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, 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 May 1, 1996, there were 11,687,919 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, 1996
and December 31, 1995 3
Consolidated Statements of Operations for the three
months ended March 31, 1996 and 1995 4
Consolidated Statements of Cash Flow for the three
months ended March 31, 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 13
SIGNATURES 14
- ----------
2
3
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TEKELEC
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(thousands, except share data)
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $42,881 $43,609
Accounts and notes receivable, less
allowances of $277 and $391, respectively . . . 12,131 19,167
Inventories . . . . . . . . . . . . . . . . . . . 8,561 6,423
Amounts due from related parties . . . . . . . . . 1,675 3,053
Prepaid expenses . . . . . . . . . . . . . . . . . 1,424 1,232
------- -------
Total current assets . . . . . . . . . . . . . 66,672 73,484
Property and equipment, net . . . . . . . . . . . . . . 7,299 6,107
Other assets . . . . . . . . . . . . . . . . . . . . . 763 897
------- -------
Total assets . . . . . . . . . . . . . . . . . $74,734 $80,488
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion
of long-term debt . . . . . . . . . . . . . . . . $ 745 $ 570
Trade accounts payable . . . . . . . . . . . . . . 4,006 3,960
Accrued expenses . . . . . . . . . . . . . . . . . 3,172 4,404
Accrued payroll and related expenses . . . . . . . 2,582 3,294
Deferred revenues . . . . . . . . . . . . . . . . 3,606 2,908
Current portion of other obligations . . . . . . . 22 31
Income taxes payable . . . . . . . . . . . . . . . 686 1,334
------- -------
Total current liabilities . . . . . . . . . . 14,819 16,501
Long-term debt . . . . . . . . . . . . . . . . . . . . 320 380
------- -------
Total liabilities . . . . . . . . . . . . . . 15,139 16,881
------- -------
SHAREHOLDERS' EQUITY:
Common stock, without par value,
50,000,000 shares authorized; 11,676,619 and
11,599,073 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . 55,226 54,936
Retained earnings . . . . . . . . . . . . . . . . 2,422 6,390
Cumulative translation adjustment . . . . . . . . 1,947 2,281
------- -------
Total shareholders' equity . . . . . . . . . . 59,595 63,607
------- -------
Total liabilities and shareholders' equity . . $74,734 $80,488
======= =======
See notes to consolidated financial statements.
3
4
TEKELEC
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
---------
1996 1995
---- ----
(thousands, except per share data)
REVENUES (including sales to related parties of
1996 - $725 and 1995 - $1,836) . . . . . . . $ 11,860 $ 18,630
COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . 4,595 6,207
Research and development . . . . . . . . . . 4,315 3,357
Selling, general and administrative . . . . 6,868 6,776
--------- ----------
Total costs and expenses . . . . . . . . 15,778 16,340
Income (Loss) from operations . . . . . . . . . . (3,918) 2,290
Other income (expense):
Interest, net . . . . . . . . . . . . . . . 423 4
Other, net . . . . . . . . . . . . . . . . . (45) (174)
--------- ----------
Total other income (expense) . . . . . . 378 (170)
--------- ----------
Income (Loss) before provision for income taxes . (3,540) 2,120
Provision for income taxes . . . . . . . . . 428 652
--------- ----------
NET INCOME (LOSS) . . . . . . . . . . . $ (3,968) $ 1,468
========= ==========
EARNINGS (LOSS) PER SHARE . . . . . . . . . . . .
Primary . . . . . . . . . . . . . . . . . . $ (0.34) $ 0.14
Fully diluted . . . . . . . . . . . . . . . (0.34) 0.13
WEIGHTED AVERAGE NUMBER OF SHARES . . . . . . . .
Primary . . . . . . . . . . . . . . . . . . 11,637 10,795
Fully diluted . . . . . . . . . . . . . . . 11,637 10,913
See notes to consolidated financial statements.
4
5
TEKELEC
CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited)
Three Months Ended
March 31,
---------
1996 1995
---- ----
(thousands)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (3,968) $ 1,468
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 828 1,095
Changes in current assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . . 6,964 108
Inventories . . . . . . . . . . . . . . . . . . . . . . (2,172) (1,633)
Amounts due from related parties . . . . . . . . . . . . 1,378 (485)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (202) 123
Trade accounts payable . . . . . . . . . . . . . . . . . 62 423
Accrued expenses . . . . . . . . . . . . . . . . . . . . (1,216) 650
Accrued payroll and related expenses . . . . . . . . . . (703) (2,029)
Deferred revenues . . . . . . . . . . . . . . . . . . . 698 393
Income taxes payable . . . . . . . . . . . . . . . . . . (621) (199)
-------- --------
Total adjustments . . . . . . . . . . . . . . . . . . 5,016 (1,554)
-------- --------
Net cash provided by (used in) operating activities . 1,048 (86)
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . (2,050) (912)
Decrease (Increase) in other assets . . . . . . . . . . . 131 (17)
-------- --------
Net cash (used in) investing activities . . . . . . . (1,919) (929)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (Payments of) short-term borrowings . . . . 175 (96)
Repayment of long-term debt . . . . . . . . . . . . . . . (60) (60)
Repayment of other obligations . . . . . . . . . . . . . . (9) (115)
Proceeds from issuance of common stock . . . . . . . . . . 290 1,024
-------- --------
Net cash provided by financing activities . . . . . . 396 753
-------- --------
Effect of exchange rate changes on cash . . . . . . . . . . . . (253) 571
-------- --------
Net change in cash and cash equivalents . . . . . . . . . (728) 309
Cash and cash equivalents at beginning of period . . . . . . . 43,609 6,653
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . $ 42,881 $ 6,962
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 33 $ 85
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 892 872
See notes to consolidated financial statements.
5
6
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. BASIS OF PRESENTATION
The consolidated financial statements are unaudited, other than the
consolidated balance sheet at December 31, 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, operating results and cash flows for the interim periods.
The results of operations for the current interim period 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 months ended March 31, 1996 and 1995 are for
the thirteen weeks ended March 29, 1996 and March 31, 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 whose carrying amounts
approximate their fair values because of their short maturity. At March 31,
1996, the Company had investments of $33.6 million classified as
held-to-maturity securities included in cash and cash equivalents, all of which
were invested in corporate debt securities with maturities of nine months or
less. At December 31, 1995, the Company had investments in such securities
amounting to $35.9 million.
6
7
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
C. CERTAIN BALANCE SHEET ITEMS
The components of inventories are:
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
(thousands)
Raw materials....................................................... $ 2,837 $ 3,109
Work in process..................................................... 1,737 1,653
Finished goods...................................................... 3,987 1,661
-------- --------
$ 8,561 $ 6,423
======== ========
Property and equipment consist of the following:
Manufacturing and development equipment............................. $ 11,945 $ 10,823
Furniture and office equipment...................................... 6,282 5,651
Demonstration equipment............................................. 3,858 3,406
Leasehold improvements.............................................. 1,132 1,232
-------- --------
23,217 21,112
Less, accumulated depreciation and amortization..................... (15,918) (15,005)
-------- --------
Property and equipment, net........................................ $ 7,299 $ 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. INCOME TAXES
Although the Company's pre-tax results showed a loss for the three
months ended March 31, 1996, the Company had a tax provision of $428,000,
compared to $652,000, or 31%, in the first quarter of 1995. The provisions for
both periods were principally foreign taxes on the income of the Company's
Japanese subsidiary. The provision for the three months ended March 31, 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.
7
8
TEKELEC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
F. BORROWINGS
The Company has a $7.5 million line of credit with a U.S. bank and
lines of credit aggregating $3.3 million available to the Company's Japanese
subsidiary from various Japan-based banks.
The Company's $7.5 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.25% at March 31, 1996) plus 2.5% per annum, and expires September 30,
1996, if not renewed. Maximum borrowings available under the line of credit
are based on eligible accounts receivable and amounted to $3.7 million at March
31, 1996, of which $505,000 was then outstanding. This line of credit includes
a $1.0 million long-term credit facility payable in 47 monthly installments of
$20,000 each which began in June 1994 with a final installment of $60,000 due
in May 1998, or upon the expiration of the underlying $7.5 million line of
credit, if not renewed. At March 31, 1996, $560,000 was outstanding under this
long-term facility, of which $320,000 was included under long-term debt.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.3 million with interest at the Japanese prime
rate (1.625% at March 31, 1996) plus 0.125% per annum which expire between May
29, 1996, and March 31, 1997, if not renewed. There have been no borrowings
under these lines of credit.
G. MAJOR CUSTOMERS
Sales to Nippon Telegraph & Telephone amounted to 15% and 17% of
revenues for the first quarter of 1996 and 1995, respectively. Sales to AT&T
amounted to 11% of revenues for the first quarter of 1995.
8
9
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 statement of operations items bear to total revenues:
Percentage of Revenues
----------------------
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
Revenues . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of goods sold . . . . . . . . . . . 38.7 33.3
----- -----
Gross profit . . . . . . . . . . . . . . 61.3 66.7
Research and development . . . . . . . . 36.4 18.0
Selling, general & administrative . . . 57.9 36.4
----- -----
Total operating expenses . . . . . . . . 94.3 54.4
----- -----
Income (Loss) from operations . . . . . (33.0) 12.3
Interest and other income (expense), net 3.2 (0.9)
----- -----
Income (Loss) before provision for
income taxes. . . . . . . . . . . . . (29.8) 11.4
Provision for income taxes . . . . . . . 3.6 3.5
----- -----
Net income (loss) . . . . . . . . . . . (33.4)% 7.9%
===== =====
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,
----------------------
1996 1995
---- ----
Network diagnostic products . . . . . . . . . 77% 74%
Network switching products . . . . . . . . . 23 26
---- ----
Total . . . . . . . . . . . . . . . 100% 100%
==== ====
9
10
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,
------------------------------
1996 1995
---- ----
North America . . . . . . . . . . . . . 52% 59%
Japan . . . . . . . . . . . . . . . . . 28 22
Europe . . . . . . . . . . . . . . . . . 9 12
Rest of the World . . . . . . . . . . . 11 7
---- ----
Total . . . . . . . . . . . . . . . 100% 100%
==== ====
THREE MONTHS ENDED MARCH 31, 1996 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1995
Revenues. The Company's revenues decreased by $6.8 million or 36%
during the first quarter of 1996 due to lower than anticipated sales of both
switching and diagnostic products.
Revenues from switching products decreased by $2.0 million or 42% in
the first quarter of 1996 due to the delay of certain orders for the Company's
EAGLE STP. Revenues from diagnostic products decreased by $4.8 million or 34%
primarily attributable to softness in all markets for the Company's
signalling/wireless diagnostic products and lower sales of the Company's older
diagnostic products. Sales of the Chameleon Open were slightly higher than in
the prior year's first quarter.
Revenues in North America decreased by $4.5 million or 41% primarily
as a result of lower switching and signalling/wireless diagnostic product
sales. Sales in Japan decreased by $769,000 or 19% of which $420,000 was the
result of exchange rate fluctuations on currency translations. Other
international revenues decreased by $1.5 million or 41% primarily due to lower
sales of the Company's older diagnostic products in Europe.
The impact of exchange rate fluctuations on currency translations
decreased revenues by $400,000 or 3% and increased net loss by $41,000 or 1% in
the first quarter of 1996.
Gross Profit. Gross profit as a percentage of revenues decreased from
67% in the first quarter of 1995 to 61% in the first quarter of 1996, primarily
due to higher per unit manufacturing overhead costs as a result of lower sales
volumes in the first quarter of 1996, and certain non-recurring costs incurred
to establish, with certain existing customers, First Office Applications (FOA)
of the latest version of the Company's EAGLE product designed to meet the needs
of the Regional Bell Operating Companies (RBOC) and large interexchange carrier
markets.
10
11
Research and Development. Research and development expenses increased
by $1.0 million or 29% in the first quarter of 1996 and increased as a
percentage of revenue from 18% in the first quarter of 1995 to 36% in the
first quarter of 1996. The dollar increase in expenses was primarily
attributable to the hiring of additional personnel and contractors, and to
expenses incurred in connection with the Bellcore technical audit of the
Company's EAGLE product. The increase in such expenses as a percentage of
revenues was also due to lower revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $92,000 or 1% in the first quarter of
1996, and such expenses increased as a percentage of revenues from 36% in the
first quarter of 1995 to 58% in the first quarter of 1996 due primarily to
lower revenues.
Income Taxes. Although the Company's pre-tax results showed a loss
for the three months ended March 31, 1996, the Company had a tax provision of
$428,000, compared to $652,000, or 31%, in the first quarter of 1995. The
provisions for both periods were principally foreign taxes on the income of the
Company's Japanese subsidiary. The provision for the three months ended March
31, 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.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 1996, the Company
financed its net working capital and capital expenditure requirements
principally from operations and available cash. At March 31, 1996, the Company
had $42.9 million of cash and cash equivalents, representing a decrease of
$728,000 from the balance at December 31, 1995.
Accounts receivable, including amounts due from related parties,
decreased by 38% during the first three months of 1996 due primarily to lower
sales in the first quarter of 1996 compared to the fourth quarter of 1995.
Inventories increased by 33% during the first quarter of 1996 primarily to meet
anticipated higher sales levels than were achieved.
Capital expenditures amounted to $2.1 million during the first three
months of 1996 for planned replacement and addition of equipment principally
for research and development and sales demonstration.
The net cash provided by financing activities in the first quarter of
1996 was $396,000 which included $290,000 in proceeds from the issuance of
Common Stock resulting upon the exercise of options and warrants, and net
borrowings against the Company's U.S. credit facility.
The Company has a $7.5 million line of credit with a U.S. bank and
lines of credit aggregating $3.3 million available to the Company's Japanese
subsidiary from various Japan-based banks.
11
12
The Company's $7.5 million line of credit is collateralized by
substantially all of the Company's assets, bears interest at the U.S. prime
rate (8.25% at March 31, 1996) plus 2.5% per annum, and expires September 30,
1996, if not renewed. Maximum borrowings available under the line of credit
are based on eligible accounts receivable and amounted to $3.7 million at March
31, 1996, of which $505,000 was then outstanding. This line of credit includes
a $1.0 million long-term credit facility payable in 47 monthly installments of
$20,000 each which began in June 1994 with a final installment of $60,000 due
in May 1998, or upon the expiration of the underlying $7.5 million line of
credit, if not renewed. At March 31, 1996, $560,000 was outstanding under this
long-term facility, of which $320,000 was included under long-term debt.
The Company's Japanese subsidiary has collateralized yen-denominated
lines of credit with Japan-based banks, primarily available for use in Japan,
amounting to the equivalent of $3.3 million with interest at the Japanese prime
rate (1.625% at March 31, 1996) plus 0.125% per annum which expire between May
29, 1996, and March 31, 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 current bank lines of credit should be sufficient to
satisfy anticipated operating requirements at least through 1996.
"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.
12
13
PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation(1)
3.2 Bylaws, as amended(2)
11.1 Statement of Computation of Earnings Per Share for the Three
Months Ended March 31, 1996 and 1995
27 Financial Data Schedule
(b) Reports
No reports on Form 8-K were filed by the Company during the
three months ended March 31, 1996.
_________________
(1) Incorporated by reference to the Company's Annual
Report on Form 10-K (File No. 0-15135) for the year ended
December 31, 1994.
(2) Incorporated by reference to Amendment No. 2 to the
Company's Registration Statement on Form S-3 (Registration No.
33-58551) filed with the Commission on May 18, 1995.
13
14
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, 1996
/s/ Philip J. Alford
-------------------------------------
Philip J. Alford
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)
14
15
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ------------
11.1 Statement of Computation of Earnings Per Share for the
Three Months Ended March 31, 1996 and 1995
27 Financial Data Schedule