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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23212
TELULAR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 36-3885440
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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647 NORTH LAKEVIEW PARKWAY, VERNON HILLS, ILLINOIS 60061
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(847) 247-9400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this form 10-K or any amendment to this Form 10-K. [ ]
As of November 21, 1997, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $50,787,288*
(based upon the closing sales price of such stock as reported by the NASDAQ
National Market on such date).
The number of shares outstanding of the Registrant's common stock as
of November 21, 1997, the latest practicable date, was 32,613,543 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended September 30, 1997 are incorporated by reference
in Part III of this Form 10-K.
* Excludes the common stock held by Named Executive Officers, directors
and stockholders whose ownership exceeds 5% of the common stock
outstanding at November 21, 1997. Exclusion of such shares should not
be construed to indicate that any such person possesses the power,
direct or indirect, to direct or cause the direction of management or
policies of the Registrant or that such person is controlled by or
under common control with the registrant.
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PART I
ITEM 1. BUSINESS
Overview
Telular Corporation (the "Company") is in the fixed wireless
telecommunications industry. The Company designs, develops, manufactures and
markets products based on its proprietary interface technologies, which provide
the capability to bridge wireline telecommunications customer premises
equipment ("CPE") with cellular-type transceivers for use in wireless
communication networks, whether cellular, personal communications services
("PCS"), or satellite-based. Applications of the Company's technology include
fixed wireless telecommunications as a primary service where wireline systems
are unavailable, unreliable or uneconomical, as well as wireless backup systems
for wireline telephone systems and wireless alarm signaling ("WAS"). The
Company's principal product lines: PHONECELL(R), a line of fixed wireless
terminals ("FWTs"); and TELGUARD(R), a line of WAS products, which allow CPE
designed for traditional wireline networks to send and receive voice, data and
facsimile signals over wireless networks.
The Company in 1986 acquired the intellectual property rights of a
pending patent application dealing with a "cellular interface" concept and
methodology. The patent not only describes a simple physical circuit or
device, but also the very concept and principles underlying the use of an
intelligent interface device (the "invention") in conjunction with
cellular-type transceivers and systems.
In March 1990, the Company entered into a cross-license agreement with
Motorola Inc. ("Motorola") under which the Company licensed to Motorola certain
rights to manufacture, sell or use the invention. The cross-license agreement
allows the Company to use Motorola's transceivers in its products. In December
1992, Telular Canada, Inc. ("Telular Canada"), an independent Toronto-based
distributor of telecommunications products, purchased the title to the Canadian
patents for the Company's technology and the right to acquire the Company's
technologies solely for use and sale within Canada.
In May 1993, Telular Canada acquired a minority interest in the
Company. As a result of sales and dilution, Telular Canada owned approximately
2% of the outstanding stock as of November 21, 1997. In November 1993,
Motorola partnered with the Company by acquiring an equity interest in the
Company, and owns approximately 15% of the shares outstanding as of November
21, 1997.
During 1993, the Company also began to solidify its market position by
acquiring two key distributors/licensees: Telular International, Inc. ("Telular
International"), formerly known as Codecom Rural Communications located in
Puerto Rico, and Telular-Adcor Security Products, Inc. located in Atlanta,
formerly known as Adcor Electronics International, Inc..
In January 1994, the Company completed an initial public offering
("IPO") of its common stock, which raised approximately $56.4 million. The
Company's stock is traded on the NASDAQ National Market System under the ticker
symbol "WRLS". In December 1995, the Company raised $18.0 million from a
private placement of convertible debentures. In April and June 1997, the
Company raised an additional $18.8 million from private placements of series A
convertible preferred stock. See "Liquidity and Capital Resources" - Part II.
In 1996, the Company announced and implemented a restructuring
program. Under the restructuring, the Company consolidated three manufacturing
locations into its Atlanta, Georgia, facility, reduced the number of employees
from over 250 to 110 and eliminated a number of less profitable products.
During 1997, faced with terminating leases in Atlanta, Georgia and at its
headquarters in Buffalo Grove, Illinois, the Company consolidated the majority
of its manufacturing, sales and marketing, engineering, finance and
administrative functions into a new facility in Vernon Hills, Illinois.
In three separate transactions on June 28, 1996, January 29, 1997 and
August 29, 1997, the Company acquired a total of 50% interest in Wireless
Domain Incorporated ("WD") (formerly Telepath Corporation) for $1.5 million of
cash and common stock of the Company valued at approximately $2.9 million. WD
is a radio developer, based in Hauppauge, New York, that specializes in the
design of advanced cellular and personal communication services products. The
agreement between WD and the Company includes a multi-year product development
program designed to provide a new generation of state-of-the-art FWTs, which
include both analog and digital radio standards, for markets worldwide. During
fiscal year 1997, the Company purchased services from WD approximating $2.7
million.
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On November 10, 1997, the Company acquired the remaining 50% of WD.
Under the terms of the merger, the Company issued 500,000 shares of common
stock and relinquished control of the 500,000 shares of common stock held by
WD. The Company expects to achieve more rapid deployment of new products with
the full-time addition of WD's 29 engineers.
Wireless Telecommunications Overview
The vast majority of the telephones in the world continue to be
concentrated in a relatively small number of industrialized countries. While
telecommunications infrastructure is a critical element of economic growth,
most developing nations have telephone systems that are inadequate to sustain
essential services. Thus, developing countries are seeking basic
communications solutions which are cost effective and can be deployed rapidly
to support aggressive economic development programs.
The process of improving and expanding telephone networks using
advanced wireless technology in developed and developing countries has created
a major market for wireless telecommunication equipment such as the Company's
FWT. In developed countries, mobile cellular systems have changed the way
people communicate and have enjoyed phenomenal growth that is expected to
continue in the future. In developing countries, wireless local loop ("WLL")
systems represent what is very often the fastest and most cost-effective way of
providing basic telephone service. WLL systems are conventional cellular
networks constructed and operated primary for fixed users.
The International Telecommunications Union ("ITU") estimates that more
than 400 million access lines will be added worldwide during the 1995-2000 time
period. Of these access lines, 191 million are expected to be added in
developing countries. The average projected cost per access line is $1,200
with most of the growth in developing countries occurring in urban areas. The
potential role of wireless products and systems could be a significant factor
in the deployment of basic phone service as the cost per access line is
potentially lower and speed of deployment faster versus traditional wireline
systems. Additionally, where wired telephone networks exist, wireless networks
offer an adjunct as well as an alternative method of communicating. Where
wired telephone networks are non-existent or substandard, wireless
cellular-type networks are a primary service option.
In the domestic market, rapid and dramatic advances in digital
wireless and wireline technology (Time Divisional Multiple Access ("TDMA"),
Group Special Mobile ("GSM, DCS 1800 and PCS 1900") and Code Division Multiple
Access ("CDMA")) along with fiber optic deployment have had, or are anticipated
to have, significant impact on the number and quality of telecommunications
service offerings. These technological advancements, coupled with the changes
in regulation, are reshaping the domestic telecommunications landscape as
evidenced by the creation of a new service offering, PCS, and the addition of
many new service providers in the local exchange telecommunications business.
If technological advances and price decreases continue to occur, a market in
the United States for fixed wireless service to be used in conjunction with, or
in place of, traditional wireline service may emerge for a variety of wireless
alternative access ("WAA") applications.
The WAA market involves FWTs operating on mobile cellular networks
built primarily for handheld cellular phone users. For WAA applications, FWT
sales generally begin developing after a new mobile network has been in
operation for a few years, when the growth rate in new cellular phone
subscribers slows and the mobile operator begins looking for new revenue
sources. FWTs offer this opportunity since they are less costly to support
(permanently linked to a specific cell site), generate more average airtime and
operate mainly at off-peak times. The number of FWTs presently operating on
WAA networks exceeds that of WLL and is driven by the relative price for
airtime, as well as by the large installed base of mobile networks worldwide.
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Company Strategy
The Company's strategy is to leverage eleven years of pioneering
experience in the market, internationally-accepted products, and court-tested
patents into a continuing leadership position in the rapidly developing WLL and
WAA FWT equipment industry. Global telecommunications equipment manufacturers
together with national and international service providers are increasingly
sharing the Company's vision that wireless systems in both developed and
developing countries are well suited for use as basic telephone service
networks. The key trends that are fueling the worldwide adoption of WLL/WAA
programs include the following:
- Rapid acceptance of cellular mobile communications;
- An accelerating trend toward privatization of
telecommunication service in both developed and developing
countries;
- Development and adoption of digital wireless transmission
standards (e.g., TDMA, GSM, DCS 1800, PCS 1900 and CDMA)
which enhance network capacity and service capability while
significantly reducing the effective cost per subscriber
served;
- Service network providers acceptance of wireless network
solutions as fast, cost effective answers to their
customers' unfulfilled demand for telecommunications; and
- PCS licensing within the U.S., which should intensify
competition by wireless service providers to capture
wireline minutes of usage and the potential for a large
bypass market.
Based upon its proprietary interface technology, the Company designs,
manufactures and markets a full line of FWT's covering all major radio
standards, allowing cost-effective, innovative communications solutions where
wired telephone networks are (1) of substandard quality, (2) unavailable on a
timely basis, (3) too costly, or (4) in need of alternative access or
backup/diverse routing capability for local telephone service exists.
During fiscal year 1997, the Company's FWTs gained market position on
the following major radio standards:
Analog - While the overall FWT market is shifting from analog
cellular to digital cellular, there are many analog opportunities.
Analog is sometimes used to meet regulatory deadlines on new WLL
deployments in which the new digital infrastructure cannot be
deployed fast enough. Also, when new digital mobile networks are
installed in urban areas, the older analog infrastructure often is
displaced and then redeployed for WLL use in the surrounding
suburban area. The Company is the original supplier of analog
FWTs and one of the few remaining analog suppliers, enabling it to
capture a sizeable share of all new analog FWT business worldwide.
Digital GSM - Despite the historical importance of analog, most
planned FWT deployment in both WLL and WAA markets will be on one
of the various digital standards - GSM, CDMA, or TDMA. Digital is
more desirable than analog because it provides superior capacity,
voice privacy, higher transmission rates for fax and data, and
additional user services such as Caller ID and messaging. The
Company's new GSM 900 FWTs was introduced during fiscal 1997. It
should allow the Company to capture a fair share of the growth in
the digital market.
The Company spotted the beginning of a new trend in the WLL market
during the year. Previously, most FWTs going onto WLL networks were sold by
infrastructure manufacturers who "bundled" the FWT/infrastructure for sale to
the WLL operator. Now, however, more savvy operators are unbundling: buying
infrastructure and FWTs separately. The Company has already realized the
initial benefits of this trend with major new contracts with operators to
supply FWTs in the Philippines and Guinea.
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Target Markets and Product Applications
The Company's fiscal 1997 revenues have been primarily international,
derived from the sale of PHONECELL(R) FWTs for integration into WLL/WAA systems
being installed in developing countries. Significant revenues were derived
domestically from the Company's TELGUARD(R) product line, which provides
wireless backup to traditional wireline telephone and security systems, and
remote data acquisition and monitoring applications.
The Company believes that its future revenues will be increasingly
derived from its international target markets, new product applications and
licensing, and the domestic expansion of the PCS service providers and its WAS
business. As described below, the range of opportunities can be grouped into
four categories:
- Wireless basic local and long-distance voice, data and
facsimile telephone service through repeat sales into
established mobile cellular networks and through joint
selling of terminals and to new WLL projects with
infrastructure providers;
- Licensing and OEM supplier of the Company's technology;
- Remote monitoring and supervisory control and data
acquisition ("SCADA"), including WAS products;
- Disaster recovery and emergency back-up circuits.
Wireless Basic Telephone Service
Many countries are evaluating or have already deployed wireless basic
telecommunications systems in conjunction with, or as an alternative to, the
expansion of their basic wireline systems. The most significant market
opportunity for the Company's products is to continue to provide wireless basic
telephone service ("WBTS") in such developing countries. A customer's needs
are very basic: simple voice, data and facsimile service. The primary customers
for WBTS in developing countries are businesses and medium-to-upper income
residential users, such as those in Hungary, Spain, Portugal, China,
Bangladesh, Philippines, Brazil, and Columbia.
In developed countries, the Company's products represent an "enabling
technology" for competitive access service providers. The use of wireless
technology to gain rapid and transparent WAA to a customer's long distance
service provider will be a significant application for the Company's products,
especially in the coming U.S. PCS environment. Several wireless operators,
such as Sprint and AT&T Wireless, have already publicly identified WLL/WAA for
long distance traffic as a potentially major market segment.
Licensing and Original Equipment Manufacturer ("OEM") supplier of the Company's
technology
In response to the international demand for the Company's proprietary
interface technology, which allows most standard wireline customer premises
equipment to operate over wireless telecommunications networks, the Company has
been promoting the use of its interface technology in other telecommunication
companies' products. Such a marketing strategy may result in licensing,
selling of component parts and OEM production of complete units. The Company
is actively talking with large international telecommunication companies with
respect to licensing its proprietary interface technology and providing product
under OEM arrangements.
Remote Monitoring and Security Alarm Monitoring
The use of fixed wireless cellular systems for remote monitoring and
SCADA applications has been the most prevalent WAA application in developed
countries, especially in the U.S. The Company's products have been
successfully marketed to numerous companies in a wide range of industries such
as highway authorities, oil companies, utility companies, agribusinesses, banks
and law enforcement agencies.
A major sub-group within the wireless monitoring application segment
is security alarm monitoring. Alarm monitoring was one of the first
applications of the Company's technology and continues to be a growing segment
of the market. Use of the Company's specialized products allows an alarm
monitoring system to automatically switch to a cellular network in the event of
a telephone line failure, allowing alarms to be transmitted.
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Disaster Recovery and Back-Up Services
Hundreds of major telephone network outages occur annually in the U.S.
and other countries around the world. Additionally, individual circuit outages
occur hourly, which not only cost businesses major sums of money annually, but
may also be life threatening, such as when hospitals or law enforcement or fire
departments are affected. Today, with the widespread availability of wireless
telephone networks, a readily available and cost-effective solution is possible
with the Company's technology.
The Company's products are installed in hospitals, financial
institutions, airports, emergency response and public service centers and
utility companies. The wireless back-up approach also allows businesses to
take advantage of other communications situations where wireless service may be
a desirable option to wired phone service. For example, wireless service may
be used for overflow traffic relief when regular telephone lines become blocked
due to usage or for least-cost routing for long distance where wireless may be
less expensive than local exchange carrier (LEC) rates. Wireless back-up
capability may also be integrated as part of a security monitoring system.
TECHNOLOGY AND PRODUCTS
Core Technology
The Company's core patented technology is an intelligent interface
invention that permits standard wireline CPE to operate on wireless networks.
The Company's products containing the invention provide the capability to
bridge wireline telecommunications CPE and wireless networks, whether cellular,
PCS or satellite-based. The invention provides a standard dial tone, off-hook
detection signal and other signals usually provided by the LEC, through its
"tip" and "ring" wired local loop connection, which automatically generates a
"send" signal to the cellular transceiver once the user has finished entering
the telephone number. The Company has incorporated this core technology into a
variety of products and radio standards and continues to develop and exploit
derivative products and technologies for customer-specific applications.
Interface Technology
The Company's products contain printed circuit boards that incorporate
its patented intelligent interface invention. The interface components are used
in the Company's finished products and are also sold separately. In certain
cases, the Company licenses its interface technology or patent rights to other
companies, for which, in most cases, royalty fees are received. However, to
date the bulk of the Company's revenues have been generated primarily through
the sale of finished products.
Transceivers
The Company historically has contracted with several suppliers for the
critical components of its products. The major exception to this policy has
been transceiver units, which have been principally supplied by Motorola. The
Company's interface technology is compatible with several other manufacturers'
transceivers and the Company has been able to utilize transceivers from such
manufacturers. In addition, the Company will design and build its own radios
for selected FWTs in the future.
The Company's Product Line
The product requirements for WLL and WAA can be categorized as
single-line fixed subscriber terminals (PHONECELL(R) series), and WAS units
(TELGUARD(R) /Series). The Company believes future product offerings will
reflect a continued evolution of its existing product line.
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PRODUCT FEATURES
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o PHONECELL(R)/Series Single-line, self-contained unit for voice, data and facsimile
(FWT products) that is available in a variety of standards (AMPS, NAMPS, ETACS,
TDMA, CDMA, GSM, PCS, DCS) and various housings
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o TELGUARD(R)/Series Specialized, single-line security alarm backup units for
(WAS products) commercial and residential use; available with a range of options
and features
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SALES, MARKETING AND SERVICE
International Sales
The international marketplace is characterized by new and repeat sales
into established mobile cellular networks and to the emerging WLL programs
throughout the world. The Company has built an international sales and
marketing team made up of professionals with experience in the Middle-East,
Latin America, Asia, Europe, and Africa. It has regional sales offices in
Chicago, Illinois; Atlanta, Georgia; Miami, Florida; Oxford, England and
Singapore. The ability to provide on-site customer technical assistance and
support has been identified as a key selling requirement, and these regional
offices aid in providing this important service.
U.S. Sales
The Company markets certain products in the U.S. directly via an OEM
sales group in Chicago, Illinois. With the imminent deployment of PCS networks
in the U.S., the Company is focusing on establishing product development and
supply relationships with network operators and PCS transceiver/infrastructure
manufacturers and large telecommunication companies.
The Company's TELGUARD(R) line of WAS products is marketed almost
exclusively in the U.S. for operation on AMPS - based cellular networks.
Service and Support
The Company believes that providing customers with comprehensive
product service and support is critical to maintaining a competitive position
in the wireless telecommunications equipment industry. The Company offers
warranty and repair service for its products through three primary methods: (1)
advance replacement kits shipped as warranty with orders, (2) in-house service
and technical sales support technicians and engineers at its Vernon Hills,
Illinois and Hauppauge, New York facilities, as well as each regional sales
offices (domestic and international) and (3) authorized third party service
centers in various regions of the world (often operated by authorized
distributors).
MOTOROLA RELATIONSHIP
In November 1993, the Company entered into a strategic agreement with
Motorola, whereby Motorola, through its Cellular Subscriber Group, acquired an
interest in the Company of approximately 19% and, pursuant to an option,
subsequently increased its holdings to 20%. Motorola, after dilution due to
the issuance of additional shares of common stock by the Company, now owns
approximately 15% of the outstanding shares of the Company. Motorola also
obtained the right to representation on the Company's Board of Directors and
presently has one director. The agreement provided the Company with access to
certain of Motorola's engineering, technical service and other resources on a
fee basis, subject to availability. In addition, Motorola makes its Advanced
Mobile Phone System ("AMPS"), Extended Total Access Communication System
("ETACS"), NAMPS, TDMA, GSM, CDMA, Iridium and other transceivers available for
purchase by the Company for use in its products when, if, and as available.
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During October and November of 1995 the Company expanded its
relationship with Motorola. It was awarded a contract to supply a customized
version of its PHONECELL(R) product to Motorola's Cellular Infrastructure
Group ("CIG") for deployment in existing and future WLL projects in Hungary.
In addition, CIG agreed to purchase $100 million of the Company's FWTs and
provide funding for engineering and product development activities over a
three-year period, commencing January 1, 1996. During 1996 and 1997 the Company
shipped $6 million and $21 million, respectively, of product under this
agreement.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing telecommunications environment and to continue to
meet customers' needs. The Company is currently adapting its products to new
wireless technologies and is working closely with several companies, including
long-distance carriers, cellular service providers and telecommunications
infrastructure providers and equipment manufacturers, to develop new FWT
products.
As of September 30, 1997, the Company's research and development staff
comprised 19 engineers segregated into four teams. Each team is responsible
for a specific standard such as GSM, CDMA or AMPS. Additionally, the research
area continually investigates methods by which the Company can reduce the costs
of its products. During 1996 and 1997 the Company acquired a 50% interest in
WD which has 29 engineers available for research and development projects on a
contract basis. On November 10, 1997, the Company acquired the remaining 50%
of WD. The Company expects to achieve more rapid deployment of new products
now that it has nearly 50 full-time engineers.
The Company plans to introduce five new FWTs in fiscal 1998. These
include one analog FWT-the SX3 AMPS, and four digital FWTs-the SX2 TDMA, the
SX2 CDMA, the SX2 DCS1800 and the SX4 GSM900. All of these will operate
from a common hardware/software platform, will cost less to make and will have
more features than the present versions they will replace.
MANUFACTURING
Fabrication of the Company's products is accomplished through a
combination of in-house manufacturing and subcontracting. The assembly of
printed circuit board interfaces for both FWT and WAS products is performed at
the Company's facility in Vernon Hills, Illinois. The Company has developed
proprietary testing equipment and procedures to conduct comprehensive quality
control and quality assurance throughout the manufacturing and assembly
process. Quality programs are a high priority at the Company. The Vernon Hills
facility expects to become ISO 9001 certified during fiscal year 1998. The
Company utilizes contract manufacturers to augment its manufacturing
capability, thereby enabling it to more rapidly expand capacity when required
to meet large orders. The Company's quality assurance department works closely
with contract manufacturers to ensure compliance to the strict quality
standards of the Company.
EMPLOYEES
As of November 21, 1997, the Company had 155 employees, of which 26%
are in sales and marketing, 31% in engineering and product development, 35% in
manufacturing and 8% in finance and administration. None of the Company's
employees are represented by organized labor.
COMPETITION
The industry consists of major domestic and international
telecommunications equipment companies, many of which have substantially
greater financial, technical, marketing, sales, manufacturing, distribution and
other resources than those of the Company, and includes companies such as
Motorola, Northern Telecom, Ericsson and Nokia. There are also international
and domestic companies with less resources that make products that compete
directly with the Company where the Company's patent protection is not
available. The Company competes with these companies primarily by selling
products that provide features and qualities not otherwise available on the
market, by developing new products incorporating its technology and by
promoting new applications of its existing product line. The Company's
interface and its related technology have been, and will continue to be,
afforded substantial protection in those markets in which it holds patents (See
"Business--Patents, Licenses and Other Intellectual Property"). In markets
where the Company holds no patents, the Company competes directly with a range
of competitors. Approximately 82% of the Company's fiscal 1997 shipments were
destined for foreign countries, most of which afforded little or no patent
protection.
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The wireless telecommunications industry is experiencing significant
technological change, such as the transformation of cellular systems from
analog to digital. The rate at which this change occurs and the success of such
new technologies may have a material effect on the rate at which the Company
expands its business and on its ability to achieve profitability. The Company
continues to invest in research and development in order to meet the
technological advances in the industry and stay abreast of changes in cellular
standards and end-user requirements.
Presently, the Company licenses its patent rights to Motorola, under
which Motorola is licensed to produce its own cellular interface. Motorola also
sells fixed cellular products, and several other companies purchase Motorola's
interface for inclusion in there own fixed cellular products. The Company
receives a per unit royalty for any such products sold that are covered by the
Company's patents. Motorola is a competitor with the Company in markets for
analog AMPS and digital CDMA products both domestically and internationally.
The Company has granted licenses under its patents to others for
various uses and applications and continues to pursue such license
arrangements. It may face competition from those licensees, their
sublicensees, or their customers.
It is inevitable in growing markets with huge potential that
competition will increase. Accordingly, a few infrastructure suppliers
introduced FWTs during the year. The Company believes its advantages over
industry competition are:
Better focus/commitment - In the WLL market, the Company's only
business is FWTs. Most often, competitors sell FWTs to support
their infrastructure business.
More experience - The Company has been in the FWT business for
eleven years.
Broader product line - The Company offers FWTs that operate on all
major non-proprietary radio standards.
To ensure that our leadership position is maintained, we are doing a
comprehensive makeover of our entire product line for introduction in fiscal
1998.
PATENTS, LICENSES AND OTHER INTELLECTUAL PROPERTY
The Company's success in the United States depends to a considerable
extent upon its ability to obtain and enforce intellectual property rights for
its technology in the United States. With respect to its interface technology,
the Company currently has seven United States patents, as well as 24 foreign
patents, and two pending foreign patent application.
Principal Patent. The patent for the Company's "system for
interfacing a standard telephone set with a radio transceiver", U.S. Patent No.
4,658,096 (the "096 Patent"), was issued by the U.S. Patent Office on April 14,
1987 and expires on April 14, 2004. The '096 Patent has been filed in 16
countries and to date has been issued in all but one of these countries.
The invention covered by the claims of the '096 Patent is an interface
between a standard telephone and a cellular transceiver and its equivalents.
The interface provides dial tone, off-hook detection signals, and many of the
other signals usually provided by regular wireline telephones. The interface
also provides for the automatic generation of a "send" signal from the cellular
transceiver once the telephone number has been entered.
In 1989, the validity of the '096 Patent was upheld by a U.S. District
Court, which enjoined a company from further infringement on the patent. See
"Item 3 - Legal Proceedings".
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Continuation Patents. In October, 1988 and May, 1990, the Company
obtained two patents (U.S. Patent Nos. 4,775,997 and 4,922,517, respectively),
the first of which is a continuation and broadening of the '096 Patent and the
second of which is a continuation of the first and further broadens the '096
Patent. These continuation patents are meant to protect devices that are used
for outgoing calls only and do not require incoming call detection, and have
been terminally disclaimed to expire on April 14, 2004. In April, 1988, the
Company obtained a continuation-in-part of the '096 Patent (U.S. Patent
4,737,975), which allows the interface to be programmed to enable it to
intelligently detect when various types of dialing formats are used (e.g.,
three digit numbers such as 911 or 411) and to set the proper logic to cause
the transceiver to send the dialed phone number and allows the reprogramming of
the interface for use in countries where other dialing formats are used.
The Company has successfully defended these continuation patents in
separate infringement actions. See "Item 3 - Legal Proceedings".
Other Patents. In July, 1992, and November, 1994 patents were granted
to the Company (U.S. Patent Nos. 5,134,651 and 5,361,297) for "a method and
apparatus for providing answer supervision and an autonomous pay telephone
incorporating the same which relates to an interface for use with a pay
telephone and provides a real time display or printout of the costs associated
with a placed call".
The following patents were granted to the Company: for the
self-diagnostic system for cellular transceivers, in November 1995, U.S. Patent
No. 5,469,494; in September 1991, U.S. Patent No. 5,046,085 for "interfacing
system for an international-type pay telephone" (in which the Company has
equitable rights); in the following countries for the "self-diagnostic system
for cellular transceiver systems": in December 1994, South Africa Patent
94/1880; in December 1995, Peru Patent 595; in November 1996, Slovenian Patent
9420026; in September 1996, Turkey Patent 28486; in November 1996, New Zealand
Patent 263661; in May 1997, Israel Patent 108809; for the "self-diagnostic
systems for cellular transceiver systems with remote reporting capability" in
June 1996, South Africa Patent 95/8218; and for the "method and apparatus for
providing answer supervision and an autonomous pay telephone incorporating the
same" in June 1994, Mexico Patent 174,818.
In addition, the Company has the following patent applications: in the
U.S. (i) "Concurrent Wireline/Landline Interface Apparatus & Method"; (ii)
"Concurrent Wireline/Landline Interface Apparatus & Method" ("CIP"); (iii)
"Concurrent Wireline/Landline Interface Apparatus & Method"; (iv) "Method and
Apparatus for Generating Tariff Pulses for a Cellular Pay-Telephone (patent
pending)"; and (v) Self Diagnostic Systems on Cellular Transceiver Systems with
Remote Reporting CIP; and in foreign countries: (i) "Self-Diagnostic System for
Cellular Transceiver Systems" in 35 countries ending most parties contracting
to the European Patent Convention or PCT; (ii) "Self-Diagnostic System for
Cellular Transceiver Systems with Remote Reporting Capabilities" in 3
countries; and (iii) "Concurrent Wireline/Landline Interface Apparatus &
Method" in Israel.
Applicability of the Company's Patents to Emerging Wireless
Technologies. Although the Company believes its intelligent interface can be
adapted to accommodate emerging wireless technologies (such as PCS, ESMR and
satellite networks), there can be no assurance that these new applications will
fall within the scope of the existing patent protection because in certain
circumstances the licenses for these technologies have not been granted or have
not yet been defined.
Infringement Claims. The only claim is by two individuals, and it is
a reassertion of a claim against the Company originally made in 1986. The
Company, in reliance on the advice of its patent counsel, believes the claim is
both erroneous and legally precluded. The Company's patent counsel is Hamman &
Benn, the principals of which are stockholders of the Company and stockholders
of DNIC, a major shareholder of the Company. See "Item 3(b) - Legal
Proceeding."
Foreign Patents. While the Company has obtained patent protection in
certain foreign jurisdictions, and has patent applications pending in some
countries, it has not established patent protection in many other countries,
including the principal countries of Western Europe for its principal patents.
The Company, as well as any third party, is now precluded from obtaining patent
coverage for the Company's core technology in any country where it does not
currently have patent protection in Western Europe and throughout the world
under the Patent Cooperation Treaty for new uses of the invention in
conjunction with a pending U.S. patent application. In the absence of patent
protection, the Company has relied upon other competitive factors, including
the quality of its products and the desirability of using products that meet
the same specifications as those in the United States and other countries where
the Company has obtained patent protection.
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<PAGE> 11
The Canadian patents for the Company's technology are owned by Telular
Canada, which is the Company's exclusive distributor in Canada.
Licensing of Technology.
The Company has granted licenses to a number of other companies, which include
the following:
<TABLE>
<S> <C>
Motorola (See Motorola Relationship);
CKG Technologies (non-exclusive, nontransferable license limited
to the manufacture of a portable cellular workstation
and/or a cellular modem);
Harvest Electronics, Ltd. (non-exclusive license for manufacture and
sale of an interface for vending equipment);
Millidyne, Inc. (non-exclusive license for manufacture and
sale of subscriber data modems and mobile data gateway equipment, incorporating
certain technology transferred by the Company); and
Powertek Industries (non-exclusive U.S. license for manufacture
and sale of a portable cellular workstation).
ADI (non-exclusive world-wide license for manufacture
and sale of fixed wireless terminals).
</TABLE>
Trademarks and Other Proprietary Information.
The Company has 11 registered trademarks which are: TELULAR plus
design, TELULAR, CELJACK, MAXJACK, TELCEL, Hexagon Logo, PHONECELL, CELSERV,
TELGUARD, CPX, and AXCELL. In addition, the Company has six registered Mexican
trademarks covering the names and logos used for some of its products. The
Company has one pending U.S. trademark application, which is: PCS(one). The
Company has 80 other foreign trademark registrations and 15 other foreign
trademark applications.
ITEM 2. PROPERTIES.
The Company leases, pursuant to a ten-year lease, its corporate
headquarters in Vernon Hills, Illinois which occupies 72,000 square feet. In
addition to serving as corporate headquarters, the facility houses
manufacturing, sales and marketing, engineering, finance and administrative
functions. The Company also leases space for international sales offices in
Miami, Florida, Oxford, England and Singapore. The Company also leases space
to house its domestic salesforce in Atlanta, Georgia.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to the following actions:
(a) Alliance Research Corporation v. Telular Corporation and Spectrum
Information Technologies, Inc. ("Spectrum"), CV 94 1065 RG, United States
District Court, Central District of California.
On February 17, 1994, Alliance Research Corporation sued the Company
and Spectrum seeking Declaratory Judgment for invalidity and non-infringement
of the Company's 4,658,096 patent as well as its two continuation patents,
4,922,517 and 4,775,997. The Company has denied the allegations and has
counterclaimed for patent infringement of the two continuation patents. On May
2, 1994, the Federal court in Los Angeles ruled in favor of Telular and
rejected the lawsuit challenging the '096 patent. Spectrum was dismissed as a
defendant on a motion made by Spectrum. The Company has acquired Spectrum's
rights to receive court awarded damages in this case. The Federal court, on
October 23, 1995, granted the Company's Motion for Partial summary judgment on
all issues except damages. The
11
<PAGE> 12
court enjoined Alliance from selling its CDL line of products. Alliance has
appealed the summary judgment decision. In May 1997, the United States Court
of Appeals for the Federal Circuit affirmed the lower court's summary judgement
decision on all issues except damages. The matter is now back with the
district court for damage determination. The Company intends to vigorously
pursue its claims.
(b) Arthur L. Serrano and Andrew W. Holman v. Telular Corporation and
Spectrum, CV 94 1272, United States District Court, Central District of
California.
On February 28, 1994, Serrano and Holman filed a Declaratory Judgment
action against the Company and Spectrum. The suit involves the Company's
4,658,096 patent, as well as its two continuation patents, 4,922,517 and
4,775,997. The Company has answered and counterclaimed for patent infringement
of its continuation patents. Plaintiffs are the former principals of Morrison
& Dempsey, which is now out of business. On July 13, 1995, Judge Letts entered
an order finding for the Company on all counts of the Complaint and
Counterclaims, and determining the Serrano and Holman infringement to be
willful, enabling the Company to receive treble damages, attorney's fees and
costs. The final order was entered on March 20, 1996 granting the Company a
total of $663,178.82 in treble damages, attorney's fees and costs. This
decision has been appealed by Serrano and Holman. In April 1997, the United
States Court of Appeals for the Federal Circuit unanimously affirmed the lower
court's conclusion that patents 4,775,997 and 4,922,517 are valid and had been
infringed by the Plaintiffs. The Company is currently executing its judgement
of $663,178.82 against the Plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1997.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The Company's common stock trades publicly on the NASDAQ National
Market System under the symbol "WRLS". The following table sets forth the
quarterly high and low sales prices for each quarter of fiscal 1997, 1996,
1995, as reported by NASDAQ. Such quotations reflect inter-dealer prices
without markup, markdown or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED DURING FISCAL 1997
-------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- --------- ------- ------------
<S> <C> <C> <C> <C>
High . . . . . . . . . $ 5.56 $ 8 .38 $ 6.00 $ 3.13
Low . . . . . . . . . $ 4.31 $ 5 .00 $ 3.50 $ 2.25
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED DURING FISCAL 1996
-------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
High . . . . . . . . . $ 15.37 $ 10 .50 $ 9.00 $ 6.62
Low . . . . . . . . . $ 8.00 $ 2.00 $ 4.12 $ 4.12
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED DURING FISCAL 1995
-------------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
High . . . . . . . . . $ 10.62 $ 10 .25 $ 20.50 $ 20.25
Low . . . . . . . . . $ 6.00 $ 6.50 $ 7.25 $ 12.75
</TABLE>
On November 21, 1997, there were approximately 359 shareholders of
record, 9,064 beneficial shareholders and 32,613,543 shares of common stock
outstanding. The Company has not paid any dividends since its inception and
does not intend to pay any dividends on its common stock in the foreseeable
future. Pursuant to the Company's Loan and Security Agreement with Sanwa
Commercial Credit Corporation, the Company has agreed that, during the term of
that agreement, the Company will not, without the consent of the lender,
declare or pay any dividend or other distribution on any class of its stock.
RECENT SALES OF UNREGISTERED SECURITIES
Compensation
On April 18, 1996, the Company entered into an employment agreement
with Kenneth E. Millard, pursuant to which Mr. Millard agreed to serve as Chief
Executive Officer and President of the Company. Under the Agreement, Mr.
Millard is to eligible to receive an incentive bonus of $200,000, payable
quarterly, based on performance targets established by the Board of Directors,
a portion of which is to be paid in the form of shares of common stock of the
Company (the "Common Stock") at fair market value. For the quarter ended
December 31, 1996, the Company awarded Mr. Millard a bonus and in connection
therewith issued Mr. Millard 3,012 shares of Common Stock valued at $15,284.
For the quarter ended March 31, 1997, the Company awarded Mr. Millard a bonus
and in connection therewith issued Mr. Millard 1,546 shares of Common Stock
valued at $8,775.
On April 22, 1997, the Company entered into a new employment agreement
with Robert C. Montgomery, pursuant to which Mr. Montgomery agreed to serve as
Chief Operating Officer and Executive Vive President of the Company. Under the
Agreement, Mr. Montgomery is eligible to receive an annual incentive bonus of
$100,000 under the Company's Senior Management Bonus Plan, payable quarterly, a
portion of which is to be paid in the form of shares of Common Stock at fair
market value. For the quarter ended December 31, 1996, the Company awarded Mr.
Montgomery a bonus and in connection therewith issued Mr. Montgomery 1,118
shares of Common Stock valued at $5,675. For the quarter ended March 31, 1997,
the Company awarded Mr. Montgomery a bonus and in connection therewith issued
Mr. Montgomery 773 shares of Common Stock valued at $4,338.
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<PAGE> 14
During the fiscal year ended September 30, 1997, the Company paid the
law of firm of Hamman and Benn aggregate fees of $354,613 for legal services,
which payments were comprised of $331,365 in cash and 5,448 shares of Common
Stock valued at $23,248. The Company also issued 26,209 shares of Common Stock
valued at $86,045 to William L. De Nicolo, the Chairman of the Company pursuant
to a consulting agreement. The consulting agreement with Mr. De Nicolo was
terminated effective September 30, 1997.
Wireless Domain Investment
On June 28, 1996, the Company entered into an agreement to acquire a
50% interest in Wireless Domain in three transactions. On June 28, 1996, the
Company purchased a one-third interest in Wireless Domain in exchange for
$1.0 million in cash and 350,000 shares of Common Stock valued at
approximately $2.2 million. In two separate transactions on January 29, 1997,
and August 29, 1997, the Company purchased an additional one-sixth interest in
Wireless Domain in exchange for payments totaling $0.5 million and 150,000
shares of Common Stock valued at approximately $0.7 million.
Issuance of Preferred Stock
The Board of Directors of the Company on April 15, 1997 created a new
series of 21,000 shares of Series A Convertible Preferred Stock (the "Preferred
Stock"), of which 20,000 shares have been issued. On April 16, 1997, the
Company issued 5,000 shares of Preferred Stock to each of Nelson Partners and
Olympus Securities, Ltd. (collectively, 10,000 shares) in a private placement.
On June 6, 1997, the Company issued 5,000 shares of Preferred Stock to each of
Stark International and Shepherd International Investments, Ltd. (collectively
10,000 shares) in a private placement. The Company received $20,000,000 from
the sales of the Preferred Stock, and paid to Lehman Brothers a placement fee
in connection with such sales, which was comprised of $996,197 in cash and
38,653 shares of Common Stock valued at approximately $106,296. Senior
management anticipates that the funds will be used for the development of new
products for its worldwide fixed wireless terminal business.
Each share of Preferred Stock issued by the Company has a face value
of $1,000, and is convertible into shares of Common Stock at a conversion price
equal to the lower of (i) $6.4856, which represents 110% of the 30-day average
trading price of the Common Stock immediately prior to April 16, 1997, when the
first shares of Preferred Stock were issued, and (ii) 85% (prior to October 15,
1999) or 100% (on or after October 15, 1999) of the 30-day average trading
price of the Common Stock prior to conversion, but in no event lower than a
minimum price. The minimum price is $3.00 per share until April 15, 1998, and
$2.00 per share thereafter, in each case subject to certain adjustments. In
addition, at conversion, holders of the Preferred Stock are entitled to an
effective 5% annual dividend on the shares of Preferred Stock, paid in shares
of Common Stock with the conversion price based on the average market price of
the Common Stock for the 30 trading days preceding conversion.
If a holder of Preferred Stock elects not to convert its shares, then
the shares of Preferred Stock automatically convert to shares of Common Stock
on April 16, 1999, or October 16, 1999, depending upon the conversion price.
The Company also has the right to redeem the Preferred Stock for cash at
defined terms.
A right of redemption on the part of the holders of the Preferred
Stock may be triggered by a number of events including the merger,
consolidation or sale of substantially all of the assets of the Company, the
purchase of more than 50% of the outstanding shares of Common Stock of the
Company, the failure by the Company to convert Preferred Stock when required to
do so, the delisting of the Company's Common Stock from a national securities
exchange, or the failure by the Company to timely register and keep in effect
the registration of the Common Stock to be issued upon conversion of the
Preferred Stock.
The Common Stock into which the Preferred Stock is convertible has
been registered with the Securities and Exchange Commission for resale.
The shares of Common Stock and Preferred Stock described in this
section were issued and sold by the Company in reliance on Section 4(2) of the
Securities Act of 1933, as amended, and the regulations promulgated thereunder.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table is a summary of certain condensed statement of
operations and balance sheet information of the Company. The table sets forth
selected historical financial data of the Company for the years ended
September 30, 1997, 1996, 1995 and 1994 and the nine month period ended
September 30, 1993. The selected financial data were derived from audited
financial statements. The summary should be read in conjunction with financial
statements and notes thereto appearing elsewhere in this report.
<TABLE>
<CAPTION>
NINE MOS.
YEAR ENDED SEPTEMBER 30, ENDED
--------------------------------------------------
1997 1996 1995 1994 1993(1)
---- ---- ---- ---- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $48,417 $27,271 $ 33,031 $ 17,734 $ 6,575
Cost of sales 37,881 23,906 27,530 13,326 4,741
------ -------- -------- -------- -------
Gross profit 10,536 3,365 5,501 4,408 1,834
Operating expenses 16,753 19,936 27,042 33,809 5,894
Restructuring - 11,019 - - -
------ -------- -------- -------- -------
Loss from operations (6,217) (27,590) (21,541) (29,401) (4,060)
Net other income/(expense) 364 643 1,340 1,187 (12)
Royalty income 551 354 540 281 364
-------- ------- ---- -------- -------
Net loss $( 5,302) $(26,593) $(19,661) $(27,933) $(3,708)
Less-amortization of preferred stock
beneficial conversion discount (2,222) - - -
------ -------- -------- -------- -------
Loss applicable to common shares $(7,524) $(26,593) $(19,661) $(27,933) $(3,708)
-------- --------- --------- --------- --------
Net loss/Pro forma net loss per share (2) $ (0.24) $ (0.96) $ (0.84) $ (1.25) $ (0.18)
======== ======== ======== ========= =======
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995 1994(3) 1993
------ -------- -------- -------- -------
BALANCE SHEET DATA:
Working capital (deficiency) $39,033 $ 26,557 $ 25,930 $ 46,071 $ (361)
Total assets 57,553 41,939 54,747 61,242 14,749
Long-term debt - 1,500 10,000 -- 4,098
Owners equity 25,699 30,770 37,956 56,318 7,338
</TABLE>
(1) The Company has a fiscal year end of September 30.
(2) Pro forma net loss per common share for the nine month period ended
September 30, 1993 is unaudited and has been calculated based on
20,389,994 weighted shares outstanding for the period January 1, 1993
through September 30, 1993 and includes net losses of Telular Group
L.P. for the period from January 1, 1993 to May 13, 1993, and
thereafter for Telular Corporation. The pro forma net loss per common
share for the year ended September 30, 1994 is unaudited and has been
calculated based on 22,362,986 weighted shares outstanding. Common
and common equivalent shares issued during the twelve month period
prior to the January 27, 1994 IPO have been included as if they were
outstanding for all periods presented using the treasury stock method
and an IPO price of $20 per share.
(3) On January 27, 1994, the Company effected an IPO of 4,000,000 shares
of common stock. After underwriting discounts and commissions and
other expenses, proceeds to the Company were approximately
$56,414,000, and have a material effect on the comparability of the
information presented.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
INTRODUCTION
The Company designs, develops, manufactures and markets products based
on its proprietary interface technologies, which allows most standard wireline
customer premises equipment -- phones, facsimile machines, computer modems,
PBXs, and key systems, among others -- to operate over wireless
telecommunications networks. Currently, the Company is devoting a substantial
portion of its resources to international market development, extension of its
core product line to new wireless standards, expansion, protection and
licensing of its intellectual property rights, and development of underlying
radio technology.
The Company's operating expense levels are based in large part on
expectations of future revenues. If anticipated sales in any quarter do not
occur as expected, expenditure and inventory levels could be disproportionately
high, and the Company's operating results for that quarter, and potentially for
future quarters, could be adversely affected. Certain factors that could
significantly impact expected results are described in "Cautionary Statements
Pursuant to the Securities Litigation Reform Act" which is an exhibit to this
Form 10-K.
OVERVIEW
The Company has seen substantial growth in the market for FWTs in both
WLL and WAA systems. The Company encountered heightened activity during fiscal
1997 that gives it reason to believe that the FWT market is maturing beyond the
nascent stage. The Company quoted more contracts, shipped more product (78%
more than fiscal 1996) and observed more data that confirmed momentum in the
FWT market than during any previous period. The major trends driving the
market include a broad consumer acceptance of cellular communications, rapid
privatization of telecommunications in developed and developing countries,
adoption of digital wireless transmission standards that enhance network
capacity and service, service network providers' acceptance of FWTs as
cost-effective answers to customer demand for improved telecommunications and
PCS licensing that will drive down the price of wireless communications and
expand the number of users within the U.S. If these trends continue, they will
provide significant international and domestic opportunities.
WLL, which is the core of the Company's FWT business in developing
countries, involves cellular infrastructure employed predominately (and
sometimes exclusively) for the fixed location user. Continued growth of the
WLL market depends primarily on the pricing of WLL airtime service to the
customer relative to available wireline prices, the relative local availability
of WLL and wireline service, operator regulatory constraints on fixed cellular,
and money available in a given country. These factors have contributed
to the increase in the number of new WLL networks commissioned in 1997 compared
with the previous year. Because FWT deployment lags network commissioning, the
Company believes the "pent up" opportunity is even larger as FWT deployment
materializes on the networks previously commissioned.
WAA, which represents the majority of the Company's sales in developed
countries, has primarily involved wireless back-up of existing wireline systems
and where wireline service is unavailable or unreliable, using mobile cellular
networks built primarily for handheld cellular phone users. Management
anticipates that additional FWT markets for WAA applications will develop as
existing cellular networks mature and new networks and services are introduced.
As capacity and price competition increase on new and existing cellular
networks and the growth rate in new cellular phone subscribers slows, mobile
cellular operators will be forced to look for new revenue sources. FWTs
provide an excellent opportunity for cellular network operators as they are
less costly to support than mobile units (permanently linked to a specific cell
site), generate more average airtime and operate mainly at off-peak times. The
number of FWTs presently operating on WAA networks exceeds that of WLL and is
driven by the relative price for airtime, as well as by the large installed
base of mobile networks worldwide.
16
<PAGE> 17
The Company has a number of undertakings which embody its strategy to
capitalize on the growth it anticipates for FWTs. The Company added new
personnel in each of its international sales offices and will continue to
strengthen and build its sales and marketing organizations.
The Company's product development program is designed to result in a
line of FWTs over the next two years that will address the cellular radio
standards projected to serve 85% of all cellular subscribers in the year 2000.
In fiscal 1997, the Company raised approximately $19 million of capital, most
of which will be used for product development purposes. The Company also
consolidated and upgraded its manufacturing facilities in order to increase
working efficiencies between functions, improve quality, modernize equipment,
increase capacity and facilitate the introduction of new products.
During fiscal 1997, the Company's FWTs gained market position on the
following major radio standards:
Analog - While the overall FWT market is shifting from analog cellular
to digital cellular, there are many analog opportunities. Analog is
sometimes used to meet regulatory deadlines on new WLL deployments in
which the new digital infrastructure cannot be deployed fast enough.
Also, when new digital mobile networks are installed in urban areas,
the older analog infrastructure often is displaced and then redeployed
for WLL use in the surrounding suburban area. The Company is the
original supplier of analog FWTs and one of the few remaining analog
suppliers, enabling it to capture a sizeable share of all new analog
FWT business worldwide.
Digital GSM - Despite the historical importance of analog, most
planned FWT deployment in both WLL and WAA markets will be on one of
the various digital standards -GSM, CDMA, or TDMA. Digital is more
desirable than analog because it provides superior capacity, voice
privacy, higher transmission rates for fax and data, and additional
user services such as Caller ID and messaging. The Company's new GSM
900 FWT was introduced during fiscal 1997. It should allow the
Company to capture a fair share of the growth in the digital market.
The Company plans to introduce five new FWTs in fiscal 1998. These
include one analog FWT-the SX3 AMPS, and four digital FWTs-the SX2
TDMA, the SX2 CDMA, the SX2 DCS 1800 and the SX4 GSM 900. All of these will
operate from a common hardware/software platform, will cost less to make and
will have more features than the present versions.
17
<PAGE> 18
The Company spotted the beginning of a new trend in the WLL market
during the year. Previously, most FWTs used in WLL networks were sold by
infrastructure manufacturers who "bundled" the FWT/infrastructure for sale to
the WLL operator. Now, however, more savvy operators are buying infrastructure
and FWTs separately. The Company already has realized the initial benefits of
this trend with major new contracts with operators to supply FWTs in the
Philippines and Guinea.
Having reversed its strategy of not licensing its intellectual
property in fiscal 1996, the Company has been negotiating licenses with a
number of large international telecommunications companies. The Company has
agreed to provide component circuit boards to QUALCOMM Incorporated. In
October, 1997, the Company signed a Memorandum of Understanding with Ericcson
Radio Systems AB to license certain of its technology for use in Ericcson
products.
It is inevitable in growing markets with huge potential that
competition will increase. Accordingly, a few infrastructure suppliers
introduced FWTs during the year. The Company believes its advantages over
industry competition include:
Better focus/commitment - In the WLL market, the Company's only
business is FWTs. Most often, competitors sell FWTs to support their
infrastructure business.
More experience - The Company has been in the FWT business for eleven
years.
Broader product line - The Company offer FWTs that operate on all
major non-proprietary radio standards.
RESTRUCTURING AND ORGANIZATIONAL CHANGES
On January 22, 1996, the Company announced a restructuring program
(the "restructuring program") which was implemented during the second and third
quarters of fiscal 1996. The difficulty in predicting demand for the Company's
products, due in part to immature foreign markets, underscored the importance
of properly aligning costs and expenses to attainable levels of revenue.
Manufacturing and engineering consolidation, outsourcing and the elimination of
non-core product lines were the focus of the restructuring. The Company's
Puerto Rico and Buffalo Grove manufacturing operations were phased out during
the second fiscal quarter of fiscal 1996, and production was consolidated at
the Company's Atlanta, Georgia facility (Apart from the restructuring, the
Company further consolidated and moved its offices and operations to Vernon
Hills, Illinois during 1997). The restructuring program reduced general,
administrative and manufacturing costs Company-wide. The number of employees
decreased from over 250 to 110 during fiscal 1996. Restructuring and
impairment charges were incurred during the second and third quarters of fiscal
1996. Restructuring charges were approximately $6.7 million and consisted of
intangible, inventory and fixed asset write-offs as well as severance payments
to employees separated from the Company. The Company will experience
approximately $1.2 million in reduced amortization charges in each of the next
five years as the result of intangible assets written off as restructuring or
impairment charges.
In addition, impairment charges of $4.3 million were recorded, which
represented specific intangibles that were determined to be impaired based on
estimated cash flows over the remaining business life cycle of the related
assets. Events related to a change in management and the corresponding change
in business direction, and the restructuring plan prompted the evaluation of
these intangibles.
CONSOLIDATION OF MANUFACTURING
The Company signed a lease in December 1996 for a 72,000 square foot
facility located in Vernon Hills, Illinois, which is in the metropolitan
Chicago area. During fiscal 1997, the Company consolidated most operations,
excluding certain sales offices, into the Vernon Hills facility. This move
situated engineering, marketing and manufacturing resources in close proximity
to one another. This effort has increased the overall quality of manufactured
products and will speed the delivery of new products to market.
18
<PAGE> 19
SALES AND MARKETING
The Company strengthened and rebuilt its sales and marketing
organizations in fiscal 1997. The Company's sales increased 78% during fiscal
1997 (see Results of Operations - Fiscal 1997 Compared to Fiscal 1996). New
sales personnel have been added and more will be hired for each international
sales region to meet anticipated demand. The Company launched an OEM sales
organization during fiscal 1997. The OEM segment manages the licensing of
technology, sales of components and finished goods components to original
equipment manufacturers and joint ventures. The Company hired and has plans to
hire additional marketing personnel to coordinate product development and
market opportunities.
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. For the year ended September 30, 1997, net sales increased
approximately 78% to $48.4 million from $27.3 million in fiscal 1996. Sales of
FWTs increased approximately 96% to $39.7 million in fiscal 1997, due to an
increase by $15.3 million of shipments to the WLL project in Hungary, as well
as a 28% increase in other than Hungary FWT business during fiscal 1997. Sales
of WAS products increased 26% to $8.8 million in 1997.
Gross Profit. Gross profit for the year ended September 30, 1997,
increased to 22% from 12% in 1996. This increase was primarily attributable to
$2.5 million in inventory charges incurred during the second fiscal quarter of
1996. The charges were related to the closing of the Company's Puerto Rico
operation.
Engineering and Development Expenses. Engineering and development
expenses of $6.0 million increased 23% compared to 1996, which resulted from
the Company's increased focus on developing analog and digital FWTs that will
operate on additional radio standards.
Selling and Marketing Expenses. Selling and marketing expenses
decreased 28% compared to 1996. The Company, as part of the restructuring
program, realigned its worldwide sales organization during fiscal 1996. Lower
levels of selling and marketing expense were maintained in fiscal 1997.
General and Administrative Expenses (G&A). G&A decreased 13% compared
to 1996. The decrease is essentially attributable to the reduction or
elimination of expenditures, primarily through headcount reductions, achieved
through the restructuring program implemented during the second and third
fiscal quarters of fiscal 1996. Lower levels of G&A expense were maintained in
fiscal 1997.
Allowance for Doubtful Accounts. The allowance for doubtful account
expense decreased primarily due to the collection of $0.5 million account
receivable from one customer that was fully reserved for during fiscal year
1996 and an improvement in the Company's collection experience.
Amortization Charges. Amortization charges decreased by 43% compared
to 1996. Intangible assets written off as part of restructuring and impairment
charges during the third quarter of fiscal 1996 significantly reduced related
amortization charges. The write-off reduced the intangible asset balance and
related amortization charges in fiscal 1997 compared to fiscal 1996.
Other Income (Expense). Other income for the year ended September 30,
1997 decreased by approximately $0.1 million compared to 1996. This decrease
was primarily the result of lower royalty income, which was offset by higher
interest income as cash balances in interest bearing accounts were higher in
1997 compared to 1996.
Net Loss. The fiscal 1997 loss of $5.3 million compares to a loss of
$26.6 million in fiscal 1996, an improvement of 80%. The improvement in fiscal
1997 resulted from increased net sales and gross margins and lower operating
expenses. The fiscal 1996 net loss included restructuring and impairment
charges of $11.0 million.
Loss applicable to common shares. After giving effect to amortization
of the preferred stock beneficial conversion discount (see financial statement
footnote 10) of $2.2 million for fiscal 1997, loss applicable to common shares
of $7.5 million or ($0.24) per share, compares to loss applicable to common
shares of $26.6 million or ($0.96) per share for fiscal 1996.
19
<PAGE> 20
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. For the year ended September 30, 1996, net sales decreased
17% compared to 1995. Through the first three-quarters of 1996, sales were
down more than 40% compared to 1995. With the exception of Asia and sales of
WAS products domestically, the Company experienced lower sales in all other
regions compared to fiscal 1995. Specifically, sales in 1996 were lower due to
large non-recurring orders in Latin America during 1995 and returns during the
first fiscal quarter of 1996 of GSM PHONECELL(R) product. Sales rose
significantly during the fourth quarter to $13.9 million or more than 50% of
total 1996 revenues. The Company began to ship significant volumes to Motorola
for the WLL project in Hungary, which represented approximately 40% of the
fourth quarter sales. Sales of FWTs to the Asian, European, Middle Eastern and
African regions and of WAS products also increased substantially during the
fourth quarter.
Gross Profit. Gross profit for the year ended September 30, 1996,
decreased 39% over the same period in 1995. This decrease was primarily
attributable to $2.5 million in inventory charges incurred during the second
fiscal quarter of 1996. The charges were related to the closing of the
Company's Puerto Rico operation. Excluding the inventory charges, gross profit
increased in 1996 to 21% from 17% in 1995.
Selling and Marketing Expenses. Selling and marketing expenses
decreased 37% compared to 1995. The Company, as part of the restructuring
program, realigned its worldwide sales organization during fiscal 1996. In
addition, the sales support functions were consolidated during fiscal 1995 and
1996, which resulted in the closing of the Company's sales support office in
Memphis and the execution of a domestic, non-exclusive master distribution
agreement with a related party.
General and Administrative Expenses (G&A). G&A decreased 34% compared
to 1995. The decrease is essentially attributable to the reduction or
elimination of expenditures, primarily through headcount reductions, achieved
through a restructuring program implemented during the second and third fiscal
quarters of fiscal 1996.
Allowance for Doubtful Accounts. The allowance for doubtful account
expense increased 210% compared to 1995. The increase principally reflected
$0.5 million reserved during the third quarter of fiscal 1996 for a trade
receivable due from one customer.
Amortization Charges. Amortization charges increased by 11% compared
to 1995. Although a substantial amount of intangible assets were written off
as part of the aforementioned restructuring and impairment charges during 1995,
amortization charges increased primarily due to deferred financing costs,
related to debentures issued during the year.
Other Income (Expense). Other income for the year ended September 30,
1996 decreased by $0.9 million compared to 1995. This decrease was primarily
the result of lower interest income as cash balances in interest bearing
accounts were lower in 1996 compared to 1995 and lower royalty income.
Net Loss. The 1996 loss, net of restructuring and impairment charges,
was $15.6 million or ($0.56) per share, compared to a net loss of $19.7
million, or ($0.84) per share in 1995. The net loss for the year ended
September 1996, inclusive of restructuring and impairment charges, totaled
$26.6 million, or ($0.96) per share.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $28.5 million in cash and cash
equivalents and working capital of $39.0 million.
Cash provided by operations was $0.5 million for the year ended
September 30, 1997, compared to $15.0 million cash used during the same fiscal
period last year due primarily to reduced operating losses.
Cash used for capital expenditures and other investing activities was
approximately $3.6 million for the year ended September 30, 1997 compared to
$1.7 million for the same fiscal period last year. In January 1997 and in
August 1997, the Company increased its investment in WD by approximately $0.7
million and $0.5 million, respectively. The additional investments, comprised
of cash totaling $500,000 and 150,000 shares of the Company's common stock
raised the Company's stake in WD to 50%. The Company spent approximately $2.6
million in capital expenditures during fiscal 1997, primarily for leasehold
improvements and production/engineering equipment for new products.
20
<PAGE> 21
Financing activities provided $18.7 million during fiscal 1997,
compared to $7.9 million during fiscal period in 1996. The current period
amount reflects the issuance of redeemable preferred stock, $18.8 million; the
sale of stock through the Company's stock option plan, $0.3 million; and
deferred financing costs, ($0.4) million. In the prior year, the Company
raised $7.9 million from the sale of convertible debentures, net of payments
against the Company's revolving line of credit (see below).
On April 23, 1997, the Company entered into a Loan and Security
Agreement with Sanwa Business Credit Corporation that, among other things,
provides a credit facility with a loan limit of $20.0 million (the "Loan").
Borrowings under the Loan are subject to borrowing base requirements and other
restrictions. Under the Loan and Security Agreement, the Company is required
to comply with certain affirmative and negative covenants. The Loan matures on
April 23, 2000. As of September 30, 1997, the Company's borrowing capacity
under the Loan provisions was $11.3 million although there have been no
borrowings and none are contemplated in the near-term. This facility replaces
a Loan and Security Agreement with LaSalle National Bank that, among other
things, provided a credit facility with a loan limit of up to $20.0 million.
That agreement, which terminated on May 1, 1997, required the Company to
maintain a $10.0 million compensating balance.
During the third fiscal quarter of 1997, the Company issued 20,000
shares (10,000 shares April 16, 1997 and 10,000 shares on June 6, 1997) of
Series A Convertible Preferred Stock (the "Preferred Stock") for $18.8 million
which is net of issuance cost of $1.2 million. The Preferred Stock
automatically converts to common stock on April 16, 1999, or October 16, 1999,
depending on the conversion price and includes the equivalent of a 5% annual
stock dividend. Holders of the Preferred Stock are entitled, at their option,
subject to trading volume and other restrictions, to convert Preferred Stock
into shares of common stock using defined conversion formulas based on the
NASDAQ closing bid prices for the Company's common stock. In addition, the
holders have the option to redeem the Preferred Stock upon the occurrence of a
(i) consolidation or merger with another company; (ii) sale or transfer of
substantially all assets; or (iii) 50% change in ownership. The redemption
price upon holder redemption is the greater of $1,250 per share and the cash
equivalent of the defined conversion formula on the date of redemption. The
Company is entitled to require the holders to convert the Preferred Stock and
accrued dividends into shares of common stock of the Company using a defined
conversion formula based upon the NASDAQ closing bid prices for the Company's
common stock. In addition, the Company has the right to redeem the Preferred
Stock after April 15, 1999 for $1,200 per share plus 120% of the accrued
dividends. Holders of the Preferred Stock are not entitled to vote on matters
submitted for vote to the stockholders of the Company.
The Preferred Stock reflects a beneficial conversion feature that
allows holders to convert the security to common stock of the Company at a
discount. The amount of the discount is determined using NASDAQ closing bid
prices for the Company's common stock. During the year, the Company recorded
$2.2 million of amortization of preferred stock beneficial conversion discount.
The offset entry to amortization of preferred stock beneficial conversion
discount increased redeemable preferred stock by $2.2 million. This amount
will accrete to the Company's common stock and additional paid in capital
accounts as shares of redeemable preferred stock are converted into shares of
common stock of the Company. No shares of Preferred Stock were converted to
common stock as of September 30, 1997.
The Company will use much of the capital recently raised to fund new
product development. Beyond its specific research and product development
needs, expected future uses of cash include working capital requirements,
marketing and sales support programs in anticipation of future revenues and
certain capital expenditures. Based upon its current operating plan, the
Company believes its existing capital resources, including the credit facility
and proceeds from the issuance of Preferred Stock, should enable it to maintain
its current and planned operations. Cash requirements may vary and are
difficult to predict given the nature of the developing markets targeted by the
Company. The amount of royalty income from the Company's licensees is
unpredictable, but could have an impact on the Company's actual cash flow.
The Company requires letters of credit or qualification for export
credit insurance underwritten by third party credit insurance companies or the
Export-Import Bank of the United States on a substantial portion of its
international sales orders. Also, to mitigate the effects of currency
fluctuations on the Company's results of operations, the Company endeavors to
conduct all of its international transactions in U.S. dollars. To date, the
Company's sales have not been adversely affected by currency fluctuations;
however, as the Company's international operations grow, foreign exchange or
the inflation of a foreign currency may pose greater risks for the Company, and
the Company may be required to develop and implement additional strategies to
manage these risks.
21
<PAGE> 22
FORWARD LOOKING INFORMATION
Statements contained in this filing, other than historical statements,
consist of forward looking information. The Company's actual results may vary
considerably from those discussed in this filing as a result of various risks
and uncertainties. For example, there are a number of uncertainties as to the
degree and duration of the revenue momentum, which could impact the Company's
ability to be profitable as lower sales may likely result in lower margins. In
addition, product development expenditures, which are expected to benefit
future periods, are likely to have a negative impact on near term earnings.
Other risks and uncertainties, which are discussed in Exhibit 99 to this
filing, include the risk that technological change will render the Company's
technology obsolete, the risk of litigation, the Company's ability to develop
new products, the Company's dependence on contractors and Motorola, the
Company's ability to maintain quality control, the risk of doing
business in developing markets, the Company's dependence on research and
development, the uncertainty of additional funding, the potential for
redemption of preferred stock, the effects of control by existing shareholders,
the effect of changes in management, intense industry competition, and
uncertainty in the development of wireless service generally.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<S> <C> <C>
1. THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART II, ITEM 8 OF THIS FORM 10-K.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . 24
Consolidated Balance Sheets as of September 30, 1997 and 1996 . . . . . . . . . . 25
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Equity for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . 28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 29
</TABLE>
23
<PAGE> 24
Report of Independent Auditors
The Board of Directors
Telular Corporation
We have audited the accompanying consolidated balance sheets of Telular
Corporation as of September 30, 1997 and 1996, and the related consolidated
statements of operations, equity, and cash flows for each of the three years in
the period ended September 30, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14a. These financial statements
and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Telular Corporation at September 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
November 7, 1997,
except for the second paragraph of Note 6, as to which the date is
November 12, 1997
24
<PAGE> 25
Telular Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 28,451 $ 12,838
Receivables:
Trade, less an allowance for doubtful accounts of $426 and
$900 at September 30, 1997 and 1996, respectively 6,527 6,328
Related parties 4,670 4,088
-----------------------------
11,197 10,416
Inventories, net 9,431 12,792
Prepaid expenses and other current assets 500 181
-----------------------------
Total current assets 49,579 36,227
Property and equipment, net 3,611 2,325
Other assets:
Intangible assets, net 461 180
Investment in affiliate 3,851 3,146
Deposits and other 51 61
-----------------------------
4,363 3,387
-----------------------------
Total assets $ 57,553 $ 41,939
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ - $ -
Accounts payable:
Trade 3,764 1,794
Related parties 3,640 6,283
Accrued liabilities 3,142 1,592
-----------------------------
Total current liabilities 10,546 9,669
Convertible debentures - 1,500
Commitments and contingencies - -
-----------------------------
Total liabilities 10,546 11,169
Redeemable Preferred Stock:
Series A convertible preferred stock, $.01 par value; $20,386
liquidation preference at September 30, 1997; 21,000 shares
authorized at September 30, 1997; 20,000 shares outstanding
at September 30, 1997 21,308 -
Stockholders' equity:
Preferred stock, $.01 par value; 9,979,000 and 10,000,000
shares authorized at September 30, 1997 and 1996; none
outstanding - -
Common stock, $.01 par value; 40,000,000 shares authorized;
31,684,073 and 31,016,675 outstanding, at September 30, 1997
and 1996, respectively 322 316
Additional paid-in capital 111,143 108,311
Deficit (84,159) (76,250)
Treasury stock, 560,000 shares at cost (1,607) (1,607)
-----------------------------
Total stockholders' equity 25,699 30,770
-----------------------------
Total liabilities and stockholders' equity $ 57,553 $ 41,939
=============================
</TABLE>
See accompanying notes.
25
<PAGE> 26
Telular Corporation
Consolidated Statements of Operations
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Net sales to unrelated parties $27,227 $ 18,642 $ 28,627
Net sales to related parties 21,190 8,629 4,404
-------------------------------------------------
Total net sales 48,417 27,271 33,031
Cost of sales 37,881 23,906 27,530
-------------------------------------------------
10,536 3,365 5,501
Engineering 6,007 4,888 5,765
Selling 4,510 6,254 9,848
General and administrative 5,863 6,754 10,159
Provision for (recovery of) doubtful accounts (231) 974 314
Amortization 604 1,066 956
Restructuring and impairment charges - 11,019 -
-------------------------------------------------
Loss from operations (6,217) (27,590) (21,541)
Other income (expense):
Interest income 1,009 936 1,340
Royalty income 55 2 30
Royalty income from related parties 496 644 800
Interest expense (47) (293) -
Interest expense to related parties - - (12)
Equity in net loss of investments in
affiliates (204) (41) -
Other (394) (251) (277)
-------------------------------------------------
915 997 1,881
-------------------------------------------------
Net loss (5,302) (26,593) (19,660)
Less: amortization of redeemable preferred
stock beneficial conversion discount (2,222) - -
-------------------------------------------------
Loss applicable to common shares $ (7,524) $(26,593) $(19,660)
=================================================
Net loss per common share $ (.24) $ (.96) $ (.84)
=================================================
Weighted-average number of common shares
outstanding 31,507,622 27,655,964 23,340,706
</TABLE>
See accompanying notes.
26
<PAGE> 27
Telular Corporation
Consolidated Statements of Equity
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT STOCK EQUITY
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994 $ - $237 $ 87,684 $(29,997) $(1,607) $56,317
Proceeds from issuances of common
stock - 4 689 - - 693
Stock issued for services
rendered - 1 604 - - 605
Net loss for year ended September
30, 1995 - - - (19,660) - (19,660)
--------------------------------------------------------------------------
Balance at September 30, 1995 - 242 88,977 (49,657) (1,607) 37,955
Proceeds from issuances of common
stock 4 551 - - 555
Conversion of debentures into
6,655,315 shares of common stock - 67 16,598 - - 16,665
Stock issued in connection with
the investment in Wireless Domain - 3 2,185 - - 2,188
Net loss for year ended September
30, 1996 - - - (26,593) - (26,593)
--------------------------------------------------------------------------
Balance at September 30, 1996 - 316 108,311 (76,250) (1,607) 30,770
Proceeds from issuances of common
stock - 1 329 - - 330
Conversion of debentures into
378,200 shares of common stock 4 1,551 1,555
Stock issued in connection with
the investment in Wireless Domain - 1 694 - - 695
Amortization of redeemable
preferred stock beneficial
conversion discount - - - (2,222) - (2,222)
Dividends on redeemable preferred
stock - - - (385) - (385)
Stock issued for services
rendered - - 258 - - 258
Net loss for year ended September
30, 1997 - - - (5,302) - (5,302)
--------------------------------------------------------------------------
Balance at September 30, 1997 $ - $322 $111,143 $(84,159) $(1,607) $25,699
==========================================================================
</TABLE>
See accompanying notes.
27
<PAGE> 28
Telular Corporation
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,302) $(26,593) $(19,660)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,016 1,064 1,329
Amortization 604 1,066 956
Inventory obsolescence expense - 2,958 736
Compensation expense related to stock options
and grants 202 99 129
Interest on debentures 55 209 -
Common stock issued for services - - 606
Restructuring and impairment charges 319 9,839 -
Equity in net loss of investments 204 41 -
Loss on disposal of property and equipment - 16 -
Changes in assets and liabilities:
Receivables (199) (545) (1,452)
Related parties (3,225) 4,029 (1,437)
Inventories 3,361 (4,782) (3,363)
Prepaid expenses, deposits, and other (35) 216 7
Accounts payable 1,970 (1,363) (386)
Accrued liabilities 1,550 (1,207) 1,712
------------------------------------------------
Net cash provided by (used in) operating activities 520 (14,953) (20,823)
INVESTING ACTIVITIES
Investment in Wireless Domain (500) (1,000) -
Acquisition of property and equipment (2,620) (1,267) (1,197)
Acquisition of licenses and technology (525) - (3,180)
Proceeds from disposal of equipment - 561 -
------------------------------------------------
Net cash used in investing activities (3,645) (1,706) (4,377)
FINANCING ACTIVITIES
Proceeds from issuances of common stock 278 459 564
Revolving line of credit - (10,000) 10,000
Proceeds from issuance of redeemable preferred stock 18,808 - -
Proceeds from convertible debentures - 18,000 -
Payment of deferred financing costs (348) (515) -
------------------------------------------------
Net cash provided by financing activities 18,738 7,944 10,564
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,613 (8,715) (14,636)
Cash and cash equivalents, beginning of period 12,838 21,553 36,189
------------------------------------------------
Cash and cash equivalents, end of period $28,451 $ 12,838 $ 21,553
================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid - Principally to related parties in 1995 $ 47 $ 84 $ 13
================================================
</TABLE>
See accompanying notes.
28
<PAGE> 29
Telular Corporation
Notes to Consolidated Financial Statements
(In Thousands, Except Share Data)
1. DESCRIPTION OF BUSINESS
Telular Corporation (the Company), operates in a single line of business and
designs, engineers, and manufactures component elements and complete
telecommunications equipment assemblies and other complementary products and
markets such products domestically and internationally by sale, lease, or
license.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Adcor-Telular Security Products (Adcor) and
Telular International, Inc. (International). All significant intercompany
balances and transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments which have maturities of
three months or less from the date of purchase.
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Credit risks with respect to trade receivables are limited due to the diversity
of customers comprising the Company's customer base. The Company performs
ongoing credit evaluations and charges uncollectible amounts to operations when
they are determined to be uncollectible.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
29
<PAGE> 30
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The Company will adopt Financial Accounting Standards Board SFAS No. 128
"Earnings Per Share," effective December 15, 1997. SFAS No. 128 requires the
calculation of basic earnings per share, which is computed by dividing net
income by the weighted-average number of shares of common stock outstanding
during the period and diluted earnings per common share, which is computed
using the weighted-average number of shares of common stock, common stock
equivalents, and any other dilutive securities. Adoption of the new statement
is not expected to have a material impact on the earnings per share amounts
presently reported in the financial statements.
RECLASSIFICATIONS
Certain amounts in the September 30, 1995 and 1996 financial statements have
been reclassified to conform to the September 30, 1997 presentation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using straight-line and accelerated methods for financial reporting
purposes.
INVESTMENTS
Investments in certain affiliates owned 50% or less are accounted for under the
equity method of accounting.
INCOME TAXES
Financial Accounting Standards Board SFAS No. 109 requires that the liability
method be used in accounting for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws in effect at the date of the financial statements.
INTANGIBLE ASSETS
Intangible assets consist primarily of license and technology agreements which
are being amortized over the lives of the related agreements using the
straight-line method.
30
<PAGE> 31
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The excess of cost over fair value of net assets acquired (goodwill) was
amortized based on the straight-line method over the assets' estimated useful
lives, which ranged from eight to ten years (see Note 5).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
DEFERRED FINANCING COSTS
During the year ended September 30, 1996, financing costs incurred to issue the
convertible debentures, totaling $515, were capitalized and were amortized from
the date of issuance to December 1996 (the date that the last of the debentures
was converted). During the year ended September 30, 1997, financing costs
incurred related to the revolving line of credit were $348. These costs are
being amortized over 36 months using the straight-line method. During the
years ended September 30, 1997 and 1996, total amortization of deferred
financing costs were $73 and $481, respectively.
STOCK-BASED COMPENSATION EXPENSE
The Company recognizes stock-based compensation expense using Accounting
Principles Board Opinion No. 25 (APB No. 25), which is based on the excess of
the fair value of the stock on the measurement date, which is the grant date
for stock options, over the exercise price of options granted to employees.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" (Statement 123). This statement
encourages companies to record compensation costs for stock options granted to
employees on the date of grant based on the fair value of these options.
Alternatively, it allows companies to continue to measure compensation based on
the difference between the option exercise price and the fair market value on
the date of grant. The Company has elected to continue measuring compensation
under APB No. 25.
31
<PAGE> 32
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reported in the statement of financial position for
receivables, revolving line of credit, and accounts payable approximate their
fair values at September 30, 1997 and 1996.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
--------------------------
<S> <C> <C>
Raw materials $6,344 $11,196
Work in process 455 467
Finished goods 3,155 2,328
--------------------------
9,954 13,991
Less: Reserve for obsolescence 523 1,199
--------------------------
$9,431 $12,792
==========================
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-------------------------
<S> <C> <C>
Computer equipment $1,809 $1,539
Shop equipment 2,209 1,614
Office equipment 636 462
Automobiles 21 31
Leasehold improvements 907 455
Security equipment held for rent 328 271
Construction in progress 352 -
-------------------------
6,262 4,372
Less: Accumulated depreciation 2,651 2,047
-------------------------
$3,611 $2,325
=========================
</TABLE>
32
<PAGE> 33
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
5. WRITE-DOWN OF INTANGIBLE ASSETS
During the year ended September 30, 1996, the carrying value of goodwill was
determined to be impaired based on the estimated undiscounted cash flow of the
related businesses over the remaining life of the goodwill. Events relating to
a change in management and the corresponding change in business direction and
the restructuring plan (see Note 12) prompted the evaluation of these
intangibles. During the year ending September 30, 1996, impairment charges of
approximately $4,812 were included in restructuring and impairment charges.
As part of the restructuring plan (see Note 12), the Company decided to
discontinue the manufacturing and marketing of products under a certain license
agreement. As a result, during the year ended September 30, 1996, the
remaining unamortized asset of approximately $2,530 was written off and was
included in restructuring and impairment charges.
6. INVESTMENT IN WIRELESS DOMAIN INCORPORATED (FORMERLY TELEPATH CORPORATION)
On June 28, 1996, the Company entered into an agreement and acquired a 33%
interest in Wireless Domain Incorporated (WD) in exchange for $1 million in
cash and common stock of the Company valued at approximately $2.2 million.
During the year ended September 30, 1997, the Company increased its equity
position in WD to 50% by purchasing an additional 17% of WD in exchange for
$500 in cash and 150,000 shares of common stock valued at $695. Under the
agreement, the Company purchases various product development services from WD.
The difference between the carrying amount of the Company's equity interest in
the net assets of WD, $2,766, is being amortized over ten years using the
straight-line method.
On November 10, 1997, the Company acquired the remaining 50% of WD in exchange
for one million shares of common stock. This acquisition will be accounted for
using the purchase method of accounting.
7. INCOME TAXES
At September 30, 1997, the Company has net operating loss carryforwards of
approximately $74,268 for income tax purposes that begin expiring in 2008.
33
<PAGE> 34
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
-----------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for inventories $ 203 $ 465
Allowance for doubtful accounts 165 349
Certain intangible assets 3,565 3,973
Other 468 336
Research and development tax credit 121 241
Net operating loss carryforwards 28,816 26,924
-----------------------------
Total deferred tax assets 33,338 32,288
Valuation allowance 33,338 32,288
-----------------------------
Net deferred tax assets $ - $ -
=============================
</TABLE>
The valuation allowance has increased by $1,050 during the year ended September
30, 1997, due principally to the increase in the net operating loss
carryforwards in 1997.
Based on the Internal Revenue Code and changes in the ownership of the Company,
utilization of the net operating loss carryforwards may be subject to annual
limitations.
8. REVOLVING LINE OF CREDIT
On April 23, 1997, the Company entered into a Loan and Security Agreement with
Sanwa Business Credit Corporation that, among other things, provides a
revolving credit facility with a loan limit of $20,000 (the Loan). Borrowings
under the Loan are limited to certain percentages and amounts of accounts
receivable and inventories. The Loan requires the Company to maintain a $4,000
compensating balance; beginning with the second fiscal quarter of 1998, this
compensating balance requirement may be waived based upon attainment of
specified tangible net worth levels. At September 30, 1997, the Company had
approximately $11.4 million in available borrowings under this agreement.
Under the Loan and Security Agreement, the Company is restricted from making
certain dividend payments and is required to comply with certain affirmative
and negative covenants. The Loan matures on April 23, 2000. At the Company's
election, the Loan carries interest at the bank's prime rate plus 1.0%
34
<PAGE> 35
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
8. REVOLVING LINE OF CREDIT (CONTINUED)
or the Eurodollar rate (Libor) plus 3.00%. The Company has not
borrowed any amounts pursuant to the loan as of September 30, 1997.
9. CONVERTIBLE DEBENTURES
On December 11, 1995, the Company issued $18 million in convertible debentures
(the Debentures) at 4% per annum. The Debentures were issued under the
provisions of Regulation S as promulgated under the United States Securities
Act of 1933, as amended. Holders of the Debentures were entitled, at their
option any time after issuance until December 10, 1997, to convert principal
and interest accrued thereon, in whole or in part, into shares of common stock
using defined conversion formulas based on NASDAQ closing bids for the
Company's common stock. The Company is entitled, at its option any time
commencing one year after issuance (and under certain circumstances prior to
that date) through maturity, to require the holders to convert the principal
and accrued interest into shares of common stock of the Company using defined
conversion formulas based on NASDAQ closing bids for the Company's common
stock. During the years ended September 30, 1997 and 1996, all convertible
debentures and accrued interest totaling $1,555 and $16,665 were converted into
378,200 and 6,655,315 shares of common stock, respectively.
10. REDEEMABLE PREFERRED STOCK
During year ending September 30, 1997, the Company issued 20,000 shares (10,000
shares on April 16, 1997 and 10,000 shares on June 6, 1997) of Series A
Convertible Preferred Stock (the "Preferred Stock") for $18.8 million which is
net of issuance cost of $1.2 million. The Preferred Stock automatically
converts to Common Stock on April 16, 1999, or October 16, 1999, depending on
the conversion price and includes the equivalent of a 5% annual stock dividend
($385 at September 30, 1997). Holders of the Preferred Stock are entitled, at
their option, subject to trading volume and other restrictions, to convert
Preferred Stock into shares of Common Stock using defined conversion formulas
based on the NASDAQ closing bid prices for the Company's Common Stock. In
addition, the holders have the option to redeem the Preferred Stock upon the
occurrence of a: (i) consolidation or merger with another company; (ii) sale
or transfer of substantially all assets; or (iii) 50% change in ownership. The
redemption price upon holder redemption is the greater of $1,250 per share or
the cash equivalent of the defined conversion formula on the date redemption.
The Company is entitled to require the holders to convert the Preferred Stock
and accrued dividends into shares of common stock of the Company using a
defined conversion formula based upon the NASDAQ closing bid prices for the
35
<PAGE> 36
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
10. REDEEMABLE PREFERRED STOCK (CONTINUED)
Company's common stock. In addition, the Company has the right to
redeem the Preferred Stock after April 15, 1999, for $1,200 per share plus
120% of the accrued dividends. Holders of the Preferred Stock are not entitled
to vote on matters submitted for vote to the stockholders of the Company.
The Preferred Stock reflects a beneficial conversion feature that allows
holders to convert the security to common stock of the Company at a discount.
The amount of the discount is determined using NASDAQ closing bid prices for
the Company's common stock. During year ending September 30, 1997, the Company
recorded $2.2 million of amortization of preferred stock beneficial conversion
discount. The offset entry to amortization of preferred stock beneficial
conversion discount increased redeemable preferred stock by $2.2 million. This
amount will accrete to the Company's common stock and additional paid-in
capital accounts as shares of redeemable preferred stock are converted into
shares of common stock of the Company. No shares of Preferred Stock have been
converted to common stock as of September 30, 1997.
11. RELATED PARTY TRANSACTIONS
Pursuant to the terms of a 1993 Stock Purchase Agreement, the Company issued
and sold 3,824,240 shares of common stock to Motorola, Inc. (Motorola) in
exchange for cash proceeds of $11 million, access to specified services of
Motorola, and certain transceiver supply and pricing arrangements. Among other
things, the Stock Purchase Agreement contains restrictions on certain actions
that would adversely impair the rights of Motorola and on the sale of
additional Company stock to strategic investors, as defined. In connection
with this transaction, the patent cross-license agreement was amended to revise
the royalty due to Motorola for units leased, used, or sold and to reduce the
purchase price of certain products purchased by the Company from Motorola.
In addition, the Company has an agreement with Motorola, whereby the Company
will provide engineering services, at their typical rates, over a three-year
period ending November 10, 1998. For the years ended September 30, 1997 and
1996, payments received under this agreement were approximately $1,850 and
$1,000, respectively. The Company has also obtained a volume purchase
commitment, as defined, from Motorola over a three-year period commencing
January 1, 1996. Sales made to Motorola and its affiliates pursuant to this
purchase commitment were $21,190 and $6,000 during the fiscal years ended
September 30, 1997 and 1996.
36
<PAGE> 37
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to the terms of the patent license agreement with Motorola, the
Company receives a royalty for each unit leased, used, or sold by Motorola.
The agreement will remain in effect for the life of the patents by country,
unless it is terminated by either party in accordance with the terms of the
agreement. Pursuant to a technology transfer agreement with DNIC Brokerage Co.
(DNIC), the Company's predecessor, the Company remits the first $250 of
royalties received annually to DNIC. For the years ended September 30, 1997,
1996, and 1995, royalty income earned by the Company pursuant to the Motorola
agreement was approximately $496, $644, and $800, respectively.
A note receivable in the amount of $72 was entered into with a former officer
of the Company related to his exercise of an option to purchase 72,170 shares
of common stock during November 1993. This note was forgiven in accordance
with the officer's amended employment agreement entered into during the period
ended September 30, 1995.
On June 1, 1994, the Company entered into an agreement with Access Technologies
Group (ATG) that called for ATG to provide a variety of multimedia services to
the Company over an 18-month period commencing July 1, 1994. The estimated fee
of $300 was prepaid after the contract was signed contingent upon a 50% owner
of ATG joining the Company as an officer and ATG granting an option to the
Company to acquire 20% of ATG for $200. The Company did not exercise the
option, which expired in May 1995. The prepayment was fully utilized at
September 30, 1995. The officer, who no longer is employed by the Company,
subsequently reduced his ownership from 50% to 4% of ATG.
Net sales to related parties consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Motorola and affiliates $21,190 $8,586 $3,663
Telular Canada Inc. - 1 219
Global Data, Inc. - 42 522
--------------------------------------------------
$21,190 $8,629 $4,404
==================================================
</TABLE>
Accounts receivable from related parties consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1997 1996
----------------------------
<S> <C> <C>
Motorola and affiliates $4,670 $4,069
Global Data, Inc. - 20
----------------------------
$4,670 $4,089
============================
</TABLE>
37
<PAGE> 38
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
Purchases from Motorola totaled approximately $9,557, $12,983, and $11,006 for
the years ended September 30, 1997, 1996, and 1995, respectively. Purchases
from Wireless Domain totaled approximately $2,709 and $675 for the years ended
September 30, 1997 and 1996, respectively.
Accounts payable to Motorola, were approximately $3,449 and $6,197 for the
years ended September 30, 1997 and 1996, respectively. Accounts payable to
Wireless Domain were approximately $191 and $86 at September 30, 1997 and 1996,
respectively.
During the years ended September 30, 1996 and 1995, the Company incurred
expenses of approximately $50 and $239, respectively, for professional services
rendered by a firm controlled by a director of the Company. The Company and
the director's firm entered into an agreement, whereby the Company issued
shares of common stock in lieu of cash for services rendered during the period
January 1, 1995 through September 30, 1995. The Company issued 16,488 common
shares pursuant to the terms of this agreement. During the year ended
September 30, 1997, this individual ceased to be a director of the Company.
12. RESTRUCTURING AND IMPAIRMENT COSTS
On January 22, 1996, the Company announced a restructuring program which was
completed during the third quarter of fiscal 1996. The difficulty in
predicting demand for the Company's products, due in part to immature foreign
markets, underscored the importance of properly aligning costs and expenses to
attainable levels of revenue. Manufacturing and engineering consolidation,
outsourcing, and the elimination of noncore product lines were the focus of the
restructuring. The Company's Puerto Rico and Illinois manufacturing operations
were phased out during the second fiscal quarter of fiscal 1996, and production
was consolidated at the Company's Atlanta, Georgia, facility. The
restructuring program has reduced general, administrative, and manufacturing
costs Company-wide.
Restructuring charges related to the activities discussed above were
approximately $6,740 and consist of intangible ($3,062), inventory, and fixed
asset write-offs as well as severance payments to employees separated from the
Company. Restructuring payments were approximately $675 in fiscal 1996. These
charges are included in restructuring and impairment charges. See Note 5 for
discussion of impairment of intangibles assets.
38
<PAGE> 39
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
13. LEASES
The Company and its subsidiaries occupy certain facilities under lease
agreements and lease certain equipment under various agreements expiring
through December 31, 2003. Rent expense for the years ended September 30,
1997, 1996, and 1995 was approximately $596, $595, and $805, respectively.
Future minimum obligations under noncancelable operating leases are as follow:
<TABLE>
<S> <C>
1998 $ 573
1999 566
2000 547
2002 519
Thereafter 2,687
--------------
$4,892
==============
</TABLE>
14. CAPITAL STOCK AND STOCK OPTIONS
The Company has a Stock Incentive Plan (the Plan). Under the Plan, options to
purchase shares of common stock may be granted to all employees and employed
directors. Outside of the Plan, the Company has entered into stock option
agreements (the Non-Qualified Stock Option Agreements) with officers and key
employees of the Company.
Under the Non-Qualified Stock Option Agreements, certain employees were granted
options before the Company's 1994 initial public offering. These options were
granted at exercise prices, which range from $.93 to $6.93 per share, were
determined by the Board of Directors, and represented estimated fair market
values of the Company's common stock at the grant date. These options are
fully vested and, if not exercised or terminated, will terminate on the fifth
anniversary of the vesting date.
Under the Plan, certain officers and key employees have been granted stock
options. These options vest over two years, as defined in the agreement. Upon
termination of employment for any reason other than death or termination
without cause, any options that have not vested shall terminate. All options,
if not exercised or terminated, will terminate on the tenth anniversary of the
date of grant. The executive may purchase at any time less than the full
number of shares for which the option is then exercisable.
39
<PAGE> 40
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
14. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
Non-Qualified Stock Options have been granted to officers and all employees of
the Company pursuant to the Plan. These options will vest either immediately
or over a period of up to seven years, as defined in the agreement. All
options, if not exercised or terminated, will terminate either on the sixth or
the tenth anniversary of the date of grant as defined in the agreement.
Non-Qualified Stock Options have been granted to the independent directors of
the Company in lieu of compensation as directors and members of committees of
the Board of Directors which, if not exercised or terminated, will terminate on
the sixth anniversary date of grant.
In April 1996, the Company reset the exercise price on the options granted to
officers, all employees, and directors pursuant to the Plan. The revised
exercise price represented the fair value of the Company's stock as of April
17, 1996, and, accordingly, no compensation expense was recognized. In October
1997, the Company once again reset the exercise price for all outstanding
options. The revised exercise price represented the fair value of the
Company's stock as of October 28, 1997, and, accordingly, no compensation
expense was recognized.
Stock option activity, including Non-Qualified Stock Options, activity under
the Plan, and options granted to independent directors, is as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,399 $4.02 1,734 $6.58 1,858 $5.31
Granted 770 8.40 1,103 4.84 478 5.02
Exercised (427) 1.39 (361) 1.23 (47) 5.73
Canceled (8) 8.25 (618) 8.65 (511) 7.72
------------------------------------------------------------------------------
Outstanding at end of year 1,734 $6.58 1,858 $5.31 1,778 $4.56
==============================================================================
Exercisable at end of year 875 690 779
Exercise price range $0.93 - $18.00 $0.93 - $18.00 $0.93 -$13.00
</TABLE>
At September 30, 1997, 1,381 options had an exercise price between $4.50 and
$7.00 per share.
40
<PAGE> 41
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
14. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
A summary of the weighted-average fair value of options granted during 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE FAIR VALUE EXERCISE FAIR VALUE
PRICE OF OPTIONS PRICE OF OPTIONS
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options with exercise prices equal to
market price $5.19 $2.12 $5.56 $1.73
Options with exercise prices less than
market price 4.91 3.86 4.55 3.79
Options with exercise prices exceeding
market price 5.56 3.73 - -
</TABLE>
At September 30, 1997, the Company has reserved 3,000 shares of the Company's
common stock for issuance in connection with the Plan.
Pro forma information regarding net income and earnings per share is required
by Statement 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options granted subsequent to
October 1, 1995, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997
and 1996, risk-free interest rates of 6.5% and 6.3%, respectively, volatility
factor of the expected market price of the Company's common stock of 35%; a
weighted-average expected life of the options of four years; and no dividend
yield.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's option, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
41
<PAGE> 42
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
14. CAPITAL STOCK AND STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Pro forma net loss applicable to common shares
$(8,435) $(27,178)
Pro forma loss per common share (.27) (.98)
</TABLE>
15. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the years ended September 30, 1997, 1996,
and 1995, were approximately $5,698, $4,271, and $5,204, respectively.
16. MAJOR CUSTOMERS
For the years ended September 30, 1997 and 1996, the Company derived
approximately $21,190 (44%) and $8,600 (32%), of its net sales from one
customer, Motorola, of which approximately $4,690 and $4,100 was included in
accounts receivable at September 30, 1997 and 1996, respectively. During the
year ended September 30, 1995, no customers made up more than 10% of the
Company's net sales.
17. EXPORT SALES
Export sales were approximately $39,272, $12,872, and $22,383 for the years
ended September 30, 1997, 1995, and 1995, respectively. Export sales were
primarily to the Asian and European, Middle Eastern, and African (EMEA) regions
during the years ended September 30, 1997 and 1996, and to the Caribbean and
Latin American (CALA) and EMEA regions during the year ended September 30,
1995.
18. CONTINGENCIES
The Company is involved in legal proceedings which arise in the ordinary course
of its business. While any litigation contains an element of uncertainty,
based upon the opinion of the Company's counsel, management believes that the
outcome of such proceedings will not have a material adverse effect on the
Company's consolidated results of operations.
42
<PAGE> 43
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1997, 1996, and 1996 (in thousand, except share data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
--------------------------------------------------------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED 1997
Net sales $18,380 $11,417 $5,280 $13,340
Gross profit 4,583 2,837 530 2,586
Net income (loss) 740 (732) (3,973) (1,337)
Net income (loss) per common share .02 (.02) (.19) (.05)
FISCAL YEAR ENDED 1996
Net sales 4,028 4,574 4,750 13,919
Gross profit (loss) 286 (1,993) 1,178 3,894
Net income (loss) (5,230) (17,399) (4,495) 531
Net income (loss) per common share (.22) (.69) (.15) .02
FISCAL YEAR ENDED 1995
Net sales 6,820 8,209 8,656 9,346
Gross profit 1,395 1,416 1,847 844
Net loss (4,864) (4,063) (3,761) (6,973)
Net loss per common share (.21) (.17) (.16) (.30)
</TABLE>
The accumulation of fiscal 1996 quarterly net (loss) income per common share
does not equal the net loss per common share for the year ended September 30,
1996, due to the large number of shares issued in conjunction with the
conversion of debentures during the second and third quarters of fiscal 1996.
43
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Directors of the Company" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission on or before
December 29, 1997, which is incorporated herein.
The executive officers of the Company and their ages as of November
21, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Kenneth E. Millard . . . . . 50 Chief Executive Officer and President
Robert C. Montgomery . . . . 56 Executive Vice President and Chief Operating Officer
Daniel D. Giacopelli . . . . 39 Executive Vice President and Chief Technology Officer
Jeffrey L. Herrmann . . . . 32 Senior Vice President, Chief Financial Officer, Secretary
S.W.R. (Sandy) Moore. . . . 54 Senior Vice President, Strategic Alliances & OEM Sales
John F. Mitchell . . . . . . 38 Senior Vice President, Marketing
</TABLE>
Kenneth E. Millard, age 50, has served as a director, President and
Chief Executive Officer of the Company since April 1996. Mr. Millard served as
President and Chief Operating Officer of Oncor Communications, based in
Bethesda, Maryland. He worked for Ameritech from 1982 to 1992 where he served
as President and Chief Executive Officer of Michigan Bell Telephone Company
from 1989 to 1992. Prior to 1989, he held the positions of Senior
Vice-President of Corporate Strategy for three years and Senior Vice-President
and General Counsel of Ameritech for four years. From 1972 to 1982, Mr.
Millard worked for AT&T and Wisconsin Bell as an attorney.
Robert C. Montgomery, age 56, has served as director since October 28,
1997. He has been the Company's Executive Vice President and Chief Operating
Officer since 1996. Prior to that, Mr. Montgomery was President (and founder)
of Telular-Adcor Security Products, Inc., a company that was acquired by the
Company in 1993. Previously, Mr. Montgomery was a partner at McKinsey &
Company.
Dan Giacopelli, age 39, has served as director, Executive Vice
President and Chief Technology Officer of the Company since October 28, 1997.
Mr. Giacopelli founded and was President and Chief Executive Officer of
Wireless Domain, Incorporated from September 1995 to November 1997. Prior to
that time, Mr. Giacopelli was Director of Engineering of the Wireless Group of
Telephonics Corporation from 1987 to 1995. Prior to 1987, Mr. Giacopelli was
President and CEO of Valinor Electronics, Inc.
Jeffrey L. Herrmann, age 32, has served as Senior Vice President and
CFO, Secretary of the Company and Secretary of the Company's board of directors
since July 22, 1997. Mr. Herrmann had previously been Corporate Controller of
the Company since April, 1997. Prior to that Mr. Herrmann held a variety of
financial management positions with Bell & Howell Company (1994-1997) and R.R.
Donnelley & Sons Company (1992-1994). Mr. Herrmann began his career with
Arthur Andersen & Company in 1987.
S.W.R. (Sandy) Moore, age 54, has served as Senior Vice President,
Strategic Alliances & OEM Sales since December 1996. Mr. Moore served from
1991 to 1996 as President and CEO of Spectrix Corporation based in Deerfield,
Illinois. He worked for NovAtel Communications from 1988 to 1990 where he
served as President and COO during 1990. Prior to 1988 Mr. Moore spent 16
years with Northern Telecom in Senior Marketing and General Management
positions.
John F. Mitchell, age 38, has served as Senior Vice President,
Marketing for the Company since November 1997. Prior to that Mr. Mitchell was
Director of Marketing for the Company since October 1996. Prior to that Mr.
Mitchell was Product Marketing Manager of the Cellular Subscriber Sector of
Motorola since May 1992.
44
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Executive Compensation" in the
Company's definitive proxy statement for its 1998 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission on or before
December 29, 1997, which is incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for its 1998 Annual Meeting of Shareholders filed with the Securities and
Exchange Commission on or before December 29, 1997, which is incorporated
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3), reference is made to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 1998 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission on or
before December 29, 1997, which is incorporated herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. THE FOLLOWING FINANCIAL STATEMENTS ARE INCLUDED IN PART II,
ITEM 8 OF THIS FORM 10-K.
Report of Independent Auditors
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Operations for the years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Equity for the years ended
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
September 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. THE FOLLOWING SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 1997,
1996 AND 1995.
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
financial statements or notes thereto.
3. EXHIBITS.
<TABLE>
<CAPTION>
Number Description Reference
------- ----------- ---------
<S> <C> <C>
3.1 Certificate of Incorporation Filed as Exhibit 3.1 to
Registration
Statement
No. 33-72096
(the "Registration
Statement")
3.2 Amendment No. 1 to Certificate Filed as
of Incorporation Exhibit 3.2 to
the Registration
Statement
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C> <C>
3.3 Amendment No. 2 to Certificate File as
of Incorporation Exhibit 3.3 to
the Registration
Statement
3.4 By-Laws Filed as
Exhibit 3.4 to
the Registration
Statement
4.1 Loan Agreement with LaSalle Filed as Exhibit
National Bank and Amendment 4.1 to Form 10-K
thereto filed December 27, 1995
4.2 Debenture Agreements dated Filed as Exhibit
December 11, 1995 4.2 to Form 10-K
filed December
27, 1995
4.3 Certificate of Designations, Preferences, Filed as Exhibit 99.2
and Rights of Series A Convertible Preferred Form 8-K filed
Stock April 25, 1997
4.4 Loan and Security Agreement with Filed as Exhibit 4.2 to
Sanwa Business Credit Corporation Form 10-Q filed
August 14, 1997
10.1 Consulting Agreement with Filed as Exhibit
William L. De Nicolo 10.1 to the
Registration
Statement
10.2 Employment Agreement with Filed as Exhibit
Kenneth E. Millard 10.1 to Form 10-Q
filed August 14, 1996
10.3 Stock Option Agreement with Filed as Exhibit
Kenneth E. Millard 10.2 to Form 10-Q
filed August 14, 1996
10.4 Stock Purchase Agreement By Filed as Exhibit
and Among Telular Corporation 10.3 to Form 10-Q
and TelePath Corporation (which filed August 14, 1996
had changed its name to Wireless
Domain, Incorporated)
10.5 Appointment of Larry J. Ford Filed as Exhibit 10.2
to Form 10-Q filed
May 1, 1995
10.6 Option Agreement with Motorola Filed as Exhibit 10.6
dated November 10, 1995 to Form 10-K filed
December 26, 1996(1)
10.7 Stock Purchase Agreement Filed as Exhibit 10.11
between Motorola, Inc. and to the Registration
Telular Corporation dated Statement
September 20, 1993
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C>
10.8 Patent Cross License Agreement Filed as Exhibit 10.12
between Motorola, Inc. and the to the Registration
Company, dated March 23, 1990 Statement(1)
and Amendments No. 1, 2 and
3 thereto
10.9 Exclusive Distribution and Filed as Exhibit 10.14
Trademark License Agreement the Registration
between Telular Canada Inc. Statement(1)
and the Company, dated April 1,
1989, and Amendments thereto
10.10 Amended and Restated Shareholders Filed as Exhibit 10.15
Agreement dated November 2, 1993 to the Registration
Statement(1)
10.11 Amendment No. 1 to Amended and Filed as Exhibit 10.24
Restated Shareholders the Registration
Agreement, dated January 24, Statement
1994
10.12 Amendment No. 2 to Amended and Filed as Exhibit 10.5
Restated Shareholders Agreement, to the Form 10-Q filed
dated June 29, 1995 July 28, 1995
10.13 Amended and Restated Registration Filed as Exhibit 10.16
Rights Agreement dated November to the Registration
2, 1993 Statement
10.14 Amendment No. 1 to Amended and Filed as Exhibit 10.25
Restated Registration Rights to the Registration
Agreement, dated January 24, Statement
1994
10.15 Amended and Restated Employee Filed as Exhibit 10.17
Stock Option Plan to Form 10-K filed
December 26, 1996
10.16 Stock Option Grant to File as Exhibit 10.7
Independent Directors to Form 10-Q filed
July 28, 1995
10.17 Securities Purchase Agreement dated Filed as Exhibit 99.1 to
April 16, 1997, by and between Telular Form 8-K filed
Corporation and purchasers of the Series April 25, 1997
A Convertible Preferred Stock
10.18 Registration Rights Agreement dated Filed as Exhibit 99.3 to
April 16, 1997, by and between Telular Form 8-K filed
Corporation and purchasers of the Series April 25, 1997
A Convertible Preferred Stock
10.19 Securities Purchase Agreement dated Filed as Exhibit 99.3 to
June 6, 1997, by and between Telular Registration Statement on
Corporation and purchasers of the Series Form S-3, Registration
A Convertible Preferred Stock No. 333-27915, as amended
by Amendment No. 1 filed
June 13, 1997, and further
Amended by Amendment
No. 2 filed July 8, 1997
("Form S-3")
10.20 Registration Rights Agreement dated Filed as Exhibit 99.4 to
June 6, 1997, by and between Telular Form S-3
Corporation and purchasers of the Series
A Convertible Preferred Stock
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C> <C>
10.21 Agreement and Plan of Merger by and Attached hereto as
among Wireless Domain Incorporated Exhibit 10.21
(formerly TelePath), Telular-WD (a
wholly-owned subsidiary of Telular) and
certain stockholder of Wireless Domain
Incorporated
11 Statement regarding computation Filed herewith
of per share earnings
21 Subsidiaries of registrant Filed herewith
99 Cautionary Statements Pursuant to the Filed herewith
Securities Litigation Act of 1995
</TABLE>
(1) Confidential treatment granted with respect to redacted portions
of documents.
(b) REPORTS ON FORM 8-K
The Company filed (1) report on Form 8-K during the three months ended
September 30, 1997:
(i) On July 1, 1997, the Company reported a slowdown of shipments
to the Hungary project and the appointment of Jeffrey Herrmann
to Chief Financial Officer, and filed related documents.
(c) SEE EXHIBIT INDEX AND EXHIBITS ATTACHED TO THIS REPORT AND LISTED
UNDER ITEM 14(a)(3).
(d) FINANCIAL STATEMENTS SCHEDULES REQUIRED BY THIS ITEM ARE LISTED UNDER
ITEM 14(a)(2).
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Telular Corporation
Date: December 19, 1997 By: /s/ KENNETH E. MILLARD
-------------------------------
Kenneth E. Millard
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILLIAM L. DE NICOLO Chairman of the Board December 19, 1997
- ------------------------------------
William L. De Nicolo
/s/ KENNETH E. MILLARD President, Chief Executive December 19, 1997
- ------------------------------------ Officer and Director
Kenneth E. Millard
/s/ ROBERT C. MONTGOMERY Chief Operating Officer, Executive December 19, 1997
- -------------------------------------- Vice President and Director
Robert C. Montgomery
/s/ DANIEL D. GIACOPELLI Chief Technology Officer, Executive December 19, 1997
- ------------------------------------ Vice President and Director
Daniel D. Giacopelli
/s/ JEFFREY L. HERRMANN Chief Financial Officer, Secretary December 19, 1997
- ------------------------------------ and Senior Vice President
Jeffrey L. Herrmann
/s/ S.W.R. (SANDY) MOORE Senior Vice President, December 19, 1997
- ------------------------------------ Strategic Alliances and OEM Sales
S.W.R. (Sandy) Moore
/s/ JOHN F. MITCHELL Senior Vice President, Marketing December 19, 1997
- ------------------------------------
John F. Mitchell
/s/ JOHN E. BERNDT Director December 19, 1997
- ------------------------------------
John E. Berndt
/s/ LARRY J. FORD Director December 19, 1997
- ------------------------------------
Larry J. Ford
/s/ RICHARD D. HANING Director December 19, 1997
- ------------------------------------
Richard D. Haning
/s/ DAVID P. MIXER Director December 19, 1997
- ------------------------------------
David P. Mixer
</TABLE>
49
<PAGE> 50
SCHEDULE VIII
TELULAR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS---- DEDUCTIONS-- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
--------------- -------------- ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
PERIOD ENDED SEPTEMBER 30, 1997............
Accumulated Amortization of Intangible Assets $ 140 $ 531 $ - $ - $ 671
Valuation Allowance of Deferred Tax Asset 32,288 1,050 (3) - - 33,338
Allowance for Doubtful Accounts 900 - - (474) (5) 426
Inventory Reserve 1,199 (259) - (417) (6) 523
PERIOD ENDED SEPTEMBER 30, 1996............
Accumulated Amortization of Intangible Assets 1,909 7,926 (1) - (9,695) (2) 140
Valuation Allowance of Deferred Tax Asset 21,888 10,400 (3) - - 32,288
Allowance for Doubtful Accounts 218 974 - (292) (4) 900
Inventory Reserve 1,312 4,304 - (4,417) (6) 1,199
PERIOD ENDED SEPTEMBER 30, 1995............
Accumulated Amortization of Intangible Assets 952 956 - - 1,908
Valuation Allowance of Deferred Tax Asset 12,096 9,792 (3) - - 21,888
Allowance for Doubtful Accounts 216 319 - (317) (4) 218
Inventory Reserve 576 1,375 - (639) (6) 1,312
</TABLE>
(1) Approximately $7,341 represents assets written off as restructuring or
impairment charges.
(2) Amount represents assets fully amortized and netted against the
reserve during the period.
(3) Amount represents the valuation amount for deferred tax assets, which
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
(4) Bad debts written-off.
(5) Bad debts written-off $(242) and the release of a prior reserve due to
the collection of such reserved account $(231).
(6) Inventory disposed.
50
<PAGE> 1
Exhibit 10.21
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made
and entered into this 10th day of November, 1997, by and among WIRELESS DOMAIN
INCORPORATED, a New York corporation ("Wireless Domain"), TELULAR-WD
CORPORATION, a New York corporation ("TWD"), TELULAR CORPORATION, a Delaware
corporation ("Telular"), and certain STOCKHOLDERS OF WIRELESS DOMAIN
INCORPORATED who are signatories hereto ("Wireless Domain Stockholders");
W I T N E S S E T H:
WHEREAS, TWD and Wireless Domain have determined to enter
into a business combination in the manner provided for in this Agreement;
WHEREAS, TWD is a wholly-owned subsidiary of Telular;
WHEREAS, TWD, Wireless Domain, Telular and the Wireless Domain
Stockholders desire to provide for certain undertakings, conditions,
representations, warranties, and covenants in connection with the transactions
contemplated by this Agreement;
NOW, THEREFORE, in consideration of the premises and of the
representations, warranties, and agreements herein contained, the parties
hereto, intending to be legally bound, agree as follows:
ARTICLE I
THE MERGER
1.01 THE MERGER. Subject to the terms and conditions of this
Agreement, Wireless Domain shall be merged with and into TWD (the "Merger") in
accordance with the New York Business Corporation Law (the "New York Code") and
the separate corporate existence of Wireless Domain shall cease. TWD shall be
the surviving corporation, shall have the name of Telular-WD Corporation, shall
be a wholly-owned subsidiary of Telular, and shall continue to be governed by
the laws of the State of New York. TWD, as the surviving corporation, is
hereinafter sometimes referred to as the "Surviving Corporation."
1.02 CLOSING. The closing of the Merger (the "Closing") shall take
place, subject to satisfaction or waiver of all conditions set forth in Article
VII hereof, at the offices of Covington & Burling, Washington, D.C., or such
other place as to which the parties may agree, at 10:00 a.m. local time, on
November 10, 1997, or such other Business Day (as hereinafter defined) as to
which the parties may agree(the "Closing Date"). For purposes of this
Agreement, "Business Day" shall mean any
<PAGE> 2
- 2 -
day that the Office of the Department of State of the State of New York ("New
York Department of State") is open for receipt of corporate filings.
1.03 EFFECTIVE TIME. On the Closing Date, the parties hereto will
cause the Merger to be consummated by filing with the New York Department of
State a certificate of merger (the "New York Certificate of Merger") in such
form as required by, and duly executed and acknowledged in accordance with, the
New York Code. The Merger shall be effective (the "Effective Time") upon the
filing of the Certificate of Merger with the New York Department of State as
provided in the New York Code. At the Effective Time, the effect of the Merger
shall be as provided in the New York Code. Without limiting the generality of
the foregoing, upon the Effective Time, the separate existence of Wireless
Domain shall cease, and the Surviving Corporation shall possess all the rights,
privileges, powers and franchises of a public as well as of a private nature,
and shall be subject to all of the restrictions, disabilities and duties of
each of TWD and Wireless Domain, and all and singular, the rights, privileges,
powers and franchises of each of TWD and Wireless Domain. All property, real,
personal and mixed, and all debts due to each of TWD and Wireless Domain on
whatever account, as well for stock subscriptions as all other things in action
or belonging to each of TWD and Wireless Domain shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of TWD and Wireless
Domain, and the title to any real estate vested by deed or otherwise in either
of TWD or Wireless Domain shall not revert or be in any way impaired, but all
rights of creditors and all liens upon any property of any of TWD and Wireless
Domain shall be preserved unimpaired, and all debts, liabilities and duties of
each of TWD and Wireless Domain shall thenceforth attach to the Surviving
Corporation, and may be enforced against it to the same extent as if said
debts, liabilities and duties had been incurred or contracted by it.
1.04 CERTIFICATE OF INCORPORATION AND BY-LAWS. The Certificate of
Incorporation and By-Laws of TWD in effect immediately prior to the Effective
Time shall be the Certificate of Incorporation and By-Laws of the Surviving
Corporation and shall continue until amended in accordance with their
provisions and applicable law.
1.05 BOARD OF DIRECTORS AND OFFICERS.
(a) At the Effective Time, the Board of Directors of the Surviving
Corporation shall consist of those persons serving as directors of TWD
immediately prior to the Effective Time and the terms of those directors after
the Effective Time shall be the
<PAGE> 3
- 3 -
same as their respective terms immediately prior to the Effective Time.
(b) The officers of TWD shall be the officers of the Surviving
Corporation until their respective successors are duly elected and qualified.
1.06 ADDITIONAL ACTIONS. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any further deeds,
assignments, or assurances in law or any other acts are necessary or desirable
to (a) vest, perfect, or confirm, of record or otherwise, in the Surviving
Corporation its right, title, or interest in, to, or under any of the rights,
properties, or assets of Wireless Domain, or (b) otherwise carry out the
purposes of this Agreement, Wireless Domain and its officers and directors
shall be deemed to have granted to the Surviving Corporation an irrevocable
power of attorney to execute and deliver all such deeds, assignments, or
assurances in law and to do all acts necessary or proper to vest, perfect, or
confirm title to and possession of such rights, properties, or assets in the
Surviving Corporation and otherwise to carry out the purposes of this
Agreement, and the officers and directors of the Surviving Corporation are
authorized in the name of Wireless Domain or otherwise to take any and all such
actions.
1.07 CONVERSION OF SHARES; CLOSING BALANCE SHEET.
At the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof:
(a) all shares of Wireless Domain Common Stock owned by Telular
shall be cancelled;
(b) each share of Wireless Domain Common Stock held by Wireless
Domain in treasury immediately prior to the Effective Time shall be cancelled
without the payment of any consideration;
(c) each then outstanding share of common stock, par value $.01
per share, of Wireless Domain ("Wireless Domain Common Stock") shall, by virtue
of the merger and without any action on the part of the holder thereof, be
converted into forty (40) shares of Common Stock of Telular, par value $.01 per
share ("Telular Common Stock"); and
(d) each share of TWD capital stock issued and outstanding
immediately prior to the Effective Time shall be converted into one share of
common stock, par value $.01 per share, of the Surviving Corporation.
<PAGE> 4
- 4 -
1.08 SURRENDER OF CERTIFICATES.
(a) After the Effective Time, no holder of Wireless Domain Common
Stock which is issued and outstanding immediately prior to the Effective Time
will have any rights in respect of such Wireless Domain Common Stock except to
receive the consideration for the shares of Wireless Domain Common Stock
converted as provided in Subsection 1.07(c) (the "Merger Consideration"),
consisting of the shares of Telular Common Stock to be issued pursuant thereto
(the "Telular Shares").
(b) Each holder of a stock certificate or stock certificates
representing outstanding shares of Wireless Domain Common Stock immediately
prior to the Effective Time shall, upon surrender of such certificate or
certificates to TWD after the Effective Date be entitled to receive a stock
certificate or stock certificates representing the number of shares of Telular
Common Stock into which such shares of Wireless Domain Common Stock have been
converted as provided by Subsection 1.07(c).
(c) Until a certificate for shares of Wireless Domain Common Stock
is duly surrendered, no payment of Merger Consideration will be made to the
record holder of such certificate, except that in the event that any
stockholder is unable to surrender a certificate because it has been lost or
destroyed, TWD may make distribution to that stockholder upon receipt of such
affidavits, undertakings, indemnity bonds and other agreements as are customary
in such circumstances.
1.09 TRANSFERS. The stock transfer books of Wireless Domain shall
be closed at the close of business on the Business Day immediately preceding
the Closing Date, and the holders of record of Wireless Domain Common Stock as
of the Closing Date shall be the stockholders entitled to conversion of their
Wireless Domain Common Stock into Merger Consideration as provided for in this
Agreement. No transfer or assignment of any shares of Wireless Domain Common
Stock may take place on or after the Closing Date; and if on or after the
Closing Date such certificates representing shares of Wireless Domain Common
Stock are presented to Wireless Domain or its transfer agent for transfer, they
shall be canceled against delivery of Telular Shares as provided herein.
1.10 LIQUIDATION. Promptly and as soon as practicable after the
Closing Date, and as part of an overall plan for Telular to acquire the assets
of Wireless Domain, Telular shall cause TWD to be liquidated, with all of TWD's
assets and liabilities passing to Telular. As a part of such liquidation, TWD
shall, immediately after the merger at Closing, transfer the employees listed
in Section 5.08 to Telular.
<PAGE> 5
- 5 -
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF WIRELESS DOMAIN STOCKHOLDERS
As a material inducement to Telular and TWD to enter into and
perform their respective obligations under this Agreement, and notwithstanding
any examinations, inspections, audits, and other investigations heretofore or
hereafter made by Telular or TWD, the Wireless Domain Stockholders hereby
jointly and severally represent and warrant to Telular and TWD as follows:
2.01 ORGANIZATION AND AUTHORITY. Wireless Domain is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York, and has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on the businesses that
are currently conducted by it.
2.02 CORPORATE AUTHORIZATION; RECORDS.
(a) Wireless Domain has the corporate power and authority to enter
into this Agreement and, subject to the approval of the Merger by the
stockholders of Wireless Domain, to carry out its obligations hereunder. The
only stockholder vote of Wireless Domain required to approve the Merger is the
affirmative vote of all of the holders of the outstanding shares of Wireless
Domain Common Stock entitled to vote at a meeting of stockholders of Wireless
Domain held for such purpose. The execution, delivery, and performance of this
Agreement by Wireless Domain and the consummation of the transactions
contemplated hereby have been duly authorized by the Board of Directors of
Wireless Domain.
(b) Subject to the approvals as aforesaid, this Agreement and any
agreement, document and instrument to be executed and delivered by Wireless
Domain pursuant to this Agreement constitute the valid and binding agreements
of Wireless Domain, enforceable against it in accordance with their respective
terms, except to the extent that (a) such enforcement may be subject to any
bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter in effect, relating to or limiting creditors' rights generally and
(b) the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses or to the discretion of
the court before which any proceeding therefor may be brought.
(c) The execution and delivery by Wireless Domain of this
Agreement, and the agreements, documents and instruments to be executed and
delivered by Wireless Domain pursuant hereto, and the consummation by Wireless
Domain of the transactions contemplated hereby, will not (a) violate or
conflict with or
<PAGE> 6
- 6 -
result in any breach of any provision of the Articles of Incorporation or
By-Laws of Wireless Domain; (b) violate or conflict with any order, injunction,
decree, statute, rule, ordinance or regulation applicable to Wireless Domain or
by which any of its properties or assets may be bound; (c) except as set forth
in the Disclosure Letter of even date herewith delivered by Wireless Domain to
Telular and TWD (the "Disclosure Letter"), require any filing with, or permit,
consent or approval of, any public governmental or regulatory body, agency or
authority, labor organization or private person; (d) result in a violation or
breach of, or constitute, or with giving of notice or lapse of time or both
constitute a default (or give rise to any right of termination, cancellation or
acceleration) under any of the indenture, license, franchise, permit, lease,
contract, agreement, collective bargaining agreement, instrument or other
arrangement to which Wireless Domain is a party or by which it or any of its
properties or assets may be bound; or (e) result in the creation or imposition
of any lien or encumbrance on the properties or assets of Wireless Domain.
2.03 CAPITALIZATION OF WIRELESS DOMAIN. The authorized capital
stock of Wireless Domain is as set forth in the Disclosure Letter. The
Disclosure Letter sets forth a true and complete list of the issued and
outstanding shares of Wireless Domain Stock and any other capital stock of
Wireless Domain and the record and beneficial holders thereof. Except as set
forth in the Disclosure Letter, there are no outstanding options, warrants,
convertible securities, or other contractual or other rights on the part of any
person to purchase, obtain or acquire Wireless Domain Stock. The shares of
Wireless Domain Stock that are currently outstanding are duly and validly
issued, fully paid and nonassessable. Except as set forth in the Disclosure
Letter, Wireless Domain does not have any subsidiaries or hold any partnership
interests, stock, or other equity interests in any other corporation,
partnership, limited liability company, or other entity.
2.04 FINANCIAL STATEMENTS.
(a) Wireless Domain heretofore has provided to Telular true and
complete copies of the financial statements of Wireless Domain as at and for
the fiscal year ended September 30, 1996, and the fiscal year ended September
30, 1997 (collectively, the "Financial Statements"). The Financial Statements
are true and correct in all material respects and were prepared in accordance
with generally accepted accounting principles consistently applied. The
Financial Statements present fairly the financial position of Wireless Domain
as at the dates thereof.
(b) The books of account, minute books, stock record books and
other records of Wireless Domain, all of which have been
<PAGE> 7
- 7 -
made available to Telular, are complete and correct in all material respects.
(c) All of the accounts and notes receivable reflected in Wireless
Domain's balance sheet as of September 30, 1997 or which have arisen since such
date, arose in the ordinary and usual course of business, represent valid
obligations to Wireless Domain, in each case in the aggregate amounts thereof
recorded on the books of Wireless Domain.
2.05 TITLE TO AND CONDITION OF ASSETS.
(a) Wireless Domain has good, marketable and insurable title to,
or valid leasehold interest in, all the properties and assets it owns or uses
in its business or purports to own, including, without limitation, those
reflected in its books and records. None of such properties and assets is
subject to any mortgage, pledge, lien, charge, security interest, encumbrance,
restriction, lease, license, easement, liability or adverse claim of any nature
whatsoever, direct or indirect, whether accrued, absolute, contingent or
otherwise, except (i) as expressly set forth in the September 30, 1997 Balance
Sheet as securing specific liabilities or as otherwise expressly permitted by
the terms hereof; or (ii) for Permitted Exceptions (as defined in Section
2.17(c)).
(b) All of the properties and assets owned, leased or used by
Wireless Domain are in good operating condition and repair, are suitable for
the purposes used, are adequate and sufficient for all current operations of
Wireless Domain and are directly related to the business of Wireless Domain.
2.06 LEASES OF REAL AND PERSONAL PROPERTY.
(a) The Disclosure Letter sets forth a list of (i) all leases
pursuant to which Wireless Domain leases, as lessee, real property; (ii) all
leases pursuant to which Wireless Domain leases, as lessor, real property; and
(iii) all leases pursuant to which Wireless Domain leases, as lessee, personal
property for use in its business.
(b) Except as set forth in the Disclosure Letter, Wireless Domain
as to all leases (i) has performed all material obligations required to be
performed by it to date; and (ii) is not in default or, to the knowledge of the
Wireless Domain Stockholders, alleged to be in default, in any material respect
thereof. To the knowledge of the Wireless Domain Stockholders, there exists no
material default, or any event which upon the giving of notice or passage of
time would give rise to any material default, in the performance of any
obligation to be performed by any other party to any of such leases.
<PAGE> 8
- 8 -
2.07 CONTRACTS AND COMMITMENTS. The Disclosure Letter sets forth
all contracts, agreements, instruments or arrangements, including all
amendments thereto, whether written or oral, to which Wireless Domain is a
party or to which Wireless Domain or its properties or assets are subject.
Except as set forth in the Disclosure Letter, such contracts, agreements,
instruments or arrangements constitute the legal, valid and binding obligations
of Wireless Domain, enforceable against Wireless Domain in accordance with
their respective terms. To the knowledge of the Wireless Domain Stockholders,
such contracts, agreements, instruments and arrangements constitute legal,
valid and binding obligations of the other parties thereto, enforceable against
such parties in accordance with their respective terms. Except as set forth in
the Disclosure Letter, neither Wireless Domain nor, to the knowledge of the
Wireless Domain Stockholders, any other party thereto is in default under any
of the aforesaid contracts or arrangements.
2.08 ABSENCE OF UNDISCLOSED LIABILITIES. The Disclosure Letter
contains a complete and accurate list of all direct and indirect indebtedness
of Wireless Domain as of the date hereof (whether individual, joint, several or
otherwise), excluding (a) current accounts payable and (b) any indebtedness to
any person which, when aggregated with all other indebtedness of Wireless
Domain to such person and its affiliates, does not exceed Ten Thousand Dollars
($10,000). The Disclosure Letter also contains a complete and accurate list of
all guaranties of Wireless Domain (whether individual, joint, several or
otherwise), identifying the parties, amounts and maturities. Except as set
forth in the Disclosure Letter, Wireless Domain had no liability or other
obligation that would normally be reflected or reserved against on a balance
sheet prepared in accordance with generally accepted accounting principles and
that was not fully reflected or reserved against in the Interim Financial
Statements. Wireless Domain is current in its payment of debts.
2.09 INSURANCE. All material policies of fire, liability, workers'
compensation and other forms of insurance maintained as of the date hereof by
or on behalf of Wireless Domain are listed and described in the Disclosure
Letter (specifying the insurer, coverage and type of insurance). All such
policies of insurance are in full force and effect, all premiums with respect
thereto covering all periods up to and including the date hereof have been
paid, and no notice of cancellation or termination has been received with
respect any such policy which was not replaced on substantially similar terms
prior to the date of such cancellation. Such insurance is reasonably believed
by the Wireless Domain Stockholders to be adequate for the conduct of the
business of Wireless Domain.
<PAGE> 9
- 9 -
2.10 TAXES AND TAX RETURNS.
(a) Wireless Domain has timely filed with the appropriate
governmental agencies all tax returns required to be filed by it on or before
the date hereof (including extensions). Wireless Domain has timely paid the
full amount of taxes, if any, shown to be due on such tax returns or that
otherwise are due or claimed by any taxing authority to be due with respect to
such tax returns. To the knowledge of the Wireless Domain Stockholders, the
foregoing tax returns are complete and correct in all material respects.
Except as provided in the Disclosure Letter, no deficiency for any taxes has
been proposed, asserted, or assessed against Wireless Domain, nor, to the
knowledge of the Wireless Domain Stockholders is there any reasonable basis
therefor. There are no tax liens upon any property or assets of Wireless
Domain. Except as provided in the Disclosure Letter, no requests for waivers
of the time to assess any taxes are pending or have been granted. Wireless
Domain is not a party to any tax sharing or tax allocation agreement. Complete
copies of all tax returns filed by Wireless Domain prior to the date hereof
have been made available to Telular.
(b) Wireless Domain has paid, or shall set up adequate reserves on
the Final Closing Balance Sheet for the payment of, all taxes required to be
paid in respect of the periods covered by such returns and also shall set up
adequate reserves on the Final Closing Balance Sheet for the payment of all
taxes anticipated to be payable in respect of all periods ending on or prior to
the Closing Date (treating for this purpose the Closing Date as the last day of
an applicable period, whether or not it is in fact the last day of a taxable
period).
2.11 MATERIAL ADVERSE CHANGE. Except as expressly contemplated by
this Agreement (including the effects of expenses expressly contemplated by
this Agreement) since September 30, 1997 there has been no material adverse
change in the financial conditions, results of operations, business, assets or
operations of Wireless Domain taken as a whole.
2.12 LITIGATION AND OTHER PROCEEDINGS. There is no proceeding
pending or, to the knowledge of the Wireless Domain Stockholders, threatened
against Wireless Domain of any kind which questions or challenges the validity
of this Agreement or that, if adversely determined, would materially adversely
affect the ability of Wireless Domain to perform its obligations hereunder or
to conduct its business as recently conducted. Wireless Domain is not in
default with respect to any judgment, order, writ, injunction, decree or
consent of any court or other judicial authority, excluding such defaults which
would not have a material adverse affect on the ability of Wireless Domain to
perform its obligations hereunder.
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2.13 GOVERNMENTAL COMPLIANCE.
(a) Wireless Domain is in compliance in all material respects with
all applicable laws, ordinances, rules and regulations of any federal, state,
provincial, local or foreign governmental authority. Wireless Domain has not
received any notification of any asserted present or past failure by Wireless
Domain to comply with such laws, rules and regulations.
(b) To the knowledge of the Wireless Domain Stockholders, except
as disclosed in the Disclosure Letter, all facilities owned, leased, used or
operated by Wireless Domain or any predecessor in interest have been, and
continue to be, owned, leased, used and operated in compliance with all
applicable environmental laws. Wireless Domain has obtained and presently has
in force, and the Disclosure Letter identifies, all permits, licenses,
registrations and other authorizations and approvals needed under all
applicable environmental laws to maintain and occupy the real property used by
Wireless Domain to operate its business, and to dispose of all substances and
materials used or owned by Wireless Domain.
2.14 LABOR AND EMPLOYMENT. The Disclosure Letter contains a
complete and accurate list of each officer, director or consultant of Wireless
Domain and of each employee of Wireless Domain (including anyone on leave of
absence or layoff status), specifying for each: name; job title; existence and
date of any employment or other agreement with Wireless Domain, whether oral or
written; current compensation paid or payable by Wireless Domain and showing
any change in compensation since September 30, 1997, and vacation accrued and
entitlement. No full-time officer or employee of Wireless Domain is subject to
any agreement, arrangement or understanding with any person that in any way
restricts or limits the scope or type of work in which the officer or employee
may be engaged by Wireless Domain or requires the employee or officer to
transfer, assign or disclose any intellectual property to any person other than
Wireless Domain. Each of the employees identified by an asterisk in the
Disclosure Letter has entered into an agreement with Wireless Domain, in
substantially the form presented by Wireless Domain to Telular prior to the
date hereof, providing protection to Wireless Domain with respect to (i)
ownership of intellectual property created by such employee in the course of
employment by Wireless Domain, (ii) protection of confidential or proprietary
information of Wireless Domain to which such employee may have access, and
(iii) competition with Wireless Domain for a period of at least one year after
termination of such employee's employment with Wireless Domain.
Except as set forth in the Disclosure Letter:
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(a) there are no outstanding collective bargaining agreements or
any written or oral employment, personal service or consulting
agreements with any employee or consultant, past or present,
of Wireless Domain;
(b) Wireless Domain, to the extent required under applicable law,
has in all material respects paid in full to or for all
employees all wages, salaries, bonuses, commissions, holiday,
sickness and vacation pay, and other direct compensation for
all services performed by them, including severance and
termination benefits due and payable as of the date hereof;
(c) Wireless Domain is in compliance in all material respects with
all applicable federal, state, provincial, foreign, municipal
and local laws, statutes, ordinances, rules, notices, orders
and regulations respecting employment and employment practices
or dealing with such things as occupational safety and health,
wages and overtime pay, hours of employment, unfair labor
practices and employment discrimination and other terms and
conditions of employment;
(d) there is no labor strike, slowdown, work stoppage or other job
action pending or, to the knowledge of the Wireless Domain
Stockholders, threatened against or involving Wireless Domain;
(e) no workers' compensation case or claim is pending or, to the
knowledge of the Wireless Domain Stockholders, threatened
against Wireless Domain;
(f) Wireless Domain has no agreements or contracts nor has it
conducted any negotiations with any trade union, council of
trade unions, labor organization, employee bargaining agency
or affiliated bargaining agent, nor do any of the foregoing
hold any bargaining rights with respect to any employees of
Wireless Domain that are not currently subject to a collective
bargaining agreement;
(g) Wireless Domain is not a party to any pending labor
arbitrations, applications or complaints before any
administrative agency or tribunal;
(h) there are no charges of unfair labor practices, charges of
employment discrimination, or charges of violations of
occupational safety and health laws or wage and hour laws or
laws regulating any other term or condition of employment
pending before any federal,
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state, local, provincial or foreign agency or tribunal, or, to
the knowledge of the Wireless Domain Stockholders threatened
against Wireless Domain, nor, to the knowledge of the Wireless
Domain Stockholders, is there any credible charge that is
probable of assertion; and
(i) to the knowledge of the Wireless Domain Stockholders, the
consummation of the transactions contemplated by this
Agreement will not (a) entitle any current or former director,
officer, employee or agent of Wireless Domain to any severance
pay, unemployment compensation or other payment, or (b)
accelerate the time of payment or vesting, or increase the
amount of compensation or benefits due to, any such director,
officer, employee or consultant, whether under any contract,
agreement, arrangement or otherwise.
2.15 MATERIAL INTERESTS OF CERTAIN PERSONS. To the Wireless Domain
Stockholders' knowledge, no officer or director of Wireless Domain has any
interest in any material contract or property (real or personal, tangible or
intangible) used in or pertaining to the business of Wireless Domain.
2.16 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in the Disclosure Letter, Wireless Domain
does not contribute, make payments or pay benefits to, or have any liability
whatsoever under, any employee pension benefit plan, as such term is defined in
Section 3(2) of ERISA, any "multiemployer benefit plan" as such term is defined
in Section 4001(a)(3) of ERISA, and any employee pension, retirement,
profit-sharing, savings, deferred compensation, stock option, incentive award,
stock bonus, severance pay (whether or not written), fringe benefit or similar
plan (collectively, "Pension Plan"). Set forth in the Disclosure Letter is a
complete and correct list of all employee welfare benefit plans as such term is
defined in Section 3(1) of ERISA, any "multiple-employer welfare arrangement"
as such term is defined in Section 3(40) of ERISA, and any employee medical,
vision, dental or other health plan of a life insurance, disability, or other
similar employee benefit plan ("Welfare Plan") to which Wireless Domain
contributes or under which Wireless Domain makes payments or pays benefits or
has any liability whatsoever. Wireless Domain has not made or entered into any
plan or commitment, whether legally binding or not, to create any additional
employee benefit plan, program, agreement or arrangement, or to modify or
change any existing employee benefit plan, program, agreement or arrangement,
that would affect any employee or terminated employee of Wireless Domain. With
respect to the Welfare Plans listed in the Disclosure Letter (the "Existing
Plans"), Wireless Domain, the Existing
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Plans, and the fiduciaries of the Existing Plans have complied in all material
respects with all of the applicable requirements of federal, state and local
law, including, but not limited to, ERISA, the United States Internal Revenue
Code of 1986, as amended (the "Code"), the United States Age Discrimination in
Employment Act, as amended, the Medicare secondary payer requirements, and any
other applicable laws governing age discrimination, insurance or employee
benefits. The Existing Plans do not have any unfunded liabilities, and
Wireless Domain does not have any unfunded liabilities with respect to the
Existing Plans. There are no outstanding legal actions with respect to the
Existing Plans, and Wireless Domain is not aware of any legal actions that are
contemplated with respect to the Existing Plans. Wireless Domain has made true
and correct copies of the Existing Plans available to Telular.
(b) Neither Wireless Domain nor any Existing Plan has any
obligation to provide any type of life, medical, dental, disability, long-term
care or other benefit to retirees, former employees, former directors or former
independent contractors. Wireless Domain has not made, nor will it be
obligated to make, to any current or former director or employee, any payment
in the form of wages or other compensation as a consequence, in whole or in
part, of this Agreement or of any change in the ownership or effective control
of Wireless Domain.
2.17 CONDUCT OF WIRELESS DOMAIN TO DATE. Except as set forth in
the Disclosure Letter, since the date of the Financial Statements, and except
as expressly reflected in the Interim Statements, there has not been in respect
of Wireless Domain:
(a) the incurrence of any debts, obligations or liabilities
(whether absolute, accrued, contingent or otherwise and
whether due or to become due), except debts, obligations and
liabilities incurred in the ordinary course of business
consistent with past practice;
(b) any declaration, setting aside or payment of any dividend or
distribution based on its shares, or any direct or indirect
purchase, retirement, redemption or other acquisition of any
of its shares or other securities or any obligation to do so;
(c) any mortgage, pledge or lien or granting of a security
interest in or other encumbrance on any of its assets,
tangible or intangible, except for (i) those exceptions to
title listed in the Disclosure Letter, (ii) mechanics',
carriers', workers' repairs, and other similar liens arising
or incurred in the ordinary course of business which relate to
obligations not yet due or delinquent, and (iii) liens
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on equipment or goods acquired or held in the ordinary course
of business, incurred solely to secure purchase money
financing for the equipment or goods ("Permitted Exceptions");
(d) the sale, transfer, lease, license, abandonment or other
disposition, other than in the ordinary course of business
consistent with past practice, of any of its assets, tangible
or intangible;
(e) any damage, destruction or loss in its assets which, in the
aggregate, exceeds Five Thousand Dollars ($5,000) (whether or
not covered by insurance);
(f) any transaction or transactions to which Wireless Domain was a
party having, individually or in the aggregate, a material
adverse affect on the financial condition or operations of
Wireless Domain;
(g) any change in accounting practices or any change in
depreciation or amortization policies or rates;
(h) any cancellation of any debts owed or claims held by Wireless
Domain in excess of Five Thousand Dollars ($5,000) in the
aggregate;
(i) any disposal or lapse of any intellectual property held by
Wireless Domain or used by Wireless Domain which could have a
material adverse affect on the financial condition or
operations of Wireless Domain;
(j) any authorization of any capital expenditures which,
individually, involve an excess of Twenty-Five Thousand
Dollars ($25,000);
(k) any loss of any customers or suppliers which, either
individually or in the aggregate, could have a material
adverse affect on the financial condition or operations of
Wireless Domain;
(l) any agreement by Wireless Domain to take any of the actions
described in paragraphs (a) through (k) above.
2.18 RECEIPT OF TELULAR INFORMATION. The Wireless Domain
Stockholders have received and reviewed copies of Telular's annual report on
Securities and Exchange Commission ("SEC") Form 10-K for the fiscal year ended
September 30, 1996, Telular's proxy statement for its January 1997 annual
meeting, Telular's quarterly reports on SEC Form 10-Q for the periods ended
December 31, 1996, March 31, 1997, and June 30, 1997, and Telular's current
reports on SEC Form 8-K dated April 25, 1997, and July 1, 1997 (collectively,
the "Telular Information").
<PAGE> 15
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2.19 SHARE RESTRICTIONS.
(a) The Wireless Domain Stockholders understand that because the
Telular Shares have not been registered under the Securities Act or any other
applicable securities laws they cannot dispose of any or all of the Telular
Shares unless such Telular Shares are subsequently registered under the
Securities Act or other applicable securities laws or exemptions from such
registration are available.
(b) The Wireless Domain Stockholders understand that each
certificate representing the Telular Shares will bear the following legend or
one substantially similar thereto:
The shares represented by this certificate have not been
registered under the United States Securities Act of 1933, as
amended, or any other applicable securities laws. These
shares have been acquired for investment and not with a view
to distribution or resale, and may not be sold, mortgaged,
pledged, hypothecated or otherwise transferred without an
effective registration statement for such shares under
applicable securities laws or an opinion of counsel
satisfactory to the corporation that registration is not
required under such laws.
At such time as the transfer restrictions under the Securities Act of 1933
cease to apply to any Telular Shares, Telular shall, at the request of any
Wireless Domain Stockholder, cause the foregoing legend to be removed from the
certificates evidencing such Telular Shares held by such Wireless Domain
Stockholders.
2.20 ADDITIONAL REPRESENTATIONS.
(a) The Wireless Domain Stockholders have no plan or intention to
dispose of the Telular Shares.
(b) The liabilities of Wireless Domain assumed by TWD and the
liabilities to which the transferred assets of Wireless Domain are subject were
incurred by Wireless Domain in the ordinary course of its business.
2.21 NO MISLEADING STATEMENTS. The representations and warranties
made by the Wireless Domain Stockholders in this Agreement, and the information
contained in all exhibits, schedules, lists, certificates, financial statements
and other documents and information furnished or to be furnished by Wireless
Domain or the Wireless Domain Stockholders pursuant hereto, collectively, when
read together, do not and will not
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contain any untrue statement of a material fact and do not and will not omit to
state a material fact necessary in order to make the statements contained or to
be contained herein or therein, not false or misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TELULAR AND TWD
As a material inducement to Wireless Domain and the Wireless
Domain Stockholders to enter into and perform their obligations under this
Agreement, and notwithstanding any examinations, inspections, audits, and other
investigations heretofore or hereafter made by Wireless Domain, Telular and TWD
hereby represent and warrant to Wireless Domain and the Wireless Domain
Stockholders as follows:
3.01 ORGANIZATION AND AUTHORITY.
(a) Telular is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Telular has all
requisite corporate power and authority to own, lease and operate its
properties and assets and to carry on the businesses which are currently
conducted by it. The copies of the Certificate of Incorporation and By-laws of
Telular, as amended to date, which have been made available to Wireless Domain,
are correct and complete.
(b) TWD is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York and in all other
jurisdictions where the conduct of its respective business requires it to be so
qualified and has the requisite corporate power to own its respective
properties and assets and to carry on its respective business as it is now
being conducted.
3.02 CORPORATION AUTHORIZATION. Each of Telular and TWD has all
requisite corporate power, authority and capacity to enter into this Agreement
and any other agreements required to be entered into by it hereby, and each of
Telular and TWD has the requisite power, authority and capacity to take,
perform and execute all proceedings, acts and instruments required by it to
consummate the merger and to fulfill its obligations under this Agreement and
any other agreements contemplated hereby. The execution and delivery by
Telular and TWD of this Agreement and any other agreements, documents and
instruments to be executed and delivered by Telular or TWD pursuant hereto, and
the consummation by Telular and TWD of the transactions contemplated hereby,
have been duly and validly authorized by the Board of Directors of each of
Telular and TWD and the sole stockholder of TWD, and no other corporate
proceedings on the part of Telular or TWD are necessary under any provision of
law to authorize the
<PAGE> 17
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execution and delivery by Telular and TWD of this Agreement and any other
agreements, documents and instruments to be executed and delivered by Telular
or TWD pursuant hereto or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by each of
Telular and TWD. This Agreement and any agreement, document and instrument to
be executed and delivered by Telular or TWD pursuant to this Agreement
constitute the valid and binding agreements of Telular and TWD, enforceable
against each of them in accordance with their respective terms, except to the
extent that (a) such enforcement may be subject to any bankruptcy, insolvency,
reorganization, moratorium or other laws, now or hereafter in effect, relating
to or limiting creditors' rights generally and (b) the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses or to the discretion of the court before which any
proceeding therefor may be brought.
3.03 CONSENTS AND APPROVALS; NO VIOLATIONS. The execution and
delivery by Telular and TWD of this Agreement and the agreements, documents and
instruments to be executed and delivered by Telular or TWD pursuant hereto and
the consummation by Telular of the transactions contemplated hereby will not
(a) violate or conflict with or result in any breach of any provision of the
Certificate of Incorporation or By-laws of Telular or TWD; (b) violate or
conflict with any order, injunction, decree, statute, rule, ordinance or
regulation applicable to Telular or TWD or by which its properties or assets
may be bound; (c) require any filing with, or permit, consent or approval of,
any public governmental or regulatory body, agency or authority, labor
organization or private person; or (d) result in a violation or breach of, or
constitute, or with giving of notice or lapse of time or both constitute, a
default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, franchise, permit, lease, contract,
agreement, collective bargaining agreement, instrument or other arrangement to
which Telular or TWD is a party or by which either of them or any of its
properties or assets may be bound.
3.04 LEGAL PROCEEDINGS. There is no proceeding pending or, to the
knowledge of Telular and TWD, threatened against Telular or TWD of any kind
which questions or challenges the validity of this Agreement or that, if
adversely determined, would materially adversely affect the ability of Telular
or TWD to perform its obligations hereunder. Neither Telular nor TWD is in
default with respect to any judgment, order, writ, injunction, decree or
consent of any court or other judicial authority, excluding such defaults which
would not have a material adverse affect on the ability of Telular or TWD to
perform its obligations hereunder.
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3.05 TELULAR SHARES. The Telular Shares will be duly and validly
issued, fully paid and nonassessable. Upon delivery of certificates for the
Telular Shares, pursuant to the terms of this Agreement, the Wireless Domain
Stockholders will hold valid and marketable title to the Telular Shares, free
and clear of all Liens (other than Liens created by the Wireless Domain
Stockholders and any restrictions on transfer provided herein).
3.06 ADDITIONAL REPRESENTATIONS
(a) TWD has no plan or intention to issue additional
shares of its stock that would result in Telular losing control of TWD within
the meaning of Section 368(c)(1) of the Code.
(b) Neither Telular nor TWD has any plan or intention to
discontinue Wireless Domain's historic business or to discontinue the use of a
significant portion of Wireless Domain's historic assets in that business.
(c) Neither Telular nor TWD has any plan or intention to
sell or otherwise dispose of any of the assets of Wireless Domain acquired in
the transaction, except for dispositions made in the ordinary course of
business.
(d) Telular has no plan or intention to reacquire any of
its stock issued in the transaction.
3.07 NO MISLEADING STATEMENTS. The representations and warranties
made by Telular and TWD in this Agreement, and the information contained in the
Telular Information, collectively, when taken together, do not and will not
contain any untrue statement of a material fact and do not and will not omit to
state a material fact necessary in order to make the statements contained or to
be contained herein or therein, not false or misleading.
ARTICLE IV
CONDUCT OF BUSINESS PRIOR TO THE EFFECTIVE TIME
4.01 CONDUCT OF BUSINESSES PRIOR TO THE EFFECTIVE TIME. Except as
expressly contemplated by this Agreement, during the period from the date of
this Agreement to the Effective Time, Wireless Domain shall conduct its
business according to the ordinary and usual course consistent with past and
current practices and shall use its best efforts to maintain and preserve its
business organization, employees, and advantageous business relationships and
retain the services of its officers and key employees.
4.02 FORBEARANCES BY WIRELESS DOMAIN. Except as expressly
contemplated by this Agreement, without the prior consent of
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Telular, during the period from the date of this Agreement to the Effective
Time, Wireless Domain shall not:
(a) Enter into or amend any Employee Plan or any employment,
severance, or similar agreements or arrangements with any director, officer,
key employee, or consultant; provided, however, that Wireless Domain may engage
an investment banker or other financial consultant to issue a fairness opinion
to Wireless Domain with respect to the fairness to Wireless Domain's
stockholders of this Merger from a financial point of view;
(b) (i) Authorize, recommend, propose, or announce an intention to
authorize, recommend, or propose, or enter into an agreement in principle with
respect to, any merger, consolidation, or acquisition of a material amount of
assets or securities, any disposition of a material amount of assets or
securities, or any release or relinquishment of any material contract rights
not in the ordinary course of business; (ii) Enter into any contract or
commitment involving annual consideration in excess of $75,000; (iii) Make any
material change in its buildings, leasehold improvements or fixtures;
(c) Propose or adopt any amendments to its certificate of
incorporation or by-laws;
(d) Issue any shares of capital stock or effect any stock split or
otherwise change its capitalization as it existed as of the date hereof, except
pursuant to any exercisable stock options;
(e) Grant, confer, or award any options, warrants, conversion
rights, or other rights not existing on the date hereof to acquire any shares
of its capital stock;
(f) Purchase or redeem any shares of its capital stock;
(g) Agree in writing or otherwise to take any of the foregoing
actions or engage in any activity, enter into any transaction, or take or omit
to take any other act which would make any of the Wireless Domain Stockholders'
representations and warranties untrue or incorrect in any material respect if
made anew after engaging in such activity, entering into such transaction, or
taking or omitting such other act;
(h) Directly or indirectly (including through its officers,
directors, employees, or other representatives) initiate, solicit, or encourage
any discussions, inquiries, or proposals with any party (other than Telular)
relating to the disposition of any significant portion of the business or
assets of Wireless Domain or the acquisition of the capital stock (or rights or
options exercisable for, or securities convertible or
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exchangeable into, capital stock) of Wireless Domain or the merger of Wireless
Domain with any person, corporation, partnership, business trust, or other
entity (each such transaction being referred to herein as an "Acquisition
Transaction"), or provide any such person with information (other than
information required to be given under applicable law, rule or regulation) or
assistance or negotiate with any such person with respect to an Acquisition
Transaction;
(i) Take any actions, or fail to take any actions that alone, or
together with any other action or inaction, shall create, alter, or eliminate
any rights, benefits, obligations, or liabilities of any person (including, but
not limited to the participants, beneficiaries, Wireless Domain or, after the
Merger, the Surviving Corporation) with respect to any Employee Plans or
Policies.
With respect to any written request by Wireless Domain for Telular's consent to
any nonpermitted action of Wireless Domain, Wireless Domain shall be entitled
conclusively to presume that Telular has consented to any such action unless
Wireless Domain shall have received Telular's written objection to such action
within two (2) Business Days after the date of Telular's receipt of such
written request.
4.03 NOTICE OF PROCEEDINGS. Each of Wireless Domain and Telular
promptly will notify the other in writing upon becoming aware of any order or
decree or any complaint praying for an order or decree restraining or enjoining
the consummation of this Agreement or the transactions contemplated hereunder,
or upon receiving any notice from any governmental department, court, agency or
commission of its intention to institute an investigation into, or institute
any action or proceeding to restrain or enjoin consummation of this Agreement
or such transactions, or to nullify or render ineffective this Agreement or
such transaction if consummated.
4.04 INTERIM FINANCIAL STATEMENTS. Wireless Domain shall deliver
to Telular unaudited interim consolidated financial statements for Wireless
Domain within fifteen (15) Business Days after the close of each of its monthly
accounting periods that occurs after September 30, 1997, and before the Closing
Date.
ARTICLE V
ADDITIONAL AGREEMENTS
5.01 STOCKHOLDER APPROVALS. Within fifteen (15) days of the date
of this Agreement, Wireless Domain shall obtain the written consent of its
stockholders to the Merger. Each of Telular and the Wireless Domain
Stockholders covenants and agrees that he or it will grant his or its consent
to, or vote
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all of their shares of Wireless Domain Common Stock to approve, the
transactions contemplated by this Agreement.
5.02 CURRENT INFORMATION. During the period from the date of this
Agreement to the Closing Date, each party shall promptly notify the other party
of any material change known to it in its business, operations, or prospects
and of any governmental complaints, investigations, or hearings or
communications indicating that the same may be contemplated, or the institution
or the overt threat of material litigation or administrative or other claim
involving such party, and shall keep the other party fully informed of such
events.
5.03 EXPENSES. Except as otherwise expressly provided herein each
party hereto shall bear its own legal, accounting, and other costs and expenses
incident to preparing, entering into, and carrying out this Agreement and
consummating the Merger.
5.04 MISCELLANEOUS AGREEMENTS AND CONSENTS. Subject to the terms
and conditions herein provided, each of the parties hereto agrees to use its
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper, or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement as expeditiously as possible, including, without
limitation, using its reasonable efforts to lift or rescind any injunction or
restraining order or other order adversely affecting the ability of the parties
to consummate the transactions contemplated hereby and using its reasonable
efforts to satisfy the conditions to the Closing with respect to such party set
forth herein. Wireless Domain and Telular shall use their reasonable efforts
to obtain consents of all third parties and governmental bodies necessary or,
in the opinion of any of the parties, desirable for the consummation of the
transactions contemplated by this Agreement.
5.05 PRESS RELEASES. Wireless Domain and Telular shall consult
with each other as to the form and substance of any proposed press release or
other proposed public disclosure of matters related to this Agreement or any of
the transactions contemplated hereby prior to any public dissemination of same.
5.06 COVENANT TO SATISFY CONDITIONS. Each of Wireless Domain,
Telular, TWD and the Wireless Domain Stockholders shall take all reasonable
actions necessary to comply promptly with all legal requirements that may be
imposed on it with respect to this Agreement.
5.07 ADDITIONAL UNDERTAKINGS - COMPLIANCE WITH CODE SECTION
368(A)(1)(4). Each of the Wireless Domain Stockholders, TWD, Telular, and
Wireless Domain hereby acknowledge that the parties
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hereto intend that the overall reorganization contemplated by this Agreement
will qualify as a "reorganization" as described in Section 368(a)(1)(4) of the
Code. Each Stockholder, TWD, Telular, and Wireless Domain hereby agree to use
their best efforts to take all actions necessary or appropriate to ensure that
the transactions undertaken pursuant to this Agreement qualify as a
"reorganization" as described in Section 368(a)(1)(4) of the Code. In
addition, each Wireless Domain Stockholder, TWD, Telular, and Wireless Domain
hereby agree to refrain from taking any actions that are known by such party to
be, or that clearly are, inconsistent with such qualification. The obligations
of the parties under the preceding sentence shall include, without limitation,
the obligation to refrain from: (a) taking any position on any Tax Return that
is inconsistent with the transactions undertaken pursuant to this Agreement
qualifying as a "reorganization" as described in Section 368(a)(1)(4) of the
Code; and (b) in the case of TWD and Telular, providing any consideration with
respect to the Wireless Domain Common Stock other than as expressly provided
for herein.
5.08 EMPLOYMENT AGREEMENTS. At the Time of Closing each of Dan
Giacopelli, Jeffrey Hickey and Rex Nathanson shall enter into, and TWD shall
use its best efforts to cause Jerome Deutsch to enter into, an employment
agreement with Telular in the form set forth in Exhibit A. Simultaneous with
the execution of each such employment agreement, such persons and TWD shall
terminate their existing employment agreements.
5.09 STOCKHOLDER GUARANTEES. Promptly following the Closing, Telular
shall offer its corporate guarantee in substitution for the personal guarantee
heretofore given by Dan Giacopelli to secure the obligations of Wireless Domain
on the equipment leases identified in the Disclosure Letter as having been
guaranteed by Mr. Giacopelli. Telular shall use reasonable commercial efforts
to secure a release of Mr. Giacopelli from such guarantee in exchange therefor;
provided, however, that Telular shall not be required to offer or provide a
guarantee for more than $70,000 of such obligations. "Reasonable commercial
efforts" shall include prepayment of such leases in the event that Telular is
not otherwise able to obtain such a release within 30 days after the Closing.
ARTICLE VI
TRANSFER RESTRICTIONS
6.01 RESTRICTIONS UPON TRANSFER. Without limitation of any other
restriction upon transfer specified here, or by operation of law, no
Stockholder shall offer, sell, transfer, assign, hypothecate, pledge, give or
otherwise dispose of ("Transfer") any Telular Shares, except for Permitted
Transfers defined in Section 6.03, and except as provided below:
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(a) Prior to the first anniversary of the Closing Date, and
subject to any legal restrictions upon Transfer, a Stockholder may Transfer up
to fifteen percent (15%) of the Telular Shares acquired by such Stockholder
pursuant to this Agreement;
(b) On or after the first anniversary of the Closing Date, and
prior to the second anniversary of the Closing Date, and subject to any legal
restrictions upon Transfer, a Stockholder may Transfer up to forty-five percent
(45%) of the Telular Shares acquired by such Stockholder pursuant to this
Agreement (less any Telular Shares Transferred pursuant to Subsection (a)
hereof);
(c) On or after the second anniversary of the Closing Date, and
prior to the third anniversary of the Closing Date, and subject to any legal
restrictions upon Transfer, a Stockholder may Transfer up to eighty percent
(80%) of the Telular Shares acquired by such Stockholder pursuant to this
Agreement (less any Telular Shares Transferred pursuant to Subsections (a) and
(b) hereof);
(d) On or after the third anniversary of the Closing Date, and
subject to any legal restrictions upon Transfer, a Stockholder may transfer
any and all Telular Shares acquired by such Stockholder pursuant to this
Agreement;
(e) The percentage of shares that may be Transferred at any time
prior to third anniversary of the Closing Date shall be increased by five
percentage points upon the achievement by Telular of each of the following
milestones:
(i) Production of at least 5,000 voice-only SX2(e) TDMA
units (or any other task reasonably substituted therefor by
Telular) on or before April 15, 1998;
(ii) Production of at least 5,000 voice-only SX2(e) CDMA
units (or any other task reasonably substituted therefor by
Telular) on or before May 15, 1998;
(iii) Production of at least 5,000 voice-only SX2(e) DCS-1800
units (or any other task reasonably substituted therefor by
Telular) on or before June 30, 1998;
(iv) Production of at least 5,000 SX4 GSM units (or any other
task reasonably substituted therefor by Telular) on or before
October 15, 1998; and
(v) Production of at least 5,000 SX4 DCS-1800 units (or any
other task reasonably substituted therefor by Telular) on or
before November 1, 1998; and
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(f) The restrictions of this Section 6.01 shall cease to apply
upon the sale of all or substantially all of the assets of Telular, the merger
of Telular with or into another entity if the stockholders of Telular
immediately prior to such merger do not constitute a majority of the
stockholders of the surviving entity, or the acquisition by any one person, or
group of persons acting in concert, of more than 50% of the voting stock of
Telular, on a fully-diluted basis.
6.02 LEGENDING OF CERTIFICATES. Each Wireless Domain Stockholder
hereby consents to the placement on any certificates representing ownership of
Telular Shares the transfer of which is restricted under Section 6.01 of the
following restrictive legend:
The securities represented by this certificate are subject to
an Agreement and Plan of Merger dated November 10, 1997
(including any amendments adopted after such date), a copy of
which is available for examination at the principal offices of
the Telular Corporation, and may not be offered, sold,
transferred, hypothecated, pledged, given or otherwise
disposed of except in accordance with the terms of such
Agreement. Telular Corporation will not effectuate transfers
of this stock except in accordance with the provisions of such
Agreement.
At such time as the transfer restrictions of Section 6.01 cease to apply to any
Telular Shares, Telular shall, at the request of any Wireless Domain
Stockholder, cause the foregoing legend to be removed from the certificates
evidencing such Telular Shares held by such Wireless Domain Stockholders.
6.03 PERMITTED TRANSFER. "Permitted Transfer" shall mean: a
Transfer made at any time to such person's estate or heirs at law, whether by
devise, bequest, or the laws of intestate succession, provided that the
recipient agrees to be bound by the terms of the Agreement.
ARTICLE VII
CERTAIN CONDITIONS
7.01 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment or waiver on or prior to the Closing Date of all of the
following conditions:
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(a) This Agreement shall have received the approval of all of the
Wireless Domain Stockholders at the meeting of stockholders called for the
purpose of approving the Merger.
(b) This Agreement and the transactions contemplated hereby shall
have been approved by each federal and/or state regulatory agency whose
approval is required for consummation of the transactions contemplated hereby.
(c) Wireless Domain, the Wireless Domain Stockholders, Telular,
and TWD shall not be subject to any order, decree, or injunction of a court or
agency of competent jurisdiction that enjoins or prohibits the consummation of
the Merger, and the Merger and other transactions contemplated hereby shall not
have been prohibited under any applicable federal or state law or regulation.
(d) No action or proceeding shall have been instituted before any
court or governmental body to restrain or prohibit, or to obtain substantial
damages in respect of, the consummation of this Agreement which, in the
reasonable opinion of Telular or Wireless Domain, may reasonably be expected to
result in a preliminary or permanent injunction against such consummation or an
award of such substantial damages.
(e) None of the parties to this Agreement shall have received
written notice from any governmental body of its intent to institute any action
or proceeding to restrain or enjoin or nullify this Agreement or the
transactions contemplated hereby.
(f) The Telular Shares shall have been approved by NASDAQ for
listing.
7.02 CONDITIONS TO OBLIGATIONS OF WIRELESS DOMAIN. The obligations
of Wireless Domain to effect the Merger shall be subject to the fulfillment or
waiver on or prior to the Closing Date of all of the following additional
conditions:
(a) The representations and warranties of Telular and TWD made
herein shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date (as though made on and as of the
Closing Date, except (i) to the extent such representations and warranties are
by their express provisions made as of a specified date, and (ii) for the
effect of transactions contemplated by this Agreement).
(b) Telular and TWD shall have performed in all material respects
all obligations required to be performed by them under this Agreement on or
prior to the Closing Date.
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(c) Telular and TWD shall have obtained any and all material
permits, authorizations, consents, waivers, and approvals required for the
lawful consummation of the Merger.
7.03 CONDITIONS TO OBLIGATIONS OF TELULAR AND TWD. The obligations
of Telular and TWD to effect the Merger shall be subject to the fulfillment on
or prior to the Closing Date of all of the following additional conditions:
(a) The representations and warranties of the Wireless Domain
Stockholders made herein shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date (as though made on and
as of the Closing Date, except (i) to the extent such representations and
warranties are by their express provisions made as of a specific date and (ii)
for the effect of transactions contemplated by this Agreement).
(b) Wireless Domain shall have performed in all material respects
all obligations required to be performed by it under this Agreement on or prior
to the Closing Date.
(c) Wireless Domain shall have obtained any and all material
permits, authorizations, consents, waivers, and approvals required for the
lawful consummation of the Merger.
(d) Each of Dan Giacopelli, Jeffrey Hickey and Rex Nathanson shall
have entered into an employment agreement with Telular in accordance with
Section 5.08, and Wireless Domain shall have used its best efforts to cause
Jerome Deutsch to enter into such an employment agreement.
ARTICLE VIII
TERMINATION, AMENDMENT, AND WAIVER
8.01 TERMINATION. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after approval by the stockholders
of Wireless Domain:
(a) By mutual consent of Wireless Domain and Telular;
(b) By Wireless Domain or Telular at anytime after November 30,
1997, if the Merger shall not theretofore have been consummated;
(c) By Telular or TWD, in the event of a material breach by
Wireless Domain or any Wireless Domain Stockholder of any representation,
warranty, or agreement contained in this Agreement, which breach is not cured
within 15 days after written notice thereof is given to the party committing
such breach or waived by such other party; or
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(d) By Wireless Domain or the Wireless Domain Stockholders, in the
event of a material breach by Telular or TWD of any representation, warranty,
or agreement contained in this Agreement, which breach is not cured within 15
days after written notice thereof is given to the party committing such breach
or waived by such other party.
8.02 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 8.01, this Agreement shall forthwith become
void and without further effect and there shall be no liability on the part of
any party hereto or the respective officers and directors of any party, except
as set forth in Section 5.03 (respecting payment of certain expenses) and
except that nothing herein shall relieve any party from liability for any
breach of any representation, warranty, or covenant contained herein.
8.03 AMENDMENT. This Agreement and the Exhibits hereto may be
amended by Wireless Domain and Telular at any time before or after approval of
this Agreement by the stockholders of Wireless Domain; provided, however, that
after any such approval no such modification shall (i) alter the amount or
change the form of the consideration contemplated by this Agreement to be
received by stockholders of Wireless Domain or (ii) alter or change any of the
terms of this Agreement if such alteration or change would materially and
adversely affect the stockholders of Wireless Domain. This Agreement may not
be amended except by an instrument in writing signed by Wireless Domain and
Telular.
8.04 WAIVER. Any term, condition or provision of this Agreement
may be waived in writing at any time by the party that is, or whose
stockholders are, entitled to the benefits thereof.
ARTICLE IX
REGISTRATION AND SALE OF TELULAR STOCK.
9.01 REGISTRATION. Within 30 days after the Closing Date and at
Telular's sole expense, Telular shall file with the SEC a registration
statement for the resale by the Wireless Domain Stockholders of the Telular
Shares (a "Registration Statement"). Telular shall use its best efforts to
cause each Registration Statement to become effective within 90 days after the
date upon which it is filed with the SEC, and to remain in effect thereafter
until the earlier of (i) the second anniversary of the date upon which it
becomes effective and (ii) the sale by the Wireless Domain Stockholders of all
of the Telular Shares covered thereby. Telular shall at Telular's sole expense
cause all Telular Shares to be registered for sale, or qualify from exemption
from such registration, under any applicable state securities law.
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9.02 NOTIFICATION. Telular shall immediately notify the Wireless
Domain Stockholders (i) at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of 1933 (the "Securities
Act"), (ii) of the receipt by Telular of any notification with respect to the
suspension of the qualification of the Telular Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, or (iii) of the happening of any event which comes to Telular's
attention if as a result of such event the prospectus included in such
registration statement contains an untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and, in each such case, Telular will
promptly prepare and furnish to the Wireless Domain Stockholders a supplement
or amendment to such prospectus so that, as thereafter delivered to the
purchasers of such Telular Shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
9.03 SUSPENSION OF SALES. Upon receipt of any notice from Telular
of the happening of any event of the kind described in Section 9.02, the
Wireless Domain Stockholders shall forthwith discontinue disposition of Telular
Shares pursuant to any Registration Statement until the Wireless Domain
Stockholders' receipt of the copies of the supplemented or amended prospectus
contemplated by Section 9.02, and, if so directed by Telular, the Wireless
Domain Stockholders shall deliver to Telular (at Telular's expense) all copies,
other than permanent file copies, then in the Wireless Domain Stockholders'
possession, of the prospectus covering such Telular Shares current at the time
of receipt of such notice. In the event Telular shall give any such notice,
the period mentioned in Section 9.02 shall be extended by the greater of (i)
one month or (ii) the number of days during the period from and including the
date of the giving of such notice pursuant to Section 9.02 to and including the
date when the Wireless Domain Stockholders shall have received the copies of
the supplemented or amended prospectus contemplated by Section 9.02.
9.04 INSPECTION. Telular shall make available for inspection by
the Wireless Domain Stockholders in connection with its sale of any Telular
Shares, by any underwriter participating in any disposition pursuant to such
registration statement and amendment thereto, and by any attorney, accountant
or other agent retained by the Wireless Domain Stockholders or such underwriter
(collectively, the "Inspectors"), all financial and other records, pertinent
corporate documents and properties of Telular and its subsidiaries, if any, as
shall be reasonably necessary to enable them to exercise their due diligence
responsibility, and cause the officers, directors and employees
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of Telular and its subsidiaries to supply all information and respond to all
inquiries reasonably requested by any such Inspector in connection with such
registration statement and amendments thereto.
9.05 PROVISION OF INFORMATION. Promptly prior to the filing of any
document which is to be incorporated by reference into any Registration
Statement or the prospectus included therein (after initial filing of such
Registration Statement), Telular shall provide copies of such document to
counsel to the Wireless Domain Stockholders and to its managing underwriters,
if any, and make Telular's representatives available for discussion of such
document.
9.06 DISCLOSURE BY THE WIRELESS DOMAIN STOCKHOLDERS. It shall be a
condition precedent to the obligation of Telular to take any action pursuant to
this Article IX that the Wireless Domain Stockholders shall furnish to Telular
such information regarding the securities held by the Wireless Domain
Stockholders and the intended method of disposition thereof as Telular shall
reasonably request and as shall be required in connection with the action taken
by Telular.
9.07 INDEMNIFICATION.
(a) Indemnification by Telular. With respect to any
Registration Statement filed by Telular pursuant to Section 9.01,
Telular will, and it hereby does, indemnify and hold harmless, to the
full extent permitted by law, the Wireless Domain Stockholders and
each other person, if any, is controlled by the Wireless Domain
Stockholders within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act of 1934, as amended (the "Exchange
Act") (for purposes of this Section 9.07(a), an "Indemnified Person"),
against any and all losses, claims, damages or liabilities, joint or
several, and expenses (including any amounts paid in any settlement
effected with Telular's consent) to which such Indemnified Person may
become subject under the Securities Act, the Exchange Act, state
securities or blue sky laws, common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) or expenses arise out of or are based upon (A) any
untrue statement or alleged untrue statement of any material fact
contained, on the effective date thereof, in such Registration
Statement, any preliminary, final or summary prospectus combined
therein, or any amendment or supplement thereto, (B) any omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (C) any violation by Telular of any federal, state or
common law rule or regulation applicable to Telular and relating to
action
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required of or inaction by Telular in connection with any such
registration, and, in each case, Telular will reimburse such
Indemnified Person for any reasonable legal or any other expenses
reasonably incurred by him, her or it in connection with investigating
or defending such loss, claim, liability, action or proceeding;
provided, however, that Telular shall not be liable in any such case
to the extent that any such loss, claim, damage, liability (or action
or proceeding in respect thereof) or expense is caused by any untrue
statement or alleged untrue statement or omission or alleged omission
made in such registration statement or amendment or supplement thereto
or in any such preliminary, final or summary prospectus in reliance
upon and in conformity with written information furnished to Telular
through an instrument duly executed by such Indemnified Person
specifically stating that it is for inclusion therein. Such indemnity
shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Person and shall survive the
transfer of such securities by such Indemnified Person.
(b) Indemnification by Wireless Domain Stockholders.
Telular may require, as a condition to including any Telular Shares
owned by the Wireless Domain Stockholders in any Registration
Statement, that Telular shall have received an undertaking reasonably
satisfactory to it from the Wireless Domain Stockholders, each other
person registering Telular securities pursuant to such Registration
Statement or any underwriter or selling agent, to severally and not
jointly, indemnify and hold harmless (in the same manner and to the
same extent as set forth in subsection (a) of this Section 9.07)
Telular and its directors, officers, controlling persons, any
underwriter or selling agent and all other prospective sellers and
their respective directors, officers, general and limited partners,
managing directors, and their respective controlling persons (for
purposes of this Section 9.07(b), "Indemnified Persons") but only with
respect to (A) any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any such
Registration Statement, any preliminary, final or summary prospectus
contained therein, or any amendment or supplement thereto, or (B) any
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case in reliance upon and in conformity with
written information furnished to Telular or its representatives
through an instrument duly executed by or on behalf of such Holder,
other selling person or underwriter or selling agent specifically
stating that it is for inclusion therein. Such indemnity shall remain
in full force and effect regardless of any investigation made
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by or on behalf of the Indemnified Persons and shall survive the
transfer of such securities by such indemnifying party; provided,
however, that no such indemnifying party shall be liable under this
Section 9.07(b) for any amounts exceeding the product of the purchase
price per share and the number of Telular Shares being sold pursuant
to such registration statement or prospectus by such indemnifying
party.
(c) Third Party Claims; No Limitations. The
provisions of Section 10.02 of this Agreement shall apply, and the
provisions of Section 10.03 of this Agreement shall not apply, in
respect of indemnification pursuant to this Section 9.07.
ARTICLE X
GENERAL PROVISIONS
10.01 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Except as set forth in the last sentence of this Section 10.01, the
representations and warranties of the Parties contained in this Agreement and
in any document or certificate given pursuant hereto shall survive the Closing
and continue for a period of 18 months after the Closing Date. Any right of
indemnification pursuant to Article X with respect to a claimed breach of a
representation or warranty shall expire at the date of termination of the
representation or warranty claimed to be breached (the "Termination Date"),
unless on or prior to the Termination Date a Claim Notice (as hereinafter
defined) has been made to the party from whom indemnification is sought.
Provided that a Claim Notice is timely made, the right to indemnification may
continue to be asserted beyond the Termination Date of the representation and
warranty to which such Claim Notice relates. As used in this Agreement, a
"Claim Notice" means a written notice asserting a breach of a representation or
warranty specified in this Agreement which reasonably sets forth, in light of
the information then known to the party giving such notice, a description of,
and estimate (if it is then reasonable to make an estimate) of the amount
involved in, such breach. Notwithstanding anything in this Section 10.01 to
the contrary, the representations and warranties made by the Wireless Domain
Stockholders pursuant to Section 2.10 shall survive for a period coterminous
with any applicable statute of limitations, and the representations and
warranties made by Telular and TWD pursuant to Section 3.05 shall survive
indefinitely.
10.02 INDEMNIFICATION FOR BREACHES OF WARRANTY, ETC.
(a) Subject to the limitations set forth in Section 10.03, the
Wireless Domain Stockholders shall indemnify and save harmless Telular and its
affiliates, beneficiaries, successors,
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subsidiaries, directors, officers, employees, agents and representatives (such
parties shall be collectively referred to herein as the "Telular Indemnified
Parties"), effective as of and from the Closing Date, from and against any
claims, demands, actions, causes of action, damages, losses, costs, liabilities
or expenses (including, without limitation, the disbursements, expenses and
reasonable fees of its attorneys) (hereinafter in this Article X called
"Claims") which may be made or brought against a Telular Indemnified Party, or
which it may suffer or incur, as a result of, in respect of, or arising out of
any non-fulfillment of any covenant or agreement on the part of the Wireless
Domain Stockholders under this Agreement or any incorrectness in or breach of
any representation or warranty of the Wireless Domain Stockholders contained
herein or in any certificate furnished pursuant hereto or thereto.
(b) Subject to the limitations set forth in Section 10.03, Telular
shall indemnify and save harmless the Wireless Domain Stockholders and their
beneficiaries, successors, agents and representatives (such parties shall be
collectively referred to herein as the "Wireless Domain Indemnified Parties"),
effective as of and from the Closing Date, from and against any Claims which
may be made or brought against any Wireless Domain Indemnified Party, or which
they may suffer or incur, as a result of, in respect of, or arising out of, any
non-fulfillment of any covenant or agreement on the part of Telular under this
Agreement or any incorrectness in or breach of any representation or warranty
of Telular contained herein or in any certificate furnished pursuant hereto.
(c) If any action, suit, investigation or proceeding shall be
brought or asserted by any third party (a "Third Party Claim") against a
Telular Indemnified Party or a Wireless Domain Indemnified Party, respectively
(each, an "Indemnified Party"), in respect of which indemnity may be sought
under Subsections 10.02(a) or 10.02(b) from the relevant indemnifying person or
any successor thereto (the "Indemnifying Party"), then the Third Party Claim
shall be subject to the following terms and conditions:
(i) The Indemnified Party shall promptly provide written
notice of any Third Party Claim asserted against, resulting to,
imposed upon or incurred by the Indemnified Party to the Indemnifying
Party. The Indemnifying Party, upon receiving such written notice,
may at its own expense undertake the defense of such Third Party Claim
by counsel of its own choosing, which shall be reasonably acceptable
to the Indemnified Party; provided, that, the Indemnified Party shall
have the right to employ separate counsel to participate in (but not
control) the defense of any such action, suit, claim or proceeding,
but the disbursements,
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expenses and fees of such separate counsel shall be at the expense of
the Indemnified Party.
(ii) If within twenty (20) business days after written
notice of any Third Party Claim has been provided to the Indemnifying
Party, the Indemnifying Party fails to defend the Indemnified Party,
the Indemnified Party shall have the right to undertake the defense,
compromise or settlement of such Third Party Claim for the account of
the Indemnifying Party.
(iii) Anything in this Subsection 10.02(c) to the contrary
notwithstanding, (a) if there is a reasonable probability in the
Indemnified Party's judgment that the Third Party Claim may materially
and adversely affect the Indemnified Party other than as a result of
money damages or other money payments, the Indemnified Party shall
have the right to defend, co-defend, compromise or settle such Third
Party Claim and (b) the Indemnifying Party shall not, without the
prior written consent of the Indemnified Party, settle or compromise
any claim or consent to entry of any judgment relating to any such
Third Party Claim, which settlement, compromise or judgment does not
include as an unconditional term thereof the giving by the claimant or
the plaintiff to the Indemnified Party a release from all liabilities
in respect of such Third Party Claim.
(iv) The Indemnifying Party shall provide the Indemnified
Party with access to all records and documents of the Indemnifying
Party relating to any Third Party Claim. The Indemnified Party shall
provide the Indemnifying Party with access to all records and
documents of the Indemnified Party relating to any Third Party Claim.
10.03 QUALIFICATIONS WITH RESPECT TO SUBSECTIONS 10.02(A) AND
10.02(B). The obligations of indemnification in respect of Claims set forth in
Subsections 10.02(a) and 10.02(b) shall be subject to the following
limitations: (i) such obligations shall be subject to the limitation set forth
in Section 10.01 respecting the survival of the representations and warranties
of the parties; (ii) such obligations shall be subject to Subsection 10.02(c);
(iii) such obligations shall not be applicable unless and until the aggregate
amount of claims by the party seeking indemnification exceeds One Hundred
Thousand Dollars ($100,000), in which event the right of indemnification shall
apply to the full amount of such Claims and not only those in excess of One
Hundred Thousand Dollars ($100,000); and (iv) in any claim for indemnification
against a Wireless Domain Shareholder, Telular and TWD shall have recourse only
against the Telular Shares received by such Wireless Domain Shareholder under
this Agreement, or the proceeds thereof, and shall not
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have recourse against any other assets of such Wireless Domain Shareholder.
10.04 NO ASSIGNMENT; SUCCESSORS AND ASSIGNS. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies whatsoever under or by reason of this Agreement. Neither this
Agreement nor any right or obligation set forth in any provision hereof may be
transferred or assigned by Telular or TWD without the prior written consent of
the Wireless Domain Stockholders, or by the Wireless Domain Stockholders
without the prior written consent of Telular, and any purported transfer or
assignment in violation of this Section 10.04 shall be void and of no effect;
except that Telular may assign its rights (but not its obligations) hereunder
to a wholly-owned, direct or indirect subsidiary of Telular without the
Wireless Domain Stockholders' consent, provided that, following any such
assignment by Telular, Telular shall remain primarily liable to fulfill its
liabilities and obligations hereunder.
10.05 SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be held to
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remaining provisions of this Agreement.
10.06 NO IMPLIED WAIVER. No failure or delay on the part of either
party hereto to exercise any right, power, or privilege hereunder or under any
instrument executed pursuant hereto shall operate as a waiver nor shall any
single or partial exercise of any right, power, or privilege preclude any other
further exercise thereof or the exercise of any other right, power, or
privilege.
10.07 HEADINGS. Article, section, subsection, and paragraph titles,
captions and headings herein are inserted only as a matter of convenience and
for reference, and in no way define, limit, extend, or describe the scope of
this Agreement or the intent of any provision hereof.
10.08 ENTIRE AGREEMENT. Except for the Confidentiality Agreement,
this Agreement, and the Exhibits hereto constitute the entire agreement between
and among the parties with respect to the subject matter hereof, and supersedes
all prior negotiations, representations, warranties, commitments, offers,
letters of interest or intent, proposal letters, contracts, writings, or other
agreements or understandings with respect thereto.
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10.09 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, and any party to this Agreement may execute and deliver this
Agreement by executing and delivering any of such counterparts, each of which
when executed and delivered shall be deemed to be an original and all of which
taken together shall constitute one and the same instrument.
10.10 NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to be duly given (a) on the date delivered if
delivered personally or sent by facsimile transmission or (b) on the date
received if mailed by registered or certified mail (return receipt requested),
or by nationally recognized overnight courier service, in each case to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
If to Wireless Domain or the
Wireless Domain Stockholders:
Telular-WD Corporation
580 Old Willets Path
Hauppage, NY 11788
Fax: (516) 234-8474
Attention: Dan Giacopelli (or name of Wireless Domain Stockholder)
Copy to:
Lowenthal, Landau, Fischer & Bring, P.C.
250 Park Avenue
New York, NY 10177
Fax: (212) 986-0604
Attention: Martin R. Bring, Esq.
If to Telular or TWD:
Telular Corporation
647 North Lakeview Parkway
Vernon Hills, IL 60061
Attention: Kenneth Millard
Facsimile # 847-247-9577
Copy to:
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Fax: (202) 778-5258
Attention: Michael Cutler, Esq.
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provided, however, that the providing of notice to counsel shall not, of
itself, be deemed the providing of notice to a party hereto.
10.11 GOVERNING LAW. This Agreement shall be governed by and
controlled as to validity, enforcement, interpretation, effect, and in all
other respects by the laws of the State of New York without regard to the
conflicts of laws provisions thereof.
10.12 WAIVER OF JURY TRIAL. Telular, TWD, Wireless Domain, and the
Wireless Domain Stockholders specifically waive any right to trial by jury in
any court with respect to any contractual, tortious or statutory claim,
counterclaim or crossclaim against the other arising out of or connected in any
way to this Agreement because the parties hereto, each of whom are represented
by counsel, believe that the complex commercial aspects of their dealing with
one another make a jury determination neither desirable nor appropriate.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be signed by their respective officers thereunto duly authorized
as of the 10th day of November, 1997.
WIRELESS DOMAIN INCORPORATED
By:
------------------------------
Dan Giacopelli
President and CEO
<PAGE> 37
- 37 -
TELULAR CORPORATION
By:
------------------------------
Kenneth Millard
President and CEO
TELULAR-WD CORPORATION
By:
------------------------------
Kenneth Millard
President and CEO
WIRELESS DOMAIN STOCKHOLDERS:
- ---------------------------------
Dan Giacopelli
- ---------------------------------
Jeffrey Hickey
- ---------------------------------
Rex Nathanson
- ---------------------------------
Alvin Taylor
- ---------------------------------
Frank Bianchini
<PAGE> 1
EXHIBIT (11) - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE AND PRO FORMA
EARNINGS PER SHARE (1997)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Average number of shares outstanding.............. 31,507,622 27,655,964 23,340,706
================= ================= =================
Net loss $ (5,302,000) $ (26,593,178) $ (19,660,458)
================= ================= =================
Less: amortization of redeemable preferred
stock beneficial conversion discount $ (2,222,000) $ - $ -
----------------- ----------------- -----------------
Loss applicable to common shares $ (7,524,000) $ (26,593,178) $ (19,660,458)
================= ================= =================
Net loss per share $ (0.24) $ (0.96) $ (0.84)
================= ================= =================
</TABLE>
<PAGE> 1
EXHIBIT (21) - SUBSIDIARIES OF REGISTRANT
The registrant, Telular Corporation, is a Delaware corporation. The
registrant's subsidiaries are:
Telular-Adcor Security Products, Inc., a Georgia corporation; and
Telular International, Inc., and Illinois corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 28,451,000
<SECURITIES> 0
<RECEIVABLES> 11,623,000
<ALLOWANCES> 426,000
<INVENTORY> 9,431,000
<CURRENT-ASSETS> 49,579,000
<PP&E> 6,262,000
<DEPRECIATION> 2,651,000
<TOTAL-ASSETS> 57,553,000
<CURRENT-LIABILITIES> 10,546,000
<BONDS> 0
21,308,000
0
<COMMON> 322,000
<OTHER-SE> 25,377,000
<TOTAL-LIABILITY-AND-EQUITY> 57,553,000
<SALES> 48,417,000
<TOTAL-REVENUES> 48,417,000
<CGS> 37,881,000
<TOTAL-COSTS> 37,881,000
<OTHER-EXPENSES> 15,838,000
<LOSS-PROVISION> (231,000)
<INTEREST-EXPENSE> (47,000)
<INCOME-PRETAX> (5,302,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,302,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,222,000)
<CHANGES> 0
<NET-INCOME> (7,524,000)
<EPS-PRIMARY> (.24)
<EPS-DILUTED> (.24)
</TABLE>
<PAGE> 1
EXHIBIT (99) - CAUTIONARY STATEMENTS
CAUTIONARY STATEMENTS PURSUANT TO THE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company wishes to inform its investors of the following factors
that in some cases have affected, and in the future could affect, the Company's
results of operations that could cause such future looking statements made by
or on behalf of the Company. Disclosure of these factors is intended to permit
the Company to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Many of these factors have been
discussed in prior SEC filings by the Company. Though the Company wishes to
caution investors that other factors may in the future prove to be important in
affecting the Company's results of operations.
LIMITED OPERATING HISTORY AND EXPECTATION OF CONTINUED LOSSES
The Company commenced operations in 1986 and although it
reported a profit for the fourth quarter of fiscal year 1996, and the first
quarter of fiscal year 1997, it has yet to report an annual profit. The
development of the Company's business has required significant expenditures in
connection with the defense of the Company's patents, research and development
of its technology and marketing of its products. Substantial costs related to
these activities have been and will continue to be incurred by the Company
before the realization of associated revenues.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
At September 30, 1997, the Company had $28.5 million in cash
and cash equivalents with a working capital surplus of approximately $39.0
million. Expansion of the Company's business, including the development of new
products and markets for the Company's existing products, will require
significant product development expenditures. In addition, the Company is
expected at least in the near term to continue to operate at a loss. Based on
its current operating plan, the Company believes its existing capital
resources, including a credit facility and proceeds from its issuance of
Preferred Stock, should enable it to maintain its current and planned
operations. The Company continues to consider other financing opportunities
that would be used to support additional growth and product development.
Expected future uses of cash include working capital requirements, marketing
programs and product development in anticipation of future revenues. Cash
requirements may vary and are difficult to predict given the nature of the
developing markets targeted by the Company. The amount of royalty income from
the Company's licensees is unpredictable, but could have an impact on the
Company's actual cash flow. Unanticipated events such as litigation could
increase capital requirements. To the extent that additional funds are needed
subsequently, the Company may need to raise additional funds through public or
private financings. No assurance can be given that additional financing will
be available or that, if available, it will be obtained on terms favorable to
the Company.
In 1996, the Company completed a major corporate restructuring
as part of a program to balance expenditure levels with revenues, and to
improve working capital. In connection with that restructuring, the Company
incurred approximately $11.0 million in restructuring and impairment charges,
phased out its manufacturing operations in Puerto Rico and Illinois,
consolidated its manufacturing operations at the Company's Atlanta, Georgia
facility, and reduced its workforce from approximately 250 employees in January
1996 to approximately 110 employees at the end of November 1996. Details of
the restructuring are set forth in the Company's SEC Filings. The Company is
continuing to monitor expenditure levels in light of timing of market expansion
and revenues and anticipates taking further actions from time to time as it
deems appropriate.
Faced with terminating leases at its Buffalo Grove and
Atlanta, Georgia facilities, on May 1, 1997, the Company consolidated its
Buffalo Grove and Atlanta, Georgia operations into a new facility in Vernon
Hills, Illinois. This has resulted in the majority of the Company's
manufacturing, engineering, and administration operations being located at a
single site. The Company anticipates this development will enhance the quality
of its products and speed the introduction of such products to market.
1
<PAGE> 2
MANAGEMENT TRANSITION
The Company has experienced several significant changes in
management over the past two years. Richard Gerstner served as Chief Executive
Officer from November 1993 to November 1995. From November 1995 until April
1996, William L. De Nicolo served as Chief Executive Officer. Mr. De Nicolo,
the founder of the Company, served as CEO prior to Mr. Gerstner's appointment
and has served as Chairman of the Board since the Company was founded. Kenneth
E. Millard became President and Chief Executive Officer in April 1996. Mr.
Millard also serves as a member of the Board of Directors. Robert L.
Montgomery was appointed Executive Vice-President and Chief Operating Officer
during March, 1997. Jeffrey L. Herrmann joined the Company as Controller in
April 1997, and was promoted to Senior Vice-President and Chief Financial
Officer in July, 1997. Mr. Herrmann replaced Thomas M. Mason who had been
Senior Vice President and Chief Financial Officer since joining the Company in
March, 1997.
As noted above, the Company has experienced a number of other
changes in its executives over the past year, and has substantially reduced its
workforce. These changes may have an adverse effect on the Company's ability
to implement its plans and manage its operations in a consistent manner.
RELIANCE ON KEY CUSTOMER
In the near term the Company's success may depend on a number
of large orders from a small group of companies, which creates a risk that the
loss of any one customer may have a significant impact on the Company's
financial results. During fiscal year 1997, sales by the Company to Motorola
represented approximately 44% of total sales. The Company has a substantial
contract with Motorola to sell fixed wireless terminals to Motorola for its
construction of a cellular system in Hungary. The contract includes a
commitment by Motorola to purchase $100 million of the Company's fixed wireless
terminals over a three-year period commencing January 1, 1996. As of September
30, 1997, Motorola had purchased approximately $27 million of product under
this contract. The commitment by Motorola to purchase the Company's product
over a three-year period is not guaranteed.
INTELLECTUAL PROPERTY RIGHTS
The Company's success in the United States will depend to a
considerable extent upon its ability to obtain and enforce intellectual
property protection for its technology in the United States. No assurance can
be given that the Company's existing patents or any future patents obtained by
the Company will not be challenged, invalidated or circumvented, or that the
Company's competitors will not independently develop or patent technologies
that are substantially equivalent to or superior to the Company's technology.
The nature and status of litigation that involves the Company's intellectual
property rights are set forth in the SEC Filings.
Although the Company believes that its intelligent interface
can be adapted to accommodate emerging wireless services, there can be no
assurance that these new services will fall within the boundaries of the
Company's existing patent protection.
In some countries, patent protection is not available.
Moreover, some countries that grant patents do not afford meaningful protection
or redress for violations. Neither the Company nor its competitors have
established, and both are now legally barred from establishing, patent
protection for core technology in many other countries, including the principal
countries of Western Europe. In the absence of patent protection, the Company
has relied upon other competitive factors including: (a) product
functionality, (b) the quality of its products, and (c) the desirability of
using products that meet the same specifications as those in the United States
and in other countries where the Company has obtained patent protection.
There can be no assurance that patent protection can be
obtained, in the United States or elsewhere, for new products or applications,
or that such patent protection, if obtained, will afford meaningful protection.
2
<PAGE> 3
INTENSE COMPETITION IN INDUSTRY
Competition in the wireless telecommunications equipment
industry is intense. The industry includes major domestic and international
companies such as Motorola, Ericson, Nokia, Qualcom and Nortel, many of which
have substantially greater financial, technical, marketing, sales,
manufacturing, distribution and other resources than those of the Company. The
Company faces competition in various areas from certain of its licensees and
those customers who may purchase the licensees' products. It has granted a
non-exclusive royalty-bearing license to Motorola and Ericson which enables
these companies to produce and sell products which compete with the Company's
products.
To the extent that expansion of the Company's product line or
the development of new uses or applications for its products are outside of the
protection provided by the Company's patents and other intellectual property
rights, the Company may encounter increased competition from a variety of
sources.
RELIANCE UPON GROWTH AND PRICING OF WIRELESS SERVICE
The market for basic telephone service in developing
countries, which at present are the Company's principal markets, is an emerging
one. The timing related to purchases of equipment for the provision of
telephone service is affected by regulatory, macroeconomic, capital
availability and competitive factors which make the timing of such awards
difficult to predict.
The success of the Company depends to a considerable extent
upon the continued growth and increased availability of cellular and other
wireless telecommunications services internationally and, to a lesser extent at
least in the short term, in the United States.
ANTI-TAKEOVER PROVISIONS; MOTOROLA PURCHASE RIGHTS
The Company's Board of Directors can, without obtaining
stockholder approval, issue shares of preferred stock having rights that could
adversely affect the voting power of holders of the Common Stock. The issuance
of preferred stock may delay, defer or prevent a change in control of the
Company. In addition, Section 203 of the Delaware General Corporation Law
restricts certain business combinations with any "interested stockholder" as
defined in such law. The current stockholders of the Company are not, by
virtue of their current holdings, deemed to be "interested stockholders" under
this statute. This statute may delay, deter or prevent a change in control of
the Company.
Under the terms and conditions of the Company's Preferred
Stock, the merger, consolidation, or sale of substantially all of the assets of
the Company, or the purchase of more than 50% of the outstanding shares of
Common Stock of the Company, prior to conversion of all of the shares of the
Preferred Stock may trigger a right of redemption on the part of the holders of
the Preferred Stock.
Under the Shareholders' Agreement among certain of the
Company's stockholders, the Company and its principal stockholders are required
to notify Motorola prior to any solicitation of purchase offers for, or the
acceptance of any unsolicited offer for, all or substantially all of the assets
of the Company or a majority of its voting stock. Motorola has the right to
submit a bid at that time, and the Company and its principal stockholders have
agreed not to make any such sale at a valuation lower than that of Motorola's
bid, if any. Motorola's rights will terminate upon any sale by Motorola of
shares of Common Stock, unless after such sale Motorola owns 20% or more of the
outstanding Common Stock, on a fully diluted basis. The existence of this
contractual provision may delay, deter or prevent a change in control of the
Company.
3
<PAGE> 4
REDEMPTION OF PREFERRED STOCK
A right of redemption on the part of the holders of the
Company's Preferred Stock may be triggered by a number of events in addition to
the merger, consolidation or sale of substantially all of the assets of the
Company, including the purchase of more than 50% of the outstanding shares of
Common Stock of the Company, the failure by the Company to convert Preferred
Stock when required to do so, the delisting of the Company's Common Stock from
a national securities exchange, or the failure by the Company to timely
register and keep in effect the Common Stock to be issued upon conversion of
the Preferred Stock.
VOLATILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly operating results may fluctuate based
on a number of factors, including variations in the Company's distribution
channels and the mix of products it sells, the timing of final product
approvals from any major distributor or end user, the timing of orders from and
shipments to major customers, the timing of new product introductions by the
Company or its competitors, changes in pricing policies by the Company's
suppliers, the availability and cost of key components, the timing of personnel
hirings and the market acceptance of new and enhanced versions of the Company's
products.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the results of trials or the
introduction of new products by the Company or its competitors, market
conditions in the telecommunications, technology and emerging growth sectors
and rumors relating to the Company or its competitors may have a significant
impact on the market price of the Common Stock. Furthermore, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology and emerging growth companies such as
those in the telecommunications industry. This volatility has often been
unrelated to the operating performance of such companies. These market
fluctuations could adversely affect the price of the Common Stock.
The Company's stock price was particularly volatile during
fiscal 1996. The Company believes that this volatility may have been
attributable in part to the timing of the conversion of a $18 million issue of
convertible debentures issued by the Company in December 1995. All of the
debentures have been converted, and a total of 7.0 million shares of Common
Stock have been issued.
The Preferred Stock issued by the Company in fiscal 1997 is
convertible into Common Stock at a price equal to the lower of the 110% of the
30-day average trading price prior to the time the Common Stock was issued and
85% (subject to certain adjustments) of the 30-day average trading price prior
to conversion, subject to certain minimum price provisions. Under the terms of
the purchase agreement for the Preferred Stock, the holders thereof have
covenanted, not to engage in short sales (other than short sales no more than
three days prior to conversion in an amount which does not exceed the number of
shares to be received upon such conversion) or to engage in transactions in
violation of Section 9 of the 1934 Act, relating to the manipulation of the
trading price of the Common Stock. While these limitations are intended to
minimize volatility that may result from the conversion of the Preferred Stock,
there can be no assurance that such volatility will not occur.
4
<PAGE> 5
DILUTION
Upon conversion of the Company's Preferred Stock, Common Stock
may be issued at a discount relative to the market price of Common Stock at
that time. Issuance at a discount could result in a dilution in the net
tangible book value of the Company per share and in the stockholders' equity
per share. The magnitude of any dilution will depend on the size of the
discount and the number of shares to be issued. These variables will depend on
a variety of factors, including the timing of conversion and the market price
at the time of conversion.
RAPID TECHNOLOGICAL CHANGE
The telecommunications equipment industry is characterized by
rapid technological advances, evolving industry standards, changes in end-user
requirements and frequent new product introduction and enhancements. The
wireless telecommunications industry is experiencing significant technological
change, such as the transformation of cellular systems from analog to digital.
The rate at which this change occurs and the success of such new technologies
may have a material effect on the rate at which the Company expands its
business and on its ability to achieve profitability. Moreover, there can be
no assurance that continuing developments in technology will not result in the
establishment of wireless or wireline technologies for which the Company's
interface technology is not required or in the development of equipment equal
or superior to that provided by the Company.
RISK OF LITIGATION
Litigation in the telecommunications equipment and other high
technology industries has increasingly been used as a competitive tactic both
by established companies seeking to protect their existing position in the
market and by emerging companies attempting to gain access to the market. In
such litigation, complaints may be filed on a variety of grounds, including
antitrust, breach of contract, trade secret, patent or copyright infringement,
patent or copyright invalidity, and unfair business practices. If the Company
is forced to defend itself against such claims, whether or not meritorious, the
Company is likely to incur substantial expense and diversion of management
attention, and may encounter market confusion and the reluctance of licensees
and distributors to commit resources to the Company's products. In the event
that the Company's patents or other intellectual property rights were deemed
invalid or were determined not to prohibit competing technologies, the Company
could face additional competition. See "Risk Factors -- Intellectual Property
Rights."
DEPENDENCE ON ABILITY TO DEVELOP MARKETS
The Company's success depends on its ability to develop both
domestic and international markets for its products. There can be no
assurances that the Company will continue to market its products successfully
or that a larger market for its products will continue to develop.
DEPENDENCE ON ABILITY TO MANAGE GROWTH
The Company's ability to produce and market large volumes of
competitively priced quality products depends on its ability to implement and
continually expand its operational and financial systems, recruit additional
employees and train, manage and motivate both current and new employees.
Failure to effectively manage the growth of the Company or the transition in
officers of the Company would have a material adverse effect on the business of
the Company.
5
<PAGE> 6
DEPENDENCE ON CONTRACTORS FOR MANUFACTURING AND DISTRIBUTION
The Company uses subcontractors for the manufacture of certain
of its components and for the assembly of some of its products. In the past,
the Company has experienced delays in the receipt of interface components and
products, which have resulted in delays in product deliveries. The Company may
experience similar delays in the future.
The inability to obtain sufficient quantities of key
components as required, or to develop alternative sources if and as required in
the future, could result in delays or reductions in product shipments. In
addition, shortages of raw materials or production capacity constraints at the
Company or its subcontractors could negatively affect the Company's ability to
meet its production obligations and result in increased prices for affected
parts. These events could have a material adverse effect on the Company's
customer relationships and operating results.
The Company uses third parties, in addition to its direct
sales force, to distribute and market some of its products. In particular, the
Company plans to use interconnect companies and cellular carriers to market,
distribute, install and service certain of its products. Although the Company
has entered into contracts with several major interconnect companies and
cellular carriers, the Company is only in the early stages of developing these
relationships. In addition, these third parties are not contractually
obligated to perform any of the activities on which the Company depends to meet
its business objectives.
DEPENDENCE ON MOTOROLA FOR TRANSCEIVERS
The Company currently procures most of its cellular
transceivers from Motorola, a principal stockholder of the Company. Pursuant
to the stock purchase agreement between Motorola and the Company, Motorola has
agreed to provide the Company with an opportunity to purchase transceivers
based on any transmission technology that Motorola's Cellular Subscriber Group
offers, when, as and if such products are made available to the public. Under
this agreement, Motorola has a right of first refusal to supply on competitive
terms the Company's transceiver needs provided, among other things, that
Motorola manufactures a comparable product and that the customer does not
specifically request another manufacturer's transceiver product. If sufficient
quantities of Motorola transceivers were not available, the Company might have
to redesign its products and could experience increased costs and shipment
delays.
QUALITY CONTROL PROBLEMS
From time to time, the Company has experienced quality control
problems with components provided by certain of its subcontractors. The
Company has instituted quality monitoring procedures for its components to
address these problems and to comply with ISO-9001. However, there can be no
assurance that future quality control problems will not occur.
RISKS OF DOING BUSINESS IN DEVELOPING MARKETS
Among the Company's largest potential markets are developing
countries that may deploy wireless communications networks as an alternative to
the construction of wireline infrastructure. Such countries may decline to
construct wireless telecommunications systems or construction of such systems
may be delayed for a variety of reasons, in which event the development of
demand for the Company's products in those countries will be similarly limited
or delayed. In doing business in developing markets, the Company may also face
economic, political and hard currency conditions that are more volatile than
those commonly experienced in the United States and other areas.
6
<PAGE> 7
Despite its reliance on international markets, to date, the
Company's sales have not been adversely affected by currency fluctuations.
Currently, the Company requires letters of credit or qualification for export
credit insurance underwritten by the Export-Import Bank of the United States or
other third party insurers on a substantial portion of its international sales
orders. Also, to mitigate the effects of currency fluctuations on the
Company's results of operations, the Company endeavors to conduct all of its
international transactions in U.S. dollars. However, as the Company's
international operations grow, foreign exchange or the inflation of a foreign
currency may pose greater risks for the Company, and the Company may be
required to develop and implement additional strategies to manage these risks.
DEPENDENCE ON RESEARCH AND DEVELOPMENT
The telecommunications equipment market is characterized by
rapid technological advance and the development of increasingly sophisticated
and powerful systems. To remain competitive, the Company must dedicate
significant resources to the development and enhancement of its present and
future products. There can be no assurance that the Company's development
efforts will be successful or that the Company will have adequate capital to
fund such research and development. See "Risk Factors -- Future Capital Needs;
Uncertainty of Additional Funding."
CONFLICTS OF INTEREST
The Company's Board of Directors includes, and is expected to
continue to include, persons designated by strategic partners of the Company
and other parties that have business relationships with the Company. It is
possible that the companies designating such directors, such as Motorola and
other companies in which a director may hold a financial interest, may be in
direct or indirect competition with the Company or among themselves, including
competition with respect to certain business activities and transactions that
the Company may propose to undertake. Although the affected directors may
abstain from voting on matters in which the interests of the Company and those
of another company with which they are affiliated are in conflict, the presence
of potential or actual conflicts could affect the process or outcome of Board
deliberations in ways that could be adverse to the Company.
CONTROL BY EXISTING STOCKHOLDERS
As of November 21, 1997, the officers and directors of the
Company, together with entities affiliated with directors of the Company,
beneficially own approximately 51.7% of the Common Stock (assuming the exercise
of immediately available stock options to purchase Common Stock). Accordingly,
these stockholders, if acting in concert, will be able to have a significant
impact on the election of the Company's directors and the results of actions
requiring stockholder approval. The voting power of these stockholders under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company. Under a Shareholders' Agreement, Motorola has the
right to nominate for election a number of directors proportionate to their
respective holdings of outstanding shares of Common Stock in the case of
Motorola, as long as it holds at least 10% of the outstanding shares it may
nominate at least one director, and that if it holds at least 20% of the
outstanding shares it may nominate at least two directors). The principal
stockholders of the Company have agreed to vote in favor of each such nominee.
7
