Tekelec

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Tekelec

5200 Paramount Parkway
Morrisville, North Carolina 27560
U.S.A.
Telephone: (919) 460-5500
Toll Free: (888) 628-5521
Fax: (919) 380-3862
Web site: http://www.tekelec.com

Public Company
Incorporated: 1979
Employees: 1,534
Sales: $536.91 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: TKLC
NAIC: 334210 Telephone Apparatus Manufacturing; 334515 Instrument Manufacturing for Measuring and Testing Electricity and Electrical Signals; 333298 All Other Industrial Machinery Manufacturing; 334119 Other Computer Peripheral Equipment Manufacturing; 541511 Custom Computer Programming Services; 513390 Other Telecommunications; 513322 Cellular and Other Wireless Telecommunications

Tekelec is a leading developer of telecommunications products and services for a wide range of traditional and wireless telephone networks. The company operates through three groups: Network Signaling, Switching Solutions, and Communications Software Solutions. Tekelec's primary source of income is from sales of signaling products that enable telephone carriers to offer such services as caller ID, voice and text messaging, toll free calls, prepaid calling cards, and local number portability. Tekelec manufactures its products in North Carolina and Texas and markets them worldwide to global clients that include AT&T Wireless, France Telecom, Sprint, Telmex, Verizon, Vodafone, and Reliance.

1979: GROWING A
PRODUCT LINE

Tekelec traces its roots to 1977, when it began in Calabasas, California, as a sales office for the French-based Tekelec-Airtronic SA, an electronics company with a focus on products for the aviation industry. The U.S.-based Tekelec was founded in 1979 by Jean-Claude Asscher and Philip Black, who served as the company's first president and CEO. Asscher, who founded the French firm in 1961, assumed the position of chairman of the board (a title he still held in 2006). The parent firm owned a 50 percent stake in Tekelec but the new company was set up as an independent corporation, not a subsidiary, and had its own marketing, distribution, and R&D staff.

In 1980, Tekelec began making telephone network testing equipment for emerging digital communications standards. Its first customers were primarily telephone companies and manufacturers of telecommunications equipment. The company established a domestic sales force, international distributors, and in 1985, opened Tekelec Ltd. in Tokyo, Japan, as a wholly owned subsidiary in an attempt to better serve its customers in what was the world's second largest telecommunications market.

In May 1986, Tekelec raised over $12 million with an initial public offering of one million shares of common stock that sold for $12.25 each. In December 1986, the company introduced the Chameleon 32, a protocol analyzer that tested communications networks designed to meet emerging Integrated Service Digital Network (ISDN) standards. The year ended with revenues up 44 percent to $13.9 million from $9.7 million for 1985.

In August 1987, Black was appointed vice-chairman and Peter Vicars was named as the new president. By the end of the year, the company had emerged as the market leader in ISDN protocol analyzers, selling over $12 million worth of Chameleon 32s. Tekelec had installed over 1,000 of the data and voice communications test systems and its customers included all of the major telephone companies and communications carriers. While sales to U.S. telephone companies were up 183 percent for the year, almost 38 percent of Tekelec's revenues were made in Europe and the Far East. Its Japanese subsidiary alone accounted for approximately 22 percent of Tekelec's $17 million in total revenues for 1987.

In August 1988, Vicars was also named CEO and in the same month the company completed its purchase of North Carolina-based Protocol Technologies, Inc. (PTI), another maker of test equipment, for $3.5 million in cash. The Morrisville operation, with $2 million in annual revenues, was kept in place and became a division of the company. In September, Tekelec rolled out three new products, two smaller and less expensive versions of its Chameleon system, and the #7 MATE, which was based on technology developed by PTI to test Common Channel Signaling System No. 7 (SS7). SS7 technology was used for database services such as "411" directories, credit card billing, and "800" numbers, and to interconnect telephone company providers all over the world into one common signaling network. In September 1988, Tekelec moved its operations to a bigger Calabasas location and consolidated its corporate headquarters, sales department, research and development center, and manufacturing plant all under one roof. Company revenues soared in 1988 by 93 percent to $32.8 million but in 1989 company growth slowed considerably when revenues rose just 4 percent to $34 million. International sales provided over half of Tekelec's business for the year.

The company's modest expansion continued with the October 1990 acquisition of Alabama-based Hard Engineering Inc. for $3 million and future royalties. Tekelec kept the Huntsville operation and its 31 employees in place as a division of the company and added Hard's low-end portable testing equipment to its growing line of network testing products. In June 1991, Tekelec established Tekelec Australia Pty Ltd. in Sydney, Australia, as a subsidiary to serve the continent and the South Pacific Rim area. Year-end sales totaled $52.4 million, with $4.5 million in net revenues, which marked the ninth consecutive year of revenue growth and landed Tekelec on Forbes magazine's 1991 list of "200 Best Small Companies."

FLAGSHIP SWITCHING
PRODUCT: 1992

The company established another subsidiary, Tekelec Canada Inc., in March 1992 with its acquisition of DCI Digital Communications Inc., located in Whitby, Ontario. In the same month, Tekelec's new Network Products Group launched what turned into the company's flagship product, the Eagle STP/1 Open Signaling Access switching platform for SS7 and Advanced Intelligent Networks. It was the industry's first product designed to be an STP (signal transfer point), a high-capacity switch that routes calls and connects telecommunications networks. Allnet Communications Services Inc. bought the first pair of Eagle STP/1s for $2.1 million and demand for the new product prompted the company to add 30 jobs at its 70-employee Morrisville facility. Revenues for 1992 totaled $58 million but the company showed a net loss of $8.2 million.

In January 1993, slumping worldwide sales forced the company to announce job cuts and pay freezes and reductions. In July, Tekelec reorganized into four decentralized divisions: Network Diagnostic, Network Switching, Network Monitoring, and International. For the first time in a decade, the year ended with a 19 percent decrease in revenues to $46.8 million and another net loss of $18.5 million.

COMPANY PERSPECTIVES

Tekelec is a high-performance network applications company that is accelerating the transition to IP Multimedia Subsystem (IMS) networks for service providers around the globe. With its unparalleled experience at the intersection of network applications and session control, Tekelec creates the most efficient platforms for managing media and delivering network solutions.

In January 1994, after seven years at the helm, President and CEO Peter Vicars resigned and Philip J. Alford, senior vice-president and CFO, was named president. Tekelec started turning things around in May with its first switch sale to a Bell company. Ameritech Cellular's purchase of two Eagle STP/1s was followed in September by a breakthrough distribution agreement with industry giant AT&T Corp. for the same product. The company regained momentum in the stock market as well and shares rose from $8 in August to a high of $25 by mid-October. Revenues for 1994 grew to $61.2 million and after two years of losses, the company turned a profit of $4.5 million.

Tekelec began 1995 by entering a joint-marketing agreement with Stratus Computer, Inc. The Massachusetts-based Stratus had annual revenues over $500 million with customers in over 50 countries. In July, Alford was also tapped for the company's CEO position. Sales in the domestic diagnostic equipment market softened in the third quarter and as the year came to a close, share market price plunged 35 percent to $10.25. However, revenue for the entire year was up by 23 percent to $75.2 million and net income grew to $6.3 million.

EAGLE SWITCHING PRODUCT
LINE TAKING OFF: 1996

The diagnostic equipment side of the business was ailing but sales of Tekelec's Eagle STP switching product line, which came out of the company's Morrisville operations, began to grow significantly in 1996. When Alford announced his resignation in early November, Allan Toomer, the head of the North Carolina-based Network Switching division, was named president. Company headquarters remained in California, but Toomer kept his Morrisville office and announced plans to add employees and floor space at the North Carolina location. Tekelec reported a loss of $2.5 million in 1996 and revenues fell to $72.1 million.

As the first supplier in the United States offering proven number-portability technology, which allowed customers to retain their phone numbers when changing carriers, the company rebounded strongly in 1997, beginning in February with a $10 million sale of equipment to Nynex, a New York-based regional Bell company. That was followed in May by a multi-year agreement to supply Bell Atlantic Corp. with Eagle STP products, including local number portability systems. During the year, Tekelec also received switching orders from Daewoo Telecom and SK Telecom in Korea, Southern New England Telephone, Telkom South Africa Ltd., and Iusacell Mexico. Revenues grew 74 percent to $125.1 million, net income totaled $28.9 million, and at the end of the year company stock traded at five times the rate of its last 1996 trade.

In March 1998, Toomer retired and Michael L. Margolis was appointed president and CEO of the company. In August, the company opened its European headquarters in London to handle the increased global demand for its Eagle product line and announced plans to double the workforce and plant size of the Morrisville division that produced Eagle products. Operating under a Federal Communications Commission mandate that U.S. telephone customers be allowed by 1999 to switch telephone services and retain their phone numbers, major companies including Nextel Communications Inc., AT&T Wireless Services, and Sprint turned to Tekelec for the company's Eagle number-portability technology. Company growth continued with year-end revenues up 41 percent to $176.6 million and net income of $39.2 million.

KEY DATES

1979:: Tekelec is founded when French firm's American sales office spins off as independent corporation.
1985:: Company establishes its first subsidiary, Tekelec Ltd., in Tokyo, Japan.
1986:: Tekelec goes public, raising over $12 million.
1992:: Company launches flagship switching product; opens Canadian subsidiary.
1999:: Texas-based IEX Corporation is acquired for $163 million.
2004:: Tekelec expands product line with new technology from three major acquisitions.
2006:: Accounting troubles slow growth; company restates earnings for 2003 through 2005.

In January 1999, the company closed its Network Diagnostics division in Calabasas, which accounted for less than 8 percent of sales in 1998. Tekelec stock plunged in February 1999 and again in mid-March before bottoming out on April 9 at $6.75 after the company fell short of consecutive quarterly earnings estimates. In mid-April, Tekelec announced a major expansion of its product line with its $163 million purchase of IEX Corporation, a Texas-based producer of hardware and software packages for telecom companies, large corporations, and Internet service providers. In October, Tekelec landed a $20 million multi-year contract from US West Communications Inc. and in December, the company signed an international distribution agreement with Unisys Corp. as well as a one-year $10 million contract with Orange PLC, a British wireless firm, for network equipment. The year closed with earnings of $26.6 million on total revenues of $226.1 million, with share price hovering around $20.

In February 2000, the company signed a major deal with Internet equipment maker Cisco Systems Inc. to combine technologies in a product that carried data and voice across telephone and computer networks and the Internet. In May, with its stock at a high of $54 per share, Tekelec expanded its European headquarters in the United Kingdom and in September, the company broke ground on a new 155,000-square-foot facility on its corporate campus in Morrisville, North Carolina, where the number of employees had grown to 950 from 569 in 1998. Year-end revenues were up 40 percent to $314.3 million and net income increased 68 percent to $44.8 million.

2001: PURSUING GEOGRAPHIC
DIVERSITY

Even though Tekelec had captured 75 percent of the domestic market share among signal transfer point providers, in July 2001 the company was unable to avoid the effects of a telecommunications industry slump and announced a halt to its Morrisville expansion plans and a hiring freeze. The news caused Tekelec's already depressed stock to drop $6.74 to $18.11. Poor sales for the year to Tekelec's wireline customers were somewhat offset by the company's sales to wireless carriers, which in the last three years had risen from 25 percent to around 50 percent of the company's business. In a very difficult year for the telecommunications industry as a whole, the company reported revenues of $312.4 million.

In 2002, the company's global expansion strategy shifted into high gear. Already underway with a late 2001 deal with France Telecom, in January 2002, the company extended its partnership with Orange UK. In March, IEX, Tekelec's contact center subsidiary, announced that Matrium Technologies would distribute the company's TotalView Workforce Management system to the Australian and New Zealand markets, and in April, IEX opened a new office in Amsterdam, to pursue direct sales opportunities in Europe, Africa, and the Middle East. In July, Tekelec sold its unprofitable Network Diagnostics Business, one of two Morrisville-based divisions, in a deal worth $60 million. In August, Tekelec opened an office in Beijing, China, capital of the world's largest mobile phone market. The year ended with the company reporting total revenues of $260.3 million.

In February 2003, Executive Vice-President and COO Frederick M. Lax replaced the retiring Margolis as president and CEO. In June, Tekelec acquired a majority stake with switching vendor Santera Systems Inc., located in Plano, Texas, creating a subsidiary focused on developing "softswitches" that routed telephone calls using Voice over Internet Protocol (VoIP), so-called "next-generation" technology. The company continued to pursue geographic diversification as well, opening new offices in Singapore in January, Moscow in September, and Mexico City in November, and in the course of the year closing major deals in India and Brazil. The year ended with the company reporting total revenues of $263.7 million.

"NEXT-GEN" TECHNOLOGIES:
2004

In 2004, telephone companies had begun replacing aging SS7 switches with softswitches that combined voice and data traffic into compressed digital signals. With over 80 percent of its sales coming from traditional telephone circuit switching gear, Tekelec made a major move into the next generation packet switching market with the acquisitions of softswitch vendor Taqua, Inc. for $85 million in April, voice application server vendor VocalData, Inc. for $27.5 million in September, and performance monitoring company Steleus Group Inc. for $56 million in October. The company also continued its global expansion strategy with the 2004 opening of another subsidiary, Tekelec Systems India Private Ltd. Tekelec reported revenues of $397.1 million for the year.

In February 2005, the company announced a five-year contract with SBC Services, an SBC Communications subsidiary, to deploy Tekelec's Eagle 5 Signaling Application System. In April, company headquarters moved from Calabasas, California, to Morrisville, North Carolina, and in May, the company launched a new branding campaign in an attempt to position itself as a "trusted" source of next generation network solutions. In July, Tekelec acquired German- and Czech-based iptelorg GmbH, a developer of telecommunications software, for $11 million and, in October, Tekelec completed its acquisition of Santera Systems for $75 million.

In January 2006, Tekelec named Frank Plastina as its new president and CEO. In April, the company sold its non-telecom subsidiary, IEX Corporation, for $200 million in cash. In May, the company announced that it had identified accounting errors and restated financial results for the years 2003, 2004, and 2005: net income for 2003 was actually $17.3 million on $253.5 million in revenue; net income in 2004 was $18.2 million on $368.9 million; and 2005 ended with a loss of $33.7 million on $536.9 million. On November 1, Tekelec announced a third-quarter loss of $87.5 million and laid off 104 employees at its Plano, Texas, Switching Solutions operation. However, with one-time items factored out, Tekelec posted net income from continuing operations of $11.2 million on revenues of $155.2 million, up 43 percent compared to the $108.4 million from the third quarter of 2005. Tekelec shares were up almost 7 percent to $15.50 in after-hours trading following the announcement.

Despite accounting troubles and weak financial numbers, Tekelec's strategy of diversifying its product line through acquisitions, and of growing its sales through global expansion, had positioned the company in late 2006 as a leading provider of reliable cutting-edge telecommunications signaling and switching gear with great potential for renewed success in the future.

Ted Sylvester

PRINCIPAL SUBSIDIARIES

iptelorg GmbH (Germany), Santera Systems Inc.; Taqua, Inc.; Tekelec Argentina SRL; Tekelec Limited (U.K.); Tekelec France; Tekelec Canada Inc.; Tekelec Germany GmbH; Tekelec Italy srl; Tekelec do Brasil Ltda.; Tekelec Singapore Pte. Ltd.; Tekelec Spain, SL; Tekelec International Inc.; Tekelec Malaysia Sdn. Bhd; Tekelec Mexico, S. de R.L. de C.V.; Tekelec Systems India Private Ltd.; Tekelec Taiwan Co. Ltd.; VocalData, Inc.

PRINCIPAL COMPETITORS

Siemens AG; Cisco Systems, Inc.; Huawei Technologies Co., Ltd.; Nortel Networks Corporation; Lucent Technologies Inc.; Sonus Networks, Inc.; Data Connection Limited; BroadSoft, Inc.; CopperCom Inc.