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FORM 10-Q
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, 1996
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 1, 1996 there were 11,891,664 shares of the
registrant's common stock, without par value, outstanding.
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TEKELEC
FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flow for the
nine months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(THOUSANDS, EXCEPT SHARE DATA)
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $12,318 $43,609
Short-term investments, at fair value . . . . . . 14,825 ---
Accounts and notes receivable, less
allowances of $347 and $391, respectively . . . 19,326 19,167
Inventories . . . . . . . . . . . . . . . . . . . 7,165 6,423
Amounts due from related parties . . . . . . . . . 1,860 3,053
Prepaid expenses and other current assets . . . . 1,837 1,232
------- -------
Total current assets . . . . . . . . . . . . . 57,331 73,484
Long-term investments, at fair value . . . . . . . . . 9,143 ---
Property and equipment, net . . . . . . . . . . . . . . 7,393 6,107
Other assets . . . . . . . . . . . . . . . . . . . . . 668 897
------- -------
Total assets . . . . . . . . . . . . . . . . . $74,535 $80,488
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . . . . . $ --- $ 570
Trade accounts payable . . . . . . . . . . . . . . 3,675 3,960
Accrued expenses . . . . . . . . . . . . . . . . . 3,820 4,404
Accrued payroll and related expenses . . . . . . . 2,967 3,294
Deferred revenues . . . . . . . . . . . . . . . . 4,531 2,908
Current portion of other obligations . . . . . . . --- 31
Income taxes payable . . . . . . . . . . . . . . . 652 1,334
------- -------
Total current liabilities . . . . . . . . . . 15,645 16,501
Long-term debt . . . . . . . . . . . . . . . . . . . . --- 380
------- -------
Total liabilities . . . . . . . . . . . . . . 15,645 16,881
------- -------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
50,000,000 shares authorized; 11,869,860 and
11,599,073 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . 56,181 54,936
Retained earnings . . . . . . . . . . . . . . . . 1,285 6,390
Cumulative translation adjustment . . . . . . . . 1,424 2,281
------- -------
Total shareholders' equity . . . . . . . . . . 58,890 63,607
------- -------
Total liabilities and shareholders' equity . . $74,535 $80,488
======= =======
See notes to consolidated financial statements.
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TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
(THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Sales to third parties . . . . . . . . . $18,288 $18,967 $45,321 $53,834
Sales to related parties . . . . . . . 1,108 980 2,799 4,243
------- ------- ------- -------
Total revenues . . . . . . . . . . . 19,396 19,947 48,120 58,077
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . 7,410 6,151 18,746 19,015
Research and development . . . . . . . . 4,420 3,892 13,107 10,726
Selling, general and administrative . . 6,834 7,160 21,004 20,535
Restructuring . . . . . . . . . . . . . 327 --- 327 ---
------- ------- ------- -------
Total costs and expenses . . . . . . 18,991 17,203 53,184 50,276
------- ------- ------- -------
Income (Loss) from operations . . . . . . . 405 2,744 (5,064) 7,801
Other income (expense):
Interest, net . . . . . . . . . . . . . 422 511 1,262 617
Other, net . . . . . . . . . . . . . . . (8) (3) (70) (226)
------- ------- ------- -------
Total other income . . . . . . . . . 414 508 1,192 391
------- ------- ------- -------
Income (Loss) before provision for income taxes 819 3,252 (3,872) 8,192
Provision for income taxes . . . . . . . 544 692 1,233 2,114
------- ------- ------- -------
NET INCOME (LOSS) . . . . . . . . . . . $ 275 $ 2,560 $(5,105) $ 6,078
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE:
Primary . . . . . . . . . . . . . . . . $ 0.02 $ 0.20 $ (0.44) $ 0.52
Fully diluted . . . . . . . . . . . . . 0.02 0.20 (0.44) 0.51
WEIGHTED AVERAGE NUMBER OF SHARES:
Primary . . . . . . . . . . . . . . . . 12,636 13,053 11,733 11,799
Fully diluted . . . . . . . . . . . . . 12,846 13,054 11,733 11,855
See notes to consolidated financial statements.
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TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1996 1995
---- ----
(THOUSANDS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (5,105) $ 6,078
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 2,835 2,826
Changes in current assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . (366) (4,115)
Inventories . . . . . . . . . . . . . . . . . . . . . (817) (2,364)
Amounts due from related parties . . . . . . . . . . . 1,193 (1,060)
Prepaid expenses and other current assets . . . . . . (629) (286)
Trade accounts payable . . . . . . . . . . . . . . . . (224) 404
Accrued expenses . . . . . . . . . . . . . . . . . . . (559) 1,158
Accrued payroll and related expenses . . . . . . . . . (309) (1,428)
Deferred revenues . . . . . . . . . . . . . . . . . . 1,623 1,076
Income taxes payable . . . . . . . . . . . . . . . . . (630) 788
-------- --------
Total adjustments . . . . . . . . . . . . . . . . 2,117 (3,001)
-------- --------
Net cash provided by (used in) operating activities (2,988) 3,077
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities . . . . . . . . (35,968) ---
Proceeds from maturity of available-for-sale securities . 12,000 ---
Purchase of property and equipment . . . . . . . . . . . . (4,179) (3,150)
Decrease in other assets . . . . . . . . . . . . . . . . . 173 36
-------- --------
Net cash (used in) investing activities . . . . . . . (27,974) (3,114)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Decrease in restricted cash . . . . . . . . . . . . . . . --- 1,000
Payments of short-term borrowings . . . . . . . . . . . . (570) (797)
Repayment of long-term debt . . . . . . . . . . . . . . . (380) (180)
Repayment of other obligations . . . . . . . . . . . . . . (28) (292)
Proceeds from issuance of common stock . . . . . . . . . . 1,245 38,597
-------- --------
Net cash provided by financing activities . . . . . . 267 38,328
-------- --------
Effect of exchange rate changes on cash . . . . . . . . . . . . (596) 2
-------- --------
Net increase (decrease) in cash and cash equivalents . . . (31,291) 38,293
Cash and cash equivalents at beginning of period . . . . . . . 43,609 6,653
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . $ 12,318 $ 44,946
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 95 $ 201
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 1,878 1,426
See notes to consolidated financial statements.
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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, 1995, and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
Management, necessary for a fair presentation of the Company's financial
condition and operating results 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; however,
for financial statement presentation purposes, the reporting periods are
referred to as ended on the last calendar day of the quarter. The accompanying
financial statements for the three and nine months ended September 30, 1996 and
1995 are for the thirteen and thirty-nine weeks ended September 27, 1996 and
September 29, 1995, respectively.
Earnings per share are computed using the weighted average number of
shares outstanding and dilutive common stock equivalents (options and
warrants).
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1995
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
B. FAIR VALUE OF INVESTMENTS
The Company has short-term investments in corporate debt securities
with maturities of less than 90 days whose carrying amounts approximate their
fair values because of their short maturities. These short-term investments
are included in cash and cash equivalents, are classified as held-to-maturity
securities and amounted to $5.3 million and $35.9 million at September 30, 1996
and December 31, 1995, respectively. At September 30, 1996, the Company also
had investments classified as available-for-sale securities included in
short-term and long-term investments, consisting of $6.0 million of United
States Treasury Notes with maturities of less than one year, $9.2 million of
United States Treasury Notes with maturities of between one and two years, and
$8.8 million of corporate debt securities with maturities of less than one
year. These available-for-sale securities are accounted for at their fair
value, and unrealized gains and losses on these securities are reported as a
separate component of shareholders' equity. At September 30, 1996 unrealized
gains or losses on available-for-sale securities were not significant.
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. CERTAIN BALANCE SHEET ITEMS
The components of inventories are:
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- ------------
(THOUSANDS)
Raw materials . . . . . . . . . . . . . . . . . . . $ 1,736 $ 3,109
Work in process . . . . . . . . . . . . . . . . . . 1,507 1,653
Finished goods . . . . . . . . . . . . . . . . . . . 3,922 1,661
-------- --------
$ 7,165 $ 6,423
======== ========
Property and equipment consist of the following:
Manufacturing and development equipment . . . . . . $ 12,373 $ 10,823
Furniture and office equipment . . . . . . . . . . . 7,058 5,651
Demonstration equipment . . . . . . . . . . . . . . 3,951 3,406
Leasehold improvements . . . . . . . . . . . . . . . 1,126 1,232
-------- --------
24,508 21,112
Less, accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . (17,115) (15,005)
------- --------
Property and Equipment, net . . . . . . . . . . . $ 7,393 $ 6,107
======== ========
D. RELATED PARTY TRANSACTIONS
Sales to related parties consist of, and amounts due from related
parties are, the result of transactions between the Company and foreign
affiliates controlled by the Company's Chairman of the Board.
E. RESTRUCTURING
During the third quarter of 1996, the Company recorded restructuring
charges amounting to $327,000 which represent severance pay and benefit costs
for eight terminated employees in research and development and support
functions, and other costs related to the consolidation of the Company's Ohio
research facility into the Company's North Carolina facility.
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
F. INCOME TAXES
For the three-month period ended September 30, 1996, the Company had
an effective tax rate of 66% compared to 21% for the three-month period ended
September 30, 1995. Although the Company's pre-tax results showed a loss for
the nine-month period ended September 30, 1996, the Company had a tax provision
of $1.2 million, compared to $2.1 million, or an effective tax rate of 26%, for
the comparable period in 1995. The provisions for all periods were principally
foreign taxes on the income of the Company's Japanese subsidiary. The
provisions for the three and nine month periods ended September 30, 1996 were
impacted by the Company's inability to currently recognize a benefit for its
U.S. loss and credits carryforwards, which remain available to reduce future
U.S. taxes. In 1995, the Company was able to utilize a portion of its prior
years' U.S. loss carryforwards, and consequently provided for taxes on its U.S.
taxable income at the federal alternative minimum tax rate and applicable state
tax rates.
G. BORROWINGS
In September 1996, the Company repaid all of the outstanding
borrowings on its $7.5 million line of credit, and terminated the credit
facility. In October 1996, the Company agreed to terms for a $10 million line
of credit with a U.S. bank, collateralized by substantially all of the
Company's assets and bearing interest at, or in some cases below, the U.S.
prime rate (8.25% at September 30, 1996). This credit facility expires June
30, 1998 if not renewed.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.1 million with interest at the Japanese prime
rate (1.625% at September 30, 1996) plus 0.125% per annum which expire between
March 31, 1997, and August 5, 1997, if not renewed. There have been no
borrowings under these lines of credit.
H. MAJOR CUSTOMERS
Sales to Nippon Telegraph & Telephone amounted to 13% of revenues for
the third quarter of 1995. There were no customers accounting for 10% or more
of third quarter 1996 revenues.
Sales to Nippon Telegraph & Telephone amounted to 10% and 16% of
revenues for the first nine months of 1996 and 1995, respectively. Sales to
AT&T amounted to 10% of revenues for the first nine months of 1995.
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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 by 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, 1995.
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain statement of operations items bear to total revenues:
PERCENTAGE OF REVENUES
----------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . 38.2 30.8 39.0 32.7
----- ----- ----- -----
Gross profit . . . . . . . . . . . . . . 61.8 69.2 61.0 67.3
Research and development . . . . . . . . 22.8 19.5 27.2 18.5
Selling, general and administrative . . . 35.2 35.9 43.6 35.4
Restructuring . . . . . . . . . . . . . . 1.7 --- 0.7 ---
----- ----- ----- -----
Total operating expenses . . . . . . . . 59.7 55.4 71.5 53.9
----- ----- ----- -----
Income (Loss) from operations . . . . . . 2.1 13.8 (10.5) 13.4
Interest and other income, net . . . . . 2.1 2.6 2.5 0.7
----- ----- ----- -----
Income (Loss) before provision for income
taxes . . . . . . . . . . . . . . . . . . 4.2 16.4 (8.0) 14.1
Provision for income taxes . . . . . . . 2.8 3.5 2.6 3.6
----- ----- ----- -----
Net income (loss) . . . . . . . . . . . . 1.4% 12.9% (10.6)% 10.5%
===== ===== ===== =====
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The following table sets forth, for the periods indicated, the
revenues by principal product line as a percentage of total revenues:
PERCENTAGE OF REVENUES
----------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
Network diagnostic products . . . . . . 57% 68% 62% 72%
Network switching products . . . . . . 43 32 38 28
--- --- --- ---
Total . . . . . . . . . . . . 100% 100% 100% 100%
==== ==== ==== ====
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,
---------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
North America . . . . . . . . . . . . . 59% 48% 58% 55%
Japan . . . . . . . . . . . . . . . . . 21 27 22 24
Europe . . . . . . . . . . . . . . . . 10 7 9 9
Rest of the World . . . . . . . . . . . 10 18 11 12
--- --- --- ---
Total . . . . . . . . . . . . . 100% 100% 100% 100%
=== === === ===
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE
THREE MONTHS ENDED SEPTEMBER 30, 1995
Revenues. The Company's revenues decreased by $551,000, or 3%, during
the third quarter of 1996 due to lower diagnostic product sales partially
offset by higher switching product sales.
Revenues from switching products increased by $2.0 million, or 31%, in
the third quarter of 1996 primarily due to increased EAGLE STP sales in North
America and the first EAGLE STP sale in Europe. Revenues from diagnostic
products decreased by $2.5 million, or 19%, due to lower Chameleon Open sales
in Japan, and lower sales of the Company's older diagnostic and
signalling/wireless products in the Rest of the World.
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Revenues in North America increased by $1.7 million, or 18%, as a
result of higher sales of both switching and diagnostic products. Sales in
Japan decreased by $1.3 million, or 24%, primarily due to lower Chameleon Open
sales and the impact of exchange rate fluctuations on foreign currency
translations which decreased revenues by approximately $670,000. Other
international revenues decreased by $1.0 million due primarily to lower sales
of signalling/wireless products in the Rest of the World.
The impact of exchange rate fluctuations on currency translations
decreased revenues by approximately $670,000, or 3%, and decreased net income
by $57,000, or 17%, in the third quarter of 1996.
Gross Profit. Gross profit as a percentage of revenues decreased from
69% in the third quarter of 1995 to 62% in the third quarter of 1996, primarily
due to lower margins on sales of switching products as a result of increased
price competition in the EAGLE product market, and lower margins on sales of
diagnostic products as a result of higher per-unit manufacturing costs and the
impact of trade-in programs for the Company's customers to upgrade to the
Company's newer products. Gross profit was also adversely impacted by a lower
proportion of diagnostic product sales, which typically carry higher margins
than switching products. Changes in the following factors, among others, may
affect gross profit: product and distribution channel mix, competition,
customer discounts, supply and demand conditions in the electronic components
industry, internal manufacturing capabilities and efficiencies, foreign
currency fluctuations and general economic conditions.
Research and Development. Research and development expenses increased
by $528,000, or 14%, in the third quarter of 1996 and increased as a percentage
of revenues from 20% to 23% due to the hiring of additional personnel in the
switching business and to relocation expenses incurred in connection with the
consolidation of the Company's Ohio research facility into the Company's North
Carolina facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $326,000, or 5%, in the third quarter of
1996 principally as a result of lower sales commission expenses.
Income Taxes. For the three-month period ended September 30, 1996,
the Company had an effective tax rate of 66% compared to 21% for the
three-month period ended September 30, 1995. The provisions for both periods
were principally foreign taxes on the income of the Company's Japanese
subsidiary. The provision for the three-month period ended September 30, 1996
was impacted by the Company's inability to currently recognize a benefit for
its U.S. loss and credits carryforwards, which remain available to reduce
future U.S. taxes. In 1995, the Company was able to utilize a portion of its
prior years' U.S. loss carryforwards, and consequently provided for taxes on
its U.S. taxable income at the federal alternative minimum tax rate and
applicable state tax rates.
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NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH THE
NINE MONTHS ENDED SEPTEMBER 30, 1995
Revenues. The Company's revenues decreased by $10.0 million, or 17%,
during the first nine months of 1996 due to lower diagnostic product sales,
partially offset by higher switching product sales.
In the first nine months of 1996, revenues from diagnostic products
decreased by $11.8 million, or 28%, due to lower sales of all diagnostic
products worldwide, while revenues from switching products increased by $1.8
million, or 11%, due to increased EAGLE STP sales.
Revenues in North America decreased by $3.6 million, or 11%, as a
result of lower sales of diagnostic products. Sales in Japan decreased by $3.5
million, or 25%, of which $1.9 million was the result of exchange rate
fluctuations on currency translations. Other international revenues decreased
by $2.9 million, or 23%, due to lower diagnostic product sales.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $1.9 million, or 4%, and increased net loss by $163,000,
or 3%, in the first nine months of 1996.
Gross Profit. Gross profit as a percentage of revenues decreased from
67% in 1995 to 61% in 1996 primarily due to lower sales of the Company's higher
margin diagnostic products, certain non-recurring costs associated with the
Company's EAGLE product in the first half of 1996 and increased price
competition in the EAGLE product market.
Research and Development. Research and development expenses increased
by $2.4 million, or 22%, in the first nine months of 1996 and increased as a
percentage of revenues from 19% in the first nine months of 1995 to 27% in the
first nine months of 1996. The dollar increase in such expenses was primarily
attributable to the hiring of additional personnel and contractors in the
switching business, expenses incurred in connection with the Bellcore technical
audit of the Company's EAGLE product and relocation expenses relating to the
consolidation of the Company's Ohio research facility into the Company's North
Carolina facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $469,000, or 2%, in the first nine months
of 1996 and increased as a percentage of revenues from 35% in the first nine
months of 1995 to 44% in the first nine months of 1996. The dollar increase in
such expenses was primarily attributable to increased personnel expenses,
partially offset by lower commissions as a result of lower sales levels.
Income Taxes. Although the Company's pre-tax results showed a loss
for the nine months ended September 30, 1996, the Company had a tax provision
of $1.2 million, compared to $2.1 million, for an effective tax rate of 26%, in
1995. The provisions for both periods were principally foreign taxes on the
income of the Company's Japanese subsidiary. The provision for the nine months
ended September 30, 1996 was impacted by the Company's inability to currently
recognize a benefit for its U.S. loss and credits carryforwards, which remain
available to reduce
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future U.S. taxes. In 1995, the Company was able to utilize a portion of its
prior years' U.S. loss carryforwards, and consequently provided for taxes on
its U.S. taxable income at the federal alternative minimum tax rate and
applicable state tax rates.
LIQUIDITY AND CAPITAL RESOURCES
During the nine-month period ended September 30, 1996, cash and cash
equivalents decreased by $31.3 million to $12.3 million, primarily due to a net
transfer of approximately $24.0 million from cash and cash equivalents to
short-term and long-term investments. In addition, other investing activities
used $4.0 million primarily for capital expenditures, operating activities used
$3.0 million, and financing activities provided $267,000.
Accounts receivable, including amounts due from related parties,
decreased by 5% during the first nine months of 1996 despite sales levels in
the third quarter of 1996 which were 13% higher than the fourth quarter of
1995. The decrease in accounts receivable was primarily due to the collection
of certain 1995 receivables which carried extended payment terms. Inventories
increased by 12% during the first nine months of 1996 primarily to meet
anticipated higher sales levels than were achieved.
Capital expenditures amounted to $4.2 million during the first nine
months of 1996 and represented the planned replacement and addition of
equipment principally for research and development, the Company's new facility
in North Carolina and sales demonstration.
Of the $267,000 net cash provided by financing activities in the
first nine months of 1996, Common Stock issuances upon the exercise of stock
options provided $1.2 million while debt repayments used $950,000.
In September 1996, the Company repaid all of the outstanding
borrowings on its $7.5 million line of credit, and terminated the credit
facility. In October 1996, the Company agreed to terms for a $10 million line
of credit with a U.S. bank, collateralized by substantially all of the
Company's assets and bearing interest at, or in some cases below, the U.S.
prime rate (8.25% at September 30, 1996). This credit facility expires June
30, 1998 if not renewed.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.1 million with interest at the Japanese prime
rate (1.625% at September 30, 1996) plus 0.125% per annum which expire between
March 31, 1997, and August 5, 1997, if not renewed. There have been no
borrowings under these lines of credit. Upon the expiration of the
above-described credit facilities, the Company believes that, if necessary, it
would be able to arrange for credit facilities on terms generally no less
favorable than those described above.
The Company believes that existing working capital, funds generated from
operations, and its current bank lines of credit should be sufficient to
satisfy anticipated operating requirements at least through 1996.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The statements which are not historical facts contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that involve certain risks and
uncertainties including, but not limited to, competition in the network
diagnostic and network switching markets, capital spending patterns of the
Company's customers, foreign currency fluctuations, general economic and
political conditions, announcements of new products by Tekelec or its
competitors, and other risks described in the Company's Annual Report on Form
10-K and in the Company's other Securities and Exchange Commission filings.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Consulting Agreement dated August 1, 1996 between the
Registrant and Howard Oringer, including form of Warrant and
Confidentiality Agreement
11.1 Statement of Computation of Earnings Per Share for the Three
and Nine Months Ended September 30, 1996 and 1995
27.1 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed by the Company during the
three months ended September 30, 1996
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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 13, 1996 /s/ Philip J. Alford
--------------------------
Philip J. Alford
Chief Executive Officer
(Duly authorized officer)
/s/ Gilles C. Godin
--------------------------
Gilles C. Godin
Chief Financial Officer and
Vice President, Finance
(Principal financial and chief
accounting officer)
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INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
10.1 Consulting Agreement dated August 1, 1996 between
the Registrant and Howard Oringer, including form
of Warrant and Confidentiality Agreement 18
11.1 Statement of Computation of Earnings Per Share
for the Three and Nine Months Ended September 30,
1996 and 1995 19
27.1 Financial Data Schedule 20
17