange rates could also affect demand for the Company's
products. In addition, due to the technical nature of the Company's products,
certain of the Company's export sales must be licensed by the Office of Export
Administration of the U.S. Department of Commerce. The Company's products are
subject, in certain international jurisdictions, to reduced protection for the
Company's copyrights and trademarks. See Notes A, E and N to Consolidated
Financial Statements.
Strategic Relationships. The Company believes that it can improve
market penetration and acceptance for its EAGLE products through strategic
relationships with leading communications equipment suppliers. These suppliers
have long-standing relationships with public carriers and provide a broad range
of services to these carriers through their existing sales and support
networks. Tekelec seeks strategic relationships that (i) enhance the Company's
presence in its target markets, (ii) offer products that complement the EAGLE
to provide value-added networking solutions and (iii) leverage the Company's
core technologies enabling the communications equipment suppliers to develop
enhanced products with market differentiation that can be integrated with the
EAGLE platform.
The Company has a non-exclusive distribution agreement with Lucent
Technologies, Inc. (formerly AT&T Network Systems) and a marketing agreement
with Stratus for the EAGLE STP. The Company believes that its relationships
with Lucent and Stratus demonstrate recognition of the technical advantages of
the EAGLE STP. The Company believes that these agreements provide the Company
with additional opportunities to penetrate the SS7 network switching
marketplace. Through the Company's relationships with Lucent and Stratus, the
Company has enhanced its market presence and its ability to access leading
telephone companies such as the RBOCs. In general, these agreements can be
terminated by either party on limited
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notice and do not require minimum purchases. Furthermore, Lucent is not
precluded from selling products that are competitive with the Company's
products. A termination of the Company's relationship with Lucent or the sale
of competing products by Lucent could materially and adversely affect the
Company's business and operating results.
Advertising and Promotion. The Company uses advertising in trade
journals, exhibitions at trade shows, a presence on the Internet via the World
Wide Web and direct mail to promote awareness of the Company and its products.
The Company has been most successful in generating sales through demonstrations
of its products and, therefore, focuses its advertising and promotional
activities on generating opportunities for demonstrations. The Company also
provides extensive training for, and merchandising aids to, its direct sales
force and distributors. These include sales brochures, demonstration systems
and promotional product literature. In order to support the Company's
marketing efforts, the Company also publishes a newsletter for its customers
and distributors, as well as maintains a presence on the Internet.
Services, Support and Warranty. The Company believes that customer
service, support and training are important to building and maintaining strong
customer relationships. The Company services, repairs and provides technical
support for its products. The Company maintains an in-house repair facility
and provides ongoing training and telephone assistance to customers and
international distributors from its headquarters in Calabasas, California,
certain U.S. regional offices and its Japanese subsidiary. The Company's
Technical Assistance Center in Morrisville, North Carolina supports the
Company's switching products on a 24 hour-a-day, seven day-a-week basis.
Support services include 24-hour technical support, remote access diagnostic
and servicing capabilities, extended maintenance and support programs,
comprehensive technical customer training, extensive customer documentation,
field installation and emergency replacement. The Company typically warrants
its products against defects in materials and workmanship for one year after
the sale and thereafter offers extended service warranties. To date, warranty
expenses have been consistently within management's expectations.
CUSTOMERS
During 1995, the Company shipped approximately 825 units of its
diagnostic products to over 170 customers worldwide and 28 pairs of EAGLE STPs
to 19 customers. The Company's customers include end users and marketing
intermediaries. End users for the Company's diagnostic products include long
distance carriers, telephone operating companies, communications equipment
manufacturers, wireless and cellular network operators and government agencies.
End users for the Company's EAGLE STP consist primarily of U.S. ITCs, cellular
providers, interexchange carriers and competitive access providers.
The Company's diagnostic business is substantially dependent on repeat
business and, therefore, customer satisfaction and loyalty are crucial to its
long-term success. Many of the
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Company's largest customers in 1995 were purchasers of the Company's diagnostic
systems in prior years. Sales of diagnostic products to Nippon Telegraph &
Telephone (NTT) accounted for 14% of the Company's 1995 revenues. Sales to
AT&T, consisting of sales of both diagnostic and switching products, accounted
for 12% of the Company's 1995 revenues. No other customer accounted for more
than 10% of the Company's revenues in 1995.
The top 20 end-user customers for the Company's diagnostic systems
during 1995, which accounted for approximately $30.0 million or 40% of the
Company's 1995 revenues and 58% of the Company's diagnostic product revenues
were:
AT&T MCI Telecommunications Corporation
Bell Northern Research Motorola
Ericsson NEC
Fujitsu Network Switching of America, Inc. Nortel
GTE NTT
Hitachi Puerto Rico Telephone
IBM Siemens AG
Intel Corporation Telefonos de Mexico
IntelComm Group Tokyo Lease
KDD U.S. Government Agencies
The top 10 end-user customers for the Company's EAGLE STP product
during 1995 which accounted for approximately $14.6 million in sales or 19.7%
of the Company's 1995 revenues and 61% of the Company's switching product
revenues were:
AT&T Wireless GTE
Bell Mobility Cellular, Inc. IntelComm Group
Citizen Telecom L.A. Cellular
Comcast Cellular SBC Communications, Inc.
Frontier Communications Southern New England Telephone
Federal and state agencies, including the FCC, regulate many of the
Company's domestic customers. The FCC and a majority of the states have
enacted or are considering regulations based upon alternative pricing methods.
Uncertainty regarding future pricing policies and the cost effectiveness of
deploying public network services may affect demand for communications
products, including the Company's products. However, the Company believes that
deregulation of the telecommunications market and new methods of price
regulation as evidenced by the passage of the Telecommunications Act of 1996 in
early 1996 could increase the demand for products such as those offered by the
Company which enhance the efficiency of the network or allow the expedited
introduction of new revenue-producing services.
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BACKLOG
Orders for the Company's diagnostic products are usually placed by
customers on an as-needed basis, and the Company has typically been able to
ship these products in 15 to 30 days after the receipt of the purchase order.
Backlog for switching products typically consists of contracts or purchase
orders for both product delivery scheduled within the next 12 months and EAGLE
STP extended service warranty to be provided over the next five years. Because
of variations in the magnitude and duration of orders received by the Company,
and customer delivery requirements, which may be subject to cancellation or
rescheduling, the Company's backlog at any particular date may not be a
meaningful indicator of future financial results. At December 31, 1995, the
Company's backlog amounted to approximately $23.3 million, of which $12.3
million related to EAGLE STP service warranty. This compared to $18.1 million
at December 31, 1994, of which $8.6 million related to EAGLE STP service
warranty.
MANUFACTURING
The Company's manufacturing operations consist of the procurement and
inspection of components, final assembly, burn-in, quality control testing and
packaging. Printed circuit boards, chassis and most of the other major
components used in the Company's products are subassembled to the Company's
specifications by independent contractors with whom the Company generally has
had long-standing working relationships. The assembled components are then
delivered to the Company's production facilities for final assembly, quality
control testing and product configuration, including software installation.
The Company's products incorporate the Company's proprietary software as well
as software licensed from third parties. The Company believes that its use of
independent contractors for subassembly coupled with in-house final assembly
improves production planning, increases efficiency, reduces costs and improves
quality.
The Company has a computerized manufacturing inventory control system
which integrates and monitors purchasing, inventory control and production.
The Company's quality control process tests for reliability and conformance
with product specifications and utilizes certain automated software test
procedures. The Company received ISO 9002 certification from Bellcore in
February 1995 and is currently undergoing the processes for ISO 9001
certification and expects to obtain such certification in 1996.
The Company is in the process of obtaining CE Mark registration for
all its diagnostic products to meet EC regulations that became effective
January 1, 1996 for shipment of products into Europe. The Company has obtained
CE Mark registration for those products with significant first quarter demand
in Europe and currently expects to be compliant for all products before the end
of the second quarter of 1996. While delays in the Company's ability to obtain
CE Mark registration for all of its products did not have a material impact on
European sales in
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the first quarter, further delays or failure to obtain such registration could
have a material impact on future sales in Europe.
The Company generally uses industry standard components for its
products which are available from multiple sources; however, a few key
components, such as certain microprocessors, video displays and power supplies,
are currently only available from single suppliers. Vendor supply agreements
often include provisions requiring the vendor to maintain a specified level of
key components. The Company believes that inventory levels of key components,
including those maintained by vendors, are adequate. In addition, should any
components become unavailable the Company believes that functionally similar,
if not identical, components could be obtained, and any necessary internal
redesign accomplished, without materially adversely impacting the Company. To
date, the Company has not experienced any significant delays in obtaining
components from its suppliers and independent contractors. However, the
electronics industry is subject to rapid technological change. Components
become obsolete and are discontinued by manufacturers as new succeeding
generations are introduced. An inability to obtain essential components, if
prolonged, could materially adversely affect the Company's business and
operating results and damage customer relationships.
COMPETITION
Diagnostic Products. The communications diagnostic market is
intensely competitive and subject to rapid technological change and evolving
industry standards. The Company primarily competes in the high performance
segment of the market. Its principal competitor is Hewlett-Packard. The
Company also competes with a number of other manufacturers, some of which have
greater financial, marketing, manufacturing and technological resources than
the Company. The Company believes that its long-term success will depend in
part on its ability to be a leader in offering products for new emerging
industry standards and to offer a broad line of integrated applications.
The Company believes that the principal competitive factors in the
communications diagnostic market in which the Company competes are
product/price performance, functionality and reliability, timely introduction
of new products, marketing and distribution capability and customer service and
support. The Company anticipates that the price/performance characteristics
and breadth of integrated product applications will become increasingly
important competitive factors. Although price has not been a major factor, the
Company anticipates increased price competition in the future. The Company
believes that it competes favorably, although there can be no assurance that
new or established competitors will not offer products superior to or lower in
price than those of the Company.
Network Switching Products. The market for STPs is highly competitive
and has been highly concentrated among a limited number of dominant suppliers.
The Company expects competition to increase in the future from existing and new
competitors. The Company presently
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competes with DSC, Nortel, Ericsson and Alcatel, all of whom have significantly
greater financial, marketing, manufacturing and other resources and larger
installed customer bases than the Company. The Company believes that its
long-term success will depend on its ability to penetrate the major telephone
companies, offer products with the best price/performance profile and be
responsive to customers' needs for new features and services.
The Company believes that the principal competitive factors in the
network switching products market are product price/performance characteristics
and reliability, customer service and support and the supplier's financial
resources, marketing and distribution capability. The Company anticipates that
responsiveness in adding new features will become an increasingly important
competitive factor. While the Company's competitors have greater financial
resources, the Company believes it competes favorably in other respects.
However, there can be no assurance that new entrants or established competitors
with greater financial resources have not or will not offer products superior
in performance, quality, service and support to, and/or lower in price than,
those of the Company.
INTELLECTUAL PROPERTY
The Company relies on a combination of trade secret, copyright and
trademark laws and contractual restrictions to establish and protect
proprietary rights in its products. The Company does not hold any patents with
respect to its products. The Company has entered into confidentiality and
invention assignment agreements with its employees, and enters into
non-disclosure agreements with its suppliers, distributors and appropriate
customers among others so as to limit access to and disclosure of its
proprietary information. There can be no assurance that these statutory and
contractual arrangements will prove sufficient to deter misappropriation of the
Company's technologies or independent third-party development of similar
technologies. The laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. The Company believes that,
because of the rapid pace of technological change in the communications market,
legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the quality of support
services provided by the Company.
The communications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies
that are important to the Company. There are no currently pending material
claims that the Company's products, trademarks or other proprietary rights
infringe the proprietary rights of third parties. However, there can be no
assurance that the Company will not receive communications from third parties
in the future asserting that the Company's products
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infringe or may infringe the proprietary rights of third parties. In its
distribution agreements and certain of its major customer agreements, the
Company agrees to indemnify its customers for any expenses or liabilities
resulting from claimed infringements of patents, trademarks or copyrights of
third parties. In the event of litigation to determine the validity of any
third-party claims, such litigation, whether or not determined in favor of the
Company, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel from productive
tasks. In the event of an adverse ruling in such litigation, the Company might
be required to discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses
from third parties. There can be no assurance that licenses from third parties
would be available on reasonable commercial terms, if at all. In the event of
a successful claim against the Company and the failure of the Company to
develop or license a substitute technology, the Company's business and
operating results would be materially adversely affected.
EMPLOYEES
At March 1, 1996, the Company had 358 employees, comprising 131 in
sales, marketing and support, 49 in manufacturing, 138 in research, development
and engineering and 40 in management, administration and finance. The Company
believes that its future success will depend in part on its ability to attract,
motivate and retain highly qualified personnel. Many employees hold stock
options and participate in an employee stock purchase plan. None of the
Company's employees is represented by a labor union, and the Company has not
experienced any work stoppages. The Company believes that its employee
relations are excellent.
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GLOSSARY
AIN (Advanced Intelligent Network)........... Bellcore's set of standards for advanced intelligent
services for the telephone networks of Regional
Bell Operating Companies.
ATM (Asynchronous Transfer Mode) ............ A broadband, low-delay, packet-based switching
and multiplexing technique. Usable capacity is
segmented into fixed-size cells, consisting of
header and information fields, allocated to
services on demand.
BRI (Basic Rate Interface) .................. One interface type used to access the Integrated
Services Digital Network. The BRI interface
allows two simultaneous calls across a single pair
of copper wires.
CCITT (International Telephone and
Telegraph Consultative Committee) ......... A United Nations organization which establishes
international telecommunications standards.
El .......................................... The European telecommunications standard
defining circuits that operate at speeds of
2.048 Mbps, similar to T1 lines in the United States.
Ethernet .................................... A standard set of specifications for a particular type
of LAN that employs baseband signalling (single signal
on a cable) and has a transmission rate of 10 Mbps.
FDDI (Fiber Distributed Data
Interface ................................. A standard for operating fiber optic-based LANs at
110 Mbps used for high speed and backbone applications.
Frame Relay ................................. A variable length packet-based transmission technology
that is used to transmit data at speeds up to 2 Mbps.
GSM (Global Systems for Mobile) ............. The standard for a set of protocols for digital
wireless initially deployed in Europe.
ISDN (Integrated Services Digital
Network) .................................. Public digital communications services supporting
a wide range of data, voice and image services
accessed by standard interfaces integrated with
customer control.
IS.41 ....................................... One of the Interim Standards for North American
mobile applications for digital cellular.
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LAN (Local Area Network) .................... A type of high-speed data communications
arrangement in which multiple computer and
related products in an office or campus
environment are connected by means of a
standard transmission medium (typically coaxial cable,
twisted-pair wire or optical fiber).
Mbps (Megabits per second) .................. A measurement unit, equal to 1,048,576 bits per
second, used to describe data
transfer rates as a function of time.
MSC (Mobile Switching Center) ............... A switch that coordinates trunk call set-up to and
from users in a digital cellular network.
Packet Switching ............................ A data transmission technique whereby user
information is segmented and routed in discrete
data envelopes called packets, each with its own
appended control information for routing,
sequencing and error checking.
PCS (Personal Communications
Systems) ................................. A set of evolving standards and protocols
providing for the concept of one number per
user and associated advanced intelligent
services regardless of location primarily
involving mobile communications.
PDC (Personal Digital
Communications) ........................... A set of protocol standards for Japanese digital
cellular mobile network promulgated by NEC.
Primary Rate Interface (PRI) ................ A T1 or E1 circuit used to carry 23 or 30 ISDN
calls, respectively. In an ISDN PRI, a single
channel is used for signalling for calls placed on
all of the other channels in the T1 or E1 circuit.
protocol .................................... A formal set of standards governing the
establishment of a communications link and
controlling the format and timing of transmissions
between two devices.
signalling ................................. The process by which digital information is
exchanged to establish, control and manage
connections in a network.
SCP (Service Control Point) ................. A computer database that is accessed by STPs for
customer call routing information and other
special information required for AIN services.
SMDS (Switched Multi-megabit Data
Service) .................................. A communications service providing high speed,
connectionless data transport.
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SS7 (Common Channel Signalling
System No. 7) ............................. A complex protocol which governs signalling between
certain devices in a digital telephone network.
SSP (Service Switching Point) ............... An SSP is a component of the central office switch
that sets up trunk connections. When an SSP identifies
an AIN call, it routes a signalling message to the STP
and awaits further instructions for call processing.
STP (Signal Transfer Point) ................. An STP is a switch that handles the signalling
messages used to set up telephone calls,
queries external databases for routing and
processing information and dispatches call
handling instructions.
T1 .......................................... The North American telecommunications standard
defining a circuit that multiplexes and switches
24 channels and operates at speeds of 1.544 Mbps
(T3 is the equivalent of 27 T1 circuits).
WAN (Wide Area Network) ..................... A network that extends beyond the distance that
can be accommodated by local cabling methods.
A WAN typically utilizes public carrier services
to connect sites, which may span a city, state,
country or the world.
X.25 ........................................ A protocol for transfer of information across
packet data networks. X.25 was the first
packet data technology to be widely implemented.
ITEM 2. PROPERTIES.
The Company's executive offices, as well as its principal manufacturing
and diagnostic product engineering and marketing operations, are located in an
approximate 58,000 square-foot facility in Calabasas, California under a lease
which expires in November 2004 with an option to extend for an additional five
years.
The Company also occupies a 50,000 square-foot facility in Morrisville,
North Carolina under a lease expiring in March 2003, and a 6,800 square-foot
facility in Columbus, Ohio under a lease expiring in March 1997, primarily for
engineering, product development, customer support and regional sales
activities. The Company also has eight regional sales offices occupying an
aggregate of approximately 14,700 square feet under leases expiring between
1996 and 1998 in Milbrae, California; Boulder, Colorado; Lombard, Illinois;
Kansas City, Missouri; Iselin, New Jersey; Irving, Texas; Reston, Virginia; and
Ottawa, Canada. The Company's Japanese subsidiary
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occupies approximately 10,600 square feet in Tokyo under leases expiring
between April 1996 and August 1997. The Company believes that its existing
facilities will be adequate to meet its needs at least through 1996. The
Company believes it will be able to obtain additional space when and as needed
on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded over-the-counter on the Nasdaq
National Market under the symbol TKLC. The following table sets forth the high
and low closing sales prices for the Common Stock, as reported on the Nasdaq
National Market. As of March 1, 1996, there were 192 record holders of the
Company's Common Stock based on information provided by the Company's transfer
agent.
High Low
--------- ---------
1994
----
First Quarter . . . . . . . . . . . . . . . . $ 4.38 $ 3.00
Second Quarter . . . . . . . . . . . . . . . 5.00 2.88
Third Quarter . . . . . . . . . . . . . . . . 6.75 3.75
Fourth Quarter . . . . . . . . . . . . . . . 17.00 6.00
1995
----
First Quarter . . . . . . . . . . . . . . . . 23.13 15.50
Second Quarter . . . . . . . . . . . . . . . 24.50 18.25
Third Quarter . . . . . . . . . . . . . . . . 26.75 21.50
Fourth Quarter . . . . . . . . . . . . . . . 22.50 10.25
Common Stock prices have been retroactively adjusted to reflect the two-for-one
stock split effected March 17, 1995.
The Company has never paid a cash dividend. It is the present policy
of the Company to retain earnings to finance the growth and development of its
business and, therefore, the Company does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. Additionally, certain financial
covenants in one of the Company's bank line of credit agreements restrict the
Company's ability to pay cash dividends.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The statement of operations data included in the selected consolidated
financial data set forth below for the years ended December 31, 1995, 1994 and
1993 and the balance sheet data set forth below as of December 31, 1995 and
1994 are derived from, and are qualified in their entirety by reference to,
the Company's audited consolidated financial statements and notes thereto. The
statement of operations data set forth below for the years ended December 31,
1992 and 1991 and the balance sheet data set forth below as of December 31,
1993, 1992 and 1991 are derived from audited consolidated financial statements
of the Company which are not included herein.
FIVE-YEAR SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993 1992 1991
-----------------------------------------------------------------
(thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . $ 75,276 $ 61,189 $ 46,856 $ 58,090 $ 52,449
Income (Loss) before provision
for income taxes . . . . . . . . . . . 8,450 5,711 (17,101) (6,693) 6,740
Net income (loss) . . . . . . . . . . . 6,311 4,460 (18,543) (8,296) 4,581
Earnings (Loss) per share:(1)
Primary . . . . . . . . . . . . . . $ 0.52 $ 0.47 $ (2.23) $ (1.01) $ 0.53
Fully diluted . . . . . . . . . . . 0.52 0.43 (2.23) (1.01) 0.53
Weighted average number of
shares outstanding:(1)
Primary . . . . . . . . . . . . . . 12,060 9,550 8,314 8,178 8,576
Fully diluted . . . . . . . . . . . 12,063 10,360 8,314 8,178 8,576
BALANCE SHEET DATA (AT DECEMBER 31):
Cash, cash equivalents and restricted cash $43,609 $ 7,653 $ 3,669 $ 10,067 $17,282
Working capital . . . . . . . . . . . . . 56,983 13,466 3,215 15,471 26,443
Total assets . . . . . . . . . . . . . . 80,488 34,409 28,139 38,403 43,893
Long-term obligations . . . . . . . . . . 380 654 323 204 437
Shareholders' equity . . . . . . . . . . 63,607 18,720 11,693 28,751 36,345
(1)Earnings (loss) per share and weighted average number of shares outstanding
have been retroactively adjusted to reflect the two-for-one stock split
effected March 17, 1995.
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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. Historical results and percentage
relationships among any amounts in the financial statements are not necessarily
indicative of trends in operating results for any future periods.
CORPORATE ORGANIZATION
The Company is organized into two divisions: Network Diagnostic and
Network Switching.
The Network Diagnostic Division develops and supplies diagnostic
systems for the communications marketplace. Its products are the foundation of
the Company's business and the source of the technology and expertise that has
facilitated the Company's entry into other markets.
The Network Switching Division capitalized on the Company's expertise
in SS7 to develop the EAGLE, a high-capacity packet switching platform first
introduced in 1992.
As more fully described below, the Company experienced significant
losses in 1993 and returned to profitability in 1994 as a result of actions
taken in connection with its December 1993 restructuring and increased market
acceptance of its products, particularly the EAGLE STP and the Chameleon Open.
See Note F to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that statement of operations items bear to total revenues:
PERCENTAGE OF REVENUES
----------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
----------------------------------------
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . . . . . 33.3 33.3 35.9
----- ----- -----
Gross profit . . . . . . . . . . . . . . . . . . . . 66.7 66.7 64.1
Research and development . . . . . . . . . . . . 20.0 19.6 37.5
Selling, general and administrative . . . . . . 36.7 36.7 50.7
Restructuring . . . . . . . . . . . . . . . . . -- -- 12.8
----- ----- -----
Income (Loss) from operations . . . . . . . . . . . . 10.0 10.4 (36.9)
Interest and other income (expense), net . . . . 1.2 (1.1) 0.4
----- ------ -----
Income (Loss) before provision for income taxes . . . 11.2 9.3 (36.5)
Provision for income taxes . . . . . . . . . . . 2.8 2.0 3.1
----- ----- -----
Net income (loss) . . . . . . . . . . . . . . 8.4% 7.3% (39.6)%
===== ===== =====
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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:
PERCENTAGE OF REVENUES
----------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
----------------------------------------
Network diagnostic products . . . . . . . . . . . . . 68% 72% 82%
Network switching products . . . . . . . . . . . . . 32 28 18
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
=== === ===
The following table sets forth, for the periods indicated, the
revenues by geographic territory as a percentage of total revenues:
PERCENTAGE OF REVENUES
----------------------
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------------------------------------
North America . . . . . . . . . . . . . . . . . . . . 59% 59% 54%
Japan . . . . . . . . . . . . . . . . . . . . . . . 22 20 25
Europe . . . . . . . . . . . . . . . . . . . . . . . 9 9 11
Rest of World . . . . . . . . . . . . . . . . . . . . 10 12 10
--- --- ---
Total . . . . . . . . . . . . . . . . . . . . 100% 100% 100%
=== === ===
1995 COMPARED WITH 1994
Revenues
The Company's revenues increased by $14.1 million or 23% during 1995
due to higher sales of both switching and diagnostic products.
Revenues from switching products increased by 41% in 1995 to $23.8
million due to growing market acceptance of the Company's EAGLE STP product,
particularly in the cellular market. In 1995, 28 pairs of EAGLE STPs were sold
compared with 25 in 1994. These sales included six pairs sold in 1995 under
the Company's September 1994 distribution agreement with AT&T (now held by
Lucent Technologies, Inc.) compared with one pair in 1994. The Company expects
that 1996 sales of its network switching products will continue to grow both in
dollars and as a percentage of total revenues at a percentage rate of growth
comparable to that achieved in 1995.
Revenues from diagnostic products increased by 16%, or $7.2 million,
to $51.5 million. This increase was primarily driven by a 53% or $7.2 million
increase in signalling/wireless product sales and a 30% or $3.5 million
increase in Chameleon Open sales partially offset by lower sales of older
diagnostic products. Sales of signalling/wireless products represented 40%
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of 1995 total diagnostic product sales compared with 30% in 1994. Sales of the
Chameleon Open represented 29% of 1995 total diagnostic product sales compared
with 26% in 1994. The increases in signalling/wireless product sales were due
to higher sales in all markets as a result of increased demand and market
acceptance of this product, particularly internationally. The Company believes
that 1996 sales of its signalling/wireless systems will continue to grow
although at a reduced percentage rate of growth compared to 1995. The
increases in Chameleon Open sales were the result of the Company's continued
successful product evolution from older diagnostic products to the Chameleon
Open platform supporting multiple protocol diagnostics. The Company believes
that 1996 sales of its Chameleon Open will continue to grow both in dollars and
as a percentage of diagnostic product revenues although at a reduced percentage
rate of growth compared to 1995.
Revenues in North America increased by $7.7 million, or 21%, as a
result of higher switching product sales, partially offset by lower diagnostic
sales as a result of slower spending by large equipment vendors and major
carriers in the third and fourth quarters. Revenues in Japan increased by $4.4
million, or 36%, due to higher diagnostic product sales and the impact of
exchange rate fluctuations on currency translations in 1995. Other
international revenues grew $2.0 million or 16% primarily due to higher
diagnostic product sales, partially offset by lower switching product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by approximately $1.5 million, or 2%, and increased net
income by $139,000, or 2%.
Gross Profit
Gross profit as a percentage of revenues was 67% for both 1995 and
1994. While margins on EAGLE sales were slightly higher than in 1994, this
increase was offset by the higher proportion of EAGLE sales as a percentage of
total Company sales, as the gross profit percentage on switching products is
generally lower than on diagnostic products. Changes in the following factors,
among others, may affect gross profit: product and distribution channel mix,
competition, customer discounts, supply and demand conditions in the electronic
components industry, internal manufacturing capabilities and efficiencies,
foreign currency fluctuations and general economic conditions.
Research And Development
Research and development expenses in 1995 increased by $3.1 million,
or 26%, and represented 20% of revenues for both 1995 and 1994. The dollar
increase was attributable primarily to increased headcount in research and
development, including contractors, and included costs to accelerate certain
development programs and the Bellcore audit of the EAGLE product.
The Company believes that its future success depends in large part
upon its ability to continue to enhance existing products and develop new
products that maintain its technological competitiveness. The Company intends
to continue to make substantial investments in product
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and technology development, and believes that total research and development
expenses will not change significantly as a percentage of revenues in 1996.
Selling, General And Administrative
Selling, general and administrative expenses in 1995 increased by $5.2
million, or 23%, primarily as a result of increased headcount in customer
service for both divisions, increased sales commissions due to higher revenues,
and higher tradeshow and travel expenses to support the increased revenues.
Income Taxes
In 1995, the Company had an effective tax rate of 25% compared to 22%
in 1994. The provisions for both years were principally foreign taxes on the
income of the Company's Japanese subsidiary. In both years, the Company was
able to utilize a portion of its prior years' U.S. loss carryforwards, and
consequently provided for taxes on its U.S. taxable income at the federal
alternative minimum tax rate and applicable state tax rates.
The Company anticipates that it has sufficient loss and credits
carryforwards available in 1996 to offset most of its expected U.S. taxes, and
therefore its federal and state effective tax rates should be similar in 1996
to those in 1995. However, the Company's overall tax rate is significantly
influenced by the level of income derived from its Japanese subsidiary.
Interest, Net
Interest income increased by $1.5 million as a result of interest
earned on short-term cash investments resulting primarily from proceeds of the
Company's public stock offering in 1995.
1994 COMPARED WITH 1993
Revenues
The Company's revenues increased by $14.3 million or 31% during 1994
due to higher sales of both switching and diagnostic products.
Revenues from switching products doubled in 1994 to $16.8 million due
to growing market acceptance of the Company's EAGLE STP product, particularly
in the cellular market. In 1994, 25 pairs of EAGLE STPs were sold (including
one pair sold under the Company's September 1994 distribution agreement with
AT&T) compared with 10 in 1993.
Revenues from diagnostic products increased by 15%, or $5.8 million,
to $44.3 million. This increase was primarily driven by an $8.8 million
increase in worldwide sales of the Chameleon Open (which was first shipped in
the second quarter of 1993) and the September 1994 introduction of the
Company's ATM Application Module for this product. Sales of the Chameleon Open
represented 26% of 1994 total diagnostic product sales compared with 7% in
1993. These increases were partially offset by lower worldwide sales of certain
older diagnostic
28
29
products as the Company continued its product evolution to the Chameleon Open
platform supporting multiple protocol diagnostics.
Revenues in North America increased by $10.8 million or 43% as a
result of higher switching and diagnostic product sales. Despite slightly lower
sales of diagnostic products, revenues in Japan increased by $520,000 or 4% due
to the impact of exchange rate fluctuations on currency translations in 1994.
Other international revenues grew $3.0 million or 31% primarily due to higher
switching product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by approximately $1.0 million or 2% and increased net income
by $86,000 or 2%.
Gross Profit
Gross profit as a percentage of revenues improved from 64% in 1993 to
67% in 1994 principally due to lower per-unit manufacturing overhead costs and
higher margins on EAGLE sales due to shipments of larger systems and reduced
sales discounts. Of the 3% increase in gross profit, lower per-unit
manufacturing overhead costs and higher margins on EAGLE STP sales accounted
for approximately 2% and 1%, respectively, of such increase.
Research And Development
Research and development expenses in 1994 decreased by $5.6 million or
32% and from 38% to 20% as a percentage of revenues. These decreases were
attributable primarily to reduced headcount in research and development and
termination of certain projects following the December 1993 restructuring in
which certain product lines were discontinued. Expenses related to EAGLE also
declined due to completion of its initial development.
Selling, General And Administrative
Selling, general and administrative expenses in 1994 decreased by $1.3
million or 5% primarily as a result of the December 1993 restructuring. The
decline due to the restructuring was partially offset by employee bonuses and
increased sales commissions based upon the achievement in 1994 of certain
business performance targets.
Income Taxes
In 1994, the Company had an effective tax rate of 22%, compared to 8%
in 1993. The provisions for both years were principally foreign taxes on the
income of the Company's Japanese subsidiary. In 1994, the Company was able to
utilize a portion of its prior years' U.S. loss carryforwards, and consequently
provided for taxes on its U.S. taxable income at the federal alternative
minimum tax rate and applicable state tax rates.
The 1993 provision was impacted by the Company's inability to
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce future U.S. taxes.
29
30
LIQUIDITY AND CAPITAL RESOURCES
During 1995, cash and cash equivalents increased by $37.0 million to
$43.6 million, primarily due to net proceeds of $36.5 million raised in the
Company's public offering of Common Stock which was completed in June 1995. In
addition, other financing activities provided $1.1 million, operating
activities provided $3.4 million, and investing activities used $3.8 million.
Accounts receivable, including amounts due from related parties,
increased by 41% during 1995. The increase was due to longer payment terms
offered as additional competitive incentives on large orders, particularly for
EAGLE, an increase in the concentration of the Company's sales in the last
month of the quarter in 1995 and a higher proportion of international sales
which typically carry longer payment terms. Inventories increased by 46%
during 1995 primarily to support the increased sales volume and to meet
anticipated higher sales levels in the fourth quarter than were achieved.
Capital expenditures were $4.5 million during 1995 as the Company
resumed its normal capital spending cycle. While there are currently no
significant commitments for capital expenditures, the Company expects that its
capital expenditures will increase in 1996 principally for the planned
acquisition of equipment for research and development.
Net cash provided by financing activities in 1995 was $37.6 million,
which represented $39.0 million in proceeds from the issuance of Common Stock
pursuant to the Company's public offering and from the exercise of options and
warrants, partially offset by debt and other obligation repayments amounting to
$1.4 million.
The Company has a $7.5 million line of credit with a U.S. bank and
lines of credit aggregating $3.4 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.5% at December 31, 1995) plus 2.5% per annum, and expires September 30,
1996, if not renewed. Maximum borrowings available under the line of credit are
based on eligible accounts receivable and amounted to $6.9 million at December
31, 1995, of which $330,000 was then outstanding. This line of credit includes
a $1.0 million long-term credit facility payable in 47 monthly installments of
$20,000 each which began in June 1994 and a final installment of $60,000 due in
May 1998, or upon the expiration of the underlying $7.5 million line of credit,
if not renewed. At December 31, 1995, $620,000 was outstanding under this
long-term facility, of which $380,000 was included under long-term debt.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.4
30
31
million with interest at the Japanese prime rate (1.625% at December 31, 1995)
plus 0.125% per annum which expire between March 31, 1996, and August 5, 1996,
if not renewed. There have been no borrowings under these lines of credit.
In February 1994, the Company established a $2.0 million line of
credit with a U.S. bank, collateralized by restricted cash deposits in Japan,
with interest at the U.S. prime rate plus 0.375% per annum. Upon expiration of
this facility in May 1995, the outstanding loan balance of $1.0 million was
paid in full and the line of credit was not renewed.
Upon the expiration of the above-described credit facilities, the
Company believes that, if necessary, it would be able to arrange for credit
facilities on terms generally no less favorable than those described above.
The Company believes that existing working capital, funds generated
from operations and its current bank lines of credit are sufficient to satisfy
anticipated operating requirements at least through 1996.
Foreign Exchange
International operations are subject to certain opportunities and
risks, including currency fluctuations. In 1995, 1994, and 1993, the
percentages by which weighted average exchange rates for the currencies
indicated below strengthened (weakened) against the U.S. dollar were as
follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-----------------------------------------------
Japanese yen . . . . . . . . . . . . . . 9% 9% 13%
Canadian dollar . . . . . . . . . . . . . 0% (9)% (4)%
The change in cumulative translation adjustment in 1995 was due
primarily to the weakening of the Japanese yen against the U.S. dollar when
comparing the exchange rate at December 31, 1995 to that of December 31, 1994,
even though the weighted average exchange rate for the Japanese yen
strengthened overall during the year. Exchange gains (losses) are recorded in
the period when incurred, and amounted to $(210,000), $(235,000) and $253,000
in 1995, 1994, and 1993, respectively. Exchange gains and losses include the
remeasurement of certain currencies into functional currencies and the
settlement of intercompany balances.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements which are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve certain risks and
uncertainties including, but not limited to, competition in the network
diagnostic and network switching markets, capital spending patterns of the
Company's customers, foreign currency fluctuations, general economic and
political conditions, announcements of new products by Tekelec or its
competitors, and other risks described in this
31
32
Annual Report on Form 10-K and in the Company's other Securities and Exchange
Commission filings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the consolidated financial statements of the Company and its
subsidiaries included herein and listed in Item 14 (a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
32
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 10, 1996, entitled "Election of Directors,"
"Executive Officers" and "Common Stock Ownership of Principal Shareholders and
Management - Compliance with Section 16(a) of the Securities Exchange Act of
1934," to be filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 10, 1996, entitled "Election of Directors -
Compensation of Directors," "Executive Compensation and Other Information,"
"Board of Directors and Compensation Committee Reports on Executive
Compensation" and "Performance Graph," to be filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 10, 1996, entitled "Common Stock Ownership of
Principal Shareholders and Management," to be filed with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 10, 1996, entitled "Certain Relationships and
Related Transactions," to be filed with the Commission.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents are filed as part of this Report:
CONSOLIDATED FINANCIAL STATEMENTS PAGE
----
. Report of Independent Accountants F-1
. Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1995 F-2
. Consolidated Balance Sheets as of December 31, 1995 and 1994 F-3
. Consolidated Statements of Cash Flow for each of the
three years in the period ended December 31, 1995 F-4
. Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 1995 F-5
. Notes to Consolidated Financial Statements F-6
- -----------------------------
PAGE
----
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
. Schedule II Valuation and Qualifying Accounts and Reserves
for each of the three years in the period ended
December 31, 1995 S-1
Schedules which are not listed above have been omitted because they
are not applicable or the information required to be set forth therein is
included in the consolidated financial statements or notes thereto.
LIST OF EXHIBITS
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws, as amended(2)
34
35
10.1 Amended and Restated 1984 Stock Option Plan, including forms of
stock option agreements(3)(4)
10.2 Employee Stock Purchase Plan and form of subscription
agreement(5), as amended January 29, 1988(6), January 28,
1989(7), March 15, 1991(8), May 15, 1992(9), December 8,
1992(9), March 24, 1993(9) and October 29, 1994(4)(10)
10.3 Amended and Restated Non-Employee Director Equity Incentive
Plan, including forms of stock award certificate and
nonstatutory stock option agreements(4)(11)
10.4 1994 Stock Option Plan, including forms of stock option
agreements(11), as amended February 4, 1995(12) and March 3,
1995 (4)(12)
10.5 Retirement Pension Rules of Tekelec Ltd.(1)(4)
10.6 Form of Indemnification Agreement between the Registrant and
all directors of the Registrant(4)(13)
10.7 Lease dated as of February 8, 1988 between the Registrant and
State Street Bank and Trust Company of California, N.A., not
individually, but solely as an Ancillary Trustee for State
Street Bank and Trust Company, a Massachusetts banking
corporation, not individually, but solely as Trustee for the
AT&T Master Pension Trust, covering the Company's principal
facilities in Calabasas, California(14)
10.8 Form of International Distributor Agreement(15) and Schedule of
Distributors
10.9 Loan and Security Agreement dated September 14, 1993 between
the Registrant and CoastFed Business Credit Corporation(16), as
amended by Amendment to Loan Documents dated May 18, 1994(17)
10.10 Accounts Collateral Security Agreement dated September 14, 1993
between the Registrant and CoastFed Business Credit
Corporation(16)
10.11 Equipment Collateral Security Agreement dated May 18, 1994
between the Registrant and CoastFed Business Credit
Corporation(17)
10.12 Officer Severance Plan, including form of Employment Separation
Agreement(4)(18)
10.13 Consulting Agreement dated as of January 20, 1994 between the
Registrant and Howard Oringer, including warrant and
confidentiality agreement(4)(18)
10.14 Warrant issued to Robert V. Adams on January 16, 1992, as
amended by Amendment No. 1 dated July 24, 1993(4)(18)
35
36
10.15 Warrant issued to Howard Oringer on January 16, 1992, as
amended by Amendment No. 1 dated July 24, 1993(4)(18)
10.16 Warrant issued to Philip Black on April 16, 1994(4)(10)
10.17 Distributorship Agreement dated September 16, 1994 between the
Registrant and AT&T Corp.(19)
10.18 Memo of Understanding dated October 27, 1994 between the
Registrant and Stratus Computer, Inc.(1)
10.19 Compensation agreement dated November 22, 1995 between the
Registrant and Allan Toomer(4)
11.1 Statement of Computation of Earnings Per Share
21.1 Subsidiaries of the Registrant(1)
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
- -----------------------------
(1) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1994.
(2) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-3 (Registration No. 33-58551) filed
with the Commission on May 18, 1995.
(3) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-48079) filed with the Commission on
May 22, 1992.
(4) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Annual Report.
(5) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-16094) filed with the Commission on
December 9, 1986.
(6) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-22370) filed with the Commission on
June 8, 1988.
36
37
(7) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-30475) filed with the Commission on
August 11, 1989.
(8) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-40612) filed with the Commission on
May 16, 1991.
(9) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-63102) filed with the Commission on
May 24, 1993.
(10) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-87558) filed with the Commission on
December 19, 1994.
(11) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-82124) filed with the Commission on
July 28, 1994.
(12) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (Registration No. 33-60611) filed with the Commission on
June 27, 1995.
(13) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1987.
(14) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended June 30, 1988.
(15) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-4123) filed with the Commission on
March 19, 1986.
(16) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended September 30, 1993.
(17) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended June 30, 1994.
(18) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-15135) for the year ended December 31, 1993.
(19) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-15135) for the quarter ended September 30, 1994.
Confidential treatment has been granted with respect to portions of
this exhibit, and such confidential portions have been deleted and
filed with the Commission pursuant to Rule 24b-2 promulgated under the
Securities Exchange Act of 1934.
37
38
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed or required to be filed by the
Registrant during the quarter ended December 31, 1995.
(C) EXHIBITS
See the list of Exhibits under Item 14(a)3 of this Annual Report on
Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
See the Schedule under Item 14(a)2 of this Annual Report on Form 10-K.
38
39
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Calabasas, California.
TEKELEC
By: /s/ Philip J. Alford
-------------------------------
Philip J. Alford, President and
Chief Executive Officer
Dated: March 29, 1996
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jean-Claude Asscher Chairman of the Board March 29, 1996
- -------------------------------------------
Jean-Claude Asscher
/s/ Philip J. Alford President, Chief Executive March 29, 1996
- ------------------------------------------- Officer and Director
Philip J. Alford
/s/ Robert V. Adams Director March 29, 1996
- -------------------------------------------
Robert V. Adams
/s/ Philip Black Director March 29, 1996
- -------------------------------------------
Philip Black
/s/ Daniel L. Brenner Director March 29, 1996
- -------------------------------------------
Daniel L. Brenner
/s/ Howard Oringer Director March 29, 1996
- -------------------------------------------
Howard Oringer
/s/ Jon F. Rager Director March 29, 1996
- -------------------------------------------
Jon F. Rager
/s/ Gilles C. Godin Vice President, Finance and March 29, 1996
- ------------------------------------------- Chief Financial Officer
Gilles C. Godin
40
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TEKELEC
We have audited the accompanying consolidated balance sheets of
Tekelec as of December 31, 1995 and 1994, and the related consolidated
statements of operations, shareholders' equity, and cash flow, and the
financial statement schedule for each of the three years in the period ended
December 31, 1995. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Tekelec as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents, in all material respects, the information required to be included
therein.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
February 9, 1996
F-1
41
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------------------------------------------
(thousands, except per share data)
REVENUES (including sales to related parties of
1995 - $5,305; 1994 - $3,809; 1993 - $3,972) . . $ 75,276 $ 61,189 $ 46,856
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . . 25,035 20,388 16,836
Research and development . . . . . . . . . . . . 15,054 11,962 17,570
Selling, general and administrative . . . . . . 27,653 22,466 23,756
Restructuring . . . . . . . . . . . . . . . . . -- -- 5,988
------- ------- --------
Total costs and expenses . . . . . . . . . . . 67,742 54,816 64,150
Income (Loss) from operations . . . . . . . . . . . 7,534 6,373 (17,294)
Other income (expense):
Interest, net . . . . . . . . . . . . . . . . . 1,139 (327) (16)
Other, net . . . . . . . . . . . . . . . . . . . (223) (335) 209
------- ------- --------
Total other income (expense) . . . . . . . . . 916 (662) 193
------- ------- --------
Income (Loss) before provision for income taxes . . 8,450 5,711 (17,101)
Provision for income taxes . . . . . . . . . . . 2,139 1,251 1,442
------- ------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . $ 6,311 $ 4,460 $ (18,543)
======= ======= ========
EARNINGS (LOSS) PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.47 $ (2.23)
Fully diluted . . . . . . . . . . . . . . . . 0.52 0.43 (2.23)
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary . . . . . . . . . . . . . . . . . . . 12,060 9,550 8,314
Fully diluted . . . . . . . . . . . . . . . . 12,063 10,360 8,314
See notes to consolidated financial statements.
F-2
42
TEKELEC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
1995 1994
-----------------------------
(thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 43,609 $ 6,653
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . -- 1,000
Accounts and notes receivable, less allowances
1995 -- $391; 1994 -- $318 . . . . . . . . . . . . . . . . . 19,167 14,215
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 6,423 4,391
Amounts due from related parties . . . . . . . . . . . . . . . . 3,053 1,538
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 1,232 704
------ ------
Total current assets . . . . . . . . . . . . . . . . . . . . . 73,484 28,501
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 6,107 4,794
Technology, net . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 423
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897 691
------ ------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,488 $ 34,409
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term debt . . $ 570 $ 1,366
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . 3,960 4,005
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 4,404 3,213
Accrued payroll and related expenses . . . . . . . . . . . . . . 3,294 4,132
Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . 2,908 1,412
Current portion of other obligations . . . . . . . . . . . . . . 31 312
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 1,334 595
------ ------
Total current liabilities . . . . . . . . . . . . . . . . . . 16,501 15,035
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 620
Long-term portion of other obligations . . . . . . . . . . . . . . . -- 34
------ ------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 16,881 15,689
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, without par value, 50,000,000 shares authorized;
issued and outstanding 1995 -- 11,599,073; 1994 -- 9,022,612 54,936 15,940
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 6,390 79
Cumulative translation adjustments . . . . . . . . . . . . . . . 2,281 2,701
------ ------
Total shareholders' equity . . . . . . . . . . . . . . . . . . 63,607 18,720
------ ------
Total liabilities and shareholders' equity . . . . . . . . . . $ 80,488 $ 34,409
====== ======
See notes to consolidated financial statements.
F-3
43
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
----------------------------------------------
(thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . $ 6,311 $ 4,460 $ (18,543)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . 3,643 4,406 5,522
Deferred income taxes . . . . . . . . . . . . . -- -- 145
Noncash component of restructuring charge . . . -- -- 2,969
Changes in current assets and liabilities:
Accounts and notes receivable . . . . . . . . (5,022) (5,522) (1,150)
Inventories . . . . . . . . . . . . . . . . . (2,079) 400 (370)
Amounts due from related parties . . . . . . . (1,515) (294) (23)
Income taxes receivable . . . . . . . . . . . -- 216 530
Prepaid expenses . . . . . . . . . . . . . . . (567) 427 (242)
Trade accounts payable . . . . . . . . . . . . (188) (304) 2,369
Accrued expenses . . . . . . . . . . . . . . . 1,346 (703) (449)
Accrued payroll and related expenses . . . . . (865) 559 1,569
Deferred revenues . . . . . . . . . . . . . . 1,496 932 (208)
Income taxes payable . . . . . . . . . . . . . 810 (150) 372
------- ------- -------
Total adjustments . . . . . . . . . . . . . (2,941) (33) 11,034
------- ------- -------
Net cash provided by (used in)
operating activities . . . . . . . . . . . 3,370 4,427 (7,509)
------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
(Increase) Decrease in restricted cash . . . . . 1,000 (1,000) --
Purchase of property and equipment . . . . . . . (4,530) (1,508) (2,476)
Investments in technology . . . . . . . . . . . -- -- (165)
(Increase) Decrease in other assets . . . . . . (305) 222 (681)
------- ------- -------
Net cash (used in) investing activities . . (3,835) (2,286) (3,322)
------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (Repayments of) short-term
borrowings . . . . . . . . . . . . . . . . . (796) (1,878) 3,004
Proceeds from long-term debt . . . . . . . . . . -- 1,000 --
Repayment of long-term debt . . . . . . . . . . (240) (140) --
Proceeds from (Repayments of) other obligations (323) (235) 184
Proceeds from issuance of common stock and stock
option tax benefits . . . . . . . . . . . . . 38,996 1,591 662
------- ------- -------
Net cash provided by financing activities . 37,637 338 3,850
------- ------- -------
Effect of exchange rate changes on cash . . . . . . . (216) 505 583
------- ------- -------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . 36,956 2,984 (6,398)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR . 6,653 3,669 10,067
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR . . . . $ 43,609 $ 6,653 $ 3,669
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest . . . . . . . . . . . . . . . . . . . $ 231 $ 343 $ 327
Income taxes . . . . . . . . . . . . . . . . . 1,543 1,131 439
See notes to consolidated financial statements.
F-4
44
TEKELEC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
----------------- RETAINED CUMULATIVE TOTAL
NUMBER EARNINGS TRANSLATION SHAREHOLDERS'
OF SHARES AMOUNT (DEFICIT) ADJUSTMENTS EQUITY
----------------------------------------------------------------------
(thousands)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 8,264 $ 13,687 $ 14,162 $ 902 $ 28,751
Exercise of stock options 266 662 --- --- 662
Translation adjustment --- --- --- 823 823
Net loss --- --- (18,543) --- (18,543)
- --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 8,530 14,349 (4,381) 1,725 11,693
Exercise of stock options 493 1,591 --- --- 1,591
Translation adjustment --- --- --- 976 976
Net income --- --- 4,460 --- 4,460
- --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 9,023 15,940 79 2,701 18,720
Issuance of common stock 2,013 36,520 --- --- 36,520
Exercise of stock options
and warrants 563 2,374 --- --- 2,374
Stock option tax benefits --- 102 --- --- 102
Translation adjustment --- --- --- (420) (420)
Net income --- --- 6,311 --- 6,311
- --------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 11,599 $ 54,936 $ 6,390 $ 2,281 $ 63,607
==============================================================================================================
See notes to consolidated financial statements.
F-5
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions are eliminated. Certain items shown in the December 31, 1994 and
1993 financial statements have been reclassified to conform with the current
period presentation.
ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method. The estimated useful lives are:
Manufacturing and
development equipment 3-5 years
Furniture and office equipment 5 years
Demonstration equipment 3 years
Leasehold improvements The shorter of useful
life or lease term
TECHNOLOGY
Product development costs, including costs of purchased and licensed
technology incurred to enhance significantly a product that results in the
creation and sales of a new generation of products, are capitalized; costs
incurred in conceptualization and design of new products are expensed as
incurred.
F-6
46
Amortization is based on the greater of related net shipments made
during the period to total anticipated net shipments, or the three-year
straight-line method. There were no capitalized internally developed software
costs in 1995 and 1994.
LONG-TERM ASSETS
The carrying value of long-term assets is periodically reviewed by
management, and impairment losses, if any, are recognized when the expected
nondiscounted future operating cash flows derived from such assets are less than
their carrying value. In 1995, Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS No. 121") was issued and was adopted by the
Company for the year ended December 31, 1995. This statement requires that
long-lived assets and certain identifiable intangible assets to be held and
used be reviewed for impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable. The
adoption of SFAS No. 121 did not have any impact on the financial position,
results of operations, or cash flows of the Company.
PRODUCT WARRANTY COSTS
The Company generally warrants its products for one year after sale
and provides for estimated future warranty costs at the time revenue is
recognized. At December 31, 1995 and 1994, accrued product warranty costs
amounted to $879,000 and $827,000, respectively, and are included in accrued
expenses.
REVENUE RECOGNITION
Revenues from sales of diagnostic products are generally recognized
when products are shipped. Revenues from sales of switching products are
recognized upon shipment to the customer's final site and satisfaction of
related significant Company obligations, if any. Revenues associated with
installation are realized upon completion. Extended warranty service revenues
are recognized ratably over the warranty period. Engineering service revenues
are recognized on delivery or as the services are performed.
INCOME TAXES
Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities. Deferred income taxes
are determined based on the difference between the financial reporting and tax
bases of assets and liabilities using enacted rates in effect during the year
in which the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
ADVERTISING
Advertising costs are expensed as incurred, and amounted to $625,000,
$305,000, and $509,000 for 1995, 1994, and 1993, respectively.
F-7
47
TRANSLATION OF FOREIGN CURRENCIES
Translation of foreign currencies is accounted for using the local
currency as the functional currency of the Company's foreign subsidiaries. All
assets and liabilities are translated at current exchange rates while revenues
and expenses are translated at average rates in effect for the period. The
resulting gains and losses are included in a separate component of
shareholders' equity. Gains (losses) on foreign currency transactions are
reflected in net income (loss) and amounted to $(210,000), $(235,000) and
$253,000 for 1995, 1994, and 1993, respectively.
STOCK-BASED COMPENSATION
In 1996 the Company will adopt SFAS No. 123, "Accounting for
Stock-Based Compensation." This standard establishes a fair value method for
accounting for stock-based compensation plans either through recognition or
disclosure. The Company intends to adopt this standard by disclosing the pro
forma net income and earnings per share amounts assuming the fair value method
was adopted on January 1, 1995. The adoption of this standard will not impact
the Company's results of operations, financial position or cash flows.
EARNINGS (LOSS) PER SHARE
Earnings (Loss) per share are computed using the weighted average
number of shares outstanding and dilutive common stock equivalents (options and
warrants).
NOTE B -- RESTRICTED CASH
At December 31, 1994, the Company's Japanese subsidiary had $1.0
million of restricted cash included in current assets, which represented cash
on deposit at a bank in Japan as collateral for outstanding short-term
borrowings in the U.S. under a $2.0 million line of credit. Upon expiration of
this facility during 1995, the outstanding loan balance of $1.0 million was
paid in full and the line of credit was not renewed.
NOTE C -- FAIR VALUE OF INVESTMENTS
The Company has short-term investments whose carrying amounts
approximate their fair values because of their short maturity. At December 31,
1995, the Company had investments of $35.9 million classified as
held-to-maturity securities included in cash and cash equivalents, all of which
were invested in corporate debt securities with maturities of 90 days or less.
The Company had no investments in debt or equity securities at December 31,
1994.
NOTE D -- BUSINESS AND CREDIT RISK
The Company sells communications diagnostic and network switching
systems worldwide primarily to telephone operating companies, equipment
manufacturers, and corporations that use its systems to design, install,
maintain, test, and operate communications equipment and networks. Credit is
extended based on an evaluation of each customer's financial condition, and
generally collateral is not required. Credit losses, if any, have been provided
for in the financial statements and have been consistently within management's
expectations.
F-8
48
NOTE E -- RELATED PARTY TRANSACTIONS
As of December 31, 1995, the Company's principal shareholder, a
director and his family, and a foreign-affiliated company controlled by the
director owned an aggregate of approximately 37% of the Company's outstanding
stock.
The following is a summary of transactions and balances with these
affiliates:
1995 1994 1993
---- ---- ----
(thousands)
Product sales . . . . . . . . . . . . . . . . . . . $ 5,305 $ 3,809 $3,972
Purchases of inventory . . . . . . . . . . . . . . 321 49 42
Director's fees and expenses . . . . . . . . . . . 32 15 24
Due from affiliates . . . . . . . . . . . . . . . . 3,053 1,538 1,244
Due to affiliates . . . . . . . . . . . . . . . . . 254 41 14
The amounts due from and to the affiliates are noninterest bearing.
In January 1994, the Company entered into a six-month consulting
agreement with a director pursuant to which such director received $52,000 and
a warrant to purchase 20,000 shares of the Company's Common Stock. See Note Q.
NOTE F -- RESTRUCTURINGS
During the second quarter of 1993, management reorganized the Company
into a divisional structure and in connection with such reorganization, the
Company recorded a $400,000 restructuring charge consisting of severance costs
associated with the related termination of employees and closure of the
Company's Alabama facility.
After incurring continued losses, the Company implemented in the
fourth quarter of 1993 an organizational and strategic restructuring aimed at
returning the Company to profitability by significantly reducing overhead
expenses and improving cash flow and further rationalizing the Company's
business lines. In connection with this restructuring, the Company discontinued
its network monitoring and field service product lines. A restructuring charge
of $5.6 million was recorded representing severance pay for 65 terminated
employees in management, research and development, support and administrative
functions, the write-down of technology and other assets associated with the
discontinued product lines, the write-off of a management information system
project which the Company terminated, and the accrual of other exit costs
associated with the restructuring, including costs related to the sale of the
Company's Australian subsidiary.
F-9
49
Restructuring charges for the year ended December 31, 1993 consisted
of the following:
(thousands)
Severance pay . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,256
Inventory write-down . . . . . . . . . . . . . . . . . . . . . . 438
Property and equipment write-down . . . . . . . . . . . . . . . . 1,175
Technology write-down . . . . . . . . . . . . . . . . . . . . . . 613
Other assets write-down . . . . . . . . . . . . . . . . . . . . . 743
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . 763
--------
$ 5,988
========
At December 31, 1994, all identified employees had been terminated and
all the severance costs and accrued expenses had been paid.
NOTE G -- INCOME TAXES
The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-----------------------------------------
(thousands)
CURRENTLY PAYABLE (RECEIVABLE):
Federal . . . . . . . . . . . . . . . . . . . $ 88 $ 133 $ (159)
State . . . . . . . . . . . . . . . . . . . . 228 202 39
Foreign . . . . . . . . . . . . . . . . . . . 2,258 916 1,311
DEFERRED:
Federal . . . . . . . . . . . . . . . . . . . -- -- 314
State . . . . . . . . . . . . . . . . . . . . -- -- --
Foreign . . . . . . . . . . . . . . . . . . . (435) -- (63)
------ ------- -------
$ 2,139 $ 1,251 $ 1,442
======= ======= =======
F-10
50
The primary components of temporary differences which gave rise to
deferred taxes at December 31, 1995 and 1994 are:
DECEMBER 31,
-----------
1995 1994
--------------------------
(thousands)
DEFERRED TAX ASSETS:
Net operating loss carryforward . . . . . . . $ 5,191 $ 5,565
Foreign tax credit carryforward . . . . . . . 918 918
Allowance for doubtful accounts . . . . . . . 141 117
Inventory adjustments . . . . . . . . . . . . 883 775
Depreciation and amortization . . . . . . . . 392 323
Research and development
credit carryforward . . . . . . . . . . . . 1,901 1,141
Accrued liabilities . . . . . . . . . . . . . 681 264
Warranty accrual . . . . . . . . . . . . . . . 358 325
Other . . . . . . . . . . . . . . . . . . . . 323 230
------- ------
Total deferred tax asset . . . . . . . . . . . 10,788 9,658
Less, valuation allowance . . . . . . . . . . (10,271) (9,496)
-------- -------
Total net deferred tax asset . . . . . . . . . 517 162
------- ------
DEFERRED TAX LIABILITIES:
Depreciation and amortization . . . . . . . . -- --
Deferred product development costs . . . . . . 45 84
Other . . . . . . . . . . . . . . . . . . . . 103 78
------- ------
Total deferred tax liability . . . . . . . . . 148 162
------- ------
NET DEFERRED TAX ASSET . . . . . . . . . . . . . . 369 --
CURRENT PORTION . . . . . . . . . . . . . . . . . . 224 --
------- ------
LONG-TERM PORTION
(INCLUDED IN OTHER ASSETS) . . . . . . . . . . $ 145 $ --
The valuation allowance for deferred taxes is based on the Company's operating
history and management's assessment of various uncertainties related to their
future realization. Because realization of deferred tax benefits is dependent
upon generating sufficient U.S. taxable income in future years, the amount of
the valuation allowance for deferred taxes may be reduced in the near term if
positive U.S. taxable income trends are sustainable.
F-11
51
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,
-------------------------------
1995 1994 1993
---------------------------------------------
Federal statutory provision
(benefit) rate . . . . . . . . . . . . . . . . 34.0% 34.0% (35.0)%
Research and
development credits . . . . . . . . . . . . . -- -- --
State taxes,
net of federal benefit . . . . . . . . . . . . 1.8 6.1 0.2
Foreign taxes . . . . . . . . . . . . . . . . . . . 5.5 6.9 2.9
Utilization of operating
loss carryforwards . . . . . . . . . . . . . . (17.0) (27.5) --
Loss for which no tax benefit
was recorded . . . . . . . . . . . . . . . . . -- -- 32.3
Temporary differences for which
no tax benefit was recorded . . . . . . . . . -- -- 7.9
Other . . . . . . . . . . . . . . . . . . . . . . . 1.0 2.4 0.1
------ ------ ------
25.3% 21.9% 8.4%
====== ====== ======
At December 31, 1995, the Company had available federal net operating
loss carryforwards of $14.0 million, foreign tax credit carryforwards of
$918,000, and research and development credit carryforwards of $1.9 million
which will generally expire beginning in the years 2007, 1997, and 2007,
respectively.
The Company has not provided for federal income taxes on $9.6 million
of undistributed earnings of its foreign subsidiaries which have been
reinvested in their operations. If these earnings were distributed, net
operating loss carryforwards and foreign tax credits available under current
law would eliminate the resulting federal income tax liability.
NOTE H -- INVENTORIES
The components of inventories are:
DECEMBER 31,
-----------
1995 1994
---------------------------
(thousands)
Raw materials . . . . . . . . . . . . . . . . . . . $ 3,109 $ 2,197
Work in process . . . . . . . . . . . . . . . . . . 1,653 1,246
Finished goods . . . . . . . . . . . . . . . . . . 1,661 948
----- -----
$ 6,423 $ 4,391
===== =====
F-12
52
NOTE I -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-----------
1995 1994
--------------------------
(thousands)
Manufacturing and
development equipment . . . . . . . . . . . . $ 10,823 $ 8,567
Furniture and office equipment . . . . . . . . . . 5,651 5,022
Demonstration equipment . . . . . . . . . . . . . . 3,406 3,249
Leasehold improvements . . . . . . . . . . . . . . 1,232 1,257
-------- --------
21,112 18,095
Less, accumulated depreciation
and amortization . . . . . . . . . . . . . . . (15,005) (13,301)
-------- --------
$ 6,107 $ 4,794
========= =========
NOTE J -- TECHNOLOGY
Technology consisted of capitalized product development costs, net of
accumulated amortization of $1.2 million at December 31, 1994. There were no
unamortized capitalized product development costs at December 31, 1995.
NOTE K -- BORROWINGS
The Company has a $7.5 million line of credit with a U.S. bank and
lines of credit aggregating $3.4 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.5% at December 31, 1995) plus 2.5% per annum and expires September 30,
1996, if not renewed. Maximum borrowings available under the line of credit are
based on eligible accounts receivable and amounted to $6.9 million at December
31, 1995, of which $330,000 was then outstanding. This line of credit includes
a $1.0 million long-term credit facility payable in 47 monthly installments of
$20,000 each which began in June 1994 with a final installment of $60,000 due
in May 1998 or upon the expiration of the underlying $7.5 million line of
credit, if not renewed. At December 31, 1995, $620,000 was outstanding under
this long-term facility, of which $380,000 was included under long-term debt.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.4 million with interest at the Japanese prime
rate (1.625% at December 31, 1995) plus 0.125% per annum which expire between
March 31, 1996 and August 5, 1996, if not renewed. There have been no
borrowings under these lines of credit.
The Company's weighted average short-term borrowing rates were 11.5%
and 8.8% in 1995 and 1994, respectively.
F-13
53
NOTE L -- COMMITMENTS AND CONTINGENCIES
The Company leases its office and manufacturing facilities together
with certain office equipment under operating lease agreements. Lease terms
generally range from one to ten years; certain building leases contain options
for renewal for additional periods and are subject to increases up to 10% every
24 months.
Total rent expense was $1.9 million, $2.0 million, and $2.1 million,
for 1995, 1994, and 1993, respectively.
Minimum annual noncancelable lease commitments at December 31, 1995,
are:
For The Years Ending December 31,
- -----------------------------------------------
(thousands)
1996 . . . . . . . . . . . . . . . . . . . . $ 2,062
1997 . . . . . . . . . . . . . . . . . . . . 1,658
1998 . . . . . . . . . . . . . . . . . . . . 1,385
1999 . . . . . . . . . . . . . . . . . . . . 1,410
2000 . . . . . . . . . . . . . . . . . . . . 1,309
Thereafter . . . . . . . . . . . . . . . . . 4,014
------
$ 11,838
======
NOTE M -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company has various stock option plans with maximum terms of ten
years. 5,650,000 shares of the Company's Common Stock have been issued or
reserved for issuance under these plans.
The terms of options granted under these Option Plans are determined
at the time of grant. The option price may not be less than the fair market
value per share on the date of grant. Both incentive stock options and
nonstatutory stock options can be issued under the Option Plans.
F-14
54
Combined stock option activity under the Option Plans is as follows:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-----------------------------------------------
Number of option shares:
Granted . . . . . . . . . . . . . . . . . . 646,838 1,292,348 1,947,502
Exercised . . . . . . . . . . . . . . . . . 469,801 407,982 150,126
Cancelled . . . . . . . . . . . . . . . . . 86,588 583,632 1,865,548
Outstanding at end of year . . . . . . . . . 2,338,221 2,247,772 1,947,038
Option price range:
Granted . . . . . . . . . . . . . . . . . . $ 14.25---24.88 $ 3.00 --- 16.38 $ 2.63 --- $ 5.63
Exercised . . . . . . . . . . . . . . . . . 1.88---20.06 1.88 --- 6.13 1.88 --- 4.38
Cancelled . . . . . . . . . . . . . . . . . 3.00---19.75 3.00 --- 13.63 3.25 --- 9.25
Outstanding at end of year . . . . . . . . . 1.88---24.88 1.88 --- 16.38 1.88 --- 6.25
At December 31, 1995, options for 700,911 shares were exercisable at
exercise prices ranging from $1.875 to $24.875 per share and have exercise
periods of up to ten years.
The Company has an Employee Stock Purchase Plan (the "ESPP") with a
maximum term of ten years which expires during 1996. 600,000 shares of the
Company's Common Stock have been reserved for issuance under the ESPP. Eligible
employees may authorize payroll deductions of up to 10% of their compensation
to purchase shares of Common Stock at 85% of the lower of the market price at
the beginning or end of each six-month offering period. During 1995, 1994, and
1993, 34,160, 85,176, and 114,824 shares, respectively, were purchased under
the ESPP at average prices of $10.95, $3.07, and $2.34, respectively.
The Company has a 401(k) tax-deferred savings plan under which
eligible employees may authorize from 2% to 12% of their compensation to be
invested in employee-elected investment funds managed by an independent
trustee. The Company may contribute matching funds of up to 50%, as determined
annually by the Board of Directors, of the employees' payroll deductions.
During 1995, 1994, and 1993, the Company's contributions amounted to $167,000
$122,000, and none, respectively.
F-15
55
NOTE N -- GEOGRAPHIC SEGMENTS AND FOREIGN OPERATIONS
The Company operates in one business segment. Transfers between
geographic areas are made at prices reflecting market conditions. Geographic
segment information including sales and transfers between geographic areas is
presented below:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-----------------------------------------------
(thousands)
Revenues from unaffiliated customers
United States . . . . . . . . . . . . . . . . $ 55,801 $ 47,722 $ 32,072
Japan . . . . . . . . . . . . . . . . . . . . 16,684 12,269 11,749
Other . . . . . . . . . . . . . . . . . . . . 2,791 1,198 3,035
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 75,276 $ 61,189 $ 46,856
======= ======= =======
Transfers between geographic areas
United States . . . . . . . . . . . . . . . . $ 6,060 $ 4,993 $ 4,380
Japan . . . . . . . . . . . . . . . . . . . . --- --- ---
Other . . . . . . . . . . . . . . . . . . . . --- --- ---
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 6,060 $ 4,993 $ 4,380
======= ======= =======
Total revenues
United States . . . . . . . . . . . . . . . . $ 61,861 $ 52,715 $ 36,452
Japan . . . . . . . . . . . . . . . . . . . . 16,684 12,269 11,749
Other . . . . . . . . . . . . . . . . . . . . 2,791 1,198 3,035
Intersegment eliminations . . . . . . . . . . (6,060) (4,993) (4,380)
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 75,276 $ 61,189 $ 46,856
======= ======= =======
Income (Loss) from operations
United States . . . . . . . . . . . . . . . . $ 3,441 $ 4,561 $ (19,228)
Japan . . . . . . . . . . . . . . . . . . . . 3,395 1,930 1,990
Other . . . . . . . . . . . . . . . . . . . . 698 (118) (56)
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 7,534 $ 6,373 $ (17,294)
======= ======= ========
Identifiable assets
United States . . . . . . . . . . . . . . . . $ 69,741 $ 24,905 $ 20,766
Japan . . . . . . . . . . . . . . . . . . . . 10,019 9,056 6,670
Other . . . . . . . . . . . . . . . . . . . . 728 448 703
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 80,488 $ 34,409 $ 28,139
======= ======= =======
U.S. export sales to unaffiliated customers by
destination of sale
Europe . . . . . . . . . . . . . . . . . . . . $ 7,097 $ 5,636 $ 5,435
Other . . . . . . . . . . . . . . . . . . . . 8,184 7,284 3,661
------- ------- -------
Total . . . . . . . . . . . . . . . . . . $ 15,281 $ 12,920 $ 9,096
======= ======= =======
NOTE O -- MAJOR CUSTOMERS
Sales to Nippon Telegraph and Telephone amounted to 14%, 13%, and 16%
of revenues in 1995, 1994, and 1993, respectively. Sales to AT&T amounted to
12% of revenues in 1995.
F-16
56
NOTE P -- QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
QUARTERS
First Second Third Fourth
---------------------------------------------------------
(thousands, except per share data)
For the Years Ended December 31,
- --------------------------------
1995
- ----
Revenues . . . . . . . . . . . . . . . . . $ 18,630 $ 19,500 $ 19,947 $ 17,199
Gross profit . . . . . . . . . . . . . . . 12,423 12,843 13,796 11,179
Income before provision for income taxes . 2,120 2,820 3,252 258
Net income . . . . . . . . . . . . . . . . 1,468 2,050 2,560 233
Earnings per share:
Primary . . . . . . . . . . . . . . . $ 0.14 $ 0.18 $ 0.20 $ 0.02
Fully diluted . . . . . . . . . . . . 0.13 0.18 0.20 0.02
1994
- ----
Revenues . . . . . . . . . . . . . . . . . $ 12,986 $ 13,810 $ 15,638 $ 18,755
Gross profit . . . . . . . . . . . . . . . 8,246 9,494 10,606 12,455
Income before provision for income taxes . 243 1,216 1,880 2,372
Net income . . . . . . . . . . . . . . . . 126 877 1,357 2,100
Earnings per share:
Primary . . . . . . . . . . . . . . . $ 0.01 $ 0.10 $ 0.15 $ 0.20
Fully Diluted . . . . . . . . . . . . 0.01 0.10 0.14 0.20
Tekelec typically operates with a limited backlog, and most of its
revenues in each quarter result from orders received in that quarter. Further,
Tekelec typically generates one-half or more of its revenues for each quarter
in the last month of the quarter. Tekelec establishes its expenditure levels
based on its expectations as to future revenues, and if revenue levels were to
fall below expectations this would cause expenses to be disproportionately
high. Therefore, a drop in near term demand would significantly affect
revenues, causing disproportionate reduction in profits or even losses in a
quarter. Tekelec's operating results may fluctuate for this reason or as a
result of a number of other factors, including general economic and political
conditions (such as recessions in the U.S. and Japan), capital spending
patterns of Tekelec's customers, increased competition, variations in the mix
of sales, fluctuation in proportion of foreign sales, and announcements of new
products by Tekelec or its competitors.
In 1995, Tekelec's quarterly revenue as compared to the prior year's
corresponding quarter increased by up to 43% in the first three quarters, and
decreased by 8% in the fourth quarter. The Company believes the increases
resulted from increased market acceptance of its products, while the fourth
quarter decrease resulted from lower diagnostic product sales primarily due to
reduced spending by domestic equipment vendors and major carriers. The
Company's results for 1995 and 1994 include the effect of the Company's ability
to recognize benefits amounting to $1.3 million and $1.6 million for its tax
loss carryforwards.
F-17
57
NOTE Q -- COMMON STOCK
At December 31, 1995 and 1994, the Company had warrants outstanding to
purchase an aggregate of 20,000 and 80,000 shares of its Common Stock,
respectively, as more fully discussed below.
In July 1994, the Company issued warrants to purchase 30,000 shares of
its Common Stock at $2.875 per share, exercisable in full at any time prior to
July 21, 1999, all of which were outstanding at December 31, 1994. All of
these warrants were exercised during 1995.
In April 1994, the Company issued warrants to purchase 10,000 shares
of its Common Stock at $3.375 per share to one director, all of which were
outstanding at December 31, 1995 and 1994. These warrants vest and become
exercisable in 20 equal quarterly installments beginning on April 19, 1994.
In January 1994, pursuant to a consulting agreement between the
Company and a director, the Company issued warrants to purchase 20,000 shares
of its Common Stock at $3.4375 per share to such director, all of which were
outstanding at December 31, 1994. These warrants vested during 1994, and were
exercised during 1995.
In 1992, the Company issued warrants to purchase a total of 20,000
shares of its Common Stock to two directors at $7.5625 per share. These
warrants were re-priced to $3.595 per share in 1993, and are exercisable in
full at any time prior to January 17, 1997 and were outstanding at December 31,
1994. During 1995, 10,000 of these warrants were exercised, and 10,000 were
outstanding at December 31, 1995.
On March 17, 1995, the Company effected a two-for-one stock split. All
references to numbers of shares and related prices, per share amounts, and
stock option plan data have been restated to reflect the stock split.
F-18
58
SCHEDULE II
TEKELEC
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------
(thousands)
Year ended December 31, 1993:
- ----------------------------
Allowance for doubtful accounts $ 241 $ --- $ 14 $ 34 $ 221
Product warranty 299 254 --- 273 280
Inventory provision 468 763 --- 142 1,089
Deferred tax valuation allowance 3,955 8,003 --- --- 11,958
Year ended December 31, 1994:
- ----------------------------
Allowance for doubtful accounts $ 221 $ --- $ 161 $ 64 $ 318
Product warranty 280 819 --- 272 827
Inventory provision 1,089 315 --- 239 1,165
Deferred tax valuation allowance 11,958 --- --- 2,462 9,496
Year ended December 31, 1995:
- ----------------------------
Allowance for doubtful accounts $ 318 $ 120 $ --- $ 47 $ 391
Product warranty 827 581 --- 529 879
Inventory provision 1,165 377 --- 241 1,315
Deferred tax valuation allowance 9,496 775 --- --- 10,271
S-1
59
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.8 Schedule of Distributors . . . . . . . . . . . . . . . . . . . . . .
10.19 Compensation Agreement* . . . . . . . . . . . . . . . . . . . . . . .
11.1 Statement of Computation of Earnings Per Share . . . . . . . . . . .
23.1 Consent of Coopers & Lybrand L.L.P. . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . .
- ----------------
*Confidential treatment is being requested with respect to portions of this
exhibit, and such confidential portions have been deleted and will be
separately filed with the Commission pursuant to Rule 24b-2 promulgated
under the Securities Exchange Act of 1934.