Item 1. Business
Background
Overview
Telular Corporation (the Company) is in the fixed wireless telecommunications industry. The Company designs, develops, manufactures and markets products based on its proprietary interface technologies, which provide the capability to bridge wireline telecommunications customer premises equipment (CPE) with cellular-type transceivers for use in wireless communication networks. Applications of the Company's technology include fixed wireless telecommunications as a primary service where wireline systems are unavailable, unreliable or uneconomical, as well as wireless backup systems for wireline telephone systems and wireless alarm signaling (WAS). The Company's principal product lines are: PHONECELL, a line of fixed wireless terminals (FWTs), and TELGUARD, a line of WAS products.
In 1986, the Company acquired the intellectual property rights for its cellular interface concept and methodology. The Company's patents cover not only circuitry, but also the very concept and principles underlying the use of an intelligent interface device in conjunction with cellular-type transceivers and systems.
In 1994, the Company completed an initial public offering (IPO) of its Common Stock, which raised approximately $56.4 million. The Company's stock is traded on the Nasdaq National Market System under the ticker symbol WRLS. In 1995, the Company raised $18.0 million from the private placement of convertible debentures. In 1997, the Company raised $18.8 million from private placements of Series A Convertible Preferred Stock.
Acquisitions
In 1993, the Company acquired two companies: Telular International, Inc. (Telular International), formerly Codecom Rural Communications, located in Puerto Rico, and Telular-Adcor Security Products, Inc. located in Atlanta, formerly known as Adcor Electronics International, Inc. Both entities are wholly owned subsidiaries of the Company.
Effective October 1, 1997, the Company acquired Wireless Domain Incorporated (WD). Prior to October 1, 1997, the Company had acquired 50% of WD in three separate transactions during 1997 and 1996. This transaction added 29 engineers to the Company.
Wireless Telecommunications Overview
The vast majority of the telephones in the world continue to be concentrated in a relatively small number of industrialized countries. While telecommunications infrastructure is a critical element of economic growth, most developing nations have telephone systems that are inadequate to sustain essential services. Thus, developing countries are seeking basic communications solutions that are cost effective and can be deployed rapidly to support aggressive economic development programs.
The process of improving and expanding telephone networks using advanced wireless technology in developed and developing countries has created a major market for wireless telecommunication equipment such as the Company's FWT. In developed countries, mobile cellular systems have changed the way people communicate and have enjoyed phenomenal growth that is expected to continue in the future. In developing countries, wireless local loop (WLL) systems represent what is very often the fastest and most cost-effective way of providing basic telephone service. WLL systems are conventional cellular networks constructed and operated primarily for fixed users.
The wireless alternative access (WAA) market involves FWTs operating on mobile cellular networks built primarily for handheld cellular phone users. For WAA applications, FWT sales generally begin developing after a new mobile network has been in operation for a few years, when the growth rate in new cellular phone subscribers slows and the mobile operator begins looking for new revenue sources. FWTs offer this opportunity because they are less costly to support as they are linked to a single cell site, generate more average airtime and operate mainly at off-peak times.
Company Strategy
The Company's strategy is to leverage twelve years of experience in the market, internationally-accepted products and court-tested patents into a continuing leadership position in the rapidly developing WLL and WAA FWT equipment industry. Global telecommunications equipment manufacturers together with national and international service providers are increasingly sharing the Company's vision that wireless systems in both developed and developing countries are well suited for use as basic telephone service networks. The key trends that are fueling the worldwide adoption of WLL/WAA programs include the following:
. Rapid acceptance of cellular communications; . An accelerating trend toward privatization of telecommunication service in both developed and developing countries; . Development and adoption of digital wireless transmission standards that enhance network capacity and service capability while significantly reducing the effective cost per subscriber served; . Service network providers acceptance of wireless network solutions as fast, cost effective answers to their customers' unfulfilled demand for telecommunications service; and . PCS licensing within the U.S., which should intensify competition by wireless service providers to capture wireline minutes of usage and the potential for a large bypass market.
Target Markets and Product Applications
The Company's fiscal year 1998 revenues have been primarily international, derived from the sale of PHONECELL FWTs for integration into WLL/WAA systems being installed in developing countries.Significant revenues are derived domestically from the Company's TELGUARD WAS product line.
The Company's major opportunities can be grouped into four categories:
. Wireless Basic Telephone Service; . Licensing of the Company's Technology and Sales to OEM customers; . Remote Monitoring and Supervisory Control and Data Acquisition (SCADA); . Disaster Recovery and Emergency Back-up Services.
Wireless Basic Telephone Service
Many countries are evaluating or have already deployed wireless basic telecommunications systems in conjunction with, or as an alternative to, the expansion of their basic wireline systems. The most significant market opportunity for the Company's products is for wireless basic telephone service in developing areas worldwide.
Licensing of the Company's Technology and Sales to OEM Customers
In response to the international demand for the Company's proprietary interface technology, the Company has been promoting the use of its interface technology in other telecommunication companies' products. This marketing strategy has resulted in licensing of the Companies technology and sales of component parts to OEMs. The Company expects to continue developing licensing and OEM arrangements.
Remote Monitoring and Security Alarm Monitoring
The use of fixed wireless cellular systems for remote monitoring and SCADA applications has been the most prevalent application of the Companies technology in developed countries, especially in the U.S.
A major sub-group within this segment is WAS. Wireless Alarm Signaling was one of the first applications of the Company's technology and is a growing segment of the business. Use of the Company's specialized products allows an alarm monitoring system to automatically switch to a cellular network in the event of a telephone line failure, allowing alarms to be transmitted.
Disaster Recovery and Back-Up Services
Hundreds of major telephone network outages occur annually in the U.S. and other countries around the world. Today, with the widespread availability of cellular telephone networks, a readily available and cost-effective solution is possible with the Company's technology.
The Company's products are installed in hospitals, financial institutions, airports, emergency response centers, public service centers and utility companies. The wireless back-up approach allows businesses to take advantage of situations where wireless service may be a desirable option to wired phone service. For example, wireless service may be used for overflow traffic relief when regular telephone lines become blocked due to usage or for least- cost routing for long distance where wireless may be less expensive than local exchange carrier rates.
Technology and Products
Core Technology
The Company's core patented technology is an intelligent interface (the Invention) that permits standard wireline CPE to operate on wireless networks. The Company's products containing the Invention provide the capability to bridge wireline telecommunications CPE and wireless networks. The Invention provides a standard dial tone, off-hook detection signal and other signals usually provided by the Local Exchange Carrier (LEC), through its tip and ring wired local loop connection, which automatically generates a send signal to the cellular transceiver once the user has finished entering the telephone number. The Company has incorporated this core technology into a variety of products and radio standards and continues to develop and exploit derivative products and technologies for customer-specific applications.
Interface Technology
The Company's products contain printed circuit boards that incorporate the Invention. The interface components that comprise the Invention are used in the Company's finished products and are also sold separately. In certain cases, the Company licenses its interface technology or patent rights to other companies, for which, in most cases, royalty fees are received. However, most of the Company's revenues have been generated through the sale of finished products.
Transceivers
The Company historically has contracted with several suppliers for the critical components of its products. The major exception to this policy has been transceiver units, which have been principally supplied by Motorola. The Company's interface technology is compatible with several other manufacturers' transceivers and the Company has been able to utilize transceivers from such manufacturers. In addition, the Company designs and builds its own radios for selected FWTs - see Research and Development below.
The Company's Product Lines
Products for WLL and WAA markets are marketed under the PHONECELL brand name. WAS products are marketed under the TELGUARD brand name. Future product offerings will reflect a continued evolution of existing product lines.
During fiscal year 1998, the Company improved its FWT market position on the following major radio standards:
AMPS (Advanced Mobile Phone System) - While the overall FWT market is shifting from analog cellular to digital cellular, there remains many opportunities for this mature analog cellular standard. When new digital mobile networks are installed in urban areas, the older analog infrastructure often is displaced and then redeployed for WLL use in the surrounding suburban area. The Company is the original supplier of analog FWTs and one of the few remaining analog suppliers, enabling it to capture a sizeable share of all new analog FWT business worldwide. During fiscal year 1998, the Company introduced two new cost reduced AMPS FWTs. These units have begun displacing lower featured and higher cost competitive units in several markets. In November 1998 the Company announced that it will supply a significant number of its AMPS fixed wireless terminals to the Rural Telephony Division of Telcel in Mexico during fiscal year 1999.
GSM (Group System Mobile) - Despite the historical importance of analog, most planned FWT deployment in both WLL and WAA markets will be on one of the various digital standards. Digital is more desirable than analog because it provides superior capacity, voice privacy, higher transmission rates for fax and data, and additional user services such as caller identification and messaging. Last year, the Company introduced its first GSM FWT. Sales of this unit accounted for 35% of the Company's FWT business during fiscal year 1998. The Company will introduce its second generation GSM FWT (the SX4 GSM FWT) in the second quarter of fiscal year 1999. As the SX4 GSM FWT costs 30% less and has additional features, the Company expects to capture significantly more share of the GSM market with the SX4 GSM FWT.
TDMA (Time Division Multiple Access) - Last year, the Company also introduced a new TDMA FWT which is a lower cost and higher quality product than its predecessor. Due to its smaller size, this unit is well suited for payphone and Least Cost Routing (LCR) applications. The Company has observed a rapid expansion of payphone opportunities recently. This product operates on the newer TDMA networks that are being constructed under the TDMA IS- 136 standard. Most of the older TDMA networks are being upgraded to the new TDMA standard as well. TDMA networks are widely deployed in Africa, Central America and South America.
Sales, Marketing and Service
International Sales (Other than Canada)
The international marketplace is characterized by new and repeat sales to established mobile cellular networks and to the emerging WLL programs throughout the world. The Company has built international sales and marketing teams made up of professionals with experience in the Middle-East, Latin America, Asia, Europe, and Africa. It has regional sales offices in Chicago, Illinois; Atlanta, Georgia; Miami, Florida; Oxford, England; Singapore; Hong Kong, Republic of China; Cape Town, South Africa; Budapest, Hungary; Sao Paulo, Brazil and Riga, Latvia. The ability to provide on-site customer technical assistance and support has been identified as a key selling requirement, and the larger regional offices aid in providing this important service.
U.S. Sales
The Company markets certain products in the U.S. directly via an OEM sales group in Chicago, Illinois. With the deployment of PCS networks in the U.S., the Company is focusing on establishing product development and supply relationships with network operators and PCS transceiver/infrastructure manufacturers and large telecommunication companies.
The Company's TELGUARD line of products is marketed almost exclusively in the U.S.
Sales to Canada
In 1992, Telular Canada, Inc. (Telular Canada), an independent Toronto-based distributor of telecommunications products, purchased the Company's Canadian patents and the right to acquire the Company's technologies solely for use and sale within Canada.
Service and Support
The Company believes that providing customers with comprehensive product service and support is critical to maintaining a competitive position in the wireless telecommunications equipment industry. The Company offers warranty and repair service for its products through three primary methods: (1) advance replacement kits shipped as warranty with orders, (2) in-house service and technical sales support technicians and engineers at its Vernon Hills, Illinois and Hauppauge, New York facilities, as well as at certain regional sales offices and (3) authorized third party service centers in various regions of the world.
Motorola Relationship
In 1990, the Company entered into a cross-license agreement with Motorola Inc. (Motorola) under which the Company licensed to Motorola certain rights to manufacture, sell or use its Invention. The cross- license agreement allows the Company to use Motorola's transceivers in the Company's products.
In 1993, the Company entered into an agreement with Motorola, whereby Motorola, through its Cellular Subscriber Sector (CSS), acquired an interest in the Company of approximately 19% and, pursuant to an option, subsequently increased its holdings to 20%. Motorola, after dilution due to the issuance of additional shares of Common Stock by the Company, now owns approximately 13.7% of the outstanding shares of the Company. Motorola obtained the right to representation on the Company's Board of Directors and presently has one director. This agreement provided the Company with access to certain of Motorola's engineering, technical service and other resources on a fee basis, subject to availability. In addition, Motorola makes its AMPS, Extended Total Access Communication System (ETACS), Narrow-band Advanced Mobile Phone System (NAMPS), TDMA, GSM, CDMA, Iridium and other transceivers available for purchase by the Company for use in its products when, if, and as available.
In 1995, the Company expanded its relationship with Motorola. The Company was awarded a contract to supply a customized version of its ETACS PHONECELL product to Motorola's Cellular Infrastructure Group (CIG) for deployment in existing and future WLL projects in Hungary. In addition, CIG agreed to purchase $100 million of the Company's FWTs and provide funding for engineering and product development activities over a three-year period, commencing January 1, 1996. During 1996 and 1997, the Company shipped $6 million and $21 million, respectively, of product under this agreement. No product was under this agreement during fiscal year 1998. Because of unfulfilled commitments of approximately $73 million, the Company is currently negotiating with Motorola for resolution of this contract, which expires on December 31, 1998.
Research and Development
The Company believes that its future success depends on its ability to adapt to the rapidly changing telecommunications environment and to continue to meet customers' needs. The Company is currently adapting its products to new wireless technologies and is working closely with several companies, including long-distance carriers, cellular service providers, telecommunications infrastructure providers and equipment manufacturers, to develop new products.
The Company's research and development staff is comprised of approximately 50 engineers segregated into four teams. Each team is responsible for a specific cellular standard, such as: AMPS, Code Division Multiple Access (CDMA), GSM or TDMA. Additionally, the research area continually investigates methods by which the Company can reduce the cost of its products.
The Company introduced several new PHONECELLs during fiscal year 1998. These included: two new analog AMPS FWTs, the SX3(i) AMPS and the SX3(e) AMPS; a new digital TDMA FWT, the SX2(e) TDMA; and a new digital CDMA FWT, the SX2(e) CDMA. All of these products cost less to make and have more features than predecessor versions. The SX3 AMPS units include a transceiver that was designed by the Company.
The Company expects to introduce additional PHONECELLs during fiscal year 1999. The most significant new FWT is the SX4 GSM FWT. The SX4 GSM unit includes a transceiver that was designed by the Company, as well as the Company's Application Specific Integrated Circuit (ASIC). The ASIC chip replaces some 75 electronic components and a circuit board, which significantly reduces the cost from the predecessor version.
Manufacturing
Fabrication of the Company's products is accomplished through a combination of in-house manufacturing and subcontracting. The assembly of printed circuit board interfaces for both FWT and WAS products is performed at the Company's facility in Vernon Hills, Illinois. The Company has developed proprietary testing equipment and procedures to conduct comprehensive quality control and quality assurance throughout the manufacturing and assembly process. Quality programs are a high priority at the Company. The Vernon Hills facility became ISO 9001 certified during fiscal year 1998. The Company utilizes contract manufacturers to augment its manufacturing capability, thereby enabling it to more rapidly expand capacity when required to meet large orders. The Company's quality assurance department works closely with contract manufacturers to ensure compliance to the strict quality standards of the Company.
Employees
As of November 20, 1998, the Company had 165 employees, of which 30% are in sales and marketing, 30% in engineering and product development, 30% in manufacturing and 10% in finance and administration. None of the Company's employees are represented by organized labor.
Competition
The industry consists of major domestic and international telecommunications equipment companies, many of which have substantially greater financial, technical, marketing, sales, manufacturing, distribution and other resources than those of the Company, and includes companies such as Motorola, Northern Telecom, Ericsson, Nokia and Qualcomm. There are also international and domestic companies with fewer resources that make products that compete directly with the Company where the Company's patent protection is not available. The Company competes with these companies primarily by selling products that provide features and qualities not otherwise available on the market, by developing new products incorporating its technology and by promoting new applications of its existing product line. The Company's interface and its related technology have been, and will continue to be, afforded substantial protection in those markets in which it holds patents. In markets where the Company holds no patents, the Company competes directly with a range of competitors. Approximately 60% of the Company's fiscal year 1998 shipments were destined for foreign countries most of which afforded little or no patent protection.
The wireless telecommunications industry is experiencing significant technological change, such as the transformation of cellular systems from analog to digital. The rate at which this change occurs and the success of such new technologies may have a material effect on the rate at which the Company expands its business and on its ability to achieve profitability. The Company continues to invest in research and development in order to meet the technological advances in the industry and stay abreast of changes in cellular standards and end-user requirements.
The Company has licensed its patent rights to Motorola, under an agreement in which Motorola is licensed to produce its own cellular interface. Motorola also sells fixed cellular products, and several other companies purchase Motorola's interface for inclusion in there own fixed cellular products. The Company receives a per unit royalty for any such products sold that are covered by the Company's patents. Motorola is a competitor with the Company in markets for analog AMPS and digital CDMA products both domestically and internationally.
The Company has granted licenses under its patents to others for various uses and applications and continues to pursue such license arrangements. It may face competition from those licensees, their sublicensees or their customers.
It is inevitable in growing markets with huge potential that competition will increase. Accordingly, some of the large companies noted above have introduced FWTs to the marketplace.
The Company believes its advantages over the competition are:
Better focus/commitment - In the WLL market, the Company's only business is FWTs. Most often, competitors sell FWTs to support their infrastructure business.
More experience - The Company has been in the FWT business for 12 years.
Broader product line - The Company offers FWTs that operate on all major non-proprietary radio standards.
Patents, Licenses and Other Intellectual Property
The Company's success in the United States depends to an extent upon its ability to obtain and enforce intellectual property rights for its technology in the United States. With respect to its interface technology, the Company currently has seven United States patents, as well as 24 foreign patents and two pending foreign patent applications. The Company has successfully defended many of its patents in court.
Principal Patent
The patent for the Company's system for interfacing a standard telephone set with a radio transceiver, U.S. Patent No. 4,658,096 (the 096 Patent), was issued by the U.S. Patent Office on April 14, 1987 and expires on April 14, 2004. The 096 Patent has been filed in 16 countries and to date has been issued in all but one of these countries.
The invention covered by the 096 Patent is an interface between a standard telephone and a cellular transceiver. The interface provides dial tone, off-hook detection signals and many of the other signals usually provided by regular wireline telephones. The interface also provides for the automatic generation of a send signal from the cellular transceiver once the telephone number has been entered.
Continuation Patents
In 1988 and 1990, the Company obtained two patents (U.S. Patent Nos. 4,775,997 and 4,922,517, respectively), the first of which is a continuation and broadening of the 096 Patent and the second of which is a continuation and further broadens the 096 Patent. These continuation patents expire on April 14, 2004. Also in 1988, the Company obtained a continuation-in-part of the 096 Patent, under U.S. Patent 4,737,975. Among other things, this patent allows the interface to be programmed to use three digit numbers, such as 911 or 411.
Other Patents
In 1992 and 1994, additional patents were granted to the Company (U.S. Patent Nos. 5,134,651 and 5,361,297) for a method and apparatus for providing answer supervision and an autonomous pay telephone. The Company has been granted several additional patents for self-diagnostics systems, payphones and answer supervision both in the U.S. and abroad. In addition, the Company has three patent applications in the U.S and 16 patent applications outside the U.S.
Applicability of the Company's Patents to Emerging Wireless Technologies
Although the Company believes its intelligent interface can be adapted to accommodate emerging wireless technologies, there can be no assurance that these new applications will fall within the scope of the existing patent protection.
Licensing of Technology
Trademarks and Other Proprietary Information
The Company has 11 registered trademarks which are: TELULAR plus design, TELULAR, CELJACK, PCSone , TELCEL, Hexagon Logo, PHONECELL, CELSERV, TELGUARD, CPX, and AXCELL. In addition, the Company has six registered Mexican trademarks covering the names and logos used for some of its products. The Company has 85 other foreign trademark registrations and 15 other foreign trademark applications.
Item 2.
Item 2. Properties
The Company leases, pursuant to a ten-year lease, its corporate headquarters in Vernon Hills, Illinois which occupies 72,000 square feet. In addition to serving as corporate headquarters, the facility houses manufacturing, sales and marketing, engineering, finance and administrative functions. The Company also leases space for international sales offices in Miami, Florida, Oxford, England and Singapore. The Company also leases space to house its domestic salesforce in Atlanta, Georgia.
Item 3.
Item 3. Legal Proceedings
Not applicable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 1998.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Price of and Dividends on Common Stock
The Company's Common Stock trades publicly on the Nasdaq National Market System under the symbol WRLS. The following table sets forth the quarterly high and low sales prices for each quarter of fiscal year 1998, 1997 and 1996, as reported by Nasdaq. Such quotations reflect inter- dealer prices without retail markup, markdown or commissions and may not necessarily represent actual transactions.
On November 20, 1998, there were approximately 376 shareholders of record, 7,804 beneficial shareholders and 34,710,636 shares of Common Stock outstanding. The Company has not paid any dividends since its inception and does not intend to pay any dividends on its Common Stock in the foreseeable future. Pursuant to the Company's Loan and Security Agreement with Sanwa Commercial Credit Corporation, the Company has agreed that, during the term of that agreement, the Company will not, without the consent of the lender, declare or pay any dividend or other distribution on any class of its stock.
From October 2, 1998, until November 20, 1998 (the last practicable date), the price for the Company's Common Stock has closed in the range of $0.969 to $0.594 per share. On November 12, 1998, the Company received notification from Nasdaq that the Company has a 90-day period to bring itself back into compliance with the Nasdaq's rules, which require, among other things, that listed companies maintain a minimum stock price per share of one-dollar. On October 30, 1998, the Company announced that its Board of Directors will seek shareholder approval at its annual shareholder meeting on January 26, 1999, to effect a Reverse Stock Split. By effectuating the Reverse Stock Split, the Company expects to raise its Share price above one-dollar and bring itself back into compliance with this listing requirement.
Recent Sales of Unregistered Securities
Compensation
In 1996, the Company entered into an employment agreement with Kenneth E. Millard, pursuant to which Mr. Millard agreed to serve as Chief Executive Officer and President of the Company. Under the Agreement, Mr. Millard is to eligible to receive an incentive bonus of $200,000, payable quarterly, based on performance targets established by the Board of Directors, a portion of which is to be paid in the form of shares of Common Stock of the Company (Common Stock) at fair market value. For the quarter ended December 31, 1997, the Company awarded Mr. Millard a bonus and in connection therewith issued Mr. Millard 5,373 shares of Common Stock valued at $11,350. For the quarter ended March 31, 1998, the Company awarded Mr. Millard a bonus and in connection therewith issued Mr. Millard 6,882 shares of Common Stock valued at $17,550. No bonuses were awarded for the three month periods ended June 30, 1998 and September 30, 1998.
In 1997, the Company entered into an employment agreement with Robert C. Montgomery, pursuant to which Mr. Montgomery agreed to serve as Chief Operating Officer and Executive Vice President of the Company. Under the Agreement, Mr. Montgomery is eligible to receive an annual incentive bonus of $100,000 under the Company's Senior Management Bonus Plan, payable quarterly, a portion of which is to be paid in the form of shares of Common Stock at fair market value. For the quarter ended December 31, 1997, the Company awarded Mr. Montgomery a bonus and in connection therewith issued Mr. Montgomery 2,686 shares of Common Stock valued at $5,675. For the quarter ended March 31, 1998, the Company awarded Mr. Montgomery a bonus and in connection therewith issued Mr. Montgomery 3,441 shares of Common Stock valued at $8,775. No bonuses were awarded for the three month periods ended June 30, 1998 and September 30, 1998.
In 1997, the Company entered into an employment agreement with Daniel D. Giacopelli, pursuant to which Mr. Giacopelli agreed to serve as Chief Technology Officer and Executive Vice President of the Company. Under the Agreement, Mr. Giacopelli is eligible to receive an annual incentive bonus of $100,000 under the Company's Senior Management Bonus Plan, payable quarterly, a portion of which is to be paid in the form of shares of Common Stock at fair market value. For the quarter ended December 31, 1997, the Company awarded Mr. Giacopelli a bonus and in connection therewith issued Mr. Giacopelli 2,686 shares of Common Stock valued at $5,675. For the quarter ended March 31, 1998, the Company awarded Mr. Giacopelli a bonus and in connection therewith issued Mr. Giacopelli 3,441 shares of Common Stock valued at $8,775. No bonuses were awarded for the three month periods ended June 30, 1998 and September 30, 1998.
During the fiscal year ended September 30, 1998, the Company paid the law firm of Hamman and Benn aggregate fees of $479,913 for legal services, which payments were comprised of $300,060 in cash and 101,615 shares of Common Stock valued at $179,853. The Company also paid the law firm of Bellows and Bellows aggregate fees of $44,403 for legal services, which payments comprised of $426 in cash and 21,880 shares of Common Stock valued at $43,977.
Each of the forgoing issuances of the Company's Common Stock did not involve a public offering of securities, and therefore was exempt from registration pursuant to Section 4(2) of the Securities Act of 1993, as amended.
Item 6.
Item 6. Selected Financial Data
The following table is a summary of certain condensed statement of operations and balance sheet information of the Company. The table sets forth-selected historical financial data of the Company for the years ended September 30, 1998, 1997, 1996, 1995 and 1994. The selected financial data were derived from audited financial statements. The summary should be read in conjunction with financial statements and notes thereto appearing elsewhere in this report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Introduction
The Company designs, develops, manufactures and markets products based on its proprietary interface technologies, which allows most standard wireline customer premises equipment -- phones, facsimile machines, computer modems, PBXs, and key systems, among others -- to operate over wireless telecommunications networks. Currently, the Company is devoting a substantial portion of its resources to international market development, extension of its core product line to new wireless standards, expansion, protection and licensing of its intellectual property rights and development of underlying radio technology.
The Company's operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements Pursuant to the Securities Litigation Reform Act that is Exhibit 99 to this Form 10-K.
Overview
The Company has seen substantial growth in the market for FWTs in both WLL and WAA systems. The Company encountered heightened activity during fiscal year 1998 that gives it reason to believe that the FWT market is maturing. Excluding the Motorola WLL project in Hungary during fiscal year 1997, the Company quoted more contracts, shipped more product (42% more than fiscal year 1997) and observed more data that confirmed momentum in the FWT market than during any previous period. The major trends driving the market include a broad consumer acceptance of cellular communications, rapid privatization of telecommunications in developed and developing countries, adoption of digital wireless transmission standards that enhance network capacity and service, service network providers' acceptance of FWTs as cost-effective answers to customer demand for improved telecommunications and PCS licensing that will drive down the price of wireless communications and expand the number of users within the U.S. However, poor economic conditions in Asia, which negatively affected the Company's prospects during fiscal year 1998, may continue for some time.
WLL, which is the core of the Company's FWT business in developing countries, involves cellular infrastructure employed predominately (and sometimes exclusively) for the fixed location user. Continued growth of the WLL market depends primarily on the pricing of WLL airtime service to the customer relative to available wireline prices, the relative local availability of WLL and wireline service, operator regulatory constraints on fixed cellular, and availability of money in a given country. These factors have contributed to the increase in the number of new WLL networks commissioned in 1998. Because FWT deployment lags network commissioning, the Company believes the pent up opportunity for its products is very large.
WAA, which represents the majority of the Company's sales in developed countries, has primarily involved wireless back-up of existing wireline systems, and where wireline service is unavailable or unreliable, using mobile cellular networks built primarily for handheld cellular phone users. Management anticipates that additional FWT markets for WAA applications will develop as existing cellular networks mature and new networks and services are introduced. As capacity and price competition increase on new and existing cellular networks and the growth rate in new cellular phone subscribers slows, mobile cellular operators will be forced to look for new revenue sources. FWTs provide an excellent opportunity for cellular network operators, as they are less costly to support than mobile units (permanently linked to a specific cell site), generate more average airtime, and operate mainly at off-peak times. The number of FWTs presently operating on WAA networks exceeds that of WLL and is driven by the relative price for airtime, as well as by the large installed base of mobile networks worldwide. The Company has a number of undertakings that embody its strategy to capitalize on the growth it anticipates for FWTs. During fiscal year 1998, the Company added new personnel in each of its international sales offices and will continue to strengthen and build its sales and marketing organizations.
The Company's product development program is designed to result in a line of FWTs over the next two years that will address the cellular radio standards projected to serve 85% of all cellular subscribers in the year 2000. During fiscal year 1998, the Company's FWTs continued to gain market position on its major radio standards (See Company Strategy in Item 1 above for more detail).
The Company introduced several new PHONECELLs during fiscal year 1998. These included: two new analog AMPS FWTs, the SX3(i) AMPS and the SX3(e) AMPS; a new digital TDMA FWT, the SX2(e) TDMA; and a new digital CDMA FWT, the SX2(e) CDMA. All of these products cost less to make and have more features than predecessor versions. The SX3 AMPS units include a transceiver that was designed by the Company.
The Company expects to introduce additional PHONECELLs during fiscal year 1999. The most significant new FWT is the SX4 GSM FWT. The SX4 GSM unit includes a transceiver that was designed by the Company, as well as, the Company's ASIC chip. The ASIC chip replaces some 75 electronic components and a circuit board, which significantly reduces the cost from the predecessor version.
The Company has been negotiating licenses with a number of large international telecommunications companies. The Company has agreed to provide component circuit boards to QUALCOMM Incorporated. During fiscal year 1998, the Company agreed to license certain technologies to Ericsson Radio Systems AB and to Nokia Mobile Phone Ltd.
Results of Operations
Fiscal Year 1998 Compared to Fiscal Year 1997
Net Product Sales. Net product sales of $38.8 million for the year ended September 30, 1998 decreased from $48.4 million for the year ended September 30, 1997. Net product sales, excluding net product sales to a large Motorola WLL project in Hungary during the year ended September 30, 1997, more than doubled from $17.7 million for the year ended September 30, 1997 to $38.8 million for the year ended September 30, 1998. This increase primarily resulted from shipments to WLL projects in The Philippines and Guinea, West Africa.
Royalty and Royalty Settlement Revenue. Royalty and royalty settlement revenue increased to $1.7 million during the year ended September 30, 1998, due primarily to the royalty settlement of $1.2 million with ORA Electronics, Inc. (See financial statement footnote 20)
Engineering and Development Expenses. Fiscal year 1998 engineering and development expenses of $8.2 million, increased 36% or $2.2 million over fiscal year 1997. The increase relates to the Company's increased focus on developing additional analog and digital FWTs, including its acquisition of Wireless Domain, Incorporated, which significantly increased the Company's engineering staff.
Selling and Marketing Expenses. Selling and marketing expenses for the year ended September 30, 1998 increased 61%, or $2.7 million, compared to the same period in fiscal year 1997. The increase was primarily a result of the Company's efforts to market its new products and increase its sales force to support worldwide sales coverage.
General and Administrative Expenses (G&A). G&A for fiscal year 1998 decreased 25% or $1.5 million compared to the same period in fiscal year 1997. The decrease is primarily attributable to the reduction or elimination of expenditures and the leveraging of available resources.
Provision for doubtful accounts. The provision for doubtful accounts expense decreased during fiscal year 1998 from fiscal year 1997, due to an improvement in the Company's collections experience.
Amortization. Amortization expense increased during fiscal year 1998 from fiscal year 1997, due to the amortization of goodwill recorded in connection with the acquisition of Wireless Domain, Incorporated.
Other Income. Other income during fiscal year 1998 decreased by $0.5 million compared to fiscal year 1997. The decrease is primarily due to the settlement of litigation with Global Tel*Link for $0.6 million during fiscal year 1998.
Net Loss. The fiscal year 1998 net loss of $10.4 million compares to a net loss of $5.3 million in fiscal year 1997. The change in result for fiscal year 1998 resulted from lower overall volumes and increased investments in engineering and development and selling and marketing expenses in fiscal year 1998 compared to fiscal year 1997.
Net loss applicable to common shares. After giving effect to the cumulative preferred stock dividend of $0.9 million in fiscal year 1998, net loss applicable to common shares of $11.3 million, or ($0.34) per share, compares to a net loss applicable to common shares of $7.9 million or ($0.25) per share, in fiscal year 1997. Fiscal year 1997 amounts include the preferred stock beneficial conversion discount of $2.2 million and the cumulative preferred stock dividend of $0.4 million.
Fiscal Year 1997 Compared to Fiscal Year 1996
Total Revenue. For the year ended September 30, 1997, total revenue increased 79% to $50.0 million from $27.9 million in fiscal year 1996. Sales of FWTs increased approximately 96% to $39.7 million in fiscal year 1997, due primarily to a $15.3 million increase in shipments to the WLL project in Hungary. Sales of WAS products increased 26% to $8.8 million in 1997.
Engineering and Development Expenses. Fiscal year 1997 engineering and development expenses of $6.0 million, increased 23% over fiscal year 1996. This resulted from the Company's increased focus on developing analog and digital FWTs that will operate on additional radio standards.
Selling and Marketing Expenses. Fiscal year 1997 selling and marketing expenses decreased 28% compared to fiscal year 1996. The Company, as part of the restructuring program, realigned its worldwide sales organization during fiscal year 1996. Lower levels of selling and marketing expense were maintained in fiscal year 1997.
General and Administrative Expenses (G&A). Fiscal year 1997 G&A decreased 13% compared to fiscal year 1996. The decrease is essentially attributable to the reduction or elimination of expenditures, primarily through headcount reductions, achieved through the restructuring program implemented during the second and third fiscal quarters of fiscal year 1996.
Allowance for Doubtful Accounts. The allowance for doubtful account expense decreased from fiscal year 1996 to fiscal year 1997, due to the collection of $0.5 million account receivable from one customer that was fully reserved for during fiscal year 1996 and an improvement in the Company's collection experience.
Amortization Charges. Fiscal year 1997 amortization charges decreased by 43% compared to fiscal year 1996. Intangible assets written off as part of restructuring and impairment charges during fiscal year 1996 significantly reduced related amortization charges. The write-off reduced the intangible asset balance and related amortization charges in fiscal year 1997 compared to fiscal year 1996.
Other Income (Expense). Other income for the year ended September 30, 1997, decreased by approximately $0.1 million compared to fiscal year 1996. This decrease was primarily the result of lower royalty income, which was partially offset by higher interest income, as cash balances in interest bearing accounts were higher in 1997 compared to 1996.
Net Loss. The fiscal year 1997 net loss of $5.3 million compares to a net loss of $26.6 million in fiscal year 1996, an improvement of 80%. The improvement in fiscal year 1997 resulted from increased net sales and gross margins and lower operating expenses. The fiscal year 1996 net loss included restructuring and impairment charges of $11.0 million.
Loss applicable to common shares. After giving effect to amortization of the preferred stock beneficial conversion discount of $2.2 million and cumulative preferred stock dividend of $0.4 million for fiscal year 1997 (see financial statement footnote 11), loss applicable to common shares of $7.9 million, or ($0.25) per share, compares to loss applicable to common shares of $26.6 million, or ($0.96) per share for fiscal year 1996.
Liquidity and Capital Resources
At September 30, 1998, the Company had $19.9 million in cash and cash equivalents and working capital of $28.2 million.
Cash used for operations was $5.7 million for the year ended September 30, 1998, compared to $0.5 million of cash provided for the same period in 1997, due primarily to the increased operating loss.
Cash used for capital expenditures and other investing activities was $3.0 million for the year ended September 30, 1998 compared to $3.6 million for the same fiscal period last year. The Company spent nearly the same amount for capital expenditures in both periods. In 1997, the Company used $0.5 million of cash to increase its equity position in Wireless Domain, Inc.
Financing activities provided $0.2 million during fiscal year 1998, compared to $19.1 million during fiscal year in 1997. The fiscal year 1997 amount includes proceeds to the Company of $18.8 million resulting from the issuance of redeemable preferred stock.
In 1997, the Company entered into a Loan and Security Agreement with Sanwa Business Credit Corporation that, among other things, provides a credit facility with a loan limit of $20.0 million (the Loan). Borrowings under the Loan are subject to borrowing base requirements and other restrictions. Under the Loan and Security Agreement, the Company is required to comply with certain affirmative and negative covenants. The Loan matures on April 23, 2000. As of September 30, 1998, the Company's borrowing capacity under the Loan provisions was $6.1 million although there have been no borrowings and none are contemplated in the near-term. The Company will use the Loan, as necessary, to provide working capital to support very large orders.
In 1997, the Company issued 20,000 shares of Series A Convertible Preferred Stock (the Preferred Stock) for $18.8 million that is net of issuance cost of $1.2 million. The Preferred Stock automatically converts to Common Stock on April 16, 1999, or October 16, 1999, depending on the conversion price and includes the equivalent of a 5% annual stock dividend. Holders of the Preferred Stock are entitled, at their option, subject to trading volume and other restrictions, to convert Preferred Stock into shares of Common Stock using defined conversion formulas based on the Nasdaq closing bid prices for the Company's Common Stock. Holders of the Preferred Stock are not entitled to vote on matters submitted for vote to the stockholders of the Company. As of September 30, 1998, 3,494 shares of Preferred Stock had been converted into 1,581,170 shares of Common Stock.
The Company is using much of the capital raised from the Preferred Stock offering to fund new product development. Beyond its specific research and product development needs, expected future uses of cash include working capital requirements, marketing and sales support programs in anticipation of future revenues and certain capital expenditures. Based upon its current operating plan, the Company believes its existing capital resources, including the credit facility and proceeds from the issuance of Preferred Stock, should enable it to maintain its current and planned operations through fiscal year 1999. Cash requirements may vary and are difficult to predict given the nature of the developing markets targeted by the Company. The amount of royalty income from the Company's licensees is unpredictable, but could have an impact on the Company's actual cash flow.
The Company requires letters of credit or qualification for export credit insurance underwritten by third party credit insurance companies or the Export-Import Bank of the United States on a substantial portion of its international sales orders. Also, to mitigate the effects of currency fluctuations on the Company's results of operations, the Company endeavors to conduct all of its international transactions in U.S. dollars. To date, the Company's sales have not been adversely affected by currency fluctuations; however, as the Company's international operations grow, foreign exchange or the inflation of a foreign currency may pose greater risks for the Company, and the Company may be required to develop and implement additional strategies to manage these risks.
From October 2, 1998, until November 20, 1998 (the last practicable date), the price for the Company's Common Stock has closed in the range of $0.969 to $0.594 per share. On November 12, 1998, the Company received notification from Nasdaq that the Company has a 90-day period to bring itself back into compliance with the Nasdaq's rules, which require, among other things, that listed companies maintain a minimum stock price per share of one-dollar. On October 30, 1998, the Company announced that its Board of Directors will seek shareholder approval at its annual shareholder meeting on January 26, 1999, to effect a Reverse Stock Split. By effectuating a Reverse Stock Split, the Company expects to raise its Share price above one-dollar and bring itself back into compliance with this listing requirement.
If the Company's stock is delisted from the Nasdaq National Market System, it would continue to be traded over the counter, but the delisting would likely adversely affect the attractiveness of the stock to many investors, including many institutional investors. In addition, delisting of the stock would give rise to a right on the part of the holders of the Company's Series A Convertible Preferred Stock (the Preferred Stock) to redeem their Preferred Stock at a redemption price per Share equal to the greater of (i) $1,250 and (ii) the product of the conversion rate at the time of delisting and the closing bid price immediately prior to that date. As of November 20, 1998, 13,506 Shares of Preferred Stock were issued and outstanding.
Impact of the Year 2000 Issue
Recently, national attention has focused on the potential problems and associated costs resulting from computer programs that have been written using two digits rather than four to define the applicable year. These programs treat all years as occurring between 1900 and 1999 and do not self-correct to reflect the upcoming change in the century. If not corrected, computer applications could fail or create erroneous results by or at the Year 2000.
Management has conducted a formal assessment of its significant information technology systems, including computers used in its production and manufacturing functions. Based upon this assessment, management believes that only minor modifications will be required to its internal software and hardware (imbedded chips) so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The cost of such modifications, including testing and implementation, is not expected to have a material adverse effect on the Company's results of operations and will be funded through operating cash flows. The Company expects to complete the implementation (final) phase of changes to its internal computer systems by January 31, 1999, however, there can be no assurance that such schedule will be met.
The Company does not conduct any of its purchase transactions through computer systems that interface directly with suppliers. The Company has also initiated a formal assessment of its significant suppliers to determine the extent to which the Company would be vulnerable if those third parties' fail to remedy Year 2000 issues. To date, the Company has received written responses from approximately 1,200 of its 1,400 suppliers (86%). The Company has evaluated these responses and is now monitoring the progress of suppliers that are not fully ready for the Year 2000. Where the Company determines that critical suppliers will not be ready for the Year 2000, the Company will take appropriate actions.
With respect to its customers, the Company currently has no material systems that interface directly with customers. Further, the Company has not entered into any significant supply contracts that extend beyond September 30, 1999. The Company's large customers beyond December 31, 1999 will likely be new customers due to the project nature of its business. In addition, as a global company that operates in many different countries, some of which may not be addressing the Year 2000 problem as aggressively as the United States, there can be no assurances that future customers will be Year 2000 compliant. Moreover, because markets for the Company's products are dependent on third parties, such as wireless local loop network providers, management cannot fully assess the impact that the Year 2000 problem will have on future sales.
The Company has reviewed each of its product lines and has determined that its products will operate properly in the Year 2000 and beyond. However, for some industries, the Company's products are integrated with other company's products and sold as a combined product. There can be no assurances that such combined products, current and future, will operate properly in the Year 2000 and beyond.
The cost of the Company's efforts to prepare for the Year 2000 which is estimated at $100,000 (including approximately $30,000 spent to date), and the date on which the Company believes it will complete its internal Year 2000 compliance efforts, reflect management's current estimates based upon available information. Management will continue to monitor this issue, particularly the possible impact of third-party Year 2000 compliance on the Company's operations, and will modify its estimates if warranted.
Management believes that it has an effective program in place to resolve its internal Year 2000 issues in a timely manner. Nevertheless, because it is not possible to anticipate all future outcomes, especially when third parties are involved, there could be circumstances in which the Company is adversely effected by Year 2000 problems. The loss of revenue from such occurrences has not been estimated.
Forward Looking Information
Statements contained in this filing, other than historical statements, consist of forward looking information. The Company's actual results may vary considerably from those discussed in this filing as a result of various risks and uncertainties. For example, there are a number of uncertainties as to the degree and duration of the revenue momentum, which could impact the Company's ability to be profitable as lower sales may likely result in lower margins. In addition, product development expenditures, which are expected to benefit future periods, are likely to have a negative impact on near term earnings. Other risks and uncertainties, which are discussed in Exhibit 99 to this filing, include the risk that technological change will render the Company's technology obsolete, the risk of litigation, the Company's ability to develop new product, the Company's dependence on contractors and Motorola, the Company's ability to maintain quality control, the risk of doing business in developing markets, the Company's dependence on research and development, the uncertainty of additional funding, the potential for redemption of preferred stock, the effects of control by existing shareholders, global economic conditions, intense industry competition, the uncertainty in the development of wireless service generally, and the risk that the Company's Common Stock may be delisted from the Nasdaq National Market System for failure to increase its stock price over one dollar.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosure about Market Risk
On March 2, 1998, the Company received 300,000 shares of ORA Electronics, Inc. common stock (ORA stock) in connection with the settlement of litigation (See financial statement footnotes 7 and 20). ORA stock is traded on Nasdaq's Over The Counter (OTC) system. Although ORA stock is subject to price fluctuations associated with all securities that are traded on the OTC system, the Company has the right to receive additional shares of ORA stock to ensure the fair market value of the settlement consideration received in stock is equivalent to $1.5 million on February 1, 2000.
The Company frequently invests available cash and cash equivalents in short term instruments such as: certificates of deposit, commercial paper and money market accounts. Although the rate of interest paid on such investments may fluctuate over time, each of the Company's investments is made at a fixed interest rate over the duration of the investment. All of these investments have maturities of less than 90 days. The Company believes its exposure to market risk fluctuates for these investments is not material as of September 30, 1998.
Item 8.
Item 8. Financial Statements and Supplementary Data
1. The following financial statements are included in Part II, Item 8 of this Form 10-K. Report of Independent Auditors .................. 17 Consolidated Balance Sheets as of September 30, 1998 and 1997 ............... 18 Consolidated Statements of Operations for the years ended September 30, 1998, 1997 and 1996 ................................... 19 Consolidated Statements of Stockholders' Equity for the years ended September 30, 1998, 1997 and 1996 ............................. 20 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996 ................................... 21 Notes to Consolidated Financial Statements ...... 22
Report of Independent Auditors
The Board of Directors Telular Corporation
We have audited the accompanying consolidated balance sheets of Telular Corporation as of September 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedules listed in the Index at 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telular Corporation at September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
October 26, 1998
Telular Corporation Notes to Consolidated Financial Statements (In Thousands, Except Share Data)
1. Description of Business
Telular Corporation (the Company), operates in a single line of business and designs, engineers, and manufactures component elements and complete telecommunications equipment assemblies and other complementary products and markets such products domestically and internationally by sale, lease, or license.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Telular-Adcor Security Products and Telular International, Inc. All significant intercompany balances and transactions have been eliminated.
Revenue Recognition
Product sales and associated costs are recognized at the time of shipment of products or performance of services. Royalty revenue is calculated as a percentage of sales by the licensee and is recognized by the Company upon notification of sales by the licensee.
Cash Equivalents
Cash equivalents consist of highly liquid investments that have maturities of three months or less from the date of purchase.
Financial Instruments
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. Credit risks with respect to trade receivables are limited due to the diversity of customers comprising the Company's customer base. The Company generally receives irrevocable letters of credit that are confirmed by U.S. banks to reduce its credit risk. The Company performs ongoing credit evaluations and charges uncollectible amounts to operations when they are determined to be uncollectible.
Inventories
Inventories are stated at the lower of first in, first out (FIFO) cost or market.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Earnings Per Share
During the year ended September 30, 1998, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS No. 128). SFAS No. 128 requires the calculation of basic earnings per share, which is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the period and diluted earnings per common share, which is computed using the weighted-average number of shares of common stock, common stock equivalents, and any other dilutive securities. Adoption of the new statement did not have a material impact on the earnings per share amounts presently reported in the financial statements.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income (SFAS No. 130), which is effective for years beginning after December 15, 1997. This Statement requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Management has not completed its review of SFAS No. 130, but anticipates that the adoption of this statement will not have a significant effect on the Company's financial disclosures.
Segment Disclosures
In June 1997, the FASB issued Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), which is effective for years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will adopt the new requirements retroactively in fiscal year 1999. Management has not completed its review of SFAS No. 131, but anticipates that the adoption of this statement will not have a significant effect on the Company's financial disclosures.
Reclassifications
Certain amounts in the September 30, 1996 and 1997 financial statements have been reclassified to conform to the September 30, 1998 presentation.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using straight-line and accelerated methods for financial reporting purposes.
Investments
Management determines the appropriate classification of equity securities as of each balance sheet date. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in the a separate component of stockholders' equity. Interest, dividends, and realized gains and losses on securities classified as available-for-sale are included in income.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement of Financial Accounting Standard No. 109, Accounting For Income Taxes (SFAS No. 109), which requires that the liability method be used in accounting for income taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws in effect at the date of the financial statements.
Intangible Assets
Intangible assets consist primarily of license and technology agreements, which are being amortized over the lives of the related agreements using the straight-line method.
Excess of Cost Over Fair Value of Net Assets Acquired
The excess of cost over fair value of net assets acquired (goodwill) is amortized based on the straight-line method over ten years (See Note 5 and 6).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
2. Summary of Significant Accounting Policies (continued)
Deferred Financing Costs
During the year ended September 30, 1996, financing costs incurred to issue the convertible debentures, totaling $515, were capitalized and were amortized from the date of issuance to December 1996 (the date that the last of the debentures was converted). During the year ended September 30, 1997, financing costs incurred related to the revolving line of credit were $348. These costs are being amortized over 36 months using the straight-line method. During the years ended September 30, 1998, 1997 and 1996, total amortization of deferred financing costs were $116, $73 and $481, respectively.
Stock-Based Compensation Expense
The Company recognizes stock-based compensation expense using Accounting Principles Board Opinion No. 25 (APB No. 25), which is based on the excess of the fair value of the stock on the measurement date, which is the grant date for stock options, over the exercise price of options granted to employees.
In October 1995, the FASB issued Statement of Financial Accounting Standard, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123 encourages companies to record compensation costs for stock options granted to employees on the date of grant based on the fair value of these options. Alternatively, it allows companies to continue to measure compensation based on the difference between the option exercise price and the fair market value on the date of grant. The Company has elected to continue measuring compensation under APB No. 25.
Fair Value of Financial Instruments
The carrying values reported in the statement of financial position for receivables, revolving line of credit, and accounts payable approximate their fair values at September 30, 1998 and 1997.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
3. Inventories
4. Property and Equipment
5. Write-Down of Intangible Assets
During the year ended September 30, 1996, the carrying value of goodwill was determined to be impaired based on the estimated undiscounted cash flow of the related businesses over the remaining life of the goodwill. Events relating to a change in management and the corresponding change in business direction and the restructuring plan (See Note 5) prompted the evaluation of these intangibles. During the year ending September 30, 1996, impairment charges of approximately $4,812 were included in restructuring and impairment charges.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
5. Write-Down of Intangible Assets (continued)
As part of the restructuring plan (See Note 13), the Company decided to discontinue the manufacturing and marketing of products under a certain license agreement. As a result, during the year ended September 30, 1996, the remaining unamortized asset of approximately $2,530 was written off and was included in restructuring and impairment charges.
6. Acquisitions
On June 28, 1996, the Company entered into an agreement and acquired a 33% interest in Wireless Domain Incorporated (WD), formerly Telepath Corporation, in exchange for $1,000 in cash and 350,000 shares of common stock of the Company valued at approximately $2,200. During the year ended September 30, 1997, the Company increased its equity position in WD to 50% by purchasing an additional 17% of WD in exchange for $500 in cash and 150,000 shares of common stock of the Company valued at approximately $695. On October 1, 1997, the Company acquired the remaining 50% of WD in exchange for 500,000 shares of common stock valued at $1,700.
Prior to October 1, 1997, the investment in WD was accounted for under the equity method. Since October 1, 1997, the operations of WD have been included in the consolidated financial statements.
The total purchase price for WD of approximately $6,000 exceeds the fair value of the net assets acquired by $4,896. The purchase price was allocated to the acquired assets based upon their estimated respective fair market values.
The following pro forma results of operations assumes the acquisitions of WD occurred as of October 1, 1996, after giving effect to certain adjustments including amortization of goodwill and equity income recorded for the periods in which the Company owned less than 100% of WD.
Twelve Months ended September 30, 1997 (Unaudited)
Total Revenue $ 48,968 Loss applicable to common (8,716) shares --------- Basic and diluted loss per (0.28) common share =========
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
6. Acquisitions (continued)
Revenues would not change as a result of the acquisition as WD's revenues related entirely to amounts billed to the Company. The pro forma financial information does not purport to be indicative of the results of operations that would have occurred had the transaction taken place at the beginning of the periods indicated or of future results of operations.
7. Investments
On March 2, 1998, the Company received 300,000 shares of ORA Electronics, Inc., formerly Alliance Research Corporation, common stock, valued at $450, as part of a litigation settlement (See Note 20). The investment is classified as available-for-sale and is included in other assets. On September 30, 1998, the investment had a fair value of $525. The Company recorded an unrealized gain of $75 at September 30, 1998.
8. Income Taxes
At September 30, 1998, the Company has net operating loss carryforwards of approximately $85,616 for income tax purposes that begin expiring in 2008. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
The valuation allowance has increased by $4,544 during the year ended September 30, 1998, due principally to the increase in the net operating loss carryforwards in 1998. Based on the Internal Revenue Code and changes in the ownership of the Company, utilization of the net operating loss carryforwards may be subject to annual limitations.
9. Revolving Line of Credit
On April 23, 1997, the Company entered into a Loan and Security Agreement with Sanwa Business Credit Corporation that, among other things, provides a revolving credit facility with a loan limit of $20,000 (the Loan). Borrowings under the Loan are limited to certain percentages and amounts of accounts receivable and inventories. The Loan requires the Company to maintain a $4,000 compensating balance; beginning with the second fiscal quarter of 1998, this compensating balance requirement may be waived based upon attainment of specified tangible net worth levels. The Company had approximately $6,100 and $11,400, in available borrowings under this agreement at September 30, 1998 and September 30, 1997, respectively. The Loan is secured by substantially all the assets of the Company. Under the Loan and Security Agreement, the Company is restricted from making certain dividend payments and is required to comply with certain affirmative and negative covenants. The Loan matures on April 23, 2000. At the Company's election, the Loan carries interest at the bank's prime rate plus 1.0% or the Eurodollar rate (Libor) plus 3.00%. The Company has not borrowed any amounts pursuant to the loan as of September 30, 1998.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
10. Convertible Debentures
On December 11, 1995, the Company issued $18,000 in convertible debentures (the Debentures) at 4% per annum. The Debentures were issued under the provisions of Regulation S as promulgated under the United States Securities Act of 1933, as amended. Holders of the Debentures were entitled, at their option any time after issuance until December 10, 1997, to convert principal and interest accrued thereon, in whole or in part, into shares of common stock using defined conversion formulas based on Nasdaq closing bids for the Company's common stock. The Company is entitled, at its option any time commencing one year after issuance (and under certain circumstances prior to that date) through maturity, to require the holders to convert the principal and accrued interest into shares of common stock of the Company using defined conversion formulas based on Nasdaq closing bids for the Company's common stock. During the years ended September 30, 1997 and 1996, all convertible debentures and accrued interest totaling $1,555 and $16,665 were converted into 378,200 and 6,655,315 shares of common stock, respectively.
11. Redeemable Preferred Stock
During the year ending September 30, 1997, the Company issued 20,000 shares (10,000 shares on April 16, 1997 and 10,000 shares on June 6, 1997) of Series A Convertible Preferred Stock (the Preferred Stock) for $18,800 which is net of issuance cost of $1,200. The Preferred Stock automatically converts to Common Stock on April 16, 1999, or October 16, 1999, depending on the conversion price and includes the equivalent of a 5% annual stock dividend ($895 and $385 at September 30, 1998 and 1997, respectively). Holders of the Preferred Stock are entitled, at their option, subject to trading volume and other restrictions, to convert Preferred Stock into shares of Common Stock using defined conversion formulas based on the Nasdaq closing bid prices for the Company's Common Stock. In addition, the holders have the option to redeem the Preferred Stock upon the occurrence of a: (i) consolidation or merger with another company; (ii) sale or transfer of substantially all assets; or (iii) 50% change in ownership. The redemption price upon holder redemption is the greater of $1,250 per share or the cash equivalent of the defined conversion formula on the date redemption. The Company is entitled to require the holders to convert the Preferred Stock and accrued dividends into shares of common stock of the Company using a defined conversion formula based upon the Nasdaq closing bid prices for the Company's common stock. In addition, the Company has the right to redeem the Preferred Stock after April 15, 1999, for $1,200 per share plus 120% of the accrued dividends. Holders of the Preferred Stock are not entitled to vote on matters submitted for vote to the stockholders of the Company.
The Preferred Stock reflects a beneficial conversion feature that allows holders to convert the security to common stock of the Company at a discount. The amount of the discount is determined using Nasdaq closing bid prices for the Company's common stock. During year ending September 30, 1997, the Company recorded $2,200 of amortization of preferred stock beneficial conversion discount. The offset entry to amortization of preferred stock beneficial conversion discount increased redeemable preferred stock by $2,200. This amount will accrete to the Company's common stock and additional paid-in capital accounts as shares of redeemable preferred stock are converted into shares of common stock of the Company. During the year ended September 30, 1998, 3,494 shares of preferred stock were converted into 1,581,170 shares of common stock.
12. Related Party Transactions
Pursuant to the terms of a 1993 Stock Purchase Agreement, the Company issued and sold 3,824,240 shares of common stock to Motorola, Inc. (Motorola) in exchange for cash proceeds of $11,000, access to specified services of Motorola, and certain transceiver supply and pricing arrangements. Among other things, the Stock Purchase Agreement contains restrictions on certain actions that would adversely impair the rights of Motorola and on the sale of additional Company stock to strategic investors, as defined. In connection with this transaction, the patent cross-license agreement was amended to revise the royalty due to Motorola for units leased, used, or sold and to reduce the purchase price of certain products purchased by the Company from Motorola.
In addition, the Company has an agreement with Motorola, whereby the Company will provide engineering services, at their typical rates, over a three-year period ending November 10, 1998. For the years ended September 30, 1998, 1997 and 1996, payments received under this agreement were approximately $1,900, $1,850 and $1,000, respectively. The Company had obtained a volume purchase commitment, as defined, from Motorola over a three-year period commencing January 1, 1996. No sales were made to Motorola or its affiliates pursuant to this purchase commitment during 1998. Net sales made to Motorola and its affiliates pursuant to this purchase commitment were $21,190 and $6,000 during the fiscal years ended September 30, 1997 and 1996, respectively.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
12. Related Party Transactions (continued)
Pursuant to the terms of the patent license agreement with Motorola, the Company receives a royalty for each unit leased, used, or sold by Motorola. The agreement will remain in effect for the life of the patents by country, unless either party in accordance with the terms of the agreement terminates it. Pursuant to a technology transfer agreement with DNIC Brokerage Co. (DNIC), the Company's predecessor, the Company remits the first $250 of royalties received annually to DNIC. For the years ended September 30, 1998, 1997, and 1996, royalty income earned by the Company pursuant to the Motorola agreement was approximately $350, $496, and $644, respectively.
Accounts receivable from Motorola were $1,268 and $4,670 as of September 30, 1998 and 1997, respectively.
Purchases from Motorola totaled approximately $8,020, $9,557, and $12,983 for the years ended September 30, 1998, 1997, and 1996, respectively. Purchases from Wireless Domain totaled $2,709 and $675 for the years ended September 30, 1997 and 1996, respectively.
Accounts payable to Motorola, were approximately $1,185 and $3,449 for the years ended September 30, 1998 and 1997, respectively. A payable to Wireless Domain did not exist as of September 30, 1998. Accounts payable to Wireless Domain was approximately $191 on September 30, 1997.
13. Restructuring and Impairment Costs
On January 22, 1996, the Company announced a restructuring program that was completed during the third quarter of fiscal year 1996. The difficulty in predicting demand for the Company's products, due in part to immature foreign markets, underscored the importance of properly aligning costs and expenses to attainable levels of revenue. Manufacturing and engineering consolidation, outsourcing, and the elimination of noncore product lines were the focus of the restructuring. The Company's Puerto Rico and Illinois manufacturing operations were phased out during the second fiscal quarter of fiscal year 1996, and production was consolidated at the Company's Atlanta, Georgia, facility. The restructuring program has reduced general, administrative, and manufacturing costs Company-wide.
Restructuring charges related to the activities discussed above were approximately $6,740 and consist of intangible assets, inventory, and fixed asset write-offs as well as severance payments to employees separated from the Company. Restructuring payments were approximately $675 in fiscal year 1996. These charges are included in restructuring and impairment charges. See Note 5 for discussion of impairment of intangible assets.
14. Leases
The Company and its subsidiaries occupy certain facilities under lease agreements and lease certain equipment under various agreements expiring through December 31, 2003. Rent expense for the years ended September 30, 1998, 1997, and 1996 was approximately $806, $596, and $595, respectively. Future minimum obligations under noncancelable operating leases are as follow:
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
15. Capital Stock and Stock Options
The Company has a Stock Incentive Plan (the Plan). Under the Plan, options to purchase shares of common stock may be granted to all employees and employed directors. Outside of the Plan, the Company has entered into stock option agreements (the Non-Qualified Stock Option Agreements) with officers and key employees of the Company.
Under the Non-Qualified Stock Option Agreements, certain employees were granted options before the Company's 1994 initial public offering. These options were granted at exercise prices, which range from $0.93 to $23.00 per share, were determined by the Board of Directors, and represented estimated fair market values of the Company's common stock at the grant date. These options are fully vested and, if not exercised or terminated, will terminate on the fifth anniversary of the vesting date.
Under the Plan, certain officers and key employees have been granted stock options. These options vest over two years, as defined in the agreement. Upon termination of employment for any reason other than death or termination without cause, any options that have not vested shall terminate. All options, if not exercised or terminated, will terminate on the tenth anniversary of the date of grant. The executive may purchase at any time less than the full number of shares for which the option is then exercisable.
Non-Qualified Stock Options have been granted to officers and all employees of the Company pursuant to the Plan. These options will vest either immediately or over a period of up to seven years, as defined in the agreement. All options, if not exercised or terminated, will terminate either on the sixth or the tenth anniversary of the date of grant as defined in the agreement.
Non-Qualified Stock Options have been granted to the independent directors of the Company in lieu of compensation as directors and members of committees of the Board of Directors which, if not exercised or terminated, will terminate on the sixth anniversary of the date of grant.
In April 1996, the Company reset the exercise price on the options granted to officers, all employees, and directors pursuant to the Plan. The revised exercise price represented the fair value of the Company's stock as of April 17, 1996, and, accordingly, no compensation expense was recognized. In October 1997, the Company once again reset the exercise price for all outstanding options. The revised exercise price represented the fair value of the Company's stock as of October 28, 1997, and, accordingly, no compensation expense was recognized.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
15. Capital Stock and Stock Options (continued)
Stock option activity, including Non-Qualified Stock Options, activity under the Plan, and options granted to independent directors, is as follows (in thousands, except exercise prices):
Exercisable at end of year 690 779 866 Exercise price range $ 0.93 - $ 18.00 $ 0.93 - $ 23.00 $ 0.93 - 23.00
At September 30, 1998, 2,476 of the 2,750 options outstanding had an exercise price between $1.91 and $3.06 per share. The options had a weighted average remaining contractual life of 6.5 years.
A summary of the weighted-average fair value of options granted during 1998 and 1997 is as follows:
At September 30, 1998, the Company has reserved 3,000,000 shares of the Company's common stock for issuance in connection with the Plan.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
15. Capital Stock and Stock Options (continued)
Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to October 1, 1995, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, risk-free interest rates of 6.0%, 6.5% and 6.3%, respectively, volatility factor of the expected market price of the Company's common stock of 35%; a weighted-average expected life of the options of four years; and no dividend yield.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's option, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
16. Research and Development Expenses
Research and development expenses for the years ended September 30, 1998, 1997, and 1996, were approximately $7,629, $5,698, and $4,271, respectively.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
17. Major Customers
For the year ended September 30, 1998, the Company derived approximately $4,266 (11%) and $7,369 (19%) of its total revenues from two customers, Qualcomm, Inc. and Guinea Sotelgui S.A., respectively. As of September 30, 1998, $160 was included in accounts receivable from Qualcomm, Inc and none for Guinea Sotelgui S.A. For the years ended September 30, 1997 and 1996, the Company derived approximately $21,742 (44%) and $8,600 (31%) of its total revenues from one customer, Motorola, of which approximately $4,690 and $4,100 was included in accounts receivable at September 30, 1997 and 1996, respectively.
18. Export Sales
Export sales were approximately $30,010, $39,272, and $12,872 for the years ended September 30, 1998, 1997, and 1996, respectively. Export sales were primarily to the Asian and European, Middle Eastern, and African (EMEA) regions during the years ended September 30, 1998 and 1997, and to the Caribbean and Latin American (CALA) and EMEA regions during the year ended September 30, 1996.
19. Contingencies
The Company is involved in legal proceedings, which arise in the ordinary course of its business. While any litigation contains an element of uncertainty, based upon the opinion of the Company's counsel, management believes that the outcome of such proceedings will not have a material adverse effect on the Company's consolidated results of operations.
20. Litigation Settlements
On March 2, 1998, the Company reached settlement in its patent infringement case against ORA Electronics, Inc. and received the following from ORA Electronics, Inc.: $500 in cash, a $1,000 promissory note, 300,000 shares of ORA Electronics, Inc. common stock (ORA stock) with a fair market value of $450 (See Note 7) and the right to receive additional shares of ORA stock to ensure the fair market value received in stock is equivalent to $1,500 on February 1, 2000. The Company recorded royalty and royalty settlement revenue of approximately $1,176 during fiscal year 1998 which is equivalent to the fair market value of the cash and assets received on March 2, 1998, net of legal fees.
On September 8, 1998, the Company reached settlement through arbitration in its contract termination case with Global Tel Link Corporation. The arbitrator awarded Global Tel Link Corporation $618 in damages which is included in other expenses as of September 30, 1998.
Telular Corporation Notes to Consolidated Financial Statements (continued) (In Thousands, Except Share Data)
21.Employee Benefit Plan
The Company sponsors a defined contribution plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. The Company may match employee contributions on a discretionary basis. There were no amounts charged against operations related to the Company's match for the years ended September 30, 1998, 1997, and 1996.
22. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended September 30, 1998, 1997, and 1996 (in thousand, except share data).
The accumulation of fiscal year 1996 quarterly net (loss) income per common share does not equal the net loss per common share for the year ended September 30, 1996, due to the large number of shares issued in conjunction with the conversion of debentures during the second and third quarters of fiscal year 1996.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Directors of the Company in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on or before December 29, 1998, which is incorporated herein.
The executive officers of the Company and their ages as of November 20, 1998 are as follows:
Name Age Position
Kenneth E. Millard 51 Chief Executive Officer and President Robert C. Montgomery 57 Executive Vice President and Chief Operating Officer Daniel D. Giacopelli 40 Executive Vice President and Chief Technology Officer Jeffrey L. Herrmann 33 Senior Vice President, Chief Financial Officer, Secretary S.W.R. (Sandy) Moore. 55 Senior Vice President, Strategic Alliances & OEM Sales
Kenneth E. Millard has served as a director, President and Chief Executive Officer of the Company since April 1996. Mr. Millard served as President and Chief Operating Officer of Oncor Communications, based in Bethesda, Maryland from 1992 to 1996. He worked for Ameritech from 1982 to 1992 where he served as President and Chief Executive Officer of Michigan Bell Telephone Company from 1989 to 1992. Prior to 1989, he held the positions of Senior Vice-President of Corporate Strategy for three years and Senior Vice-President and General Counsel of Ameritech for four years. From 1972 to 1982, Mr. Millard worked for AT&T and Wisconsin Bell as an attorney.
Robert C. Montgomery has served as director since October 28, 1997. He has been the Company's Executive Vice President and Chief Operating Officer since 1996. Prior to that, Mr. Montgomery was President (and founder) of Telular-Adcor Security Products, Inc., a company that was acquired by the Company in 1993. Previously, Mr. Montgomery was a partner at McKinsey & Company. He was employed by McKinsey & Company for twelve years.
Daniel D. Giacopelli has served as director, Executive Vice President and Chief Technology Officer of the Company since October 28, 1997. Mr. Giacopelli founded and was President and Chief Executive Officer of Wireless Domain, Incorporated from September 1995 to November 1997. Prior to that time, Mr. Giacopelli was Director of Engineering of the Wireless Group of Telephonics Corporation from 1987 to 1995. Prior to 1987, Mr. Giacopelli was President and CEO of Valinor Electronics, Inc.
Jeffrey L. Herrmann has served as Senior Vice President, CFO and Secretary of the Company and Secretary of the Company's board of directors since July 22, 1997. Mr. Herrmann had previously been Corporate Controller of the Company since April, 1997. Prior to that Mr. Herrmann held financial management positions with Bell & Howell Company (1994-1997) and R.R. Donnelley & Sons Company (1992-1994). Mr. Herrmann began his career with Arthur Andersen & Company in 1987.
S.W.R. (Sandy) Moore has served as Senior Vice President, Strategic Alliances & OEM Sales since December 1996. Mr. Moore served from 1991 to 1996 as President and CEO of Spectrix Corporation based in Deerfield, Illinois. He worked for NovAtel Communications from 1988 to 1990 where he served as President and COO during 1990. Prior to 1988 Mr. Moore spent 16 years with Northern Telecom in Senior Marketing and General Management positions.
Item 11.
Item 11. Executive Compensation
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Executive Compensation in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on or before December 29, 1998, which is incorporated herein.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Security Ownership of Certain Beneficial Owners and Management in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on or before December 29, 1998, which is incorporated herein.
Item 13.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Certain Relationships and Related Transactions in the Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders filed with the Securities and Exchange Commission on or before December 29, 1998, which is incorporated herein.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. The following financial statements are included in Part II, Item 8 of this Form 10-K.
Report of Independent Auditors
Consolidated Balance Sheets as of September 30, 1998 and 1997
Consolidated Statements of Operations for the years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended September 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. The following schedule for the years ended September 30, 1998, 1997 and 1996.
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. Exhibits.
(1) Confidential treatment granted with respect to redacted portions of documents.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the three months ended September 30, 1998:
(c) See Exhibit Index and Exhibits attached to this report and listed under item 14(a)(3).
(d) Financial Statements Schedules required by this Item are listed under Item 14(a)(2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Telular Corporation
Date: December 18, 1998 By: /s/KENNETH E. MILLARD Kenneth E. Millard President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.