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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-15135
TEKELEC
(Exact name of registrant as specified in its charter)
California 95-2746131
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26580 W. Agoura Road, Calabasas, California 91302
(Address and zip code of principal executive offices)
(818) 880-5656
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
As of August 2, 2002, there were 60,392,014 shares of the registrant's
common stock, without par value, outstanding.
TEKELEC
FORM 10-Q
INDEX
Part I -- Financial Information Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2002 3
and December 31, 2001
Consolidated Statements of Operations for the three and 4
six months ended June 30, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) 5
for the three and six months ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the six months 6
ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Part II -- Other Information
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Tekelec
Consolidated Balance Sheets
June 30, December 31,
2002 2001
----------- -----------
(thousands)
(unaudited)
Assets
Current assets:
Cash and cash equivalents .................................. $ 148,689 $ 92,172
Short-term investments, at fair value ...................... 32,458 68,608
Accounts and notes receivable, less
allowances of $4,761 and $5,349, respectively ............ 53,948 68,467
Inventories ................................................ 14,310 21,317
Deferred income taxes, net ................................. 16,173 15,840
Prepaid expenses and other current assets .................. 11,036 16,417
----------- -----------
Total current assets ................................... 276,614 282,821
Long-term investments, at fair value ......................... 88,004 70,200
Property and equipment, net .................................. 30,617 34,759
Investments in privately-held companies ...................... 16,525 16,500
Deferred income taxes, net ................................... 4,401 4,350
Other assets ................................................. 3,011 3,482
Goodwill, net ................................................ 44,942 44,725
Intangible assets, net ....................................... 21,233 27,567
----------- -----------
Total assets ........................................ $ 485,347 $ 484,404
=========== ===========
Liabilities And Shareholders' Equity
Current liabilities:
Trade accounts payable ..................................... $ 9,162 $ 16,903
Accrued expenses ........................................... 23,713 22,583
Accrued payroll and related expenses ....................... 13,062 9,986
Current portion of deferred revenues ....................... 42,810 46,587
Income taxes payable ....................................... 1,429 1,594
----------- -----------
Total current liabilities .............................. 90,176 97,653
Long-term convertible debt ................................... 124,949 122,992
Deferred income taxes ........................................ 7,753 9,983
Long-term portion of deferred revenues ....................... 4,548 4,954
----------- -----------
Total liabilities ...................................... 227,426 235,582
----------- -----------
Commitments and Contingencies (Note F)
Shareholders' equity:
Common stock, without par value,
200,000,000 shares authorized; 60,377,791 and
60,107,087 shares issued and outstanding,
respectively ........................................... 173,931 171,846
Retained earnings .......................................... 84,204 78,525
Accumulated other comprehensive loss ....................... (214) (1,549)
----------- -----------
Total shareholders' equity ............................. 257,921 248,822
----------- -----------
Total liabilities and shareholders' equity ............. $ 485,347 $ 484,404
=========== ===========
See notes to consolidated financial statements.
3
Tekelec
Consolidated Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(thousands, except per share data)
Revenues ................................................... $ 80,222 $ 70,882 $ 152,841 $ 155,197
Cost of sales:
Cost of goods sold ...................................... 21,924 21,191 46,288 47,875
Amortization of purchased technology .................... 2,590 2,602 5,187 5,191
--------- --------- --------- ---------
Total cost of sales .............................. 24,514 23,793 51,475 53,066
--------- --------- --------- ---------
Gross profit ..................................... 55,708 47,089 101,366 102,131
--------- --------- --------- ---------
Operating expenses:
Research and development ................................ 19,388 18,377 36,661 37,051
Selling, general and administrative ..................... 29,326 27,513 54,868 54,431
Amortization of goodwill and other intangible
assets ................................................ 400 5,416 800 10,832
--------- --------- --------- ---------
Total operating expenses ............................ 49,114 51,306 92,329 102,314
--------- --------- --------- ---------
Income (loss) from operations .............................. 6,594 (4,217) 9,037 (183)
Other income (expense):
Interest income ......................................... 1,820 2,237 3,360 4,823
Interest expense ........................................ (2,288) (2,225) (4,560) (4,448)
Other, net .............................................. 716 (347) 666 (189)
--------- --------- --------- ---------
Total other income (expense) ........................ 248 (335) (534) 186
--------- --------- --------- ---------
Income (loss) before provision for income taxes ............ 6,842 (4,552) 8,503 3
Provision for income taxes .............................. 2,325 (1) 2,836 3,185
--------- --------- --------- ---------
Net income (loss) ................................... $ 4,517 $ (4,551) $ 5,667 $ (3,182)
========= ========= ========= =========
Earnings (Loss) per share:
Basic ................................................... $ 0.08 $ (0.08) $ 0.09 $ (0.05)
Diluted ................................................. 0.07 (0.08) 0.09 (0.05)
Weighted average number of shares outstanding:
Basic ................................................... 60,197 59,468 60,170 59,252
Diluted ................................................. 61,180 59,468 61,478 59,252
See notes to consolidated financial statements.
4
Tekelec
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(thousands)
Net income (loss) ...................................... $ 4,517 $ (4,551) $ 5,667 $ (3,182)
Other comprehensive income (loss):
Foreign currency translation adjustments ............ 1,597 27 1,335 (1,202)
--------- --------- --------- ---------
Comprehensive income (loss) ............................ $ 6,114 $ (4,524) $ 7,002 $ (4,384)
========= ========= ========= =========
See notes to consolidated financial statements.
5
Tekelec
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended
June 30,
--------------------------
2002 2001
--------- ---------
(thousands)
Cash flows from operating activities:
Net income (loss) ................................................. $ 5,667 $ (3,182)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Allowance for doubtful accounts .............................. (591) 3,800
Depreciation ................................................. 9,121 7,824
Amortization ................................................. 5,987 15,976
Amortization of deferred financing costs ..................... 410 410
Convertible debt accretion ................................... 1,957 1,831
Deferred income taxes ........................................ (2,502) (2,511)
Stock-based compensation ..................................... 164 146
Tax benefit related to stock options exercised ............... 291 3,751
Changes in operating assets and liabilities:
Accounts and notes receivable .............................. 16,137 37,876
Inventories ................................................ 7,303 (3,035)
Income taxes receivable .................................... -- 1,345
Prepaid expenses and other current assets .................. 5,401 (2,437)
Trade accounts payable ..................................... (8,782) 2,696
Accrued expenses ........................................... 1,011 (5,279)
Accrued payroll and related expenses ....................... 3,036 (4,883)
Deferred revenues .......................................... (4,183) 18,539
Income taxes payable ....................................... (206) (4,136)
--------- ---------
Total adjustments ........................................ 34,554 71,913
--------- ---------
Net cash provided by operating activities ................ 40,221 68,731
--------- ---------
Cash flows from investing activities:
Proceeds from maturity of available-for-sale securities ...... 137,536 137,615
Purchase of available-for-sale securities .................... (119,190) (90,426)
Purchase of property and equipment ........................... (4,913) (15,911)
Purchase of technology ....................................... -- (142)
Change in other assets ....................................... 227 (555)
--------- ---------
Net cash provided by investing activities ................ 13,660 30,581
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ....................... 1,630 9,999
--------- ---------
Net cash provided by financing activities ................ 1,630 9,999
Effect of exchange rate changes on cash ........................... 1,006 (735)
--------- ---------
Net change in cash and cash equivalents ...................... 56,517 108,576
Cash and cash equivalents at beginning of period .................. 92,172 65,690
--------- ---------
Cash and cash equivalents at end of period ........................ $ 148,689 $ 174,266
========= =========
See notes to consolidated financial statements.
6
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
A. Basis of Presentation
The consolidated financial statements are unaudited, other than the
consolidated balance sheet at December 31, 2001, and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of Tekelec's (the "Company's")
financial condition, operating results and cash flows for the interim periods.
The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year. Certain
items shown in the prior financial statements have been reclassified to conform
with the presentation of the current period.
The Company operates under a thirteen-week calendar quarter. For financial
statement presentation purposes, however, the reporting periods are referred to
as ended on the last calendar day of the quarter. The accompanying consolidated
financial statements for the three and six months ended June 30, 2002 and 2001
are for the thirteen and twenty-six weeks ended June 28, 2002 and June 29, 2001,
respectively.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2001 and
the notes thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.
141 establishes new standards for accounting and reporting requirements for
business combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS No. 142 was adopted on January 1, 2002 and
goodwill will now be tested for impairment at the reporting unit at least
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. On January 1, 2002, the asembled workforce intangible amount
was reclassified to goodwill. Amortization of goodwill, including goodwill
recorded in past business combinations, has ceased and based on work performed
by an independent third-party valuation firm, the Company determined that there
was no goodwill impairment.
The net income for the three and six months ended June 30, 2001 includes
amortization of goodwill and assembled workforce of approximately $5.0 million
and $10.0 million, respectively. The adjusted net income and earnings per share
information for the three and six months ended June 30, 2001 as if SFAS No. 142
was adopted on January 1, 2001 would have been:
7
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
------------------------ ------------------------
As As As As
reported adjusted reported adjusted
--------- --------- --------- ---------
Net income (loss) (thousands) ................. $ (4,551) $ 371 $ (3,182) $ 6,662
Basic earnings (loss) per share ............... (0.08) 0.01 (0.05) 0.11
Diluted earnings (loss) per share ............. (0.08) 0.01 (0.05) 0.11
The identifiable intangible assets will continue to be amortized over
their estimated useful lives. The estimated aggregate amortization expense for
intangibles for the remainder of 2002 is approximately $6.0 million. The
estimated aggregate amortization expense for intangibles for the subsequent
years is:
For the Years Ending December 31,
(thousands)
2003............................... $ 11,364
2004............................... 3,916
Thereafter......................... --
--------
$ 15,280
========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This Statement also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of. This Statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The Company adopted SFAS No. 144 effective
January 1, 2002 with no material impact on the Company's financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also
includes (1) costs related to terminating a contract that is not a capital lease
and (2) termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Earlier adoption of SFAS No. 146 is encouraged. The Company
is currently evaluating the provisions of SFAS No.
8
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
146 and its potential impact on the Company's consolidated financial statements
and the disposal of the Network Diagnostics business as discussed in Note I -
Subsequent Event.
B. Certain Balance Sheet Items
June 30, December 31,
2002 2001
-------- --------
(thousands)
The components of inventories are:
Raw materials ........................................... $ 7,651 $ 8,490
Work in process ......................................... 345 2,530
Finished goods .......................................... 6,314 10,297
-------- --------
$ 14,310 $ 21,317
======== ========
Property and equipment consist of the following:
Manufacturing and development equipment ................. $ 55,505 $ 52,674
Furniture and office equipment .......................... 30,052 27,990
Demonstration equipment ................................. 4,638 5,053
Leasehold improvements .................................. 8,602 8,525
-------- --------
98,797 94,242
Less, accumulated depreciation and amortization ......... (68,180) (59,483)
-------- --------
Property and equipment, net ........................ $ 30,617 $ 34,759
======== ========
Intangible assets consist of the following:
Purchased technology .................................... $ 50,193 $ 50,193
Other ................................................... 10,000 13,000
-------- --------
60,193 63,193
Less accumulated amortization ........................... (38,960) (35,626)
-------- --------
Intangible assets, net ............................. $ 21,233 $ 27,567
======== ========
C. Related Party Transactions
The Company's Japanese subsidiary purchases, for resale under a
distribution arrangement, products from an affiliate in which three of the
Company's directors are directors and shareholders. These purchases from the
related party were $400,000 and $121,000 for the three months ended June 30,
2002 and 2001, respectively, and $1.3 million and $473,000 for the six months
ended June 30, 2002 and 2001, respectively. Amounts due to the related party at
June 30, 2002 and December 31, 2001 were $307,000 and $168,000, respectively.
9
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
D. Income Taxes
The income tax provisions for the three- and six-month periods ended June
30, 2002 were $2.3 million and $2.8 million, respectively, and reflected the
effect of non-deductible acquisition-related costs, partially offset by benefits
of $1.1 million and $2.1 million, respectively, from the utilization of deferred
tax liabilities related to certain of these acquisition-related costs. Since the
Company had a loss for the three-month period ended June 30, 2001, an income tax
benefit of $1,000 was recorded, reflecting the effect of non-deductible
acquisition-related costs, partially offset by a benefit of $1.2 million from
the utilization of deferred tax benefits related to certain of these
acquisition-related costs. The income tax provision for the six-month period
ended June 30, 2001 was $3.2 million and reflected the effect of non-deductible
acquisition-related costs, partially offset by a benefit of $2.3 million from
the utilization of deferred tax liabilities related to certain of these
acquisitions-related costs.
Excluding the effect of acquisition-related items, an estimated effective
tax rate of 35% was applied for the three- and six-month periods ended June 30,
2002 and 2001 and represented federal, state and foreign taxes on the Company's
income, reduced primarily by research and development credits, foreign tax
credits, and other benefits from foreign sourced income.
E. Lines of Credit and Long-Term Convertible Debt
The Company has a $20.0 million line of credit with a U.S. bank and lines
of credit aggregating $1.7 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $20.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at or, in some cases,
below the lender's prime rate (4.75% at June 30, 2002), and expires on October
31, 2002, if not renewed. Under the terms of this facility, the Company is
required to maintain certain financial ratios and meet certain net worth and
indebtedness tests. The Company believes it is in compliance with these
requirements. There have been no borrowings under this credit facility.
The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $1.7 million with interest at the Japanese prime
rate (1.375% at June 30, 2002) plus 0.125% per annum which expire between June
2003 and August 2003, if not renewed. There have been no borrowings under these
lines of credit.
In November 1999, the Company completed the private placement of $135.0
million principal amount at maturity of 3.25% convertible subordinated discount
notes due in 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after the first three years.
10
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
F. Commitments and Contingencies
Alcatel USA, Inc. and Alcatel USA Sourcing, L.P. vs Tekelec
In August 2000, Alcatel USA, Inc. and Alcatel USA Sourcing, L.P.
(collectively, "Alcatel") filed a complaint against Tekelec in the United States
District Court for the Eastern District of Texas, Sherman Division. The
complaint alleges that Tekelec makes and sells products that infringe two
patents owned by Alcatel Sourcing. The patents at issue relate to a system and
method for application location register routing in a telecommunications
network. Alcatel's allegations relate to three particular software applications
offered by Tekelec as a feature on its EAGLE STP for routing query messages in
wireless networks. Alcatel seeks a permanent injunction enjoining the Company
from infringing the patents at issue, unspecified general and exemplary damages,
and an award of costs.
In September 2000, Tekelec filed an answer and counterclaim to Alcatel's
complaint denying Alcatel's claims of infringement and raising several
affirmative defenses. Tekelec has also asserted several counterclaims against
Alcatel seeking declaratory relief that Tekelec has not infringed the Alcatel
patents and that such patents are invalid and unenforceable. Tekelec believes
that it has strong defenses to Alcatel's claims on the grounds of invalidity,
noninfringement and inequitable conduct by Alcatel, and is defending the action
vigorously.
A trial date was originally scheduled for June 2002. In April 2002,
Tekelec filed a motion for summary judgment for non-infringement and Alcatel
filed a motion for summary judgment for infringement. The Court referred both
motions to the Magistrate Judge for consideration. After a hearing on both
motions before the Magistrate Judge in May 2002, the Magistrate Judge issued a
report and recommendation of non-infringement in favor of Tekelec. The Court
subsequently entered an order rescinding the June 2002 trial setting and all
remaining deadlines, indicating that after the Court has ruled on the Magistrate
Judge's report and recommendation, the Court will enter such orders as are
deemed appropriate for the final disposition of the case. The Court has not yet
ruled on the Magistrate Judge's report and recommendation.
Lemelson Medical, Education and Research Foundation, Limited Partnership vs.
Tekelec
In March 2002, the Lemelson Medical, Education & Research Foundation,
Limited Partnership ("Lemelson") filed a complaint against thirty defendants,
including Tekelec, in the United States District Court for the District of
Arizona. The complaint alleges that all defendants make, offer for sale, sell,
import, or have imported products that infringe eighteen patents assigned to
Lemelson, and the complaint also alleges that the defendants use processes that
infringe the same patents. The patents at issue relate to computer image
analysis technology and automatic identification technology. Lemelson has not
identified the specific Tekelec products or processes that allegedly infringe
the patents at issue, and Tekelec is currently investigating which products
and/or processes might be subject to the lawsuit. At present, the lawsuit is
stayed pending a non-appealable resolution of a lawsuit involving the same
patents that is pending in the United States District Court for the District of
Nevada and that is scheduled for trial in November 2002. Tekelec
11
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
currently believes that the ultimate outcome of the lawsuit will not have a
material adverse effect on its financial condition or overall results of
operations.
G. Operating Segment Information
The Network Systems operating segment develops, markets and sells the
Company's Eagle signaling products based on the Company's high capacity Eagle 5
Signaling Application System (SAS) platform that has recently been expanded to
include TekWare and TekServer architecture, a high-density, high-speed
processing platform that is backward compatible with existing technology; the
IP7 Secure Gateway, an SS7/IP gateway for signaling in converged networks, and
other IP7 convergence products; Sentinel, a complete network monitoring and
revenue assurance system; and network systems products resulting from the
Company's acquisition of IEX, including ASi 4000 Service Control Point, an
advanced database server used for the provisioning of telephony applications,
and VXi Media Gateway Controller, a controller for converged networks.
The Network Diagnostics operating segment develops, markets and sells
diagnostic products, including MGTS, a diagnostic tool used primarily by
equipment suppliers for research and development, and MGTS i3000, a diagnostic
tool for converged and third generation wireless networks. The Japan Diagnostics
operating segment sells the Company's and third parties' diagnostic products to
customers in Japan. (See Note I - Subsequent Event related to the disposition of
the Network Diagnostics, including Japan Diagnostics, businesses.)
The Contact Center operating segment develops, markets and sells
software-based solutions for call centers, including TotalView Workforce
Management and TotalNet Call Routing.
Transfers between operating segments are made at prices reflecting market
conditions. The allocation of revenues from external customers by geographical
area is determined by the destination of the sale.
12
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
The Company's operating segments and geographical information are as follows (in
thousands):
Operating Segments
Net Sales
---------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Network Systems .......................... $ 57,760 $ 48,075 $ 109,081 $ 106,527
Network Diagnostics ...................... 9,142 7,646 15,679 18,506
Contact Center ........................... 10,180 10,049 19,231 18,514
Japan Diagnostics ........................ 3,384 6,410 9,445 13,821
Intercompany Eliminations ................ (244) (1,298) (595) (2,171)
--------- --------- --------- ---------
Total net sales ..................... $ 80,222 $ 70,882 $ 152,841 $ 155,197
========= ========= ========= =========
Income (Loss) from Operations
-----------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Network Systems .......................... $ 15,466 $ 8,857 $ 26,625 $ 24,842
Network Diagnostics ...................... 301 (1,389) (2,775) (816)
Contact Center ........................... 3,695 4,711 7,354 7,708
Japan Diagnostics ........................ (236) 381 133 294
Intercompany Eliminations ................ (442) (67) 336 881
General Corporate(1) ..................... (12,190) (16,710) (22,636) (33,092)
--------- --------- --------- ---------
Total operating income (loss) ....... $ 6,594 $ (4,217) $ 9,037 $ (183)
========= ========= ========= =========
- ----------
(1) General Corporate includes acquisition-related charges and amortization of
$2,800 and $7,816 for the three months ended June 30, 2002 and 2001,
respectively, and $5,600 and $15,632 for the six months ended June 30,
2002 and 2001, respectively.
13
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
Enterprise-Wide Disclosures
The following table sets forth, for the periods indicated, revenues from
external customers by principal product line:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Network Systems ................................. $ 57,831 $ 48,000 $109,142 $106,569
Network Diagnostics ............................. 12,212 12,833 24,469 30,114
Contact Center .................................. 10,179 10,049 19,230 18,514
-------- -------- -------- --------
Total revenues from external customers ..... $ 80,222 $ 70,882 $152,841 $155,197
======== ======== ======== ========
The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
North America ................................... $ 65,846 $ 50,064 $119,352 $118,780
Japan ........................................... 3,386 6,193 9,328 13,561
Europe .......................................... 5,692 2,361 12,846 6,708
Rest of World ................................... 5,298 12,264 11,315 16,148
-------- -------- -------- --------
Total revenues from external customers ..... $ 80,222 $ 70,882 $152,841 $155,197
======== ======== ======== ========
The following table sets forth, for the periods indicated, long-lived
assets by geographic area in which the Company holds assets:
June 30, December 31,
2002 2001
-------- -----------
United States ................................... $114,633 $112,478
Japan ........................................... 820 1,454
Other ........................................... 875 951
-------- --------
Total long-lived assets .................... $116,328 $114,883
======== ========
Sales to one customer accounted for 12% of revenues for the three months
ended June 30, 2002 and included sales from the network systems and contact
center operating segments. There were no customers accounting for 10% or more of
revenues for the six months ended June 30, 2002. Sales to one customer accounted
for 10% and 20% of the revenues for the three and six months ended June 30,
2001, respectively, and included sales from all three operating segments.
14
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
H. Earnings Per Share
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations for the
three- and six-month periods ended June 30, 2002 and 2001:
Net Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-----------------------------------------
For the Three Months Ended June 30, 2002: (thousands, except per share amount)
Basic EPS ............................... $ 4,517 60,197 $ 0.08
Effect of Dilutive Securities - Stock
Options and Warrants ............... -- 983
-------- --------
Diluted EPS ............................. $ 4,517 61,180 $ 0.07
======== ========
For the Three Months Ended June 30, 2001:
Basic EPS ............................... $ (4,551) 59,468 $ (0.08)
Effect of Dilutive Securities - Stock
Options and Warrants ............... -- --
-------- --------
Diluted EPS ............................. $ (4,551) 59,468 $ (0.08)
======== ========
For the Six Months Ended June 30, 2002:
Basic EPS ............................... $ 5,667 60,170 $ 0.09
Effect of Dilutive Securities - Stock
Options and Warrants ............... -- 1,308
-------- --------
Diluted EPS ............................. $ 5,667 61,478 $ 0.09
======== ========
For the Six Months Ended June 30, 2001:
Basic EPS ............................... $ (3,182) 59,252 $ (0.05)
Effect of Dilutive Securities - Stock
Options and Warrants ............... -- --
-------- --------
Diluted EPS ............................. $ (3,182) 59,252 $ (0.05)
======== ========
The computation of diluted number of shares excludes unexercised stock
options and warrants and potential shares issuable upon conversion of the
Company's convertible subordinated discount notes that are anti-dilutive. The
numbers of such shares excluded were 23.1 million and 9.7 million for the three
months ended June 30, 2002 and 2001, respectively, and 22.1 million and 12.1
million for the six months ended June 30, 2002 and 2001, respectively.
15
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
I. Subsequent Event
On July 15, 2002, the Company entered into a definitive agreement to sell
principally all of the Network Diagnostics business to Catapult Communications
Corporation for total proceeds of $60 million comprised of $42.5 million in cash
and $17.5 million in a convertible note receivable due within 2 years after
closing transaction. The transaction is anticipated to be consummated by the end
of the third quarter of 2002 and will be reflected as a discontinued operation
in accordance with the requirements of SFAS No. 144. In connection with the
sale, the Company anticipates recording certain exit and disposal costs
associated with the Network Diagnostics business which are currently being
quantified.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the consolidated financial statements and the
notes thereto included in Item 1 of this Quarterly Report and the Consolidated
Financial Statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. 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.
The Tekelec logo, IEX, Eagle and MGTS are registered trademarks of
Tekelec. Tekelec, IP7, IP7 Secure Gateway, ASi 4000, VXi, TekWare, TekServer,
MGTS i3000, TotalView and TotalNet are trademarks of Tekelec.
Overview
The Company's product offerings are currently organized along three
distinct product lines: network systems, network diagnostics and contact center.
Network Systems. The Company's network systems product line consists
principally of the Eagle 5 SAS and products, features and applications based on
the Eagle platform, including TekWare and TekServer, the IP7 Secure Gateway and
the Company's local number portability solution, Sentinel, ASi 4000 Service
Control Point, VXi Media Gateway Controller and other convergence products.
Network Diagnostics. This product line consists principally of the MGTS
and MGTS i3000 families of diagnostics products. (See "Subsequent Event" section
below related to the disposition of the Network Diagnostics business.)
Contact Center. The Company's IEX contact center products provide
planning, management and call routing and control tools for single contact
centers and for complex, multiple site contact center environments. This product
line includes the TotalView Workforce Management and TotalNet Call Routing
solutions.
17
Results of Operations
The following table sets forth, for the periods indicated, the percentages
that certain income statement items bear to total revenues:
Percentage of Revenues
----------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ............................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ..................................... 27.3 29.9 30.3 30.8
Amortization of purchased technology ................... 3.2 3.7 3.4 3.3
-------- -------- -------- --------
Gross profit ........................................... 69.5 66.4 66.3 65.9
Research and development ............................... 24.2 25.9 24.0 23.9
Selling, general and administrative .................... 36.6 38.8 35.9 35.1
Amortization of goodwill and other intangible assets ... 0.5 7.6 0.5 7.0
-------- -------- -------- --------
Total operating expenses ............................... 61.3 72.3 60.4 66.0
-------- -------- -------- --------
Income (loss) from operations .......................... 8.2 (5.9) 5.9 (0.1)
Interest and other income (expense), net ............... 0.3 (0.5) (0.3) 0.1
-------- -------- -------- --------
Income (loss) before provision for income taxes ........ 8.5 (6.4) 5.6 0.0
Provision for income taxes ............................. 2.9 (0.0) 1.9 2.1
-------- -------- -------- --------
Net income (loss) ...................................... 5.6% (6.4%) 3.7% (2.1%)
======== ======== ======== ========
The following table sets forth, for the periods indicated, the revenues by
principal product line as a percentage of total revenues:
Percentage of Revenues
----------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Network Systems ........................................ 72% 68% 71% 69%
Network Diagnostics .................................... 15 18 16 19
Contact Center ......................................... 13 14 13 12
-------- -------- -------- --------
Total ............................................. 100% 100% 100% 100%
======== ======== ======== ========
18
The following table sets forth, for the periods indicated, the revenues by
geographic territories as a percentage of total revenues:
Percentage of Revenues
----------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
North America .......................................... 82% 71% 79% 77%
Japan .................................................. 4 9 6 9
Europe ................................................. 7 3 8 4
Rest of World .......................................... 7 17 7 10
-------- -------- -------- --------
Total ............................................. 100% 100% 100% 100%
======== ======== ======== ========
Three Months Ended June 30, 2002 Compared with the Three Months Ended
June 30, 2001
Revenues. The Company's revenues increased by $9.3 million, or 13%, during
the second quarter of 2002 due primarily to higher sales of network systems
products partially offset by a decrease in network diagnostics revenues.
Revenues from network systems products increased by $9.8 million, or 20%,
due primarily to higher unit sales of Eagle STP systems, upgrades and
extensions.
Revenues from network diagnostics products decreased by $621,000, or 5%,
due principally to lower sales of the Company's MGTS i3000 product and lower
subcontracting revenue in Japan, partially offset by increased sales of MGTS
diagnostics products.
Revenues from contact center products increased by $130,000, or 1%,
primarily as a result of increased sales of the TotalView product.
Revenues in North America increased by $15.8 million, or 32%, due
primarily to higher sales of Eagle STP products. Sales in Japan decreased by
$2.8 million, or 45%, as a result of lower sales of MGTS products and lower
subcontracting revenue. Revenues in Europe increased by $3.3 million, or 141%,
due to higher MGTS product sales. Rest of world revenues decreased by $7.0
million, or 57%, due primarily to lower Eagle STP product sales.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $54,000, or less than 1%, and did not have a material
effect on net income in the second quarter of 2002.
A significant portion of the Company's revenues in each quarter results
from orders that are received in that quarter, and are difficult to predict.
Further, the Company typically generates a significant portion of its revenues
for each quarter in the last month of the quarter. The Company establishes its
expenditure levels based on its expectations as to future revenues, and if
revenue levels were to fall below expectations, then such shortfall would cause
expenses to be
19
disproportionately high. Therefore, a drop in near-term demand would
significantly affect revenues, causing a disproportionate reduction in profits
or even losses in a quarter.
The Company believes that its future revenue growth depends in large part
upon a number of factors, including the continued market acceptance, both
domestically and internationally, of the Company's products, particularly the
Eagle products including TekWare and TekServer and related applications as well
as the Company's suite of products for converged circuit and packet networks,
including the IP7 Secure Gateway and VXi Media Gateway Controller network
systems products.
Gross Profit. Gross profit as a percentage of revenues increased to 69.5%
in the second quarter of 2002 compared to 66.4% in the second quarter of 2001.
The increase in gross profit was primarily due to a higher proportion of sales
of Eagle STP upgrades and extensions and service agreements which typically
carry higher margins. In addition, there was a favorable geographic mix of sales
during the second quarter of 2002.
Research and Development. Research and development expenses increased
overall by $1.0 million, or 6%, and decreased as a percentage of revenues to
24.2% in the second quarter of 2002 from 25.9% in the second quarter of 2001.
This increase was due primarily to higher compensation costs.
The Company intends to continue to make substantial investments in product
and technology development and believes that its future success depends in large
part upon its ability to continue to enhance existing products and to develop or
acquire new products that maintain the Company's technological competitiveness.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1.8 million, or 7%, and decreased as a
percentage of revenues to 36.6% in the second quarter of 2002 from 38.8% in the
second quarter of 2001. This increase was due primarily to higher compensation
costs, higher legal expenses and costs associated with international expansion
initiatives.
Interest and Other Income (Expense), net. Interest expense increased
slightly by $63,000. Interest income decreased $417,000 or 19% due to lower
interest rates in 2002 compared to 2001.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and intangible assets in the second quarter of 2002 decreased by $5.0 million to
$400,000, and decreased as a percentage of revenues to 0.5% for the three months
ended June 30, 2002 from 7.6% for the three months ended June 30, 2001. This
decrease was due to the adoption of SFAS 142 on January 1, 2002, which no longer
permits the amortization of acquisition-related goodwill.
Income Taxes. The income tax provision for the second quarter 2002 was
$2.3 million and reflected the effect of non-deductible acquisition-related
costs, partially offset by a benefit of $1.1 million from the utilization of
deferred tax liabilities related to certain of these acquisition-related costs.
Since the Company had a loss for the three-month period ended June 30, 2001, an
income tax benefit of $1,000 was recorded net of the effect of non-deductible
acquisition-related costs,
20
partially offset by a benefit of $1.2 million from the utilization of deferred
tax benefits related to certain of these acquisition-related costs. Excluding
the effect of acquisition-related items, an estimated effective tax rate of 35%
was applied for the three month periods ended June 30, 2002 and 2001 and
represented federal, state and foreign taxes on the Company's income, reduced
primarily by research and development credits, foreign tax credits and other
benefits from foreign sourced income.
Six Months Ended June 30, 2002 Compared with the Six Months Ended
June 30, 2001
Revenues. The Company's revenues decreased by $2.4 million, or 2%, during
the six months ended June 30, 2002 due primarily to lower sales of network
diagnostics products, partially offset by higher sales of network systems and
contact center products.
Revenues from network systems products increased by $2.6 million, or 2%,
due primarily to higher sales of Sentinel products and secondarily to increased
sales of service contracts partially offset by lower sales of local number
portability products.
Revenues from network diagnostics products decreased by $5.6 million, or
19%, due to lower sales of MGTS and MGTS i3000 products.
Revenues from contact center products increased by $716,000, or 4%,
primarily as a result of increased sales of the TotalView product.
Revenues in North America increased by $572,000. Sales in Japan decreased
$4.2 million, or 31%, as a result of lower sales of MGTS and lower
subcontracting revenues. Revenues in Europe increased by $6.1 million, or 92%,
due primarily to stronger sales of Eagle STP products and secondarily to higher
sales of the Company's MGTS diagnostic products. Rest of world revenues
decreased by $4.8 million or 30% due primarily to lower sales of Eagle STP
products and secondarily to lower sales of the Company's MGTS products.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $631,000, or less than 1%, and did not have a material
effect on net income in the six months ended June 30, 2002.
Gross Profit. Gross profit as a percentage of revenues increased to 66.3%
in the six months ended June 30, 2002 compared with 65.9% in the six months
ended June 30, 2001. The increase in gross margins was primarily due to a higher
proportion of sales of Eagle STP upgrades and extensions and service agreements
which typically carry higher margins.
21
Research and Development. Research and development expenses decreased
overall by $390,000, or 1.1%, and increased slightly as a percentage of revenues
to 24.0% in the six months ended June 30, 2002 from 23.9% in the six months
ended June 30, 2001. The dollar decrease in 2002 was primarily due to decreased
usage of material supplies and contract labor.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $437,000, or 1%, and increased as a
percentage of revenues to 35.9% in the six months ended June 30, 2002 from 35.1%
in the six months ended June 30, 2001. This increase was due primarily to
increased compensation costs and higher legal expenses.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and intangible assets in the first half of 2002 decreased by $10.0 million to
$800,000, and decreased as a percentage of revenues to 0.5% for the six months
ended June 30, 2002 from 7.0% for the six months ended June 30, 2001. This
decrease was due to the adoption of SFAS 142 on January 1, 2002, which no longer
permits the amortization of acquisition-related goodwill.
Interest and Other Income (Expense), net. Interest expense increased by
$112,000, or 2.5%, for the six months ended June 30, 2002 compared to 2001.
Interest income decreased $1.5 million, or 30.3%, due to lower interest rates in
2002 compared to 2001.
Income Taxes. The income tax provisions for the six months ended June 30,
2002 and 2001 were $2.8 million and $3.2 million, respectively, and reflected
the effect of non-deductible acquisition-related costs and amortization,
partially offset by a benefit of $2.1 million and $2.3 million, respectively,
from the utilization of deferred tax liabilities related to certain of these
acquisition-related costs. Excluding the effect of acquisition-related items, an
estimated effective tax rate of 35% was applied for the six-month periods ended
June 30, 2002 and 2001 and represented federal, state and foreign taxes on the
Company's income, reduced primarily by research and development credits, foreign
tax credits and other benefits from foreign sourced income.
Subsequent Event
On July 15, 2002, the Company entered into a definitive agreement to sell
principally all of the Network Diagnostics business to Catapult Communications
Corporation for total proceeds of $60 million comprised of $42.5 million in cash
and $17.5 million in a convertible note receivable due within 2 years after
closing transaction. The transaction is anticipated to be consummated by the end
of the third quarter of 2002 and will be reflected as a discontinued operation
in accordance with the requirements of SFAS No. 144. In connection with the
sale, the Company anticipates recording certain exit and disposal costs
associated with the Network Diagnostics business which are currently being
quantified.
Liquidity and Capital Resources
During the six months ended June 30, 2002, cash and cash equivalents
increased by $56.5 million to $148.7 million, including net proceeds of $18.3
million from the sale of short-term and
22
long-term investments. Operating activities, net of the effects of exchange rate
changes on cash, provided $41.2 million. Financing activities, which represented
proceeds from the issuance of common stock upon the exercise of options and
warrants, provided $1.6 million, and investing activities, excluding the net
proceeds from the sale of short-term and long-term investments, used $4.7
million primarily due to capital expenditures.
Cash flows from operating activities were comprised mainly of net income
adjusted for depreciation and amortization, and a decrease in accounts
receivable. Net accounts receivable decreased by 21% during the first half of
2002 due primarily to strong collections activity.
Capital expenditures of $4.9 million during the first six months of 2002
represented the planned addition of equipment principally for research and
development, manufacturing operations and a company wide information system.
The Company has a $20.0 million line of credit with a U.S. bank and lines
of credit aggregating $1.7 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $20.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at or, in some cases,
below the lender's prime rate (4.75% at June 30, 2002), and expires on October
31, 2002, if not renewed. Under the terms of this facility, the Company is
required to maintain certain financial ratios and meet certain net worth and
indebtedness tests. The Company believes it is in compliance with these
requirements. There have been no borrowings under this credit facility.
The Company's Japanese subsidiary has collateralized yen-denominated lines
of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $1.7 million with interest at the Japanese prime
rate (1.375% at June 30, 2002) plus 0.125% per annum which expire between June
2003 and August 2003, if not renewed. There have been no borrowings under these
lines of credit.
In November 1999, the Company completed the private placement of $135.0
million principal amount at maturity of 3.25% convertible subordinated discount
notes due in 2004 (the "Notes"), issued at 85.35% of their face amount
(equivalent to gross proceeds of approximately $115.2 million at issuance before
discounts and expenses). The Notes are callable after the first three years.
The Company believes that its existing working capital, funds generated
through operations, and its current bank lines of credit will be sufficient to
satisfy operating requirements for at least the next twelve months. Nonetheless,
the Company may seek additional sources of capital as necessary or appropriate
to fund acquisitions or to otherwise finance the Company's growth or operations;
however, there can be no assurance that such funds, if needed, will be available
on favorable terms, if at all.
23
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
new standards for accounting and reporting requirements for business
combinations initiated after June 30, 2001 and prohibits the use of the
pooling-of-interests method for combinations initiated after June 30, 2001. SFAS
No. 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. SFAS No. 142 was adopted on January 1, 2002 and
goodwill will now be tested at the reporting unit at least annually and whenever
events or circumstances occur indicating that goodwill might be impaired. On
January 1, 2002, the assembled workforce intangible amount was reclassifed to
goodwill. Amortization of goodwill, including goodwill recorded in past business
combinations, has ceased and based on work performed by an independent,
third-party valuation firm, the Company determined that there was no goodwill
impairment. See Note "A" to the consolidated financial statements for further
detail on the effects of implementing SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This Statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This Statement also supersedes the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for segments of a
business to be disposed of. This Statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
temporarily controlled subsidiary. The Company adopted SFAS No. 144 effective
January 1, 2002 with no material impact on the Company's financial position,
results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." The scope of SFAS No. 146 also
includes (1) costs related to terminating a contract that is not a capital lease
and (2) termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Earlier adoption of SFAS No. 146 is encouraged. The Company
is currently evaluating the provisions of SFAS No. 146 and its potential impact
on the Company's consolidated financial statements and the disposal of the
Network Diagnostics business as discussed in the preceding "Subsequent Event"
section.
24
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements that are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report on Form 10-Q are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 that reflect the current belief, expectations or
intent of the Company's management. These statements are subject to and involve
certain risks and uncertainties including, but not limited to, timing of
significant orders and shipments and the resulting fluctuation of the Company's
operating results; changes in customer product mix; customer acceptance of the
Company's products; capital spending patterns of customers; the Company's
limited product offerings; risks relating to the convergence of voice and data
networks; competition and pricing; the Company's relatively limited number of
customers; new product introductions by the Company or its competitors; product
liability risks; the continued growth in third party purchases of diagnostics
systems; uncertainties relating to the Company's international operations;
intellectual property protection; carrier deployment of new technologies and
intelligent network services; the level and timing of research and development
expenditures; regulatory changes; general economic conditions; and other risks
described in this Quarterly Report, the Company's Annual Report on Form 10-K for
2001 and in certain of the Company's other Securities and Exchange Commission
filings. Many of these risks and uncertainties are outside of the Company's
control and are difficult for the Company to forecast or mitigate. Actual
results may differ materially from those expressed or implied in such
forward-looking statements. The Company is not responsible for updating or
revising these forward-looking statements. Undue emphasis should not be placed
on any forward-looking statements contained herein or made elsewhere by or on
behalf of the Company.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes for the six-month period ended June
30, 2002. For a further discussion of the quantitative and qualitative
disclosures about market risk, reference is made to the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Alcatel USA, Inc. and Alcatel USA Sourcing, L.P. vs Tekelec
In August 2000, Alcatel USA, Inc. and Alcatel USA Sourcing, L.P.
(collectively, "Alcatel") filed a complaint against Tekelec in the United States
District Court for the Eastern District of Texas, Sherman Division. The
complaint alleges that Tekelec makes and sells products that infringe two
patents owned by Alcatel Sourcing. The patents at issue relate to a system and
method for application location register routing in a telecommunications
network. Alcatel's allegations relate to three particular software applications
offered by Tekelec as a feature on its EAGLE STP for routing query messages in
wireless networks. Alcatel seeks a permanent injunction enjoining the Company
from infringing the patents at issue, unspecified general and exemplary damages,
and an award of costs.
In September 2000, Tekelec filed an answer and counterclaim to Alcatel's
complaint denying Alcatel's claims of infringement and raising several
affirmative defenses. Tekelec has also asserted several counterclaims against
Alcatel seeking declaratory relief that Tekelec has not infringed the Alcatel
patents and that such patents are invalid and unenforceable. Tekelec believes
that it has strong defenses to Alcatel's claims on the grounds of invalidity,
noninfringement and inequitable conduct by Alcatel, and is defending the action
vigorously.
A trial date was originally scheduled for June 2002. In April 2002,
Tekelec filed a motion for summary judgment for non-infringement and Alcatel
filed a motion for summary judgment for infringement. The Court referred both
motions to the Magistrate Judge for consideration. After a hearing on both
motions before the Magistrate Judge in May 2002, the Magistrate Judge issued a
report and recommendation of non-infringement in favor of Tekelec. The Court
subsequently entered an order rescinding the June 2002 trial setting and all
remaining deadlines, indicating that after the Court has ruled on the Magistrate
Judge's report and recommendation, the Court will enter such orders as are
deemed appropriate for the final disposition of the case. The Court has not yet
ruled on the Magistrate Judge's report and recommendation.
Lemelson Medical, Education and Research Foundation, Limited Partnership vs.
Tekelec
In March 2002, the Lemelson Medical, Education & Research Foundation,
Limited Partnership ("Lemelson") filed a complaint against thirty defendants,
including Tekelec, in the United States District Court for the District of
Arizona. The complaint alleges that all defendants make, offer for sale, sell,
import, or have imported products that infringe eighteen patents assigned to
Lemelson, and the complaint also alleges that the defendants use processes that
infringe the same patents. The patents at issue relate to computer image
analysis technology and automatic identification technology. Lemelson has not
identified the specific Tekelec products or processes that allegedly infringe
the patents at issue, and Tekelec is currently investigating which products
and/or processes might be subject to the lawsuit. At present, the lawsuit is
stayed pending a non-appealable resolution of a lawsuit involving the same
patents that is pending in the United States
27
District Court for the District of Nevada and that is scheduled for trial in
November 2002. Tekelec currently believes that the ultimate outcome of the
lawsuit will not have a material adverse effect on its financial condition or
overall results of operations.
Please refer to Item 3, Legal Proceedings, in Tekelec's Annual Report on
Form 10-K for the year ended December 31, 2001 for information previously
furnished concerning the legal proceedings described above.
28
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 10, 2002, the Company held its 2002 Annual Meeting of
Shareholders (the "Annual Meeting").
(b) At the Annual Meeting, the following persons were elected as directors
of the Company. The numbers of votes cast for each director, as well as the
number of votes withheld, are listed opposite each director's name.
Name of Director Votes Cast for Director Votes Withheld
---------------- ----------------------- --------------
Robert V. Adams 56,186,925 431,931
Jean-Claude Asscher 52,905,025 3,713,831
Daniel L. Brenner 56,210,824 408,032
Michael L. Margolis 52,837,227 3,781,629
Howard Oringer 56,041,744 577,112
Jon F. Rager 56,116,317 502,539
(c) At the Annual Meeting, the shareholders approved, with 27,272,590
votes cast in favor and 13,697,474 votes cast against, an amendment to the
Company's 1994 Stock Option Plan increasing the aggregate number of shares of
Common Stock authorized for issuance thereunder by 3,000,000. There were 49,349
abstentions and 15,599,443 broker nonvotes with respect to this matter.
(d) At the Annual Meeting, the shareholders approved, with 20,602,586
votes cast in favor and 20,351,699 votes cast against, the Company's
Non-Employee Director Stock Option Plan under which an aggregate of 500,000
shares of Common Stock is authorized and reserved for issuance. There were
65,128 abstentions and 15,599,443 broker nonvotes with respect to this matter.
(e) At the Annual Meeting, with 55,828,608 votes cast in favor, the
shareholders ratified the appointment of PricewaterhouseCoopers LLP as
independent accountants of the Company for the year ending December 31, 2002.
There were 750,130 votes cast against such ratification, and there were 40,118
abstentions with respect to this matter.
29
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement dated July 15, 2002 between Registrant and
Catapult Communications Corporation (schedules are omitted from this
agreement and the other agreements filed herewith as Exhibits 2.2, 2.3,
2.4, 2.5 and 2.6, and the Registrant agrees to furnish supplementally a
copy of any such schedule to the Commission upon request)
2.2 Transitional Services Agreement dated July 15, 2002 between Registrant and
Catapult Communications Corporation
2.3 License Agreement dated July 15, 2002 between Registrant, Catapult
Communications Corporation and Catapult Communications International
Limited
2.4 International Rights License Agreement dated July 15, 2002 between
Registrant, Catapult Communications Corporation and Catapult
Communications International Limited
2.5 Registration Rights Agreement dated July 15, 2002 between Registrant and
Catapult Communications Corporation
2.6 Subordinated Guaranty dated July 15, 2002 executed by Catapult
Communications Corporation in favor of Registrant
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended June 30, 2002.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEKELEC
August 14, 2002
/s/ Michael L. Margolis
---------------------------------------
Michael L. Margolis
President and Chief Executive Officer
(Duly authorized officer)
/s/ Paul J. Pucino
---------------------------------------
Paul J. Pucino
Vice President and Chief Financial
Officer
(Principal financial and chief
accounting officer)
31
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Asset Purchase Agreement dated July 15, 2002 between Registrant and
Catapult Communications Corporation (schedules are omitted from this
agreement and the other agreements filed herewith as Exhibits 2.2, 2.3,
2.4, 2.5 and 2.6, and the Registrant agrees to furnish supplementally a
copy of any such schedule to the Commission upon request)
2.2 Transitional Services Agreement dated July 15, 2002 between Registrant and
Catapult Communications Corporation
2.3 License Agreement dated July 15, 2002 between Registrant, Catapult
Communications Corporation and Catapult Communications International
Limited
2.4 International, Rights License Agreement dated July 15, 2002 between
Registrant, Catapult Communications Corporation and Catapult
Communications International Limited
2.5 Registration Rights Agreement dated July 15, 2002 between
Registrant and Catapult Communications Corporation
2.6 Subordinated Guaranty dated July 15, 2002 executed by Catapult
Communications Corporation in favor of Registrant
32