1
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 MARCH 31, 1999
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 May 1, 1999, there were 54,741,052 shares of the registrant's
common stock, without par value, outstanding.
2
TEKELEC
FORM 10-Q
INDEX
PART I -- FINANCIAL INFORMATION PAGE
- ------------------------------- ----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1999
and December 31, 1998 3
Consolidated Income Statements for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income for the three
months ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flow for the three
months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II -- OTHER INFORMATION
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(thousands, except share data)
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 37,642 $ 31,932
Short-term investments, at fair value .......... 32,391 37,704
Accounts and notes receivable, less
allowances of $725 and $763, respectively .... 46,495 54,606
Inventories .................................... 15,346 12,872
Amounts due from related parties ............... 1,768 1,896
Income taxes receivable ........................ 134 32
Deferred income taxes, net ..................... 8,336 8,616
Prepaid expenses and other current assets ...... 4,181 3,317
-------- --------
Total current assets ....................... 146,293 150,975
Long-term investments, at fair value ................ 46,510 44,138
Property and equipment, net ......................... 13,411 12,859
Technology, net ..................................... 1,192 131
Deferred income taxes, net .......................... 1,536 1,514
Other assets ........................................ 575 625
-------- --------
Total assets ............................... $209,517 $210,242
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ......................... $ 13,917 $ 10,904
Accrued expenses ............................... 8,572 10,932
Accrued payroll and related expenses ........... 4,499 5,660
Current portion of deferred revenues ........... 13,155 10,480
Income taxes payable ........................... 472 4,237
-------- --------
Total current liabilities .................. 40,615 42,213
Long-term portion of deferred revenues ......... 2,313 2,252
-------- --------
Total liabilities .......................... 42,928 44,465
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
200,000,000 shares authorized; 54,649,780 and
54,328,512 shares issued and outstanding,
respectively .................................. 93,671 92,803
Retained earnings .............................. 72,576 72,084
Cumulative translation adjustment .............. 342 890
-------- --------
Total shareholders' equity ................. 166,589 165,777
-------- --------
Total liabilities and shareholders' equity . $209,517 $210,242
======== ========
See notes to consolidated financial statements.
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TEKELEC
CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998
------------ ------------
(thousands, except per share data)
REVENUES ......................................... $32,685 $34,908
COSTS AND EXPENSES:
Cost of goods sold .......................... 11,349 11,405
Research and development .................... 8,868 5,568
Selling, general and administrative ......... 11,375 7,970
Restructuring ............................... 1,800 --
------- -------
Total costs and expenses ................ 33,392 24,943
------- -------
Income (Loss) from operations .................... (707) 9,965
------- -------
Other income (expense):
Interest, net ............................... 1,471 979
Other, net .................................. 4 (209)
------- -------
Total other income ...................... 1,475 770
------- -------
Income before provision for income taxes ......... 768 10,735
Provision for income taxes .................. 276 4,079
------- -------
NET INCOME .............................. $ 492 $ 6,656
======= =======
EARNINGS PER SHARE:
Basic ....................................... $ 0.01 $ 0.13
Diluted ..................................... 0.01 0.11
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic ....................................... 54,471 52,660
Diluted ..................................... 58,612 58,480
See notes to consolidated financial statements.
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TEKELEC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
------------ ------------
(thousands)
NET INCOME ..................................... $ 492 $6,656
Other comprehensive income:
Foreign currency translation adjustments .. (548) (303)
----- ------
COMPREHENSIVE INCOME (LOSS) .................... $ (56) $6,353
===== ======
See notes to consolidated financial statements.
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TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------ ------------
(thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................ $ 492 $ 6,656
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 1,693 1,359
Non-cash portion of restructuring charge .............. 800 --
Deferred income taxes ................................. 225 (174)
Changes in current assets and liabilities:
Accounts and notes receivable ....................... 7,894 1,078
Inventories ......................................... (2,501) (717)
Amounts due from related parties .................... 129 411
Income taxes receivable ............................. (105) 453
Prepaid expenses and other current assets ........... (866) 29
Trade accounts payable .............................. 3,142 1,436
Accrued expenses .................................... (2,720) 1,105
Accrued payroll and related expenses ................ (1,143) (3,582)
Deferred revenues ................................... 2,742 1,879
Income taxes payable ................................ (3,717) 3,799
-------- -------
Total adjustments ................................. 5,573 7,076
-------- -------
Net cash provided by operating activities ......... 6,065 13,732
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from maturity of available-for-sale securities 20,850 3,000
Purchase of available-for-sale securities ............. (17,909) (5,105)
Purchase of property and equipment .................... (2,661) (1,449)
Purchase of technology ................................ (1,080) --
Decrease in other assets .............................. 31 --
-------- -------
Net cash (used in) investing activities ........... (769) (3,554)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................ 867 2,374
-------- -------
Net cash provided by financing activities ......... 867 2,374
-------- -------
Effect of exchange rate changes on cash .................... (453) (201)
-------- -------
Net change in cash and cash equivalents ............... 5,710 12,351
Cash and cash equivalents at beginning of period ........... 31,932 38,748
-------- -------
Cash and cash equivalents at end of period ................. $ 37,642 $51,099
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH FLOW ACTIVITY:
Tax benefit related to stock options .................. $ -- $ 4,394
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, 1998, 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, operating results and cash flows for the interim periods.
The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year. Certain
items shown in the prior financial statements have been reclassified to conform
with the presentation of the current period.
The Company operates under a thirteen-week calendar quarter. For
financial statement presentation purposes, however, the reporting periods are
referred to as ended on the last calendar day of the quarter. The accompanying
financial statements for the three months ended March 31, 1999 and 1998 are for
the thirteen weeks ended April 2, 1999 and April 3, 1998, respectively.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements for the year ended December 31, 1998,
and the notes thereto in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
B. CERTAIN BALANCE SHEET ITEMS
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(thousands)
The components of inventories are:
Raw materials ......................................... $ 6,462 $ 3,830
Work in process ....................................... 2,086 2,064
Finished goods ........................................ 6,798 6,978
-------- --------
$ 15,346 $ 12,872
======== ========
Property and equipment consist of the following:
Manufacturing and development equipment ............... $ 21,546 $ 23,024
Furniture and office equipment ........................ 8,892 9,677
Demonstration equipment ............................... 2,700 4,038
Leasehold improvements ................................ 1,989 1,953
-------- --------
35,127 38,692
Less, accumulated depreciation and amortization ....... (21,716) (25,833)
-------- --------
Property and equipment, net ...................... $ 13,411 $ 12,859
======== ========
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. 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. Sales to related
parties amounted to $511,000 and $1.2 million for the three months ended March
31, 1999 and 1998, respectively.
D. RESTRUCTURING
During the first quarter of 1999, the Company announced a plan to scale down its
Data Network Diagnostics Division and integrate the division into its
Intelligent Network Diagnostics Division. In connection with this activity, the
Company recorded a restructuring charge of $1.8 million consisting of cash
severance costs, principally paid in the first quarter of 1999, for 27
terminated employees in management, research and development, support and
administrative functions, and non-cash charges consisting of the write-down of
certain assets to their net realizable value. The costs consisted of the
following:
(thousands)
Severance pay......................................... $ 700
Other accrued expenses................................ 300
Inventory............................................. 350
Fixed assets.......................................... 200
Other assets.......................................... 250
--------
$ 1,800
At March 31, 1999, all identified employees had been terminated, and
approximately $850,000 of the severance costs and other accrued expenses had
been paid.
E. INCOME TAXES
For the three-month period ended March 31, 1999, an estimated effective
tax rate of 36% was applied compared to 38% for the three-month period ended
March 31, 1998. The decreased effective tax rate was due primarily to increased
benefits from research and development credits.
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
F. LINES OF CREDIT
The Company has a $15.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.5 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $15.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at the lender's prime
rate (7.75% at March 31, 1999), and expires on June 30, 2000, if not renewed.
Under the terms of this facility, the Company is required to maintain certain
financial ratios and meet certain net worth and indebtedness tests. In
connection with the Company's May 1999 acquisition of IEX Corporation, the
Company renegotiated certain terms under this credit facility, including various
financial ratios and net worth and indebtedness tests, and believes that the
Company is in compliance with these requirements. See Note I. There have been
no borrowings under this credit facility.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $2.5 million with interest at the Japanese prime
rate (1.375% at March 31, 1999) plus 0.125% per annum which expire between
August 5, 1999, and November 24, 1999, if not renewed. There have been no
borrowings under these lines of credit.
G. OPERATING SEGMENT INFORMATION
The Company's reportable operating segments are strategic operating
units that are managed separately due to their different products or geographic
location. The Network Switching operating segment develops and supplies the
Company's EAGLE product, a high-capacity packet-switching platform. The
Intelligent Network Diagnostics operating segment develops and supplies
diagnostic products for intelligent networks. In January 1999, the Data Network
Diagnostics Division, which developed and supplied diagnostic products for data
networks, was scaled down and integrated into the Intelligent Network
Diagnostics Division. (see Note D). Accordingly, the prior period activities of
these two segments have been restated and aggregated into one segment, Network
Diagnostics. The Japan Diagnostics operating segment sells the Company's and
third parties' diagnostic products to customers in Japan. Transfers between
operating segments are made at prices reflecting market conditions. Geographic
areas for which revenues from external customers are reported are determined by
the destination of the sale.
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's operating segments and geographical information are as follows (in
thousands):
OPERATING SEGMENTS
NET SALES
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------ ------------
Network Switching ............. $20,365 $21,285
Network Diagnostics ........... 7,882 9,301
Japan Diagnostics ............. 4,833 5,646
Intercompany Eliminations ..... (395) (1,324)
------- -------
Total net sales .......... $32,685 $34,908
======= =======
OPERATING INCOME (LOSS)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
------------ ------------
Network Switching ................ $ 3,312 $8,025
Network Diagnostics(1) ........... (1,981) 1,581
Japan Diagnostics ................ 300 1,443
Intercompany Eliminations ........ 161 (218)
General Corporate(2) ............. (2,499) (866)
------- ------
Total operating income (loss) $ (707) $9,965
======= ======
(1) Network Diagnostics operating segment reflects the $1,800
restructuring charge recorded in the first quarter of 1999 (see Note
D).
(2) General Corporate included a benefit of $1,631 for the settlement of an
insurance claim in the first quarter of 1998.
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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
MARCH 31,
-----------------------------
1999 1998
------------ ------------
Network Switching ....................... $20,365 $21,285
Network Diagnostics ..................... 12,320 13,623
------- -------
Total revenues from external customers .. $32,685 $34,908
======= =======
The following table sets forth, for the periods indicated, revenues from
external customers by geographic territory:
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------ ------------
North America ........................... $21,130 $19,588
Japan ................................... 4,833 5,646
Europe .................................. 1,802 1,487
Rest of World ........................... 4,920 8,187
------- -------
Total revenues from external customers .. $32,685 $34,908
======= =======
The following table sets forth, for the periods indicated, long-lived assets by
geographic area in which the Company holds assets:
MARCH 31,
-----------------------------
1999 1998
------------ ------------
United States ........................... $13,986 $12,348
Japan ................................... 1,145 1,216
Other ................................... 47 51
------- -------
Total long-lived assets ............ $15,178 $13,615
======= =======
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TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
H. EARNINGS PER SHARE
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted earnings per-share computations for the
three-month periods ended March 31, 1999 and 1998:
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------ ------------
FOR THE THREE MONTHS ENDED MARCH 31, 1999: (thousands, except per share amount)
Basic EPS ................................ $ 492 54,471 $0.01
Effect of Dilutive Securities - Stock
Options and Warrants ................ -- 4,141
------ ------
Diluted EPS .............................. $ 492 58,612 $0.01
====== ======
FOR THE THREE MONTHS ENDED MARCH 31, 1998:
Basic EPS ................................ $6,656 52,660 $0.13
Effect of Dilutive Securities - Stock
Options and Warrants ................ -- 5,820
------ ------
Diluted EPS .............................. $6,656 58,480 $0.11
====== ======
I. SUBSEQUENT EVENT
In May 1999, the Company acquired IEX Corporation for $163 million,
consisting of $63 million in cash and $100 million in short-term notes maturing
on November 7, 1999. The transaction will be treated as a purchase for
accounting purposes, and will result in net goodwill and other intangibles of
approximately $139 million with amortization periods of from three to five
years. In connection with the acquisition, the Company will record a one-time
charge in the second quarter of 1999 of approximately $6.0 million related to
the write-off of in-process research and development.
In connection with the acquisition of IEX, the Company has renegotiated
the financial ratios and net worth and indebtedness tests required under its
$15.0 million credit facility with a U.S. bank, and believes that the Company is
in compliance with these new requirements.
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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 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, 1998. 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.
In January 1999, the Company scaled down its Data Network Diagnostics
Division and integrated this division into its Intelligent Network Diagnostics
Division. See Note D to Consolidated Financial Statements.
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
MARCH 31,
----------------------------
1999 1998
---------- ----------
Revenues ............................... 100.0% 100.0%
Cost of goods sold ..................... 34.7 32.7
---------- ----------
Gross profit ........................... 65.3 67.3
Research and development ............... 27.2 16.0
Selling, general and administrative .... 34.8 22.8
Restructuring .......................... 5.5 --
---------- ----------
Total operating expenses ............... 67.5 38.8
---------- ----------
Income (Loss) from operations .......... (2.2) 28.5
Interest and other income, net ......... 4.5 2.3
---------- ----------
Income before provision for income taxes 2.3 30.8
Provision for income taxes ............. 0.8 11.7
---------- ----------
Net income ............................. 1.5% 19.1%
========== ==========
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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
MARCH 31
------------------------
1999 1998
---------- ----------
Network switching ......................... 62% 61%
Network diagnostics ....................... 38 39
---------- ----------
Total ............................. 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
MARCH 31
------------------------
1999 1998
---------- ----------
North America ..... 65% 56%
Japan ............. 15 16
Europe ............ 5 4
Rest of the World.. 15 24
---------- ----------
Total ..... 100% 100%
========== ==========
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1998
Revenues. The Company's revenues decreased by $2.2 million, or 6%,
during the first quarter of 1999 due to lower sales of both network switching
products and network diagnostics products.
Revenues from switching products decreased by $920,000, or 4%, to $20.4
million due primarily to lower EAGLE STP revenues as a result of lower average
STP system prices. The lower average STP system prices were due to smaller
average system sizes sold in the first quarter of 1999, and were partially
offset by higher sales of upgrades and software enhancements to the Company's
larger installed base of EAGLE STP's.
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Revenues from diagnostics products decreased by $1.3 million, or 10%,
due primarily to lower sales of Chameleon products following the scaling down of
a major portion of the former data network diagnostics division, with the
remaining data network diagnostics products being integrated into the
intelligent network diagnostics division. Lower sales of data network diagnostic
products and, to a lesser extent MGTS diagnostic products, were partially offset
by higher sales of development services in Japan.
Revenues in North America increased by $1.5 million, or 8%, primarily
as a result of higher EAGLE STP sales. Sales in Japan decreased by $813,000, or
14%, due to lower Chameleon and MGTS product sales, partially offset by higher
sales of MGTS-related development services. Revenues in Europe increased by
$315,000, or 21%, due to higher switching product sales. Other international
revenues decreased by $3.3 million, or 40%, due primarily to lower switching
product sales.
The impact of exchange rate fluctuations on currency translations
increased revenues by $396,000, or 1%, and did not have a material effect on net
income in the first quarter of 1999.
A significant portion of the Company's revenues in each quarter result
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, as was the case in the first
quarter of 1999, 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 of the
Company's products, particularly the EAGLE products and related applications,
the MGTS Sentinel, and market acceptance of the Company's recently introduced
EAGLE IP7 and FALCON product lines.
Gross Profit. Gross profit as a percentage of revenues decreased to
65.3% in the first quarter of 1999 compared with 67.3% in the first quarter of
1998. The decrease in gross margins was primarily due a higher percentage of
lower margin sales, primarily development services by the Company's Japanese
subsidiary.
Research and Development. Research and development expenses increased
overall by $3.3 million, or 59%, and increased as a percentage of revenues to
27% in the first quarter of 1999 from 16% in the first quarter of 1998. The
dollar increase was attributable principally to increased expenses incurred in
connection with the hiring of additional personnel for product development and
enhancements for both switching and intelligent network diagnostics products,
primarily related to the continued development of products to address the IP/SS7
market. Based on the Company's present product development plans, the Company
expects that research and development expenses for the remainder of 1999 will
increase in dollars when compared to prior periods.
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Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.4 million, or 43%, and increased as a
percentage of revenues to 35% in the first quarter of 1999 from 23% in the first
quarter of 1998. The dollar increase was primarily due to increased personnel
and infrastructure related expenses incurred to support the growing EAGLE STP
installed base and to support higher anticipated sales levels. The increase over
1998 was also due to a $1.6 million insurance settlement which benefited the
1998 expenses. The Company expects that selling, general and administrative
expenses for the remainder of 1999 will increase in dollars when compared to
prior periods.
Interest Income. Interest income increased by $492,000, or 50%, during
the first quarter of 1999 due primarily to higher cash and investment balances
compared to the first quarter of 1998.
Income Taxes. For the first quarter of 1999, an estimated effective tax
rate of 36% was applied compared to 38% for the first quarter of 1998. The
decreased effective tax rate was due primarily to increased benefits from
research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 1999, cash and cash
equivalents increased by $5.7 million to $37.6 million, after net proceeds of
$2.9 million from the sale of short-term and long-term investments. Operating
activities, net of the effects of exchange rate changes on cash, provided $5.6
million. Financing activities, which represented proceeds from the issuance of
Common Stock upon the exercise of options and warrants, provided $867,000, and
investing activities, excluding the net proceeds from the sale of short-term and
long-term investments, used $3.7 million.
Accounts receivable, including amounts due from related parties,
decreased by 15% during the first three months of 1999 due primarily to lower
sales levels in the first quarter of 1999, compared to the fourth quarter of
1998. Inventory levels increased by 19% primarily to support higher anticipated
sales levels. Trade accounts payable increased by 28% during the first three
months of 1999, primarily due to the increased inventory levels and the
increased level of operating expenses incurred by the Company primarily to
support the Company's product development programs and higher anticipated sales
levels. Deferred revenues increased 21% during the first three months of 1999
primarily as a result of increased extended warranty service revenues which are
deferred and recognized ratably over the warranty period.
Capital expenditures of $2.7 million during the first three months of
1999 represented the planned addition of equipment principally for research and
development, manufacturing operations and facility expansion. Technology
purchases amounted to $1.1 million, and consisted primarily of purchased
software licenses for use in switching and diagnostics product applications.
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The Company has a $15.0 million line of credit with a U.S. bank and
lines of credit aggregating $2.5 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $15.0 million credit facility is collateralized by
substantially all of the Company's assets, bears interest at the lender's prime
rate (7.75% at March 31, 1999), and expires on June 30, 2000 if not renewed.
Under the terms of this facility, the Company is required to maintain certain
financial ratios and meet certain net worth and indebtedness tests. In
connection with the Company's May 1999 acquisition of IEX Corporation, the
Company renegotiated certain terms of this credit facility, including various
financial ratios and net worth and indebtedness tests, and believes that the
Company is in compliance with these requirements. There have been no borrowings
under this credit facility.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $2.5 million with interest at the Japanese prime
rate (1.375% at March 31, 1999) plus 0.125% per annum which expire between
August 5, 1999, and November 24, 1999, if not renewed. There have been no
borrowings under these lines of credit.
ACQUISITION OF IEX CORPORATION
In May 1999, the Company acquired IEX Corporation for $163 million,
consisting of $63 million in cash and $100 million in short-term notes maturing
on November 7, 1999. The transaction will be treated as a purchase for
accounting purposes, and will result in net goodwill and other intangibles of
approximately $139 million with an average amortization period of five years. In
connection with the acquisition, the Company will record a one-time charge in
the second quarter of 1999 of approximately $6.0 million related to the
write-off of in-process research and development.
Although the short-term notes assumed in connection with the
acquisition of IEX Corporation include provisions allowing for the extension of
the maturity date, the Company intends to refinance the short-term notes with
long-term debt during 1999. The Company believes that it will be successful in
its efforts to refinance the short-term notes, and 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.
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READINESS FOR YEAR 2000
Background. As the year 2000 approaches, a critical issue has emerged
regarding how existing application software programs, operating systems and
embedded computer chips can accommodate the year 2000 date value. The Company
has a year 2000 project team in place with overall responsibility for the
Company's year 2000 compliance programs. In addition, executive management
regularly monitors the status of the Company's year 2000 remediation plans.
Project. The Company has identified potential year 2000 risks in four
categories: software and system products the Company sells to customers;
internal business software and information technology systems; systems other
than information technology systems ("Non-IT systems"); and third-party
suppliers to the Company. The Company's year 2000 project includes the following
phases for the first three categories above: (1) identifying year 2000 risks;
(2) assigning priorities to identified risks; (3) testing year 2000 compliance
for risks determined to be material to the Company; (4) correcting problems
determined to be material and not year 2000 compliant; (5) retesting corrections
that have been implemented and (6) developing contingency plans. With respect to
the Company's third-party suppliers, the Company's year 2000 project consists of
the following phases: (1) contacting suppliers for information concerning their
year 2000 readiness; (2) prioritizing suppliers as to relative importance; (3)
validating supplier responses regarding year 2000 compliance and (4) developing
contingency plans in the event that one or more suppliers fails to achieve year
2000 compliance.
Assessment. The software and systems products that the Company sells to
customers consist of internally developed software, third-party software
licensed by the Company for use in or with the Company's products, hardware
systems designed and manufactured by the Company and hardware systems designed
and manufactured by third parties. The Company has identified priorities,
completed the initial testing phase and begun offering solutions to its
customers. The Company believes that its current product offerings are year 2000
compliant. For past product offerings that the Company is still supporting, the
Company is offering releases that should make such products year 2000 compliant.
However, failure to achieve year 2000 compliance for any products could
materially adversely affect sales in 1999. Additionally, if any of the Company's
mission critical products were to fail in the field as a result of year 2000
noncompliance, such failure could result in substantial liability to the Company
and have a material adverse effect on the Company's financial results, business,
market position, reputation and prospects.
Internal business software and systems consists primarily of the Company's
business information systems in the United States and at the Company's Japanese
subsidiary. The Company has implemented and tested the necessary modifications
to make its significant internal business systems year 2000 compliant, and the
Company believes that such internal business software and systems are year 2000
compliant. However, if the Company's business systems are not year 2000
compliant, the Company could experience interruptions to its production process,
development programs and general business operations.
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19
The Company has been advised by the suppliers of its Non-IT systems, which
consist primarily of environmental systems such as fire suppression and security
systems at the various buildings the Company occupies, that such systems are
currently year 2000 compliant.
Third-party suppliers provide component parts, purchased assemblies and contract
manufacturing services incorporated by the Company into the products and systems
it sells. The Company is requiring that each of its key suppliers certify
whether they are year 2000 compliant. The Company has also prioritized its
suppliers by level of criticality to the Company's business. Based on
information received from the Company's critical suppliers, the Company
estimates that approximately 67% of its critical suppliers are presently year
2000 compliant. The Company plans to monitor its critical suppliers and either
develop alternate sources or increase inventory levels prior to the year 2000
for those vendors considered to be at risk of not achieving year 2000
compliance. However, there can be no assurance that such alternate sources will
be available or that adequate inventory levels will be attainable if necessary,
and the Company could experience parts shortages and production interruptions if
one or more key third-party suppliers experience year 2000 problems.
Costs. Incremental costs of the Company's year 2000 project have consisted of
the hiring of two contractors to assist with administrative duties related to
the year 2000 project, consulting by PricewaterhouseCoopers LLP at the initial
stages of the project and a third-party audit team, which provides year 2000
compliance test audit reports. Such costs in the aggregate have not been
material to the Company's financial position, results of operations or cash
flows. The balance of the effort for the Company's year 2000 project has been by
employees whose costs for this project are not tracked separately. The Company
believes that costs for the remainder of the year 2000 project will not be
material to the Company's financial position, results of operations or cash
flows.
Risks. The Company's results of operations, financial condition and cash flows
could be materially adversely affected if the Company or any of its key
suppliers or customers do not achieve year 2000 compliance. Although the
Company's year 2000 project is expected to minimize the Company's risks of
experiencing a year 2000 problem, inherent risks and uncertainties exist despite
the Company's efforts. There can be no assurance that a failure on the part of
the Company, its products, its key suppliers or its customers will not be
disruptive to the Company's business. As a result of these uncertainties the
Company is unable to determine at this time whether the consequences of year
2000 failures will have a material effect on the Company's results of
operations, financial condition or cash flows.
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20
"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 are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that reflect the current belief,
expectations or intent of the Company's management. These statements are subject
to and involve certain risks and uncertainties including, but not limited to,
timing of significant orders and shipments, changes in customer product mix,
customer acceptance of the Company's products, capital spending patterns of
customers, including shifts in such patterns as a result of customers' deferral
of product purchases until the year 2000, competition and pricing, new product
introductions by the Company or its competitors, carrier deployment of
intelligent network services, the level and timing of research and development
expenditures, regulatory changes, readiness for the year 2000 by the Company,
its customers and its suppliers, general economic conditions and other risks
described in this Annual Report and in certain of the Company's 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. Actual
results may differ materially from those expressed or implied in such
forward-looking statements.
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PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
21
22
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
May 14, 1999
/s/ Michael L. Margolis
-----------------------------------------
Michael L. Margolis
President and 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
- ------- ----------- ------------
27.1 Financial Data Schedule (provided for the information of the Securities
and Exchange Commission only)