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, 1999
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 19, 1999, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately
$11,327,984* (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 19, 1999, the latest practicable date, was 11,709,544
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended September 30, 1999 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 19, 1999. 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
OVERVIEW
Background
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), including standard telephones, fax
machines, data modems and alarm panels, with cellular-type transceivers
for use in wireless communication networks in the Cellular and PCS bands.
Applications of the Company's technology include fixed wireless
telecommunications as a primary access service where wireline systems are
unavailable, unreliable or uneconomical, as well as wireless backup
systems for wireline telephone systems and wireless security and alarm
monitoring signaling (WAS). The Company's business segments are divided
among its two principal product lines: PHONECELL(R), a line of fixed
wireless terminals (FWTs), and TELGUARD(R), a line of WAS products. Refer
to the financial statement footnotes for financial information about the
business segments.
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 core 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 $18.4
million from private placements of Series A Convertible Preferred Stock.
On January 26, 1999, the Company executed a 1 for 4 reverse stock split
of its Common Stock. All Common Stock information presented herein has
been restated to reflect the 1 for 4 reverse stock split.
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, Wireless Domain Incorporated (WD) merged into
the Company. 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.
Wireless Telecommunications Overview
The majority of the wireline telephones in the world continue to be
concentrated in a relatively small number of industrialized countries.
While telecommunications infrastructure has been recognized as a critical
element for sustained economic growth, many developing nations have
telephone systems that are inadequate to sustain essential services.
Thus, many developing countries are seeking basic communications
solutions that are cost effective and can be deployed rapidly to support
aggressive economic development programs.
<PAGE>
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 FWTs. 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 many developing countries,
wireless local loop (WLL) systems represent what is often the fastest and
most cost-effective way of providing basic telephone service. WLL systems
are wireless networks constructed and operated primarily for fixed users,
both business and residential.
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 than wireless handsets as they
are linked to a single cell site, generate more average billable airtime,
and provide demand during off-peak times when system capacity is
high.
COMPANY STRATEGY
The Company's strategy is to leverage its thirteen 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 as well as to support application niches such
as alarm backup with WAS products. Global telecommunications equipment
manufacturers together with national and international service providers
are increasingly sharing the Company's vision that wireless cellular
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 which should intensify competition by wireless
service providers to capture wireline minutes of usage and the
potential for a large wireline bypass market.
TARGET MARKETS and PRODUCT APPLICATIONS
The Company's revenues to date have been derived from the sale of
PHONECELL(R) FWTs primarily in international markets. Domestic revenues to
date have been driven primarily by the Company's TELGUARD(R) WAS product
line.
The Company's major target market opportunities can be grouped into five
categories:
. Wireless Basic Telephone Service via WLL and WAA markets;
. Licensing of the Company's Technology and Sales to OEM customers;
. Remote Monitoring and Supervisory Control and Data Acquisition
(SCADA);
. Wireless Alarm Signaling Wireless Alarm System Backup;
. 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
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 one of the most prevalent applications
of the Company's technology in developed countries, especially in
the USA.
Wireless Alarm Signaling Wireless Alarm System Backup
Remotely-monitored alarm systems are routinely subject to
catastrophic failure by virtue of telephone lines being cut by
intruders or inadvertently severed by construction crews and other
activity. 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. The Company believes that the Alarm industry may soon
adopt its wireless technologies as a substitute for telephone line
connections.
Disaster Recovery and Back-Up Services
Major telephone network outages occur in the USA 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 FWT products provide continued communications capability
during these critical events.
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.
<PAGE>
TECHNOLOGY
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.
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.
PRODUCT LINES and RESEARCH and DEVELOPMENT
Products for WLL and WAA markets are marketed under the PHONECELL(R) brand
name. WAS products are marketed under the TELGUARD(R) brand name. Future
product offerings will reflect a continued evolution of existing product
lines.
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.
During fiscal year 1999, the Company improved its FWT market
position on the following major radio standards:
GSM (Group System Mobile) - In 1997, the Company introduced its
first GSM FWT. The Company introduced its second generation GSM
FWT (the SX4 GSM FWT) in fiscal year 1999. The SX4 GSM FWT
incorporates the Company's latest product innovations including
platform miniaturization and feature enhancements.
CDMA (Code Division Multiple Access) - The Company entered into a
distribution agreement with Motorola during fiscal year 1999,
whereby the Company will distribute a CDMA FWT made by Motorola.
TDMA (Time Division Multiple Access) - The Company also
introduced its second generation TDMA FWT, the SX2 TDMA FWT,
which is IS-136 compliant as well as fax data capable. In January
2000, the Company expects to introduce its third generation TDMA
FWT, the SX4 TDMA FWT. The SX4 TDMA FWT will be IS-136 compliant,
will incorporate the Company's latest product innovations
including platform miniaturization and feature enhancements, and
will utilize a transceiver made by Ericsson Radio Systems AB.
<PAGE>
During fiscal year 1999 the Company also improved it's WAS market
position by completing market introduction of its second generation
Telguard(R) WAS products, the Telguard Databurst(TM) products. These
products have improved features and dramatically reduced cost and price
points for both the WAS terminal and accompanying transmission service.
These new products operate on cellular control channels via the Aeris
Communications, Inc. network nationwide in the USA and are operated via
a new Communications Center located in the Company's Atlanta office. The
Communications Center, designed and built by the Company, is the first of
its kind and may be used for a number of wireless communication
applications, including telemetry.
The Company believes that its future success depends on its ability to
continue to meet customer's needs through product innovation, rapid time-
to-market with new products, and superior in market customer support.
Telular works closely with long distance carriers, cellular service
providers, telecommunications infrastructure suppliers and equipment
manufacturers, to develop new fixed wireless products for global WLL
markets. Current product lines deploy the major worldwide cellular air
interface standards: GSM, TDMA, CDMA, and AMPS. Development programs are
progressing for next generation digital technologies.
The Company's research and development staff is focused on developing a
steady stream of competitive products addressing the WLL and WAS market
opportunities. Its technology competence encompasses all major cellular
air-interface standards, which is reflected in the broadest product line
offering in the industry. Additionally, the Company has developed
innovative products addressing many other market categories such as
Wireless Pay Phones, Least Call routing systems, and Telemetry. Telular's
expertise in engineering products to operate reliably in the rigorous
environments of many developing countries has been recognized as a core
design competence. In addition to developing products incorporating the
latest in advanced technologies, the research and development staff
continually investigates methods by which the Company can improve the
cost of its products.
The Company expects to introduce a number of new FWT and WAS models
during fiscal year 2000 that will further secure its position as the
industry leader in its market segments.
SALES, MARKETING and SERVICE
International Sales
The international marketplace is characterized by new and repeat sales to
established mobile cellular operators and to the emerging WLL operators
throughout the world. The Company has built international sales and
marketing teams consisting of industry professionals with experience in
the Middle-East, Latin America, Asia, Europe, Africa, and the USA. It has
regional sales offices in Vernon Hills, Illinois; Atlanta, Georgia;
Miami, Florida; Oxford, England; Singapore; Hong Kong, Republic of China;
Budapest, Hungary and Istanbul, Turkey. Additionally, the Company has a
strong global distributor network covering many countries. The ability to
provide on-site customer technical assistance and support has been
identified as a key competitive advantage for Telular, and the larger
regional offices aid in providing this important service.
U.S. Sales
The Company markets both WAS and FWT products in the USA directly
through its sales groups in Vernon Hills, Illinois and Atlanta, Georgia.
With the deployment of PCS networks in the USA, the Company is focusing
on establishing product development and supply relationships with network
operators, PCS transceiver/infrastructure manufacturers, and large
telecommunication companies. The Company's TELGUARD(R) line of WAS products
is marketed almost exclusively in the USA.
<PAGE>
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.
ERICSSON RELATIONSHIP
In 1997, the Company entered into a non-exclusive limited field of use
patent license agreement with Ericsson Radio Systems AB of Sweden. The
Company receives a per unit royalty for fixed wireless terminal products
covered under this agreement that are manufactured and marketed by
Ericsson.
In 1999, the Company entered into an agreement with Ericsson Radio
Systems AB of Sweden for the supply and distribution of FWT products
incorporating the TDMA digital cellular standard. Ericsson is the world's
leading infrastructure provider with over 100,000 employees in more than
140 countries. Under this agreement, the Company may benefit from
increased sales activity arising from Ericsson's extensive worldwide
infrastructure sales organization and relationships with the world's
leading telecommunications operators. Ericsson may incorporate Telular's
TDMA FWT into its product portfolio to provide carriers with a complete
solution for fixed cellular applications. Further, Ericsson may promote
the sale of the Company's TDMA FWT products in connection with its
infrastructure sales activities. The Company also entered into an
agreement with Ericsson involving technical and testing cooperation.
The Company competes directly with Ericsson in markets where Ericsson
offers FWT products, except on products incorporating the TDMA digital
cellular standard.
MOTOROLA RELATIONSHIP
In 1990, the Company entered into a cross-license agreement with Motorola
Inc. under which the Company licensed to Motorola certain rights to
manufacture, sell and use its Invention. The cross-license agreement
allows the Company to use Motorola's transceivers in the Company's
products. Using the Invention, Motorola sells fixed cellular products,
and other companies purchase Motorola's interface for inclusion in their
own fixed cellular products. The Company receives a per unit royalty for
any products sold that are covered by the Company's patents. Motorola is
a competitor with the Company for analog AMPS and digital CDMA products
both domestically and internationally.
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 10% 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, 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 1999, the Company entered into a OEM distribution agreement whereby
the Company distributes fixed products made by Motorola's CIG for the
CDMA cellular radio standard. The CIG products utilize the Company's
Invention and CIG pays the company a royalty on each unit that CIG sells
to customers other than the Company.
MANUFACTURING
Fabrication of the Company's products is accomplished through a
combination of in-house assembly and contract manufacturing. Contract
manufacturers make and test printed circuit boards for the Company. The
assembly of 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's
quality assurance department works closely with contract manufacturers to
ensure compliance to the strict quality standards of the Company.
The Company contracts with a variety of suppliers to buy several critical
components of its products, including cellular transceivers. In 1998, the
Company began designing and producing its own cellular radio transceivers
for the AMPS and GSM FWT product lines. Although many of the radio
transceivers that the Company uses are 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 1999, the Company began designing products that
utilize certain cellular transceivers manufactured by Ericsson Radio
Systems AB.
Executive Officers
The executive officers of the Company and their ages as of November 19,
1999 are as follows:
Name Age Position
Kenneth E. Millard 52 Chief Executive Officer and President
Daniel D. Giacopelli 41 Executive Vice President and Chief
Technology Officer
Jeffrey L. Herrmann 34 Senior Vice President, Chief Financial
Officer, Secretary
Michael A. Kinser 48 Senior Vice President, Marketing
Richard K. Beckley 46 Senior Vice President, FWT Sales
James M. Hawthorne 40 Senior Vice President, WAS Sales
Kenneth E. Millard has served as 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.
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.
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.
<PAGE>
Michael A. Kinser was appointed Senior Vice President, Marketing on
August 3, 1999. Prior to that Mr. Kinser served as a Vice President at
Altec Lansing Technologies. From 1993 to 1998 Mr. Kinser served as
Director - American Standards Business Group for Ericsson Mobile Phones.
From 1983 to 1993 Mr. Kinser held a number of senior marketing management
positions with GTE Mobile Communications, Inc. Prior to 1983, Mr Kinser
served in financial management positions with GTE and the Bendix
Corporation.
Richard K Beckley has served as Senior Vice President, FWT Sales since
June 1, 1998. Prior to that he served as VP, World Wide Sales for Phoenix
Wireless and Sales Director for LCC. Prior to entering the
communications field, Mr. Beckley held several senior management
positions including VP and General Manager of ELE International in Chicago
and Lloyd Instruments, in Pennsylvania.
James M. Hawthorne has served as Senior Vice President, WAS Sales since
November 4, 1997. From 1996 to 1997, Mr. Hawthorne served as Regional
Manager for King Alarm Distributors. Prior to that, Mr. Hawthorne served
as National Sales Manager for C&K Systems, Inc. from 1986 to 1996. From
1984 to 1986, Mr. Hawthorne was Director of Technical Publications for
Radionics, Inc.
EMPLOYEES
The Company has 132 employees, of which 33% are in sales and marketing,
27% in engineering and product development, 29% in manufacturing and 11%
in finance and administration. None of the Company's employees are
represented by organized labor.
COMPETITION
The FWT industry consists of large domestic and international
telecommunications equipment companies, many of which have substantially
greater resources than those of the Company, and includes companies such
as Motorola, Nokia, Ericsson, Siemens, and Qualcomm. The Company also
competes with a number of smaller companies that have arisen in markets
where enforcement of the Companys patent protection is not available or
practicable. The Company competes with these companies primarily on the
basis of its higher product quality and reliability, state of the art
technology and enhanced features, rapid product innovation, and customer
support. 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.
The wireless telecommunications industry is experiencing significant
technological change, such as the upgrade of cellular systems from
analog to digital, increased capacity and the deployment of additional
PCS networks. 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 granted licenses under its patents to others for various
uses and applications and continues to pursue such license arrangements.
It faces competition from those licensees, their sublicensees or their
customers.
<PAGE>
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. The Company believes its advantages
over the competition include:
Better focus/commitment - In the WLL market, the Company's only
business is FWTs. Typically, the largest competitors sell FWTs in
support of their primary focus -- their network infrastructure
business.
More experience - The Company has been in the FWT business for 13
years and the WAS business for eight years and has deployed its
units in more than 130 countries worldwide which is reflected in
the quality and reliability of its products.
Broader product line _ The Company offers both analog and digital
FWTs that operate on all the world's major cellular air-interface
standards. In addition, these are non-proprietary open standards
which enable an operator certain advantages in selecting from a
broader range of equipment and services suppliers.
The Company's participation in the WAS industry is focused on the USA
market. The competitive environment has been previously dominated by a
few major equipment suppliers who have leveraged proprietary systems to
maintain their market share. Some of these suppliers have vertically
integrated up the distribution chain to include ownership of distribution
channels as well. As a result, the pace of technological change to date
in the industry has lagged that of the telecommunications sector
generally.
The Company has adopted an innovator role, and has competed
successfully by introducing innovative new wireless technology into the
marketplace. The Company's value proposition is enabled through its
products providing greater signaling reliability, interface
compatibility over a wide range of manufacturers' alarm equipment, simple
installation, and operational cost efficiencies. The Company is entering
into distribution agreements with a number of leading distributors and
end-user-marketing companies that will give the Company substantially
increased points of presence in the marketplace. Some of these companies
also compete directly with the Company on products. Although the Company
derives some benefits through its owned and licensed patents, it's
competitive success is not substantially based on its patents.
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 16 issued patents and 6 pending
patent applications in the United States, as well as 19 foreign patents
and 16 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 September 18, 2004. The 096 Patent has been filed in 16
countries.
The invention covered by the 096 Patent is a transparent interface
between a standard telephone (or other tip and ring device such as a
facsimile machine) and a cellular transceiver thereby allowing the
telephone to control the operation of the 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.
<PAGE>
Continuation Patents
In 1988 and 1990, the Company obtained two patents (U.S. Patent Nos.
4,775,997 and 4,922,517, respectively), each of which is a continuation
and broadening of the 096 Patent. These continuation patents expire on
the same date as the 096 Patent. 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 in
the field to recognize variations in telephone systems from country to
country.
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 USA and abroad. In 1995
and 1997, the Company was granted three U.S. patents relating to self-
diagnostic systems for cellular transceiver systems for both local and
remote reporting. (U.S. Patent Nos: 5,469,494; 5,859,894 and 5,966,428).
These patents cover a system for providing diagnostics reporting of a
fixed wireless terminal initiated either at the terminal or remotely by
the cellular provider. Also in 1999, the Company was granted U.S.
Patent 5,946,616 entitled Concurrent Wireless/Landline Interface
Apparatus and Method which allows the easy adaptation of an unused
telephone line as a cellular line for use throughout the wired facility.
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.
Licensing of Technology
The Company has granted licenses to a number of other companies, which
include the following:
Motorola (See Motorola Relationship)
Ericsson Radio Systems AB (See Ericsson Relationaship)
Nokia Mobile Phones, Ltd. (limited non-exclusive field of use
and limited geographic license)
Ora Electronics, Inc. (limited non-exclusive field of use license)
ADI (limited non-exclusive field of use license)
Communications Mfg. Co. (limited non-exclusive field of use license)
Trademarks and Other Proprietary Information
The Company has 10 registered trademarks which are: TELULAR, TELULAR plus
design, CELJACK, PCSone, TELCEL, Hexagon Logo, PHONECELL, CELSERV,
TELGUARD, and CPX. In addition, the Company has six registered Mexican
trademarks covering the names and logos used for some of its products.
The Company has 80 other foreign trademark registrations and 16 other
foreign trademark applications.
<PAGE>
Item 2. PROPERTIES
The Company leases, pursuant to a renewable ten-year lease that began
January 1, 1997, 72,000 square feet for its corporate headquarters in
Vernon Hills, Illinois. In addition to serving as corporate headquarters,
the facility houses manufacturing, sales, marketing, finance and
administrative functions. The Company leases, pursuant to a renewable
five-year lease that began October 10, 1997, 20,000 square feet of space
for its engineering center in Hauppauge, New York. The Company leases
space for its international sales offices in Miami, Florida; Oxford,
England and Singapore. The Company leases, pursuant to a renewable
five-year lease that began December 15, 1998, 7,715 square feet for its
WAS sales office located in Atlanta, Georgia.
Item 3. LEGAL PROCEEDINGS
The Company was involved in litigation with Global Emerging Markets North
America, Inc. (GEM) over a commission GEM claimed in connection with the
Preferred Stock issued by the Company in 1997. On April 5, 1999 the Circuit
Court of Cook County (Illinois) awarded GEM $549,000, and the company
appealed that judgement. Subsequent to filing the appeal the litigation
was settled for $425,000, which the Company paid in August 1999. The
payment that the Company agreed to make represents stock issuance cost and
has been included in its financial statements as a reduction to Redeemable
Preferred Stock.
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, 1999.
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 1999,
1998 and 1997, as reported by Nasdaq. Such quotations reflect inter-
dealer prices without retail markup, markdown or commissions and may not
necessarily represent actual transactions. All stock sales prices reflect
a 1-for-4 reverse stock split which occurred January 27, 1999.
<TABLE>
Quarter ended during fiscal year 1999
December 31 March 31 June 30 September 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
High.......... $ 4.00 $ 2.65 $ 3.63 $ 3.00
Low .......... $ 2.00 $ 1.44 $ 1.56 $ 1.69
Quarter ended during fiscal year 1998
December 31 March 31 June 30 September 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
High.......... $ 16.12 $ 12.36 $ 10.00 $ 7.76
Low .......... $ 7.64 $ 7.24 $ 7.36 $ 3.84
Quarter ended during fiscal year 1997
December 31 March 31 June 30 September 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
High.......... $ 22.24 $ 33.52 $ 24.00 $ 12.52
Low .......... $ 17.24 $ 20.00 $ 14.00 $ 9.00
</TABLE>
On November 19, 1999, there were 357 shareholders of record, 5,823
beneficial shareholders and 11,709,544 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.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended September 30, 1999, the Company paid the law
firm of Hamman and Benn fees of $275,729 for legal services, in 161,156
shares of Common Stock. The Company also paid the law firm of Bellows and
Bellows fees of $61,080 for legal services, in 32,555 shares of Common
Stock.
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.
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 fiscal
years ended September 30, 1999, 1998, 1997, 1996 and 1995. 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.
<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
(in thousands, except share data)
1999 1998 1997 1996 1995
<S> ----- ----- ----- ----- -----
Statement of operations data: <C> <C> <C> <C> <C>
Net product sales $ 34,829 $ 38,784 $ 48,417 $ 27,271 $ 33,031
Net royalty and royalty
settlement revenue 1,948 1,652 551 646 540
-------- -------- -------- -------- --------
Total revenue 38,062 40,436 48,968 27,917 33,571
Cost of sales 30,392 30,571 37,881 23,906 27,530
-------- -------- -------- -------- --------
7,670 9,865 11,087 4,011 6,041
Operating Expenses 18,434 20,697 16,753 19,936 27,042
Restructuring _ _ _ 11,019 _
-------- -------- -------- -------- --------
Loss from operations (10,764) (10,832) (5,666) (26,944) (21,001)
Net other income 182 428 364 351 1,340
-------- -------- -------- -------- --------
Net loss (10,582) (10,404) (5,302) (26,593) (19,661)
Less-amortization of
preferred stock beneficial
conversion discount _ _ (2,222) _ _
Less-cumulative dividend on
redeemable preferred stock (805) (895) (395) _ _
-------- -------- -------- -------- --------
Loss applicable to common shares $(11,387) $(11,299) $(7,909) $(26,593) $(19,661)
Basic and diluted loss per
common share $ (1.27) $ (1.36) $ (1.00) $ (3.84) $ (3.36)
As of September 30 1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Balance sheet data:
(in thousands)
Working capital $ 19,117 $ 28,193 $ 39,033 $ 26,557 $ 25,930
Total assets 35,328 48,812 57,553 41,939 54,747
Longterm debt _ _ _ 1,500 10,000
Stockholders' equity 14,991 20,682 25,699 30,770 37,956
</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 provide the capability to
bridge wireline telecommunications customer premises equipment (CPE) with
cellular-type transceivers for use in wireless communication networks in
the Cellular and PCS bands. Applications of the Company's technology
include fixed wireless telecommunications as a primary access service
where wireline systems are unavailable, unreliable or uneconomical, as
well as wireless backup systems for wireline telephone systems and
wireless security and alarm monitoring signaling (WAS). The Company's
principal product lines are: PHONECELL(R), a line of fixed wireless
terminals (FWTs), and TELGUARD(R), a line of WAS products.
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 set forth in Exhibit 99 to this filing.
OVERVIEW
Major trends driving the market for the Company's products include 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
solutions to customer demand for improved telecommunications and PCS
licensing that will drive down the price of wireless communications and
expand the number of users. However, poor economic conditions in Asia,
which negatively affected the Company's prospects during fiscal year
1999, may continue for some time.
Wireless Local Loop (WLL), which is the core of the Company's prospects
for the 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 an increase in the number of new cellular networks, primarily in
Africa, Brazil, China, Dominican Republic and Mexico.
Wireless Alternative Access (WAA), which represents the majority of the
Company's current sales in developed countries, has primarily involved an
alternative to existing wireline systems, and where wireline service is
unavailable, unreliable or uneconomic, placing FWTs on cellular networks
built for mobile cellular phones to provide regular telephone service.
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.
<PAGE>
The Company's strategy is to leverage its thirteen 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 cellular
systems in both developed and developing countries are well suited for
use as basic telephone service networks.
The Company believes that its future success depends on its ability to
continue to meet customer's needs through product innovation, rapid time-
to-market with new products, and superior in market customer support.
Telular works closely with long distance carriers, cellular service
providers, telecommunications infrastructure suppliers and equipment
manufacturers to develop new fixed wireless products for global WLL
markets. Current product lines deploy the major worldwide cellular air
interface standards: GSM, TDMA, CDMA, and AMPS. Development programs are
progressing for next generation digital technologies.
The Company's research and development staff is focused on developing a
steady stream of competitive products addressing the WLL and WAS market
opportunities. Its technology competence encompasses all major cellular
air-interface standards, which is reflected in the broadest product line
offering in the FWT and WAS industries.
During fiscal year 1999, the Company improved its FWT market position on
GSM, TDMA and CDMA. The Company introduced second generation GSM, TDMA
and CDMA FWTs during fiscal year 1999. The GSM product, the SX4 GSM FWT,
incorporates the Company's latest product innovations including platform
miniaturization and feature enhancements. The TDMA product, the SX2 TDMA
FWT, uses a cellular transceiver made by Motorola. The CDMA product, the
SX2 CDMA FWT, is made by Motorola using the Company's Invention. The
Company entered into a distribution agreement with Motorola, whereby the
Company distributes the SX2 CDMA FWT.
In January 2000, the Company expects to launch its third generation TDMA
product, the SX4 TDMA FWT. The SX4 TDMA FWT incorporates the Company's
latest product innovations including platform miniaturization and feature
enhancements and will utilize a transceiver made by Ericsson Radio
Systems AB.
The Company expects to capture significantly more FWT market share in the
GSM market, primarily in China and Europe; in the CDMA market, primarily
in Central and South America; and in the TDMA market, primarily in
Central and South America with these new products during its fiscal year
2000.
During fiscal year 1999, the Company completed market introduction of its
second generation Telguard WAS(R) products, the Telguard Databurst(TM)
products. These products have improved features and dramatically reduced
cost and price points for both the WAS terminal and accompanying airtime.
These new products operate on cellular control channels via the Aeris
Communications, Inc. network nationwide in the USA and are operated via
a new communications center located in our Atlanta sales office. The
Communications Center, designed and built by the Company, is the first of
its kind and may be used for a number of wireless communication
applications, including telemetry.
<PAGE>
Results of Operations
Fiscal Year 1999 Compared to Fiscal Year 1998
Net Product Sales. Net product sales of $34.8 million for the fiscal year
ended September 30, 1999 decreased 10% from $38.8 million for the fiscal
year ended September 30, 1998. Sales of FWTs decreased 12% from $30.1
million during the fiscal year ended 1998 to $26.6 million for fiscal
year ended 1999. The decrease resulted primarily from lower shipments to
Africa and Philippines during the current year, but also due to economic
turmoil in Asia in general and in specific areas of South America. Mexico
and Dominican Republic have had increased sales, and have partially
offset weaker sales in the other regions. The Company shipped $10.9
million of FWTs to Guinea, West Africa and Philippines during fiscal year
1998. There were no sales to these destinations in fiscal year 1999. The
sale of WAS products increased approximately 11% from $10.3 million
during fiscal year ended 1998 to $11.4 million during fiscal year ended
1999. Net product sales to related parties of approximately $1.3 million
represents sales of radios and components to Motorola.
Royalty and Royalty Settlement Revenue. Royalty and royalty settlement
revenue increased from $1.7 million during fiscal 1998 to $1.9 million
during fiscal year 1999. The fiscal year 1998 amount included $1.2
million for the royalty settlement with ORA Electronics, Inc. The fiscal
year 1999 amount includes $0.9 million of royalty settlement revenue from
Motorola. The settlement is the final payment relating to the Option
Agreement with Motorola. The above payment together with favorable
changes in terms granted to the Company by Motorola in connection with
the Hungary project comprise the balance of liquidated damages owed the
Company by Motorola in connection with the Option Agreement and the
Hungary project contract. Further, in connection with the above
settlement, the Company has agreed to reduce certain present and future
royalties from Motorola.
Cost of sales. Cost of sales decreased from $30.6 million for fiscal 1998
to $30.4 million for fiscal 1999. During the third quarter of fiscal year
1999 the Company recorded a one-time special charge of $1.5 million (or
$.17 per share) to write-off its ETACS and CDMA inventories. On June 30,
1999, the Company decided to exit the ETACS business and to offer a new
generation of CDMA products which are purchased by the Company. Excluding
this one-time charge, cost of sales for fiscal year 1999 of $28.9 million
or 76 percent of sales compares to $30.6 million or 76 percent of sales
for fiscal year 1998.
Engineering and Development Expenses. Engineering and development
expenses of $5.6 million for fiscal year 1999 decreased approximately 32%
or $2.6 million compared to fiscal year 1998. During fiscal year 1998,
the Company had increased engineering and development expenses as a
result of efforts to bring several new, lower cost products and a wider
range of products to market. Because many of the products were completed
and introduced to market during fiscal 1998, the Company has reduced
engineering and development expenses in 1999, primarily through
reductions in material costs and contracted engineering services.
Selling and Marketing Expenses. Selling and marketing expenses of $7.3
million for fiscal year ended 1999 were approximately the same as the
$7.2 million during fiscal 1998. The $7.3 million and the $7.2 million
represent 19% and 18% compared to sales for the fiscal years ended 1999
and 1998, respectively.
General and Administrative Expenses (G&A). G&A for the fiscal year ended
1999 increased 2% to $4.5 million from $4.4 million for fiscal year ended
1998. The increase relates to legal fees for patent defense in New
Zealand.
<PAGE>
Provision for doubtful accounts. Provision for doubtful accounts
increased $0.4 million during fiscal year ended 1999, compared to the
fiscal year ended 1998. The increase is a result of the Company providing
reserves for three accounts where the Company's potential exposure
exceeds its insurance coverage.
Amortization. Amortization expense decreased slightly during fiscal year
ended 1999 compared to fiscal year ended 1998, due to certain intangible
assets which became fully amortized during the first 6 months of fiscal
year 1999.
Other Income. Other income for fiscal year 1999 decreased by $0.2 million
compared to fiscal year 1998. The decrease is primarily due to lower
interest income due to reduced cash balances during fiscal year 1999
compared to fiscal year 1998.
Net loss. The Company recorded a net loss of $10.6 million or $1.18 per
share for fiscal year 1999 compared to a net loss of $10.4 million or
$1.25 per share for fiscal year 1998. Excluding the $1.5 million one-time
charge to write-off certain inventories, the net loss of $9.1 million or
$1.01 per share for the fiscal year 1999, compares to net loss of $10.4
million or $1.25 per share for the fiscal year 1998.
Net loss applicable to common shares. After giving effect to the
cumulative preferred stock dividend of $0.8 million for fiscal year
1999, net loss applicable to common shares of $11.4 million or $1.27 per
share compares to a net loss of $11.3 million or $1.36 for fiscal year
1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Product Sales. Net product sales of $38.8 million for the fiscal year
ended September 30, 1998 decreased from $48.4 million for the fiscal year
ended September 30, 1997. Net product sales, excluding net product sales
to a large Motorola WLL project in Hungary during the fiscal year ended
September 30, 1997, more than doubled from $17.7 million for the fiscal
year ended September 30, 1997 to $38.8 million for the fiscal year ended
September 30, 1998. This increase primarily resulted from shipments to WLL
projects in Philippines and Guinea, West Africa.
Royalty and Royalty Settlement Revenue. Royalty and royalty settlement
revenue increased to $1.7 million during the fiscal year ended
September 30, 1998 due primarily to the royalty settlement of $1.2
million with ORA Electronics, Inc. (See financial statement footnote 17).
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.
<PAGE>
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 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 ($1.36) per
share, compares to net loss applicable to common shares of $7.9 million
or ($1.00) 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.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1999, the Company had $9.8 million in cash and cash
equivalents and working capital of $19.1 million. Cash used for
operations was $7.9 million, for the year ended September 30, 1999,
compared to $5.7 million of cash used at September 30, 1998. The increase
in cash usage during fiscal year 1999 compared to fiscal year 1998 is
primarily the result of an increase in receivables and a decrease in
accounts payable during fiscal year 1999.
Cash used for capital expenditures was $1.5 million during fiscal year
1999, compared to $2.9 million used during fiscal 1998.
Financing activities used $0.4 million during fiscal year 1999, compared
to $0.2 million of cash provided during fiscal year 1998. The $0.4
million of cash used for financing in 1999 was paid to Global Emerging
Markets North America, Inc. (GEM) for commissions in connection with the
Preferred Stock issued by the Company in 1997.
During fiscal 1999, the Company entered into a two-year manufacturing
agreement with SCI Technology, Inc. to manufacture circuit card
assemblies for the Company's products. The agreement may be terminated by
the following events: (1) Failure by either party to perform any of its
material obligations under the agreement or (2) Entering into or filing a
petition for relief under bankruptcy laws of the United States or similar
laws of any other jurisdiction. As of September 30, 1999, the Company had
$856,000 in open purchase commitments.
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 costs of $1.2 million. As of September 30, 1999, 8,650 shares of
Preferred Stock had been converted into 1,583,865 shares of common stock.
On October 15, 1999, the remaining 11,350 shares of Preferred Stock were
converted into 2,146,540 shares of common stock. Previous holders of the
Preferred Stock have since notified the Company that they disagree with
the conversion formula the Company used to process the mandatory
conversion. In Form SC-13G filings with the Securities and Exchange
Commission, the previous holders have noted that based upon their
interpretation of the mandatory conversion formula, they are entitled to an
aggregate of 4,247,834 additional shares of the Company's common stock.
The Company believes that it processed the conversion correctly and that
the claim by previous holders of Preferred Stock is unfounded.
<PAGE>
On November 22, 1999, the Company agreed to a written proposal from Wells
Fargo Business Credit, Inc. (Wells) to provide a credit facility with
maximum borrowings of $5 million (the Proposed Loan), and paid a deposit
to Wells to commence due diligence procedures. Borrowings under the
Proposed Loan will be subject to borrowing base requirements and other
restrictions. The Proposed Loan would mature on December 12, 2002. If
consummated, the Company will grant stock options and pay financing fees
to Wells on the date of closing. As of October 30, 1999, the Company
estimated its borrowing capacity under the Proposed Loan would be $5
million. The Proposed Loan would replace a previous Loan and Security
Agreement with Fleet Capital Corporation (the successor to Sanwa Business
Credit Corporation) which was terminated on July 15, 1999.
If the Proposed Loan is approved, the Company expects to borrow funds
from time to time to fund working capital requirements, to fund future
product development efforts and to sustain significant levels of cash
reserves which are required to qualify for large sales opportunities.
The Company is using much of the capital raised from the issuance of
Preferred Stock to fund new product development. Beyond product
development needs, expected future uses of cash include working capital
requirements, marketing and sales support programs and certain capital
expenditures. Based upon its current operating plan, the Company believes
its existing capital resources, including the proceeds from the issuance
of Preferred Stock and the Proposed Loan, will enable it to maintain its
current and planned operations through fiscal year 2000. 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 its foreign customers to obtain letters of credit or
to qualify for export credit insurance underwritten by third party credit
insurance companies prior to making international shipments. Also, to
mitigate the effects of currency fluctuations on the Company's results of
operations, the Company conducts all of its international transactions in
U.S. dollars.
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.
In 1998, management conducted a formal assessment of its significant
information technology systems, including computers used in its
production and manufacturing functions. Based upon this assessment,
management developed an action plan to modify 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, was not
significant and was funded with available cash. Although the Company has
completed all known changes to its internal computer systems and has
obtained certification of year 2000 compliance from its key external
software providers, there can be no absolute assurance that all of the
Company's internal systems will operate properly in the Year 2000 and
beyond. The Company is prepared to operate the business without the
benefit of internal computer systems should its systems fail to operate
after December 31, 1999.
<PAGE>
The Company does not conduct any of its purchase transactions through
computer systems that interface directly with suppliers. However, the
Company has 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 most of its suppliers. 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.
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 December 31, 1999. The Company's
large customers beyond December 31, 1999 will likely be new customers due
to the project nature of its business. However, 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 USA, 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 companies' products and sold as combined product by other
companies. 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 was
approximately $100,000, of which approximately 50% was incurred during
the current fiscal year. Management will continue to monitor this issue,
particularly the possible impact of third-party Year 2000 compliance on
the Company's operations.
Management believes that it is Year 2000 ready and does not anticipate
any additional preparation cost. 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
affected 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
products, the Company's dependence on contractors, Ericsson 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 effects of
control by existing shareholders, the effect of changes in management,
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
maintain 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
patent litigation. 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 fluctuations for these investments
is not material as of September 30, 1999.
<PAGE>
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 .................. 22
Consolidated Balance Sheets as
of September 30, 1999 and 1998 .................. 23
Consolidated Statements of
Operations for the years ended
September 30, 1999, 1998 and 1997 ............... 24
Consolidated Statements of
Stockholders' Equity for the years
ended September 30, 1999, 1998 and 1997 ......... 25
Consolidated Statements of
Cash Flows for the years ended
September 30, 1999, 1998 and 1997 ............... 26
Notes to Consolidated Financial Statements ...... 27
<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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three year period ended September 30,
1999. These financial statements 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, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the
three years ended September 30, 1999, in conformity with generally
accepted accounting principles.
October 22, 1999
/s/ ERNST & YOUNG LLP
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
September 30
1999 1998
<S> -------- ---------
Assets
Current assets: <C> <C>
Cash and cash equivalents $ 9,972 $ 19,854
Receivables:
Trade, less an allowance for doubtful
accounts of $103 and $112, respectively 6,670 4,468
Related parties 483 1,268
-------- ---------
7,153 5,736
Inventories, net 8,770 11,594
Prepaid expenses and other current assets 502 853
-------- ---------
Total current assets 26,397 38,037
Property and equipment, net 5,202 5,496
Other assets:
Excess of cost over fair value of net
assets acquired,less accumulated
amortization of $1,303 and $785, respectively 3,592 4,111
Other intangible assets, less
accumulated amortization of
$1,089 and $845, respectively 6 250
Deposits and other 131 918
-------- ---------
3,729 5,279
-------- ---------
Total assets $ 35,328 $ 48,812
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable:
Trade 2,450 5,138
Related parties 1,738 1,185
Accrued liabilities 3,092 3,521
-------- ---------
Total current liabilities 7,280 9,844
Commitments and contingencies _ _
Redeemable preferred stock:
Series A convertible preferred stock,
$.01 par value; $12,775 liquidation
preference at September 30, 1999 and
1998; 21,000 shares authorized at
September 30, 1999; 11,350 and 16,506
shares outstanding at September 30,
1999 and 1998, respectively 13,057 18,286
Stockholders' equity:
Preferred stock, $.01 par value;
9,979,000 shares authorized at
September 30, 1999 and 1998; none
outstanding _ _
Common stock, $.01 par value;
75,000,000 shares authorized;
9,563,004 and 8,534,298 outstanding,
at September 30, 1999 and 1998, respectively 97 346
Additional paid-in capital 123,730 117,326
Deficit (106,845) (95,458)
Accumulated other comprehensive income (loss) (384) 75
Treasury stock, 140,000 shares at cost (1,607) (1,607)
-------- ---------
Total stockholders' equity 14,991 20,682
-------- ---------
Total liabilities and stockholders' equity $ 35,328 $ 48,812
========= =========
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Statements of Operations
(In Thousands, Except Share Data)
Year ended September 30
1999 1998 1997
<S> --------- -------- --------
Revenue <C> <C> <C>
Net product sales to unrelated parties $ 34,829 $ 38,784 $ 27,227
Net product sales to related parties 1,285 _ 21,190
--------- -------- --------
Total net product sales 36,114 38,784 48,417
Royalty and royalty settlement revenue 1,948 1,652 551
--------- -------- --------
Total revenue 38,062 40,436 48,968
Cost of sales 30,392 30,571 37,881
--------- -------- --------
7,670 9,865 11,087
Operating Expenses
Engineering, research and development 5,568 8,159 6,007
Selling 7,270 7,248 4,510
General and administrative 4,543 4,380 5,863
Provision for (recovery of) doubtful accounts 290 (72) (231)
Amortization 763 982 604
--------- -------- --------
Loss from operations (10,764) (10,832) (5,666)
Other income (expense)
Interest income 562 1,327 1,009
Interest expense (25) (19) (47)
Equity in net loss of investments
in affiliates _ _ (204)
Other (355) (880) (394)
--------- -------- --------
182 428 364
--------- -------- --------
Net loss (10,582) (10,404) (5,302)
Less: Amortization of
redeemable preferred stock
beneficial conversion discount _ _ (2,222)
Less: Cumulative dividend
on redeemable preferred stock (805) (895) (385)
--------- -------- --------
Loss applicable to common shares $ (11,387)$ (11,299) $(7,909)
========== ========= ========
Basic and diluted loss per common share $ (1.27) $ (1.36) $ (1.00)
========== ========= ========
Weighted-average number of
common shares outstanding 8,976,640 8,307,342 7,876,906
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Statements of Stockholders' Equity
(In Thousands)
Accumulated
Additional Other Total
Preferred Common Paid-in Comprehensive Treasury Stockholder's
Stock Stock Capital Deficit Income(Loss) Stock Equity
<C> --------- ------ --------- ------- ------------- -------- -------------
Balance at <C> <C> <C> <C> <C> <C> <C>
September 30, 1996 $- $316 $108,311 $(76,250) $- $(1,607) $30,770
Proceeds from issuances
of common stock _ 1 329 _ _ _ 330
Conversion of debentures
into 378,200 shares of
common stock - 4 1,551 - - - 1,555
Stock issued in
connection with the
investment in
Wireless Domain _ 1 694 _ _ _ 695
Amortization of redeemable
preferred stock beneficial
conversion discount _ _ _ (2,222) _ _ (2,222)
Dividends on redeemable
preferred stock _ _ _ (385) _ _ (385)
Stock issued for
services rendered _ _ 258 _ _ _ 258
Net loss for year ended
September 30, 1997 _ _ _ (5,302) _ _ (5,302)
--------- ------ --------- ------- ------------- -------- -------------
Balance at
September 30, 1997 $- $322 $111,143 $(84,159) $- $(1,607) $25,699
Proceeds from the issances
of common stock _ 2 148 _ _ _ 150
Conversion of redeemable
preferred stock to
common stock _ 15 3,753 _ _ _ 3,768
Stock issued in connection
with the purchase of
Wireless Domain _ 5 1,714 _ _ _ 1,719
Deferred compensation
related to stock options _ _ 138 _ _ _ 138
Dividends on redeemable
preferred stock _ _ _ (895) _ _ (895)
Stock issued in connection
with services relating to
redeemable preferred stock_ 1 149 _ _ _ 150
Stock issued for services
and compensation _ 1 281 _ _ _ 282
Comprehensive loss:
Net loss for year ended
September 30, 1998 _ _ _ (10,404) _ _ (10,404)
Unrealized gain
on investments _ _ _ _ 75 _ 75
---------
Comprehensive loss (10,329)
--------- ------ --------- ------- ------------- -------- -------------
Balance at
September 30, 1998 $ _ $346 $117,326 $(95,458) $75 $(1,607) $20,682
<PAGE>
Conversion of redeemable
preferred stock to
common stock _ 18 5,591 _ _ _ 5,609
Deferred compensation
related to stock options _ _ 165 _ _ _ 165
Dividends on redeemable
preferred stock _ _ _ (805) _ _ (805)
One-for-four stock exchange _ (269) 269 _ _ _ _
Stock issued for services
and compensation _ 2 379 _ _ _ 381
Comprehensive loss:
Net loss for year ended
September 30, 1999 _ _ _ (10,582) _ _ (10,582)
Unrealized loss
on investments _ _ _ _ (459) _ (459)
---------
Comprehensive loss (11,041)
========= ====== ========= ======= ============= ======== =============
Balance at
September 30, 1999 $ _ $97 $123,730 $(106,845) $(384) $(1,607) $14,991
========= ====== ========= ========== ============= ======== =============
<FN>
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Telular Corporation
Consolidated Statements of Cash Flows
(In Thousands)
Year ended September 30
1999 1998 1997
<S> --------- -------- --------
Operating activities <C> <C> <C>
Net loss $(10,582) $(10,404) $(5,302)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation 1,804 1,622 1,016
Amortization 763 982 604
Inventory obsolescence expense 2,119 1,819 551
Provision for (recovery of)
doubtful accounts 290 (72) (231)
Compensation expense related
to stock options and grants 165 138 179
Interest on debentures _ _ 55
Common stock issued for
services and compensation 381 432 23
Restructuring and impairment charges _ _ 319
Equity in net loss of investments _ _ 204
Changes in assets and liabilities:
Receivables (2,492) 2,912 32
Related party receivables 785 3,402 (3,225)
Inventories 705 (3,982) 2,810
Prepaid expenses, deposits, and other 679 (1,117) (35)
Accounts payable (2,688) 985 1,970
Related party payables 553 (2,455) _
Accrued liabilities (429) 18 1,550
--------- -------- --------
Net cash provided by (used in)
operating activities (7,947) (5,720) 520
Investing activities
Investment in Wireless Domain _ _ (500)
Acquisition of property and equipment (1,510) (2,877) (2,620)
Acquisition of licenses and technology _ (150) (525)
--------- -------- --------
Net cash used in investing activities (1,510) (3,027) (3,645)
Financing activities
Proceeds from issuances of common stock _ 150 278
Payments for the issuance of
redeemable preferred stock (425) _ (1,192)
Proceeds from issuance of
redeemable preferred stock _ _ 20,000
Payment of deferred financing costs _ _ (348)
--------- -------- --------
Net cash provided by (used in)
financing activities (425) 150 18,738
--------- -------- --------
Net increase (decrease) in cash
and cash equivalents (9,882) (8,597) 15,613
Cash and cash equivalents,
beginning of period 19,854 28,451 12,838
--------- -------- --------
Cash and cash equivalents, end
of period $ 9,972 $19,854 $ 28,451
========= ======== =========
Supplemental cash flow information
Interest paid $ 25 $ 19 $ 47
========= ======== =========
<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 two business segments,
fixed wireless terminals (FWTs) and wireless alarm signaling (WAS). The
Company 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.
Net Loss Per Share
Basic and diluted net loss per share are computed based upon the
weighted-average number of shares of common stock outstanding. Common
shares issuable upon the exercise of options, warrants and redeemable
preferred stock are not included in the per share calculations since the
effect of their inclusion would be anti-dilutive. All earnings per share
amounts for all periods have been presented and, where appropriate,
restated to conform to Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard No. 128, Earnings Per Share.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
Comprehensive Loss
On October 1, 1998, the Company adopted FASB Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS No.
130). Comprehensive income is defined by SFAS No. 130 as net income plus
other comprehensive income, which, under existing accounting standards
includes foreign currency items, minimum pension liability and unrealized
gains and losses on certain investments in debt and equity securities.
Comprehensive income is reported by the Company in the consolidated
statement of stockholders' equity.
Segment Disclosures
Effective October 1, 1998, the Company adopted the FASB Statement of
Financial Accounting Standard No. 131, Disclosures about Segments of an
Enterprise and Related Information (SFAS No. 131). SFAS No. 131
superseded FASB Statement of Financial Accounting Standard No. 14,
Financial Reporting for Segments of a Business Enterprise. 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 adoption of SFAS No. 131 did not affect
the Company's results of operations or financial position, but did affect
the disclosure of segment information (See Note 8).
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after
June 15, 2000. The Statement permits early adoption as of the beginning
of any fiscal quarter after its issuance. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivatives will either be offset
against the change in the fair value of the hedged assets, liabilities,
or firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not anticipate that the adoption
of this statement will have a significant effect on the Company's
financial disclosures.
Reclassifications
Certain amounts in the September 30, 1997 and 1998 financial statements
have been reclassified to conform to the September 30, 1999 presentation.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
Reverse Stock Split
The number of shares of common stock outstanding, the weighted average
number of common shares outstanding and basic and diluted net loss per
share amounts have all been restated to reflect the one-for-four (1:4)
reverse stock split of the Company's common stock on January 27, 1999.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are computed using straight-line and accelerated methods over the assets
useful life ranging from 3 to 10 years.
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 as 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
ranging from 2 to 10 years, 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).
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)
Stock-Based Compensation Expense
The Company accounts for stock-based compensation awards to employees
using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock issued to Employees, and
has adopted the disclosure alternative of FASB Statement of Financial
Accounting Standard, Accounting for Stock-Based Compensation (SFAS
No. 123). The Company accounts for stock-based compensation awards to
nonemployees using the fair value method prescribed in SFAS No. 123.
Fair Value of Financial Instruments
The carrying values reported in the statement of financial position for
receivables, and accounts payable approximate their fair values at
September 30, 1999 and 1998.
3. Inventories
Inventories consist of the following:
September 30
1999 1998
------- -------
Raw materials $3,873 $6,709
Finished goods 5,481 5,488
------- -------
9,354 12,197
Less: Reserve for obsolescence 584 603
------- -------
$8,770 $11,594
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
4. Property and Equipment
Property and equipment consist of the following:
September 30
1999 1998
------- -------
Computer equipment $2,637 $2,590
Shop equipment 5,849 3,967
Office equipment 1,066 1,076
Automobiles 21 21
Leasehold improvements 1,464 1,466
Security equipment held for rent 333 333
Construction in progress - 494
------- -------
11,370 9,947
Less: Accumulated depreciation 6,168 4,451
------- -------
$5,202 $5,496
5. 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 shares (8,716)
Basic and diluted loss per common share (1.12)
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
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.
6. 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 17). The investment is
classified as available-for-sale and is included in other assets. On
September 30, 1999 and 1998, the investment had a fair value of $66 and
$525, respectively.
7. Income Taxes
The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. Federal statutory
rate is due to net operating losses not being benefited. Accordingly,
there is no provision for income taxes for the years ended September 30,
1999, 1998 and 1997. On September 30, 1999, the Company has net operating
loss carryforwards of approximately $96,640 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:
September 30
1999 1998
------ -------
Deferred tax assets:
Reserve for inventories $ 227 $ 234
Allowance for doubtful accounts 40 44
Certain intangible assets 2,897 3,230
Other 361 425
Research and development tax credit 1,397 670
Net operating loss carryforwards 37,496 33,219
------- ------
Total deferred tax assets 42,418 37,882
Valuation allowance 42,418 37,882
------- --------
Net deferred tax assets $ - $ -
The valuation allowance has increased by $4,536 during the year ended
September 30, 1999, due principally to the increase in the net operating
loss carryforwards in 1999.
Based on the Internal Revenue Code and changes in the ownership of the
Company, utilization of the net operating loss carryforwards may be
subject to annual limitations.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
8. Segment Reporting
The Company, which is organized on the basis of products and services,
has two reportable business segments, Fixed Wireless Terminals and
Security Products. The Company designs, develops, manufactures and
markets both fixed wireless terminals and security products. Fixed
wireless terminals bridge wireline telecommunications customer premises
equipment with cellular-type transceivers for use in wireless
communication networks. Security products provide wireless backup systems
for both commercial as well as residential alarms.
Export sales of fixed wireless terminals represent 79%, 75% and 97% of
total fixed wireless net sales for the years ending September 30, 1999,
1998 and 1997, respectively.
Export sales of security products were insignificant for years ending
September 30, 1999, 1998 and 1997.
<TABLE>
1999 1998 1997
------ ------ ------
<S> ($ in millions)
Revenue <C> <C> <C>
Fixed Wireless Terminals 26,638 30,130 40,218
Security Products 11,424 10,306 8,750
------ ------ ------
38,062 40,436 48,968
Loss From Consolidated
Operations
Fixed Wireless Terminals (10,093) (10,009) (3,915)
Security Products (489) (395) (1,387)
------ ------ ------
(10,582) (10,404) (5,302)
Tangible Long-Lived Assets, net
Fixed Wireless Terminals 4,017 4,974 3,554
Security Products 1,185 522 57
------ ------ ------
5,202 5,496 3,611
Capital Expenditures
Fixed Wireless Terminals 751 2,378 2,571
Security Products 759 499 49
------ ------ ------
1,510 2,877 2,620
Depreciation and Amortization
Fixed Wireless Terminals 2,443 2,479 1,560
Security Products 124 125 108
------ ------ ------
2,567 2,604 1,668
</TABLE>
For the period ending September 30, 1999, two customers located in Mexico
and Dominican Republic accounted for 26% and 17% respectively, of the
fixed wireless terminal net sales and two customers, both located in the
USA, accounted for 30% and 13% respectively, of the security products
net sales. For the fiscal year ending September 30, 1998, two customers
from Guinea, West Africa and the Philippines, accounted for 26% and 10%
respectively, of the fixed wireless terminal net sales and two customers,
both located in the USA accounted for 29% and 17% respectively, of the
security products net sales. For period ending September 30,
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
1997, one customer, located in Hungary, accounted for 53% of the fixed
wireless terminal net sales and two customers, both located in the USA
accounted for 22% and 16% respectively, of the security products net
sales.
9. 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 was
entitled, at its option any time commencing one year after issuance (and
under certain circumstances prior to that date) through maturity, to
require the holders to convert the principal and accrued interest into
shares of common stock of the Company using defined conversion formulas
based on Nasdaq closing bids for the Company's common stock. During the
year ended September 30, 1997, convertible debentures and accrued
interest totaling $1,555 were converted into 378,200 shares of common
stock
10. 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
$18,375 which is net of issuance cost of $1,200. The Preferred Stock has
a liquidation preference of $12,775 on September 30, 1999. The Preferred
Stock includes the equivalent of a 5% annual stock dividend ($805, $895
and $385 at September 30, 1999, 1998 and 1997, respectively). Holders of
the Preferred Stock are not entitled to vote on matters submitted for
vote to the stockholders of the Company. The Preferred Stock reflects a
beneficial conversion feature that allows holders to convert the security
to common stock of the Company at a discount. The amount of the discount
is determined using NASDAQ closing bid prices for the Company's common
stock. During the fiscal year ending September 30, 1997, the Company
recorded $2,222 of amortization of preferred stock beneficial conversion
discount. The offset entry to amortization of preferred stock beneficial
conversion discount increased redeemable preferred stock by $2,222. This
amount accretes 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. As of September 30, 1999,
8,650 shares of Preferred Stock had been converted into 1,583,865 shares
of common stock.
On October 15, 1999, the remaining 11,350 shares of Preferred Stock
automatically converted into 2,146,540 shares of common stock. Previous
holders of the Preferred Stock have since notified the Company that they
disagree with the conversion formula the Company used to process the
mandatory conversion. In Form SC-13G filings with the Securities and
Exchange Commission, the previous holders have noted that based upon
their interpretation of mandatory conversion formula, they are entitled
to an aggregate of 4,247,834 additional shares of the Company's common
stock. The Company believes that it processed the conversion correctly
and that the claim by previous holders of Preferred Stock is unfounded.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
11. Related Party Transactions
Pursuant to the terms of a 1993 Stock Purchase Agreement, the Company
issued and sold 3,824,240 shares of common stock to Motorola, Inc.
(Motorola) in exchange for cash proceeds of $11,000, 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, 1999, 1998 and 1997, payments received under this agreement were
approximately $1,000, $1,900 and $1,850, respectively.
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, 1999, 1998, and 1997, royalty income earned by the
Company pursuant to the Motorola agreement was approximately $1,948,
$350, and $496, respectively.
Accounts receivable from Motorola were $483 and $1,268 as of September
30, 1999 and 1998, respectively.
Purchases from Motorola totaled approximately $6,404, $8,020, and $9,557
for the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
Purchases from Wireless Domain totaled $2,709 for the year ended
September 30, 1997.
Accounts payable to Motorola were approximately $1,738 and $1,185 for the
years ended September 30, 1999 and 1998, respectively.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
12. Commitments
The Company occupies 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, 1999, 1998, and 1997
was approximately $997, $806, and $596, respectively. Future minimum
obligations under noncancelable operating leases are as follow:
2000 $1,021
2001 987
2002 977
2003 808
2004 677
Thereafter 1,535
-------
$6,005
=======
During fiscal 1999, the Company entered into a two-year manufacturing
agreement with SCI Technology, Inc. to manufacture circuit card
assemblies for the Company's products. The agreement may be terminated by
the following events: (1) failure by either party to perform any of its
material obligations under the agreement or (2) entering into or filing a
petition for relief under bankruptcy laws of the United States or similar
laws of any other jurisdiction. As of September 30, 1999, the Company had
$856 in open purchase commitments.
13. 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 independent 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 $3.72 to $92.00
per share, as 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 cancelled,
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
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
committees of the Board of Directors which, if not exercised or
terminated, will terminate on the sixth anniversary of the date of grant.
In October 1997, the Company 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.
The following table displays stock option activity, including Non-Qualified
Stock Options and options granted to independent directors.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> --------------------------------------------------------
Outstanding at beginning <C> <C> <C> <C> <C> <C>
of year 688 $12.56 445 $18.24 465 $21.24
Granted 742 3.31 386 11.60 120 20.08
Exercised - - (40) 3.72 (12) 22.92
Canceled (225) 7.97 (103) 17.60 (128) 30.88
--------------------------------------------------------
Outstanding at end of year 1,205 $7.71 688 $12.56 445 $18.24
========================================================
<FN>
Weighted average fair value
of options granted during
the period $1.06 $2.72 $8.48
Exercisable at end of year 479 $10.64 217 $15.20 195 $20.00
Exercise price range $1.56 -$92.00 $3.72 - $92.00 $3.72 - $92.00
</TABLE>
At September 30, 1999, 1,175 of the 1,205 options outstanding had an
exercise price between $1.56 and $12.25 per share. The options had a
weighted average remaining contractual life of 6.6 years.
At September 30, 1999, the Company has reserved 5,837,041 shares of the
Company's common stock for issuance in connection with the Plan.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to October 1, 1995, under the fair value method of
that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1999, 1998 and 1997, risk-free
interest rates of 6.0%, 6.0% and 6.5%, 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
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
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:
1999 1998 1997
-------- -------- -------
Pro forma net loss applicable $(12,002) $(11,655) $(8,435)
to common shares
Pro forma basic and diluted
loss per common share (1.34) (1.40) (1.08)
14. Major Customers
For the year ended September 30, 1999, the Company derived approximately
$4,422 (12%) and $6,840 (18%) of its total revenues from two customers,
Tricom, Inc. and Radiomovil S.A., respectively. As of September 30, 1999,
$2.2 million was included in accounts receivable from Radiomovil, S.A.
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 year ended September 30, 1997
the Company derived approximately $21,742 (44%) of its total revenues
from one customer, Motorola, of which approximately $4,690 was included
in accounts receivable at September 30, 1997.
15. Export Sales
Export sales were approximately $20,963, $30,010, and $39,272 for the
years ended September 30, 1999, 1998 and 1997, respectively. Export sales
were primarily to the Caribbean and Latin American (CALA) and European,
Middle Eastern, and African (EMEA) regions during the year ended
September 30, 1999, and to the Asian and EMEA regions during the years
ended September 30, 1998 and 1997.
16. 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 or
financial position.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
17. Litigation Settlement
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 6) 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 at which
time the Company shall distribute to the Hamman & Benn and Jones, Bell et
al., the Company's legal representation, 27% and 8% respectively of the
stock value or stock of ORA Electronics, Inc, totaling $367. 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
cash and assets received on March 2, 1998, net of legal fees of $633.
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 for the year ended September 30, 1998.
The Company was involved in litigation with Global Emerging Markets North
America, Inc. (GEM) over a commission GEM claimed in connection with the
Preferred Stock issued by the Company in 1997 (see note 10 above). On
April 5, 1999 the Circuit Court of Cook County (Illinois) awarded GEM
$549, and the company appealed that judgement. Subsequent to filing the
appeal the litigation was settled for $425, which the Company paid in
August 1999. The payment that the Company agreed to make represents stock
issuance cost and has been included in its financial statements as a
reduction to Redeemable Preferred Stock.
18. 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, 1999,
1998, and 1997.
<PAGE>
Telular Corporation
Notes to Consolidated Financial Statements (continued)
(In Thousands, Except Share Data)
19. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the
years ended September 30, 1999, 1998, and 1997 (in thousand, except share
data).
<TABLE>
<CAPTION>
Three months ended
December 31 March 31 June 30 September 30
<S> ----------------------------------------------------
Fiscal year ended 1999 <C> <C> <C> <C>
Total revenue $8,211 $8,362 $10,684 $10,805
Gross profit 1,791 2,514 1,100 2,265
Net loss (2,691) (1,998) (3,216) (2,677)
Basic and diluted loss (.33) (.25) (.38) (.31)
per common share
Fiscal year ended 1998
Total revenue $12,687 $11,054 $8,657 $8,038
Gross profit (loss) 2,774 3,359 1,982 1,750
Net loss (2,041) (1,812) (2,548) (4,003)
Basic and diluted loss (.28) (.24) (.36) (.48)
per common share
Fiscal year ended 1997
Total revenue $18,380 $11,600 $5,444 $13,544
Gross profit 4,583 3,020 694 2,790
Net Income (loss) 740 (732) (3,973) (1,337)
Basic and diluted loss .08 (.08) (.68) (.20)
per common share
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3), reference is made to the
information in Part I above in the Company's definitive proxy statement
for its 2000 Annual Meeting of Shareholders filed with the Securities and
Exchange Commission on or before December 29, 1999, which is incorporated
herein.
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 2000 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission on or
before December 29, 1999, 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 2000 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on or before December 29, 1999, 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 2000
Annual Meeting of Shareholders filed with the Securities and Exchange
Commission on or before December 29, 1999, 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, 1999 and 1998
Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. The following schedule for the years ended September 30, 1999,
1998 and 1997.
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.
<PAGE>
3. Exhibits.
Number Description Reference
-------- --------------------------- ------------------
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 to
of Incorporation the Registration
Statement
3.3 Amendment No. 2 to Certificate Filed as Exhibit 3.3 to
of Incorporation the Registration
Statement
3.4 Amendment No. 3 to Certificate Filed as Exhibit 3.4 to
of Incorporation Form 10-Q filed
February 16, 1999
3.5 Amendment No.4 to Certificate Filed as Exhibit 3.5 to
of Incorporation Form 10-Q filed
February 16, 1999
3.6 By-Laws Filed as Exhibit 3.4 to
the Registration
Statement
4.1 Loan Agreement with LaSalle Filed as Exhibit
National Bank and Amendment 4.1 to Form 10-K
thereto filed December 27, 1995
4.2 Debenture Agreements dated Filed as Exhibit
December 11, 1995 4.2 to Form 10-K
filed December 27, 1995
4.3 Certificate of Designations, Filed as Exhibit 99.2
Preferences, and Rights of Series Form 8K filed
A Convertible Preferred Stock April 25, 1997
4.4 Loan and Security Agreement with Filed as Exhibit 4.2 to
Sanwa Business Credit Corporation Form 10-Q filed
August 14, 1997
10.1 Consulting Agreement with Filed as Exhibit
William L. De Nicolo 10.1 to the
Registration
Statement
10.2 Employment Agreement with Filed as Exhibit
Kenneth E. Millard 10.1 to Form 10-Q
filed August 14, 1996
10.3 Stock Option Agreement with Filed as Exhibit
Kenneth E. Millard 10.2 to Form 10-Q
filed August 14, 1996
10.4 Stock Purchase Agreement By Filed as Exhibit
and Among Telular Corporation 10.3 to Form 10-Q
and TelePath Corporation (which filed August 14, 1996
had changed its name to Wireless
Domain, Incorporated)
10.5 Appointment of Larry J. Ford Filed as Exhibit 10.2
to Form 10-Q filed
May 1, 1995
<PAGE>
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 Amendment No.1 dated September 24, Filed as Exhibit 10.7
1996 to Option Agreement with to Form 10-Q filed
Motorola August 13, 1999(1)
10.8 Amendment No.2 dated April 30, Filed as Exhibit 10.8
1999 to Option Agreement with to Form 10-Q filed
Motorola August 13, 1999(1)
10.9 Stock Purchase Agreement Filed as Exhibit 10.11
between Motorola, Inc. and to the Registration
Telular Corporation dated Statement
September 20, 1993
10.10 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
10.11 Amendment No. 4 to Patent Cross Filed as Exhibit 10.11
License Agreement between to Form 10-Q filed
Motorola, Inc. and the Company, August 13, 1999(1)
dated May 3, 1999
10.12 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
10.13 Amended and Restated Shareholders Filed as Exhibit 10.15
Agreement dated November 2, 1993 to the Registration
Statement(1)
10.14 Amendment No. 1 to Amended and Filed as Exhibit 10.24
Restated Shareholders the Registration
Agreement, dated January 24, Statement
1994
10.15 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
10.16 Amended and Restated Registration Filed as Exhibit 10.16
Rights Agreement dated November to the Registration
2, 1993 Statement
10.17 Amendment No. 1 to Amended and Filed as Exhibit 10.25
Restated Registration Rights to the Registration
Agreement, dated January 24, Statement
1994
10.18 Amended and Restated Employee Filed as Exhibit 10.17
Stock Option Plan to Form 10-K filed
December 26, 1996
10.19 Stock Option Grant to Filed as Exhibit 10.7
Independent Directors to Form 10-Q filed
July 28, 1995
10.20 Securities Purchase Agreement Filed as Exhibit 99.1
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
<PAGE>
10.21 Registration Rights Agreement Filed as Exhibit 99.3
dated April 16, 1997, by and to Form 8-K filed
between Telular Corporation and April 25, 1997
purchasers of the Series A
Convertible Preferred Stock
10.22 Securities Purchase Agreement Filed as Exhibit 99.3
dated June 6, 1997, by and to Registration
between Telular Corporation and Statement on Form S-3,
purchasers of the Series A Registration No.
Convertible Preferred Stock 333-27915, as amended
by Amendment No. 1 filed
June 13, 1997, and
further Amended by
Amendment No.2 filed
July 8, 1997 (Form S-3)
10.23 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
10.24 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
10.25 Employment Agreement with Daniel Filed as Exhibit 10.22
D.Giacopelli to Form 10-Q filed
February 13, 1998
10.26 Employment Agreement with Robert Filed as Exhibit 10.23
C. Montgomery to Form 10-Q filed
February 13, 1998
10.27 OEM Equipment Purchase Agreement Filed as Exhibit 10.27
for WAFU dated April 30,1999 to form 10-Q filed
August 13, 1999 (1)
11 Statement regarding computation Filed herewith
of per share earnings
21 Subsidiaries of registrant Filed herewith
27 Financial data schedule Filed herewith
99 Cautionary Statements Pursuant Filed herewith
to the Securities Litigation
Act of 1995
(1) Confidential treatment granted with respect to redacted
portions of documents.
<PAGE>
(b) Reports on Form 8-K
The Company filed one (1) report on Form 8-K during the three months
ended September 30, 1999:
On October 18, 1999, the Company reported the mandatory
conversion of Series A Convertible Preferred Stock and the
existence of a disagreement with certain Holders of Series A
Convertible Preferred Stock over the conversion formula.
(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 20, 1999 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.
Signature Title Date
-------------------------- --------------------- ---------------
/s/WILLIAM L. DE NICOLO Chairman of the Board December 20, 1999
------------------------
William L. De Nicolo
/s/KENNETH E. MILLARD President, Chief Executive December 20, 1999
------------------------- Officer and Director
Kenneth E. Millard
/s/DANIEL D. GIACOPELLI Chief Technology Officer, December 20, 1999
------------------------ EVP and Director
Daniel D. Giacopelli
/s/ JEFFREY L. HERRMANN Chief Financial Officer, December 20, 1999
------------------------ Secretary and SVP
Jeffrey L. Herrmann
/s/JOHN E. BERNDT Director December 20, 1999
------------------------
John E. Berndt
/s/LARRY J. FORD Director December 20, 1999
------------------------
Larry J. Ford
/s/RICHARD D. HANING Director December 20, 1999
------------------------
Richard D. Haning
/s/MARK R. WARNER Director December 20, 1999
------------------------
Mark R. Warner
<PAGE>
Item 14(a) 2. Schedule VIII - Valuation and Qualifing Accounts
<TABLE>
<CAPTION>
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, 1999
Accumulated Amortization of
Intangible Assets $ 1,630 $ 762 $ 0 $ 0 $ 2,392
Valuation Allowance of Deferred
Tax Asset 37,882 4,536 (3) 0 0 42,418
Allowance for Doubtful Accounts 112 299 0 (308) (6) 103
Inventory Reserve 603 2,119 0 (2,138) (5) 584
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
(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
(6) Accounts receivable written-off
</TABLE>
Exhibit (11) - Statement Re: Computation of Earnings Per Share and
Pro Forma Earnings Per Share (1999)
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Average number of shares outstanding 8,976,640 8,307,342 7,876,906
============== ============= =============
Net loss $ (10,582,000) $ (10,404,000) $ (5,302,000)
Less: amortization of redeemable
preferred stock beneficial conversion
discount $ 0 $ 0 $ (2,222,000)
Less: cumulative dividend on
redeemable preferred stock $ (805,000) $ (895,000) $ (385,000)
-------------- ------------- -------------
Loss applicable to common shares $ (11,387,000) $ (11,299,000) $ (7,909,000)
============== ============= ==============
Net loss per share $ (1.27) $ (1.36) $ (1.00)
============== ============= ==============
</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;
Telular International, Inc., an Illinois corporation and
Telular-WD, a New York corporation.
Exhibit 99
CAUTIONARY STATEMENTS
We wish to inform investors of the following factors that in some cases
have affected, and in the future could affect, our results of operations
and that could cause future performance and results to differ materially
from those expressed in any forward looking statements we make or that are
made on our behalf. You can find many of these statements by looking for
words such as may, estimate, project, believe, anticipate, intend, expect,
plan and similar expressions, although some forward-looking statements are
expressed differently. Disclosure of these factors is intended to permit
us 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 our prior SEC filings. Although we have attempted to identify
all material factors, you should be aware that other factors in the future
may affect our performance and results.
We expect to continue to have losses and we may never achieve profitability.
We started operations in 1986. Although we had a profit in the fourth
quarter of our 1996 fiscal year and the first quarter of our 1997 fiscal
year, we have never had an annual profit. In order to develop our
business we already have spent significant amounts to defend our patents,
research and develop the technology we use in our products, develop new
products, and market those products. We believe that to be profitable
ultimately, we must continue to make significant investment in these
areas. However, we do not expect to generate revenues from product sales
or licensing that exceed our expenses in the near term, which would result
in continued losses during this period.
In order for us to achieve and sustain profitability, we must generate
significant and consistent revenues from operations through increased
sales of our products and/or licensing revenues. We cannot assure you
that we will be able to do this, so we may never achieve, or be able to
sustain, profitability.
We may not be able to obtain the funding we need to operate our business.
Our ability to continue operations depends on having adequate funds to
cover our expenses. Our current operating plan provides for significant
expenditures for research and development of new products, development
of new markets for our products, and marketing programs for our products.
At September 30, 1999, we had $9.8 million in cash and cash equivalents
and a working capital surplus of $19.1 million. On November 22, 1999, we
agreed to a written proposal from the Wells Fargo Business Credit, Inc.
(Wells) under which Wells would provide a $5 million credit facility.
However, you should be aware that this facility has not yet been
finally approved by Wells and may not be approved. Based on our current
operating plan, we believe that our existing capital resources, including
the Wells credit facility, revenues from sales and royalty income from
licensees, will allow us to maintain our current and planned operations.
However, we caution you that our cash requirements may vary and are
difficult to predict. There are many uncertainties involved in
technological research. We also target markets in developing countries
for product sales, and the nature of these markets makes it difficult to
predict costs and revenues. Events that we cannot anticipate, such as
litigation, may also increase our capital needs. We also may change our
operating plan in ways that would increase our costs. Thus, our actual
cash requirements may be greater than we currently anticipate. Also,
it is difficult to predict the amount of sales revenue we will generate
or the amount of royalty income we will receive from our licensees. As
noted above, we may not be able to borrow under the Wells credit facility.
Accordingly, we may not have adequate funds to cover our expenses. If
this is the case, we would need to find other financing sources to
provide the necessary funds, such as public or private sales of our
equity or debt securities. We cannot assure you that if we needed
additional funds we would be able to obtain them or obtain them on
terms we find acceptable. If we could not obtain the necessary
financing we would be forced to cut back operations, which might include
the scaling back or elimination of research and development programs.
<PAGE>
Unfavorable economic events in our target markets could lead to lower
sales of our products.
Sales of our products depend on the growth of the fixed wireless
telecommunications industry in general and increased demand for fixed
wireless products worldwide, particularly in developing countries. Based
on observed trends, we believe that the market for fixed wireless
terminals, such as our PHONECELL products, will experience substantial
growth over the next five years. We believe that nearer term prospects
should enable our sales to grow, but at more modest rates. We anticipate
that significant opportunities for product sales will develop in the near
future in Africa, Brazil, the Dominican Republic, Mexico, Malaysia, Turkey
and Venezuela. However, we cannot assure you that we will have
significant sales in any of these markets or that any sales will made in
the near term. Each of these markets will develop at a different pace,
and some or all of them may not develop to the point that will enable us
to achieve significant revenues.
In addition, unfavorable general economic conditions in any market will
have a negative affect on sales in that market. Because economic
conditions in one region often affect conditions globally, unfavorable
general economic conditions in one market or region might result in damage
to industry growth and demand in other markets as well. For instance, the
recent economic turmoil experienced by Russia and many Asian nations has
and will continue to negatively affect our growth prospects in the near
term. If the unfavorable economic conditions in these regions continue,
or if conditions in other countries decline, our product sales and
financial condition could be seriously harmed.
Our competitive position will be seriously damaged if we cannot protect
intellectual property rights in our technology.
We believe that our success depends, in part, on our ability to obtain
and enforce intellectual property protection for our technology. We
believe that the U.S. patent for our intelligent interface technology is
valid. However, it is possible that this patent, any of our other
existing patents, or any patents that we may obtain in the future, will
be challenged, invalidated or circumvented. If we lose or cannot
enforce patent protection in the U.S. for our technology and products,
our competitive position will be significantly harmed because it would
be much easier for competitors to sell products similar to ours.
It also is possible that a competitor may independently develop and/or
patent technologies that are substantially equivalent to or superior to
our technology. If this happens, our patents will not provide protection
and our competitive position will be significantly harmed.
We believe that our intelligent interface technology can be adapted for
use with new wireless services, such as telemetry. However, we cannot be
sure that any new services will fall within the boundaries of the patent
we hold. If we expand our product line or develop new uses for our
products, these uses may be outside the protection provided by our
current patents and other intellectual property rights. In addition,
if we develop new products or enhancements to existing products we cannot
assure you that we will be able to obtain patents to protect them. Even
if we do get patents for new products, these patents may not provide
meaningful protection.
In some countries outside of the U.S., such as Brazil and many African
nations, patent protection is not available. Moreover, some countries
that do allow registration of patents do not provide meaningful redress
for violations of patents. As a result, protecting intellectual property
in these countries is difficult. In addition, neither we nor any of our
competitors in the past obtained patent protection for our core
intelligent interface technology in many countries, including the
principal countries of Western Europe, and we and our competitors are now
legally barred from obtaining patents in these countries.
<PAGE>
In countries where we do not have patent protection or where patents
provide little, if any, protection, we have to rely on other factors to
differentiate our products from our competitors' products. These factors
include:
o the features and functions of our products;
o our reputation and experience in the industry;
o the quality of our products; and
o the desirability of products that meet the same specifications
as those in the U.S. and in other countries where we do have
patent protection.
Although we believe our products are superior to those of competitors, it
is easier for competitors to sell products similar to ours in countries
where we do not have meaningful patent protection. This could result in
a loss of potential sales.
The intense competition in the fixed wireless industry could prevent us
from achieving or sustaining profitability.
The market for fixed wireless products is extremely competitive, and we
may not be able to successfully compete with other companies already in
the market and new companies that enter the market. The major national
and international companies in this market are:
o Motorola;
o Ericsson;
o Nokia;
o LGIC;
o Samsung;
o Qualcomm; and
o Siemens.
Many of these competitors have greater resources than us in many areas
critical to succeeding in the industry, including:
o financial resources;
o manufacturing capabilities;
o name recognition;
o research and development capabilities;
o technical expertise;
o sales and marketing staffs; and
o distribution channels.
Because of these advantages our competitors may succeed in developing
products that are more effective, desirable and/or cheaper than ours or
that render our products and technology obsolete. They also may have
better and more efficient marketing and distribution structures than we
do.
In addition, we have granted non-exclusive, royalty bearing licenses to
Motorola, Ericsson and Nokia, which permits these companies to produce
and sell products using our technology that compete with ours. Because
these companies have greater resources than us, they may be able to sell
similar products more effectively and cheaper than we can.
<PAGE>
Our success depends on the growth and availability of wireless
telecommunications services in the markets we target.
Currently, some of our largest potential markets are developing countries
where the demand for basic telephone service has started to grow
significantly only in recent years, such as Mexico, Turkey and the
Dominican Republic. In these countries, the relatively low cost of
developing and constructing wireless communications infrastructure as
compared to traditional wireline infrastructure may make wireless an
attractive alternative to wireline. Our success depends to a large
extent on the continued growth and increased availability of cellular and
other wireless telecommunications services in these countries and the
availability of such services at competitive prices.
However, these countries may decline to construct additional wireless
systems, or construction of planned wireless systems may be delayed, for
a variety of reasons, including government regulation, general economic
factors, the availability of funding and other competitive factors. These
factors may also limit or delay purchases of equipment used to provide
telephone services, such as our products. If system construction and
equipment purchases in these countries are not made or are delayed, the
demand for our products in these countries will be limited or delayed.
Similarly, if the cost of using wireless telecommunications services in
these countries is not cost effective, the demand for our products may be
limited.
While wireless telecommunication systems in the U.S. are more developed
than in many other markets that we target, continued expansion of
wireless infrastructure and demand for fixed wireless products in the U.S.
is also important for the growth of our business. As is the case with
conditions in other target markets, there is no guarantee that wireless
telecommunications systems will continue to develop.
Delaware law and our charter documents may inhibit a potential
takeover bid that would be beneficial to common stockholders.
Delaware law and our certificate of incorporation may inhibit potential
acquisition bids for Telular Common Stock at a price greater than the
market price of the common stock. We are subject to the antitakeover
provisions of the Delaware General Corporation Law, which could delay,
deter or prevent a change of control of Telular or make this type of
transaction more difficult. In addition, our board of directors does not
need the approval of common stockholders to issue shares of preferred
stock having rights that could significantly weaken the voting power of
the common stockholders and, as a result, make a change of control more
difficult.
An agreement among our principal stockholders and Motorola may
inhibit a potential takeover bid that would be beneficial to
common stockholders.
We and our principal stockholders, including Motorola, have entered into
an agreement under which we and these stockholders are required to notify
Motorola before:
o we or the other stockholders solicit any purchase offers for
all or substantially all of our assets or a majority of the
outstanding common stock; or
o we or the other stockholders accept any unsolicited offer for
all or substantially all of our assets or a majority of the
outstanding common stock.
After Motorola has been notified, it has the right to submit a bid for the
proposed sale and we and the other stockholders cannot make any sale at a
valuation lower than Motorola's bid, if any. Motorola's contractual right
may inhibit other companies from making takeover bids at a price that
would benefit the common stockholders.
<PAGE>
If our common stock is delisted from the Nasdaq National Market
the liquidity and price of the common stock could be seriously
harmed.
Our common stock currently is listed for trading on the Nasdaq National
Market. In order to remain listed, we must comply with maintenance
requirements established by Nasdaq, including:
o minimum bid price of $1 per share;
o 750,000 shares publicly held;
o market value of publicly held shares of at least $5 million;
o net tangible assets of at least $4 million; and
o at least 400 stockholders of round lots.
In late 1998, our common stock price fell below $1 per share. On January
27, 1999, we completed a one-for-four reverse stock split to bring the
price of common stock back into compliance. We believe that we currently
comply with all requirements for continued listing, but we cannot assure
you that we will satisfy these requirements in the future.
If our common stock is delisted from the Nasdaq National Market, it
likely would continue to be traded in the over-the-counter market in the
so-called "pink sheets" or through the NASD's Electronic Bulletin Board.
It often is difficult to obtain accurate quotations of the market value of
stock traded in the over-the-counter market, and these stocks are often
less attractive to many investors, including institutional investors, and
lenders. Thus, delisting likely would make it more difficult for common
stockholders to sell their stock or use it as collateral, which could
cause the price of the common stock to significantly decrease.
If the common stock is not traded on the Nasdaq National Market and the
market price of the common stock is less than $5.00 per share, the common
stock likely would be classified as a penny stock. This means that the
common stock would be subject to Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that
recommend the purchase or sale of penny stocks to people other than people
who qualify as accredited investors or established customers. Rule 15g-9
requires the broker-dealer to make a determination that investments in
penny stocks are suitable for the customer and to make certain special
disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock could make it
more difficult to sell or use for collateral, which could cause the price
of the common stock to significantly decrease.
Our operating results may fluctuate greatly from quarter to quarter, which
may cause the price of our common stock to be volatile.
Our quarterly operating results may fluctuate greatly due to numerous
factors, including:
o our reliance on large volume orders from only a few customers for most
of our product sales, so we may experience volatility when those orders
are filled if we do not then have other orders;
o variations in our distribution channels;
o the mix of products we sell;
o general economic conditions in our target markets;
o the timing of final product approvals from any major distributor or
end user;
<PAGE>
o the timing of orders from and shipments to major customers;
o the timing of new product introductions by us or our competitors;
o changes in the pricing policies of our suppliers;
o the availability and cost to us of the key components for our products;
o the timing of personnel hirings; and
o market acceptance of our new products or enhanced versions of our
existing products.
These quarterly fluctuations may cause volatility in the price of our
common stock, as described in the following paragraph.
Our common stock price has been extremely volatile, and extreme price
fluctuations could negatively affect your investment.
The market price of our common stock has been extremely volatile. From
January 2, 1998 to December 13, 1999, the closing price of our common stock
(calculated on the basis of the reverse stock split implemented in
January 1999) ranged from a high of $12.38 to a low of $1.25 per share.
Publicized events and announcements may have a significant impact on the
market price of our common stock. For example, the occurrence of any of
the following events could have the effect of temporarily or permanently
driving down the price of our common stock:
o shortfalls in our revenue or net income;
o the results of trials or the introduction of new products by us or our
competitors;
o conversions of preferred stock into common stock;
o market conditions in the telecommunications, technology and emerging
growth sectors; and
o rumors related to us or our competitors.
In addition, the stock market from time to time experiences extreme price
and volume fluctuations which particularly affect the market prices for
emerging growth and technology companies, like Telular, and which often
are unrelated to the operating performance of the affected companies.
These broad fluctuations may negatively affect your ability to sell your
shares at a price equal to or greater than the price you paid for them.
In addition, a decrease in the price of our common stock could cause it to
be delisted from the Nasdaq National Market.
Sales of common stock issuable on the exercise of outstanding and
contemplated options and warrants may depress the price of the common
stock.
As of September 30, 1999, there were options granted to employees and
directors to purchase approximately 1,205,000 shares of the Company's
common stock. However, options to purchase only 479,000 of these shares
were exercisable at that time. The exercise prices for the exercisable
options ranges from $1.56 to $92.00 per share, with a weighted average
exercise price of $10.64. Options to purchase the remaining 726,000
shares will become exercisable over the next five years. The exercise
prices for the options that are not yet exercisable have a weighted
average exercise price of $7.71.
In addition, we expect that in connection with the proposed credit
facility with Wells, we will issue Wells warrants to purchase 50,000
shares of common stock at an exercise price equal to 110% of the
closing sale price of the common stock on the date the facility is
established. In the future we may issue additional shares of common stock,
convertible securities, options and warrants.
<PAGE>
The issuance of shares common stock issuable upon the exercise of options
or warrants could cause substantial dilution to holders of common stock.
It also could negatively affect the terms on which we could obtain equity
financing.
Technology changes rapidly in our industry and our future success will
depend on our ability to keep pace with these changes and meet the needs
of our customers.
The telecommunications equipment industry is characterized by rapid
technological advances, evolving industry standards, changing customer
needs and frequent new product introductions and enhancements. The
wireless telecommunications industry also is experiencing significant
technological change, such as the transformation of cellular systems from
analog to digital. The introduction of products embodying new
technologies and the emergence of new industry standards could render our
existing products and technology obsolete and unmarketable.
To succeed, we must timely develop and market new products and
enhancements to existing products that keep pace with advancing
technological developments and industry standards and that address the
needs of customers. We may not be successful in developing and marketing
new products and enhancements or we may experience difficulties that
prevent development of products and enhancements in a timely manner.
In addition, our products may fail to meet the needs of the marketplace or
achieve market acceptance. Any of these circumstances would seriously
harm our results and financial condition.
We must devote substantial resources to research and development to remain
competitive and we may not have the resources to do so.
For us to be competitive, we must continue to dedicate substantial
resources to research and development of new products and enhancements of
current and future products as described in the preceding paragraph. We
cannot assure you that we will have sufficient resources to fund the
necessary research and development or that our research and development
efforts will be successful.
We may face litigation that could significantly damage our business and
financial condition.
In the telecommunications equipment and other high technology industries,
litigation increasingly has been used as a competitive tactic by both
established companies seeking to protect their position in the market and
by emerging companies attempting to gain access to the market. In this
type of litigation, complaints may be filed on various grounds, such as:
o antitrust;
o breach of contract;
o trade secret;
o copyright or patent infringement;
o patent or copyright invalidity; and
o unfair business practices.
If we have to defend ourselves against one or more of these claims,
whether or not they have any merit, we are likely to incur substantial
expense and management's attention will be diverted from operations. This
type of litigation also may cause confusion in the market and make our
licensees and distributors reluctant to commit resources to our products.
Any of these effects could have a significant negative impact on our
business and financial condition.
<PAGE>
In the event that any of our patents or other intellectual property rights
were deemed invalid or were determined not to prohibit competing
technologies as a result of litigation, our competitive position would be
significantly harmed. See Our competitive position will be seriously
damaged if we cannot protect intellectual property rights in our
technology.
Certain former holders of our 5% Series A Convertible Preferred Stock
believe that we did not issue them enough common stock on conversion of
their preferred stock.
Under the terms of our 5% Series A Convertible Preferred Stock, on
October 18, 1999, all of the 11,350 outstanding shares of preferred stock
automatically were converted into approximately 2.1 million shares of
common stock at the minimum conversion price of $8.00 per common share
specified in the terms. However, we received notice form two holders of
preferred stock, NP Partners and Olympus Securities, Ltd., that they
believe that they are entitled to additional shares of common stock
because the minimum conversion price did not apply to the automatic
conversion. We do not agree with this interpretation and we have
notified these holders of our position. NP Partners and Olympus
Securities have not indicated the number of additional shares to which
they believe they are entitled. However, we have determined that if the
minimum conversion price did not apply, all former holders of preferred
stock would be entitled to a total of approximately 4.2 million additional
shares. If we were required to issue these shares it would cause
substantial dilution to our stockholders.
In order to succeed we must develop markets for our products and we may be
unable to do so.
Our ability to achieve profitability depends on our ability to develop
both domestic and international markets for our products and on the
acceptance of our products by these markets. We cannot assure you that
we will be able to develop adequate markets or generate enough sales to
achieve and sustain profitability.
We rely on third parties to manufacture components for our products.
We manufacture some of our products and product components in-house. We
also use subcontractors to manufacture certain product components, such
as cellular transceivers and radio modules, and to assemble some of our
products, such as fixed wireless terminals. In the past, we experienced
delays in receiving subcontracted components and assembled products which
resulted in delays in our ability to deliver products. We may experience
similar delays in the future.
Our inability to obtain sufficient quantities of raw materials and key
components when required, or to develop alternative sources of supply if
required in the future, could result in delays or reductions in product
shipments and increased costs for affected parts. In addition, production
capacity restraints at our subcontractors or in our own manufacturing
facilities could prevent us from meeting production obligations.
Delays in product deliveries for any reason or our failure to deliver
products could significantly harm customer relationships and result in
the loss of potential sales. Delivery delays or failures also could
subject us to litigation. We may face litigation that could significantly
damage our business and financial condition.
<PAGE>
We depend on Motorola to supply the transceivers for some of our products.
We currently obtain most of the cellular transceivers we use in some of our
products from Motorola, which is one of our major stockholders and
competitors. Motorola has agreed to make transceivers available to us
based on any transmission technology that Motorola's Cellular Subscriber
Group offers, when, as and if these products are offered to the public.
Motorola has a right of first refusal to supply all of our transceiver
needs on the same terms as we could get from a competitor of Motorola,
provided that Motorola manufactures a product comparable to the
competitor's and our customer does not specifically request another
manufacturer's transceiver. If we are unable to get sufficient quantities
of Motorola transceivers, we might have to redesign some of our products.
This could increase our costs and cause shipments delays.
Quality control problems could harm our sales.
We believe that our products currently meet high standards of quality. We
have instituted quality monitoring procedures and we are ISO-9001
compliant. All of our major subcontractors also have quality control
procedures in place and are ISO-9001 compliant. However, we and/or our
subcontractors may experience quality control problems in the future. If
this occurs, the quality of our products could suffer, which could
significantly harm product sales.
We operate in developing markets which may subject us to volatile
conditions not present in the U.S.
Developing countries are some of our largest potential markets. As we
expand our operations in these countries, our business and performance
could be negatively affected by a variety of factors and conditions that
businesses operating in the U.S. generally do not have to contend with,
such as:
o foreign currency exchange fluctuations and instability of foreign
currencies;
o political or economic instability and volatility in particular
countries or regions;
o limited protection for intellectual property;
o difficulties in staffing and managing international operations; and
o difficulties in collecting accounts receivable.
To date, our sales have not been negatively affected by currency
fluctuations. We currently require either letters of credit or
qualification for export credit insurance underwritten by the U.S.
Export-Import Bank or other third party insurers on a substantial portion
of our international orders. We also try to conduct all of our
international transactions in U.S. dollars to minimize the effects of
currency fluctuations. However, as our international operations grow,
foreign exchange fluctuations and foreign currency inflation may pose
greater risks for us and we may be required to develop and implement
additional strategies to mange these risks. If we are not successful in
managing these risks our business and financial condition could be
seriously harmed.
Some of our directors may have conflicts of interest that may adversely
affect our business.
Our board of directors currently includes, and we expect that it will
continue to include, persons designated by companies with whom we have
business relationships. It is possible that the companies that designate
these directors, such as Motorola, may be in direct or indirect
competition with us or among themselves for business activities or
transactions. Although the affected directors may abstain from voting
on matters in which Telular's interests and the interests of another
company are in conflict, the presence of potential or actual conflicts
could affect the process or outcome of board deliberations in ways that
would harm our business and financial condition.
<PAGE>
A small number of our existing stockholders exercise significant control
over our affairs.
As of September 30, 1999, our officers and directors, together with
entities affiliated with our directors, beneficially owned 32.3% of our
common stock (this is assuming that they had actually exercised all stock
options that were exercisable within 60 days of November 19, 1999). If
these stockholders act together, they have a significant impact on
director elections and matters that require stockholder approval, such as
a change of control of Telular. Thus, these stockholders may have the
ability to direct our affairs in a manner that is beneficial for
themselves but harmful to other shareholders.
Under a shareholders agreement, Motorola has the right to nominate a number
of directors that is proportionate to its holding of common stock. As of
November 19, 1999, Motorola held 10.1% of our common stock. As long as
Motorola holds at least 10% of our outstanding common stock it may nominate
at least one director, and as long as it holds at least 20% of our
outstanding common stock it may nominate at least two directors. Our other
principal stockholders have agreed to vote in favor of each Motorola
nominee.
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