<PAGE> 1
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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)
<TABLE>
<S> <C>
Delaware 36-3885440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
647 North Lakeview Parkway
Vernon Hills, Illinois
60061
(Address of principal executive offices)
(Zip Code)
(847) 247-9400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock, par value
$.01, as of March 31, 1997, the latest practicable date, was 31,540,041 shares.
<PAGE> 2
TELULAR CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements:
<S> <C>
Consolidated Balance Sheets
March 31, 1997 and September 30, 1996 3
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and March 31, 1996 4
Six Months Ended March 31, 1997 and March 31, 1996 5
Consolidated Statement of Stockholders' Equity
Period from September 30, 1996 to March 31, 1997 6
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1997 and March 31, 1996 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 3
TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1997 1996
----------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,828 $ 12,838
Receivables:
Trade, net of allowance for doubtful accounts of $582
and $900 at March 31, 1997 and September 30, 1996,
respectively 3,424 6,328
Related parties 3,553 4,088
------------- -----------
6,977 10,416
Inventories, net 11,517 12,792
Prepaid expenses and other current assets 388 181
------------- -----------
Total current assets 30,710 36,227
Property and equipment, net 2,920 2,325
Other assets:
Intangible assets, net 655 180
Investment in affiliate 3,818 3,146
Deposits and other 55 61
------------ -----------
4,528 3,387
------------ -----------
Total assets $ 38,158 $ 41,939
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable:
Trade $ 2,658 $ 1,794
Related parties 887 6,197
Accrued liabilities 1,418 1,678
------------ -----------
Total current liabilities 4,963 9,669
Convertible debentures --- 1,500
------------ -----------
Total liabilities 4,963 11,169
Commitments and contingencies --- ---
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding --- ---
Common stock; $.01 par value; 75,000,000 shares
authorized; 31,540,041 and 31,016,675 outstanding in
March 31, 1997 and September 30, 1996, respectively 321 316
Additional paid-in capital 110,722 108,311
Deficit (76,241) (76,250)
Treasury stock, 560,000 share at cost (1,607) (1,607)
------------ -----------
Total stockholders' equity 33,195 30,770
------------ -----------
Total liabilities and stockholders' equity $ 38,158 $ 41,939
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE> 4
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales to third parties $ 5,419 $ 4,094
Net sales to related parties 5,998 480
------------- ------------
Total net sales 11,417 4,574
Cost of sales 8,580 6,567
------------- ------------
2,837 (1,993)
Engineering and development expenses 1,387 1,279
Selling and marketing expenses 948 1,879
General and administrative expenses 1,326 1,952
Provision for doubtful accounts 47 144
Amortization 20 203
Restructuring and impairment changes --- 9,907
------------- ------------
Income (loss) from operations (891) (17,357)
Other income (expense) 159 (42)
------------- ------------
Net income (loss) $ (732) $ (17,399)
============= ============
Net income (loss) per common share $ (0.02) $ (0.69)
============= ============
Weighted average number of common
shares outstanding 31,452,294 25,271,755
============= ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
----------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales to third parties $ 12,164 $ 7,884
Net sales to related parties 17,633 719
------------- -------------
Total net sales 29,797 8,603
Cost of sales 22,377 10,310
------------- -------------
7,420 (1,707)
Engineering and development expenses 2,727 2,768
Selling and marketing expenses 2,028 3,819
General and administrative expenses 2,863 3,888
Provision for doubtful accounts 231 188
Amortization 40 525
Restructuring and impairment changes --- 9,907
------------- -------------
Income (loss) from operations (469) (22,802)
Other income (expense) 478 (172)
------------- -------------
Net income (loss) $ 9 $ (22,630)
============= =============
Net income (loss) per common share $ 0.00 $ (0.92)
============= =============
Weighted average number of common
shares outstanding 31,447,644 24,489,772
============= =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Preferred Common Paid-In Treasury
Stock Stock Capital Deficit Stock
--------- ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at September
30, 1996 $ --- $ 316 $ 108,311 $(76,250) $ (1,607)
Proceeds from the
conversion of
debentures and
issuances of common
stock --- 4 1,828 --- ---
Stock issued in
connection with the
equity investment in
Wireless Domain --- 1 489
Stock issued in
connection with
compensation expense --- 0 94
Net income for
period from October
1, 1996 to March 31,
1997 --- --- --- 9
--------- --------- ---------- -------- --------
Balance at March 31,
1997 $ --- $ 321 $ 110,722 $(76,241) $ (1,607)
========= ========= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance at September
30, 1996 $ 30,770
Proceeds from the
conversion of
debentures and
issuances of common
stock 1,832
Stock issued in
connection with the
equity investment in
Wireless Domain 490
Stock issued in
connection with
compensation expense 94
Net income for
period from October
1, 1996 to March 31,
1997 9
----------
Balance at March 31,
1997 $ 33,195
==========
</TABLE>
See accompanying notes.
6
<PAGE> 7
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1997 1996
------ ------
OPERATING ACTIVITIES: (unaudited) (unaudited)
<S> <C> <C>
Net income (loss) $ 9 $ (22,630)
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Restructuring and impairment charges --- 9,155
Depreciation 405 640
Amortization 133 525
Interest on debentures --- 154
Non-cash compensation expense 94 99
Equity in net income of affiliate 43 ---
Changes in assets and liabilities:
Receivables, net 3,439 2,462
Inventories, net 1,275 1,924
Prepaid expenses, deposits and other (731) (117)
Accounts payable (4,446) (1,933)
Accrued liabilities (260) (919)
------------- -------------
Net cash used in operating activities (39) (10,640)
INVESTING ACTIVITIES:
Acquisition of property and equipment (1,000) (992)
Investment in affiliate (250) ---
Proceeds from disposal of equipment --- 216
------------- -------------
Net cash used in investing activities (1,250) (776)
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 279 149
Payments on revolving line of credit --- (10,000)
Proceeds from convertible debentures --- 18,000
------------- -------------
Net cash provided by financing activities
279 8,149
------------- -------------
Net decrease in cash and cash equivalents
(1,010) (3,267)
Cash and cash equivalents, beginning of period
12,838 21,552
------------- -------------
Cash and cash equivalents, end of period $ 11,828 $ 18,285
============= =============
</TABLE>
See accompanying notes.
7
<PAGE> 8
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the six months
ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the full fiscal year ending September 30, 1997. For
further information, refer to the consolidated financial statements for
the fiscal year ended September 30, 1996.
2. INVENTORIES
The components of inventories consist of the following (000's):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
--------- -------------
(unaudited)
<S> <C> <C>
Raw materials $ 7,470 $ 11,196
Work in process 462 467
Finished goods 4,508 2,328
------- --------
12,440 13,991
Less: Reserve for obsolescence 923 1,199
-------- --------
$ 11,517 $ 12,792
======== ========
</TABLE>
3. INVESTMENT IN WIRELESS DOMAIN CORPORATION (FORMERLY TELEPATH
CORPORATION)
On June 28, 1996, the Company entered into an agreement to acquire a
one-third interest in Wireless Domain Corporation ("Wireless Domain")
in exchange for $1 million in cash and common stock of the Company
valued at approximately $2.2 million. The agreement calls for the
Company to increase its equity position in Wireless Domain to 50% by
August of 1997 by purchasing an additional one-sixth of Wireless Domain
for 150,000 shares of the Company's common stock as well as payments
totaling $0.5 million in two separate transactions. The first of the
two additional investments in Wireless Domain occurred during the
second quarter of fiscal year 1997. In January 1997, the Company
exchanged $0.25 million in cash and 75,000 shares of the Company's
common stock (approximate value of $0.5 million) for an additional
one-twelfth of Wireless Domain. Under the agreement, the Company
purchases various product development services from Wireless Domain.
The Company spent $0.5 million and $1.1 million respectively on such
services from Wireless Domain during the three months and six months
ended March 31, 1997.
8
<PAGE> 9
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CONVERTIBLE DEBENTURES
On December 11, 1995, the Company issued $18 million in convertible
debentures (the "Debentures") at 4% per annum, which were to mature on
December 11, 1997. 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 the
NASDAQ closing bids for the Company's common stock. The Company was
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 the NASDAQ closing bids for the Company's common
stock. By November 30, 1996, the entire issuance of convertible
debentures and all interest accrued thereon were converted into
approximately 7,033,000 shares of common stock.
5. CONTINGENCIES
The Company is involved in legal proceedings that arise in the ordinary
course of 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 financial
position and results of operations.
6. SUBSEQUENT EVENTS
On April 16, 1997, the Company issued 10,000 shares of Series A
Convertible Preferred Stock (the "Preferred Stock") for $10 million
(less fees and expenses). The conversion of the Preferred Stock
reflects the equivalent of a 5% annual stock dividend. The Preferred
Stock automatically converts to Common Stock on April 16, 1999, or
October 16, 1999, depending on the conversion price. The Preferred
Stock was issued under the provisions of Regulation D of the United
States Securities Act of 1933, as amended. Management expects to
register for resale the shares of Common Stock issued in connection
with the conversion of shares of Preferred Stock under the Securities
Act of 1933, as amended, during the third fiscal quarter of 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. 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 defined conversion formulas based on the NASDAQ closing bid
prices for the Company's Common Stock. In addition, the Company also
has the right to redeem the Preferred Stock for cash at defined terms.
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 $20.0
million (the "Loan"). Borrowings under the Loan are subject to
borrowing base requirements and other conditions. 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.
At the Company's election, the Loan carries interest at the bank's
prime rate plus 1.0% or the Eurodollar rate (Libor) plus 3.00%. As of
May 14, 1997, the Company has not borrowed any funds pursuant to the
Loan.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, manufactures and markets products based on its
proprietary interface technologies, which allow 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 is investing in new product development for both analog and digital
fixed wireless terminals. As with any emerging market, it is difficult to
predict the timing of the market demand. 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 attached as exhibit 99 to the Form 10-K filed for the period ended September
30, 1996.
RELATIONSHIP WITH MOTOROLA, INC.
In November 1993, the Company entered into a strategic agreement with Motorola
Inc. ("Motorola"), whereby Motorola, through its Cellular Subscriber Group,
acquired an interest in the Company and received an option to increase its
holdings. Motorola exercised the option in April 1994 and now owns approximately
15% of the outstanding shares of common stock. Motorola also obtained the right
to representation on the Company's Board of Directors. In addition, the Company
purchases components from and sells finished goods to Motorola. For further
information about the Company and Motorola, refer to the Form 10-K filed for the
period ended September 30, 1996.
RESTRUCTURING
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, and production was consolidated at the Company's Atlanta,
Georgia facility. In May of 1997, the Company further consolidated its offices
and operations in a single facility located in Vernon Hills, Illinois. The
Restructuring Program reduced general, administrative and manufacturing costs
Company-wide. The number of employees decreased from over 250 in January 1996 to
less than 110 at the end of November 1996. Restructuring and impairment charges
amounting to approximately $11.0 million were incurred during the second and
third fiscal quarters of 1996. 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.
Also, depreciation charges were reduced as part of the restructuring, but may
return to former levels or increase in the future as the Company moved to a new
facility in the third quarter and plans to update manufacturing equipment in the
third and fourth quarters of fiscal 1997. Wages decreased as part of the
restructuring, but may also increase in future periods if the demand for the
Company's products meets management's expectations.
10
<PAGE> 11
RESULTS OF OPERATIONS
SECOND QUARTER FISCAL 1997 COMPARED TO SECOND QUARTER FISCAL 1996
Net Sales. Second quarter fiscal 1997 sales increased by approximately 150% from
$4.6 million for the three months ended March 31, 1996 to $11.4 million for the
three months ended March 31, 1997. Sales of fixed wireless terminals (FWTs)
accounted for almost the entire increase as shipments to Motorola for the
wireless local loop (WLL) project in Hungary represented approximately 50% of
second quarter fiscal 1997 sales. Sales of FWTs, excluding the Hungary project,
and of wireless security alarm products increased approximately 19% in fiscal
1997 compared to the same period of fiscal 1996.
Gross Profit. Second quarter fiscal 1997 gross profit increased by $4.8 million
compared to the same period of fiscal 1996. The increase was primarily due to
the substantial increase in sales volumes in fiscal 1997 as compared to fiscal
1996. The Company incurred $0.5 million of expenses to increase its
manufacturing capacity and to move to a new facility to increase efficiency
during the second quarter of fiscal 1997. For the second quarter, the Company's
gross margin percentage was 25% compared to negative gross profit margin in
fiscal 1996. During 1996, a $2.5 million charge for inventory determined to be
excess or obsolete as part of the Company's consolidation of manufacturing
facilities accounted for the negative gross margin. After adjusting for the
inventory charge, margins improved in 1997 as a result of lower manufacturing
costs and higher sales volumes which resulted in the absorption of fixed costs
over more units.
Engineering and Development Expenses. Engineering and development expenses of
$1.4 million, increased approximately 9% over the second quarter of fiscal 1996,
which resulted in part from the Company's increased focus on developing analog
and digital fixed wireless terminals that will operate on additional radio
standards.
Selling and Marketing expenses. Selling and marketing expenses for the second
quarter of fiscal 1997 decreased approximately 50% compared to the same quarter
of fiscal 1996. This decrease was primarily a result of the Company's
realignment, as part of its Restructuring Program, of its worldwide sales
organization.
General and Administrative Expenses (G&A). G&A for the second quarter decreased
approximately 32% compared to the same quarter of fiscal 1996. The decrease is
primarily attributable to the reduction or elimination of expenditures,
primarily through headcount reductions, achieved through the Restructuring
Program.
Provision for doubtful accounts. The provision for doubtful accounts expense
decreased from the same quarter of fiscal 1996 due to improvement in the
Company's collections experience.
Amortization Charges. Amortization charges for the second quarter decreased by
approximately 90% compared to the same quarter of fiscal 1996. Intangible assets
written off as part of the Restructuring Program during the second quarter of
fiscal 1996 significantly reduced the intangible asset balance and related
amortization charges in fiscal 1997 compared to fiscal 1996.
Other Income (Expense). Second quarter 1997 other income was higher compared to
the same fiscal quarter of 1996 primarily due to lower interest expense during
the current period.
Net Income (loss). The Company recorded a net loss of ($0.7) million or ($.02)
per share for the second quarter in fiscal 1997 compared to a loss of ($17.4)
million or ($0.69) per share in the same quarter of fiscal 1996.
11
<PAGE> 12
RESULTS OF OPERATIONS (CONTINUED)
FIRST HALF FISCAL 1997 COMPARED TO FIRST HALF FISCAL 1996
Net Sales. First half fiscal 1997 sales increased by 246% from $8.6 million for
the six months ended March 31, 1996, to $29.8 million for the six months ended
March 31, 1997. Sales of fixed wireless terminals (FWTs) accounted for almost
the entire increase. Shipments to Motorola for the wireless local loop (WLL)
project in Hungary represented approximately 59% of first half fiscal 1997
sales. Sales of FWTs, excluding the Hungary project, and of wireless security
alarm products increased approximately 42% in the first half of fiscal 1997
compared to the same period of fiscal 1996.
Gross Profit. First half fiscal 1997 gross profit increased by $9.1 million
compared to the same period of fiscal 1996. The increase was primarily due to
the substantial increase in sales volumes in fiscal 1997 as compared to fiscal
1996. The Company incurred $0.5 million of expenses to increase its
manufacturing capacity and to move to a new facility to increase efficiency
during the six months ended March 31, 1997. For the first half of fiscal 1997,
the Company's gross margin percentage was 25% compared to negative gross profit
margin in fiscal 1996. During 1996, a $2.5 million charge for inventory
determined to be excess or obsolete as part of the Company's Restructuring
Program and the consolidation of manufacturing facilities accounted for the
negative gross margin. After adjusting for the inventory charge, margins
improved in 1997 as a result of lower manufacturing costs and higher sales
volumes which resulted in the absorption of fixed costs over more units.
Engineering and Development Expenses. Engineering and development expenses of
$2.7 million are approximately the same amount as in the first half of fiscal
1996.
Selling and Marketing expenses. Selling and marketing expenses for the first
half of fiscal 1997 decreased approximately 47% compared to the same period of
fiscal 1996. This decrease was primarily a result of the Company's realignment,
as part of its Restructuring Program, of its worldwide sales organization.
General and Administrative Expenses (G&A). G&A for the first half of fiscal 1997
decreased 26% compared to the same quarter of fiscal 1996. The decrease is
primarily attributable to the reduction or elimination of expenditures,
primarily through headcount reductions, achieved through the Restructuring
Program.
Amortization Charges. Amortization charges for the first half of fiscal 1997
decreased by approximately 92% compared to the same period in fiscal 1996.
Intangible assets written off as part of the Restructuring Program and
impairment charges during the second quarter of fiscal 1996 significantly
reduced the intangible asset balance and related amortization charges in fiscal
1997 compared to fiscal 1996.
Other Income (Expense). First half fiscal 1997 other income was higher compared
to the same fiscal period of 1996 primarily due to lower interest expense during
the current period.
Net Income (loss). The Company recorded net income of $9 thousand for the first
half of fiscal 1997, compared to a loss of ($22.6) million or ($0.92) per share
in the same period of fiscal 1996.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had $11.8 million in cash and cash equivalents
with a working capital surplus of approximately $25.7 million.
From an operating standpoint, the Company was cash neutral during the six months
ended March 31, 1997 compared to the $10.6 million cash used during the same
fiscal period last year.
Cash used for capital spending and other investing activities was approximately
$1.3 million during the six months ended March 31, 1997 compared to $0.8 million
during the same fiscal period last year. In January 1997, the Company increased
its investment in Wireless Domain Corporation (formerly Telepath Corporation) by
approximately $0.7 million. The additional investment which was comprised of
cash in the amount of $250,000 and 75,000 shares of the Company's common stock,
raised Telular's stake in Wireless Domain Corporation to approximately 43%. The
Company spent approximately $1.0 million in capital expenditures during the
first half of fiscal 1997, primarily for leasehold improvements and
production/engineering equipment for new products.
Financing activities provided for $0.3 million during the first half of fiscal
1997, compared to $8.1 million during the same fiscal period in 1996. The
current period amount is from the sale of stock through the Company's stock
option plan. In the prior year, the Company raised $8 million, net of payments
against the Company's revolving line of credit (see below) from the sale of
convertible debentures.
During fiscal 1995, the Company entered into a Loan and Security Agreement with
LaSalle National Bank that, among other things, provides a credit facility with
a loan limit of $20.0 million. Borrowings under the loan are subject to
borrowing base requirements and other conditions. Under the Loan and Security
Agreement, the Company is required to comply with certain affirmative and
negative covenants. The agreement, which originally terminated on March 1, 1997,
was extended until May 1, 1997. This facility requires the Company to maintain a
$10 million compensating balance.
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 conditions. 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.
On April 16, 1997, the Company issued 10,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") for $10 million (less fees and
expenses). The conversion rate on the Preferred Stock reflects the equivalent of
a 5% annual stock dividend. The Preferred Stock automatically converts to Common
Stock on April 15, 1999, or October 15, 1999, depending on the conversion price.
The Preferred Stock was issued under the provisions of Regulation D of the
United States Securities Act of 1933, as amended. Management expects to register
for resale the shares of Common Stock issued in connection with the conversion
of shares of Preferred Stock under the Securities Act of 1933, as amended,
during the third fiscal quarter of 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.
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 defined
conversion formulas based on the NASDAQ closing bid prices for the Company's
Common Stock. In addition, the Company also has the right to redeem the
Preferred Stock for cash at defined terms.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. The Company continues to consider new financing
opportunities that would be used to support additional growth. 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.
14
<PAGE> 15
OUTLOOK
The statements contained in this outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
The Company expects fiscal 1997 sales levels to significantly exceed fiscal 1996
sales levels. Second quarter fiscal 1997 revenues significantly exceeded the
same period in the prior year, primarily due to the completion of Phase One
shipments for the WLL project in Hungary. The Company is exploring a number of
opportunities, including the supply of FWTs for Phases Two and Three of the
Hungary project. The Company expects the demand for FWTs to continue to grow and
is cultivating other revenue opportunities that it believes will contribute to
future revenue growth. The Company has hired and plans to hire additional
personnel to coordinate opportunities.
To capitalize on the anticipated growth in the market for FWTs, the Company
launched an ambitious product development plan during fiscal 1996. The strategy
has been, and continues to be, to introduce fixed wireless terminals over the
next three years that will address the radio standards serving 85 percent of all
cellular subscribers in the year 2000. The Company plans to continue to devote
substantial resources to product development. Pursuant to the terms of its
agreement with Wireless Domain Corporation (formerly TelePath Corporation) the
Company plans to increase its equity position in Wireless Domain Corporation to
50% by August of 1997 through the issuance of shares of the Company's common
stock and cash payments. In addition, the Company has and will continue to hire
additional qualified engineering personnel.
The Company announced that, in conjunction with product development and other
matters, it intends to relocate its manufacturing to Vernon Hills, Illinois, a
suburb of Chicago, during fiscal 1997. The move will geographically consolidate
the Company's engineering, sales, marketing and manufacturing resources, which
the Company believes will make new product introduction more efficient, improve
overall quality and increase manufacturing capacity. Most of the relocation
activities are expected to be completed by the end of the third fiscal quarter.
Based upon observed trends, the Company believes that the market for FWTs is
undergoing substantial growth. The Company is seeking to capitalize on the
anticipated growth by devoting resources across the Company to meet the
anticipated needs of the market.
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 the "Outlook" section and elsewhere 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 sustain recent profitability as
lower sales may likely result in lower margins. In addition, product development
and the relocation of manufacturing facilities, 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 the
Company's Annual Report on Form 10-K for the period ended September 30, 1996,
include the risk that technological change will render the Company's technology
obsolete, the risk of litigation, the Company's ability to develop new and
foreign markets, 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 effect of changes in management, and
uncertainty in the development of wireless service generally.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is party to or involved in the following actions:
Alliance Research Corporation v. Telular Corporation and Spectrum Technologies,
Inc., CV 94 1065 RG, United States District Court, Central District of
California.
A patent infringement and declaratory judgement action brought by the
parties regarding the Company's 4,922,517 and 4,775,997 patents. The
Company has been successful in a Motion for Summary Judgement. This matter
was appealed to the Federal Circuit Court, Case No. 96-1225. On April 29,
1997, the Federal Court affirmed the lower court's decision. The matter is
now back before the lower court to determine willfulness and damages.
Arthur L. Serrano and Andrew W. Holman v. Telular Corporation and Spectrum
Information Technologies, Inc., CV 94 1272, United States District Court,
Central District of California.
A companion case to the Alliance case. The lower court issued a Summary
Judgement and a monetary judgement against Serrano and Holman for more than
$600,000 in damages and attorney's fees. On appeal, the Federal Circuit
Court (Case No. 96-1308) affirmed the lower court's decision on April 25,
1997.
ITEM 2. CHANGES IN SECURITIES
Under the terms of the Series A Convertible Preferred Stock issued on April 16,
1997, for so long as such stock is outstanding, dividends may be paid on the
Common Stock only out of retained earnings of the Company generated after April
1, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Shareholders was held on January 28, 1997. The
number of shares issued and outstanding and entitled to vote was 31,398,084.
There were present at said meeting, in person or by proxy, shareholders holding
28,311,619 shares of common stock, that is 90% of the stock outstanding, and
entitled to vote, which constituted a quorum.
The first matter voted upon was the election of the Board of Directors. The
directors elected were as follows:
<TABLE>
<CAPTION>
For Withheld
<S> <C> <C>
John E. Berndt 28,214,212 97,407
William L. DeNicolo 28,212,812 98,807
Larry J. Ford 28,215,212 96,407
Richard D. Haning 28,215,812 95,407
Kenneth E. Millard 28,214,812 96,807
David P. Mixer 28,215,612 96,007
</TABLE>
All nominees for Director were elected, and therefore all Director's term of
office continued after the meeting.
16
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED).
The second matter voted upon was to amend the Articles of Incorporation to
increase the number of authorized shares of Common Sock from 40,000,000 to
75,000,000. Votes on this matter were: 27,580,074 For, 675,511 Against, 50,034
Abstentions and Broker Non-Votes were 0.
The third matter voted on was to approve the Company's Second Amended and
Restated Incentive Plan (the "Plan"), which amends the existing Stock Incentive
Plan to increase the number of shares of Common Stock authorized for issuance
under such plan from 2,000,000 to 3,000,000, and increase the maximum number of
shares of Common Stock that may be issued to any one individual in any
three-year period from 500,000 to 750,000. Votes on this matter were: 26,504,488
For, 880,833 Against, 180,744 Abstentions, and Broker Non-Votes were 745,544.
The forth matter voted upon was to amend the Ratification of Ernst & Young LLP
as Independent Auditors for the year ending September 30, 1997. Votes on this
matter were: 28,098,034 For, 56,071 Against, 157,514 Abstentions, and Broker
Non-Votes were 0.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (listed by number according to Exhibit table of Item 601 in
Regulation S-K)
<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
3.3 Amendment No. 2 to Certificate Filed as
of Incorporation Exhibit 3.3 to
the Registration
Statement
3.4 Amendment No. 3 to Certificate Filed herewith
of Incorporation
3.5 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
26, 1995
4.2 Certificate of Designations, Preferences, Filed as
and Rights of Series A Convertible Preferred Exhibit 99.2 to
Stock Form 8-K filed
April 25, 1997
10.1 Securities Purchase Agreement by and Filed as
between Telular Corporation and the Exhibit 99.1 to
purchasers of the Series A Convertible Form 8-K filed
Preferred Stock April 25, 1997
10.2 Registration Rights Agreement by and Filed as
between Telular Corporation and the Exhibit 99.3 to
purchasers of the Series A Convertible Form 8-K filed
Preferred Stock April 25, 1997
11 Statement regarding computation Filed herewith
of per share earnings
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1997.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant duly caused this Report of Form 10-Q to be signed on its behalf by
the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
Telular Corporation
Date May 14, 1997 By: /s/ Kenneth E. Millard
--------------------------------- -----------------------
Kenneth E. Millard
President & Chief Executive Officer
Date May 14, 1997 /s/ Thomas M. Mason
--------------------------------- --------------------
Thomas M. Mason
Chief Financial Officer & Senior Vice President
</TABLE>
19
<PAGE> 20
EXHIBIT INDEX
<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
3.3 Amendment No. 2 to Certificate Filed as
of Incorporation Exhibit 3.3 to
the Registration
Statement
3.4 Amendment No. 3 to Certificate Filed herewith
of Incorporation
3.5 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
26, 1995
4.2 Certificate of Designations, Preferences, Filed as
and Rights of Series A Convertible Preferred Exhibit 99.2 to
Stock Form 8-K filed
April 25, 1997
10.1 Securities Purchase Agreement by and Filed as
between Telular Corporation and the Exhibit 99.1 to
purchasers of the Series A Convertible Form 8-K filed
Preferred Stock April 25, 1997
10.2 Registration Rights Agreement by and Filed as
between Telular Corporation and the Exhibit 99.3 to
purchasers of the Series A Convertible Form 8-K filed
Preferred Stock April 25, 1997
11 Statement regarding computation Filed herewith
of per share earnings
</TABLE>
20
<PAGE> 1
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
-------------------------------
TELULAR CORPORATION, a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by
the unanimous written consent of its members, filed with the minutes of the
board, adopted a resolution proposing and declaring advisable the following
amendment to the Certificate of Incorporation of said corporation:
RESOLVED, that the Directors do hereby adopt and approve the
amendment of Article IV of the Certificate of Incorporation of the
Corporation to read in its entirety as follows:
ARTICLE IV
CAPITAL STOCK
A. The total number of shares of capital stock that the
Corporation shall have authority to issue is Eighty-Five million
(85,000,000) shares, of which Seventy-Five million (75,000,000) shall
be shares of Common Stock with par value of one cent ($.01) each and
ten million (10,000,000) shall be shares of Preferred Stock with par
value of one cent ($.01) per share.
B. Preferred Stock may be used from time to time in one
or more series, each of such series to have such terms as stated or
expressed herein and in the resolution or resolutions providing for
the issue of such series adopted by the Board of Directors of the
Corporation as hereinafter provided. Any shares of Preferred Stock
<PAGE> 2
-2-
which may be redeemed, purchased or acquired by the Corporation may be
reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes
of shares for the purposes of voting by classes unless expressly
provided.
C. Authority is hereby expressly granted to the Board of
Directors from time to time to issue the Preferred Stock in one or
more series, and in connection with the creation of any such series,
by resolution or resolutions providing for the issue of the shares
thereof, to determine and fix such voting powers, full or limited, or
no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including without limitation
thereof, dividend rights, special voting rights, conversion rights,
redemption privileges and liquidation preferences, as shall be stated
and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware.
Without limiting the generality of the foregoing, the resolutions
providing for issuance of any series of Preferred Stock may provide
that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law.
Except as otherwise specifically provided in this Certificate of
Incorporation, no vote of the holders of the Preferred Stock or Common
Stock shall be a prerequisite to the issuance of any shares of any
series of the Preferred Stock authorized by and complying with the
conditions of this Certificate of Incorporation, the right to have
such vote being expressly waived by all present and future holders of
the capital stock of the Corporation.
SECOND: That at a meeting of stockholders duly called and
held on January 28, 1997, the stockholders have approved said amendment.
THIRD: That the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the General
Corporation Law of the State of Delaware.
<PAGE> 3
- 3 -
IN WITNESS WHEREOF, said Telular Corporation has caused this
certificate to be signed by Kenneth E. Millard, its President, and attested by
Frank J.M. ten Brink, its Secretary, this 31st day of January, 1997.
TELULAR CORPORATION
By: /s/ Kenneth E. Millard
----------------------
Kenneth E. Millard
President
ATTEST:
/s/ Frank J. M. ten Brink
- -------------------------
Frank J.M. ten Brink
Secretary
<PAGE> 1
Exhibit (11) - Statement Re: Computation of Pro Forma
Earnings Per Share
(Dollars in thousands, expect share data)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
Average number of shares
outstanding ......... 31,452,294 25,271,755
============ ============
Net income (loss) $ (732) $ (17,399)
============ =============
Net income (loss) per share $ (0.02) $ (0.69)
============ =============
<CAPTION>
Six months ended March 31,
1997 1996
------------ -------------
<S> <C> <C>
Average number of shares
outstanding ......... 31,447,644 24,489,772
============ =============
Net income (loss) $ 9 $ (22,630)
============ =============
Net income (loss) per share $ 0.00 $ (0.92)
============ =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 11,828
<SECURITIES> 0
<RECEIVABLES> 7,559,000
<ALLOWANCES> 582,000
<INVENTORY> 11,517,000
<CURRENT-ASSETS> 30,710,000
<PP&E> 5,439,000
<DEPRECIATION> (2,519,000)
<TOTAL-ASSETS> 38,158,000
<CURRENT-LIABILITIES> 4,963,000
<BONDS> 0
0
0
<COMMON> 321,000
<OTHER-SE> 32,874,000
<TOTAL-LIABILITY-AND-EQUITY> 38,158,000
<SALES> 11,417,000
<TOTAL-REVENUES> 11,417,000
<CGS> 8,580,000
<TOTAL-COSTS> 8,580,000
<OTHER-EXPENSES> 3,681,000
<LOSS-PROVISION> 47,000
<INTEREST-EXPENSE> 20,000
<INCOME-PRETAX> (732,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (732,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (732,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
