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UNITED STATES
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, 1996
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.)
920 DEERFIELD PARKWAY, BUFFALO GROVE, ILLINOIS 60089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(847) 465-4500
(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 [ ] No [X]
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 December 1, 1996, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $69,123,045* (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
December 1, 1996, the latest practicable date, was 31,398,084 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, 1996 are incorporated by reference in Part III
of this Form 10-K.
* Excludes the Common Stock held by executive officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
December 1, 1996. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of management or policies of the Registrant
or that such person is controlled by or under common control with the
registrant.
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PART I
ITEM 1. BUSINESS
Overview
Telular Corporation (the "Company") is in the fixed wireless
telecommunications industry. The Company designs, develops, manufactures and
markets products based on its proprietary interface technologies, which provide
the capability to bridge wireline telecommunications customer premises
equipment ("CPE") with cellular-type transceivers for use in wireless
communication networks, whether cellular, personal communications services
("PCS"), or satellite-based. Applications of the Company's technology include
fixed wireless telecommunications as a primary service where wireline systems
are unavailable, unreliable or uneconomical and as wireless backup systems for
wireline telephone systems and wireless security alarm transmission systems.
The Company's principal product lines, PHONECELL(R) and TELGUARD(R) allow CPE
designed for traditional wireline networks to send and receive voice, data and
facsimile signals over wireless networks.
The Company was founded in June 1986 by Mr. William L. De Nicolo, the
current Chairman of the Board, when he acquired title to the intellectual
property rights of a pending patent application dealing with a "cellular
interface" concept and methodology. The patent not only describes a simple
physical circuit or device, but also the very concept and principles underlying
the use of an intelligent interface device (the "invention") in conjunction
with cellular-type transceivers and systems.
In March 1990, the Company entered into a cross-license agreement with
Motorola Inc. ("Motorola") under which the Company licensed to Motorola
certain rights to manufacture, sell or use the licensed invention. The cross
license agreement allows the Company to use Motorola's transceivers in its
products. In December 1992, Telular Canada, Inc. ("Telular Canada"), an
independent Toronto-based distributor of telecommunications products, purchased
the title to the Canadian patents for the Company's technology and the right to
acquire the Company's then existing technologies solely for use and sale within
Canada.
In May 1993, Telular Canada acquired a minority interest in the Company
which represents approximately 6% of the outstanding stock at December 1, 1996.
In November 1993, Motorola partnered with the Company by acquiring an equity
interest in the Company, and owned approximately 15% of the shares outstanding
at December 1, 1996.
During 1993, the Company also began to solidify its market position by
acquiring two key distributors/licensees: Telular International, Inc.
("Telular International"), formerly known as Codecom Rural Communications, and
Telular-Adcor Security Products, Inc., formerly known as Adcor Electronics
International, Inc.. Telular International, located in Puerto Rico, was
primarily responsible for the manufacturing of the Company's single-line
wireless products. Telular-Adcor Security Products, Inc., located in Atlanta,
Georgia, manufactures and markets wireless security devices under the name
TELGUARD(R) as well as other brand names.
In January 1994, the Company completed an initial public offering ("IPO")
of its common stock and is traded on the NASDAQ National Market System under
the ticker symbol "WRLS".
On January 22, 1996, the Company announced a restructuring program to be
implemented during the second and third quarters of fiscal 1996. The Company's
Puerto Rico and Illinois manufacturing operations were phased out during the
second quarter, and production was consolidated at the Company's Atlanta,
Georgia facility. The restructuring also reduced general, administrative and
manufacturing overhead costs Company-wide. The number of employees decreased
from over 250 in January 1996 to less than 110 at the end of September 1996.
On June 28, 1996, the Company acquired a one-third interest in TelePath
Corporation ("TelePath"), a radio developer, based in Hauppauge, New York, that
specializes in the design of advanced cellular and PCS products. The agreement
provides the Company with fifty percent voting position on the Board of
Directors of TelePath, and it includes a multi-year product development program
designed to provide a new generation of state-of-the-art fixed wireless
terminals, which include both analog and digital radio standards, for markets
worldwide. TelePath will provide and the Company will purchase certain
development services including the conversion of Telular's patented interface
technology into a chip set, integration of Telular's patented interface
technology with new and existing cellular radio standards, and development of
new feature functions for future generations of analog and digital terminals.
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The Company was awarded a contract to supply a specifically customized
version of its PHONECELL SX(R) product to Motorola's Cellular Infrastructure
Group for deployment in existing and future wireless local loop projects in
Hungary. In March 1996, the Company and Motorola announced that Motorola issued
purchase orders for $25 million for the project. Deliveries began in June 1996
and is expected to be fulfilled by Spring 1997.
Wireless Telecommunications Overview
The vast majority of the telephones in the world continue to be
concentrated in a relatively small number of industrialized countries. While
telecommunications infrastructure is a critical element of economic growth,
most developing nations have telephone systems that are inadequate to sustain
essential services. Thus, developing countries are seeking basic
communications solutions which are cost effective and can be deployed rapidly
to support aggressive economic development programs.
The process of improving and expanding telephone networks using advanced
wireless technology in developed and developing countries, has created a major
market for wireless telecommunication equipment. In developed countries,
mobile cellular systems have changed the way people communicate to the concept
of anytime, anywhere convenience and has enjoyed phenomenal growth that is
expected to continue in the future. In developing countries, wireless local
loop ("WLL") systems represent what is very often the fastest and most
cost-effective way of providing basic telephone service.
The International Telecommunications Union ("ITU") estimates that more
than 311 million access lines will be added worldwide during the 1994-2000 time
period at a cost of more than $466 billion. Of these access lines, 191 million
are expected to be added in developing countries. The average projected cost
per access line is $1,200 with most of the growth in developing countries
occurring in urban areas. The potential role of wireless products and systems
could be a significant factor in the deployment of basic phone service as the
cost per access line is potentially lower and speed of deployment faster versus
traditional wireline systems. Additionally, where wired telephone networks
exist, wireless networks offer an adjunct as well as an alternative method of
communicating. Where wired telephone networks are non-existent or substandard,
wireless cellular-type networks will be a primary service option.
In the domestic market, rapid and dramatic advances in digital wireless
and wireline technology (Time Divisional Multiple Access ("TDMA"), Group
Special Mobile ("GSM", DCS 1800 and PCS 1900) and Code Division Multiple
Access ("CDMA")) along with fiber optic deployment have had, or are anticipated
to have, significant impacts on the number and quality of telecommunications
service offerings. These technological advancements, coupled with the changes
in regulation, are reshaping the domestic telecommunications landscape as
evidenced by the creation of a new service offering, PCS, and the addition of
many new service providers in the local exchange telecommunications business.
If technological advances and price decreases continue to occur, a market in
the United States for fixed wireless service to be used in conjunctions with,
or in place of, traditional wireline service may emerge for a variety of
applications.
Company Strategy
The Company's strategy is to leverage ten years of experience in the
market, internationally-accepted products, and court-tested patents into a
continuing leadership position in the rapidly developing wireless alternate
access ("WAA") and WLL subscriber terminal equipment industry. Global
telecommunications equipment manufacturers together with national and
international service providers are increasingly sharing the Company's vision
that wireless systems in both developed and developing countries are well
suited for use as basic telephone service networks. The key trends that are
fueling the worldwide adoption of WAA/WLL programs include the following:
- Rapid acceptance of cellular mobile communications;
- An accelerating trend toward privatization of
telecommunication service in both developed and developing
countries;
- Development and adoption of digital wireless
transmission standards (e.g., TDMA, GSM, DCS 1800 and PCS 1900
CDMA) which enhance network capacity and service capability while
significantly reducing the effective cost per subscriber served;
- Service network providers, acceptance of wireless
network solutions as fast, cost effective answers to their
customers' unfulfilled demand for telecommunications; and,
- PCS licensing within the U.S., which should intensify
competition by wireless service providers to capture wireline
minutes of usage and the potential for a large bypass market.
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Based upon its proprietary interface technology, the Company designs,
manufactures and markets a full line of WAA/WLL products which allow
cost-effective, innovative communications solutions where wired telephone
networks are (1) of substandard quality, (2) unavailable on a timely basis, (3)
too costly, or, (4) in need of alternative access or backup/diverse routing
capability for local telephone service exists.
Target Markets and Product Applications
The Company's fiscal 1996 revenues have been primarily international,
derived from the sale of PHONECELL(R) units for integration into WAA/WLL
systems being installed in developing countries. The Company's primary domestic
revenue sources are currently the TELGUARD(R) wireless backup systems to
traditional wireline telephone and security systems and remote data acquisition
and monitoring applications.
The Company believes that its future revenues will be increasingly derived
from its international target markets, new product applications and licensing,
and the domestic expansion of the PCS service providers. As described below,
the range of opportunities can be grouped into five categories:
- Wireless basic local and long-distance voice, data
and facsimile telephone service through repeat sales into
established mobile cellular networks and through joint selling
of terminals with infrastructure providers;
- Licensing and OEM supplier of the Company's technology;
- Remote monitoring and supervisory control and data acquisition,
including security alarm systems;
- Disaster recovery and emergency back-up circuits.
Wireless Basic Telephone Service
Many countries are evaluating or have already deployed wireless basic
telecommunications systems in conjunction with, or as an alternative to, the
expansion of their basic wireline systems. The most significant market
opportunity for the Company's products is to continue to provide wireless basic
telephone service ("WTS") in such developing countries. A customer's needs are
very basic: simple voice, data and facsimile service. The primary customers for
WTS in developing countries are businesses and medium-to-upper income
residential users, such as those in Hungary, Spain, China, Bangladesh, Brazil,
and other countries for which the Company has provided a fixed wireless phone
product.
In developed countries, the Company's products represent an "enabling
technology" for competitive access service providers. The use of wireless
technology to gain rapid and transparent wireless alternative access to a
customer's long distance service provider will be a significant application for
the Company's products, especially in the coming U.S. PCS environment. Several
wireless operators, such as Nextwave and AT&T Wireless, have already publicly
identified WAA/WLL for long distance traffic as a potentially major market
segment.
Licensing and Original Equipment Manufacturer ("OEM") supplier of the Company's
technology
In response to the international demand for the Company's proprietary
interface technology, which allows most standard wireline customer premises
equipment to operate over wireless telecommunications networks, the Company has
been promoting the use of its interface technology in other telecommunication
companies' products. Such a marketing strategy may result in licensing,
selling of component parts and OEM production of complete units. The Company
is actively talking with large international telecommunication companies with
respect to licensing its proprietary interface technology and providing product
under an OEM arrangement.
Remote Monitoring and Security Alarm Monitoring
The use of fixed wireless cellular systems for remote monitoring and
supervisory control and data acquisition ("SCADA") applications has been the
most prevalent WAA application in developed countries, especially in the U.S..
The Company's products have been successfully marketed to numerous companies in
a wide range of industries such as highway authorities, oil companies, utility
companies, agribusinesses, banks and law enforcement agencies.
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A major sub-group within the wireless monitoring application segment is
security alarm monitoring. Alarm monitoring was one of the first applications
of the Company's technology and continues to be a growing segment of the
market. Use of the Company's specialized products, manufactured and sold by
Telular-Adcor Security Products, Inc., allows an alarm monitoring system to
automatically switch to a cellular network in the event of a telephone line
failure, allowing alarms to still be activated.
Disaster Recovery and Back-Up Services
Hundreds of major telephone network outages occur annually in the U.S. and
other countries around the world. Additionally, countless individual circuit
outages occur hourly which not only cost businesses millions of dollars
annually, but may also be life threatening, such as when hospitals, law
enforcement or fire departments are affected. Today, with the widespread
availability of wireless telephone networks, a readily available and cost
effective solution is possible with the Company's technology.
The Company's products are installed in hospitals, financial institutions,
airports, emergency response and public service centers and utility companies.
The wireless back-up approach also allows businesses to take advantage of other
communications situations where wireless service may be a desirable option to
wired phone service. For example, wireless service may be used for overflow
traffic relief when regular telephone lines become blocked due to usage or for
least-cost routing for long distance where wireless may be less expensive than
local exchange carrier ("LEC") rates. Wireless back-up capability may also be
integrated as part of a security monitoring system.
TECHNOLOGY AND PRODUCTS
Core Technology
The Company's core patented technology is an intelligent interface
invention that permits standard wireline CPE to operate on wireless networks.
The Company's products containing the invention provide the capability to
bridge wireline telecommunications CPE and wireless networks, whether cellular,
PCS or satellite-based. The invention provides a standard dial tone, off-hook
detection signal and other signals usually provided by the LEC, through its
"tip" and "ring" wired local loop connection, which automatically generates a
"send" signal to the cellular transceiver once the user has finished entering
the telephone number. The Company has incorporated this core technology into a
variety of products and continues to develop and exploit derivative products
and technologies for customer-specific applications.
Interface Technology
The Company's products contain printed circuit boards that incorporate its
patented intelligent interface invention. The interface components are used in
the Company's finished products and are also sold separately. In certain
cases, the Company licenses its interface technology or patent rights to other
companies, for which, in most cases, royalty fees are received. However, to
date, the bulk of the Company's revenues have been generated primarily through
the sale of finished products.
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The Company's Product Line
The product requirements for WAA and WLL can be categorized as single-line
fixed subscriber terminals (PHONECELL(R) \series), and security alarm monitoring
units (TELGUARD(R) \Series). The Company believes future product offerings
will reflect a continued evolution of its existing product line.
PRODUCT FEATURES
- - PHONECELL(R)\Series Single-line, self-contained unit for voice, data and facsimile
(wireless communications that is available in a variety of standards (AMPS, NAMPS, ETACS,
products) TDMA, CDMA, GSM etc.) and various housings
Specialized, single-line security alarm monitoring units for
- - TELGUARD(R) \Series commercial and residential use: with a range of options and features
(wireless security products)
SALES, MARKETING AND SERVICE
International Sales
The international marketplace is characterized by new and repeat sales
into established mobile cellular networks and to the emerging wireless local
loop programs throughout the world. The Company has built an international
sales and marketing team made up of professionals with experience in the
Middle-East, Latin America, Asia, Europe, and Africa. It has regional sales
offices in Miami, Florida; Oxford, England and Singapore. The ability to
provide on-site customer technical assistance and support has been identified
as a key selling requirement, and these regional offices aid in providing this
important service.
U.S. Sales
The Company markets certain products in the U.S. through a master
distribution agreement with Global Data, Inc., a subsidiary of Telular Canada,
Inc. and a related party of the Company. With the imminent deployment of PCS
networks in the U.S., the Company is focusing on establishing product
development and supply relationships with network operators and PCS
transceiver/infrastructure manufacturers and large telecommunication companies.
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 Buffalo Grove and
Atlanta facilities, and (3) authorized third party service centers in various
regions of the world (often associated with authorized distributors).
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MOTOROLA RELATIONSHIP
In November 1993, the Company entered into a strategic agreement with
Motorola, whereby Motorola, through its Cellular Subscriber Group, acquired an
18.8% interest in the Company and, pursuant to an option, subsequently
increased its holdings to 20%. Motorola, after dilution due to the issuance of
additional shares of Common Stock, now owns approximately 15% of the
outstanding shares of the Company. Motorola also obtained the right to
representation on the Company's Board of Directors. The agreement provided the
Company with access to certain of Motorola's engineering, technical service and
other resources on a fee basis, subject to availability. In addition, Motorola
will make its Advanced Mobile Phone System ("AMPS"), Extended Total Access
Communication System ("ETACS"), NAMPS, TDMA (including GSM), CDMA, Iridium and
other transceivers available for purchase by the Company for use in its
products when, if, and as available.
The Company made three announcements during October and November of 1995
that expanded its relationship with Motorola. First, the Company was awarded a
contract to supply a specifically customized version of its PHONECELL(R) SX
product to Motorola's Cellular Infrastructure Group ("CIG") for deployment in
existing and future WLL projects in Hungary. The first phase of the deliveries
started in 1996 and will continue during the beginning of fiscal 1997. Second,
the Company and the Network Ventures Division ("NVD") of Motorola jointly
announced the signing of a Preferred Supplier Agreement whereby the Company
will be presented as a preferred supplier of fixed wireless subscriber
equipment to NVD's joint ventures worldwide. Third, the Company announced an
agreement with CIG under which CIG agreed to purchase $100 million of the
Company's fixed wireless terminals and provide funding for engineering and
product development activities over a three-year period, commencing January 1,
1996.
RESEARCH AND DEVELOPMENT
The Company believes that its future success depends on its ability to
adapt to the rapidly changing telecommunications environment and to continue to
meet customers' needs. The Company is currently adapting its products to new
wireless technologies and is working closely with several companies, including
long-distance carriers, cellular service providers, telecommunications
infrastructure providers and equipment manufacturers, to develop new fixed
wireless products. Additionally, Motorola has agreed to fund certain product
development activities (see "Industry Relationships").
As of December 1, 1996, the Company's research and development staff
comprised 23 engineers and was segregated into four teams. Each team is
responsible for a specific standard such as GSM, CDMA or AMPS. Additionally,
the research area continually investigates methods by which the Company can
reduce the costs of its products. In June 1996 the Company acquired an
interest in TelePath which has over 15 additional engineers available for
research and development projects on a contract basis.
The Company is currently adapting and developing new generations of its
products to wireless standards such as Advanced AMPS, ETACS, GSM, DCS 1800,
PCS 1900, TDMA and CDMA as well as multi-line and satellite-based systems.
MANUFACTURING
Fabrication of the Company's products is accomplished through a
combination of in-house manufacturing and subcontracting. The assembly of
printed circuit board interfaces for both fixed wireless terminals and security
alarm transmission products is performed at the facility in Atlanta, Georgia.
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; in 1994, the Buffalo Grove, and in 1996, the Atlanta facilities were
certified and designated as ISO 9001 certified sites.
The Company historically has contracted with several suppliers for the
critical components of its products. The major exception to this policy has
been transceiver units, which have been principally supplied by Motorola. The
Company's interface technology is compatible with several other manufacturers'
transceivers and the Company believes it could obtain transceivers from such
manufacturers if sufficient quantities were not available from Motorola,
although not necessarily on equivalent terms.
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COMPETITION
The competition in the telecommunications equipment industry is intense.
The industry consists of major domestic and international companies, many of
which have substantially greater financial, technical, marketing, sales,
manufacturing, distribution and other resources than those of the Company, and
includes companies such as Motorola, Northern Telecom, Ericsson, Nokia, and
Oki. There are also international and domestic companies with less resources
that make products that compete directly with the Company. The Company
competes with these companies primarily by selling products that provide
features and qualities not otherwise available on the market, and by developing
new products incorporating its technology and promoting new applications of its
existing product line. The Company's interface and its related technology have
been, and will continue to be, afforded substantial protection in those markets
in which it holds patents (See "Business--Patents, Licenses and Other
Intellectual Property"). In markets where the Company holds no patents, the
Company competes directly with a range of competitors. Approximately 75% of
the Company's fiscal 1996 shipments were destined for other countries, most of
which afforded little or no patent protection.
Additionally, the telecommunications equipment industry is characterized
by rapid technological advances, evolving industry standards, changes in
end-user requirements and frequent new product introductions and enhancements.
The wireless telecommunications industry is experiencing significant
technological change, such as the transformation of cellular systems from
analog to digital. The rate at which this change occurs and the success of such
new technologies may have a material effect on the rate at which the Company
expands its business and on its ability to achieve profitability. Moreover,
there can be no assurance that continuing developments in technology will not
result in the establishment of wireless or wireline technologies for which the
Company's interface is not required or in the development of equipment equal or
superior to that provided by the Company. 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 licenses its patent rights to Motorola, under which Motorola
is licensed to produce its own cellular interface. Motorola also sells fixed
cellular products, and several other companies purchase Motorola's interface
for inclusion in their own fixed cellular products. The Company receives a per
unit royalty for any such products sold that are covered by the Company's
patents. Motorola is a competitor with the Company in markets for analog AMPS
products both domestically and internationally.
The Company has granted licenses under its patents for various uses and
applications to others as well, and may face competition from those licensees,
their sublicensees, or their customers.
As the competition in the telecommunications equipment industry has
increased, so has litigation as a competitive tactic. Complaints may be filed
on a variety of grounds, including antitrust, breach of contract, trade secret,
patent or copyright infringement, patent or copyright invalidity, and unfair
business practices. If the Company is forced to defend itself against such
claims, whether or not meritorious, the Company is likely to incur substantial
expense and diversion of management attention, and may encounter market
confusion and the reluctance of licensees and distributors to commit resources
to the Company's products. In the event that the Company's patents or other
intellectual property rights were deemed invalid or were determined not to
prohibit competing technologies, the Company could face additional competition.
The Company considers that the upholding of the its patents is an important
aspect of the Company's strategy and is currently involved in litigation
concerning these patents. See "Item 3 -- Legal Proceedings", for descriptions
of these cases.
PATENTS, LICENSES AND OTHER INTELLECTUAL PROPERTY
The Company's success in the United States will depend to a considerable
extent upon its ability to obtain and enforce intellectual property rights for
its technology in the United States. With respect to its interface technology,
the Company currently has seven United States patents, as well as 17 foreign
patents, and one pending foreign patent application.
Principal Patent. The patent for the Company's "system for interfacing a
standard telephone set with a radio transceiver", U.S. Patent No. 4,658,096
(the "096 Patent"), was issued by the U.S. Patent Office on April 14, 1987 and
expires on April 14, 2004. The '096 Patent has been filed in 19 countries and
to date has been issued in all but one of these countries.
The invention covered by the claims of the '096 Patent is an interface
between a standard telephone and a cellular transceiver and its equivalents.
The interface provides dial tone, off-hook detection signals, and many of the
other signals usually provided over
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regular wireline telephones. The interface also provides for the automatic
generation of a "send" signal from the cellular transceiver once the telephone
number has been entered.
In 1989, the validity of the '096 Patent was upheld by a U.S. District
Court, which enjoined a company from further infringement on the patent. See
"Item 3 - Legal Proceedings".
Continuation Patents. In October, 1988 and May, 1990, the Company
obtained two patents (U.S. Patent Nos. 4,775,997 and 4,922,517, respectively),
the first of which is a continuation and broadening of the '096 Patent and the
second of which is a continuation of the first and further broadens the '096
Patent. These continuation patents are meant to protect devices that are used
for outgoing calls only and do not require incoming call detection, and have
been terminally disclaimed to expire on April 14, 2004. In April, 1988, the
Company obtained a continuation-in-part of the '096 Patent (U.S. Patent
4,737,975), which allows the interface to be programmed to enable it to
intelligently detect when various types of dialing formats are used (e.g.,
three digit numbers such as 911 or 411) and to set the proper logic to cause
the transceiver to send the dialed phone number and allows the reprogramming of
the interface for use in countries where other dialing formats are used.
The Company has successfully defended those continuation patents in three
separate infringement actions, one of which the Company prevailed and two of
which are pending. See "Item 3 - Legal Proceedings".
Other Patents. In July, 1992, and November, 1994 patents were granted to
the Company (U.S. Patents No. 5,134,651 and 5,361,297) for "a method and
apparatus for providing answer supervision and an autonomous pay telephone
incorporating the same which relates to an interface for use with a pay
telephone and provides a real time display or printout of the costs associated
with a placed call".
The following patents were granted to the Company: for the
self-diagnostic system for cellular transceivers, in November, 1995 U.S. Patent
No. 5,469,494; in September, 1991 U.S. Patent No. 5,046,085 for "interfacing
system for an international-type pay telephone"; (in which the Company has
equitable rights); in the following countries for the "self-diagnostic system
for cellular transceiver systems": in April, 1995 Nigeria Patent RP 12013; in
December, 1994 South Africa Patent 94/1880; in December, 1995 Peru Patent 595;
in March, 1993 Zaire Patent 94/3417; in November, 1996 Slovenian Patent
9420026; in September, 1996 Turkey Patent 28486; for the "self-diagnostic
systems for cellular transceiver systems with remote reporting capability" in
June, 1996 in South Africa Patent 95/8218; and for the "method and apparatus
for providing answer supervision and an autonomous pay telephone incorporating
the same" in June, 1994 Mexico Patent 174,818.
In addition, the Company has the following patent applications: in the
U.S. (i) "Concurrent Wireline/Landline Interface Apparatus & Method"; (ii)
"Concurrent Wireline/Landline Interface Apparatus & Method" ("CIP"); (iii)
"Concurrent Wireline/Landline Interface Apparatus & Method" (Continuation of
CIP); (iv) "Method and Apparatus for Generating Tariff Pulses for a Cellular
Pay-Telephone (patent pending)"; and in foreign countries: (i) "Self-Diagnostic
System for Cellular Transceiver Systems" in 30 countries and most parties
contracting to the European Patent Convention or PCT; (ii) "Self-Diagnostic
System for Cellular Transceiver Systems with Remote Reporting Capabilities" in
3 countries; (iii) "Concurrent Wireline/Landline Interface Apparatus & Method"
in Israel.
Applicability of the Company's Patents to Emerging Wireless Technologies.
Although the Company believes its intelligent interface can be adapted to
accommodate emerging wireless technologies (such as PCS, ESMR and satellite
networks), there can be no assurance that these new applications will fall
within the scope of the existing patent protection because in certain
circumstances the licenses for these technologies have not been granted or have
not yet been defined.
Infringement Claims. The only claim is by two individuals, and it is a
reassertion of a claim against the Company originally made in 1986. The
Company, in reliance on the advice of its patent counsel, believes the claim is
both erroneous and legally precluded. The Company's patent counsel is Hamman &
Benn, the principals of which are stockholders of the Company and stockholders
of DNIC, a major shareholder of the Company.
Foreign Patents. While the Company has obtained patent protection in
certain foreign jurisdictions, and has patent applications pending in some
countries, it has not established patent protection in many other countries,
including the principal countries of Western Europe for its principal patents.
The Company, as well as any third party, is now precluded from obtaining
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patent coverage for the Company's core technology in any country where it does
not currently have patent protection in Western Europe and throughout the world
under the Patent Cooperation Treaty for new uses of the invention in
conjunction with a pending U.S. patent application. In the absence of patent
protection, the Company has relied upon other competitive factors, including
the quality of its products and the desirability of using products that meet
the same specifications as those in the United States and other countries where
the Company has obtained patent protection.
The Canadian patents for the Company's technology are owned by Telular
Canada, which is the Company's exclusive distributor in Canada.
Licensing of Technology.
The Company has granted licenses to a number of other companies, which include
the following:
Motorola (See Industry Relationship);
CKG Technologies (non-exclusive, nontransferable license limited
to the manufacture of a portable cellular workstation
and/or a cellular modem);
Harvest Electronics, Ltd. (non-exclusive license for manufacture and
sale of an interface for vending equipment);
Millidyne, Inc. (non-exclusive license for manufacture and
sale of subscriber data modems and mobile data
gateway equipment, incorporating certain
technology transferred by the Company); and
Powertek Industries (non-exclusive U.S. license for manufacture
and sale of a portable cellular workstation).
Trademarks and Other Proprietary Information.
The Company has 15 registered trademarks which are: TELULAR plus design, T
plus design, TELULAR, CELJACK, CELSWITCH, CNTE plus design, MAXJACK, PAYJACK,
TELCEL, Hexagon Logo, PHONECELL, CELSERV, TELGUARD, CPX, and AXCELL. In
addition, the Company has six registered Mexican trademarks covering the names
and logos used for some of its products. The Company has one pending U.S.
trademark which is: PCSone. The Company has 67 other foreign trademark
registrations and 27 other foreign trademark applications.
EMPLOYEES
As of December 1, 1996, the Company employed 109 persons, of which 19% are
in sales and marketing, 28% in engineering and product development, 30% in
manufacturing and 23% in finance and administration. None of the Company's
employees are represented by organized labor.
ITEM 2. PROPERTIES.
The Company leases its Corporate headquarters, pursuant to a three and
one-half year lease, in Buffalo Grove, Illinois which occupies 27,000 square
feet on 2.1 acres. Besides serving as corporate headquarters, the facility
houses sales and marketing, engineering, finance and administrative operations.
The Company also leases space for international sales offices in Miami,
Florida, Oxford, England and Singapore. The Company's subsidiary in Atlanta
leases office and manufacturing space which occupies approximately 60,000
square feet. The Company signed a lease in December 1996 for a 72,000 square
foot facility located in Vernon Hills, Illinois, which is in metropolitan
Chicago. The Company plans to consolidate the Atlanta and Buffalo Grove
operations into the facility during early calendar 1997 (See Management's
Discussion and Analysis of Financial Condition and Results of Operations).
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ITEM 3. LEGAL PROCEEDINGS
The Company is party to the following actions:
(a) Alliance Research Corporation v. Telular Corporation and Spectrum
Technologies, Inc., CV 94 1065 RG, United States District Court, Central
District of California.
On February 17, 1994, Alliance Research Corporation sued the Company and
Spectrum Information Technologies, Inc. ("Spectrum") seeking Declaratory
Judgement for invalidity and non-infringement of the Company's 4,658,096 patent
as well as its two continuation patents, 4,922,517 and 4,775,997. The Company
has denied the allegations and has counterclaimed for patent infringement of
the two continuation patents. On May 2, 1994, the Federal court in Los Angeles
ruled in favor of Telular and rejected the lawsuit challenging the '096 patent.
Spectrum was dismissed as a defendant on a motion made by Spectrum. The
Company has acquired Spectrum's rights to receive court awarded damages on this
case. The Federal court, on October 23, 1995, granted the Company's Motion for
Partial summary judgement on all issues except damages. The court enjoined
Alliance from selling its CDL line of products. Alliance has appealed the
summary judgement decision. The matter is fully briefed and awaiting oral
arguments. The Federal circuit modified the injunction and allowed Alliance to
sell the CDL product for Motorola transceivers only. The litigation is ongoing
and the Company intends to vigorously pursue its claims and contest Alliance's
allegations.
(b) Arthur L. Serrano and Andrew W. Holman v. Telular Corporation and
Spectrum Information Technologies, Inc., CV 94 1272, United States District
Court, Central District of California.
On February 28, 1994, Serrano and Holman filed a Declaratory Judgement
action against the Company and Spectrum Information Technologies, Inc. The
suit involves the Company's 4,658,096 patent, as well as its two continuation
patents, the 4,922,517 and 4,775,997 patents. The Company has answered and
counterclaimed for patent infringement of its continuation patents. Plaintiffs
are the former principals of Morrison & Dempsey, which is now out of business.
On July 13, 1995, Judge Letts entered an order finding for the Company on all
counts of the Complaint and Counterclaims, and determining the Serrano and
Holman infringement to be willful, enabling the Company to receive treble
damages, attorney's fees and costs. The final order was entered on March 20,
1996 granting the Company a total of $663,178.82 in treble damages, attorney's
fees and costs. This decision has been appealed by Serrano and Holman. The
matter is fully briefed awaiting oral argument and collection proceedings have
begun against the individuals on the judgement.
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, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 1996, 1995 and 1994 since
the Company's IPO on January 27, 1994, as reported by NASDAQ. Such quotations
reflect inter-dealer prices without markup, markdown or commissions and may not
necessarily represent actual transactions.
QUARTER ENDED DURING FISCAL 1996
---------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ ----------- ----------- -------------
High $15.37 $10.50 $9.00 $6.62
Low $8.00 $2.00 $4.12 $4.12
QUARTER ENDED DURING FISCAL 1995
---------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
------------ ----------- ----------- -------------
High $10.62 $10.25 $20.50 $20.25
Low $6.00 $6.50 $7.25 $12.75
QUARTER ENDED DURING FISCAL 1994
----------------------------------------
DECEMBER 31, MARCH 31(1), JUNE 30, SEPTEMBER 30,
------------ ------------ ----------- -------------
High (1) $24.50 $17.00 $15.75
Low (1) $15.50 $10.75 $6.87
(1) Prior to January 27, 1994, there was no established public trading market
for the Common Stock. Market prices presented for the quarter ended March
31, 1994 are for the period commencing January 27, 1994 and ending March
31, 1994.
At December 1, 1996, there were approximately 342 shareholders of record,
9,100 beneficial shareholders and 31,398,084 shares of outstanding Common
Stock. The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its Common Stock in the foreseeable future.
Pursuant to the Company's Loan and Security Agreement with LaSalle National
Bank, the Company has agreed that, during the term of that agreement, the
Company will not, without the consent of the lender, declare or pay any
dividend or other distribution on any class of its stock.
ITEM 6. SELECTED FINANCIAL DATA.
The following table is a summary of certain condensed statement of
operations and balance sheet information of the Company and its Predecessor
(Note 2). The table sets forth: selected historical financial data of (i) the
Company for the years ended September 30, 1996, 1995 and 1994, the nine month
period ended September 30, 1993, and the seven month period ended December 31,
1992, and as of September 30, 1996, 1995, 1994, 1993 and December 31, 1992, and
(ii) the Predecessor for the five month period ended May 31, 1992 and as of May
31, 1992, and (iii) pro forma selected financial data of the Company for the
year ended December 31, 1992. The selected historical financial data were
derived from audited financial statements with the exception of the pro forma
data for the year ended December 31, 1992. In the opinion of the management of
the Company, the unaudited financial statements include all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the financial information included herein. The summary should be read in
conjunction with financial statements and notes thereto appearing elsewhere in
this report.
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
COMPANY(1) PREDECESSOR(2)
-------------------------------------------------------- --------------------
SEVEN FIVE
YEAR ENDED NINE MO. PRO FORMA MONTHS MONTHS
---------- ENDED YEAR ENDED ENDED ENDED
SEPT. 30 SEPT. 30, SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, MAY 31,
1996 1995 1994 1993(3) 1992(4) 1992 1992
--------- ---------- --------- --------- ---------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales $27,271 $33,031 $17,734 $6,575 $3,032 $1,987 $1,161
Cost of sales 23,906 27,530 13,326 4,741 1,904 1,247 774
--------- ---------- --------- --------- ---------- -------- --------
Gross profit 3,365 5,501 4,408 1,834 1,128 740 387
Selling, general & administrative
expenses 19,936 27,042 33,809 5,894 2,646 1,801 828
Restructuring 11,019 - - - - - -
--------- ---------- --------- --------- ---------- -------- --------
Loss from operations (27,590) (21,541) (29,401) (4,060) (1,518) (1,061) (441)
Net interest income/(expense) 643 1,340 1,187 (12) (49) 23 (95)
Royalty income and other 354 540 281 364 15 15 158
--------- ---------- --------- --------- ---------- -------- --------
Net loss $(26,593) $(19,661) $(27,933) $(3,708) $(1,552) $(1,023) $(378)
========= ========== ========= ========= ========== ======== ========
Net loss per share $(0.96) $(0.84)
========= ==========
Pro forma net loss per share(5)
(unaudited): $(1.25) $(0.18)
========= =========
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, DEC. 31, MAY 31,
1996 1995 1994(6) 1993 1992 1992
--------- ---------- --------- --------- -------- --------
BALANCE SHEET DATA:
Working capital (deficiency) $26,557 $25,930 $46,071 $(361) $(259) $(1,828)
Total assets 41,939 54,747 61,242 14,749 2,729 1,878
Long-term debt 1,500 -- -- -- -- 496
Total debt 1,500 10,000 -- 4,098 996 2,202
Owners equity (deficit) 30,770 37,956 56,318 7,338 660 (1,312)
(1) The Company, formerly known as The Telular Group L.P., a limited
partnership, was established on May 15, 1992 and commenced business on
June 1, 1992. On May 13, 1993, the Company, a newly organized Delaware
corporation, entered into various agreements whereby all of the
outstanding partnership interests in the Telular Group L.P. were exchanged
for shares of common stock.
(2) The predecessor of the Company was DNIC Brokerage Co. ("Predecessor").
(3) The Company has a fiscal year end of September 30.
(4) The unaudited pro forma selected statement of operations data of the
Company for the year ended December 31, 1992 gives pro forma effect to the
formation of The Telular Group L.P. and the combination of the operations
of the limited partnership with the Predecessor as if the limited
partnership had been formed on January 1, 1992.
(5) Pro forma net loss per common share for the nine month period ended
September 30, 1993 has been calculated based on 20,389,994 weighted shares
outstanding for the period January 1, 1993 through September 30, 1993 and
includes net losses of The Telular Group L.P. for the period from January
1, 1993 to May 13, 1993, and thereafter for Telular Corporation. The pro
forma net loss per common share for the year ended September 30, 1994 has
been calculated based on 22,362,986 weighted shares outstanding. Common
and common equivalent shares issued during the twelve month period prior
to the January 27, 1994 IPO have been included as if they were outstanding
for all periods presented using the treasury stock method and an IPO price
of $20 per share.
(6) On January 27, 1994, the Company effected an initial public offering of
4,000,000 shares of common stock. After underwriting discounts and
commissions and other expenses, proceeds to the Company were approximately
$56,414,000, and have a material effect on the comparability of the
information presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company designs, develops, manufactures and markets products based on
its proprietary interface technologies, which allows most standard wireline
customer premises equipment -- phones, facsimile machines, computer modems,
PBXs, and key systems, among others -- to operate over wireless
telecommunications networks. Currently, the Company is devoting a substantial
portion of its resources to international market development, extension of its
core product line to new wireless standards, expansion, protection and
licensing of its intellectual property rights, and development of underlying
radio technology.
The Company's operating expense levels are based in large part on
expectations of future revenues. If anticipated sales in any quarter do not
occur as expected, expenditure and inventory levels could be disproportionately
high, and the Company's operating results for that quarter, and potentially for
future quarters, could be adversely affected. Certain factors that could
significantly impact expected results are described in "Cautionary Statements
Pursuant to the Securities Litigation Reform Act" which is an exhibit to this
Form 10-K.
OVERVIEW
The Company has seen substantial growth in the market for FWTs. The
Company encountered heightened activity during the latter half of fiscal 1996
that gives it reason to believe that the FWT market is maturing beyond the
nascent stage. The Company quoted more contracts, shipped more product and
observed more data that confirmed momentum in the FWT market than during any
previous period. The Company experienced record shipments during the fourth
quarter and began shipping significant volumes to Motorola for a WLL project in
Hungary. The major trends driving the market include a broad consumer
acceptance of cellular communications, rapid privatization of
telecommunications in developed and developing countries, adoption of digital
wireless transmission standards that enhance network capacity and service,
service network providers' acceptance of FWTs as cost-effective answers to
customer demand for improved telecommunications and PCS licensing that will
drive down the price of wireless communications and expand the number of users
within the U.S. If these trends will continue, they will provide significant
international and domestic opportunities.
The Company has a number of undertakings which embody its strategy to
capitalize on the growth it anticipates for FWTs. The Company's product
development program is designed to result in a line of FWTs over the next three
years that will address the cellular radio standards projected to serve 85% of
all cellular subscribers in the year 2000. The Company is seeking to raise
approximately $15-20 million of capital, most of which is specifically for
product development purposes. The Company plans to consolidate and upgrade its
manufacturing facilities in order to increase working efficiencies between
functions, modernize equipment, increase capacity and facilitate the
introduction of new products and new generations of product. The Company has
and will continue to strengthen and build its sales and marketing
organizations. The Company has added new personnel in each of its
international sales offices and plans additional hiring to meet perceived
demand. During fiscal 1996, the Company reversed a prior strategy of not
licensing its intellectual property. The Company began negotiating the
licensing of its patented technology with a number of large international
telecommunications companies. Along the same line, the Company also began
discussing OEM arrangements and launched a function within the Company to
specifically manage licensing and OEM relationships. The Company has hired and
will continue to hire additional senior-level managers as well as other
qualified personnel to accomplish its strategy. The Company will continue to
monitor expenditure levels in light of market timing and expansion revenues to
maintain the balance it achieved during the restructuring that occurred during
fiscal 1996.
RESTRUCTURING AND ORGANIZATIONAL CHANGES
On January 22, 1996, the Company announced a restructuring program which
was implemented during the second and third quarters of fiscal 1996. The
difficulty in predicting demand for the Company's products, due in part to
immature foreign markets, underscored the importance of properly aligning costs
and expenses to attainable levels of revenue. Manufacturing and engineering
consolidation, outsourcing and the elimination of non-core product lines were
the focus of the restructuring. The Company's Puerto Rico and Buffalo Grove
manufacturing operations were phased out during the second fiscal quarter, and
production was consolidated at the Company's Atlanta, Georgia facility. The
restructuring program reduced general, administrative and manufacturing costs
Company-wide. The number of employees decreased from over 250 in January 1996
to less than 110 at the end of November 1996. Restructuring and impairment
charges were incurred during the second and third fiscal quarters of fiscal
1996. The Company will experience approximately $1.2 million in reduced
amortization charges in each of the next five years as the result of intangible
assets written off as restructuring or impairment charges. Also, depreciation
charges were reduced as part of the restructuring, but may increase in return
to formal levels or increase in the future as the Company plans to move into a
new facility and update manufacturing equipment during fiscal 1997. Wages
decreased as part of the restructuring, but may increase in future periods if
the demand for the Company's products meets Management's expectations.
Restructuring charges related to the activities discussed were
approximately $6.7 million and consisted of intangible, inventory and fixed
asset write-offs as well as severance payments to employees separated from the
Company. Restructuring payments were approximately $675,000 through September
30, 1996.
In addition, impairment charges of $4.3 million were recorded, which
represented specific intangibles that were determined to be impaired based on
estimated cash flows over the remaining business life cycle of the related
assets. Events related to a change in management and the corresponding change
in business direction, and the restructuring plan prompted the evaluation of
these intangibles.
The Company appointed Kenneth E. Millard President and Chief Executive
Officer (CEO) effective April 18, 1996. Mr. Millard also serves as a member of
the Board of Directors. He joined Telular with over twenty-five years of
telecommunications experience, most recently as President and Chief Operating
Officer of Oncor Communications, based in Bethesda, Maryland. Robert C.
Montgomery was appointed Executive Vice-President and Chief Operating Officer
during March 1996. Mr. Montgomery had
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been president of Telular's wireless security alarm subsidiary, headquartered
in Atlanta, Georgia. On July 1, 1996, Frank J.M. ten Brink joined the Company
as Senior Vice President and Chief Financial Officer. Mr. ten Brink brings
over fifteen years of finance, international business and manufacturing
experience, most recently as Executive Director with Tenneco Packaging,
Hexacomb Products. The Company has and plans to hire additional senior
executives for other functions during fiscal 1997.
PRODUCT DEVELOPMENT
The Company has devoted substantial resources to product development
projects during fiscal 1996. The projects include the introduction of new
products, the launch of new generations of products, the initiation work for
future generations of products and converting Telular's patented interface
technology into a chip set. The product development efforts are focused on
both analog and digital cellular standards such as AMPS, ETACS, CDMA, DCS 1800,
PCS 1900 and GSM. GSM is a priority as it is expected to account for as much
as 40% of all cellular subscribers by the year 2000. The product development
program is designed to result in a line of FWTs over the next three years that
will address the cellular radio standards projected to serve 85% of all
cellular subscribers in the year 2000. Most of the FWTs to be introduced will
incorporate the Company's new "integrated radio" design, in which radio
frequency and interface functionality are combined onto a single circuit card
assembly. The Company expects to significantly reduce the product cost and
increase field reliability while making the packaging more compact. The
Company considers product development initiatives key to its future success and
will continue to focus and expand such activities. The Company plans to raise
additional capital (See LIQUIDITY AND CAPITAL RESOURCES) specifically for
product development purposes.
On June 28, 1996, the Company acquired a one-third interest in TelePath
Corporation for $1,000,000 in cash and common stock of the Company valued at
$2,187,500. TelePath is a radio developer, based in Hauppauge, New York, that
specializes in the design of advanced cellular and personal communication
services products. The agreement provides the Company with fifty percent voting
position on the Board of Directors of TelePath, and it calls for the Company to
increase its equity position in TelePath Corporation to fifty percent by August
of 1997 by purchasing an additional one-sixth of TelePath for 150,000 shares of
the Company's common stock as well as payments totaling $500,000. The agreement
includes a multi-year product development program designed to provide a new
generation of state-of-the-art fixed wireless terminals, which include both
analog and digital radio standards, for markets worldwide. The agreement
contemplates that TelePath will provide and the Company will purchase certain
development services including the conversion of Telular's patented interface
technology into a chip set, integration of Telular's patented interface
technology with new and existing cellular radio standards, and development of
new feature functions for future generations of analog and digital terminals.
CONSOLIDATION OF MANUFACTURING
The Company plans to consolidate manufacturing in metropolitan Chicago
during fiscal 1997. The Company signed a lease in December 1996 for a 72,000
square foot facility located in Vernon Hills, Illinois, which is in the
metropolitan Chicago area. The Company expects that facilities consolidation
during fiscal 1996 will result in significantly lower costs and more efficient
orchestration of operations. The Company intends to further capitalize on the
benefits it experienced through facilities consolidation during 1996 by
relocating manufacturing operations from Atlanta to suburban Chicago during
1997. The move will result in engineering, sales, marketing and manufacturing
resources to be within a proximity to each other that the Company believes will
make new product introduction more efficient as well as increase the overall
quality of manufactured products. Also, the Company plans to increase
manufacturing capacity to be consistent with the introduction of new products
or new generations of product. The consolidation requires the Company to
relocate to a different site as the space it currently occupies in Buffalo
Grove, Illinois does not have sufficient space for manufacturing.
SALES AND MARKETING
The Company plans to strengthen and rebuild its sales and marketing
organizations. The Company experienced record sales (see Results of Operations
- - Fiscal 1996 Compared to Fiscal 1995) during the fourth fiscal quarter of
1996. New sales personnel have been added and more will be hired for each
international sales region to meet perceived demand. The Company launched an
OEM sales organization during fiscal 1997. The OEM segment manages the
licensing of technology, sales of components and finished goods components to
original equipment manufacturers and joint ventures. The Company hired and has
plans to hire additional marketing personnel to coordinate product development
and market opportunities.
EXPANDED RELATIONSHIP WITH MOTOROLA
In November 1993, the Company entered into a strategic agreement with
Motorola, whereby Motorola, through its Cellular Subscriber Group, acquired an
interest in the Company and received an option to increase its holdings.
Motorola exercised the option in April 1994 and now owns approximately 15% of
the outstanding shares of common stock. Motorola also obtained the right to
representation on the Company's Board of Directors. The agreement provided the
Company with access to certain of Motorola's engineering, technical service and
other resources on a fee basis, subject to availability. In addition, Motorola
will make its TDMA (including GSM), CDMA, Iridium and other transceivers
available for purchase by the Company for use in its products when, if and as
available.
During fiscal 1996, the Company expanded its relationship with Motorola in
several respects.
First, the Company was awarded a contract to supply a specifically
customized version of its PHONECELL(R) SX product to Motorola's Cellular
Infrastructure Group for deployment in existing and future WLL projects in
Hungary. In March 1996, the Company and Motorola, announced that Motorola
issued a purchase order for $25 million of PHONECELL(R) SX product in
connection with Phase
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I of the project. Shipments commenced during the third quarter of fiscal 1996.
Approximately $19.0 million of the order will ship during fiscal 1997. The
Company is currently negotiating with Motorola to supply units for Phases II
and III of the project.
Second, the Company and the Network Ventures Division ("NVD") of Motorola
jointly announced the signing of a Preferred Supplier Agreement whereby the
Company will be presented as a preferred supplier of fixed wireless subscriber
equipment to NVD's joint ventures worldwide.
Third, in November 1995, the Company entered into an agreement with CIG
under which CIG agrees to purchase $100 million of the Company's fixed wireless
terminals and provide funding for engineering and product development
activities over a three-year period, commencing January 1, 1996. The Company
and Motorola also modified existing equipment purchase and technology license
agreements in certain respects. These include reduction of pricing to the
Company on Motorola transceivers, reduction of royalty rates payable by
Motorola on wireless fixed access units incorporating CDMA technology, minimum
purchase commitments from Motorola to the Company, bidding opportunities to the
Company for certain product needs of Motorola, and the grant by the Company to
Motorola of an option to license (as a paid-up license) and sublicense to a
single third party rights under certain of the Company's patents, limited to
use in the field of WLL terminals employing CDMA techniques for the wireless
connection. In the event that the board of directors of the Company rejects
the license and sublicense requested by Motorola, Motorola has the right to
terminate the agreement.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. For the year ended September 30, 1996, net sales decreased
17.4% compared to 1995. Through the first three quarters of 1996, sales were
down more than 40% compared to 1995. With the exception of Asia and sales of
wireless security alarm products domestically, the Company experienced lower
sales in all other regions compared to fiscal 1995. Specifically, sales in
1996 were lower due to large non-recurring orders in Latin America during 1995
and returns during the first fiscal quarter of 1996 of GSM PHONECELL product.
Sales rose significantly during the fourth quarter to $13.9 million or more
than 50% of total 1996 revenues. The Company began to ship significant volumes
to Motorola for the WLL project in Hungary, which represented approximately 40%
of the fourth quarter sales. Sales of FWTs to the Asian, European, Middle
Eastern and African regions and of wireless security alarm products also
increased substantially during the fourth quarter.
Gross Profit. Gross profit for the year ended September 30, 1996,
decreased 38.8% over the same period in 1995. This decrease was primarily
attributable to $2.5 million in inventory charges incurred during the second
fiscal quarter of 1996. The charges were related to the closing of the
Company's Puerto Rican operation. Excluding the inventory charges, gross
profit increased in 1996 to 21.3% from 16.7% in 1995.
Engineering and Development Expenses. Engineering and development
expenses decreased 15.2% compared to 1995. Although the Company consolidated
engineering as part of the restructuring program, management considers
engineering and product development to be integral to the future success of the
Company. Engineering and development expenses are expected to increase in the
future to reflect the Company's commitment to the development of future
generations of product.
Selling and Marketing Expenses. Selling and marketing expenses decreased
36.5% compared to 1995. The Company, as part of the restructuring program,
realigned its worldwide sales organization during fiscal 1996. In addition, the
sales support functions were consolidated during fiscal 1995 and 1996, which
resulted in the closing of the Company's sales support office in Memphis and
the execution of a domestic, non-exclusive master distribution agreement with a
related party.
General and Administrative Expenses (G&A). G&A decreased 33.5% compared
to 1995. The decrease is essentially attributable to the reduction or
elimination of expenditures, primarily through headcount reductions, achieved
through the restructuring program implemented during the second and third
fiscal quarters of fiscal 1996.
Allowance for Doubtful Accounts. The allowance for doubtful account
expense increased 210.2% compared to 1995. The increase principally reflected
$0.5 million reserved during the third quarter of fiscal 1996 for a trade
receivable due from one customer.
Amortization Charges. Amortization charges increased by 11.4% compared to
1995. Although a substantial amount of intangible assets were written off as
part of the aforementioned restructuring and impairment charges during 1996,
amortization charges increased primarily due to deferred financing costs,
related to debentures issued during the year.
Other Income (Expense). Other income for the year ended September 30,
1996 decreased by $0.9 million compared to 1995. This decrease was primarily
the result of lower interest income as cash balances in interest bearing
accounts were lower in 1996 compared to 1995 and lower royalty income.
Net Loss. The 1996 loss, net of restructuring and impairment charges, was
$15.6 million or ($0.56) per share, compared to a net loss of $19.7 million, or
($0.84) per share in 1995. The net loss for the year ended September 30, 1996,
inclusive of restructuring and impairment charges, totaled $26.6 million, or
($0.96) per share.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. For the year ended September 30, 1995, net sales increased
86.3% compared to 1994. The increase in net sales was primarily in
international markets, including Latin America, Europe, the Middle East and
Asia. Management attributes the increase to a
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greater market awareness of fixed cellular and wireless local loops as a means
of providing primary phone service, increased focus on international sales,
improved performance in the wireless security alarm business, and modest price
reductions applied to the single subscriber PHONECELL(R) products.
Gross Profit. Gross profit for the year ended September 30, 1995,
increased 24.8% over the same period in 1994. This increase is attributable to
the aforementioned increase in sales. The gross profit margin decreased from
24.9% to 16.7%. The margin decrease is primarily due to charges to inventory
reserves, the aforementioned reduction in selling prices, a changing product
mix of sales due to the focus on international markets and material expediting
costs. Inventory reserves were charged approximately $700,000 during the
fourth quarter. These charges were made based upon a review of current
inventories compared to forecasted sales for fiscal year 1996. Based upon this
review, it was determined that certain products will no longer be part of the
Company's core product line, and a reserve was therefore established.
Selling, General and Administrative Expenses ("SG&A"). SG&A for the year
ended September 30, 1995 decreased 20.0% compared to the same period in 1994.
As a percent of net sales, SG&A decreased from 190.6% to 81.9%. Included in
the 1994 expenses is $9.7 million in amortization expense for an intangible
asset recorded in connection with an investment made by Motorola in November
1993. The intangible asset in the amount of $9.7 million reflected deferred
costs associated with the Company's access to specified services to be provided
by Motorola and certain transceiver supply and pricing arrangements. This
asset was fully amortized as of September 30, 1994. Net of the aforementioned
amortization, SG&A increased 12.2% over the prior year. This increase mainly
reflects the more resources allocated to research and development efforts, an
increase in legal expenses in defense of intellectual property rights, and the
write-off of an asset capitalized in connection with the development of certain
wireless component prototypes.
In an attempt to further expand sales, a contract was entered into during
late fiscal 1994 pursuant to which a vendor agreed to develop certain wireless
component prototypes for $1,500,000. These prototypes were to be used in
certain projects which the Company was and is currently pursuing. The contract
provided a credit up to $1,500,000 against future purchase orders placed for
production of the prototypes. Accordingly, payments made during fiscal 1995 of
$1,500,000 were capitalized. As of September 30, 1995, management believes,
due to the uncertainties surrounding the aforementioned projects, that this
asset has become impaired. Future benefits, if any, are not determinable.
Therefore, the $1,500,000 asset was written-off during the fourth quarter of
1995 and is included in Selling, General and Administrative expenses.
Other Income (Expense). Other income for the year ended September 30,
1995 increased $0.4 million compared to 1994. This increase was primarily due
to the interest income generated on the proceeds from the Company's IPO
received in February 1994, and an increase in royalty income.
Net Loss. The net loss for the year ended September 30, 1995 decreased
approximately $8.3 million or 29.6% compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $12.8 million in cash and cash
equivalents, with a net working capital surplus of approximately $26.6 million.
Net cash used in operating activities was $15.0 million during fiscal 1996
compared to $20.8 million in fiscal 1995. The $26.6 million loss for the
current year includes approximately $15.3 million of non-cash operating
expenses. Cash uses include cash losses of $11.3 million and working capital
increases of $3.7 million reflecting higher sales in the fourth quarter of
fiscal 1996.
Cash used by investing activities was approximately $1.7 million during
fiscal 1996 compared to $4.4 million in fiscal 1995, $1.0 million of which was
the investment in TelePath. Net property and equipment expenditures declined
from 1995 to 1996 due to an effort to reduce capital expenditures through a
corporate restructuring program.
Financing activities provided for $7.9 million during fiscal 1996 compared
to $10.6 million in fiscal 1995. During fiscal 1996, proceeds from the
issuance of the debentures and the exercise of stock options net of repayment
on borrowings on the revolving line of credit resulted in the net increase in
cash provided by financing activities. The fiscal 1995 activity resulted from
the exercise of stock options, and the proceeds received from borrowings on the
revolving line of credit.
On September 29, 1995, the Company entered into a Loan and Security
Agreement with LaSalle National Bank that, among other things, provides a
credit facility with a loan limit of $20.0 million. Borrowings under the loan
are subject to borrowing base requirements and other conditions. Under the
Loan and Security Agreement, the Company is required to comply with certain
affirmative and negative covenants. The term of the agreement is through March
1, 1997.
On December 11, 1995, the Company issued $18,000,000 in convertible
debentures (the "Debentures") at 4% per annum which were to mature on December
11, 1997. The Debentures were issued under the provisions of Regulation S as
promulgated under the United States Securities Act of 1933, as amended. Holders
of the Debentures were entitled, at their option any time after issuance until
December 10, 1997, to convert principal and interest accrued thereon, in whole
or in part, into shares of common stock using defined conversion formulas based
on 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. The Company also had the right to redeem
the Debentures for cash at defined terms, subject to immediate exercise of the
conversion option. Through the end of November 1996, all of the debentures plus
interest accrued thereon were converted into 7,033,412 shares of common stock.
17
18
Based on its current operating plan, the Company believes its existing
capital resources, including the credit facility and proceeds from the issuance
of the Debentures, should enable it to maintain its current and planned
operations through 1997. However, management is in the process of raising
$15-20 million additional capital that is primarily earmarked for research and
product development. Beyond the specific research and product development
needs, expected future uses of cash include working capital requirements,
marketing and sales support programs in anticipation of future revenues and
certain capital expenditures. Cash requirements may vary and are difficult to
predict given the nature of the developing markets targeted by the Company.
The amount of royalty income from the Company's licensees is unpredictable, but
could have an impact on the Company's actual cash flow.
The Company requires letters of credit or qualification for export credit
insurance underwritten by the Export-Import Bank of the United States on a
substantial portion of its international sales orders. Also, to mitigate the
effects of currency fluctuations on the Company's results of operations, the
Company endeavors to conduct all of its international transactions in U.S.
dollars. To date, the Company's sales have not been adversely affected by
currency fluctuations; however, as the Company's international operations grow,
foreign exchange or the inflation of a foreign currency may become risks, and
the Company may be required to develop and implement additional strategies to
manage these risks.
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 .................................
Consolidated Balance Sheets as of September 30, 1996 and 1995 ..
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994 ..............................
Consolidated Statements of Equity for the years ended
September 30, 1996, and 1995 ...................................
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994 ..............................
Notes to Consolidated Financial Statements .....................
18
19
[LETTERHEAD OF ERNST & YOUNG LLP]
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, 1996 and 1995, and the related consolidated
statements of operations, equity, and cash flows for each of the three years in
the period ended September 30, 1996. Our audits also included the financial
statement schedules listed in the Index at Item 14a. These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
November 8, 1996
20
20
Telular Corporation
Consolidated Balance Sheets
SEPTEMBER 30
1996 1995
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $12,838,087 $21,552,372
Receivables:
Trade, less an allowance for doubtful accounts of
$900,000 and $218,000 at September 30, 1996
and 1995, respectively 6,327,502 5,782,269
Related parties 4,088,481 2,717,573
----------------------------
10,415,983 8,499,842
Inventories, net 12,791,701 12,313,679
Prepaid expenses and other current assets 180,569 355,374
----------------------------
Total current assets 36,226,340 42,721,267
Property and equipment, net 2,325,389 3,851,250
Other assets:
Intangible assets, net 180,000 8,106,325
Investment in affiliate 3,146,208 -
Deposits and other 61,004 68,388
----------------------------
3,387,212 8,174,713
----------------------------
Total assets $41,938,941 $54,747,230
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit $ - $10,000,000
Accounts payable:
Trade 1,794,505 3,157,240
Related parties 6,196,983 797,310
Accrued liabilities 1,677,671 2,836,905
----------------------------
Total current liabilities 9,669,159 16,791,455
Convertible debentures 1,500,000 -
Commitments and contingencies - -
----------------------------
Total liabilities 11,169,159 16,791,455
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value; 40,000,000 shares
authorized; 31,016,675 and 23,646,266 outstanding, at
September 30, 1996 and 1995, respectively 315,768 242,064
Additional paid-in capital 108,310,915 88,977,434
Deficit (76,250,194) (49,657,016)
Treasury stock, 560,000 shares at cost (1,606,707) (1,606,707)
----------------------------
Total stockholders' equity 30,769,782 37,955,775
----------------------------
Total liabilities and stockholders' equity $41,938,941 $54,747,230
============================
See accompanying notes.
21
21
Telular Corporation
Consolidated Statements of Operations
YEAR ENDED SEPTEMBER 30
1996 1995 1994
-------------------------------------------------------------------
Net sales to unrelated parties $ 18,642,469 $ 28,626,888 $ 17,555,099
Net sales to related parties 8,628,914 4,403,850 179,017
-------------------------------------------------------------------
Total net sales 27,271,383 33,030,738 17,734,116
Cost of sales 23,906,446 27,529,462 13,326,218
-------------------------------------------------------------------
3,364,937 5,501,276 4,407,898
Engineering 4,887,939 5,765,136 2,837,704
Selling 6,253,889 9,847,582 11,174,887
General and administrative 6,754,355 10,159,367 9,176,848
Provision for doubtful accounts 974,379 314,085 98,168
Amortization 1,065,736 956,270 10,521,226
Restructuring and impairment charges 11,018,939 - -
-------------------------------------------------------------------
Loss from operations (27,590,300) (21,541,164) (29,400,935)
Other income (expense):
Interest income 936,294 1,340,268 1,248,138
Royalty income 2,500 30,177 3,193
Royalty income from related parties 643,757 800,550 446,448
Interest expense (292,831) - -
Interest expense to related parties - (12,979) (61,016)
Equity in net loss of investments
in affiliates (41,292) - (79,862)
Other (251,306) (277,310) (88,647)
-------------------------------------------------------------------
997,122 1,880,706 1,468,254
-------------------------------------------------------------------
Net loss $ (26,593,178) $(19,660,458) $(27,932,681)
===================================================================
Net loss per common share $ (.96) $ (.84) $ -
===================================================================
Pro forma net loss per common share $ - $ - $ (1.25)
===================================================================
Weighted-average number of common
shares outstanding 27,655,964 23,340,706 -
Pro forma weighted-average number of
common shares outstanding - - 22,362,986
===================================================================
See accompanying notes.
22
22
Telular Corporation
Consolidated Statements of Equity
ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN TREASURY STOCKHOLDERS'
STOCK STOCK CAPITAL DEFICIT STOCK EQUITY
-----------------------------------------------------------------------------------
Balance at September 30,
1994 $ - $237,271 $87,683,810 $(29,996,558) $(1,606,707) $56,317,816
Proceeds from issuances
of common stock - 4,269 688,766 - - 693,035
Stock issued for services
rendered - 524 604,858 - - 605,382
Net loss for year ended
September 30, 1995 - - - (19,660,458) - (19,660,458)
-----------------------------------------------------------------------------------
Balance at September 30,
1995 - 242,064 88,977,434 (49,657,016) (1,606,707) 37,955,775
Proceeds from issuances
of common stock - 3,651 551,169 - - 554,820
Conversion of debentures
into 6,655,315 shares of
common stock - 66,553 16,598,312 - - 16,664,865
Stock issued in connection
with the investment in
TelePath Corp. - 3,500 2,184,000 - - 2,187,500
Net loss for year ended
September 30, 1996 - - - (26,593,178) - (26,593,178)
-----------------------------------------------------------------------------------
Balance at September 30,
1996 $ - $315,768 $108,310,915 $(76,250,194) $(1,606,707) $30,769,782
===================================================================================
See accompanying notes.
23
23
Telular Corporation
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30
1996 1995 1994
---------------------------------------------------
OPERATING ACTIVITIES
Net loss $(26,593,178) $(19,660,458) $(27,932,681)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,063,777 1,329,405 918,408
Amortization 1,065,736 956,270 10,521,226
Inventory obsolescence expense 2,958,490 736,300 575,700
Compensation expense related to stock
options and grants 99,067 128,873 593,117
Interest on debentures 209,412 - -
Common stock issued for services - 605,382 -
Restructuring and impairment charges 9,839,061 - -
Equity in net loss of investments 41,292 - 79,862
Loss on disposal of property and equipment 16,658 - 5,137
Changes in assets and liabilities:
Receivables (545,233) (1,452,010) (2,255,067)
Related parties 4,028,765 (1,437,069) (698,455)
Inventories (4,782,084) (3,362,863) (7,408,233)
Prepaid expenses, deposits, and other 216,403 6,871 (311,454)
Accounts payable (1,362,735) (386,201) 1,799,181
Accrued liabilities (1,206,734) 1,711,673 128,053
---------------------------------------------------
Net cash used in operating activities (14,951,303) (20,823,827) (23,985,206)
INVESTING ACTIVITIES
Investment in TelePath Corporation (1,000,000) - -
Acquisition of property and equipment (1,267,641) (1,196,785) (4,118,473)
Acquisition of licenses and technology - (3,180,000) -
Proceeds from disposal of equipment 560,953 -
---------------------------------------------------
Net cash used in investing activities (1,706,688) (4,376,785) (4,118,473)
FINANCING ACTIVITIES
Proceeds from issuances of common stock 458,706 564,162 68,197,864
Principal repayments of notes payable to
related parties, net - - (3,750,000)
Revolving line of credit (10,000,000) 10,000,000 (348,136)
Proceeds from convertible debentures 18,000,000 - -
Payment of deferred financing costs (515,000) - -
Purchase of treasury stock - - (1,606,707)
---------------------------------------------------
Net cash provided by financing activities 7,943,706 10,564,162 62,493,021
---------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (8,714,285) (14,636,450) 34,389,342
Cash and cash equivalents, beginning of period 21,552,372 36,188,822 1,799,480
---------------------------------------------------
Cash and cash equivalents, end of period $12,838,087 $21,552,372 $36,188,822
===================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid - Principally to related
parties in 1995 and 1994 $ 83,419 $ 12,979 $ 139,374
===================================================
See accompanying notes.
24
24
Telular Corporation
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
Telular Corporation (the Company), operates in a single line of business whose
purpose is to design, engineer, and manufacture component elements and complete
telecommunications equipment assemblies and other complementary products; to
market such products domestically and internationally by sale, lease, or
license; and to pursue other distribution channels. In addition, the Company
may engage in the provision of telecommunications products on a worldwide basis
(except in Canada for products using the Company's patented core technology),
otherwise engage in the fixed and mobile communications business, and engage in
other activities related thereto.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Adcor-Telular Security Products, Inc. (Adcor)
and Telular International, Inc. (International). All significant intercompany
balances and transactions have been eliminated.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments which have maturities of
three months or less from the date of purchase.
FINANCIAL INSTRUMENTS
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Credit risks with respect to trade receivables are limited due to the
diversity of customers comprising the Company's customer base. The Company
performs ongoing credit evaluations and charges uncollectible amounts to
operations when they are determined to be uncollectible.
INVENTORIES
Inventories are stated at the lower of first in, first out (FIFO) cost or
market.
25
25
Telular Corporation
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using straight-line and accelerated methods for financial reporting
purposes.
INVESTMENTS
Investments in certain affiliates owned 50% or less are accounted for under the
equity method of accounting.
INCOME TAXES
Statement No. 109 requires that the liability method be used in accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws in
effect at the date of the financial statements.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reported in the statement of financial position for
receivables, revolving line of credit, accounts payable, and convertible
debentures approximate their fair values at September 30, 1996 and 1995.
26
26
Telular Corporation
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Financing costs incurred to issue the debentures, totaling $515,000, were
capitalized and are being amortized over the term of the debentures or date of
conversion, if converted. During the year ended September 30, 1996,
amortization of deferred financing costs was $480,800.
RECLASSIFICATIONS
Certain amounts in the September 30, 1995 and 1994 financial statements have
been reclassified to conform to the September 30, 1996 presentation.
STOCK-BASED COMPENSATION EXPENSE
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement encourages companies
to record compensation costs for stock options granted to employees on the date
of grant based on the fair value of these options. Alternatively, it allows
companies to continue to measure compensation based on the difference between
the option exercise price and the fair market value on the date of grant. The
Company has elected to continue measuring compensation under Accounting
Principle Board Opinion No. 25, and will provide the pro forma disclosure
requirements of SFAS No. 123 beginning with the financial statements for the
year ending September 30, 1997.
3. ISSUANCE OF COMMON STOCK
On January 27, 1994, the Company effected an initial public offering (IPO) of
4,000,000 shares of common stock. In the public offering, the Company sold
3,100,000 shares, and 900,000 shares were sold by certain stockholders of the
Company. Upon closing on February 3, 1994, proceeds to the Company, after
underwriting discounts and commissions and other expenses, were approximately
$56,414,000.
On November 2, 1993, pursuant to the terms of a Stock Purchase Agreement dated
September 20, 1993, the Company issued and sold 3,824,240 shares of common
stock (18.8% of outstanding common stock) to Motorola, Inc. (Motorola) in
exchange for cash proceeds of $11 million, access to specified services of
Motorola, and certain transceiver supply and pricing arrangements. Among other
things, the Stock Purchase Agreement contains restrictions on certain actions
that would adversely impair the rights of Motorola
27
27
Telular Corporation
Notes to Consolidated Financial Statements (continued)
3. ISSUANCE OF COMMON STOCK (CONTINUED)
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, Motorola received an option to purchase additional shares of
common stock of the Company such that after such purchase, Motorola would own
an aggregate 20% of the common stock of the Company on a fully diluted basis.
This option was exercised on April 26, 1994, and the additional shares were
purchased from certain major shareholders of the Company in lieu of the Company
issuing such shares.
4. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30
1996 1995
----------------------------
Raw materials $11,196,334 $8,512,519
Work in process 466,768 1,155,481
Finished goods 2,327,599 3,957,229
----------------------------
13,990,701 13,625,229
Less: Reserve for obsolescence 1,199,000 1,312,000
----------------------------
$12,791,701 $12,313,229
============================
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
SEPTEMBER 30
1996 1995
----------------------------
Computer and telephone equipment $1,538,305 $1,980,740
Shop equipment 1,613,991 2,261,894
Furniture and office equipment 462,375 1,074,415
Automobiles 31,317 76,466
Leasehold improvements 455,346 771,645
Security equipment held for rent 270,942 188,032
----------------------------
4,372,276 6,353,192
Less: Accumulated depreciation 2,046,887 2,501,942
----------------------------
$2,325,389 $3,851,250
============================
28
28
Telular Corporation
Notes to Consolidated Financial Statements (continued)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30
1996 1995
--------------------------------
Patents $ - $ 35,690
Licenses and technology 320,000 3,180,000
Excess of cost over fair value
of net assets acquired - 6,799,139
--------------------------------
320,000 10,014,829
Less: Accumulated amortization 140,000 1,908,504
--------------------------------
$180,000 $8,106,325
================================
Licenses and technology consist primarily of the repurchase of a license
agreement for which the Company has the exclusive right to manufacture, use,
and sell certain interface products. The license had been previously granted
from one of the Company's patents. As part of the restructuring plan (see note
12), the Company has decided to discontinue the manufacturing and marketing of
products under the license agreement. The remaining unamortized asset of
approximately $2,529,900 was written off during the year ended September 30,
1996, and is included in restructuring and impairment charges.
The excess of cost over fair market value of net assets acquired (goodwill) is
amortized based on the straight-line method over the assets' estimated useful
lives, which range from eight to nine years. During the year ended September
30, 1996, the carrying value of goodwill was determined to be impaired based on
undiscounted cash flow over the remaining life of the related asset. Events
relating to a change in management and the corresponding change in business
direction and the restructuring plan (see note 12) prompted the evaluation of
these intangibles. Impairment charges of approximately $4,811,400 are included
in restructuring and impairment charges.
The value attributable to certain intangible benefits received by the Company
pursuant to the Stock Purchase Agreement with Motorola, in the amount of
$9,727,758, was capitalized as of November 2, 1993, the date of the
transaction. This amount, representing the value of access to specified
services of Motorola and certain transceiver supply and pricing arrangements,
was fully amortized over the remainder of the year ended September 30, 1994,
which was the period in which the Company utilized the intangible benefits.
The amortization of these deferred costs is included in amortization.
29
29
Telular Corporation
Notes to Consolidated Financial Statements (continued)
7. INVESTMENT IN TELEPATH CORPORATION
On June 28, 1996, the Company entered into an agreement to acquire a one-third
interest in TelePath Corporation (TelePath) in exchange for $1,000,000 in cash
and common stock of the Company valued at $2,187,500. The agreement calls for
the Company to increase its equity position in TelePath to 50% by August of
1997 by purchasing an additional one-sixth of TelePath for 150,000 shares of
the Company's common stock as well as payments totaling $500,000. The
agreement contemplates a multiyear product development program designed to
provide the next generation of fixed wireless terminals pursuant to which
TelePath will provide and the Company will purchase certain services.
8. INCOME TAXES
At September 30, 1996, the Company has net operating loss carryforwards of
approximately $69,391,000 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
1996 1995
--------------------------------
Deferred tax assets:
Reserve for inventories $ 465,000 $ 509,000
Allowance for doubtful accounts 349,000 85,000
Certain intangible assets 3,973,000 4,304,000
Other 336,000 470,000
Research and development tax credit 241,000 241,000
Net operating loss carryforwards 26,924,000 16,279,000
--------------------------------
Total deferred tax assets 32,288,000 21,888,000
Valuation allowance 32,288,000 21,888,000
--------------------------------
Net deferred tax assets $ - $ -
================================
The valuation allowance has increased by $10,400,000 during the year ended
September 30, 1996, due principally to the increase in the net operating loss
carryforward in 1996.
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.
30
30
Telular Corporation
Notes to Consolidated Financial Statements (continued)
9. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit agreement with a bank under which it
may borrow up to $20,000,000, including letters of credit. Borrowings are
limited to certain percentages and amounts of cash, accounts receivable, and
inventories. The agreement is effective through March 1, 1997, and is subject
to annual renewals thereafter. At the Company's election, the revolving line
of credit carries interest at the bank's prime rate (8.25% and 8.75% at
September 30, 1996 and 1995, respectively) or the Eurodollar rate (LIBOR) plus
2.25%.
The borrowings are collateralized by substantially all assets of the Company.
Among other things, the agreement requires the Company to maintain a
$10,000,000 compensating balance and to maintain specified levels of tangible
net worth, working capital, and debt-to-equity ratios, as defined.
10. CONVERTIBLE DEBENTURES
On December 11, 1995, the Company issued $18,000,000 in convertible debentures
(the Debentures) at 4% per annum, which mature on December 11, 1997. The
Debentures were issued under the provisions of Regulation S as promulgated
under the United States Securities Act of 1933, as amended. Holders of the
Debentures are entitled, at their option any time after issuance until December
10, 1997, to convert principal and interest accrued thereon, in whole or in
part, into shares of common stock using defined conversion formulas based on
NASDAQ closing bids for the Company's common stock. The Company is entitled,
at its option any time commencing one year after issuance (and under certain
circumstances prior to that date) through maturity, to require the holders to
convert the principal and accrued interest into shares of common stock of the
Company using defined conversion formulas based on NASDAQ closing bids for the
Company's common stock. The Company also has the right to redeem the
Debentures for cash at defined terms. During the year ended September 30,
1996, convertible debentures and accrued interest totaling $16,664,865 were
converted into 6,655,315 shares of common stock.
31
31
Telular Corporation
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS
Net sales to related parties consist of the following:
YEAR ENDED SEPTEMBER 30
1996 1995 1994
----------------------------------
Motorola and affiliates $8,586,426 $3,663,322 $ -
Telular Canada Inc. 820 218,365 176,812
Global Data, Inc. 41,668 522,163 -
Others - - 2,205
----------------------------------
$8,628,914 $4,403,850 $179,017
==================================
Accounts receivable from related parties consist of the following:
SEPTEMBER 30
1996 1995
-----------------------
Motorola and affiliates $4,068,674 $2,525,310
Telular Canada Inc. - 8,803
Global Data, Inc. 19,807 183,460
-----------------------
$4,088,481 $2,717,573
=======================
Purchases from Motorola totaled approximately $12,983,000, $11,006,000, and
$5,170,000 for the years ended September 30, 1996, 1995, and 1994,
respectively. Purchases from Telepath totaled approximately $675,000 for the
year ended September 30, 1996. Purchases from DNIC Brokerage Co. (DNIC)
totaled approximately $84,200 for the year ended September 30, 1994. No
purchases were made from DNIC during the years ended September 30, 1996 and
1995.
Accounts payable to Motorola, were approximately $6,196,983 and $797,300 for
the years ended September 30, 1996 and 1995, respectively. Accounts payable to
Telepath at September 30, 1996 were $86,000.
During the years ended September 30, 1996, 1995, and 1994, the Company incurred
expenses of approximately $50,500, $239,100, and $207,000, respectively, for
professional services rendered by a firm controlled by a director of the
Company. The Company and the director's firm entered into an agreement,
whereby the Company issued shares of common stock in lieu of cash for services
rendered during the period January 1, 1995 through September 30, 1995. The
Company issued 16,488 common shares pursuant to the terms of this agreement.
32
32
Telular Corporation
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has an option agreement with Motorola, whereby the Company will
provide engineering services, at their typical rates, over a three-year period
ending November 10, 1998. The Company is also guaranteed a volume purchase
commitment, as defined, from Motorola over a three-year period commencing
January 1, 1996. For the year ended September 30, 1996, payments received
under this agreement were approximately $1,000,000.
The Company has a patent license agreement with Motorola, whereby the Company
receives a royalty for each unit leased, used, or sold. The agreement will
remain in effect for the life of the license patents by country, unless it is
terminated by either party in accordance with the terms of the agreement.
Pursuant to a technology transfer agreement with DNIC, the Company remits the
first $250,000 of royalties received annually to DNIC. For the years ended
September 30, 1996, 1995, and 1994, royalty income earned by the Company
pursuant to the Motorola agreement was approximately $643,800, $800,000, and
$446,000, respectively.
The Company had a consulting services agreement (the Consulting Agreement) with
Columbia Capital Corporation (CCC), a shareholder of the Company. The Company
was required to reimburse CCC for reasonable travel, lodging, and out-of-pocket
expenses incurred by CCC in connection with the services provided, which were
approximately $112,500 for the year ended September 30, 1994. The Consulting
Agreement terminated effective as of the completion of the initial public
offering.
A note receivable in the amount of $72,000 was entered into with a former
officer of the Company related to his exercise of an option to purchase 72,170
shares of common stock during November 1993. This note was forgiven in
accordance with the officer's amended employment agreement entered into during
the period ended September 30, 1995.
On June 1, 1994, the Company entered into an agreement with Access Technologies
Group (ATG) that called for ATG to provide a variety of multimedia services to
the Company over an 18-month period commencing July 1, 1994. The estimated fee
of $300,000 was prepaid after the contract was signed contingent upon a 50%
owner of ATG joining the Company as an officer and ATG granting an option to
the Company to acquire 20% of ATG for $200,000. The Company did not exercise
the option, which expired in May 1995. The prepayment was fully utilized at
September 30, 1995. The officer, who no longer is employed by the Company,
subsequently reduced his ownership from 50% to 4% of ATG.
33
33
Telular Corporation
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
During the year ended September 30, 1994, the Company purchased insurance
coverage from an insurance broker which has an executive who is related to a
former officer of the Company. Total payments made under this insurance policy
were approximately $501,000.
12. RESTRUCTURING AND IMPAIRMENT COSTS
On January 22, 1996, the Company announced a restructuring program which was
implemented during the second and third quarters of fiscal 1996. The
difficulty in predicting demand for the Company's products, due in part to
immature foreign markets, underscored the importance of properly aligning costs
and expenses to attainable levels of revenue. Manufacturing and engineering
consolidation, outsourcing, and the elimination of noncor product lines were
the focus of the restructuring. The Company's Puerto Rico and Illinois
manufacturing operations were phased out during the second fiscal quarter, and
production was consolidated at the Company's Atlanta, Georgia, facility. The
restructuring program has reduced general, administrative, and manufacturing
costs Company-wide.
Restructuring charges related to the activities discussed above were
approximately $6,739,800 and consist of intangible ($3,062,200), inventory, and
fixed asset write-offs as well as severance payments to employees separated
from the Company. Restructuring payments were approximately $675,000. These
charges are included in restructuring and impairment charges. See Note 6 for
discussion of impairment of intangibles.
13. LEASES
The Company and its subsidiaries occupy certain facilities under lease
agreements and lease certain equipment under various agreements expiring
through December 31, 2003. Rent expense for the years ended September 30,
1996, 1995, and 1994 was approximately $595,000, $805,000, and $597,000,
respectively. Future minimum obligations under noncancelable operating leases
are as follow:
1997 $503,000
1998 110,000
1999 78,000
2000 33,000
2001 33,000
Thereafter 10,000
--------
$767,000
========
34
34
Telular Corporation
Notes to Consolidated Financial Statements (continued)
14. 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 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 IPO. These options were granted at exercise
prices, which range from $.93 to $6.93 per share, were determined by the Board
of Directors, and represented estimated fair market values of the Company's
common stock at the grant date. These options are fully vested and, if not
exercised or terminated, will terminate on the fifth anniversary of the vesting
date.
Under the Plan, certain officers and key employees have been granted stock
options. These options vest over two years, as defined in the agreement. Upon
termination of employment for any reason other than death or termination
without cause, any options that have not vested shall terminate. All options,
if not exercised or terminated, will terminate on the tenth anniversary of the
date of grant. The executive may purchase at any time less than the full
number of shares for which the option is then exercisable.
Non-Qualified Stock Options have been granted to officers and all employees of
the Company pursuant to the Plan. These options will vest either immediately
or over a period of up to seven years, as defined in the agreement. All
options, if not exercised or terminated, will terminate either on the sixth or
the tenth anniversary of the date of grant as defined in the agreement.
Non-Qualified Stock Options have been granted to the independent directors of
the Company in lieu of compensation as directors and members of committees of
the Board of Directors which, if not exercised or terminated, will terminate on
the sixth anniversary date of grant.
In April 1996, the Company reset the exercise price on the options granted to
officers, all employees, and directors pursuant to the Plan. The revised
exercise price represented the fair value of the Company's stock as of April
17, 1996, and, accordingly, no compensation expense was recognized.
Pursuant to a Share Purchase Agreement, the selling shareholders of Adcor were
granted options to purchase common stock currently exercisable at $18.00 per
share. During the year ended September 30, 1994, options for 86,800 common
shares with an exercise price
35
35
Telular Corporation
Notes to Consolidated Financial Statements (continued)
14. STOCK OPTIONS (CONTINUED)
of $1.44 were exercised. During the year ended September 30, 1996, options for
61,950 common shares were canceled. At September 30, 1996, 24,850 authorized
but unissued shares of common stock have been reserved for future issuance to
the selling shareholders of Adcor.
Stock option activity, including Non-Qualified Stock Options, activity under
the Plan, the 1993 Adcor Agreement, and options granted to independent
directors, is as follows:
1994 1995 1996
------------------------------------------------
Outstanding at beginning of period 1,359,050 1,398,715 1,734,179
Granted 297,265 770,454 1,102,607
Exercised (257,600) (426,800) (360,672)
Canceled - (8,190) (617,680)
------------------------------------------------
Outstanding at end of period 1,398,715 1,734,179 1,858,434
================================================
Exercisable at end of period 1,006,898 874,648 690,405
Exercise price range $0.93 - $18.00 $0.93 - $18.00 $0.93 - $18.00
15. RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the years ended September 30, 1996, 1995,
and 1994, were approximately $4,271,000, $5,204,000, and $1,659,000,
respectively.
16. MAJOR CUSTOMERS
For the year ended September 30, 1996, the Company derived approximately
$8,600,000 (32%), of its net sales from one customer, of which approximately
$4,100,000 is included in accounts receivable at September 30, 1996. During
the year ended September 30, 1995, no customers made up more than 10% of the
Company's net sales. For the year ended September 30, 1994, the Company
derived approximately $1,941,000 (11%), of its net sales from one customer, of
which approximately $1,573,000 was included in accounts receivable at September
30, 1994.
36
36
Telular Corporation
Notes to Consolidated Financial Statements (continued)
17. EXPORT SALES
Export sales were approximately $12,872,000, $22,383,000, and $10,405,000 for
the years ended September 30, 1996, 1995, and 1994, respectively. Export sales
were primarily to the Asian and European, Middle Eastern, and African (EMEA)
regions during the year ended September 30, 1996, the Caribbean and Latin
American (CALA) and EMEA regions during the year ended September 30, 1995, and
to the CALA region during the year ended September 30, 1994.
18. CONTINGENCIES
The Company is involved in legal proceedings which arise in the ordinary course
of its business. While any litigation contains an element of uncertainty,
based upon the opinion of the Company's counsel, management believes that the
outcome of such proceedings will not have a material adverse effect on the
Company's consolidated results of operations.
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 1996, 1995, and 1994.
THREE MONTHS ENDED
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------------------------------------------------
FISCAL YEAR ENDED 1996
Net sales $4,028,325 $4,574,452 $4,749,647 $13,918,959
Gross profit (loss) 286,155 (1,992,825) 1,178,078 3,893,529
Net (loss) income (5,230,216) (17,399,326) (4,494,892) 531,256
Net (loss) income per
common share (.22) (.69) (.15) .02
FISCAL YEAR ENDED 1995
Net sales 6,819,805 8,208,781 8,655,915 9,346,237
Gross profit 1,394,702 1,415,736 1,847,257 843,581
Net loss (4,864,293) (4,062,815) (3,760,717) (6,972,633)
Net loss per common share (.21) (.17) (.16) (.30)
FISCAL YEAR ENDED 1994
Net sales 4,918,152 4,692,786 3,195,260 4,927,918
Gross profit 1,573,346 1,263,589 329,893 1,241,070
Net loss (5,195,374) (7,160,881) (7,306,414) (8,270,012)
Pro forma net loss per
common share (.25) (.32) - -
Net loss per common share - - (.32) (.35)
37
37
Telular Corporation
Notes to Consolidated Financial Statements (continued)
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
The accumulation of fiscal 1996 quarterly net (loss) income per common share
does not equal the net loss per common share for the year ended September 30,
1996, due to the large number of shares issued in conjunction with the
conversion of debentures during the second and third quarters of fiscal 1996.
38
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3), reference is made to the information
contained under the caption "Directors of the Company" in the Company's
definitive proxy statement for its 1997 Annual Meeting of Shareholders filed
with the Securities and Exchange Commission on or before December 16, 1996,
which is incorporated herein.
The executive officers of the Company and their ages as of December 1,
1996 are as follows:
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------------
William L. De Nicolo .. 50 Chairman of the Board
Kenneth E. Millard .... 49 Chief Executive Officer and President
Robert C. Montgomery .. 55 Executive Vice President and Chief Operating Officer
Frank J.M. ten Brink .. 39 Senior Vice President, Chief Financial Officer, Secretary
George Claudio, Jr. ... 36 Senior Vice President Development Technology
Gordon T. Jenkins ..... 48 Vice President Finance
Timothy L. Walsh ...... 38 Treasurer and Comptroller
William L. De Nicolo, age 50, is the founder of the Company and has served
as Chairman of the Board (including service to DNIC Brokerage Co. (DNIC) prior
to formation of The Telular Group L.P.) since its formation in 1986. Mr. De
Nicolo served as Chief Executive Officer (CEO) of the Company from 1986 until
November 1993 and from November 1995 until April 1996. Mr. De Nicolo continues
to serve as President and Chairman of the Board of Directors of DNIC, a
principal stockholder of the Company. Mr. De Nicolo is also a Director of
Wells-Garner Electronics Corporation.
Kenneth E. Millard, 49, has served as a director, President and Chief
Executive Officer of the Company since April 1996. Mr. Millard served as
President and Chief Operating Officer of Oncor Communications, based in
Bethesda, Maryland. He worked for Ameritech from 1982 to 1992 where he served
as President and Chief Executive Officer of Michigan Bell Telephone Company
from 1989 to 1992. Prior to 1989, he held the positions of Senior
Vice-President of Corporate Strategy for three years and Senior Vice-President
and General Counsel of Ameritech. From 1972 to 1982, Mr. Millard worked for
AT&T and Wisconsin Bell as an attorney.
Robert C. Montgomery, 55, has served as Chief Operating Officer and
Executive Vice President of the Company since March 1996. Mr. Montgomery had
previously been President of the Company's wholly-owned subsidiary
Telular-Adcor Security Products, Inc. since 1986. Prior to that, Mr.
Montgomery was a partner with McKinsey & Company management consulting firm.
Frank J.M. ten Brink, 39, has served as Senior Vice President, CFO since
July 1, 1996 and became Secretary of the Company during August of 1996. Prior
to joining Telular, Mr. ten Brink served as Executive Director and CFO for
Hexacomb Corporation from October 1991 until June 1996, and Vice President
Finance for Interlake Packaging from 1989 until September 1991.
George Claudio, Jr. has been employed by the Company since 1986 and has
served as Vice President Technology of the Company since May 1992. Mr. Claudio
has been involved in the design and evolution of the Company's patented
technology and products.
Gordon T. Jenkins has served as Vice President of the Company's wholly
owned subsidiary, Telular-Adcor Security Products, Inc. since 1986. Mr. Jenkins
is a certified public accountant
Timothy L. Walsh has served as Treasurer and Comptroller of the Company
since April 1993. From January 1990 - April 1993, Mr. Walsh was controller of
Chicago Bulletproof. Mr. Walsh is a certified public accountant.
39
39
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 1997 Annual Meeting of Shareholders filed
with the Securities and Exchange Commission on or before December 29, 1996,
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 1997 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission on or
before December 29, 1996, 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 1997 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission on or before
December 29, 1996, which is incorporated herein.
40
40
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, 1996 and 1995
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Equity for the years ended
September 30, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. THE FOLLOWING SCHEDULE FOR THE YEARS ENDED SEPTEMBER 30, 1996,
1995 AND 1994.
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
3. EXHIBITS.
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 the
of Incorporation Registration Statement
3.3 Amendment No. 2 to Certificate Filed as Exhibit 3.3 to the
of Incorporation Registration Statement
3.4 By-Laws Filed as Exhibit 3.4 to the
Registration Statement
4.1 Loan Agreement with LaSalle Filed as Exhibit 4.1 to Form
National Bank and Amendment 10-K filed December 27, 1995
thereto
4.2 Debenture Agreements dated Filed as Exhibit 4.2 to Form
December 11, 1995 10-K filed December 27, 1995
10.1 Consulting Agreement with Filed as Exhibit 10.1 to the
William L. De Nicolo Registration Statement
41
41
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 filed August 14, 1996
10.5 Appointment of Larry J. Ford Filed as Exhibit 10.2
to Form 10-Q filed
May 1,1995
10.6 Option Agreement with Motorola Filed as Exhibit 10.6
dated November 10, 1995 to Form 10-K filed
December 26, 1996 (1)
10.7 Stock Purchase Agreement Filed as Exhibit 10.11
between Motorola, Inc. and to the Registration
Telular Corporation dated Statement
September 20, 1993
10.8 Patent Cross License Agreement Filed as Exhibit 10.12
between Motorola, Inc. and the to the Registration
Company, dated March 23, 1990 Statement(1)
and Amendments No. 1, 2 and
3 thereto
10.9 Exclusive Distribution and Filed as Exhibit 10.14
Trademark License Agreement the Registration
between Telular Canada Inc. Statement(1)
and the Company, dated April 1,
1989, and Amendments thereto
10.10 Amended and Restated Shareholders Filed as Exhibit 10.15
Agreement dated November 2, 1993 to the Registration
Statement(1)
10.11 Amendment No. 1 to Amended and Filed as Exhibit 10.24
Restated Shareholders the Registration
Agreement, dated January 24, Statement
1994
10.12 Amendment No. 2 to Amended and Filed as Exhibit 10.5
Restated Shareholders Agreement, to the Form 10-Q filed
dated June 29, 1995 July 28, 1995
10.13 Amended and Restated Registration Filed as Exhibit 10.16
Rights Agreement dated November to the Registration
2, 1993 Statement
42
42
10.14 Amendment No. 1 to Amended and Filed as Exhibit 10.25
Restated Registration Rights to the Registration
Agreement, dated January 24, Statement
1994
10.15 Amended and Restated Employee Filed as Exhibit 10.17
Stock Option Plan to Form 10-K filed
December 26, 1996
10.16 Stock Option Grant to File as Exhibit 10.7
Independent Directors to Form 10-Q filed
July 28, 1995
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 to Filed herewith
the Securities Litigation
Act of 1995
(1) Confidential treatment granted with respect to redacted
portions of documents.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this report.
(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).
43
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Telular Corporation
Date: December 19, 1996 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 19, 1996
- -------------------------
William L. De Nicolo
/s/ KENNETH E. MILLARD President, Chief Executive December 19, 1996
- -------------------------
Kenneth E. Millard Officer and Director
/s/ FRANK J.M. TEN BRINK Chief Financial Officer, Secretary December 19, 1996
- -------------------------
Frank J.M. ten Brink and Senior Vice President
/s/ TIMOTHY L. WALSH Comptroller and Treasurer December 19, 1996
- -------------------------
Timothy L. Walsh
/s/ JOEL J. BELLOWS Director December 19, 1996
- -------------------------
Joel J. Bellows
/s/ JOHN E. BERNDT Director December 19, 1996
- -------------------------
John E. Berndt
/s/ ROBERT B. BLOW Director December 19, 1996
- -------------------------
Robert B. Blow
/s/ LARRY J. FORD Director December 19, 1996
- -------------------------
Larry J. Ford
/s/ RICHARD D. HANING Director December 19, 1996
- -------------------------
Richard D. Haning
/s/ DAVID P. MIXER Director December 19, 1996
- -------------------------
David P. Mixer
/s/ WILLIAM E. SPENCER Director December 19, 1996
- -------------------------
William E. Spencer
44
44
SCHEDULE VIII
TELULAR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
CHARGED
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- --------- -------- ------------ ------------ ---------
PERIOD ENDED SEPTEMBER 30, 1996............
Accumulated Amortization of Intangible Assets $ 1,908,504 $ 7,926,325 (1) $ - $(9,694,829) (2) $ 140,000
Cumulative Amortization of Deferred Costs - - - - -
Valuation Allowance of Deferred Tax Asset 21,888,000 10,400,000 (3) - - 32,288,000
Allowance for Doubtful Accounts 218,000 974,400 - (292,400) (4) 900,000
Inventory Reserve 1,312,000 4,304,062 - (4,417,062) (5) 1,199,000
PERIOD ENDED SEPTEMBER 30, 1995............
Accumulated Amortization of Intangible Assets $ 952,234 $ 956,270 $ - $ - $ 1,908,504
Cumulative Amortization of Deferred Costs - - - - -
Valuation Allowance of Deferred Tax Asset 12,096,000 9,792,000 (3) - - 21,888,000
Allowance for Doubtful Accounts 216,000 318,675 - (316,675) (4) 218,000
Inventory Reserve 575,700 1,374,977 - (638,677) (5) 1,312,000
PERIOD ENDED SEPTEMBER 30, 1994...........
Accumulated Amortization of Intangible Assets $ 159,256 $ 792,978 $ - $ - $ 952,234
Cumulative Amortization of Deferred Costs - 9,727,758 - (9,727,758) (6) -
Valuation Allowance of Deferred Tax Asset 1,829,000 10,267,000 (3) - - 12,096,000
Allowance for Doubtful Accounts 85,000 174,526 - (43,526) (4) 216,000
Inventory Reserve - 611,111 - (35,411) (5) 575,700
(1) Approximately $7,341,400 represents assets written off as restructuring or
impairment charges.
(2) Amount represents assets fully amortized and netted against the reserve
during the period.
(3) Amount represents the valuation amount for deferred tax assets, which
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes.
(4) Bad debts written-off.
(5) Inventory disposed.
(6) Amount represents deferred costs for the value attributed to access to
specified services of Motorola and certain transceiver supply and pricing
arrangements.