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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2002
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-23212
Telular Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3885440
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
647 North Lakeview Parkway, Vernon Hills, Illinois 60061
(Address of principal executive offices and zip code)
(847) 247-9400
(Registrant's telephone number, including area code)
Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
form 10-K or any amendment to this Form 10-K. |_|
As of December 6, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $38,128,289* (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 6, 2002, the latest practicable date, was 12,818,424 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, 2002 are incorporated by reference in Part III
of this Form 10-K.
* Excludes the Common Stock held by Named Executive Officers, directors and
stockholders whose ownership exceeds 5% of the Common Stock outstanding at
December 6, 2002. 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
Background
Telular Corporation (the Company) is in the Cellular Fixed Wireless
telecommunications industry. The Company designs, develops, manufactures and
markets products based on its proprietary interface technologies, which provide
the capability to connect standard telecommunications equipment, including
standard telephones, fax machines, data modems and alarm panels with wireless
communication networks in the cellular and PCS frequency bands (collectively
cellular). The Company's business segments are divided between its two principal
product lines: PHONECELL(R), a line of cellular Fixed Wireless Terminals and
cellular Fixed Wireless Desktop Phones (collectively Fixed Wireless Terminals or
FWTs), and TELGUARD(R), a line of Wireless Security Products. Refer to the
financial statement footnotes for financial information about the business
segments.
In 1986, the Company acquired the intellectual property rights for its cellular
interface concept and methodology. The Company's patents cover not only
circuitry, but also the core concept and principles underlying the use of an
intelligent interface device in conjunction with cellular-type transceivers and
systems.
In 1994, the Company completed an initial public offering (IPO) of its Common
Stock. The Company's stock is traded on the NASDAQ National Market System under
the ticker symbol WRLS.
Wireless Telecommunications Overview
The majority of the wireline telephones in the world are concentrated in a
relatively small number of industrialized countries. While telecommunications
infrastructure has been recognized as a critical element for sustained economic
growth, many developing nations have telephone systems that are inadequate to
sustain essential services. Thus, many developing countries are seeking basic
communications solutions that are cost effective and can be deployed rapidly to
support economic development programs.
The process of improving and expanding telephone networks using advanced
wireless technology in developed and developing countries has created a market
for cellular wireless telecommunication equipment such as the Company's FWTs.
Mobile cellular systems have changed the way people communicate and have enjoyed
phenomenal growth. In many developing countries, Wireless Local Loop represents
what is often the fastest growing and most cost-effective way of providing basic
telephone service.
The Wireless Local Loop (WLL) market involves FWTs operating on cellular
networks built primarily for handheld mobile cellular phone users. FWT sales
generally begin developing after a cellular network has been in operation for a
few years, when the growth rate in new mobile cellular phone subscribers slows
and the mobile operator begins looking for new revenue sources. FWTs are the
better choice than handheld mobile cellular phones for the WLL market, because
they offer longer talk time, better reception, and can be easily linked to
phones, fax machines and computers. Among the benefits for network operators,
FWTs generally generate higher average billable airtime and increase demand
during "off-peak" times when available system capacity is high.
COMPANY STRATEGY
The Company's strategy is to leverage its sixteen years of experience in the
market, internationally accepted products and court-tested patents into a
leadership position in the Cellular Fixed Wireless industry. Wireless network
operators and their distribution partners are increasingly sharing the Company's
vision that cellular systems in both developed and developing countries are well
suited for use as basic telephone service networks. The key trends that are
fueling the worldwide adoption of WLL programs include the following:
o Extensive worldwide coverage of cellular wireless networks.
o Privatization of telecommunication service in both developed and
developing countries.
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o Development and adoption of next generation digital networks that
provide greater voice capacity and higher data speeds.
o Network service providers acceptance of FWTs as fast, cost effective
answers to the unfulfilled demand for telecommunications service.
o Licensing of multiple cellular operators in a given region, which
has intensified competition among cellular service providers to
capture additional minutes of usage and the potential for a large
wireline bypass market.
o Recent slowdown in growth rates for mobile telephony reflecting
approaching market saturation, which encourages network carriers to
develop other applications on their networks.
TARGET MARKETS AND PRODUCT APPLICATIONS
The Company's international revenues are derived primarily from the sale of
PHONECELL(R) FWTs. Domestic revenues are driven by the sale of both TELGUARD(R)
Wireless Security Products and PHONECELL(R) FWTs.
The Company's major target market opportunities can be grouped into the
following categories:
o Wireless Basic Telephone Service/Wireless Local Loop
o Wireless Security Products
o Least Cost Routing (LCR)
o Telemetry/Remote Monitoring
o Cellular Public Phones
o Portable Cellular Access
o Disaster Recovery/Emergency Back-up Services.
Wireless Basic Telephone Service/Wireless Local Loop
Wireless basic telephone service, also referred to as Wireless Local Loop,
provides primary telephone service where wireline systems are unavailable,
unreliable or uneconomical. Deployed in rural areas of developed nations and in
developing nations where there is inadequate wireline infrastructure,
PHONECELL(R) FWTs provide the vital "last mile" solution in both urban and rural
areas. Rapid deployment on existing cellular telecommunications systems provides
the most cost-effective means of primary telephone service.
Wireless Security Products
While most security systems rely on wireline phone service for its primary mode
of communication, it has certain vulnerabilities that have created a need for a
reliable and cost-effective communications path. Wireline phone service can be
rendered inoperative for many reasons, including weather, accidents and
intentionally cut lines. TELGUARD(R) products allow a security system to
automatically switch to the cellular network in the event of a telephone line
failure, allowing alarms to be transmitted. As cellular rates fall and the
networks become more reliable, employing cellular as the primary communications
path has become a growth driver for this market.
Least Cost Routing
Least Cost Routing is a steadily growing niche market for the Company.
PHONECELL(R) FWTs are used in conjunction with PBX and Voice over Internet
Protocol (VoIP) systems to provide lower cost telecommunications services.
Corporate and enterprise customers are able to effectively manage call flow to
and from wireless subscribers, take advantage of favorable tariff rates and
reduce their telecommunications costs.
Telemetry/Remote Monitoring
PHONECELL(R) FWTs are being successfully deployed where two-way communications
are required to monitor and control remotely deployed equipment. Common
applications include pipelines, railroad switches and utility equipment. In many
cases wireline service is not available or practical at these sites and the
Company's products emulate wireline service for easy connection to wireline
telemetry equipment.
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Cellular Public Phones
Public Calling Offices are businesses dedicated to providing phone service where
people cannot afford a phone, but can afford to make a call. In these businesses
the proprietor charges customers for making calls using the Company's products.
The Company's FWTs are also sold to payphone suppliers who embed the FWT in pay
phone housings for use in the familiar public phone booth. Cellular public
phones are also used for temporary deployment at public events to avoid the
expense and delay in providing wired payphones.
Portable Cellular Access
The market for wireless dial tone and data services in portable environments
includes emergency vehicles, delivery trucks, marine vessels, recreational
vehicles, trains and radio/television broadcast trucks. PHONECELL(R) FWTs
provide vital voice, fax and data communications capability anywhere there is
wireless coverage. This solution is particularly effective because it enables
simple connection (via RJ-11) to standard telephone, fax and computer equipment.
Unlike typical mobile phones, PHONECELL(R) FWTs can be outfitted with optional
higher gain antennas to improve signal strength.
Disaster Recovery and Emergency Back-Up Services
The need for rapidly deployed, reliable communications capability is more
important than ever. Whether a wireline network outage is due to natural or
man-made disasters, PHONECELL(R) and TELGUARD(R) products provide continued
communications capability at the most critical times and in the most critical
places. The Company's products are installed in hospitals, schools, financial
institutions, airports, emergency response centers, public service centers and
utility companies. Emergency response teams use the Company's products to
quickly restore vital communications to affected areas.
TECHNOLOGY
Core Technology
The Company's core patented technology is an intelligent interface (the
Invention) that permits standard telecommunications equipment to operate on
standard cellular and PCS wireless networks. The Company's products containing
the Invention provide the capability to bridge wireline customer premises
equipment and cellular networks. The Invention provides a standard dial tone,
off-hook detection signal and other signals usually provided by the wireline
telephone company, through its tip and ring wired local loop connection, which
automatically generates a send signal to the cellular transceiver once the user
has finished entering the telephone number. The Company has incorporated this
core technology into a variety of products and radio standards and continues to
develop and exploit derivative products and technologies for customer-specific
applications.
Interface Technology
The Company's products contain printed circuit boards and software that
incorporate the Invention. In certain cases, the Company licenses its interface
technology or patent rights to other companies, for which, in most cases,
royalty fees are received. However, most of the Company's revenues have been
generated through the sale of finished products.
RESEARCH AND DEVELOPMENT AND PRODUCT LINES
The Company's research and development staff is focused on developing a steady
stream of competitive products addressing cellular Fixed Wireless Terminal and
Wireless Security market opportunities. Its technological competence encompasses
all major cellular air-interface standards, which is reflected in the broadest
product line offering in the industry. Additionally, the Company has developed
innovative products addressing many market categories such as WLL, Cellular
Public Phones, Least Cost Routing systems and Telemetry. The Company's expertise
in engineering products to operate reliably in the rigorous environments of
developing countries has been recognized as a core design competence. In
addition to designing products incorporating the latest in advanced
technologies, the research and development staff continually investigates
methods by which the Company can improve existing products. The Company
outsources engineering services from third parties when specific expertise is
required or when additional staff is needed to complete projects.
The Company believes that its future success depends on its ability to continue
to meet customers' needs through product innovation, rapid time-to-market with
new products, and superior "in market" customer support. The Company works
closely with cellular network operators, telecommunications infrastructure
suppliers and equipment manufacturers to develop new Cellular Fixed Wireless
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products for global markets. Current product lines deploy the major worldwide
cellular air interface standards: GSM, CDMA, TDMA and AMPS. Initial products
based on next generation technologies, GPRS and 1xRTT, were launched in 2002.
The Company expects to introduce a number of new PHONECELL(R) and TELGUARD(R)
models during fiscal year 2003 that will further secure its position as the
industry leader in its market segments. The following details fiscal year 2002
and anticipated fiscal year 2003 product updates by major radio standard:
GSM (Global System for Mobile Communications) - During fiscal year 2002, the
Company completed development of its next generation GSM product line, the
PHONECELL(R) SX5 that includes General Packet Radio Service (GPRS) offering
high-speed packet data capability. PHONECELL(R) SX5 GSM production commenced in
October 2002. In fiscal year 2003, the Company plans to add several features to
the SX5 GSM/GPRS family, including multi-language support, Public Calling Office
(PCO) features, telemetry support and Over the Air (OTA) capability. In fiscal
year 2003, the Company also expects to launch the TELGUARD(R) TG-5. Unlike all
previous TELGUARD(R) products, the TG-5 will be a digital product using GSM/GPRS
technology.
CDMA (Code Division Multiple Access) - During fiscal year 2002, the Company
completed development of its next generation CDMA desktop phone which includes
1xRTT, a service that increases network capacity for network operators and
enables high speed packet data applications, such as Internet access and e-mail.
In fiscal year 2003, the Company plans to develop SX5 CDMA 1xRTT products,
including both a Fixed Wireless Phone and a Fixed Wireless Terminal with
features comparable to the SX5 GSM/GPRS family. Once development of these
products is complete, the Company plans to no longer distribute private label
CDMA products manufactured by other companies, but plans instead to design and
distribute its own SX5 CDMA 1xRTT products, which will be manufactured
exclusively for the Company.
TDMA (Time Division Multiple Access) - During fiscal year 2002, the Company
completed development of a Class 1 (3-Watt) version of its PHONECELL(R) SX4D
TDMA Desktop Phone.
AMPS (Advanced Mobile Phone System) - During fiscal year 2002, the Company was
able to reduce its cost of the TELGUARD(R) databurst product line by replacing a
purchased radio with one manufactured by the Company.
SALES, MARKETING SERVICE AND SUPPORT
International Sales
The international marketplace is characterized by new and repeat sales to mobile
cellular operators and their distribution channels throughout the world. The
Company has built international sales and marketing teams consisting of industry
professionals with experience in Africa, Asia, Europe, Latin America, the Middle
East, and the USA. It has regional sales offices in Atlanta, Georgia;
Johannesburg, South Africa; London, England; Mexico City, Mexico; Miami,
Florida; Singapore; and Vernon Hills, Illinois. Additionally, the Company has
strong relationships with distributors and value-added resellers in a number of
other markets. The ability to provide on-site customer technical assistance and
support has been identified as a key competitive advantage for the Company, and
the regional offices are staffed to provide this important service.
Domestic Sales
In the USA, the Company markets PHONECELL(R) and TELGUARD(R) products through
its sales groups in Vernon Hills, Illinois and Atlanta, Georgia, respectively.
In the USA, the Company is focusing on developing vertical markets and
appropriate distribution channels. The Company's TELGUARD(R) line is marketed
almost exclusively in the USA. Primary customers are security system
installation companies and security system distributors.
Service and Support
The Company believes that providing customers with comprehensive product service
and support is critical to maintaining a competitive position in the cellular
telecommunications equipment industry. The Company offers warranty and repair
service for its products through three primary methods: (1) advance replacement
kits shipped as warranty with orders, (2) in-house service and technical sales
support technicians and engineers at its Vernon Hills, Illinois and Hauppauge,
New York facilities, as well as at regional sales offices, and (3) authorized
third party service centers in various regions of the world.
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ERICSSON RELATIONSHIP
In 1997, the Company entered into a non-exclusive limited field of use patent
license agreement with Ericsson Radio Systems AB of Sweden (Ericsson). Ericsson
is the world's leading infrastructure provider with sales offices around the
world. The Company receives a per-unit royalty for fixed wireless terminal
products covered under this agreement that are manufactured and marketed by
Ericsson.
In 1999, the Company entered into an agreement with Ericsson for the supply and
distribution of FWT products incorporating the TDMA digital cellular standard.
Under this agreement, the Company benefits from increased sales activity arising
from Ericsson's extensive worldwide infrastructure sales organization and
relationships with the world's leading telecommunications operators. Ericsson
may incorporate the Company's PHONECELL(R) TDMA FWTs into its product portfolio
to provide carriers with a complete solution for fixed cellular applications.
Ericsson may also promote the sale of the Company's PHONECELL(R) TDMA products
in connection with its infrastructure sales activities. Ericsson has provided
marketing assistance to the Company in connection with its large shipments to
Radiomovil Dipsa (Telcel) in Mexico since 2001. The Company also entered into an
agreement with Ericsson involving technical and testing cooperation.
Separately, the Company purchases TDMA digital cellular transceivers for its
PHONECELL(R) SX4 TDMA Fixed Wireless Terminals and Desktop Phones from Sony
Ericsson Mobile Communications (SEMC), a joint venture formed during 2001
between Ericsson and Sony. SEMC was the Company's largest supplier in both 2002
and 2001.
The Company competes directly with Ericsson in markets where Ericsson offers GSM
digital cellular FWT products, but not on products incorporating the TDMA
digital cellular standard.
AXESSTEL RELATIONSHIP
In 2001, the Company entered into an OEM supply agreement with Axesstel, Inc., a
San Diego-based manufacturer of CDMA products, for the supply of Telular-labeled
PHONECELL(R) Fixed Wireless Terminals based on the CDMA standard. At the same
time the Company and Axesstel entered into a non-exclusive, limited field of use
patent license agreement allowing Axesstel to incorporate the Company's
Invention into their products.
MOTOROLA RELATIONSHIP
In 1999, the Company entered into a five year OEM distribution agreement whereby
the Company distributed FWT products made by Motorola, Inc. (Motorola) for the
CDMA cellular radio standard. The Motorola products utilized the Company's
Invention and Motorola paid the Company a royalty on each unit that Motorola
sold to customers other than the Company.
In 2000, Motorola announced the discontinuance of its CDMA fixed wireless
products. In 2001, the Company and Motorola agreed to terminate the OEM
agreement. Terms of the settlement included payment by Motorola of accelerated
royalties of $5 million.
In 1993, the Company entered into an agreement with Motorola, whereby Motorola
acquired a significant ownership interest in the Company, agreed to pay the
Company royalties on sales of cellular fixed wireless products and obtained the
right to representation on the Company's Board of Directors. Motorola, after
dilution due to the issuance of additional shares of common stock by the
Company, owned approximately 9.4% of the outstanding shares of the Company until
August of 2001.
In August 2001, Motorola sold its holdings in the Company to a private investor.
Motorola also relinquished its right to representation on the Company's Board of
Directors, as well as its right of first refusal on any tender offer for the
Company.
During fiscal year 2002, the Company continued to source analog cellular
transceivers from Motorola for some of its TELGUARD(R) products. Motorola also
continued to pay the Company royalties on sales of its analog cellular fixed
wireless products.
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MANUFACTURING
Fabrication of the Company's products is accomplished through a combination of
in-house assembly and contract manufacturing. Contract manufacturers make and
test printed circuit boards for the Company. The final assembly of PHONECELL(R)
and TELGUARD(R) products is performed at the Company's facility in Vernon Hills,
Illinois, except for the PHONECELL(R) SX4 Desktop Phones and PHONECELL(R) SX5
products, which are assembled by a contract manufacturer in Mexico.
The Company has developed proprietary testing equipment and procedures to
conduct comprehensive quality control and quality assurance throughout the
manufacturing and assembly process. Quality programs are a high priority at the
Company. The Vernon Hills facility is ISO 9001 certified. The Company's quality
assurance department works closely with contract manufacturers to ensure
compliance to the strict quality standards of the Company.
The Company contracts with a variety of suppliers to buy several critical
components of its products, including certain cellular transceivers.
EXECUTIVE OFFICERS
The executive officers of the Company and their ages as of December 1, 2002 are
as follows:
Name Age Position
- -----------------------------------------------------------------------------------------------------
Kenneth E. Millard 55 Chairman of the Board, Chief Executive Officer and
President
Daniel D. Giacopelli 44 Executive Vice President and Chief Technology
Officer
Jeffrey L. Herrmann 37 Executive Vice President, Chief Operating Officer,
Chief Financial Officer and Secretary
Daniel C. Wonak 54 Senior Vice President, Marketing
Matthew M. Kushner 41 Senior Vice President Sales and Marketing for TELGUARD(R)
Wireless Security Products
Kenneth E. Millard was elected Chairman of the Board on October 9, 2001, and is
currently President and Chief Executive Officer of the Company. Mr. Millard has
served as a director, President and Chief Executive Officer of the Company since
April 1996. Previously, Mr. Millard served as President and Chief Operating
Officer of Oncor Communications, based in Bethesda, Maryland from 1992 to 1996.
He worked for Ameritech from 1982 to 1992 where he served as President and Chief
Executive Officer of Michigan Bell Telephone Company from 1989 to 1992. Prior to
1989, he held the positions of Senior Vice President of Corporate Strategy for
three years and Senior Vice President and General Counsel of Ameritech for four
years. From 1972 to 1982, Mr. Millard worked for AT&T and Wisconsin Bell as an
attorney. Mr. Millard is currently a member of the Board of Directors of Digi
International and Omnitech Inc.
Daniel D. Giacopelli has served as a director, Executive Vice President and
Chief Technology Officer of the Company since October 28, 1997. Mr. Giacopelli
founded and was President and Chief Executive Officer of Wireless Domain,
Incorporated from September 1995 to November 1997. Prior to that time, Mr.
Giacopelli was Director of Engineering of the Wireless Group of Telephonics
Corporation from 1987 to 1995. Prior to 1987, Mr. Giacopelli was President and
CEO of Valinor Electronics, Inc.
Jeffrey L. Herrmann has served as Executive Vice President, COO, CFO and
Secretary since December 15, 1999. Prior to that he served as Senior Vice
President, CFO and Secretary since July 22, 1997. Mr. Herrmann had previously
been Corporate Controller of the Company since April 1997. Prior to that Mr.
Herrmann held financial management positions with Bell & Howell Company
(1994-1997) and R.R. Donnelley & Sons Company (1992-1994). Mr. Herrmann began
his career in public accounting in 1987.
Daniel C. Wonak has served as Senior Vice President, Marketing since July 10,
2000. Mr. Wonak had previously been Marketing Director for the Coherent OEM
Division of Tellabs. From 1995 to 1998 Mr. Wonak served as Vice President of
Marketing and Vice President and General Manager for Coherent Communications
Corporation. Prior to that he was Vice President for XL Vision, Inc. from 1993
to 1995, President and CEO for HETRA Computer and Communications Industries,
Inc. from 1988 to 1993 and Vice President Engineering for Extel Corporation from
1982 to 1988.
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Matthew M. Kushner has served as Senior Vice President, Sales and Marketing for
TELGUARD(R) Wireless Security Products since August 8, 2001. From 1997 to August
2001, Mr. Kushner was Director of National Account Sales for Ademco Group. From
1995 to 1997, he was employed by the Company as Vice President of Sales and
Marketing for TELGUARD(R) Wireless Security Products. Prior to that, he served
as Vice President of Sales and Marketing for Versus Technology and Base Ten
Telecom. Mr. Kushner is an active member in the Security Industry Association
(SIA) and the National Fire Protection Association (NFPA).
EMPLOYEES
The Company has 158 employees, of which 37% are in sales and marketing, 24% in
manufacturing, 29% in engineering and product development and 10% in finance and
administration. None of the Company's employees are represented by organized
labor.
COMPETITION
The Cellular Fixed Wireless industry consists of large domestic and
international telecommunications equipment companies, many of which have
substantially greater resources than those of the Company, and includes
companies such as Nokia, Ericsson and LG Electronics. The Company also competes
with a number of smaller companies that have arisen in markets where enforcement
of the Company's patent protection is not available or practicable. The Company
competes with these companies primarily on the basis of its higher product
quality and reliability, state-of-the-art technology and enhanced features,
rapid product innovation and customer support. The cellular telecommunications
industry is experiencing significant technological change, such as the upgrade
of cellular networks to 2.5G and 3G technologies. 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
maintain profitability. The Company continues to invest in research and
development in order to meet the technological advances in the industry and stay
abreast of changes in cellular standards and end-user requirements.
The Company has granted licenses under its patents to others for various uses
and applications and continues to pursue such license arrangements. It faces
competition from those licensees, their sublicensees or their customers.
The Company believes its advantages over the competition include:
Better focus/commitment - In the WLL market, the Company's only business is
cellular FWTs. Typically, the largest competitors sell FWTs in support of their
primary focus--their network infrastructure business.
More experience - The Company has been in the FWT business for 16 years and the
Wireless Security Products business for 11 years and has deployed its units in
more than 130 countries worldwide, which reflects in the quality and reliability
of its products.
Broader product line - The Company offers products that operate on the world's
major cellular air-interface standards and has developed products for 2.5G
networks. The company offers both terminal type and phone-type products.
Service and support - The Company provides customers with comprehensive product
service and support. The Company provides on-site technical and application
support through its regional sales and support offices backed up by field
support engineers dispatched from its Hauppauge, New York and Vernon Hills,
Illinois offices.
Although the Company's participation in the Wireless Security Products industry
has been focused on the North American market, the new GSM TELGUARD(R) TG-5
product is expected to aid the Company in opening up global security products
markets. The competitive environment in this segment is dominated by a few major
equipment suppliers, who have leveraged proprietary systems to maintain their
market share. Some of these suppliers have vertically integrated up the
distribution chain to include ownership of distribution channels as well. As a
result, the pace of technological change to date in the industry has lagged that
of the telecommunications sector generally. Products in this market have
historically been based on analog technology. Because demand for analog service
in the US is predicted to decline over time, Telular and its competitors are
developing products based on digital technology.
The Company has adopted an "innovator" role, and has competed successfully by
introducing innovative new wireless technology into the marketplace. The
TELGUARD(R) value proposition is enabled through its products providing greater
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signaling reliability, interface compatibility over a wide range of
manufacturers' alarm equipment, simple installation and operational cost
efficiencies. The Company is selectively entering into distribution agreements
with a number of leading distributors and fulfillment companies that will give
the Company substantially increased points of presence in the marketplace. Some
of these companies also compete directly with the Company on products.
PATENTS, LICENSES AND OTHER INTELLECTUAL PROPERTY
With respect to its interface technology, the Company currently has 14 issued
patents and 7 pending patent applications in the United States, as well as 50
foreign patents and 14 pending foreign patent applications. The Company has
successfully defended many of its patents in court.
Principal Patent
The patent for the Company's system for interfacing a standard telephone set
with a radio transceiver, US Patent No. 4,658,096 (the 096 Patent), was issued
by the US Patent Office on April 14, 1987 and expires on September 18, 2004. The
096 Patent has been filed in 14 countries.
The invention covered by the 096 Patent is a transparent interface between a
standard telephone (or other tip and ring device such as a facsimile machine)
and a cellular transceiver thereby allowing the telephone to control the
operation of the cellular transceiver. The interface provides dial tone,
off-hook detection signals and many of the other signals usually provided by
regular wireline telephones. The interface also provides for the automatic
generation of a send signal from the cellular transceiver once the telephone
number has been entered.
Continuation Patents
In 1988 and 1990, the Company obtained two patents (US Patent Nos. 4,775,997 and
4,922,517, respectively), each of which is a continuation and broadening of the
096 Patent. These continuation patents expire on the same date as the 096
Patent. Also in 1988, the Company obtained a continuation-in-part of the 096
Patent, under US Patent No. 4,737,975. Among other things, this patent allows
the interface to be programmed in the field to recognize variations in telephone
systems from country to country.
Other Patents
The Company has been granted several additional patents for self-diagnostics
systems, payphones and answer supervision both in the USA and abroad. In 1995
and 1997, the Company was granted three US patents relating to self-diagnostic
systems for cellular transceiver systems for both local and remote reporting.
(US Patent Nos: 5,469,494; 5,859,894 and 5,966,428). These patents cover a
system for providing diagnostics reporting of a fixed wireless terminal
initiated either at the terminal or remotely by the cellular provider. Also in
1999, the Company was granted US Patent No. 5,946,616 entitled "Concurrent
Wireless/Landline Interface Apparatus and Method" which allows the easy
adaptation of an unused telephone line as a cellular line for use throughout the
wired facility. On March 7, 2000, US Patent No. 6,035,220 was granted to the
Company entitled "Method of Determining End-of-Dialing for Cellular Interface
Coupling a Standard Telephone to the Cellular Network."
Applicability of the Company's Patents to Emerging Wireless Technologies
Although the Company believes its intelligent interface can be adapted to
accommodate emerging wireless technologies, there can be no assurance that these
new applications will fall within the scope of the existing patent protection.
Licensing of Technology
The Company has granted licenses to a number of other companies, which include
the following:
Motorola (See Motorola Relationship)
Ericsson Radio Systems AB (See Ericsson Relationship)
Andrew Corporation (limited non-exclusive field of use and limited
geographic license)
Axesstel, Inc. (See Axesstel Relationship)
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Trademarks and Other Proprietary Information
The Company has eight registered trademarks, which are: Telular (block), TELULAR
plus design, CELJACK, PCSone, Hexagon Logo, PHONECELL and TELGUARD. In addition,
the Company has 4 registered Mexican trademarks covering the names and logos
used for some of its products. The Company has 69 other foreign trademark
registrations and 1 other foreign trademark applications.
ITEM 2. PROPERTIES
The Company leases, pursuant to a renewable ten-year lease that began January 1,
1997, 72,000 square feet for its corporate headquarters in Vernon Hills,
Illinois. In addition to serving as corporate headquarters, the facility houses
manufacturing, sales, marketing, finance and administrative functions. The
Company leases, pursuant to a renewable five-year lease that began October 10,
1997, 20,000 square feet of space for its engineering center in Hauppauge, New
York. The Company leases space for its international sales offices in London,
England; Miami, Florida and Singapore. The Company leases space to house its
TELGUARD(R) sales force and operations in Atlanta, Georgia.
ITEM 3. LEGAL PROCEEDINGS
On October 5, 2000, the Company filed suit against Vox2, Inc., of Northborough,
Massachusetts, which manufactures a cellular interface product named the Vox
Link. The Company has alleged infringement of its US Patents: 4,659,096;
5,715,296; and 5,946,616, and seeks injunction, damages and attorney fees and
costs. On January 8, 2002, a Magistrate recommended that Vox2, Inc.'s product
not be enjoined. Despite the Company's objection, the court adopted the
Magistrate's recommendation. The Company has filed for reconsideration of that
decision. The attorneys for Vox2 have withdrawn their appearances. Because Vox2
has not identified new attorneys, the Company has filed a motion for default
judgement. The court is currently considering this motion.
On September 8, 2001, the Company filed a patent infringement lawsuit in Korea
for an injunction against LG Electronics on its cellular interface products for
CDMA Fixed Wireless Terminals; Models LST-220 (F) and 2200 (F). On December 4,
2001 the Korean Court denied the Company an injunction on the sale or
manufacture of these products because LG Electronics stated it had ceased
manufacturing the products as of December 26, 2000. On September 18, 2002, the
Company filed a separate cause of action for damages arising out of the sales of
the LST-220 (F), 230 (F) and 2200 (F) by LG Electronics.
The Company is involved in the above and other legal proceedings, which arose 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 all pending legal proceedings will not have a
material adverse effect on the Company's consolidated results of operation or
financial position.
10
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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The Company's Common Stock trades publicly on the NASDAQ National Market System
under the symbol WRLS. The following table sets forth the quarterly high and low
sales prices for each quarter of fiscal year 2002, 2001 and 2000, as reported by
NASDAQ. Such quotations reflect inter-dealer prices without retail markup,
markdown or commissions and may not necessarily represent actual transactions.
QUARTER ENDED DURING FISCAL YEAR 2002
-------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
High $9.66 $9.49 $7.82 $4.00
Low $4.50 $5.92 $2.52 $2.30
QUARTER ENDED DURING FISCAL YEAR 2001
-------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
High $12.38 $10.81 $12.15 $10.17
Low $4.00 $5.63 $8.00 $4.68
QUARTER ENDED DURING FISCAL YEAR 2000
-------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
High $22.25 $32.00 $15.00 $21.50
Low $1.00 $9.63 $5.38 $10.75
On December 6, 2002, there were approximately 341 shareholders of record,
approximately 8,400 beneficial shareholders and 12,818,424 shares of Common
Stock outstanding. The Company has not paid any dividends since its inception
and does not intend to pay any dividends on its Common Stock in the foreseeable
future.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended September 30, 2002, the Company issued 26,099
shares of Common Stock to the law firm of Hamman and Benn in lieu of cash
payments of $129,987 for legal services.
Each of the forgoing issuances of the Company's Common Stock did not involve a
public offering of securities, and therefore was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
11
ITEM 6. SELECTED FINANCIAL DATA
The following table is a summary of certain condensed statement of operations
and balance sheet information of the Company. The table sets forth-selected
historical financial data of the Company for the years ended September 30, 2002,
2001, 2000, 1999 and 1998. The selected financial data were derived from audited
financial statements. The summary should be read in conjunction with financial
statements and notes thereto appearing elsewhere in this report.
Year ended September 30,
-------------------------------------------------------
(In thousands, except share data)
2002 2001 2000 1999 1998
-------------------------------------------------------
Statement of operations data:
Net product sales $ 58,407 $ 95,708 $ 37,650 $ 36,375 $ 39,370
Net royalty and royalty settlement revenue 268 5,442 2,703 1,948 1,652
-------------------------------------------------------
Total revenue 58,675 101,150 40,353 38,323 41,022
Cost of sales 42,196 68,724 29,463 30,392 30,571
-------------------------------------------------------
16,479 32,426 10,890 7,931 10,451
Operating expenses 19,374 20,000 17,380 18,695 21,283
-------------------------------------------------------
Income (loss) from operations (2,895) 12,426 (6,490) (10,764) (10,832)
Net other income (expense) (114) 450 584 182 428
-------------------------------------------------------
Net income (loss) (3,009) 12,876 (5,906) (10,582) (10,404)
Less-cumulative dividend on redeemable
preferred stock -- -- (29) (805) (895)
-------------------------------------------------------
Income (loss) applicable to common shares $ (3,009) $ 12,876 $ (5,935) $(11,387) $(11,299)
Basic income (loss) per common share $ (0.23) $ 1.01 $ (0.49) $ (1.27) $ (1.36)
Diluted income (loss) per common share $ (0.23) $ 0.99 $ (0.49) $ (1.27) $ (1.36)
As of September 30 2002 2001 2000 1999 1998
-------------------------------------------------------
Balance sheet data:
Working capital $ 40,186 $ 41,752 $ 28,171 $ 19,117 $ 28,193
Total assets 61,825 62,169 44,586 35,328 48,812
Long term debt, including current
maturities (1) 3,789 3,000 1,900 -- --
Stockholders' equity 46,747 48,999 35,679 14,991 20,682
(1) The Company has 100% of its long term debt collaterized with restricted
cash and therefore has no net debt as of September 30, 2002, 2001 and
2000.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTRODUCTION
The Company designs, develops, manufactures and markets products based on its
proprietary interface technologies, which provide the capability to connect
standard telecommunications equipment including standard telephones, fax
machines, data modems and alarm panels with wireless communication networks in
the cellular and PCS frequency bands (collectively cellular). Applications of
the Company's technology include Wireless Local Loop, a primary access service
where wireline systems are unavailable, unreliable or uneconomical. The
Company's business segments are divided between its two principal product lines:
PHONECELL(R), a line of cellular Fixed Wireless Terminals and cellular Fixed
Wireless Desktop Phones (collectively Fixed Wireless Terminals or FWTs), and
TELGUARD(R), a line of Wireless Security Products.
Currently, the Company is devoting a substantial portion of its resources to
international market development, extension of its core product line to new
cellular wireless standards, expansion, protection and licensing of its
intellectual property rights and development of underlying radio technology.
The Company's operating expense levels are based in large part on expectations
of future revenues. If anticipated sales in any quarter do not occur as
expected, expenditure and inventory levels could be disproportionately high, and
the Company's operating results for that quarter, and potentially for future
quarters, could be adversely affected. Certain factors that could significantly
impact expected results are described in Cautionary Statements Pursuant to the
Securities Litigation Reform Act that is set forth in Exhibit 99 to this
document.
OVERVIEW
Major trends driving the market for the Company's products include a broad
consumer acceptance of cellular communications, rapid privatization of
telecommunications in developed and developing countries, adoption of next
generation digital wireless transmission standards that enhance network capacity
and service, service network providers' acceptance of cellular FWTs as
cost-effective answers to customer demand for basic telecommunications and the
trend of licensing multiple cellular operators in a given region, which
intensifies competition among cellular wireless service providers to capture
additional minutes of usage and the potential for a large wireline bypass
market.
Wireless Local Loop (WLL), which is the core of the Company's prospects for the
PHONECELL(R) business in developing countries, involves FWTs operating on
cellular networks built primarily for handheld cellular phone users. FWT sales
generally begin developing after a cellular network has been in operation for a
few years, when the growth rate in new mobile cellular phone subscribers slows
and the mobile operator begins looking for new revenue sources. FWTs are the
better choice than handheld cellular phones for the WLL market, because they
offer longer talk time, better reception, and can be easily linked to phones,
fax machines and computers. Among the benefits for network operators, FWTs
generally generate higher average billable airtime and increase demand during
"off-peak" times when available system capacity is high.
The Company's strategy is to leverage its 16 years of experience in the market,
internationally accepted products and court-tested patents into a leadership
position in the Cellular Fixed Wireless industry. Wireless network operators and
their distribution partners are increasingly sharing the Company's vision that
cellular systems in both developed and developing countries are well suited for
use as basic telephone service networks. The Company sees a significant
opportunity for growth in developed countries with the advent of high-speed
wireless data services.
The Company's research and development staff is focused on developing a steady
stream of competitive products addressing cellular Fixed Wireless Terminal and
Wireless Security market opportunities. Its technological competence encompasses
all major cellular air-interface standards, which is reflected in the broadest
product line offering in the industry. Additionally, the Company has developed
innovative products addressing many market categories such as WLL, Cellular
Public Phones, Least Cost Routing systems and Telemetry. The research and
development staff continually investigates methods by which the Company can
improve existing products.
13
The Company believes that its future success depends on its ability to continue
to meet customers' needs through product innovation, rapid time-to-market with
new products, and superior "in market" customer support. Current product lines
deploy the major worldwide cellular air interface standards: GSM, CDMA, TDMA and
AMPS. Initial products based on next generation technologies, GPRS and 1xRTT,
were launched in 2002. The Company expects to introduce a number of new
PHONECELL(R) and TELGUARD(R) models during fiscal year 2003 that will further
secure its position as the industry leader in its market segments. The following
details fiscal year 2002 and anticipated fiscal year 2003 product updates by
major radio standard:
GSM (Global System for Mobile Communications) - During fiscal year 2002, the
Company completed development of its next generation GSM product line, the
PHONECELL(R) SX5 that includes General Packet Radio Service (GPRS) offering
high-speed packet data capability. PHONECELL(R) SX5 GSM production commenced in
October 2002. In fiscal year 2003, the Company plans to add several features to
the SX5 GSM/GPRS family, including multi-language support, Public Calling Office
(PCO) features, telemetry support and Over the Air (OTA) capability. In fiscal
year 2003, the Company also expects to launch the TELGUARD(R) TG-5. Unlike all
previous TELGUARD(R) products, the TG-5 will be a digital product using GSM/GPRS
technology.
CDMA (Code Division Multiple Access) - During fiscal year 2002, the Company
completed development of its next generation CDMA desktop phone which includes
1xRTT, a service that increases network capacity for network operators and
enables high speed packet data applications, such as Internet access and e-mail.
In fiscal year 2003, the Company plans to develop SX5 CDMA 1xRTT products,
including both a Fixed Wireless Phone and a Fixed Wireless Terminal with
features comparable to the SX5 GSM/GPRS family. Once development of these
products is complete, the Company plans no longer to distribute private label
CDMA products manufactured by other companies, but plans instead to design and
distribute its own SX5 CDMA 1xRTT products, which will be manufactured
exclusively for the Company.
TDMA (Time Division Multiple Access) - During fiscal year 2002, the Company
completed development of a Class 1 (3-Watt) version of its PHONECELL(R) SX4D
TDMA Desktop Phone.
AMPS (Advanced Mobile Phone System) - During fiscal year 2002, the Company was
able to reduce its cost of the TELGUARD(R) databurst product line by replacing a
purchased radio with one manufactured by the Company.
Fabrication of the Company's products is accomplished through a combination of
in-house assembly and contract manufacturing. Contract manufacturers make and
test printed circuit boards for the Company. The final assembly of PHONECELL(R)
and TELGUARD(R) products is performed at the Company's facility in Vernon Hills,
Illinois, except for the PHONECELL(R) SX4 Desktop Phones and PHONECELL(R) SX5
products, which are assembled by a contract manufacturer in Mexico.
The Cellular Fixed Wireless industry consists of large domestic and
international telecommunications equipment companies, many of which have
substantially greater resources than those of the Company, and includes
companies such as Nokia, Ericsson and LG Electronics. The Company also competes
with a number of smaller companies that have arisen in markets where enforcement
of the Company's patent protection is not available or practicable. The Company
competes with these companies primarily on the basis of its higher product
quality and reliability, state-of-the-art technology and enhanced features,
rapid product innovation and customer support.
Although the Company's participation in the Wireless Security Products industry
has been focused on the North American market, the new GSM TELGUARD(R) TG-5
product is expected to aid the Company in opening up global security products
markets. The competitive environment has been previously dominated by a few
major equipment suppliers, who have leveraged proprietary systems to maintain
their market share. The Company has adopted an "innovator" role, and has
competed successfully by introducing innovative new wireless technology into the
marketplace.
With respect to its interface technology, the Company currently has 14 issued
patents and 7 pending patent applications in the United States, as well as 50
foreign patents and 14 pending foreign patent applications. The Company has
successfully defended its patents in court.
14
RESULTS OF OPERATIONS
Fiscal Year 2002 Compared to Fiscal Year 2001
Net Product Sales. Net product sales of $58.4 million for the fiscal year ended
September 30, 2002 decreased 39% from $95.7 million for the fiscal year ended
September 30, 2001. Sales of PHONECELL(R) products decreased 46% from $84.8
million during the fiscal year 2001 to $46.0 million for fiscal year 2002. The
decrease is primarily the result of lower shipments of desktop phones to Mexico
under the Company's supply agreement with Radiomovil Dipsa (Telcel). The sale of
TELGUARD(R) products increased approximately 14% from $10.9 million during
fiscal year 2001 to $12.4 million during fiscal year 2002.
Royalty and Royalty Settlement Revenue. Royalty and royalty settlement revenue
decreased 95% from $5.4 million during fiscal year 2001 to $0.3 million during
fiscal year 2002. The fiscal year 2001 amount includes $5.0 million in royalty
settlement revenue related to the termination of an OEM agreement with Motorola.
Cost of Sales. Cost of sales decreased from $68.7 million for fiscal year 2001
to $42.2 million for fiscal year 2002. The decrease is principally due to the
lower sales volume and a special charge of $1.0 million taken in fiscal year
2001. This special charge was to reduce the carrying cost of CDMA FWT inventory
due to technological change to the next generation of CDMA products. Cost of
sales is 72% of total revenue for fiscal year 2002 compared to 68% for fiscal
year 2001. The increase in cost of sales as a percentage of total revenue is due
primarily to the $5.0 million royalty settlement received in fiscal year 2001
related to the termination of an OEM agreement with Motorola.
Engineering and Development Expenses. Engineering and development expenses of
$6.1 million for fiscal year 2002 decreased approximately 4% or $0.3 million
compared to fiscal year 2001. The decrease consists primarily of lower
performance bonuses as a result of reduced profitability. The engineering and
development expenses are 10% of total revenue for fiscal year 2002 compared to
6% for fiscal year 2001 due primarily to lower sales volume.
Selling and Marketing Expenses. Selling and marketing expenses of $8.4 million
for fiscal year 2002 increased 7%, or $0.5 million from fiscal year 2001. The
increase resulted from higher spending to promote the Company's new PHONECELL(R)
SX5 GSM products, primarily by adding additional human resources in the Europe,
Middle East and Africa regions. Selling and marketing expenses are 14% of total
revenue for fiscal year 2002 compared to 8% for fiscal year 2001 due primarily
to lower sales volume.
General and Administrative Expenses (G&A). G&A for fiscal year 2002 decreased
14% to $4.3 million from $5.0 million for fiscal year 2001. The decrease
consists primarily of lower performance bonuses as a result of reduced
profitability. G&A expenses are 7% of total revenue for fiscal year 2002
compared to 5% for fiscal year 2001.
Provision for Doubtful Accounts. Provision for doubtful accounts decreased 76%
or $0.1 million for fiscal year 2002 compared to fiscal year 2001. The decrease
was the result of a $0.1 million provision recorded in fiscal year 2001 due to
the bankruptcy of a TELGUARD(R) customer in the USA.
Amortization. Amortization expense decreased 22% or $0.1 million during fiscal
year 2002 compared to fiscal year 2001. The decrease consists of the combination
of lower amortization of goodwill due to the adoption of a new accounting
standard (Statement of Financial Accounting Standards 142, "Goodwill and Other
Intangible Assets") offset by a full year of amortization of an intangible asset
acquired in fiscal year 2001.
Other Income (Expense). Other income (expense) for fiscal year 2002 decreased by
$0.6 million compared to fiscal year 2001. The decrease consists primarily of
lower interest income on cash balances as a result of lower interest rates.
Income Taxes. See Note 7 of the Consolidated Financial Statements.
15
Net Income (Loss). The Company recorded a net loss of $3.0 million or $0.23 per
share for fiscal year 2002 compared to a net income of $12.9 million or $1.01
per share for fiscal year 2001. The decrease is primarily the result of lower
sales volume and reduced royalty settlement revenue.
Fiscal Year 2001 Compared to Fiscal Year 2000
Net Product Sales. Net product sales of $95.7 million for the fiscal year ended
September 30, 2001 increased 154% from $37.7 million for the fiscal year ended
September 30, 2000. Sales of PHONECELL(R) products increased 213% from $27.1
million during the fiscal year 2000 to $84.8 million for fiscal year 2001. The
increase resulted primarily from the shipment of Desktop Phones to Mexico in
connection with the Company's supply agreement with Telcel during the current
year. The sale of TELGUARD(R) products increased approximately 3% from $10.6
million during fiscal year 2000 to $10.9 million during fiscal year 2001.
Royalty and Royalty Settlement Revenue. Royalty and royalty settlement revenue
increased 101% from $2.7 million during fiscal year 2000 to $5.4 million during
fiscal year 2001. The fiscal year 2001 amount includes $5.0 million in royalty
settlement revenue related to the termination of the OEM agreement with
Motorola. The fiscal year 2000 amount includes $1.5 million of royalty revenue
from Motorola and $1.0 million for the royalty from Andrew Corporation.
Cost of Sales. Cost of sales increased from $29.5 million for fiscal year 2000
to $68.7 million for fiscal year 2001. The increase is primarily the result of
the added sales volume. Cost of sales is 68% of total revenue for fiscal year
2001 compared to 73% for fiscal year 2000. The decrease in cost of sales as a
percentage of total revenue is due primarily to an improvement in the absorption
of fixed costs and increased royalty and royalty settlement revenue.
Engineering and Development Expenses. Engineering and development expenses of
$6.4 million for fiscal year 2001 increased approximately 23% or $1.2 million
compared to fiscal year 2000. The increase is primarily the result of added
labor costs for the development of the next generation of PHONECELL(R) SX5 GSM
fixed wireless terminals, including 1900 MHz models and models with General
Packet Radio Service (GPRS) and additional TELGUARD(R) products. The engineering
and development expenses are 6% of total revenue for fiscal year 2001 compared
to 13% for fiscal year 2000.
Selling and Marketing Expenses. Selling and marketing expenses of $7.8 million
for fiscal year 2001 increased 4%, or $0.3 million from fiscal year 2000. The
increase is primarily the result of higher commission expenses due to the larger
volume of product shipments. Selling and marketing expenses are 8% of total
revenue for fiscal year 2001 compared to 19% for fiscal year 2000.
General and Administrative Expenses (G&A). G&A for fiscal year 2001 increased
22% to $5.0 million from $4.1 million for fiscal year 2000. The increase
consists primarily of legal fees associated with ongoing claims of infringement
on the Company's patents in Korea and the USA and performance bonuses based on
profitability. G&A expenses are 5.0% of total revenue for fiscal year 2001
compared to 10% for fiscal year 2000.
Provision for Doubtful Accounts. Provision for doubtful accounts increased 300%,
or $0.1 million during fiscal year 2001 compared to fiscal year 2000. The
increase was the result of the bankruptcy of a TELGUARD(R) customer in the USA.
Amortization. Amortization expense increased $0.1 million during fiscal year
2001 compared to fiscal year 2000. The increase is due to the addition of
certain intangible assets during fiscal year 2001, which will be amortized over
a life of two years.
Other Income. Other income for fiscal year 2001 decreased by $0.1 million
compared to fiscal year 2000. The decrease is primarily the result of increased
interest expense on the revolving line of credit.
Income Tax. See Note 7 of the Consolidated Financial Statements.
Net Income (Loss). The Company recorded a net income of $12.9 million for fiscal
year 2001 compared to a net loss of $5.9 million for fiscal year 2000. The
increase is primarily the result of higher sales volume.
16
Net Income (Loss) Applicable to Common Shares. After giving effect to the
cumulative preferred stock dividend, net income applicable to common shares of
$12.9 million or $1.01 per share for fiscal year 2001 compares to a net loss of
$5.9 million or $0.49 per share for fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 2002, the Company had $33.8 million in cash and cash
equivalents and working capital of $40.2 million. During fiscal year 2002, cash
and cash equivalents decreased $2.6 million, compared to an increase in cash and
cash equivalents of $15.9 million during fiscal year 2001.
The Company used $1.2 million of cash from operating activities during fiscal
year 2002 compared to generating $17.8 million in cash for fiscal year 2001. The
cash used in operating activities is primarily the result of reduced
profitability caused by lower sales volume. Working capital changes, consisting
primarily of increases in accounts receivable and accounts payable and decreases
in inventories, used $0.8 million of cash from operating activities. These
changes are the result of volume purchases and sales and favorable payment terms
with both vendors and customers.
Cash used in investing activities of $2.2 million for fiscal year 2002 compares
to $3.0 million for fiscal year 2001. The investing activities for both periods
include capital spending of $0.9 million for product testing equipment.
Increases in restricted cash related to the revolving line of credit of $0.8
million for fiscal year 2002 compares to $1.1 million for fiscal year 2001. The
investing activities for fiscal year 2002 also include $0.5 million in net cash
advanced to a shareholder of the company against future royalties due to that
shareholder (See Note 6 to the Consolidated Financial Statements). The investing
activities for fiscal year 2001 include $1.0 million for the acquisition of a
GPRS software product license.
Financing activities generated cash of $0.9 million during fiscal year 2002
compared to $1.0 million for fiscal year 2001. Both fiscal years 2002 and 2001
consist primarily of the proceeds from borrowings under the revolving line of
credit.
The Company expects to maintain significant levels of cash reserves, which are
required to undertake major product development initiatives, expand marketing
and sales development worldwide, repurchase up to 1,000,000 shares of the
Company's Common Stock and qualify for large sales opportunities.
The Company generally requires its foreign customers to prepay, obtain letters
of credit or to qualify for export credit insurance underwritten by third party
credit insurance companies prior to making international shipments. Also, to
mitigate the effects of currency fluctuations on the Company's results of
operations, the Company conducts all of its international transactions in US
dollars.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following are several
of the more critical accounting policies that currently affect the presentation
of the Company's financial condition and results of operations.
Inventories
The Company values inventories at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method, including material, labor and factory
overhead. Significant management judgment is required to determine the reserve
for obsolete or excess inventory. The Company currently considers inventory
quantities greater than a one-year supply based on current year activity as well
as any additional specifically identified inventory to be excess. The Company
also provides for the total value of inventories that are determined to be
obsolete based on criteria such as customer demand and changing technologies. At
September 30, 2002 and 2001, the inventory reserves were $0.5 million and $0.9
million, respectively. Changes in strategic direction, such as discontinuance of
product lines, changes in technology or changes in market conditions, could
result in significant changes in required reserves.
17
Impairment
The Company periodically evaluates the fair value and recoverability of the
goodwill (See Note 2 to the Consolidated Financial Statements) of each of its
business segments whenever events or changes in circumstances indicate the
carrying value of the asset may not be recoverable. In analyzing fair value and
recoverability, the Company makes projections regarding future cash flows. These
projections are based on assumptions and estimates of growth rates for the
related business segment, anticipated future economic, regulatory and political
conditions, the assignment of discount rates relative to risk and estimates of
terminal values. The Company also considers the volatility of its stock price
and a potential control premium which would most likely be realized in an equity
event. An impairment loss is assessed and recognized in operating earnings when
the fair value of the asset is less than its carrying amount.
OUTLOOK
The statements contained in this outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
Based upon observed trends, the Company believes that the market for cellular
FWTs will experience substantial growth over the next five years. The Company
has identified significant growth opportunities in Africa, Brazil, China,
Europe, India, Mexico, Venezuela and the USA. Each of these markets will develop
at a different pace, and the sales cycle for these regions are likely to be
several months or quarters. Further, economic conditions play an important role
in the timing of market development for the Company's products. In connection
with the present global economic slowdown, the Company's prospects for continued
growth have been accordingly reduced in the near term. However, as economic
conditions improve, the Company is well positioned with a wide range of products
to capitalize on these market opportunities.
Over the last two years, there has been considerable price pressure in the
cellular FWT market, particularly for CDMA products. Most CDMA products are
manufactured in Korea, where several manufacturers are competing for the same
business. There appears to be a glut of CDMA products, which has resulted in
very low prices. The Company expects this trend to continue until next
generation 1xRTT CDMA networks and products become generally available.
The Company expects to improve its position in the GSM FWT markets with the
launch of its PHONECELL(R) SX5 GSM products with GPRS in 2003. GPRS in GSM
networks also allow for the use of high-speed data applications.
The Company expects the market for cellular FWTs to be favorably impacted by
1xRTT and GPRS once these services become generally available, especially in
developed countries.
Shipments under the Company's agreement with Telcel to supply $67.5 million
Desktop Phones dated September 13, 2000, were completed during the fourth
quarter of fiscal year 2001. The absence of desktop phone shipments to Mexico
during the first quarter of fiscal year 2002 resulted in a significant decline
in net product sales. On January 2, 2002, Telcel ordered additional desktop
phones under the above agreement and the Company shipped the additional desktop
phones to Mexico from February through June 2002. On June 14, 2002, Telcel
extended the above agreement, to include a $24 million order (subsequently
increased to $31 million) for more desktop phones to be shipped from August
through January 2003. In addition, on June 19, 2002, the Company received a
letter of intent from Telcel indicating its intent to acquire an additional $18
million in desktop phones after December 2002 provided that there is a demand
for such phones in the consumer market in Mexico.
FORWARD LOOKING INFORMATION
Please be advised that some of the information in this filing presents the
Company's intentions, beliefs, judgments and expectations of the future and are
forward-looking statements. It is important to note that the Company's actual
results could differ materially from these forward looking statements. For
example, there are a number of uncertainties as to the degree and duration of
the revenue momentum, which could impact the Company's ability to be profitable
as lower sales may likely result in lower margins. In addition, product
development expenditures, which are expected to benefit future periods, are
18
likely to have a negative impact on near term earnings. Other risks and
uncertainties, which are discussed in Exhibit 99 to this filing, include the
risk that technological change will render the Company's technology obsolete,
ability to protect intellectual property rights in its products, unfavorable
economic conditions could lead to lower product sales, the risk of litigation,
the Company's ability to develop new products, the Company's dependence on
suppliers and contractors, the Company's ability to maintain quality control,
the risk of doing business in developing markets, the Company's dependence on
research and development, the uncertainty of additional funding, dilution of
ownership to stockholders resulting from financing activities, volatility of
Common Stock price, intense industry competition including competition from its
licensees and new market entrants with cellular phone docking station products
and the uncertainty in the development of wireless service generally.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company frequently invests available cash and cash equivalents in short term
instruments such as: certificates of deposit, commercial paper and money market
accounts. Although the rate of interest paid on such investments may fluctuate
over time, each of the Company's investments is made at a fixed interest rate
over the duration of the investment. All of these investments have maturities of
less than 90 days. The Company believes its exposure to market risk fluctuates
for these investments is not material as of September 30, 2002.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
For international sales, the Company generally receives either payment prior to
shipment or irrevocable letters of credit that are confirmed by US banks to
reduce its credit risk. Further, the Company purchases credit insurance for all
significant open accounts outside of the United States. The Company performs
ongoing credit evaluations and charges amounts to operations when they are
determined to be uncollectible.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. The following financial statements are included in this document.
Report of Independent Auditors ............................................ 21
Consolidated Balance Sheets as of September 30, 2002 and 2001 ............. 22
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000 ......................................... 23
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2002, 2001 and 2000 ......................................... 24
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000 ......................................... 25
Notes to Consolidated Financial Statements ................................ 26
20
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Telular Corporation
We have audited the accompanying consolidated balance sheets of Telular
Corporation as of September 30, 2002 and 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2002. Our audits also included the
financial statement schedule at Item 15(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telular
Corporation at September 30, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, effective on
October 1, 2001, the Company changed its method of accounting for goodwill to
conform with Statement of Financial Accounting Standards 142, Goodwill and Other
Intangible Assets.
/s/ Ernst & Young LLP
Chicago, Illinois
October 25, 2002, except for Note 18,
As to which the date is November 27, 2002
21
Telular Corporation
Consolidated Balance Sheets
(In Thousands, Except Share Data)
September 30
2002 2001
----------------------
Assets
Current assets:
Cash and cash equivalents $ 33,812 $ 36,385
Restricted cash 3,789 --
Short term investment -- 15
Trade accounts receivable, less allowance for doubtful accounts of
$104 and $210 at September 30, 2002 and 2001, respectively 9,613 5,151
Inventories, net 7,192 10,008
Prepaid expenses and other current assets 859 363
----------------------
Total current assets 55,265 51,922
Restricted cash -- 3,000
Property and equipment, net 3,328 3,743
Other assets:
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $2,342 at September 30, 2002
and 2001 2,554 2,554
Other intangible assets, less accumulated amortization of
$625 and $125 at September 30, 2002 and 2001, respectively 375 875
Deposits and other 303 75
----------------------
Total other assets 3,232 3,504
----------------------
Total assets $ 61,825 $ 62,169
======================
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 9,531 $ 8,470
Accrued liabilities 1,758 1,700
Current portion of revolving line of credit 3,789 --
----------------------
Total current liabilities 15,078 10,170
Long term revolving line of credit -- 3,000
Commitments and contingencies -- --
----------------------
Total liabilities 15,078 13,170
----------------------
Stockholders' equity:
Common stock, $.01 par value; 75,000,000 shares authorized; 12,882,866
and 12,810,998 outstanding, at September 30, 2002 and 2001,
respectively 129 129
Additional paid-in capital 149,531 149,071
Deficit (102,913) (99,904)
Accumulated other comprehensive loss -- (297)
----------------------
Total stockholders' equity 46,747 48,999
----------------------
Total liabilities and stockholders' equity $ 61,825 $ 62,169
======================
See accompanying notes.
22
Telular Corporation
Consolidated Statements of Operations
(In Thousands, Except Share Data)
Year ended September 30
2002 2001 2000
-----------------------------------------
Revenue
Net product sales $ 58,407 $ 95,708 $ 37,650
Royalty and royalty settlement revenue 268 5,442 2,703
-----------------------------------------
Total revenue 58,675 101,150 40,353
Cost of sales 42,196 68,724 29,463
-----------------------------------------
16,479 32,426 10,890
Operating Expenses
Engineering and development 6,111 6,374 5,162
Selling and marketing 8,394 7,845 7,546
General and administrative 4,342 5,025 4,119
Provision for doubtful accounts 27 112 28
Amortization 500 644 525
-----------------------------------------
Income (loss) from operations (2,895) 12,426 (6,490)
Other income (expense)
Interest income 754 1,578 983
Interest expense (183) (246) (151)
Other (685) (882) (248)
-----------------------------------------
(114) 450 584
-----------------------------------------
Net income (loss) (3,009) 12,876 (5,906)
Less: Cumulative dividend on redeemable preferred stock -- -- (29)
-----------------------------------------
Income (loss) applicable to common shares $ (3,009) $ 12,876 $ (5,935)
=========================================
Basic earnings (loss) per common share $ (0.23) $ 1.01 $ (0.49)
=========================================
Diluted earnings (loss) per common share $ (0.23) $ 0.99 $ (0.49)
=========================================
Weighted-average number of common shares outstanding:
Basic 12,858,682 12,748,677 12,183,022
=========================================
Diluted 12,858,682 12,961,507 12,183,022
=========================================
See accompanying notes.
23
Telular Corporation
Consolidated Statements of Stockholders' Equity
(In Thousands)
Accumulated
Additional Other Total
Common Paid-in Comprehensive Treasury Stockholders'
Stock Capital Deficit Income (Loss) Stock Equity
--------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 97 $123,730 $(106,845) $ (384) $ (1,607) $ 14,991
--------------------------------------------------------------------------------------
Comprehensive loss:
Net loss for the year ended
September 30, 2000 -- -- (5,906) -- -- (5,906)
Unrealized gain on investment -- -- -- 89 -- 89
--------
Comprehensive loss (5,817)
Common stock and warrants issued in
private placement 4 9,629 -- -- -- 9,633
Stock options exercised 5 1,740 -- -- 1,607 3,352
Conversion of redeemable preferred stock
to common stock 21 13,065 -- -- -- 13,086
Deferred compensation related to stock
options -- 140 -- -- -- 140
Dividends on redeemable preferred stock -- -- (29) -- -- (29)
Stock and warrants issued for services
and compensation -- 323 -- -- -- 323
--------------------------------------------------------------------------------------
Balance at September 30, 2000 $ 127 $148,627 $(112,780) $ (295) $ -- $ 35,679
--------------------------------------------------------------------------------------
Comprehensive income:
Net income for the year ended
September 30, 2001 -- -- 12,876 -- -- 12,876
Unrealized loss on investment -- -- -- (2) -- (2)
--------
Comprehensive income 12,874
Deferred compensation related to stock
options -- 140 -- -- -- 140
Stock options exercised 1 223 -- -- -- 224
Stock issued for services and
compensation 1 370 -- -- -- 371
Other -- (289) -- -- -- (289)
--------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 129 $149,071 $(99,904) $ (297) $ -- $ 48,999
--------------------------------------------------------------------------------------
Comprehensive loss:
Net loss for the year ended
September 30, 2002 -- -- (3,009) -- -- (3,009)
Reclassification adjustments:
Loss on sale of investment -- -- -- 133 -- 133
Permanent impairment in market
value of investment -- -- -- 164 -- 164
--------
Comprehensive loss (2,712)
Deferred compensation related to stock
options -- 140 -- -- -- 140
Stock options exercised -- 114 -- -- -- 114
Stock issued in connection with services
and compensation -- 206 -- -- -- 206
--------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 129 $149,531 $(102,913) $ -- $ -- $ 46,747
--------------------------------------------------------------------------------------
See accompanying notes.
24
Telular Corporation
Consolidated Statements of Cash Flows
(In Thousands)
Year ended September 30
2002 2001 2000
-----------------------------------
Operating activities
Net income (loss) $(3,009) $12,876 $(5,906)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,382 1,442 1,737
Amortization 500 644 525
Compensation expense related to stock options 140 140 140
Common stock issued for services and compensation 206 371 128
Realized loss on sale of investment 133 109 3
Permanent impairment in market value of investment 164 -- --
Changes in assets and liabilities:
Trade receivables (4,462) 1,620 (101)
Related party receivables -- 900 (417)
Inventories 2,816 (3,617) 2,379
Prepaid expenses, deposits, and other (224) 173 151
Trade accounts payable 1,061 5,598 422
Related party payable -- (2,037) 299
Accrued liabilities 58 (398) (994)
-----------------------------------
Net cash provided by (used in) operating activities (1,235) 17,821 (1,634)
Investing activities
Proceeds from sale of short term investment 15 21 5
Increase in restricted cash (789) (1,100) (1,900)
Acquisition of property and equipment (967) (919) (801)
Acquisition of licenses and technology -- (1,000) --
Advance to shareholder, net (500) -- --
-----------------------------------
Net cash used in investing activities (2,241) (2,998) (2,696)
Financing activities
Proceeds from issuances of common stock 114 224 12,985
Proceeds from revolving line of credit 789 1,100 1,900
Other -- (289) --
-----------------------------------
Net cash provided by financing activities 903 1,035 14,885
-----------------------------------
Net increase (decrease) in cash and cash equivalents (2,573) 15,858 10,555
Cash and cash equivalents, beginning of period 36,385 20,527 9,972
-----------------------------------
Cash and cash equivalents, end of period $33,812 $36,385 $20,527
===================================
Supplemental cash flow information
Interest paid $ 183 $ 248 $ 134
===================================
Taxes paid $ 13 $ 240 $ --
===================================
See accompanying notes.
25
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
1. DESCRIPTION OF BUSINESS
Telular Corporation (the Company) operates in two business segments, divided
among its two principal product lines: PHONECELL(R), a line of cellular Fixed
Wireless Terminals (FWTs), and TELGUARD(R), a line of Wireless Security Products
(Security Products). The Company designs, engineers, and manufactures component
elements and complete telecommunications equipment assemblies and other
complementary products and markets such products domestically and
internationally.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Telular-Adcor Security Products and Telular
International, Inc. All significant intercompany balances and transactions have
been eliminated.
Revenue Recognition
Product sales and associated costs are recognized at the time of shipment of
products which is when title transfers or performance of services. Royalty
revenue is calculated as a percentage of sales by the licensee and is recognized
by the Company upon notification of sales by the licensee.
Cash Equivalents
Cash equivalents consist of highly liquid investments that have maturities of
three months or less from the date of purchase.
Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
Credit risks with respect to trade receivables are limited due to the diversity
of customers comprising the Company's customer base. For international sales,
the Company generally receives payment in advance of shipment, irrevocable
letters of credit that are confirmed by US banks or purchases international
credit insurance to reduce its credit risk. The Company performs ongoing credit
evaluations and charges 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.
Goodwill and Intangible Assets
Effective October 1, 2001, the Company adopted Statement of Financial Accounting
Standards 142, "Goodwill and Other Intangible Assets" (SFAS 142), which resulted
in the discontinuance of the amortization of goodwill. Under SFAS 142, goodwill
will be carried at its book value as of September 30, 2001. The Company
completed its transitional and annual impairment tests by comparing the fair
value of each reporting unit to its book value and determined that its goodwill
was not impaired. In accordance with SFAS 142, in future years, a goodwill
impairment test will be conducted at least annually and any impairment will be
recorded as a charge to operating expense.
Intangible assets consist primarily of license and technology agreements, which
are being amortized over the lives of the related agreements, typically 2 years,
using the straight-line method. The Company's other intangible assets at
September 30, 2002 and 2001 were $375 and $875, respectively. The Company's
goodwill was $2,554 at September 30, 2002 and 2001.
26
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share Data)
Amortization expense for other intangible assets was $500 and $125 for fiscal
year 2002 and 2001, respectively. The remaining $375 book value of the
intangible assets will be fully amortized in fiscal year 2003. Amortization
expense for goodwill was $519 for fiscal year 2001.
As required by SFAS 142 the results for the prior year have not been restated. A
reconciliation of net income as if SFAS 142 had been adopted is presented below
for the fiscal year ended September 30, 2001 and 2000.
September 30
2001 2000
--------------------
Net income (loss) as reported $12,876 $(5,906)
Add back goodwill amortization 519 519
--------------------
Adjusted net income (loss) $13,395 $(5,387)
====================
Basic earnings (loss) per share as reported $ 1.01 $ (0.49)
Goodwill amortization 0.04 0.04
--------------------
Adjusted basic earnings (loss) per share $ 1.05 $ (0.45)
====================
Diluted earnings (loss) per share as reported $ 0.99 $ (0.49)
Goodwill amortization 0.04 0.04
--------------------
Adjusted diluted earnings (loss) per share $ 1.03 $ (0.45)
====================
Reclassifications
Certain amounts in the September 30, 2000 financial statements have been
reclassified to conform to the September 30, 2002 and 2001 presentation.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using straight-line method over the assets' useful lives ranging from 3
to 10 years.
Investments
Management determines the appropriate classification of equity securities as of
each balance sheet date. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported as a separate component of
stockholders' equity. Interest, dividends, and realized gains and losses or any
impairment considered to be permanent on securities classified as
available-for-sale are included in income.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on differences
between the financial reporting and tax bases of assets and liabilities using
the enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse. The Company provides a valuation allowance
for deferred tax assets for which it does not consider realization of such
assets to be more likely than not.
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.
27
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
Research and Development Costs
Research and development costs for the years ended September 30, 2002, 2001 and
2000, respectively, were $5,617, $5,263 and $3,974, and are included in
engineering and development expense.
Shipping and Handling Costs
Shipping and handling costs of approximately $445, $417, and $221 were included
in selling and marketing expense for the years ended September 30, 2002, 2001
and 2000, respectively.
Stock-Based Compensation
The Company accounts for stock-based compensation awards to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
"Accounting for Stock issued to Employees," and has adopted the disclosure
alternative of Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
Fair Value of Financial Instruments
The carrying values reported in the consolidated balance sheet for accounts
receivable and accounts payable approximate their fair values at September 30,
2002 and 2001.
3. INVENTORIES
Inventories consist of the following:
September 30
2002 2001
-------------------------
Raw materials $ 4,066 $ 5,486
Finished goods 3,591 5,468
-------------------------
7,657 10,954
Less: Reserve for obsolescence 465 946
-------------------------
$ 7,192 $10,008
=========================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30
2002 2001
------------------------
Computer equipment $ 3,173 $ 3,045
Test and shop equipment 7,957 7,137
Office equipment 1,101 1,094
Leasehold improvements 1,493 1,481
Security equipment held for rent 333 333
------------------------
14,057 13,090
Less: Accumulated depreciation 10,729 9,347
------------------------
$ 3,328 $ 3,743
========================
28
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
5. INVESTMENTS
On March 2, 1998, the Company received 300,000 shares of ORA Electronics, Inc.
common stock ("ORA stock") in connection with the settlement of patent
litigation. ORA stock is traded on NASDAQ's Over The Counter (OTC) system. The
Company's holdings in ORA stock are valued at the quoted price on OTC for ORA
stock on the date of each balance sheet presented. Since 1998 the Company has
reduced its holdings in ORA stock via open market sales and holds 107,500 shares
of ORA stock on September 30, 2002. During fiscal year 2002, the Company sold
100,000 shares of ORA stock and recognized a loss on the sale of $133.
Pursuant to the settlement with ORA, as amended, the Company received rights to
12.2 million additional shares of ORA stock (Additional Shares). ORA has not
issued the Additional Shares to the Company and the Company has not recorded the
Additional Shares on its books.
On April 17, 2002, ORA filed a Chapter 11 voluntary petition in US Bankruptcy
Court in California. During fiscal year 2002, the Company reduced the carrying
cost of its holdings in ORA stock to the market value as quoted on OTC, and
recognized a loss of $164 for the permanent impairment in the market value of
the investment. The Company simultaneously reversed a $152 accrual recorded in
fiscal year 1998, but no longer required for legal fees related to this matter
but not incurred.
The combination of the realized loss on the sale of ORA stock of $133, the loss
recognized on the market value decline of ORA stock of $164, and the reversal of
the legal accrual of $152 have been included in other income (expense) in the
consolidated statement of operations. The net effect of these transactions
resulted in additional expense of $145 during fiscal year 2002.
6. ADVANCE TO SHAREHOLDER
In 1992, the Telular Group L.P., predecessor of the Company, entered into a
contribution agreement with DNIC Brokerage Company (DNIC) pursuant to which DNIC
contributed a variety of assets including certain patents and license
agreements, to the Company. Under the contribution agreement, DNIC retained the
right to receive the first $250 per year in annual royalty payments pursuant to
the contributed license agreements. On October 10, 2001, the Company entered
into an agreement with DNIC, pursuant to which the Company agreed to advance an
amount not to exceed $750 of future royalties to DNIC to be used solely for the
purpose of purchasing the Company's common stock in open market transactions.
Beginning in October 2001, all royalties received by the Company for the benefit
of DNIC will first be applied to amounts advanced to DNIC by the Company, and
any remaining royalties will be paid to DNIC. The advance bears interest at the
prime rate as published in the Wall Street Journal. In October and November
2001, the Company advanced a total of $750 to DNIC under the terms of this
arrangement. On April 1, 2002, the Company offset $250 of royalties earned by
DNIC against the $750 outstanding balance of the advance. On September 30, 2002
the current portion of $250 was recorded in other current assets, and the
long-term portion of $250 was included in other assets. DNIC is a shareholder of
the Company, who as of December 6, 2002 held approximately 1.1 million shares of
the Company's Common Stock.
7. INCOME TAXES
The Company did not record any US federal or state income tax provision or
benefit for the current period due to the net operating loss generated in the
current year.
29
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
On September 30, 2002, the Company had net operating loss carryforwards of
approximately $101,625 for income tax purposes that begin expiring in 2008. Of
this amount, $7,613 relates to tax deductions generated by the exercise of
certain stock options by employees, which will be available to offset future
income tax liabilities by a total of $2,954. This amount will be treated as a
credit to paid in capital when realized. In addition, the Company has $2,055 of
research and development credit carryforwards which expire in the years 2009 to
2022.
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
2002 2001
-----------------------
Deferred tax assets:
Reserve for inventories $ 184 $ 406
Allowance for doubtful accounts 40 81
Intangible assets 2,031 2,164
Research and development tax credit 2,055 1,458
Net operating loss carryforwards 39,430 34,762
Other 213 319
-----------------------
Total deferred tax assets 43,953 39,190
Valuation allowance 43,953 39,190
-----------------------
Net deferred tax assets $ -- $ --
=======================
The Company has provided a full valuation allowance on the deferred tax asset
due to the uncertainty of its realizability. The valuation allowance increased
by $4,763 during the fiscal year ended September 30, 2002, due principally to
the increase in the net operating loss carryforwards in 2002.
Based on the Internal Revenue Code and changes in the ownership of the Company,
utilization of the net operating loss carryforwards are subject to certain
annual limitations.
8. REVOLVING LINE OF CREDIT
On January 7, 2000, the Company entered into a Loan and Security Agreement with
Wells Fargo Business Credit Inc. (Wells) to provide a revolving credit facility
with a loan limit of $5 million (the Loan). In accordance with the agreement,
100% of the outstanding amount of the Loan is collaterized in cash. At September
30, 2002, the Company had $3,789 of borrowings outstanding under the Loan. Under
the Loan, the Company is restricted from making dividend payments. The Loan
matures on January 7, 2003 and bears interest at the bank's prime rate. To
reduce applicable financing fees, the Company issued 50,000 shares of Common
Stock Warrants to Wells. The Warrants have a strike price of $16.29 per share
and expire on January 6, 2005. The value of the Warrants was accounted for as
deferred financing costs, and was recorded at the fair value of the financing
fees of $195. The deferred financing costs are included in other assets and are
being amortized over the life of the Loan.
30
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
9. COMMITMENTS
The Company occupies certain facilities and rents certain equipment under
various lease agreements expiring through October 31, 2007. Rent expense for the
years ended September 30, 2002, 2001, and 2000 was approximately $928, $919, and
$1,137, respectively. Future minimum obligations under noncancelable operating
leases are as follow:
2003 $ 1,297
2004 1,076
2005 986
2006 951
2007 560
Thereafter 22
-----------
Total $ 4,892
===========
10. REDEEMABLE PREFERRED STOCK AND PREFERRED STOCK
During the year ending September 30, 1997, the Company issued 20,000 shares of
Series A Convertible Preferred Stock (the "Redeemable Preferred Stock") for
$18,375, which is net of issuance costs of $1,200. The Redeemable Preferred
Stock includes the equivalent of a 5% annual stock dividend.
On October 15, 1999, all remaining outstanding shares of Redeemable Preferred
Stock automatically converted into shares of Common Stock.
On September 30, 2002 and 2001, the Company had 21,000 shares of $0.01 par value
Redeemable Preferred Stock authorized and none outstanding and 9,979,000 shares
of $0.01 par value Preferred Stock authorized and none outstanding.
11. CAPITAL STOCK AND STOCK OPTIONS
On March 3, 2000, the Company issued 444,444 shares of Common Stock for $9,533
which is net of issuance costs of $467, including $100 of Common Stock issued to
the Company's placement agent. The Common Stock was issued to investors under
the provisions of Regulation D of the United States Securities Act of 1933, as
amended. In connection with this financing, the Company issued 358,407 shares of
Common Stock Warrants to investors and the placement agent. The Common Stock
Warrants have strike prices, which range from $12.27 to $31.56 per share and
expire during the period from March 2, 2005 through April 11, 2005. The fair
value of these Common Stock Warrants of $2,264, determined using the
Black-Scholes method was included in additional paid in capital.
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. Stock options
have been granted at exercise prices as determined by the Board of Directors to
all officers and employees of the Company pursuant to the Plan. These stock
options will vest either immediately or over a period of up to seven years.
All stock options, if not exercised or terminated, will expire either on the
sixth or the tenth anniversary of the date of grant.
31
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
Outside of the Plan, the Company has entered into stock option agreements (the
Stock Option Agreements) with former employees and independent directors. Under
these Stock Option Agreements, certain employees were granted options before the
Company's 1994 initial public offering. These options were granted at exercise
prices ranging from $3.72 to $39.00 per share, as determined by the Board of
Directors, and represented the estimated fair market values of the Company's
Common Stock at the grant date. These options are fully vested and those not
exercised or cancelled will expire on the tenth anniversary of the date of
grant.
Stock Option Agreements are provided annually to the independent directors of
the Company in lieu of compensation as directors and members of committees of
the Board of Directors. These options are granted at exercise prices equal to
the price of the Company's common stock on the date of grant and expire on the
tenth anniversary of the date of grant.
The following table displays all stock option activity as of September 30,
including stock options granted to all employees and the Stock Option
Agreements.
2002 2001 2000
----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Options Exercise Options Exercise
(000's) Price (000's) Price (000's) Price
----------------------------------------------------------------------------------
Outstanding at beginning of year 1,208 $10.95 1,001 $ 8.27 1,205 $7.71
Granted 231 6.68 584 13.33 406 8.40
Exercised (36) 3.23 (81) 2.55 (461) 7.30
Canceled (207) 11.39 (296) 8.88 (149) 5.59
----------------------------------------------------------------------------------
Outstanding at end of year 1,196 $10.27 1,208 $10.95 1,001 $8.27
==================================================================================
Weighted average fair value of
options granted during the period $ 3.47 $ 7.00 $4.39
The following table summarizes information about options outstanding at
September 30, 2002:
Weighted- Outstanding Exercisable
Average Weighted- Weighted-
Outstanding as Remaining Average Exercisable Average
Range of of 9/30/02 Contractual Exercise as of 9/30/02 Exercise
Exercise Prices (000's) Life Price (000's) Price
- -----------------------------------------------------------------------------------------------------
$1.56 - 3.75 277 4.60 $ 3.35 242 $ 3.38
4.25 - 10.05 335 5.69 7.93 106 8.86
10.06 - 15.25 286 3.83 11.94 159 11.93
17.50 - 39.00 298 3.89 17.74 199 17.77
----------------------------------------------------------------------------------
1,196 4.54 $10.27 706 $10.18
==================================================================================
At September 30, 2002, the Company has reserved 2,850,000 shares of Common
Stock, of which 1,924,364 are available for issuance in connection with the
Plan.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, which also requires that the information be determined as if the
Company had accounted for its options granted subsequent to October 1, 1995,
under the fair value method of that Statement. The fair value of options was
estimated at the date of grant using a Black-Scholes stock option pricing model
with the following weighted-average assumptions for 2002, 2001 and 2000:
volatility factor of the expected market price of the common stock of 60%;
32
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
a weighted-average expected life of the options of four years; and no dividend
yield. The risk-free interest rates of 3.75%, 6.0% and 6.0% were used for 2002,
2001 and 2000, respectively.
The Black-Scholes stock option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, stock option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
2002 2001 2000
----------------------------------
Pro forma net earnings (loss) applicable to common shares $(4,475) $10,587 $(7,102)
Pro forma basic earnings (loss) per common share $ (0.35) $ 0.83 $ (0.58)
Pro forma diluted earnings (loss) per common share $ (0.35) $ 0.82 $ (0.58)
==================================
12. EARNINGS PER SHARE
Basic and diluted net income (loss) per common share are computed based upon the
weighted-average number of shares of common stock outstanding. Common shares
issuable upon the exercise of options, warrants and redeemable preferred stock
are not included in the per share calculations if the effect of their inclusion
would be anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
2002 2001 2000
----------------------------------------------
Net income (loss) $ (3,009) $ 12,876 $ (5,935)
Weighted average number of common shares outstanding
Basic 12,858,682 12,748,677 12,183,022
Effect of dilutive employee stock options -- 212,830 --
----------------------------------------------
Diluted 12,858,682 12,961,507 12,183,022
Net income (loss) per share
Basic $ (0.23) $ 1.01 $ (0.49)
Diluted $ (0.23) $ 0.99 $ (0.49)
==============================================
13. SEGMENT REPORTING
The Company, which is organized on the basis of products and services, has two
reportable business segments, Fixed Wireless Terminals and Security Products
(see Segment Reporting table below). The Company designs, develops, manufactures
and markets both fixed wireless terminals and security products. Fixed Wireless
Terminals bridge wireline telecommunications customer premises equipment with
cellular-type transceivers for use in wireless communication networks. Security
products provide wireless backup systems for both commercial and residential
alarms systems.
33
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
Segment Reporting 2002 2001 2000
--------------------------------------
Revenue
Fixed Wireless Terminals $ 46,283 $ 90,235 $ 29,727
Security Products 12,392 10,915 10,626
--------------------------------------
58,675 101,150 40,353
Net Income (Loss)
Fixed Wireless Terminals (2,010) 14,859 (4,188)
Security Products (999) (1,983) (1,718)
--------------------------------------
(3,009) 12,876 (5,906)
Tangible Long-Lived Assets, net
Fixed Wireless Terminals 2,483 2,743 3,094
Security Products 845 1,000 1,172
--------------------------------------
3,328 3,743 4,266
Capital Expenditures
Fixed Wireless Terminals 963 861 597
Security Products 4 58 204
--------------------------------------
967 919 801
Depreciation and Amortization
Fixed Wireless Terminals 1,628 1,855 2,045
Security Products 254 231 217
--------------------------------------
1,882 2,086 2,262
Export sales of fixed wireless terminals represent 89%, 88%, and 78% of total
fixed wireless net sales for the years ending September 30, 2002, 2001, and
2000, respectively. Export sales of security products were insignificant for
these periods.
For the fiscal year ending September 30, 2002, one customer located in Mexico
accounted for 55% of Fixed Wireless Terminal revenue and two customers, both
located in the US, accounted for 24% and 10%, respectively, of the Security
Products revenue.
For the fiscal year ending September 30, 2001, one customer located in Mexico
accounted for 77% of Fixed Wireless Terminal revenue and two customers, both
located in the US, accounted for 16% and 13%, respectively, of the Security
Products revenue.
For the fiscal year ending September 30, 2000, one customer located in the
Dominican Republic accounted for 21% of Fixed Wireless Terminal revenue and two
customers, both located in the US, accounted for 19% and 15%, respectively, of
the Security Products revenue.
14. MAJOR CUSTOMERS
For the year ended September 30, 2002, the Company derived approximately 25,618
(44%) of its total revenues from one customer, Radiomovil Dipsa Mexico (Telcel).
As of September 30, 2002, $2,239 was included in accounts receivable from
Telcel.
34
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
For the year ended September 30, 2001, the Company derived approximately $69,235
(68%) of its total revenues from one customer, Telcel. As of September 30, 2001,
$1,630 was included in accounts receivable from Telcel.
For the year ended September 30, 2000, the Company derived approximately $6,070
(15%) of its total revenues from one customer, Tricom, Inc. As of September 30,
2000, $72 was included in accounts receivable from Tricom, Inc.
15. EXPORT SALES
Export sales were approximately $41,138, $79,340, and $23,305 for the years
ended September 30, 2002, 2001, and 2000, respectively. Export sales were
primarily to the Caribbean and Latin American (CALA) and European, Middle
Eastern, and African (EMEA) regions during the years ended September 30, 2002,
2001 and 2000.
16. CONTINGENCIES
The Company is involved in various legal proceedings that arose in the ordinary
course of its business. While any litigation contains an element of uncertainty,
based upon the opinion of the Company's counsel, management believes that the
outcome of such proceedings will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
17. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan under section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees of the
Company. The Company may match employee contributions on a discretionary basis.
There were no matches and therefore no amounts charged against operations
related to the Company's match for the years ended September 30, 2002, 2001, and
2000.
18. SUBSEQUENT EVENT
The Company's Board of Directors authorized the repurchase of up to 1,000,000
shares of the Company's Common Stock to commence November 6, 2002. As of
December 6, 2002, the Company had acquired 78,313 shares for a total cost of
$295.
35
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share Data)
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended September 30, 2002, 2001, and 2000 (in thousands, except share data).
Three months ended
December 31 March 31 June 30 September 30
-----------------------------------------------------------------
Fiscal year ended 2002
Total revenue $ 7,195 $ 19,217 $ 15,625 $ 16,638
Gross profit 1,630 5,574 4,496 4,779
Net income (loss) (2,830) 211 (400) 10
Basic income (loss) per common share (0.22) 0.02 (0.03) 0.00
Diluted income (loss) per common share (0.22) 0.02 (0.03) 0.00
Fiscal year ended 2001
Total revenue $ 15,207 $ 38,615(1) $ 28,343 $ 18,985
Gross profit 4,614 13,581 8,546 5,685
Net income 151 8,343(1) 3,476 906
Basic income per common share 0.01 0.66 0.27 0.07
Diluted income per common share 0.01 0.64 0.27 0.07
Fiscal year ended 2000
Total revenue $ 9,077 $ 9,709 $ 10,750 $ 10,817
Gross profit 1,914 2,832 2,709 3,435
Net loss (2,354) (1,475) (1,411) (666)
Basic and diluted loss per common share (0.21) (0.12) (0.11) (0.05)
(1) Includes a one-time $5,000 royalty settlement.
36
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Reference is made to the information contained under the caption Election of
Directors of the Company in the Company's definitive proxy statement for its
2003 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission on or before December 31, 2002.
The Directors' names and occupations are listed in the Company's definitive
proxy statement for its 2002 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on or before December 31, 2002. Names and
information about executive officers are provided in Item 1 of this filing.
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 2003 Annual Meeting of Shareholders filed with the
Securities and Exchange Commission on or before December 31, 2002, 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 2003 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission on or
before December 31, 2002, which is incorporated herein.
Further, for the information required by Item 201(d) of Regulation S-K,
reference is made to the information contained under the caption Option
Exercise and Fiscal Year-End Option Values in the Company's definitive proxy
statement for its 2003 Annual Meeting of Shareholders filed with the Securities
and Exchange Commission on or before December 31, 2002, 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 Certain Transactions in
the Company's definitive proxy statement for its 2003 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission on or before
December 31, 2002, which is incorporated herein.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), within 90 days of the filing date of this report.
Based on their evaluation, our principal executive officer and principal
accounting officer concluded that the Company's disclosure controls and
procedures are effective.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in the paragraph above.
37
PART IV
ITEM 15. 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, 2002 and 2001
Consolidated Statements of Operations for the years ended September
30, 2002, 2001 and 2000
Consolidated Statements of Stockholders' Equity for the years ended
September 30, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended September
30, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. The following financial statement Schedule VIII Valuation and
Qualifying Accounts for the years ended September 30, 2002, 2001 and
2000 is filed as part of this report. All other financial statement
schedules have been omitted because they are not applicable or are
not required or the information required to be set forth therein is
included in the financial statements or notes thereto contained in
Part II, Item 8 of this current report.
Item 15(a) 2. Schedule VIII - Valuation and Qualifying Accounts
Charged
Balance At Charged to to other Balance
Beginning of Costs and accounts Deductions at end of
Description Period Expenses Describe Describe period
- ---------------------------------------------------------------------------------------------------------------------------------
Period Ended September 30, 2002
Accumulated Amortization of Intangible Assets $ 2,467 $ 500 $ -- $ -- $ 2,967
Valuation Allowance of Deferred Tax Asset 39,190 4,639(2) -- -- 43,829
Allowance for Doubtful Accounts 210 27 -- (133)(4) 104
Inventory Reserve 946 289 -- (770)(3) 465
Period Ended September 30, 2001
Accumulated Amortization of Intangible Assets $ 1,823 $ 644 $ -- $ -- $ 2,467
Valuation Allowance of Deferred Tax Asset 44,374 (5,184)(2) -- -- 39,190
Allowance for Doubtful Accounts 104 112 -- (6)(4) 210
Inventory Reserve 211 1,000 -- (265)(3) 946
Period Ended September 30, 2000
Accumulated Amortization of Intangible Assets $ 2,393 $ 525 $ -- $(1,095)(1) $ 1,823
Valuation Allowance of Deferred Tax Asset 42,418 1,956(2) -- -- 44,374
Allowance for Doubtful Accounts 103 28 -- (27)(4) 104
Inventory Reserve 584 404 -- (777)(3) 211
(1) Amount represents assets fully amortized and netted against the
reserve during the period.
38
(2) Amount represents the change in the valuation amount for deferred
taxes due principally to the origination and utilization of net
operating loss carryforwards. The valuation amount reflects 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.
(3) Inventory disposed.
(4) Accounts receivable written-off.
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 Amendment No. 3 to Certificate Filed as Exhibit 3.4 to Form
of Incorporation 10-Q filed February 16, 1999
3.5 Amendment No.4 to Certificate Filed as Exhibit 3.5 to Form
of Incorporation 10-Q filed February 16, 1999
3.6 By-Laws Filed as Exhibit 3.4 to the
Registration Statement
4.1 Certificate of Designations, Filed as Exhibit 99.2 Form 8-K
Preferences, and Rights of filed April 25, 1997
Series A Convertible Preferred
Stock
4.2 Loan Agreement with Wells Filed as Exhibit 4.5 to Form
Fargo Business 10-Q filed February 14, 2000
4.3 Stock Purchase Warrant with Filed as Exhibit 4.6 to Form
Wells Fargo Business 10-Q filed February 14, 2000
10.1 Employment Agreement with Filed as Exhibit 10.1 to Form
Kenneth E. Millard 10-Q filed August 14, 1996
10.2 Stock Option Agreement with Filed as Exhibit 10.2 to Form
Kenneth E. Millard 10-Q filed August 14, 1996
39
10.3 Stock Purchase Agreement By Filed as Exhibit 10.3 to Form
and Among Telular Corporation 10-Q filed August 14, 1996
and TelePath Corporation
(which had changed its name to
Wireless Domain, Incorporated)
10.4 Appointment of Larry J. Ford Filed as Exhibit 10.2 to Form
10-Q filed May 1, 1995
10.5 Option Agreement with Motorola Filed as Exhibit 10.6 to Form
dated November 10, 1995 10-K filed December 26,
1996(1)
10.6 Amendment No.1 dated September Filed as Exhibit 10.7 to Form
24, 1996 to Option Agreement 10-Q filed August 13, 1999(1)
with Motorola
10.7 Amendment No.2 dated April 30, Filed as Exhibit 10.8 to Form
1999 to Option Agreement with 10-Q filed August 13, 1999(1)
Motorola
10.8 Stock Purchase Agreement Filed as Exhibit 10.11
between Motorola, Inc. and to the Registration
Telular Corporation dated Statement
September 20, 1993
10.9 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
10.10 Amendment No. 4 to Patent Filed as Exhibit 10.11 to Form
Cross License Agreement 10-Q filed August 13, 1999 (1)
between Motorola, Inc. and the
Company, dated May 3, 1999
10.11 Amended and Restated Filed as Exhibit 10.15 to the
Shareholders Agreement dated Registration Statement(1)
November 2, 1993
10.12 Amendment No. 1 to Amended and Filed as Exhibit 10.24 the
Restated Shareholders Registration Statement
Agreement, dated January 24,
1994
10.13 Amendment No. 2 to Amended and Filed as Exhibit 10.5 to the
Restated Shareholders Form 10-Q filed July 28, 1995
Agreement, dated June 29, 1995
10.14 Amended and Restated Filed as Exhibit 10.16 to the
Registration Rights Agreement Registration Statement
dated November 2, 1993
10.15 Amendment No. 1 to Amended and Filed as Exhibit 10.25 to the
Restated Registration Rights Registration Statement
Agreement, dated January 24,
1994
10.16 Securities Purchase Agreement Filed as Exhibit 99.1 to Form
dated April 16, 1997, by and 8-K filed April 25, 1997
between Telular Corporation
and purchasers of the Series A
Convertible Preferred Stock
10.17 Registration Rights Agreement Filed as Exhibit 99.3 to Form
dated April 16, 1997, by and 8-K filed April 25, 1997
between Telular Corporation
and purchasers of the Series A
Convertible Preferred Stock
40
10.18 Securities Purchase Agreement Filed as Exhibit 99.3 to
dated June 6, 1997, by and Registration Statement on Form
between Telular Corporation S-3, Registration No.
and purchasers of the Series A 333-27915, as amended by
Convertible Preferred Stock Amendment No. 1 filed June 13,
1997, and further Amended by
Amendment No. 2 filed July 8,
1997 (Form S-3)
10.19 Registration Rights Agreement Filed as Exhibit 99.4 to Form
dated June 6, 1997, by and S-3
between Telular Corporation
and purchasers of the Series A
Convertible Preferred Stock
10.20 Agreement and Plan of Merger Filed as Exhibit 10.21 to Form
by and among Wireless Domain 10-K filed December 19, 1998
Incorporated (formerly
TelePath), Telular-WD (a
wholly-owned subsidiary of
Telular) and certain
stockholder of Wireless Domain
Incorporated
10.21 Common Stock Investment Filed as Exhibit 4.8 to
Agreement dated March 3, 2000 Registration Statement on Form
S-3, Registration No.
333-33810 filed March 31,
2000, as amended By Amendment
No. 1 filed April 28,2000
10.22 Registration Rights Agreement Filed as Exhibit 4.9 to
dated March 3, 2000 Registration Statement on Form
S-3, Registration No.
333-33810 filed March 31,
2000, as amended By Amendment
No. 1 filed April 28,2000
10.23 Employment Agreement with Filed as Exhibit 10.22 to Form
Daniel D. Giacopelli 10-Q filed February 13, 1998
10.24 OEM Equipment Purchase Filed as Exhibit 10.27 to
Agreement for WAFU dated April Form10-Q filed August 13, 1999
30, 1999 dated April 30, 1999 (1)
10.25 Settlement and Release of Filed as Exhibit 10.25 to Form
Claims Agreement with Motorola 10-Q filed February 14, 2001
dated February 2, 2001 (1) (1)
10.26 Agreement for the Purchase of Filed as Exhibit 10.1 to Form
Telular Fixed Telephony 8-K filed October 12, 2000 (1)
Digital Cellular Telephones
dated as of September 13,
2000, among Telular
Corporation, et.al (1)
10.27 Nonqualified Stock Option Filed as Exhibit 4.9 to
Agreement, dated as of October Registration Statement on Form
31, 2000, by and between the S-8, Registration No.
Company and Larry J. Ford 333-61970 filed May 31, 2001
10.28 Nonqualified Stock Option Filed as Exhibit 4.10 to
Agreement, dated as of October Registration Statement on Form
26, 1999, by and between the S-8, Registration No.
Company and Larry J. Ford 333-61970 filed May 31, 2001
41
10.29 Nonqualified Stock Option Filed as Exhibit 4.11 to
Agreement, dated as of October Registration Statement on Form
27, 1998, by and between the S-8, Registration No.
Company and Larry J. Ford 333-61970 filed May 31, 2001
10.30 Nonqualified Stock Option Filed as Exhibit 4.12 to
Agreement, dated as of Registration Statement on Form
February 28, 1997, by and S-8, Registration No.
between the Company and Larry 333-61970 filed May 31, 2001
J. Ford
10.31 Nonqualified Stock Option Filed as Exhibit 4.15 to
Agreement, dated as of October Registration Statement on Form
31, 2000, by and between the S-8, Registration No.
Company and John E. Berndt 333-61970 filed May 31, 2001
10.32 Nonqualified Stock Option Filed as Exhibit 4.16 to
Agreement, dated as of October Registration Statement on Form
26, 1999, by and between the S-8, Registration No.
Company and John E. Berndt 333-61970 filed May 31, 2001
10.33 Nonqualified Stock Option Filed as Exhibit 4.17 to
Agreement, dated as of October Registration Statement on Form
27, 1998, by and between the S-8, Registration No.
Company and John E. Berndt 333-61970 filed May 31, 2001
10.34 Nonqualified Stock Option Filed as Exhibit 4.18 to
Agreement, dated as of Registration Statement on Form
February 28, 1997, by and S-8, Registration No.
between the Company and John 333-61970 filed May 31, 2001
E. Berndt
10.35 Nonqualified Stock Option Filed as Exhibit 10.38 to Form
Agreement, dated as of July 10-K filed December 21, 2001
25, 2001, by and between the
Company and Mitchell H.
Saranow
10.36 Nonqualified Stock Option Filed as Exhibit 10.39 to Form
Agreement, dated as of August 10-K filed December 21, 2001
30, 2001, by and between the
Company and Richard D. Haning
10.37 Advance Agreement dated as of Filed as Exhibit 10.40 to Form
October 9, 2001, by and 10-K filed December 21, 2001
between the Company and DNIC
Brokerage Company
10.38 Nonqualified Stock Option Filed as Exhibit 10.41 to Form
Agreement, dated as of October 10-K filed December 21, 2001
30, 2001, by and between the
Company and John E. Berndt
10.39 Nonqualified Stock Option Filed as Exhibit 10.42 to Form
Agreement, dated as of October 10-K filed December 21, 2001
30, 2001, by and between the
Company and Larry J. Ford
10.40 Nonqualified Stock Option Filed as Exhibit 10.43 to Form
Agreement, dated as of October 10-K filed December 21, 2001
30, 2001, by and between the
Company and Richard D. Haning
10.41 Nonqualified Stock Option Filed as Exhibit 10.44 to Form
Agreement, dated as of October 10-K filed December 21, 2001
30, 2001, by and between the
Company and Mitchell H.
Saranow
10.42 Amendment 1 dated June 20, Filed as Exhibit 10.45 to Form
2002, to the September 13, 10-Q filed August 14, 2002
2000 Agreement for the
Purchase of Telular Fixed
Telephony Digital Cellular
Telephones among Telular
Corporation, et.al. (1)
21 Subsidiaries of the registrant Filed herewith
42
99 Cautionary Statements Pursuant Filed herewith
to the Securities Litigation
Act of 1995
99.1 Certification Pursuant to 18 Filed herewith
U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
1. Certain portions of this exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for confidential treatment. The omitted portions have been
replaced by an * enclosed by brackets ([*]).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended September 30, 2002.
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 23, 2002 By: /s/ KENNETH E. MILLARD
---------------------------
Kenneth E. Millard
Chairman and Chief Executive Officer
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/ KENNETH E. MILLARD Chairman and Chief Executive December 23, 2002
- -------------------------------------- Officer
Kenneth E. Millard
/s/ DANIEL D. GIACOPELLI Chief Technology Officer, December 23, 2002
- -------------------------------------- EVP and Director
Daniel D. Giacopelli
/s/ JEFFREY L. HERRMANN Chief Operating Officer, Chief December 23, 2002
- -------------------------------------- Financial Officer, EVP, and
Jeffrey L. Herrmann Secretary
/s/ ROBERT L. ZIRK Chief Accounting Officer December 23, 2002
- --------------------------------------
Robert L. Zirk
/s/ JOHN E. BERNDT Director December 23, 2002
- --------------------------------------
John E. Berndt
/s/ LARRY J. FORD Director December 23, 2002
- --------------------------------------
Larry J. Ford
/s/ RICHARD D. HANING Director December 23, 2002
- --------------------------------------
Richard D. Haning
/s/ MITCHELL H. SARANOW Director December 23, 2002
- --------------------------------------
Mitchell H. Saranow
44
CERTIFICATIONS
I, Kenneth E. Millard, the Chairman and Chief Executive Officer of Telular
Corporation (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 23, 2002 /s/ Kenneth E. Millard
------------------------------
Kenneth E. Millard
Chairman and Chief Executive Officer
45
I, Jeffrey L. Herrmann, the Chief Operating Officer, Chief Financial Officer,
EVP and Secretary of Telular Corporation (the "Company"), certify that:
1. I have reviewed this annual report on Form 10-K of the Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee of the
Company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 23, 2002 /s/ Jeffrey L. Herrmann
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Jeffrey L. Herrmann
Chief Operating Officer, Chief Financial Officer,
EVP and Secretary
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