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, 1998
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)
Delaware 36-3885440
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
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)
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
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 20, 1998, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately
$13,796,490* (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 20, 1998, the latest practicable date, was 34,710,636
shares.
<PAGE>
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, 1998 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 20, 1998. 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.
<PAGE>
PART I
Item 1. Business
Background
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. 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
are: PHONECELL, a line of fixed wireless terminals (FWTs), and
TELGUARD, a line of WAS products.
In 1986, the Company acquired the intellectual property rights for
its cellular interface concept and methodology. The Company's patents
cover not only circuitry, but also the very concept and principles
underlying the use of an intelligent interface device in conjunction with
cellular-type transceivers and systems.
In 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 1995, the Company raised $18.0 million from the
private placement of convertible debentures. In 1997, the Company raised
$18.8 million from private placements of Series A Convertible Preferred
Stock.
Acquisitions
In 1993, the Company acquired two companies: Telular International,
Inc. (Telular International), formerly Codecom Rural Communications,
located in Puerto Rico, and Telular-Adcor Security Products, Inc. located
in Atlanta, formerly known as Adcor Electronics International, Inc. Both
entities are wholly owned subsidiaries of the Company.
Effective October 1, 1997, the Company acquired Wireless Domain
Incorporated (WD). Prior to October 1, 1997, the Company had acquired
50% of WD in three separate transactions during 1997 and 1996. This
transaction added 29 engineers to the Company.
<PAGE>
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 that 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
primarily for fixed users.
The wireless alternative access (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 because they are less costly to support as they are linked to
a single cell site, generate more average airtime and operate mainly at
off-peak times.
Company Strategy
The Company's strategy is to leverage twelve years of 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 communications;
. An accelerating trend toward privatization of
telecommunication service in both developed and developing
countries;
. Development and adoption of digital wireless transmission
standards that 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 service; 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.
Target Markets and Product Applications
The Company's fiscal year 1998 revenues have been primarily
international, derived from the sale of PHONECELL FWTs for integration
into WLL/WAA systems being installed in developing countries.Significant
revenues are derived domestically from the Company's TELGUARD WAS product
line.
The Company's major opportunities can be grouped into four
categories:
. Wireless Basic Telephone Service;
. Licensing of the Company's Technology and Sales to OEM customers;
. Remote Monitoring and Supervisory Control and Data Acquisition
(SCADA);
. Disaster Recovery and Emergency Back-up Services.
<PAGE>
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
for wireless basic telephone service in developing areas worldwide.
Licensing of the Company's Technology and Sales to OEM Customers
In response to the international demand for the Company's
proprietary interface technology, the Company has been promoting the
use of its interface technology in other telecommunication
companies' products. This marketing strategy has resulted in
licensing of the Companies technology and sales of component parts
to OEMs. The Company expects to continue developing licensing and
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 application of the
Companies technology in developed countries, especially in the U.S.
A major sub-group within this segment is WAS. Wireless Alarm
Signaling was one of the first applications of the Company's
technology and is a growing segment of the business. 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.
Disaster Recovery and Back-Up Services
Hundreds of major telephone network outages occur annually in the
U.S. and other countries around the world. Today, with the
widespread availability of cellular 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 centers, public service
centers and utility companies. The wireless back-up approach allows
businesses to take advantage of 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 rates.
Technology and Products
Core Technology
The Company's core patented technology is an intelligent interface
(the 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. The Invention provides a standard dial tone, off-hook
detection signal and other signals usually provided by the Local Exchange
Carrier (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.
<PAGE>
Interface Technology
The Company's products contain printed circuit boards that
incorporate the Invention. The interface components that comprise the
Invention 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, most of the Company's revenues have
been generated 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 designs and builds its own radios for selected FWTs - see
Research and Development below.
The Company's Product Lines
Products for WLL and WAA markets are marketed under the PHONECELL
brand name. WAS products are marketed under the TELGUARD brand name.
Future product offerings will reflect a continued evolution of existing
product lines.
During fiscal year 1998, the Company improved its FWT market
position on the following major radio standards:
AMPS (Advanced Mobile Phone System) - While the overall FWT
market is shifting from analog cellular to digital cellular,
there remains many opportunities for this mature analog cellular
standard. 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. During
fiscal year 1998, the Company introduced two new cost reduced
AMPS FWTs. These units have begun displacing lower featured and
higher cost competitive units in several markets. In November
1998 the Company announced that it will supply a significant
number of its AMPS fixed wireless terminals to the Rural
Telephony Division of Telcel in Mexico during fiscal year 1999.
GSM (Group System Mobile) - 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. 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 identification and
messaging. Last year, the Company introduced its first GSM FWT.
Sales of this unit accounted for 35% of the Company's FWT
business during fiscal year 1998. The Company will introduce its
second generation GSM FWT (the SX4 GSM FWT) in the second quarter
of fiscal year 1999. As the SX4 GSM FWT costs 30% less and has
additional features, the Company expects to capture significantly
more share of the GSM market with the SX4 GSM FWT.
TDMA (Time Division Multiple Access) - Last year, the Company
also introduced a new TDMA FWT which is a lower cost and higher
quality product than its predecessor. Due to its smaller size,
this unit is well suited for payphone and Least Cost Routing
(LCR) applications. The Company has observed a rapid expansion
of payphone opportunities recently. This product operates on the
newer TDMA networks that are being constructed under the TDMA IS-
136 standard. Most of the older TDMA networks are being upgraded
to the new TDMA standard as well. TDMA networks are widely
deployed in Africa, Central America and South America.
<PAGE>
Sales, Marketing and Service
International Sales (Other than Canada)
The international marketplace is characterized by new and repeat
sales to established mobile cellular networks and to the emerging WLL
programs throughout the world. The Company has built international sales
and marketing teams 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; Singapore; Hong Kong, Republic of China; Cape Town,
South Africa; Budapest, Hungary; Sao Paulo, Brazil and Riga, Latvia. The
ability to provide on-site customer technical assistance and support has
been identified as a key selling requirement, and the larger 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 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 line of products is marketed almost
exclusively in the U.S.
Sales to Canada
In 1992, Telular Canada, Inc. (Telular Canada), an independent
Toronto-based distributor of telecommunications products, purchased the
Company's Canadian patents and the right to acquire the Company's
technologies solely for use and sale within Canada.
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 at certain regional sales offices and (3)
authorized third party service centers in various regions of the world.
Motorola Relationship
In 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 its Invention. The cross-
license agreement allows the Company to use Motorola's transceivers in
the Company's products.
In 1993, the Company entered into an agreement with Motorola,
whereby Motorola, through its Cellular Subscriber Sector (CSS), 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 13.7% of the outstanding shares of the
Company. Motorola obtained the right to representation on the Company's
Board of Directors and presently has one director. This 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 AMPS, Extended Total
Access Communication System (ETACS), Narrow-band Advanced Mobile Phone
System (NAMPS), TDMA, GSM, CDMA, Iridium and other transceivers available
for purchase by the Company for use in its products when, if, and as
available.
<PAGE>
In 1995, the Company expanded its relationship with Motorola. The
Company was awarded a contract to supply a customized version of its
ETACS PHONECELL 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. No product was under this agreement during fiscal
year 1998. Because of unfulfilled commitments of approximately $73
million, the Company is currently negotiating with Motorola for
resolution of this contract, which expires on December 31, 1998.
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,
telecommunications infrastructure providers and equipment manufacturers,
to develop new products.
The Company's research and development staff is comprised of
approximately 50 engineers segregated into four teams. Each team is
responsible for a specific cellular standard, such as: AMPS, Code
Division Multiple Access (CDMA), GSM or TDMA. Additionally, the research
area continually investigates methods by which the Company can reduce the
cost of its products.
The Company introduced several new PHONECELLs during fiscal year
1998. These included: two new analog AMPS FWTs, the SX3(i) AMPS and the
SX3(e) AMPS; a new digital TDMA FWT, the SX2(e) TDMA; and a new digital
CDMA FWT, the SX2(e) CDMA. All of these products cost less to make and
have more features than predecessor versions. The SX3 AMPS units include
a transceiver that was designed by the Company.
The Company expects to introduce additional PHONECELLs during fiscal
year 1999. The most significant new FWT is the SX4 GSM FWT. The SX4 GSM
unit includes a transceiver that was designed by the Company, as well as
the Company's Application Specific Integrated Circuit (ASIC). The ASIC
chip replaces some 75 electronic components and a circuit board, which
significantly reduces the cost from the predecessor version.
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 became 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.
<PAGE>
Employees
As of November 20, 1998, the Company had 165 employees, of which 30%
are in sales and marketing, 30% in engineering and product development,
30% in manufacturing and 10% 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, Nokia and
Qualcomm. There are also international and domestic companies with fewer
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. In markets where
the Company holds no patents, the Company competes directly with a range
of competitors. Approximately 60% of the Company's fiscal year 1998
shipments were destined for foreign countries most of which afforded
little or no patent protection.
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.
The Company has licensed its patent rights to Motorola, under an
agreement in 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, some of the large companies
noted above have introduced FWTs to the marketplace.
<PAGE>
The Company believes its advantages over the 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 12
years.
Broader product line - The Company offers FWTs that operate on
all major non-proprietary radio standards.
Patents, Licenses and Other Intellectual Property
The Company's success in the United States depends to an 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 applications.
The Company has successfully defended many of its patents in court.
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 096 Patent is an interface between a
standard telephone and a cellular transceiver. 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.
Continuation Patents
In 1988 and 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 and further broadens the 096 Patent. These continuation
patents expire on April 14, 2004. Also in 1988, the Company obtained a
continuation-in-part of the 096 Patent, under U.S. Patent 4,737,975.
Among other things, this patent allows the interface to be programmed to
use three digit numbers, such as 911 or 411.
Other Patents
In 1992 and 1994, additional 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. The
Company has been granted several additional patents for self-diagnostics
systems, payphones and answer supervision both in the U.S. and abroad.
In addition, the Company has three patent applications in the U.S and 16
patent applications outside the U.S.
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, there can be no
assurance that these new applications will fall within the scope of the
existing patent protection.
<PAGE>
Licensing of Technology
<TABLE>
<CAPTION>
The Company has granted licenses to a number of other companies,
which include the following:
<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);
ADI (non-exclusive world-wide license for
manufacture and sale of fixed wireless
terminals);
Communications Mfg. Co. (limited non-exclusive field of use license);
Ora Electronics, Inc. (limited non-exclusive field of use license);
Ericsson Radio Systems AB (limited field of use patent license agreement);
Nokia Mobile Phones, Ltd. (limited geographic license);
</TABLE>
Trademarks and Other Proprietary Information
The Company has 11 registered trademarks which are: TELULAR plus
design, TELULAR, CELJACK, PCSone , 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 85 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
Not applicable.
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, 1998.
<PAGE>
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 year 1998,
1997 and 1996, as reported by Nasdaq. Such quotations reflect inter-
dealer prices without retail markup, markdown or commissions and may not
necessarily represent actual transactions.
<TABLE>
Quarter Ended during Fiscal 1998
December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
High 4.03 3.09 2.50 1.94
Low 1.91 1.81 1.84 0.96
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
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>
On November 20, 1998, there were approximately 376 shareholders of
record, 7,804 beneficial shareholders and 34,710,636 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.
From October 2, 1998, until November 20, 1998 (the last practicable
date), the price for the Company's Common Stock has closed in the range
of $0.969 to $0.594 per share. On November 12, 1998, the Company
received notification from Nasdaq that the Company has a 90-day period to
bring itself back into compliance with the Nasdaq's rules, which require,
among other things, that listed companies maintain a minimum stock price
per share of one-dollar. On October 30, 1998, the Company announced that
its Board of Directors will seek shareholder approval at its annual
shareholder meeting on January 26, 1999, to effect a Reverse Stock Split.
By effectuating the Reverse Stock Split, the Company expects to raise its
Share price above one-dollar and bring itself back into compliance with
this listing requirement.
Recent Sales of Unregistered Securities
Compensation
In 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 (Common Stock) at fair market
value. For the quarter ended December 31, 1997, the Company awarded Mr.
Millard a bonus and in connection therewith issued Mr. Millard 5,373
shares of Common Stock valued at $11,350. For the quarter ended March
31, 1998, the Company awarded Mr. Millard a bonus and in connection
therewith issued Mr. Millard 6,882 shares of Common Stock valued at
$17,550. No bonuses were awarded for the three month periods ended June
30, 1998 and September 30, 1998.
<PAGE>
In 1997, the Company entered into an employment agreement with
Robert C. Montgomery, pursuant to which Mr. Montgomery agreed to serve as
Chief Operating Officer and Executive Vice 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, 1997, the Company awarded Mr. Montgomery a bonus and in
connection therewith issued Mr. Montgomery 2,686 shares of Common Stock
valued at $5,675. For the quarter ended March 31, 1998, the Company
awarded Mr. Montgomery a bonus and in connection therewith issued Mr.
Montgomery 3,441 shares of Common Stock valued at $8,775. No bonuses
were awarded for the three month periods ended June 30, 1998 and
September 30, 1998.
In 1997, the Company entered into an employment agreement with
Daniel D. Giacopelli, pursuant to which Mr. Giacopelli agreed to serve as
Chief Technology Officer and Executive Vice President of the Company.
Under the Agreement, Mr. Giacopelli 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, 1997, the Company awarded Mr. Giacopelli a bonus and in
connection therewith issued Mr. Giacopelli 2,686 shares of Common Stock
valued at $5,675. For the quarter ended March 31, 1998, the Company
awarded Mr. Giacopelli a bonus and in connection therewith issued Mr.
Giacopelli 3,441 shares of Common Stock valued at $8,775. No bonuses
were awarded for the three month periods ended June 30, 1998 and
September 30, 1998.
During the fiscal year ended September 30, 1998, the Company paid
the law firm of Hamman and Benn aggregate fees of $479,913 for legal
services, which payments were comprised of $300,060 in cash and 101,615
shares of Common Stock valued at $179,853. The Company also paid the law
firm of Bellows and Bellows aggregate fees of $44,403 for legal services,
which payments comprised of $426 in cash and 21,880 shares of Common
Stock valued at $43,977.
Each of the forgoing issuances of the Company's Common Stock did not
involve a public offering of securities, and therefore was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1993, as
amended.
<PAGE>
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, 1998, 1997, 1996, 1995 and 1994. 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>
---------Year ended September 30,-------
1998 1997 1996 1995 1994
<S> ------- ------- ------- ------- -------
Statement of operations data: <C> <C> <C> <C> <C>
Net product sales 38,784 48,417 27,271 33,031 17,734
Net royalty and royalty
settlement revenue 1,652 551 646 540 281
Total revenue 40,436 48,968 27,917 33,571 18,015
Cost of Sales 30,571 37,881 23,906 27,530 13,326
------- ------- ------- ------- -------
9,865 11,087 4,011 6,041 4,689
Operating expenses 20,697 16,753 19,936 27,042 33,809
Restructuring 0 0 11,019 0 0
-------- ------- ------- ------- -------
Loss from operations (10,832) (5,666) (26,944) (21,001) (29,120)
Net other income/
(expense) 428 364 351 1,340 1,187
-------- ------- ------- ------- -------
Net loss (10,404) (5,302) (26,593) (19,661) (27,933)
Less - amortization of
preferred stock beneficial
conversion discount 0 (2,222) 0 0 0
Less - cumulative dividend
on redeemable preferred
stock (895) (395) 0 0 0
------- ------- ------- ------- -------
Loss applicable to
common shares (11,299) (7,909) (26,593) (19,661) (27,933)
-------- ------- ------- ------- -------
Basic and diluted loss
per common share (0.34) (0.25) (0.96) (0.84) (1.25)
======== ======= ======= ======= =======
<CAPTION>
Sept.30, Sept.30, Sept.30, Sept.30, Sept.30,
1998 1997 1996 1995 1994
Balance sheet data: ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital 28,193 39,033 26,557 25,930 46,071
Total assets 48,812 57,553 41,939 54,747 61,242
Long-term debt 0 0 1,500 10,000 0
Stockholder's equity 20,682 25,699 30,770 37,956 56,318
</TABLE>
<PAGE>
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 that is Exhibit 99 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 year 1998 that gives it reason to believe that the FWT
market is maturing. Excluding the Motorola WLL project in Hungary during
fiscal year 1997, the Company quoted more contracts, shipped more product
(42% more than fiscal year 1997) 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. However, poor economic conditions in Asia, which
negatively affected the Company's prospects during fiscal year 1998, may
continue for some time.
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 availability of money in a given country. These
factors have contributed to the increase in the number of new WLL
networks commissioned in 1998. Because FWT deployment lags network
commissioning, the Company believes the pent up opportunity for its
products is very large.
<PAGE>
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. The Company
has a number of undertakings that embody its strategy to capitalize on
the growth it anticipates for FWTs. During fiscal year 1998, 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. During fiscal year 1998, the Company's FWTs continued to gain
market position on its major radio standards (See Company Strategy in
Item 1 above for more detail).
The Company introduced several new PHONECELLs during fiscal year
1998. These included: two new analog AMPS FWTs, the SX3(i) AMPS and the
SX3(e) AMPS; a new digital TDMA FWT, the SX2(e) TDMA; and a new digital
CDMA FWT, the SX2(e) CDMA. All of these products cost less to make and
have more features than predecessor versions. The SX3 AMPS units include
a transceiver that was designed by the Company.
The Company expects to introduce additional PHONECELLs during fiscal
year 1999. The most significant new FWT is the SX4 GSM FWT. The SX4 GSM
unit includes a transceiver that was designed by the Company, as well as,
the Company's ASIC chip. The ASIC chip replaces some 75 electronic
components and a circuit board, which significantly reduces the cost from
the predecessor version.
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. During fiscal
year 1998, the Company agreed to license certain technologies to Ericsson
Radio Systems AB and to Nokia Mobile Phone Ltd.
<PAGE>
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Product Sales. Net product sales of $38.8 million for the year
ended September 30, 1998 decreased from $48.4 million for the year ended
September 30, 1997. Net product sales, excluding net product sales to a
large Motorola WLL project in Hungary during the year ended September 30,
1997, more than doubled from $17.7 million for the year ended September
30, 1997 to $38.8 million for the year ended September 30, 1998. This
increase primarily resulted from shipments to WLL projects in The
Philippines and Guinea, West Africa.
Royalty and Royalty Settlement Revenue. Royalty and royalty
settlement revenue increased to $1.7 million during the year ended
September 30, 1998, due primarily to the royalty settlement of $1.2
million with ORA Electronics, Inc. (See financial statement footnote 20)
Engineering and Development Expenses. Fiscal year 1998 engineering
and development expenses of $8.2 million, increased 36% or $2.2 million
over fiscal year 1997. The increase relates to the Company's increased
focus on developing additional analog and digital FWTs, including its
acquisition of Wireless Domain, Incorporated, which significantly
increased the Company's engineering staff.
Selling and Marketing Expenses. Selling and marketing expenses for
the year ended September 30, 1998 increased 61%, or $2.7 million,
compared to the same period in fiscal year 1997. The increase was
primarily a result of the Company's efforts to market its new products
and increase its sales force to support worldwide sales coverage.
General and Administrative Expenses (G&A). G&A for fiscal year 1998
decreased 25% or $1.5 million compared to the same period in fiscal year
1997. The decrease is primarily attributable to the reduction or
elimination of expenditures and the leveraging of available resources.
Provision for doubtful accounts. The provision for doubtful
accounts expense decreased during fiscal year 1998 from fiscal year 1997,
due to an improvement in the Company's collections experience.
Amortization. Amortization expense increased during fiscal year
1998 from fiscal year 1997, due to the amortization of goodwill recorded
in connection with the acquisition of Wireless Domain, Incorporated.
Other Income. Other income during fiscal year 1998 decreased by
$0.5 million compared to fiscal year 1997. The decrease is primarily due
to the settlement of litigation with Global Tel*Link for $0.6 million
during fiscal year 1998.
Net Loss. The fiscal year 1998 net loss of $10.4 million compares
to a net loss of $5.3 million in fiscal year 1997. The change in result
for fiscal year 1998 resulted from lower overall volumes and increased
investments in engineering and development and selling and marketing
expenses in fiscal year 1998 compared to fiscal year 1997.
Net loss applicable to common shares. After giving effect to the
cumulative preferred stock dividend of $0.9 million in fiscal year 1998,
net loss applicable to common shares of $11.3 million, or ($0.34) per
share, compares to a net loss applicable to common shares of $7.9 million
or ($0.25) per share, in fiscal year 1997. Fiscal year 1997 amounts
include the preferred stock beneficial conversion discount of $2.2
million and the cumulative preferred stock dividend of $0.4 million.
<PAGE>
Fiscal Year 1997 Compared to Fiscal Year 1996
Total Revenue. For the year ended September 30, 1997, total revenue
increased 79% to $50.0 million from $27.9 million in fiscal year 1996.
Sales of FWTs increased approximately 96% to $39.7 million in fiscal year
1997, due primarily to a $15.3 million increase in shipments to the WLL
project in Hungary. Sales of WAS products increased 26% to $8.8 million
in 1997.
Engineering and Development Expenses. Fiscal year 1997 engineering
and development expenses of $6.0 million, increased 23% over fiscal year
1996. This resulted from the Company's increased focus on developing
analog and digital FWTs that will operate on additional radio standards.
Selling and Marketing Expenses. Fiscal year 1997 selling and
marketing expenses decreased 28% compared to fiscal year 1996. The
Company, as part of the restructuring program, realigned its worldwide
sales organization during fiscal year 1996. Lower levels of selling and
marketing expense were maintained in fiscal year 1997.
General and Administrative Expenses (G&A). Fiscal year 1997 G&A
decreased 13% compared to fiscal year 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 year
1996.
Allowance for Doubtful Accounts. The allowance for doubtful account
expense decreased from fiscal year 1996 to fiscal year 1997, 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. Fiscal year 1997 amortization charges
decreased by 43% compared to fiscal year 1996. Intangible assets written
off as part of restructuring and impairment charges during fiscal year
1996 significantly reduced related amortization charges. The write-off
reduced the intangible asset balance and related amortization charges in
fiscal year 1997 compared to fiscal year 1996.
Other Income (Expense). Other income for the year ended September
30, 1997, decreased by approximately $0.1 million compared to fiscal year
1996. This decrease was primarily the result of lower royalty income,
which was partially offset by higher interest income, as cash balances in
interest bearing accounts were higher in 1997 compared to 1996.
Net Loss. The fiscal year 1997 net loss of $5.3 million compares to
a net loss of $26.6 million in fiscal year 1996, an improvement of 80%.
The improvement in fiscal year 1997 resulted from increased net sales and
gross margins and lower operating expenses. The fiscal year 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 of
$2.2 million and cumulative preferred stock dividend of $0.4 million for
fiscal year 1997 (see financial statement footnote 11), loss applicable
to common shares of $7.9 million, or ($0.25) per share, compares to loss
applicable to common shares of $26.6 million, or ($0.96) per share for
fiscal year 1996.
<PAGE>
Liquidity and Capital Resources
At September 30, 1998, the Company had $19.9 million in cash and
cash equivalents and working capital of $28.2 million.
Cash used for operations was $5.7 million for the year ended
September 30, 1998, compared to $0.5 million of cash provided
for the same period in 1997, due primarily to the increased operating
loss.
Cash used for capital expenditures and other investing activities
was $3.0 million for the year ended September 30, 1998 compared to $3.6
million for the same fiscal period last year. The Company spent nearly
the same amount for capital expenditures in both periods. In 1997, the
Company used $0.5 million of cash to increase its equity position in
Wireless Domain, Inc.
Financing activities provided $0.2 million during fiscal year 1998,
compared to $19.1 million during fiscal year in 1997. The fiscal year
1997 amount includes proceeds to the Company of $18.8 million resulting
from the issuance of redeemable preferred stock.
In 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, 1998, the
Company's borrowing capacity under the Loan provisions was $6.1 million
although there have been no borrowings and none are contemplated in the
near-term. The Company will use the Loan, as necessary, to provide
working capital to support very large orders.
In 1997, the Company issued 20,000 shares of Series A Convertible
Preferred Stock (the Preferred Stock) for $18.8 million that 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. Holders of the Preferred Stock are not entitled
to vote on matters submitted for vote to the stockholders of the Company.
As of September 30, 1998, 3,494 shares of Preferred Stock had been
converted into 1,581,170 shares of Common Stock.
The Company is using much of the capital raised from the Preferred
Stock offering 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 through fiscal year 1999.
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.
<PAGE>
From October 2, 1998, until November 20, 1998 (the last practicable
date), the price for the Company's Common Stock has closed in the range
of $0.969 to $0.594 per share. On November 12, 1998, the Company
received notification from Nasdaq that the Company has a 90-day period to
bring itself back into compliance with the Nasdaq's rules, which require,
among other things, that listed companies maintain a minimum stock price
per share of one-dollar. On October 30, 1998, the Company announced that
its Board of Directors will seek shareholder approval at its annual
shareholder meeting on January 26, 1999, to effect a Reverse Stock Split.
By effectuating a Reverse Stock Split, the Company expects to raise its
Share price above one-dollar and bring itself back into compliance with
this listing requirement.
If the Company's stock is delisted from the Nasdaq National Market
System, it would continue to be traded over the counter, but the
delisting would likely adversely affect the attractiveness of the stock
to many investors, including many institutional investors. In addition,
delisting of the stock would give rise to a right on the part of the
holders of the Company's Series A Convertible Preferred Stock (the
Preferred Stock) to redeem their Preferred Stock at a redemption price
per Share equal to the greater of (i) $1,250 and (ii) the product of the
conversion rate at the time of delisting and the closing bid price
immediately prior to that date. As of November 20, 1998, 13,506 Shares
of Preferred Stock were issued and outstanding.
Impact of the Year 2000 Issue
Recently, national attention has focused on the potential problems
and associated costs resulting from computer programs that have been
written using two digits rather than four to define the applicable year.
These programs treat all years as occurring between 1900 and 1999 and do
not self-correct to reflect the upcoming change in the century. If not
corrected, computer applications could fail or create erroneous results
by or at the Year 2000.
Management has conducted a formal assessment of its significant
information technology systems, including computers used in its
production and manufacturing functions. Based upon this assessment,
management believes that only minor modifications will be required to its
internal software and hardware (imbedded chips) so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The cost of such modifications, including testing and
implementation, is not expected to have a material adverse effect on the
Company's results of operations and will be funded through operating cash
flows. The Company expects to complete the implementation (final) phase
of changes to its internal computer systems by January 31, 1999, however,
there can be no assurance that such schedule will be met.
The Company does not conduct any of its purchase transactions
through computer systems that interface directly with suppliers. The
Company has also initiated a formal assessment of its significant
suppliers to determine the extent to which the Company would be
vulnerable if those third parties' fail to remedy Year 2000 issues. To
date, the Company has received written responses from approximately 1,200
of its 1,400 suppliers (86%). The Company has evaluated these responses
and is now monitoring the progress of suppliers that are not fully ready
for the Year 2000. Where the Company determines that critical suppliers
will not be ready for the Year 2000, the Company will take appropriate
actions.
<PAGE>
With respect to its customers, the Company currently has no material
systems that interface directly with customers. Further, the Company has
not entered into any significant supply contracts that extend beyond
September 30, 1999. The Company's large customers beyond December 31,
1999 will likely be new customers due to the project nature of its
business. In addition, as a global company that operates in many
different countries, some of which may not be addressing the Year 2000
problem as aggressively as the United States, there can be no assurances
that future customers will be Year 2000 compliant. Moreover, because
markets for the Company's products are dependent on third parties, such
as wireless local loop network providers, management cannot fully assess
the impact that the Year 2000 problem will have on future sales.
The Company has reviewed each of its product lines and has
determined that its products will operate properly in the Year 2000 and
beyond. However, for some industries, the Company's products are
integrated with other company's products and sold as a combined product.
There can be no assurances that such combined products, current and
future, will operate properly in the Year 2000 and beyond.
The cost of the Company's efforts to prepare for the Year 2000 which
is estimated at $100,000 (including approximately $30,000 spent to date),
and the date on which the Company believes it will complete its internal
Year 2000 compliance efforts, reflect management's current estimates
based upon available information. Management will continue to monitor
this issue, particularly the possible impact of third-party Year 2000
compliance on the Company's operations, and will modify its estimates if
warranted.
Management believes that it has an effective program in place
to resolve its internal Year 2000 issues in a timely manner. Nevertheless,
because it is not possible to anticipate all future outcomes, especially
when third parties are involved, there could be circumstances in which the
Company is adversely effected by Year 2000 problems. The loss of revenue
from such occurrences has not been estimated.
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 product, 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, global economic conditions, intense industry
competition, the uncertainty in the development of wireless service
generally, and the risk that the Company's Common Stock may be delisted
from the Nasdaq National Market System for failure to increase its stock
price over one dollar.
<PAGE>
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
On March 2, 1998, the Company received 300,000 shares of ORA
Electronics, Inc. common stock (ORA stock) in connection with the
settlement of litigation (See financial statement footnotes 7 and 20).
ORA stock is traded on Nasdaq's Over The Counter (OTC) system. Although
ORA stock is subject to price fluctuations associated with all securities
that are traded on the OTC system, the Company has the right to receive
additional shares of ORA stock to ensure the fair market value of the
settlement consideration received in stock is equivalent to $1.5 million
on February 1, 2000.
The Company frequently invests available cash and cash equivalents
in short term instruments such as: certificates of deposit, commercial
paper and money market accounts. Although the rate of interest paid on
such investments may fluctuate over time, each of the Company's
investments is made at a fixed interest rate over the duration of the
investment. All of these investments have maturities of less than 90
days. The Company believes its exposure to market risk fluctuates for
these investments is not material as of September 30, 1998.
Item 8. Financial Statements and Supplementary Data
1. The following financial statements are included in Part II, Item 8
of this Form 10-K.
Report of Independent Auditors .................. 17
Consolidated Balance Sheets
as of September 30, 1998 and 1997 ............... 18
Consolidated Statements of Operations
for the years ended September 30, 1998,
1997 and 1996 ................................... 19
Consolidated Statements of Stockholders'
Equity for the years ended September 30,
1998, 1997 and 1996 ............................. 20
Consolidated Statements of Cash Flows
for the years ended September 30, 1998,
1997 and 1996 ................................... 21
Notes to Consolidated Financial Statements ...... 22
<PAGE>
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended September 30, 1998.
Our audits also included the financial statement schedules listed in the
Index at 14(a). 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the
related financial statement schedules when considered in relation to the
basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
October 26, 1998
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
September 30
1998 1997
------- -------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 19,854 $ 28,451
Receivables:
Trade, less an allowance for doubtful
accounts of $112 and $426, respectively 4,468 6,527
Related parties 1,268 4,670
------- ------
5,736 11,197
Inventories, net 11,594 9,431
Prepaid expenses and other current assets 853 500
------- ------
Total current assets 38,037 49,579
Property and equipment, net 5,496 3,611
Other assets:
Excess of cost over fair value of net
assets acquired,less accumulated
amortization of $785 in 1998 4,111 0
Intangible assets, less accumulated
amortization of $845 and $384, respectively 250 461
Investment in affiliate 0 3,851
Deposits and other 918 51
------- ------
5,279 4,363
------- ------
Total assets $ 48,812 $ 57,553
======== ========
<PAGE>
Liabilities and stockholders' equity
Current liabilities:
Revolving line of credit $ 0 $ 0
Accounts payable:
Trade 5,138 3,764
Related parties 1,185 3,640
Accrued liabilities 3,521 3,142
Total current liabilities 9,844 10,546
Commitments and Contingencies 0 0
Redeemable Preferred Stock:
Series A convertible preferred stock,
$.01 par value; $17,709 and $20,386
liquidation preference at September
30, 1998 and September 30, 1997,
respectively; 21,000 shares authorized
at September 30, 1998 and September 30,
1997; 16,506 and 20,000 shares
outstanding at September 30, 1998
and September 30, 1997, respectively 18,286 21,308
Stockholders' equity:
Preferred stock, $.01 par value;
9,979,000 shares authorized at
September 30, 1998 and 1997; none
outstanding 0 0
Common stock, $.01 par value;
40,000,000 shares authorized;
34,137,190 and 31,684,073 outstanding,
at September 30, 1998 and 1997,
respectively 346 322
Additional paid-in capital 117,326 111,143
Deficit (95,458) (84,159)
Unrealized gain on investments 75 0
Treasury stock, 560,000 shares at cost (1,607) (1,607)
------- ------
Total stockholders' equity 20,682 25,699
------- ------
Total liabilities and stockholders' equity $ 48,812 $ 57,533
======== ========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Statements of Operations
(In Thousands, Except Share Data)
Year ended September 30
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenue
Net product sales to unrelated parties $ 38,784 $ 27,227 $ 18,642
Net product sales to related parties 0 21,190 8,629
------- ------- -------
Total net product sales 38,784 48,417 27,271
Royalty and royalty settlement revenue 1,652 551 646
------- ------- -------
Total revenue 40,436 48,968 27,917
Cost of sales 30,571 37,881 23,906
------- ------- -------
9,865 11,087 4,011
Operating Expenses
Engineering 8,159 6,007 4,888
Selling 7,248 4,510 6,254
General and administrative 4,380 5,863 6,754
Provision for (recovery of)
doubtful accounts (72) (231) 974
Amortization 982 604 1,066
Restructuring and impairment charges 0 0 11,019
------- ------- -------
Loss from operations (10,832) (5,666) (26,944)
Other income (expense)
Interest income 1,327 1,009 936
Interest expense (19) (47) (293)
Equity in net loss of investments in
affiliates 0 (204) (41)
Other (880) (394) (251)
------- ------- -------
428 364 351
------- ------- -------
Net loss (10,404) (5,302) (26,593)
Less: Amortization of
redeemable preferred stock
beneficial conversion discount 0 (2,222) 0
Less: Cumulative dividend
on redeemable preferred stock (895) (385) 0
------- ------- -------
Loss applicable to common shares $(11,299) $ (7,909) $(26,593)
Basic and diluted loss per common share $ (.34) $ (.25) $(.96)
======== ======== =======
Weighted-average number of
common shares outstanding 33,229,366 31,507,622 27,655,964
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
Telular Corporation
Consolidated Statements of Stockholders' Equity
(In Thousands)
Additional Total
Preferred Common Paid-in Unrealized Treasury Stockholder's
Stock Stock Capital Gain Stock Equity
--------- ------ --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 $ 0 $242 $ 0 $ (49,657) $(1,607) $ 37,955
Proceeds from issuances of
common stock 0 4 551 0 0 555
Conversion of debentures
into 6,655,315 shares
of common stock 0 67 16,598 0 0 16,665
Stock issued in connection
with the investment in
Wireless Domain 0 3 2,185 0 0 2,188
Net loss for year ended
September 30, 1996 0 0 0 (26,593) 0 (26,593)
--------- ------ --------- ---------- -------- ------------
Balance at September 30, 1996 0 316 108,311 (76,250) (1,607) 30,770
Proceeds from issuances
of common stock 0 1 329 0 0 330
Conversion of debentures
into 378,200 shares of
common stock 0 4 1,551 0 0 1,551
Stock issued in connection
with the investment in
Wireless Domain 0 1 694 0 0 695
Amortization of redeemable
preferred stock beneficial
conversion discount 0 0 0 (2,222) 0 (2,222)
Dividends on redeemable
preferred stock 0 0 0 (385) 0 (385)
Stock issued for
services rendered 0 0 258 0 0 258
Net loss for year
ended September 30, 1997 0 0 0 (5,302) 0 (5,302)
--------- ------ --------- ---------- -------- ------------
Balance at September 30, 1997 0 322 111,143 (84,159) 0 25,699
Proceeds from issuances of
common stock 0 2 148 0 0 150
Conversion of preferred
stock to common stock 0 15 3,753 0 0 3,768
Stock issued in connection
with the purchase of
Wireless Domain 0 5 1,714 0 0 1,719
Deferred compensation
related to stock options 0 0 138 0 0 138
Dividends on redeemable
preferred stock 0 0 0 (895) 0 (895)
Stock issued in connection
with services relating to
redeemable preferred stock 0 1 149 0 0 150
Stock issued for services
and compensation 0 1 281 0 0 282
Unrealized gain on investments 0 0 0 0 75 75
Net loss for year ended
September 30, 1998 0 0 0 (10,404) 0 (10,404)
--------- ------ --------- ---------- -------- ------------
Balance at September 30, 1998 $ 0 $ 346 $ 117,326 $ (95,458) $ 75 $ 20,682
======== ====== ========= ========== ======= ============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Statements of Cash Flows
(In Thousands)
Year ended September 30
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net loss $ (10,404) $ (5,302) $ (26,593)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 1,622 1,016 1,064
Amortization 982 604 1,066
Inventory obsolescence expense 1,819 551 2,958
Compensation expense related
to stock options and grants 138 179 99
Interest on debentures 0 55 209
Common stock issued for
services and compensation 432 23 0
Restructuring and impairment charges 0 319 9,839
Equity in net loss of investments 0 204 41
Loss on disposal of property and equipment 0 0 16
Changes in assets and liabilities:
Receivables 2,840 (199) (545)
Related party receivables 3,402 (3,225) 4,029
Inventories (3,982) 2,810 (4,782)
Prepaid expenses, deposits, and other (1,117) (35) 216
Accounts payable (1,470) 1,970 (1,363)
Accrued liabilities 18 1,550 (1,207)
--------- --------- ---------
Net cash provided by (used in)
operating activities (5,720) 520 (14,953)
Investing activities
Investment in Wireless Domain 0 (500) (1,000)
Acquisition of property and equipment (2,877) (2,620) (1,267)
Acquisition of licenses and technology (150) (525) 0
Proceeds from disposal of equipment 0 0 561
--------- --------- ---------
Net cash used in investing activities (3,027) (3,645) (1,706)
<PAGE>
Financing activities
Proceeds from issuances of common stock 150 278 459
Revolving line of credit 0 0 (10,000)
Proceeds from issuance of
redeemable preferred stock 0 18,808 0
Proceeds from convertible debentures 0 0 18,000
Payment of deferred financing costs 0 (348) (515)
--------- --------- ---------
Net cash provided by financing activities 150 18,738 7,944
Net increase (decrease) in cash
and cash equivalents (8,597) 15,613 (8,715)
Cash and cash equivalents,
beginning of period 28,451 12,838 21,553
--------- --------- ---------
Cash and cash equivalents, end of period $ 19,854 $ 28,451 $ 12,838
Supplemental cash flow information
Interest paid $ 19 $ 47 $ 84
<FN>
See accompanying notes.
</TABLE>
<PAGE>
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, Telular-Adcor Security Products and
Telular International, Inc. All significant intercompany balances and
transactions have been eliminated.
Revenue Recognition
Product sales and associated costs are recognized at the time of shipment
of products or performance of services. Royalty revenue is calculated as
a percentage of sales by the licensee and is recognized by the Company
upon notification of sales by the licensee.
Cash Equivalents
Cash equivalents consist of highly liquid investments that have
maturities of three months or less from the date of purchase.
Financial Instruments
Financial instruments that 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 generally receives irrevocable letters of credit that are
confirmed by U.S. banks to reduce its credit risk. 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.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Earnings Per Share
During the year ended September 30, 1998, the Company adopted Financial
Accounting Standards Board (FASB) Statement of Financial Accounting
Standard No. 128, Earnings Per Share (SFAS No. 128). 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 did not have a material impact
on the earnings per share amounts presently reported in the financial
statements.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, Reporting Comprehensive Income (SFAS No. 130), which is
effective for years beginning after December 15, 1997. This Statement
requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of
a statement of financial position. Management has not completed its
review of SFAS No. 130, but anticipates that the adoption of this
statement will not have a significant effect on the Company's financial
disclosures.
Segment Disclosures
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131), which is effective for years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The
Company will adopt the new requirements retroactively in fiscal year
1999. Management has not completed its review of SFAS No. 131, but
anticipates that the adoption of this statement will not have a
significant effect on the Company's financial disclosures.
Reclassifications
Certain amounts in the September 30, 1996 and 1997 financial statements
have been reclassified to conform to the September 30, 1998 presentation.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
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
Management determines the appropriate classification of equity securities
as of each balance sheet date. Available-for-sale securities are carried
at fair value, with the unrealized gains and losses reported in the a
separate component of stockholders' equity. Interest, dividends, and
realized gains and losses on securities classified as available-for-sale
are included in income.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement
of Financial Accounting Standard No. 109, Accounting For Income Taxes
(SFAS No. 109), which requires that the liability method be used in
accounting for income taxes. Under SFAS No. 109, 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.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) is
amortized based on the straight-line method over ten years (See Note 5
and 6).
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.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
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,
1998, 1997 and 1996, total amortization of deferred financing costs were
$116, $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 FASB issued Statement of Financial Accounting
Standard, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 123 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.
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, 1998 and 1997.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
3. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
September 30
1998 1997
------- -------
<S> <C> <C>
Raw materials $ 6,709 $ 6,799
Finished goods 5,488 3,155
------- -------
12,197 9,954
Less: Reserve for obsolesence 603 523
------- -------
$ 11,594 $ 9,431
======== =======
</TABLE>
4. Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consist of the following:
September 30
1998 1997
------- -------
<S> <C> <C>
Computer equipment $ 2,590 $ 1,809
Shop equipment 3,967 2,209
Office equipment 1,076 636
Automobiles 21 21
Leasehold improvements 1,466 907
Security equipment held for rent 333 328
Construction in progress 494 352
------- -------
9,947 6,262
Less: Accumulated depreciation 4,451 2,651
------- -------
$ 5,496 $ 3,611
======= =======
</TABLE>
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 5) 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.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
5. Write-Down of Intangible Assets (continued)
As part of the restructuring plan (See Note 13), 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. Acquisitions
On June 28, 1996, the Company entered into an agreement and acquired a
33% interest in Wireless Domain Incorporated (WD), formerly Telepath
Corporation, in exchange for $1,000 in cash and 350,000 shares of common
stock of the Company valued at approximately $2,200. 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 of the Company valued at approximately
$695. On October 1, 1997, the Company acquired the remaining 50% of WD
in exchange for 500,000 shares of common stock valued at $1,700.
Prior to October 1, 1997, the investment in WD was accounted for under
the equity method. Since October 1, 1997, the operations of WD have been
included in the consolidated financial statements.
The total purchase price for WD of approximately $6,000 exceeds the fair
value of the net assets acquired by $4,896. The purchase price was
allocated to the acquired assets based upon their estimated respective
fair market values.
The following pro forma results of operations assumes the acquisitions of
WD occurred as of October 1, 1996, after giving effect to certain
adjustments including amortization of goodwill and equity income recorded
for the periods in which the Company owned less than 100% of WD.
Twelve Months ended
September 30, 1997
(Unaudited)
Total Revenue $ 48,968
Loss applicable to common (8,716)
shares ---------
Basic and diluted loss per (0.28)
common share =========
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
6. Acquisitions (continued)
Revenues would not change as a result of the acquisition as WD's revenues
related entirely to amounts billed to the Company. The pro forma
financial information does not purport to be indicative of the results of
operations that would have occurred had the transaction taken place at
the beginning of the periods indicated or of future results of
operations.
7. Investments
On March 2, 1998, the Company received 300,000 shares of ORA Electronics,
Inc., formerly Alliance Research Corporation, common stock, valued at
$450, as part of a litigation settlement (See Note 20). The investment
is classified as available-for-sale and is included in other assets. On
September 30, 1998, the investment had a fair value of $525. The Company
recorded an unrealized gain of $75 at September 30, 1998.
8. Income Taxes
At September 30, 1998, the Company has net operating loss carryforwards
of approximately $85,616 for income tax purposes that begin expiring in
2008. 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
1998 1997
<S> <C> <C>
Deferred tax assets:
Reserve for inventories $ 234 $ 203
Allowance for doubtful accounts 44 165
Certain intangible assets 3,230 3,565
Other 425 468
Research and development tax credit 670 121
Net operating loss carryforwards 33,219 28,816
------- -------
Total deferred tax assets 37,882 33,338
Valuation allowance 37,882 33,338
------- -------
Net deferred tax assets $ 0 $ 0
======= =======
</TABLE>
The valuation allowance has increased by $4,544 during the year ended
September 30, 1998, due principally to the increase in the net operating
loss carryforwards in 1998.
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.
9. 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. The
Company had approximately $6,100 and $11,400, in available borrowings
under this agreement at September 30, 1998 and September 30, 1997,
respectively. The Loan is secured by substantially all the assets of the
Company. 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% or the Eurodollar rate (Libor) plus
3.00%. The Company has not borrowed any amounts pursuant to the loan as
of September 30, 1998.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
10. Convertible Debentures
On December 11, 1995, the Company issued $18,000 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.
11. Redeemable Preferred Stock
During the 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
$18,800 which is net of issuance cost of $1,200. 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 ($895 and $385 at September 30, 1998 and 1997,
respectively). 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 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 $2,200 of amortization of preferred stock
beneficial conversion discount. The offset entry to amortization of
preferred stock beneficial conversion discount increased redeemable
preferred stock by $2,200. 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. During the year ended September 30, 1998, 3,494 shares of
preferred stock were converted into 1,581,170 shares of common stock.
12. 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 $11,000, 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, 1998, 1997 and 1996, payments received under this agreement
were approximately $1,900, $1,850 and $1,000, respectively. The Company
had obtained a volume purchase commitment, as defined, from Motorola over
a three-year period commencing January 1, 1996. No sales were made to
Motorola or its affiliates pursuant to this purchase commitment during
1998. Net 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, respectively.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. 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 either party in accordance with the terms of
the agreement terminates it. 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, 1998, 1997, and 1996, royalty income earned by
the Company pursuant to the Motorola agreement was approximately $350,
$496, and $644, respectively.
Accounts receivable from Motorola were $1,268 and $4,670 as of September
30, 1998 and 1997, respectively.
Purchases from Motorola totaled approximately $8,020, $9,557, and $12,983
for the years ended September 30, 1998, 1997, and 1996, respectively.
Purchases from Wireless Domain totaled $2,709 and $675 for the years
ended September 30, 1997 and 1996, respectively.
Accounts payable to Motorola, were approximately $1,185 and $3,449 for
the years ended September 30, 1998 and 1997, respectively. A payable to
Wireless Domain did not exist as of September 30, 1998. Accounts payable
to Wireless Domain was approximately $191 on September 30, 1997.
13. Restructuring and Impairment Costs
On January 22, 1996, the Company announced a restructuring program that
was completed during the third quarter of fiscal year 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 year 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 assets, inventory, and
fixed asset write-offs as well as severance payments to employees
separated from the Company. Restructuring payments were approximately
$675 in fiscal year 1996. These charges are included in restructuring
and impairment charges. See Note 5 for discussion of impairment of
intangible assets.
14. 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, 1998, 1997, and 1996 was approximately $806, $596, and
$595, respectively. Future minimum obligations under noncancelable
operating leases are as follow:
<TABLE>
<S> <C>
1999 $ 829
2000 788
2001 747
2002 748
2003 572
Thereafter 1,860
-------
$ 5,544
=======
</TABLE>
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
15. 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 $0.93 to $23.00
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.
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 of the 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.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
15. Capital Stock and Stock Options (continued)
Stock option activity, including Non-Qualified Stock Options, activity
under the Plan, and options granted to independent directors, is as
follows (in thousands, except exercise prices):
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -------------------
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 1,734 $ 6.58 1,858 $ 5.31 1,778 $ 4.56
Granted 1,103 4.84 478 5.02 1,543 2.90
Exercised (361) 1.23 (47) 5.73 (160) .93
Canceled (618) 8.65 (511) 7.72 (410) 4.40
------- -------- ------- --------- ------- ---------
Outstanding at
end of year 1,858 $ 5.31 1,778 $ 4.56 2,750 $ 3.14
======= ======== ======= ========= ======= =========
</TABLE>
Exercisable at
end of year 690 779 866
Exercise price range $ 0.93 - $ 18.00 $ 0.93 - $ 23.00 $ 0.93 - 23.00
At September 30, 1998, 2,476 of the 2,750 options outstanding had an
exercise price between $1.91 and $3.06 per share. The options had a
weighted average remaining contractual life of 6.5 years.
A summary of the weighted-average fair value of options granted during
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
Weighted- Weighted- Weighted- Weighted-
Average Average Average 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 $ 2.90 $ .68 $ 5.19 $ 2.12
Options with exercise
prices less than market price 0 0 4.91 3.86
Options with exercise
prices exceeding market price 0 0 5.56 3.73
</TABLE>
At September 30, 1998, the Company has reserved 3,000,000 shares of the
Company's common stock for issuance in connection with the Plan.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
15. Capital Stock and Stock Options (continued)
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 1998, 1997 and 1996, risk-free
interest rates of 6.0%, 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.
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>
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Pro forma net loss applicable
to common shares $ (11,655) $ (8,435) $ (27,178)
Pro forma basic and diluted
loss per common share (.35) (.27) (.98)
</TABLE>
16. Research and Development Expenses
Research and development expenses for the years ended September 30, 1998,
1997, and 1996, were approximately $7,629, $5,698, and $4,271,
respectively.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
17. Major Customers
For the year ended September 30, 1998, the Company derived approximately
$4,266 (11%) and $7,369 (19%) of its total revenues from two customers,
Qualcomm, Inc. and Guinea Sotelgui S.A., respectively. As of September
30, 1998, $160 was included in accounts receivable from Qualcomm, Inc and
none for Guinea Sotelgui S.A. For the years ended September 30, 1997 and
1996, the Company derived approximately $21,742 (44%) and $8,600 (31%) of
its total revenues from one customer, Motorola, of which approximately
$4,690 and $4,100 was included in accounts receivable at September 30,
1997 and 1996, respectively.
18. Export Sales
Export sales were approximately $30,010, $39,272, and $12,872 for the
years ended September 30, 1998, 1997, and 1996, respectively. Export
sales were primarily to the Asian and European, Middle Eastern, and
African (EMEA) regions during the years ended September 30, 1998 and
1997, and to the Caribbean and Latin American (CALA) and EMEA regions
during the year ended September 30, 1996.
19. 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.
20. Litigation Settlements
On March 2, 1998, the Company reached settlement in its patent
infringement case against ORA Electronics, Inc. and received the
following from ORA Electronics, Inc.: $500 in cash, a $1,000 promissory
note, 300,000 shares of ORA Electronics, Inc. common stock (ORA stock)
with a fair market value of $450 (See Note 7) and the right to receive
additional shares of ORA stock to ensure the fair market value received
in stock is equivalent to $1,500 on February 1, 2000. The Company
recorded royalty and royalty settlement revenue of approximately $1,176
during fiscal year 1998 which is equivalent to the fair market value of
the cash and assets received on March 2, 1998, net of legal fees.
On September 8, 1998, the Company reached settlement through arbitration
in its contract termination case with Global Tel Link Corporation. The
arbitrator awarded Global Tel Link Corporation $618 in damages which is
included in other expenses as of September 30, 1998.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
21.Employee Benefit Plan
The Company sponsors a defined contribution plan under section 401(k) of
the Internal Revenue Code. The plan covers substantially all employees
of the Company. The Company may match employee contributions on a
discretionary basis. There were no amounts charged against operations
related to the Company's match for the years ended September 30, 1998,
1997, and 1996.
22. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30, 1998, 1997, 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 1998
Total revenue $ 12,687 $ 11,054 $ 8,657 $ 8,038
Gross profit 2,774 3,359 1,982 1,750
Net loss (2,041) (1,812) (2,548) (4,003)
Basic and diluted loss
per common share (.07) (.06) (.09) (.12)
Fiscal year ended 1997
Total revenue $ 18,380 $ 11,600 $ 5,444 $ 13,544
Gross profit 4,583 3,020 694 2,790
Net profit (loss) 740 (732) (3,973) (1,337)
Basic and diluted loss
per common share .02 (.02) (.17) (.05)
Fiscal year ended 1996
Total revenue $ 4,173 $ 4,740 $ 4,906 $ 14,098
Gross profit (loss) 431 (1,827) 1,334 4,073
Net profit (loss) (5,230) (17,399) (4,495) 531
Basic and diluted loss
per common share (.20) (.66) (.12) .02
</TABLE>
The accumulation of fiscal year 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 year 1996.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable.
<PAGE>
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, 1998, which is incorporated herein.
The executive officers of the Company and their ages as of November
20, 1998 are as follows:
Name Age Position
Kenneth E. Millard 51 Chief Executive Officer and President
Robert C. Montgomery 57 Executive Vice President and
Chief Operating Officer
Daniel D. Giacopelli 40 Executive Vice President and
Chief Technology Officer
Jeffrey L. Herrmann 33 Senior Vice President,
Chief Financial Officer, Secretary
S.W.R. (Sandy) Moore. 55 Senior Vice President,
Strategic Alliances & OEM Sales
Kenneth E. Millard 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 from 1992 to 1996. 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 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. He was employed by McKinsey & Company for
twelve years.
Daniel D. Giacopelli 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.
<PAGE>
Jeffrey L. Herrmann has served as Senior Vice President, CFO and
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 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 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.
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, 1998, 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, 1998, 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, 1998, which is incorporated herein.
<PAGE>
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, 1998 and 1997
Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. The following schedule for the years ended September 30, 1998,
1997 and 1996.
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> <S> <S>
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 Exhibit 3.2
of Incorporation to the Registration Statement
3.3 Amendment No. 2 to Certificate Filed as Exhibit 3.3 to the
of Incorporation Registration Statement
3.4 By-Laws Filed as Exhibit 3.4 to the
Registration Statement
4.1 Loan Agreement with LaSalle Filed as Exhibit 4.1
National Bank and Amendment to Form 10-K filed December
thereto 27, 1995
4.2 Debenture Agreements dated Filed as Exhibit 4.2
December 11, 1995 to Form 10-K filed
December 27, 1995
<PAGE>
4.3 Certificate of Designations, Filed as Exhibit 99.2
Preferences, and Rights of Form 8-K filed
Series A Convertible Preferred April 25, 1997
Stock
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 10.1
William L. De Nicolo to the Registration Statement
10.2 Employment Agreement with Filed as Exhibit 10.1 to Form 10-Q
Kenneth E. Millard filed August 14, 1996
10.3 Stock Option Agreement with Filed as Exhibit 10.2 to Form 10-Q
Kenneth E. Millard 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 Statement
Telular Corporation dated
September 20, 1993
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, 1994 Statement
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
<PAGE>
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 Filed as Exhibit 10.7
Independent Directors to Form 10-Q filed
July 28, 1995
10.17 Securities Purchase Agreement Filed as Exhibit 99.1 to
dated April 16, 1997, by and Form 8-K filed
between Telular Corporation and April 25, 1997
purchasers of the Series A
Convertible Preferred Stock
10.18 Registration Rights Agreement Filed as Exhibit 99.3 to
dated April 16, 1997, by and Form 8-K filed
between Telular Corporation and April 25, 1997
purchasers of the Series A
Convertible Preferred Stock
10.19 Securities Purchase Agreement Filed as Exhibit 99.3 to
dated June 6, 1997, by and Registration Statement on
between Telular Corporation and Form S-3, Registration
purchasers of the Series A No. 333-27915, as amended
Convertible Preferred Stock 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 Filed as Exhibit 99.4 to
dated June 6, 1997, by and Form S-3
between Telular Corporation and
purchasers of the Series A
Convertible Preferred Stock
10.21 Agreement and Plan of Merger by Filed as Exhibit 10.21
and among Wireless Domain to Form 10-K filed
Incorporated (formerly TelePath), December 19, 1998
Telular-WD (a wholly-owned
subsidiary of Telular) and
certain stockholder of Wireless
Domain Incorporated
10.22 Employment Agreement with Daniel Filed as Exhibit 10.22
D. Giacopelli to Form 10-Q filed
February 13, 1998
10.23 Employment Agreement with Robert Filed as Exhibit 10.23
C. Montgomery to Form 10-Q filed
February 13, 1998
11 Statement regarding computation Filed herewith
of per share earnings
21 Subsidiaries of registrant Filed herewith
<PAGE>
27 Financial data schedule Filed herewith
99 Cautionary Statements Pursuant Filed herewith
to the 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 did not file any report on Form 8-K during the three
months ended September 30, 1998:
(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).
<PAGE>
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 18, 1998 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 18, 1998
-----------------------
William L. De Nicolo
/s/KENNETH E. MILLARD President, Chief Executive December 18, 1998
----------------------- Officer and Director
Kenneth E. Millard
/s/ROBERT C. MONTGOMERY Chief Operating Officer, December 18, 1998
----------------------- Executive Vice President and
Robert C. Montgomery Director
/s/DANIEL D. GIACOPELLI Chief Technology Officer, December 18, 1998
----------------------- Executive Vice President and
Daniel D. Giacopelli Director
/s/ JEFFREY L. HERRMANN Chief Financial Officer, December 18, 1998
----------------------- Secretary and Senior Vice
Jeffrey L. Herrmann President
/s/ S.W.R. (SANDY) MOORE Senior Vice President, December 18, 1998
------------------------ Strategic Alliances and
S.W.R. (Sandy) Moore OEM Sales
/s/JOHN E. BERNDT Director December 18, 1998
-----------------------
John E. Berndt
/s/LARRY J. FORD Director December 18, 1998
-----------------------
Larry J. Ford
/s/RICHARD D. HANING Director December 18, 1998
-----------------------
Richard D. Haning
/s/MARK R. WARNER Director December 18, 1998
-----------------------
Mark R. Warner
</TABLE>
<PAGE>
<TABLE>
Item 14(a) 2. Schedule VIII - Valuation and Qualifing Accounts
TELULAR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
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, 1998
Accumulated Amortization of
Intangible Assets $ 671 $ 959 $ 0 $ 0 $ 1,630
Valuation Allowance of Deferred
Tax Asset 33,338 4,544 (3) 0 0 37,882
Allowance for Doubtful Accounts 426 0 0 (314) (4) 112
Inventory Reserve 523 1,819 0 (1,739) (5) 603
Period Ended September 30, 1997
Accumulated Amortization of
Intangible Assets $ 140 $ 531 $ 0 $ 0 $ 671
Valuation Allowance of Deferred
Tax Asset 32,288 1,050 (3) 0 0 33,338
Allowance for Doubtful Accounts 900 0 0 (474) (4) 426
Inventory Reserve 1,199 (259) 0 (417) (5) 523
Period Ended September 30, 1996
Accumulated Amortization of
Intangible Assets $ 1,909 $ 7,926 (1) $ 0 $ (9,695) (2) 140
Valuation Allowance of Deferred
Tax Asset 21,888 10,400 (3) 0 0 32,288
Allowance for Doubtful Accounts 218 974 0 (292) (4) 900
Inventory Reserve 1,312 4,304 0 (4,417) (5) 1,199
Period Ended September 30, 1995
Accumulated Amortization of
Intangible Assets $ 952 $ 956 $ 0 $ 0 1,908
Valuation Allowance of Deferred
Tax Asset 12,096 9,792 (3) 0 0 21,888
Allowance for Doubtful Accounts 216 319 0 (317) (4) 218
Inventory Reserve 576 1,375 0 (639) (5) 1,312
(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 taxes, 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) Collection of accounts previously written-off.
(5) Inventory disposed
</TABLE>
Exhibit (11) - Statement Re: Computation of Earnings Per Share and
Pro Forma Earnings Per Share (1998)
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Average number of shares outstanding 32,229,366 31,507,622 27,655,964
============== ============= =============
Net loss $ (10,404,000) $ (5,302,000) $ (26,593,178)
Less: amortization of redeemable
preferred stock beneficial conversion
discount $ 0 $ (2,222,000) $ 0
Less: cumulative dividend on
redeemable preferred stock $ (895,000) $ (385,000) $ 0
-------------- ------------- -------------
Loss applicable to common shares $ (11,299,000) $ (7,909,000) $ (26,593,178)
============== ============= ==============
Net loss per share $ (0.34) $ (0.25) $ (0.96)
============== ============= ==============
</TABLE>
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., an Illinois corporation.
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 and that could cause such future results
of operations to differ materially from those expressed in any forward
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 has attempted to list
material factors comprehensively, 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.
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, 1998, the Company had $19.9 million in cash
and cash equivalents with a working capital surplus of approximately
$28.2 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.
Events in Asia, Latin America and Russia
<PAGE>
Unforeseen events in Asia or Latin America could impact sales.
Our current assessment calls for continued deep recession in Japan,
Korea, Thailand, Indonesia, Malaysia, and Hong Kong and recession or
weak growth in many other Southeast Asian developing countries. In
Latin America, economies have slowed noticeably due to high interest
rates but the region as a whole is expected to avoid recession. This
assessment presumes the two regions' currencies and stock markets
stabilize over the next several months and that the impact of these
events is limited outside the two regions to slower economic growth in
the U.S. and Canada and to lower world commodity prices. If the
region's currencies and/or stock markets fail to stabilize, if China,
Hong Kong, or Brazil were to devalue, or if Japan were to experience a
financial collapse, then the impact on world growth and industry demand
would be more severe which could result in lower sales for the Company.
Recent events also highlight the risks in Russia, which has
slipped back into severe recession. Political and economic instability
is very high and a further deterioration could impact worldwide stock or
currency markets, which in turn could weaken growth opportunities for
the Company.
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 1998, sales by the
Company to two customers, Qualcomm, Inc. and Guinea Sotelgui S.A.,
accounted for 30% of total revenue. During fiscal year 1997, sales by
the Company to Motorola represented approximately 44% of total revenue.
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, 1998, Motorola
had purchased approximately $27 million of product under this contract.
Because of unfulfilled commitments of approximately $73 million, the
Company is currently negotiating with Motorola for resolution of this
contract, which expires on December 31, 1998. 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.
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.
<PAGE>
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.
Intense Competition in Industry
Competition in the wireless telecommunications equipment
industry is intense. The industry includes major domestic and
international companies such as Motorola, Ericsson, Nokia, Qualcomm 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 non-exclusive royalty-bearing
licenses to Motorola, Ericsson and Nokia, which enables these companies
to produce and sell products that 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.
<PAGE>
Potential delisting from Nasdaq
From October 2, 1998, until December 1998 (the last
practicable date), the price for the Company's Common Stock has closed
in the range of $0.969 to $0.594 per share. On November 12, 1998, the
Company received notification from Nasdaq that the Company has a 90-day
period to bring itself back into compliance with the Nasdaq's rules,
which require, among other things, that listed companies maintain a
minimum stock price per share of one-dollar. On October 30, 1998, the
Company announced that its Board of Directors will seek shareholder
approval at its annual shareholder meeting on January 26, 1999, to
effect a reverse stock split. By effectuating a reverse stock split,
the Company expects to raise its share price above one-dollar and bring
itself back into compliance with this listing requirement. However,
there can be no assurance that the reverse stock split will be approved
or that, if approved, the company will remain in compliance with
Nasdaq's rules regarding stock price, market capitalization or other
matters.
If the Company's stock is delisted from the Nasdaq National
Market System, it would continue to be traded over the counter, but the
delisting would likely adversely affect the attractiveness of the stock
to many investors, including many institutional investors. In addition,
delisting of the stock would give rise to a right on the part of the
holders of the Company's Series A Convertible Preferred Stock (the
Preferred Stock) to redeem their Preferred Stock at a redemption price
per Share equal to the greater of (i) $1,250 and (ii) the product of the
conversion rate at the time of delisting and the closing bid price
immediately prior to that date. As of November 20, 1998, 13,506 Shares
of Preferred Stock were issued and outstanding.
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. As noted above, the Company is currently seeking to effect a
reverse stock split to avoid potential delisting from the Nasdaq Market
System.
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 products.
<PAGE>
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 believes that some volatility experienced in its
fiscal year 1996 may have been attributable in part to the timing of the
conversion of Convertible Debentures issued by the Company in 1995. The
Company currently has 16,506 shares of Series A Convertible Preferred
Stock (Preferred Stock) outstanding. The Preferred Stock 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.
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.
<PAGE>
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 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
<PAGE>
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 need's 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
The Company has instituted quality monitoring procedures and
is ISO-9001 compliant. 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.
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," and Rapid Technological Change.
Conflicts of Interest
<PAGE>
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 20, 1998, the officers and directors of
the Company, together with entities affiliated with directors of the
Company, beneficially own approximately 46% 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 its holding of outstanding shares of Common Stock, as
long as it holds at least 10% of the outstanding shares it may nominate
at least one director, and 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.
11
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