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 September 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 November 4, 2002, there were 60,550,039 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 September 30, 2002 3
and December 31, 2001
Consolidated Statements of Operations for the three and nine 5
months ended September 30, 2002 and 2001
Consolidated Statements of Comprehensive Income (Loss) 7
for the three and nine months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the nine months 8
ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K 30
Signatures and Certifications 31
2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Tekelec
Consolidated Balance Sheets
September 30, December 31,
2002 2001
------------- ------------
(dollars in thousands)
(unaudited)
Assets
Current assets:
Cash and cash equivalents.............................. $ 198,803 $ 87,148
Short-term investments, at fair value.................. 30,103 68,608
Accounts receivable, less
allowances of $4,370 and $4,567, respectively........ 45,720 53,717
Inventories............................................ 11,491 14,782
Deferred income taxes, net............................. 13,697 13,648
Prepaid expenses and other current assets.............. 13,546 14,543
Current assets of discontinued operation............... -- 30,375
------------ ------------
Total current assets............................... 313,360 282,821
Long-term investments, at fair value........................ 83,094 70,200
Property and equipment, net................................. 23,563 31,479
Investments in privately-held companies..................... 16,525 16,500
Deferred income taxes, net.................................. 3,211 3,242
Other assets................................................ 2,488 3,094
Long-term convertible notes receivable ($17,300 principal
amount)..................................................... 18,115 --
Goodwill, net............................................... 44,942 44,725
Intangible assets, net...................................... 18,155 27,120
Non-current assets of discontinued operation................ -- 5,223
------------ ------------
Total assets....................................... $ 523,453 $ 484,404
============ ============
Liabilities And Shareholders' Equity
Current liabilities:
Trade accounts payable................................. $ 8,861 $ 12,902
Accrued expenses....................................... 24,346 20,887
Accrued payroll and related expenses................... 15,505 8,045
Current portion of deferred revenues................... 28,993 41,469
Income taxes payable................................... 12,213 629
Current liabilities of discontinued operation.......... -- 13,721
------------ ------------
Total current liabilities.......................... 89,918 97,653
Long-term convertible debt.................................. 125,953 122,992
Deferred income taxes....................................... 9,006 9,983
Long-term portion of deferred revenues...................... 3,896 4,378
Non-current liabilities of discontinued operation........... -- 576
------------ ------------
Total liabilities.................................. 228,773 235,582
------------ ------------
Continued on next page
See notes to consolidated financial statements.
3
Tekelec
Consolidated Balance Sheets
September 30, December 31,
2002 2001
---------------- --------------
(dollars in thousands)
(unaudited)
Commitments and Contingencies (Note G)
Shareholders' equity:
Common stock, without par value,
200,000,000 shares authorized; 60,464,876 and
60,107,087 shares issued and outstanding,
respectively.................................. 174,441 171,846
Retained earnings...................................... 120,101 78,525
Accumulated other comprehensive income (loss).......... 138 (1,549)
----------- -----------
Total shareholders' equity......................... 294,680 248,822
----------- -----------
Total liabilities and shareholders' equity......... $ 523,453 $ 484,404
=========== ===========
See notes to consolidated financial statements.
4
Tekelec
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(thousands, except per share data)
Revenues............................................. $ 73,544 $ 58,587 $ 201,918 $ 184,003
Cost of sales:
Cost of goods sold .............................. 16,479 20,456 52,298 56,313
Amortization of purchased technology ............ 2,476 2,536 7,663 7,727
-------- -------- --------- ---------
Total cost of sales ...................... 18,955 22,992 59,961 64,040
-------- -------- --------- ---------
Gross profit ............................. 54,589 35,595 141,957 119,963
-------- -------- --------- ---------
Operating expenses:
Research and development ........................ 16,251 13,164 45,149 41,567
Selling, general and administrative ............. 22,654 20,474 68,878 65,624
Amortization of goodwill and other intangible
assets ........................................ 400 5,416 1,200 16,248
-------- -------- --------- ---------
Total operating expenses .................... 39,305 39,054 115,227 123,439
-------- -------- --------- ---------
Income (Loss) from operations ........................ 15,284 (3,459) 26,730 (3,476)
Other income (expense):
Interest income ................................. 1,496 2,116 4,854 6,933
Interest expense ................................ (2,305) (2,246) (6,865) (6,694)
Other, net ...................................... (391) (183) 301 (86)
-------- -------- --------- ---------
Total other income (expense) ................ (1,200) (313) (1,710) 153
-------- -------- --------- ---------
Income (Loss) from continuing operations before
provision for income taxes ...................... 14,084 (3,772) 25,020 (3,323)
Provision for income taxes ...................... 4,760 811 8,448 4,048
-------- -------- --------- ---------
Income (Loss) from continuing operations .... 9,324 (4,583) 16,572 (7,371)
Income (Loss) from discontinued operation, net of
provision (benefit) for income taxes of $(1,553)
and $(2,707) for the three and nine months ended
September 30, 2002, respectively, and $277 and
$224 for the three and nine months ended
September 30, 2001, respectively ............... (1,898) 2,053 (3,308) 1,659
Gain on disposal of discontinued operation, net of
provision for income taxes of $13,345 .......... 28,312 -- 28,312 --
-------- -------- --------- ---------
Net income (loss) ........................ $ 35,738 $ (2,530) $ 41,576 $ (5,712)
======== ======== ========= =========
Continued on next page
See notes to consolidated financial statements.
5
Tekelec
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
--------- ---------- --------- ---------
(thousands, except per share data)
Earnings (Loss) per share from continuing operations:
Basic ........................................... $ 0.15 $ (0.07) $ 0.27 $ (0.13)
Diluted ......................................... 0.16 (0.07) 0.31 (0.13)
Earnings (Loss) per share from discontinued operation:
Basic ........................................... $ (0.03) $ 0.03 $ (0.05) $ 0.03
Diluted ......................................... (0.03) 0.03 (0.05) 0.03
Earnings per share from gain on disposal of
discontinued operation:
Basic ........................................... $ 0.47 $ -- $ 0.47 $ --
Diluted ......................................... 0.41 -- 0.41 --
Earnings (Loss) per share:
Basic ........................................... $ 0.59 $ (0.04) $ 0.69 $ (0.10)
Diluted ......................................... 0.54 (0.04) 0.67 (0.10)
Earnings (Loss) per share weighted average number of
shares outstanding:
Basic ........................................... 60,407 59,828 60,249 59,444
Diluted ......................................... 68,793 59,828 68,987 59,444
See notes to consolidated financial statements.
6
Tekelec
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(thousands)
Net income (loss)................................. $ 35,738 $ (2,530) $ 41,576 $ (5,712)
Other comprehensive income (loss):
Foreign currency translation adjustments..... 352 645 1,687 (557)
----------- ----------- ----------- -----------
Comprehensive income (loss)....................... $ 36,090 $ (1,885) $ 43,263 $ (6,269)
=========== =========== =========== ===========
See notes to consolidated financial statements.
7
Tekelec
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30,
--------------------------
2002 2001
---------- ----------
(thousands)
Cash flows from operating activities:
Net income (loss) ..................................................... $ 41,576 $ (5,712)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Net gain on disposal of discontinued operation ................... (28,312) --
Net (income) loss from discontinued operation .................... 3,308 (1,659)
Allowance for doubtful accounts .................................. (197) 4,044
Depreciation ..................................................... 12,121 11,066
Amortization ..................................................... 8,929 23,635
Amortization of deferred financing costs ......................... 615 615
Convertible debt accretion ....................................... 2,960 2,769
Deferred income taxes ............................................ (996) (2,558)
Stock-based compensation ......................................... 246 228
Tax benefit related to stock options exercised ................... 341 3,900
Changes in operating assets and liabilities (net of business disposed):
Accounts and notes receivable .................................... 8,802 42,762
Inventories ...................................................... 3,292 (3,219)
Prepaid expenses and other current assets ........................ 5,748 (2,117)
Trade accounts payable ........................................... (4,808) (976)
Accrued expenses ................................................. 1,636 (1,542)
Accrued payroll and related expenses ............................. 7,458 (2,280)
Deferred revenues ................................................ (12,958) 15,153
Income taxes payable ............................................. (1,754) (1,219)
--------- ---------
Total adjustments ............................................. 6,431 88,602
--------- ---------
Net cash provided by operating activities ..................... 48,007 82,890
--------- ---------
Cash flows from investing activities:
Proceeds from maturity of available-for-sale securities .......... 229,036 150,560
Purchase of available-for-sale securities ........................ (203,425) (197,862)
Net purchase of property and equipment ........................... (4,187) (17,101)
Net purchase of technology ....................................... 137 (59)
Change in other assets ........................................... (313) (476)
Proceeds from disposal of discontinued operation, net of cash
expenditures ..................................................... 37,883 --
--------- ---------
Net cash provided by investing activities .................... 59,131 (64,938)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................... 2,008 10,291
--------- ---------
Net cash provided by financing activities .................... 2,008 10,291
Effect of exchange rate changes on cash ............................... 502 58
Net cash flows from discontinued operation ............................ 2,007 2,277
--------- ---------
Net change in cash and cash equivalents .......................... 111,655 30,578
Cash and cash equivalents at beginning of period ...................... 87,148 57,585
--------- ---------
Cash and cash equivalents at end of period ............................ $ 198,803 $ 88,163
========= =========
See notes to consolidated financial statements.
8
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.
As more fully described in Note B - Disposition of Business, the
Company sold its Network Diagnostics Division ("NDD") effective August 30, 2002.
Accordingly, comparative 2001 financial results and notes have been restated to
reflect the Network Diagnostics Division as a discontinued operation. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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 nine months ended September
30, 2002 and 2001 are for the thirteen and thirty-nine weeks ended September 27,
2002 and September 28, 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 assembled 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.
9
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
The net income for the three and nine months ended September 30, 2001
includes amortization of goodwill and assembled workforce of approximately $5.0
million and $15.0 million, respectively. The adjusted net income and earnings
per share information for the three and nine months ended September 30, 2001 as
if SFAS No. 142 was adopted on January 1, 2001 would have been:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------------- -------------------------
As As As As
reported adjusted reported adjusted
---------- ---------- ----------- ----------
Net income (loss) (thousands)...................... $ (2,530) $ 2,392 $ (5,712) $ 9,054
Basic earnings (loss) per share.................... (0.04) 0.04 (0.10) 0.15
Diluted earnings (loss) per share.................. (0.04) 0.04 (0.10) 0.14
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 $2.9 million. The
estimated aggregate amortization expense for intangibles for the subsequent
years is:
For the Years Ending December 31,
(thousands)
2003.............................................. $ 11,355
2004.............................................. 3,916
Thereafter........................................ --
---------
$ 15,271
=========
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 Cost
Associated with 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
10
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
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, if any, on the Company's consolidated
financial statements.
B. Disposition of Business
Effective August 30, 2002, the Company completed the sale of NDD to
Catapult Communications Corporation ("Catapult") for $59.8 million, consisting
of $42.5 million in cash and convertible subordinated promissory notes (the
"Notes") issued by Catapult's wholly owned Irish subsidiary and guaranteed by
Catapult in the total amount of $17.3 million, subject to certain adjustments.
The sale resulted in a pre-tax gain of approximately $41.7 million ($28.3
million after taxes). This gain is based on certain estimates including a final
working capital adjustment in accordance with the Asset Purchase Agreement. Any
differences between these estimates and their actual settlement will change the
gain accordingly. In accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the sale of the NDD business
segment has been presented as a discontinued business and the Company's
historical financial results have been restated to reflect NDD as a discontinued
operation.
Assets and liabilities of NDD as of December 31, 2001 were the
following:
December 31,
2001
---------------
Assets (thousands)
Current assets:
Cash and cash equivalents.............................. $ 5,024
Accounts receivable, net............................... 14,750
Inventories............................................ 6,535
Deferred income taxes, net............................. 2,192
Prepaid expenses and other current assets.............. 1,874
--------------
Total current assets............................... $ 30,375
==============
Non-current assets:
Property and equipment, net................................. 3,280
Deferred income taxes, net.................................. 1,108
Other assets................................................ 388
Intangible assets, net...................................... 447
--------------
Total non-current assets........................... $ 5,223
==============
Liabilities
Current liabilities:
Trade accounts payable................................. $ 4,001
Accrued expenses....................................... 1,696
Accrued payroll and related expenses................... 1,941
Current portion of deferred revenues................... 5,118
Income taxes payable................................... 965
--------------
Total current liabilities.......................... $ 13,721
==============
Non-current liabilities:
Long-term portion of deferred revenue....................... 576
--------------
Total non-current liabilities...................... $ 576
==============
11
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
Revenues and net income for the Discontinued Operation were the
following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(thousands, except per share data)
Revenues........................... $ 2,221 $ 18,888 $ 26,556 $ 48,669
Net income......................... (1,898) 2,053 (3,308) 1,659
The Notes have a principal amount of $17.3 million bearing interest at
2% per annum and are due on August 30, 2004. The Company has the option of
converting the Notes into Catapult common stock after August 30, 2003 through
maturity at a conversion rate (subject to certain adjustments) of 62.50 shares
of Catapult common stock per $1,000 in principal (approximately 1.1 million
shares). Catapult also has the option of repaying one of the Notes at maturity
in the principal amount of $10.0 million by delivery of shares of Catapult
common stock valued at a 17.5% discount from trading prices at the time of
repayment.
The Notes, as reflected on the Consolidated Balance Sheet at September
30, 2002, are recorded at their estimated fair value of $18.1 million determined
by discounting the face value amount using a fair value rate of interest to
present value and then determining the fair value of the conversion option using
the Black-Scholes valuation model. The fair values of the Notes and the
conversion option are as follows (in millions):
$17.3 million face value Notes discounted to present value $ 14.9
Fair value of conversion option feature 3.2
-------
Fair value of Notes $ 18.1
=======
12
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
C. Certain Balance Sheet Items
September 30, December 31,
2002 2001
------------ ------------
(thousands)
The components of inventories are:
Raw materials ........................................... $ 6,019 $ 5,876
Work in process ......................................... 30 1,746
Finished goods .......................................... 5,442 7,160
------------ ------------
$ 11,491 $ 14,782
============ ============
Property and equipment consist of the following:
Manufacturing and development equipment ................. $ 46,070 $ 44,271
Furniture and office equipment .......................... 27,285 25,776
Demonstration equipment ................................. 3,582 3,898
Leasehold improvements .................................. 8,377 8,324
------------ ------------
85,314 82,269
Less, accumulated depreciation and amortization.......... (61,751) (50,790)
------------ ------------
Property and equipment, net ........................ $ 23,563 $ 31,479
============ ============
Intangible assets consist of the following:
Purchased technology..................................... $ 48,916 $ 48,908
Other.................................................... 10,000 13,000
------------ ------------
58,916 61,908
Less accumulated amortization............................ (40,761) (34,788)
------------ ------------
Intangible assets, net.............................. $ 18,155 $ 27,120
============ ============
D. Related Party Transactions
The Company's Japanese subsidiary purchased, for resale under a
distribution arrangement, products from an affiliate in which three of the
Company's directors are directors and shareholders. In August 2002, the Japanese
subsidiary was sold as part of the disposition of NDD (see Note B - Disposition
of Business), and purchases subsequent to the sale are no longer considered
related party transactions. The amount due to the related party at December 31,
2001 was $168,000.
13
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
E. Income Taxes
The income tax provisions from continuing operations for the three- and
nine-month periods ended September 30, 2002 were $4.8 million and $8.4 million,
respectively, and reflected the effect of non-deductible acquisition-related
costs, partially offset by benefits of $1.1 million and $3.2 million,
respectively, from the utilization of deferred tax liabilities related to
certain of these acquisition-related costs. The income tax provisions from
continuing operations for the three- and nine-month periods ended September 30,
2001 were $811,000 and $4.0 million, respectively, and reflected the effect of
non-deductible acquisition-related costs, partially offset by benefits of $1.1
million and $3.4 million, respectively, 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 to continuing operations for the three-
and nine-month periods ended September 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.
F. Lines of Credit and Long-Term Convertible Debt
The Company has a $20.0 million line of credit with a U.S. bank. 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 September 30, 2002), and has been extended to January 31,
2003 from its original expiration date of October 31, 2002. The Company believes
that the line of credit will be renewable on substantially the same terms and
conditions as the current line of credit. 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.
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.
14
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
G. 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. Tekelec currently
believes that the ultimate outcome of the lawsuit will not have a material
adverse effect on its financial condition, results of operations or cash flows.
Lemelson Medical, Education and Research Foundation, Limited Partnership vs.
Tekelec
In March 2002, the Lemelson Medical, Education & Research Foundation,
Limited Partnership ("Lemelson") filed a complaint against thirty defendants,
including Tekelec, in the United States District Court for the District of
Arizona. The complaint alleges that all defendants make, offer for sale, sell,
import, or have imported products that infringe eighteen patents assigned to
Lemelson, and the complaint also alleges that the defendants use processes that
infringe the same patents. The patents at issue relate to computer image
analysis technology and automatic identification technology. Lemelson has not
identified the specific Tekelec products or processes that allegedly infringe
the patents at issue, 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-
15
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
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 currently believes that the
ultimate outcome of the lawsuit will not have a material adverse effect on its
financial condition, results of operations or cash flows.
H. 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 Contact Center operating segment develops, markets and sells
software-based solutions for call centers, including TotalView Workforce
Management and TotalNet Call Routing.
As discussed in Note B - Disposition of Business, the Company sold NDD
which was comprised of the Network Diagnostics and the Japan Diagnostics
operating segments. NDD is reflected as a discontinued operation and accordingly
the historical operating segment data has been restated to exclude the
discontinued operation.
Transfers between operating segments are made at prices reflecting
market conditions. The allocation of revenues from external customers by
geographical area is determined by the destination of the sale.
16
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
The Company's operating segments and geographical information are as follows (in
thousands):
Operating Segments
Revenues
--------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---------- ---------- ----------- ------------
Network Systems................................... $ 62,815 $ 49,567 $ 171,958 $ 156,468
Contact Center.................................... 10,729 9,020 29,960 27,535
---------- --------- ---------- ----------
Total net sales.............................. $ 73,544 $ 58,587 $ 201,918 $ 184,003
========== ========= ========== ==========
Income (Loss) from Operations
-----------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2002 2001 2002 2001
---------- ---------- ----------- ------------
Network Systems................................... $ 20,993 $ 8,473 $ 47,618 $ 33,802
Contact Center.................................... 4,664 4,078 12,018 11,786
General Corporate(1).............................. (10,373) (16,010) (32,906) (49,064)
---------- ---------- ---------- -----------
Total operating income (loss)................ $ 15,284 $ (3,459) $ 26,730 $ (3,476)
=========== ========== ========== ===========
- --------------------------------
(1) General Corporate includes acquisition-related charges and amortization of
$2,800 and $7,816 for the three months ended September 30, 2002 and 2001,
respectively, and $8,400 and $23,448 for the nine months ended September
30, 2002 and 2001, respectively.
17
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 Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- ----------- ---------
Network Systems................................... $ 62,815 $ 49,567 $ 171,958 $ 156,468
Contact Center.................................... 10,729 9,020 29,960 27,535
--------- --------- ----------- ----------
Total revenues from external customers....... $ 73,544 $ 58,587 $ 201,918 $ 184,003
========= ========= =========== ==========
The following table sets forth, for the periods indicated, revenues
from external customers by geographic territory:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
2002 2001 2002 2001
--------- ---------- ----------- ---------
North America..................................... $ 53,012 $ 41,421 $ 164,649 $ 150,139
Europe............................................ 15,371 4,893 21,662 7,417
Rest of World..................................... 5,161 12,273 15,607 26,447
--------- --------- ---------- -----------
Total revenues from external customers....... $ 73,544 $ 58,587 $ 201,918 $ 184,003
========= ========= ========== ===========
The following table sets forth, for the periods indicated, long-lived
assets by geographic area in which the Company holds assets:
September 30, December 31,
2002 2001
------------- ------------
United States..................................... $ 122,924 $ 121,967
Other............................................. 864 951
----------- ------------
Total long-lived assets...................... $ 123,788 $ 122,918
=========== ============
Sales to two customers individually accounted for 12% and 10% of
revenues for the three months ended September 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 nine months ended
September 30, 2002. Sales to one customer accounted for 10% of the revenues for
the three months ended September 30, 2001 and included sales from the network
systems operating segment. Sales to one customer accounted for 17% of the
revenues for the nine months ended September 30, 2001 and included sales from
the both operating segments.
18
Tekelec
Notes to Consolidated Financial Statements
(unaudited)
I. 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 nine-month periods ended September 30, 2002 and 2001:
Net Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------------------------------------------------
(thousands, except per share amount)
For the Three Months Ended September 30, 2002:
Basic EPS........................................ $ 35,738 60,407 $ 0.59
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- 780
Effect of "if-converted" method applied to
Convertible Note.......................... 1,498 7,606
-------- ------
Diluted EPS...................................... $ 37,236 68,793 $ 0.54
======== ======
For the Three Months Ended September 30, 2001:
Basic EPS........................................ $ (2,530) 59,828 $ (0.04)
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- --
-------- ------
Diluted EPS...................................... $ (2,530) 59,828 $ (0.04)
======== ======
For the Nine Months Ended September 30, 2002:
Basic EPS........................................ $ 41,576 60,249 $ 0.69
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- 1,132
Effect of "if-converted" method applied to
Convertible Note......................... 4,463 7,606
-------- ------
Diluted EPS...................................... $ 46,039 68,987 $ 0.67
======== ======
For the Nine Months Ended September 30, 2001:
Basic EPS........................................ $ (5,712) 59,444 $ (0.10)
Effect of Dilutive Securities - Stock
Options and Warrants........................ -- --
-------- ------
Diluted EPS...................................... $ (5,712) 59,444 $ (0.10)
======== ======
For the three and nine months ended September 30, 2002, the calculation
of earnings per share includes, for the purposes of the calculation, the
add-back to net income of $1,498 and $4,463, respectively, for assumed after-tax
interest cost related to the convertible debt using the "if-converted" method of
accounting for diluted earnings per share. The weighted average number of shares
outstanding for the three and nine months ended September 30, 2002 includes
7,606 shares related to the convertible debt using the "if-converted" method.
The computation of diluted number of shares for the three and nine
months ended September 30, 2001 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 17.5 million and 13.9 million for the three and nine months ended
September 30, 2001 respectively.
19
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.
As more fully described in Note B - Disposition of Business to the
Consolidated Financial Statements, the Company completed the sale of its Network
Diagnostics Division ("NDD") to Catapult Communications Corporation ("Catapult")
effective August 30, 2002 for $59.8 million, consisting of $42.5 million in cash
and convertible subordinated promissory notes issued by Catapult's wholly owned
Irish subsidiary and guaranteed by Catapult in the total amount of $17.3
million, subject to certain adjustments. The sale resulted in a pre-tax gain of
approximately $41.7 million ($28.3 million after taxes). As a result, the
Company's 2001 financial results have been restated to reflect the NDD as a
discontinued operation. The discussions and figures below are based on this
restated presentation.
The Tekelec logo, IEX and Eagle are registered trademarks of Tekelec.
Tekelec, IP7, IP7 Secure Gateway, ASi 4000, VXi, TekWare, TekServer, TotalView
and TotalNet are trademarks of Tekelec.
Overview
The Company's product offerings are currently organized into two
distinct product lines: network systems 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.
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.
20
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 Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
2002 2001 2002 2001
-------------- ----------- ----------- ----------
Revenues.............................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................... 22.4 34.9 25.9 30.6
Amortization of purchased technology.................. 3.4 4.3 3.8 4.2
----- ----- ----- -----
Gross profit.......................................... 74.2 60.8 70.3 65.2
Research and development.............................. 22.1 22.6 22.4 22.6
Selling, general and administrative................... 30.8 34.9 34.1 35.7
Amortization of goodwill and other intangible assets.. 0.5 9.2 0.6 8.8
----- ----- ----- -----
Total operating expenses.............................. 53.4 66.7 57.1 67.1
----- ----- ----- -----
Income (loss) from continuing operations.............. 20.8 (5.9) 13.2 (1.9)
Interest and other income (expense), net.............. (1.6) (0.5) (0.8) 0.1
----- ----- ----- -----
Income (loss) from continuing operations before 19.2 (6.4) 12.4 (1.8)
provision for income taxes.......................
Provision for income taxes............................ 6.5 1.4 4.2 2.2
Net income (loss) from continuing operations.......... 12.7 (7.8) 8.2 (4.0)
Income (loss) from discontinued operation, net of
provision (benefit) for income taxes............. (2.6) 3.5 (1.6) 0.9
Gain on disposal of discontinued operation, net of
provision for income taxes....................... 38.5 -- 14.0 --
----- ----- ----- -----
Net income (loss)..................................... 48.6% (4.3)% 20.6% (3.1)%
===== ===== ===== =====
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 Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2002 2001 2002 2001
--------- ---------- ----------- ---------
Network Systems................................... 85% 85% 85% 85%
Contact Center.................................... 15 15 15 15
--- --- --- ---
Total........................................ 100% 100% 100% 100%
=== === === ===
21
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 Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
North America..................................... 72 % 71% 81% 82%
Europe............................................ 21 8 11 4
Rest of World..................................... 7 21 8 14
--- --- --- ---
Total........................................ 100% 100% 100% 100%
=== === === ===
Three Months Ended September 30, 2002 Compared with the Three Months Ended
September 30, 2001
Revenues. The Company's revenues increased by $15.0 million, or 26%,
during the third quarter of 2002 due primarily to higher sales of network
systems products.
Revenues from network systems products increased by $13.2 million, or
27%, due primarily to higher sales of Eagle STP systems, and increased upgrade,
extension and service revenues.
Revenues from contact center products increased by $1.7 million, or
19%, primarily as a result of increased sales of the TotalView product.
Revenues in North America increased by $11.6 million, or 28%, due
primarily from higher sales of Eagle STP products and services. Revenues in
Europe increased by $10.5 million, or 214%, due to higher Eagle STP product
sales. Rest of world revenues decreased by $7.1 million, or 58%, due primarily
to lower Eagle STP product sales.
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 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.
22
Gross Profit. Gross profit as a percentage of revenues increased to
74.2% in the third quarter of 2002 compared to 60.8% in the third quarter of
2001. The increase in gross profit was due primarily to a higher proportion of
sales of Eagle STP upgrades and extensions, service agreements and local number
portability solutions, which typically carry higher margins.
Research and Development. Research and development expenses increased
overall by $3.1 million, or 23%, and decreased as a percentage of revenues to
22.1% in the third quarter of 2002 from 22.6% in the third quarter of 2001. The
dollar increase was due primarily to an increase in variable 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 $2.2 million, or 11%, and decreased as a
percentage of revenues to 30.8% in the third quarter of 2002 from 34.9% in the
third quarter of 2001. The dollar increase was due primarily to an increase in
variable compensation costs partially offset by lower legal and consulting
expenses.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and intangible assets in the third 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 September 30, 2002 from 9.2% for the three months ended
September 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
slightly by $59,000. Interest income decreased $620,000, or 29%, due to lower
interest rates in 2002 compared to 2001. Other expenses increased $208,000 due
to foreign exchange losses.
Income Taxes. The income tax provisions for the third quarter 2002 and
2001 were $4.8 million and $811,000, respectively, and reflect the effect of
non-deductible acquisition-related costs and amortization, partially offset by a
benefit of $1.1 million in each year 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 three-month periods ended September 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.
23
Nine Months Ended September 30, 2002 Compared with the Nine Months Ended
September 30, 2001
Revenues. The Company's revenues increased by $17.9 million, or 10%,
during the nine months ended September 30, 2002 due primarily to higher sales of
network systems products.
Revenues from network systems products increased by $15.5 million, or
10%, due primarily to higher sales of Eagle STP products and secondarily, to
higher sales of Sentinel products.
Revenues from contact center products increased by $2.4 million, or 9%,
primarily as a result of increased sales of the TotalView product.
Revenues in North America increased by $14.5 million, or 10%, due
primarily to increased sales of Sentinel and Eagle services. Revenues in Europe
increased by $14.2 million, or 192%, due primarily to stronger sales of Eagle
STP products. Rest of world revenues decreased by $10.8 million or 41% due
primarily to lower sales of Eagle STP products.
Gross Profit. Gross profit as a percentage of revenues increased to
70.3% in the nine months ended September 30, 2002 compared with 65.2% in the
nine months ended September 30, 2001. The increase in gross margins was due
primarily to a higher proportion of sales of Eagle STP upgrades and extensions
and service agreements which typically carry higher margins.
Research and Development. Research and development expenses increased
overall by $3.6 million, or 8.6%, and decreased slightly as a percentage of
revenues to 22.4% in the nine months ended September 30, 2002 from 22.6% in the
nine months ended September 30, 2001. The dollar increase was due primarily to
an increase in variable compensation expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.3 million, or 5%, and decreased as a
percentage of revenues to 34.1% in the nine months ended September 30, 2002 from
35.7% in the nine months ended September 30, 2001. The dollar increase was due
primarily to an increase in variable compensation costs and higher legal
expenses.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and intangible assets for the nine months ended September 30, 2002
decreased by $15.0 million to $1.2 million, and decreased as a percentage of
revenues to 0.6% for the nine months ended September 30, 2002 from 8.8% for the
nine months ended September 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
$171,000, or 2.6%, for the nine months ended September 30, 2002 compared to the
2001 comparable period.
24
Interest income decreased $2.1 million, or 30.0%, due to lower interest rates in
2002 compared to 2001.
Income Taxes. The income tax provisions for the nine months ended
September 30, 2002 and 2001 were $8.4 million and $4.0 million, respectively,
and reflected the effect of non-deductible acquisition-related costs and
amortization, partially offset by a benefit of $3.2 million and $3.4 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 nine-month periods ended September 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.
Liquidity and Capital Resources
During the nine months ended September 30, 2002, cash and cash
equivalents increased by $111.7 to $198.8 million, including net proceeds of
$37.9M from the sale of NDD and $25.6 million from the sale of short-term and
long-term investments. Operating activities, net of the effects of exchange rate
changes on cash, provided $48.5 million. Financing activities, which represented
proceeds from the issuance of common stock upon the exercise of options provided
$2.0 million. Investing activities provided $59.1M and was comprised primarily
of the proceeds from the sale of NDD and net proceeds from the sale of
short-term and long-term investments, partially offset by $4.2M for capital
expenditures.
Cash flows from operating activities were comprised mainly of net
income adjusted for the gain on the sale of NDD, depreciation and amortization,
and a decrease in deferred revenue. Deferred revenue decreased by 28% during the
nine months ended September 30, 2002 due primarily to an increase in revenue
recognized for transactions that completed acceptance or delivery requirements.
Net capital expenditures of $4.2 million during the first nine months
of 2002 represented the planned addition of equipment principally for research
and development and manufacturing operations.
The Company has a $20.0 million line of credit with a U.S. bank. 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 September 30, 2002), and has been extended to January 31,
2003 from its original expiration date of October 31, 2002. The Company believes
that the line of credit will be renewable on substantially the same terms and
conditions as the current line of credit. 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.
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.
25
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.
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 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. 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
26
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.
27
"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 the 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. There can be no assurance that the Company's
actual future performance will meet the Company's expectations. As discussed in
the Company's 2001 Annual Report on Form 10-K and other filings with the SEC,
the Company's future operating results are difficult to predict and subject to
significant fluctuations. Factors that may cause future results to differ
materially from the Company's current expectations include, among others:
overall telecommunications spending, changes in general economic conditions, the
timing of significant orders and shipments, the lengthy sales cycle for the
Company's products, the timing of the convergence of voice and data networks,
the ability of carriers to utilize excess capacity of signaling infrastructure
and related products in the network, the capital spending patterns of customers,
the dependence on wireless customers for a significant percentage and growth of
the Company's revenues, the success or failure of strategic alliances or
acquisitions, the timely development and introduction of new products and
services, product mix, the geographic mix of the Company's revenues and the
associated impact on gross margins, market acceptance of new products and
technologies, carrier deployment of intelligent network services, the ability of
our customers to obtain financing, the level and timing of research and
development expenditures, regulatory changes, and the expansion of the Company's
marketing and support organizations, both domestically and internationally 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.
28
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes for the nine-month period ended
September 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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of a date within 90 days prior to the filing date of this
quarterly report, the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including the Company's
President and Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" as defined in Exchange Act Rule 13a-14. Based upon that
evaluation, the Company's President and Chief Executive Officer and its Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are adequate and effective in timely alerting them to material
information relating to the Company and its consolidated subsidiaries required
to be included in the Company's periodic SEC filings to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.
(b) Changes in Internal Controls
There have not been any significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above. There were
no significant deficiencies or material weaknesses, and therefore no corrective
actions were taken.
29
PART II --OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certificate of Chief Executive Officer of Tekelec pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Chief Financial Officer of Tekelec pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Tekelec filed a report on Form 8-K on August 14, 2002 with respect
to the certifications of its Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed under Item 9 of Form 8-K).
Tekelec filed a report on Form 8-K on September 16, 2002 with
respect to the sale of substantially all of the assets of its
Network Diagnostics Division to Catapult Communications Corporation.
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
November 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
CERTIFICATION
November 14, 2002
I, Michael L. Margolis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tekelec;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Michael L. Margolis
- -------------------------------------
President and Chief Executive Officer
32
CERTIFICATION
November 14, 2002
I, Paul J. Pucino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tekelec;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Paul J. Pucino
- ------------------------------------------
Vice President and Chief Financial Officer
33
INDEX TO EXHIBITS
Exhibit
Number Description
99.1 Certificate of Chief Executive Officer of Tekelec pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certificate of Chief Financial Officer of Tekelec pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
34
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tekelec (the "Company") on Form 10-Q
for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Michael L. Margolis,
President and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
1) The Report fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the Company's consolidated financial
position and results of operations.
/s/ Michael L. Margolis
- -------------------
President and Chief Executive Officer
November 14, 2002
35
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Tekelec (the "Company") on Form 10-Q
for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Paul J. Pucino, Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
1) The Report fully complies with the requirements of Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in
all material respects, the Company's consolidated financial
position and results of operations.
/s/ Paul J. Pucino
- -------------------
Vice President and Chief Financial Officer
November 14, 2002
36