United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2003.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to .
Commission File Number 0-23212
Telular Corporation
(Exact name of Registrant as specified in its charter)
Delaware 36-3885440
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
647 North Lakeview Parkway
Vernon Hills, Illinois
60061
(Address of principal executive offices)
(Zip Code)
(847) 247-9400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act).
Yes No |X|
The number of shares outstanding of the Registrant's common stock, par value
$.01, as of June 30, 2003, the latest practicable date, was 12,945,937 shares.
1
TELULAR CORPORATION
Index
Part I - Financial Information Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2003 (unaudited) and September 30, 2002 3
Consolidated Statements of Operations (unaudited)
Three Months Ended June 30, 2003 and
June 30, 2002 4
Consolidated Statements of Operations (unaudited)
Nine Months Ended June 30, 2003 and
June 30, 2002 5
Consolidated Statement of Stockholders' Equity (unaudited)
Period from September 30, 2002 to
June 30, 2003 6
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended June 30, 2003 and
June 30, 2002 7
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Recent Sales of Unregistered Securities 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 21
Exhibit Index 22
2
TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
June 30, September 30,
2003 2002
--------- ---------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 27,187 $ 33,812
Restricted cash -- 3,789
Trade receivables, net of allowance for doubtful accounts of
$104 at June 30, 2003 and September 30, 2002 7,197 9,613
Inventories, net 10,176 7,192
Prepaid expenses and other current assets 748 859
--------- ---------
Total current assets 45,308 55,265
Property and equipment, net 3,729 3,328
Other assets:
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $2,342 at June 30, 2003
and September 30, 2002 2,554 2,554
Other intangible assets, less accumulated amortization of
$0 and $625 at June 30, 2003 and September 20, 2002,
respectively 3,000 375
Deposits and other 53 303
--------- ---------
Total other assets 5,607 3,232
--------- ---------
Total assets $ 54,644 $ 61,825
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 4,538 $ 9,531
Accrued liabilities 2,414 1,758
Revolving line of credit -- 3,789
--------- ---------
Total current liabilities 6,952 15,078
Long-term liabilities 1,000 --
--------- ---------
Total liabilities 7,952 15,078
--------- ---------
Stockholders' equity:
Common stock; $.01 par value; 75,000,000 shares
authorized; 12,945,937 and 12,882,866 outstanding
at June 30, 2003 and September 30, 2002, respectively 129 129
Additional paid-in capital 150,161 149,531
Deficit (103,598) (102,913)
--------- ---------
Total stockholders' equity 46,692 46,747
--------- ---------
Total liabilities and stockholders' equity $ 54,644 $ 61,825
========= =========
See accompanying notes
3
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
Three Months Ended June 30
2003 2002
------------ ------------
Revenues $ 12,132 $ 15,625
Cost of sales 8,642 11,129
------------ ------------
3,490 4,496
Engineering and development expenses 1,974 1,514
Selling and marketing expenses 2,136 2,051
General and administrative expenses 1,103 1,120
Amortization 125 125
------------ ------------
Loss from operations (1,848) (314)
Other income (expense), net 28 (86)
------------ ------------
Loss before income taxes (1,820) (400)
Income taxes, net of tax benefit -- --
------------ ------------
Net loss $ (1,820) $ (400)
============ ============
Net loss per common share:
Basic $ (0.14) $ (0.03)
Diluted $ (0.14) $ (0.03)
Weighted average number of common shares outstanding:
Basic 12,941,070 12,876,043
Diluted 12,941,070 12,876,043
See accompanying notes
4
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)
Nine Months Ended June 30,
2003 2002
------------ ------------
Revenues $ 51,673 $ 42,037
Cost of sales 36,542 30,337
------------ ------------
15,131 11,700
Engineering and development expenses 5,470 4,723
Selling and marketing expenses 6,283 6,304
General and administrative expenses 3,372 3,371
Amortization 375 375
------------ ------------
Loss from operations (369) (3,073)
Other income (expense), net (316) 54
------------ ------------
Loss before income taxes (685) (3,019)
Income taxes, net of tax benefit -- --
------------ ------------
Net loss $ (685) $ (3,019)
============ ============
Net loss per common share:
Basic $ (0.05) $ (0.23)
Diluted $ (0.05) $ (0.23)
Weighted average number of common shares outstanding:
Basic 12,866,166 12,850,990
Diluted 12,866,166 12,850,990
See accompanying notes
5
TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Additional Total
Common Paid-In Stockholders'
Stock Capital Deficit Equity
------- ---------- ---------- -------------
Balance at September 30, 2002 $ 129 $ 149,531 $(102,913) $ 46,747
Net loss for period from October 1,
2002 to June 30, 2003 -- -- (685) (685)
Deferred compensation related
to stock options -- 106 -- 106
Stock options exercised -- 39 -- 39
Stock issued in connection with
services and compensation -- 79 -- 79
Stock issued in connection with
license agreement 2 998 -- 1,000
Purchase of treasury stock, at cost (2) (592) -- (594)
-----------------------------------------------
Balance at June 30, 2003 $ 129 $ 150,161 $(103,598) $ 46,692
===============================================
See accompanying notes
6
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended June 30,
2003 2002
-------- --------
Operating Activities:
Net loss $ (685) $ (3,019)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 962 1,036
Amortization 375 375
Compensation expense related to
stock options 106 105
Common stock issued for services
and compensation 79 190
Loss on sale of short term investment -- 303
Changes in assets and liabilities:
Trade receivables 2,416 (661)
Inventories (2,984) 2,622
Prepaid expenses, deposits and other 361 (38)
Trade accounts payable (4,993) (4,103)
Accrued liabilities 1,656 (537)
-------- --------
Net cash used in operating activities (2,707) (3,727)
Investing Activities:
Proceeds from the sale of short term investment -- 3
Decrease (increase) in restricted cash 3,789 (789)
Acquisition of property and equipment (1,363) (632)
Advance to shareholder -- (500)
Acquisition of license and technology (2,000) --
-------- --------
Net cash provided by (used in) investing activities 426 (1,918)
-------- --------
Financing Activities:
Proceeds from the issuance of common stock 39 118
Borrowings, net (3,789) 789
Purchase of treasury stock, at cost (594) --
-------- --------
Net cash provided by (used in) financing activities (4,344) 907
-------- --------
Net decrease in cash and cash equivalents (6,625) (4,738)
Cash and cash equivalents, beginning of period 33,812 36,385
-------- --------
Cash and cash equivalents, end of period $ 27,187 $ 31,647
======== ========
Supplemental cash flow information
Non-cash item
Stock issued in connection with license agreement 1,000 --
See accompanying notes
7
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited, dollars in thousands, except share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
June 30, 2003, are not necessarily indicative of the results that may be
expected for the full fiscal year ending September 30, 2003. For further
information, refer to the consolidated financial statements and the
footnotes included in the Annual Report on Form 10-K for the fiscal year
ended September 30, 2002.
2. Inventories
The components of inventories consist of the following (000's):
June 30, September 30,
2003 2002
-------- -------------
(unaudited)
Raw materials $ 7,002 $ 4,066
Finished goods 4,053 3,591
------- -------
11,055 7,657
Less: Reserve for obsolescence 879 465
------- -------
$10,176 $ 7,192
======= =======
3. Advance to Shareholder
In 1992, the Telular Group L.P., predecessor of the Company, entered into
a contribution agreement with DNIC Brokerage Company (DNIC) pursuant to
which DNIC contributed a variety of assets including certain patents and
license agreements, to the Company. Under the contribution agreement, DNIC
retained the right to receive the first $250 per year in annual royalty
payments pursuant to the contributed license agreements. On October 10,
2001, the Company entered into an agreement with DNIC, pursuant to which
the Company agreed to advance an amount not to exceed $750 of future
royalties to DNIC to be used solely for the purpose of purchasing the
Company's common stock in open market transactions.
Beginning on October 1, 2001, all royalties received by the Company for
the benefit of DNIC will first be applied to amounts advanced to DNIC by
the Company, and any remaining royalties will be paid to DNIC. The
advances bear interest at the prime rate as published in the Wall Street
Journal. In October and November 2001, the Company advanced a total of
$750 to DNIC under the terms of this arrangement. On June 30, 2003 and
September 30, 2002, the current portion of the outstanding balance of $326
and $250, respectively, were recorded in other current assets. On
September 30, 2002, the long-term portion of the outstanding balance of
$250, was recorded in other assets. DNIC is a shareholder of the Company,
who as of December 6, 2002 held approximately 1.1 million shares of the
Company's Common Stock.
8
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited, dollars in thousands, except share data)
4. Revolving Line of Credit
On December 31, 2002, the Company's Loan and Security Agreement (the
Agreement) with Wells Fargo Business Credit Inc. (Wells) matured. On
December 30, 2002, the Company repaid the full balance of the loan
outstanding under the Agreement and obtained releases from all security
interests in assets of the Company held by Wells. In accordance with the
Agreement, 100% of the outstanding amount of the Loan was collaterized
with restricted cash, which was used to repay the outstanding balance of
the Loan.
5. Redeemable Preferred Stock and Preferred Stock
On June 30, 2003 and September 30, 2002, the Company had 21,000 shares of
$0.01 par value Redeemable Preferred Stock authorized and none outstanding
and 9,979,000 shares of $0.01 par value Preferred Stock authorized and
none outstanding.
6. Stock Repurchase
The Company's Board of Directors authorized the repurchase of up 1,000,000
shares of the Company's Common Stock commencing on November 6, 2002. As of
June 30, 2003, the Company had acquired 148,553 shares at a total cost of
$594.
7. Stock Based Compensation
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure (SFAS 148), which requires that pro forma
information regarding net income, earnings per share and stock-based
employee compensation be presented in interim financial information for
any period in which stock-based employee awards are outstanding.
The Company's pro forma information is as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- ------- -------- --------
Net income (loss) as reported $ (1,820) $ (400) $ (685) $ (3,019)
Plus employee stock option expense
recorded under the intrinsic method 36 35 106 105
Less stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects 246 367 812 1,100
-------- ------- -------- --------
Pro forma net income (loss) $ (2,030) $ (732) $ (1,391) $ (4,014)
======== ======= ======== ========
Net income (loss) per share:
Basic - as reported $ (0.14) $ (0.03) $ (0.05) $ (0.23)
Basic - pro forma $ (0.16) $ (0.06) $ (0.11) $ (0.31)
Diluted - as reported $ (0.14) $ (0.03) $ (0.05) $ (0.23)
Diluted - pro forma $ (0.16) $ (0.06) $ (0.11) $ (0.31)
9
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited, dollars in thousands, except share data)
8. Issuance of Common Stock
On April 14, 2003, the Company acquired a fixed wireless CDMA subscriber
unit license from QUALCOMM Inc. (QUALCOMM). The Company paid for the
up-front license fee by agreeing to make cash installment payments and by
issuing 166,309 shares of the Company's Common Stock. This issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended, as it did not involve a public offering of securities.
The Company subsequently filed a registration statement on Form S-3 under
the Securities Act of 1933, which was declared effective by the Securities
and Exchange Commission on June 11, 2003.
9. Earnings Per Share
Basic and diluted net income (loss) per common share are computed based
upon the weighted-average number of shares of common stock outstanding.
Common shares issuable upon the exercise of options and warrants are not
included in the per share calculations if the effect of their inclusion
would be anti-dilutive.
The following is a reconciliation of the weighted average number of common
shares outstanding for the basic and diluted earnings per share
computation:
Three Months Ended June 30,
2003 2002
---------- ----------
Net loss $ (1,820) $ (400)
========== ==========
Weighted average number of common shares outstanding
Basic 12,941,070 12,876,043
Effect of dilutive employee stock options -- --
---------- ----------
Diluted 12,941,070 12,876,043
========== ==========
Net loss per share
Basic $ (0.14) $ (0.03)
Diluted $ (0.14) $ (0.03)
Nine Months Ended June 30,
2003 2002
Net loss $ (685) $ (3,019)
========== ==========
Weighted average number of common shares outstanding
Basic 12,866,166 12,850,990
Effect of dilutive employee stock options -- --
---------- ----------
Diluted 12,866,166 12,850,990
========== ==========
Net loss per share
Basic $ (0.05) $ (0.23)
Diluted $ (0.05) $ (0.23)
10
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(Unaudited, dollars in thousands, except share data)
10. Segment Disclosures
The Company, which is organized on the basis of products and services, has
two reportable business segments, Fixed Wireless Terminals and Security
Products. The Company designs, develops, manufactures and markets both
fixed wireless terminals and security products. Fixed wireless terminals
provide the capability to connect standard wireline telecommunications
customer premises equipment with cellular-type transceivers for use in
wireless communication networks. Security products provide wireless backup
systems for commercial and residential alarm systems.
Summarized below are the Company's segment revenue and net income (loss)
by reportable segment:
Nine Months Ended
June 30,
2003 2002
-------- --------
Revenue
Fixed Wireless Terminals $ 42,207 $ 32,934
Security Products 9,466 9,103
--------------------------
$ 51,673 $ 42,037
Net Income (Loss)
Fixed Wireless Terminals $ 398 $ (2,400)
Security Products (1,083) (619)
--------------------------
$ (685) $ (3,019)
For the nine months ended June 30, 2003, one customer, located in Mexico,
accounted for 60% of the fixed wireless terminal net product sales and two
customers, both located in the USA, accounted for 47% and 11%
respectively, of the security products net product sales. For the nine
months ended June 30, 2002, one customer located in Mexico, accounted for
54% of the fixed wireless terminal net product sales and two customers,
both located in the USA, accounted for 52% and 9% respectively, of the
security products net product sales.
Export sales of fixed wireless terminals represent 87% and 89% of total
fixed wireless net product sales for the first nine months of fiscal years
2003 and 2002, respectively.
Export sales of security products were insignificant for the first nine
months of fiscal years 2003 and 2002.
11. Commitments
In December 2002, the Company entered into an agreement with a third-party
contractor whereby the contractor will develop and integrate new product
hardware and software. The Company's total commitment under the agreement
is $1.3 million, subject to the completion of certain project milestones.
The contractor may also receive additional compensation for early
completion of the project as specified in the agreement. As of June 30,
2003, the Company had a commitment of $1.0 million remaining under the
agreement.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company designs, develops, manufactures and markets products based on its
proprietary interface technologies, which provide the capability to connect
standard telecommunications equipment, including standard telephones, fax
machines, data modems and alarm panels with wireless communication networks in
the cellular and PCS frequency bands (collectively cellular). Applications of
the Company's technology include Wireless Local Loop, a primary access service
where wireline systems are unavailable, unreliable or uneconomical. The
Company's business segments are divided between its two principal product lines:
PHONECELL(R), a line of cellular Fixed Wireless Terminals and cellular Fixed
Wireless Desktop Phones (collectively Fixed Wireless Terminals or FWTs), and
TELGUARD(R), a line of Wireless Security Products.
The Company believes that its future success depends on its ability to continue
to meet customers' needs through product innovation, rapid time-to-market with
new products, and superior "in market" customer support. The Company works
closely with cellular network operators, telecommunications infrastructure
suppliers and equipment manufacturers to develop new Cellular Fixed Wireless
products for global markets.
The Company's operating expense levels are based in large part on expectations
of future revenues. If anticipated sales in any quarter do not occur as
expected, expenditure and inventory levels could be disproportionately high, and
the Company's operating results for that quarter, and potentially for future
quarters, could be adversely affected. Certain factors that could significantly
impact expected results are described in Cautionary Statements Pursuant to the
Securities Litigation Reform Act that is set forth in Exhibit 99 to the
Company's Form 10-K for the fiscal year ended September 30, 2002.
Results of Operations
Third quarter fiscal year 2003 compared to third quarter fiscal year 2002
Revenues. Total revenue of $12.1 million decreased $3.5 million, or 22%, for the
three months ended June 30, 2003, compared to the same period last year.
PHONECELL(R) products sales of $9.0 decreased 27%, or $3.3 million, during the
third quarter of fiscal year 2003, compared to the same period of fiscal year
2002. This decrease was the result of reduced shipments of desktop phones to
Radiomovil Dipsa (Telcel) Mexico under the Company's supply agreement, as
amended with Telcel. TELGUARD(R) revenues of $3.1 million decreased 3%, or $0.1
million, during the third quarter of fiscal year 2003 compared to the same
period last year. Royalty revenues decreased 100%, or $0.1 million, during the
third quarter of fiscal year 2003 compared to the same period last year.
Cost of sales. Cost of sales decreased $2.5 million, or 22%, for the three
months ended June 30, 2003 compared to the same period last year. Cost of sales
for the third quarter of fiscal year 2003 of $8.6 million, or 71% of total
revenue, compares to $11.1 million, or 71% of total revenue, for the third
quarter of fiscal year 2002. The decrease in cost of sales during the second
quarter of fiscal year 2003 is due primarily to lower sales volume.
Engineering and Development Expenses. Engineering and development expenses
increased $0.5 million, or 30% for the third quarter of fiscal year 2003
compared to the same period of fiscal year 2002. The increase is due primarily
to the added expense from substantial investments in CDMA2000(R) 1XRTT products.
Other Income (Expense). Other income of $0.0 million for the third quarter of
fiscal year 2003 compares to other expense of $0.1 million for the same period
last year. The improvement is primarily the result of the elimination of
interest expense, which occurred as a result of the repayment of the Company's
credit line agreement in December 2002.
Net loss. The Company recorded net loss of $1.8 million for the three months
ended June 30, 2003, compared to a
12
net loss of $0.4 million for the third quarter of last year. The decrease is
primarily the result of lower sales volume.
Net loss per Common Share. Basic net loss per share of $0.14 for the three
months ended June 30, 2003 compares to basic net loss per share of $0.03 for the
same period last year. The decrease is primarily the result of lower sales
volume.
First nine months of fiscal year 2003 compared to first nine months of fiscal
year 2002
Revenues.Total revenues of $51.7 million for the nine months ended June 30, 2003
increased 23% from $42.0 million for the nine months ended June 30, 2002. Sales
of PHONECELL(R) products increased 29% from $32.8 million during the first nine
months of fiscal year 2002 to $42.2 million during the first nine months of
fiscal year 2003. This increase was the result of a rise in shipments of desktop
phones to Telcel under the Company's supply agreement with Telcel. TELGUARD(R)
revenues increased $0.4 million, or 4% from $9.1 million during the nine months
ended June 30, 2002 to $9.5 million during the nine months ended June 30, 2003.
Royalty revenues decreased 100%, or $0.1 million, during the first nine months
of fiscal year 2003 compared to the same period last year.
Cost of sales. Cost of sales of $36.5 million increased 20%, or $6.2 million for
the nine months ended June 30, 2003 compared to the same period last year. Cost
of sales for the first nine months of fiscal year 2003 is 71% of total revenue,
compared to 72% of total revenue for the same period last year. The increase in
cost of sales during the first nine months of fiscal year 2003 is primarily the
result of the increase in sales volume. The decrease in cost of sales as a
percentage of total revenue is attributable to the fact that the cost of sales
includes certain fixed costs that do not change as total revenues increase.
Engineering and Development Expenses. Engineering and development expenses for
the first nine months of fiscal year 2003 of $5.5 million increased 16%, or $0.7
million, compared to the same period of fiscal year 2002. The increase is due
primarily to the added expense from substantial investments in CDMA2000(R) 1XRTT
products.
Other Income (Expense). Other income (expense) during the first nine months of
fiscal year 2003 decreased by $0.4 million compared to the same period of fiscal
2002. The decrease is primarily due to lower interest income, as a result of
lower interest rates compared to those for the same period last year.
Net Loss. The Company recorded net loss of $0.7 million for the first nine
months of fiscal year 2003 compared to a net loss of $3.0 million for the first
nine months of fiscal year 2002. The improvement is primarily the result of
increased sales volume.
Net loss per Common Share. A basic net loss per share of $0.05 for the first
nine months of fiscal year 2003 compares to a basic net loss per share of $0.23
for the first nine months of fiscal year 2002. The improvement is primarily the
result of increased sales volume.
Liquidity and Capital Resources
On June 30, 2003, the Company had $27.2 million in cash and cash equivalents
with a working capital surplus of $37.4 million.
During the first nine months of fiscal year 2003, the Company used $2.7 million
of cash in operations, compared to $3.7 million of cash used during the same
period of fiscal year 2002. The improvement primarily resulted from the $2.3
million reduction in net loss from fiscal year 2002 to fiscal year 2003.
Cash provided by investing activities of $0.4 million during the first nine
months of fiscal year 2003 compares to cash used of $1.9 million during the same
period of fiscal year 2002. The amount for the first nine months of fiscal year
2003 includes a $2.0 million use of cash for the acquisition of licenses and
technology (partially offset by an increase in accrued liabilities). The first
nine months of fiscal year 2003 also includes cash provided by a $3.8 million
decrease in restricted cash, which was used in financing activities to repay the
revolving line of credit. The
13
first nine months of last year includes a use of cash of $0.8 million due to an
increase in restricted cash from the financing activity of net borrowings.
Investing activities also included capital spending for product software and
product testing equipment of $1.4 million during the first nine months of fiscal
year 2003, which compares to $0.6 million for the same period of fiscal year
2002. Fiscal year 2002 investing activities also included $0.5 million in net
cash advanced against future royalties to a shareholder of the Company (See Note
3 to the Consolidated Financial Statements).
Cash used in financing activities of $4.3 million during the first nine months
of fiscal year 2003 compares to $0.9 million of cash provided by financing
activities during the same period of fiscal year 2002. The fiscal year 2003
amount consists primarily of $3.8 million used to repay the Company's revolving
line of credit. This is compared to $0.8 million provided by borrowings under
the same facility during the first half of fiscal year 2002 (each transaction is
offset by the same amount of restricted cash from investing activities). The
Company also used $0.6 million in cash for the purchase of treasury stock during
the first half of fiscal year 2003 (See Note 6 to the Consolidated Financial
Statements).
The first nine months of fiscal year 2003 also included a non-cash transaction
for the issuance of stock for a portion of the acquisition cost of a fixed
wireless CDMA unit subscriber license.
Based upon its current operating plan, the Company believes its existing capital
resources will enable it to maintain its current and planned operations. Cash
requirements may vary and are difficult to predict given the nature of the
developing markets targeted by the Company. The Company expects to maintain
significant levels of cash reserves, which are required to undertake major
product development initiatives, expand marketing and sales development
worldwide, fund stock repurchases (See Note 6 to the Consolidated Financial
Statements) and qualify for large sales opportunities.
The Company generally requires its foreign customers to prepay, to obtain
letters of credit or to qualify for export credit insurance underwritten by
third-party credit insurance companies prior to the Company making international
shipments. Also, to mitigate the effects of currency fluctuations on the
Company's results of operations, the Company conducts all of its international
transactions in U.S. dollars.
Critical Accounting Policies
The Company's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following represent the
critical accounting policies that currently affect the presentation of the
Company's financial condition and results of operations.
Inventories
The Company values inventories at lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method, including material, labor and factory
overhead. Significant management judgment is required to determine the reserve
for obsolete or excess inventory. The Company currently considers inventory
quantities greater than a one-year supply based on current year activity as well
as any additional specifically identified inventory to be excess. The Company
also provides for the total value of inventories that are determined to be
obsolete based on criteria such as customer demand and changing technologies. At
June 30, 2003, and September 30, 2002, the inventory reserves were $0.9 million
and $0.5 million, respectively. Changes in strategic direction, such as
discontinuance of product lines, changes in technology or changes in market
conditions, could result in significant changes in required reserves.
Impairment
The Company periodically evaluates the fair value and recoverability of the
goodwill of each of its business segments whenever events or changes in
circumstances indicate the carrying value of the asset may not be recoverable.
In analyzing fair value and recoverability, the Company makes projections
regarding future cash flows. These
14
projections are based on assumptions and estimates of growth rates for the
related business segment, anticipated future economic, regulatory and political
conditions, the assignment of discount rates relative to risk and estimates of
terminal values. The Company also considers the volatility of its stock price
and a potential control premium which would most likely be realized in an equity
event. An impairment loss is assessed and recognized in operating earnings when
the fair value of the asset is less than its carrying amount.
Outlook
The statements contained in this outlook are based on current expectations.
These statements are forward looking, and actual results may differ materially.
Based upon observed trends, the Company believes that the market for cellular
FWTs will experience substantial growth over the next five years. The Company
has identified significant growth opportunities in Africa, Brazil, China,
Europe, India, Mexico, Venezuela and the USA. Each of these markets will develop
at a different pace, and the sales cycles for these regions are likely to be
several months or quarters. Further, economic conditions play an important role
in the timing of market development for the Company's products. In connection
with the present global economic slowdown, political uncertainties in Venezuela
and the war on terror, the Company's prospects for continued growth have been
accordingly reduced in the near term. However, as economic conditions improve,
the Company is well positioned with a wide range of products to capitalize on
these market opportunities.
The amount and frequency of product shipments to Telcel depends on many factors,
including market conditions in Mexico and Telcel's agreements with other
suppliers. The outcome of pending and future negotiations for orders and the
timing of shipments will have a significant impact on the Company's future
revenues and profitability.
Forward Looking Information
Please be advised that some of the information in this filing presents the
Company's intentions, beliefs, judgments and expectations of the future and are
forward-looking statements. It is important to note that the Company's actual
results could differ materially from these forward looking statements. For
example, there are a number of uncertainties as to the degree and duration of
the revenue momentum, which could impact the Company's ability to be profitable
as lower sales may likely result in lower margins. In addition, product
development expenditures, which are expected to benefit future periods, are
likely to have a negative impact on near term-earnings. Other risks and
uncertainties, which are discussed in Exhibit 99 to the Company's 10-K for the
fiscal year ended September 30, 2002, include the risk that technological change
will render the Company's technology obsolete, the ability to protect
intellectual property rights in its products, the fact that unfavorable economic
conditions could lead to lower product sales, the risk of litigation, the
Company's ability to develop new products, the Company's dependence on suppliers
and contractors, the Company's reliance on a limited number of customers for
most product sales, the Company's ability to maintain quality control, the risk
of doing business in developing markets, the Company's dependence on research
and development, the uncertainty of additional funding, dilution of ownership to
stockholders resulting from financing activities, the volatility of the Common
Stock price, intense industry competition including competition from its
licensees and new market entrants with cellular phone docking station products
and the uncertainty in the development of wireless service generally.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company frequently invests available cash and cash equivalents in short-term
instruments such as certificates of deposit, commercial paper and money market
accounts. Although the rate of interest paid on such investments may fluctuate
over time, each of the Company's investments is made at a fixed interest rate
over the duration of the investment. All of these investments have maturities of
less than 90 days. The Company believes its exposure to market risk fluctuations
for these investments is not material as of June 30, 2003.
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
For international sales, the Company generally receives either payment prior
15
to shipment or irrevocable letters of credit that are confirmed by U.S. banks to
reduce its credit risk. Further, the Company may purchase credit insurance for
all significant open accounts outside of the United States. The Company performs
ongoing credit evaluations and charges amounts to operations when they are
determined to be uncollectible.
Item 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of the Company's disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective.
Subsequent to the date of their most recent evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls.
16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is involved in legal proceedings, which arose in the ordinary course
of its business. While any litigation contains an element of uncertainty,
management believes that the outcome of all pending legal proceedings will not
have a material adverse effect on the Company's consolidated results of
operation or financial position. However, because of the nature and inherent
uncertainties of litigation, should the outcome of any legal actions be
unfavorable, the Company may be required to pay damages and other expenses,
which could have a material adverse effect on the Company's financial position
and results of operations.
Item 2. Changes in Securities and Recent Sales of Unregistered Securities
Recent Sales of Unregistered Securities
During the three months ended June 30, 2003, the Company issued 547 shares of
Common Stock valued at $1,942 to the law of firm of Much Shelist (successor firm
to Hamman & Benn) for legal services. These issuances were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended,
as they did not involve a public offering of securities.
On April 14, 2003, the Company acquired a fixed wireless CDMA subscriber unit
license from QUALCOMM Inc. (QUALCOMM). The Company paid for the up-front license
fee by agreeing to make cash installment payments and by issuing 166,309 shares
of the Company's Common Stock. This issuance was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as it did
not involve a public offering of securities. The Company subsequently filed a
registration statement on Form S-3 under the Securities Act of 1933, which was
declared effective by the Securities and Exchange Commission on June 11, 2003.
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (listed by number according to Exhibit table of Item 601 in
Regulation S-K)
Number Description Reference
------ ----------- ---------
3.1 Certificate of Incorporation Filed as Exhibit 3.1 to
Registration Statement
No. 33-72096 (the Registration
Statement)
3.2 Amendment No. 1 to Certificate Filed as
of Incorporation Exhibit 3.2 to
the Registration
Statement
3.3 Amendment No. 2 to Certificate Filed as
of Incorporation Exhibit 3.3 to
the Registration
Statement
3.4 Amendment No. 3 to Certificate Filed as
of Incorporation Exhibit 3.4 to
Form 10-Q filed
February 16, 1999
3.5 Amendment No.4 to Certificate Filed as
of Incorporation Exhibit 3.5 to
Form 10-Q filed
February 16, 1999
3.6 By-Laws Filed as
Exhibit 3.4 to
the Registration
Statement
4.1 Certificate of Designations, Preferences, Filed as Exhibit 99.2
and Rights of Series A Convertible Preferred Form 8-K filed
Stock April 25, 1997
10.1 Employment Agreement with Filed as Exhibit 10.1
Kenneth E. Millard dated to Form 10-Q filed
January 1, 2003 February 14, 2003
10.2 Stock Option Agreement with Filed as Exhibit 10.2
Kenneth E. Millard dated to Form 10-Q filed
January 28, 2003 February 14, 2003
10.3 Appointment of Larry J. Ford Filed as Exhibit 10.2
to Form 10-Q filed
May 1, 1995
10.4 Settlement and Release of Claims Filed as Exhibit 10.25
Agreement with Motorola (1) to Form 10-Q filed
February 14, 2001 (1)
10.5 Agreement for the Purchase of Telular Filed as Exhibit 10.1
Fixed Telephony Digital Cellular to Form 8-K filed
Telephones Dated as of September 13, September 13, 2000 (1)
2000, among Telular Corporation,
Radiomovil DIPSA, S.A. de C.V., and
BrightStar de Mexico S.A. de C.V. (1)
10.6 Amendment 1 dated June 20, 2002, to the Filed as Exhibit 10.45 to
September 13, 2000 Agreement for the Form 10-Q filed
Purchase of Telular Fixed Telephony August 14, 2002
Digital Cellular Telephones among
Telular Corporation, et.al. (1)
13
10.7 Nonqualified Stock Option Agreement, Filed as Exhibit 4.9 to
dated as of October 31, 2000, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.8 Nonqualified Stock Option Agreement, Filed as Exhibit 4.10 to
dated as of October 26, 1999, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.9 Nonqualified Stock Option Agreement, Filed as Exhibit 4.11 to
dated as of October 27, 1998, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.10 Nonqualified Stock Option Agreement, Filed as Exhibit 4.15 to
dated as of October 31, 2000, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.11 Nonqualified Stock Option Agreement, Filed as Exhibit 4.16 to
dated as of October 26, 1999, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.12 Nonqualified Stock Option Agreement, Filed as Exhibit 4.17 to
dated as of October 27, 1998, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.13 Nonqualified Stock Option Agreement, Filed as Exhibit 10.38 to
dated as of July 25, 2001, by and Form 10-K filed
between the Company and Mitchell H. Saranow December 21, 2001
10.14 Nonqualified Stock Option Agreement, Filed as Exhibit 10.39 to
dated as of August 30, 2001, by and Form 10-K filed
between the Company and Richard D. Haning December 21, 2001
10.15 Advance Agreement dated as of Filed as Exhibit 10.40 to
October 9, 2001, by and between the Form 10-K filed
Company and DNIC Brokerage Company December 21, 2001
10.16 Nonqualified Stock Option Agreement, Filed as Exhibit 10.41 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and John E. Berndt December 21, 2001
10.17 Nonqualified Stock Option Agreement, Filed as Exhibit 10.42 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Larry J. Ford December 21, 2001
10.18 Nonqualified Stock Option Agreement, Filed as Exhibit 10.43 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Richard D. Haning December 21, 2001
10.19 Nonqualified Stock Option Agreement, Filed as Exhibit 10.44 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Mitchell H. Saranow December 21, 2001
10.20 Telular Corporation Non-employee Filed as Exhibit 10.22
Directors' Stock Incentive Plan to Form 10-Q filed
February 14, 2003
10.21 Telular Corporation Common Stock Filed as Exhibit 10.23
Purchase Agreement dated April 14, 2003, to Form 10-Q filed
by and among Telular Corporation and May 15, 2003
QUALCOMM Incorporated
14
99.1 Certification Pursuant to 18 Filed herewith
U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 Filed herewith
U.S.C. Section 1350 as Adopted
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(1) Certain portions of this exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for confidential treatment. The omitted portions have been
replaced by an * enclosed by brackets ([*]).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2003. The Company furnished a report on Form 8-K to report
its earnings in a press release on April 24, 2003.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized.
Telular Corporation
Date August 14, 2003 By: /s/ Kenneth E. Millard
-------------------------------------
Kenneth E. Millard
Chairman and Chief Executive Officer
Date August 14, 2003 /s/ Jeffrey L. Herrmann
----------------------------------------
Jeffrey L. Herrmann
Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
Date August 14, 2003 /s/ Robert L. Zirk
----------------------------------------
Robert L. Zirk
Controller and Chief Accounting Officer
16
Exhibit Index
Number Description Reference
------ ----------- ---------
3.1 Certificate of Incorporation Filed as Exhibit 3.1 to
Registration Statement
No. 33-72096 (the Registration
Statement)
3.2 Amendment No. 1 to Certificate Filed as
of Incorporation Exhibit 3.2 to
the Registration
Statement
3.3 Amendment No. 2 to Certificate Filed as
of Incorporation Exhibit 3.3 to
the Registration
Statement
3.4 Amendment No. 3 to Certificate Filed as
of Incorporation Exhibit 3.4 to
Form 10-Q filed
February 16, 1999
3.5 Amendment No.4 to Certificate Filed as
of Incorporation Exhibit 3.5 to
Form 10-Q filed
February 16, 1999
3.6 By-Laws Filed as
Exhibit 3.4 to
the Registration
Statement
4.1 Certificate of Designations, Preferences, Filed as Exhibit 99.2
and Rights of Series A Convertible Preferred Form 8-K filed
Stock April 25, 1997
10.1 Employment Agreement with Filed as Exhibit 10.1
Kenneth E. Millard dated to Form 10-Q filed
January 1, 2003 February 14, 2003
10.2 Stock Option Agreement with Filed as Exhibit 10.2
Kenneth E. Millard dated to Form 10-Q filed
January 28, 2003 February 14, 2003
10.3 Appointment of Larry J. Ford Filed as Exhibit 10.2
to Form 10-Q filed
May 1, 1995
10.4 Settlement and Release of Claims Filed as Exhibit 10.25
Agreement with Motorola (1) to Form 10-Q filed
February 14, 2001 (1)
10.5 Agreement for the Purchase of Telular Filed as Exhibit 10.1
Fixed Telephony Digital Cellular to Form 8-K filed
Telephones Dated as of September 13, September 13, 2000 (1)
2000, among Telular Corporation,
Radiomovil DIPSA, S.A. de C.V., and
BrightStar de Mexico S.A. de C.V. (1)
10.6 Amendment 1 dated June 20, 2002, to the Filed as Exhibit 10.45 to
September 13, 2000 Agreement for the Form 10-Q filed
Purchase of Telular Fixed Telephony August 14, 2002
Digital Cellular Telephones among
Telular Corporation, et.al. (1)
10.7 Nonqualified Stock Option Agreement, Filed as Exhibit 4.9 to
dated as of October 31, 2000, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
17
10.8 Nonqualified Stock Option Agreement, Filed as Exhibit 4.10 to
dated as of October 26, 1999, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.9 Nonqualified Stock Option Agreement, Filed as Exhibit 4.11 to
dated as of October 27, 1998, by and Registration Statement on
between the Company and Larry J. Ford Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.10 Nonqualified Stock Option Agreement, Filed as Exhibit 4.15 to
dated as of October 31, 2000, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.11 Nonqualified Stock Option Agreement, Filed as Exhibit 4.16 to
dated as of October 26, 1999, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.12 Nonqualified Stock Option Agreement, Filed as Exhibit 4.17 to
dated as of October 27, 1998, by and Registration Statement on
between the Company and John E. Berndt Form S-8, Registration
No. 333-61970 filed
May 31, 2001
10.13 Nonqualified Stock Option Agreement, Filed as Exhibit 10.38 to
dated as of July 25, 2001, by and Form 10-K filed
between the Company and Mitchell H. Saranow December 21, 2001
10.14 Nonqualified Stock Option Agreement, Filed as Exhibit 10.39 to
dated as of August 30, 2001, by and Form 10-K filed
between the Company and Richard D. Haning December 21, 2001
10.15 Advance Agreement dated as of Filed as Exhibit 10.40 to
October 9, 2001, by and between the Form 10-K filed
Company and DNIC Brokerage Company December 21, 2001
10.16 Nonqualified Stock Option Agreement, Filed as Exhibit 10.41 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and John E. Berndt December 21, 2001
10.17 Nonqualified Stock Option Agreement, Filed as Exhibit 10.42 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Larry J. Ford December 21, 2001
10.18 Nonqualified Stock Option Agreement, Filed as Exhibit 10.43 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Richard D. Haning December 21, 2001
10.19 Nonqualified Stock Option Agreement, Filed as Exhibit 10.44 to
dated as of October 30, 2001, by and Form 10-K filed
between the Company and Mitchell H. Saranow December 21, 2001
10.20 Telular Corporation Non-employee Filed as Exhibit 10.22
Directors' Stock Incentive Plan to Form 10-Q filed
February 14, 2003
10.21 Telular Corporation Common Stock Filed as Exhibit 10.23
Purchase Agreement dated April 14, 2003, to Form 10-Q filed
by and among Telular Corporation and May 15, 2003
QUALCOMM Incorporated
99.1 Certification Pursuant to 18 Filed herewith
U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
18
99.2 Certification Pursuant to 18 Filed herewith
U.S.C. Section 1350 as Adopted
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(1) Certain portions of this exhibit have been omitted and filed separately
with the United States Securities and Exchange Commission pursuant to a
request for confidential treatment. The omitted portions have been
replaced by an * enclosed by brackets ([*]).