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Telular 10-K 2009 SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For the Fiscal Year Ended September 30, 2009
or
For
the Transition Period from to
Commission File Number 0-23212
Telular Corporation
(Exact name of registrant as specified in its charter)
311 South Wacker Drive, Suite 4300, Chicago, Illinois 60606-6622
(Address of principal executive offices and zip code) (312) 379-8397
(Registrant’s telephone number, including area code) Securities registered pursuant to 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes o No þ Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ 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 þ No o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of March 31, 2009, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $27,232,807 (based upon the closing sales price
of such stock as reported by The NASDAQ Stock Market LLC on such date). The number of shares
outstanding of the registrant’s Common Stock as of December 7, 2009, the latest practicable date,
was 14,933,938 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the registrant’s fiscal year ended September 30, 2009
are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
(Dollars in Thousands, Except Per Share Data)
OVERVIEW
Telular Corporation (Telular or the Company) designs, develops and distributes products and
services that utilize wireless networks to provide data and voice connectivity among people and
machines. Telular’s product and service offerings combine the Company’s historical competency in
developing cellular networking electronics with the data transport capabilities of commercial
wireless networks in order to create information networking solutions.
Telular was established in 1986 when it acquired the intellectual property rights for its cellular
interface concept and methodology. Today, it creates solutions based on the development of
specialized wireless terminals that work in conjunction with software systems to provide integrated
event monitoring and reporting services for machine-to-machine (M2M) applications. M2M
applications typically involve outfitting machinery with sensors and remotely reading those sensors
to improve process efficiency in areas such as supply chain management, security monitoring, meter
reading, vehicle tracking and many other commercial and industrial situations. Telular’s core
competencies with wireless networking evolved from its original focus of developing and marketing
Fixed Cellular Terminals (FCTs) and Fixed Cellular Phones (FCPs) to markets in North America and in
developing countries around the world.
COMPANY STRATEGY
Strategically, Telular is focused on M2M market segments in which the Company can provide a
differentiated product and service offering using specialized electronics and wireless networks to
improve information flows and enhance solutions in areas such as home security and supply chain
optimization. In addition, Telular continues to sell general purpose, wireless terminals (i.e.,
FCTs) that enable end users to transmit voice, data and fax information over commercial wireless
networks.
The Company’s Telguard solution supports residential and commercial security dealers and generates
a majority of Telular’s revenue. The Telguard solution includes a specialized terminal unit which
interfaces with commercial security control panels and then communicates with Telular’s event
processing servers to provide real-time transport of alarm signals from residential and commercial
locations to an alarm company’s central monitoring station. Alarm monitoring companies purchase
the products and cellular service from Telular and resell them to end users in order to provide
wireless conveyance of alarm signals, which were historically sent over traditional wireline phone
networks. While the Company’s Telguard solution can function as a backup to a traditional
telephone line, it is increasingly being used as the primary means for the transmission of alarm
signals as end users eliminate traditional phone lines in favor of voice-over-IP (VoIP) connections
and cellular telephones.
The Company’s TankLink solution combines a specially designed cellular communicator, wireless data
services and a web-based application into a single offering which allows end-users to remotely
monitor the level of product contained in a given tank vessel. Telular’s cellular communicator
interfaces with a variety of commercially available sensors and conveys the level-reading of those
sensors to our event processing servers. This information commonly feeds a vendor managed
inventory (VMI) program that improves the efficiency and timeliness of product delivery, while
optimizing the amount of product held by customers at any given time. Many of the Company’s
existing TankLink systems are installed in fuel and lubricant tanks. Additional market segments
served include industrial chemicals, food additives and waste water treatment.
In its Telguard and TankLink service lines, Telular embeds wireless data services in its solutions.
The Company is able to resell and service its customers through agreements it has negotiated with
major wireless network operators in the United States. Management believes Telular’s status as a
wireless data reseller and service provider represents an advantage over a number of its
competitors because we are able to offer this as an embedded service within our products and we
have a high volume of subscribers to achieve economies of scale as a wireless service provider.
2
Telular’s standalone FCT business targets both commercial and residential consumers, who use FCTs
for voice, fax, and Internet access over the wireless networks. At its most basic level, an FCT
allows users to simultaneously plug in a standard telephone, fax machine and a computer data line,
which the FCT then makes functional over the wireless phone network. In the United States, FCTs
are most often used for remote or mobile applications in which cellular service is available but
broadband Internet connectivity is not. For example, FCTs are used by public safety agencies to
provide connectivity for mobile command centers. In Latin America, Telular FCTs are used more
extensively due to the fact that traditional wireline telephone and broadband networks were not
built as extensively as in the United States, but cellular systems have been widely implemented.
Telular operates as a single-segment enterprise for financial reporting purposes. For financial
information about geographic areas, see “Note 14. Major Customers” and “Note 15. Export Sales” to
the consolidated financial statements of Telular set forth in Item 8 of this Form 10-K.
GEOGRAPHICAL MARKETS
Telguard products and service are currently sold only in the United States, although the
Company continues efforts to expand service to other North American countries during fiscal 2010.
Currently, the vast majority of M2M tank applications served by Telular are located within the
United States, with some recent fiscal year 2010 sales to Mexico. These installations span the
entire country and the Company expects to expand over time into other countries, particularly in
Latin America where it has strong relationships with the leading wireless carriers.
The Company currently focuses its FCT sales efforts in North and South America, but also has sales
in Africa, Asia and the Middle East.
In total, 98% of the Company’s revenues are derived from customers within the United States.
TECHNOLOGY
Integral to our success in the Telguard and M2M space is our experience in processing data
messages over the cellular networks. Our data processing center is able to process hundreds of
thousands of messages effectively and on a real-time basis each day, which is critical for our
customers, particularly within the security space. Also critical to our success is the ability to
develop new products and features that may become necessary as new applications are developed or
are otherwise considered desirable by the markets that we serve. We can also leverage our
technical knowledge related to cellular radios and our engineering skills to develop new products
and services based on our core technology platform to serve other M2M vertical markets.
RESEARCH AND DEVELOPMENT AND PRODUCT LINES
Our Telguard and TankLink M2M solutions operate in conjunction with real-time, transaction
processing servers which receive data, transform the data, and immediately forward the result to
our customers. The M2M tank level monitoring and Telguard security solutions are a combination of
hardware product design along with software system design. In both cases, the software system is
capable of high-volume, real-time transaction processing of mission critical data (security alarms
and tank fill levels). Such integrated hardware and software system solutions will be the focus of
our research and development activities going forward and can be further applied to event
monitoring opportunities in other vertical markets. Telular has built a core competency in
developing products which enable devices such as standard telephones, fax machines and computers to
utilize both GSM-based and CDMA-based wireless networks.
Because our products operate on a coordinated basis with wireless phone networks, Telular works
closely with major carriers to certify our products on their networks. In many cases, the carriers
themselves are our customers and they sell and distribute our products to end users upon
certification. Based on this need to work closely with the major wireless phone carriers, Telular
has developed strong working relationships with these carriers as customers and solution partners.
3
Research and development activities sponsored by the Company for the years ended September 30,
2009, 2008, and 2007, were $2,974, $4,448, and $6,076, respectively, and are included in
engineering and development expense. There are no customer sponsored research and development
activities included in any of those years.
The following details areas of product delivery and research during fiscal 2009 and anticipated in
fiscal 2010.
Telguard — Telular’s engineering team continues to update the Telguard digital product portfolio by
addressing the growing demand and technology changes in the electronics security market. In fiscal
2009, Telular enhanced the functionality of its TG-9 product and undertook a redesign of certain
other Telguard hardware devices. Product innovation within this space is important for the
long-term success of this business, and we expect to continue to enhance our products as part of
our overall business strategy.
TankLink — The fiscal 2009 acquisition of TankLink Corp. (formerly known as SupplyNet
Communications, Inc.) brought the Company a successful wireless communicator product line for tank
level monitoring. Enhancements to this hardware and its supporting message center have been made
during 2009. Telular plans to further enhance this product line during fiscal 2010 to support a
wider array of sensors and to add additional features to the hardware products which enable the
service offering.
Other
M2M Solutions — During 2009, Telular evaluated a number of vertical and sub-vertical M2M
markets to determine the viability of creating or acquiring a product and/or service for these
markets. While the Company did not develop any such solutions, it will continue to examine growth
possibilities and new solutions in the M2M market space.
SALES, MARKETING SERVICE AND SUPPORT
Domestic Sales
In the United States, Telular markets both its Telguard and FCT products through an Atlanta-based
sales group. Telguard customers are security system distributors and security service dealers to
which the Company sells on a direct basis. Telular utilizes a number of manufacturer’s
representatives to manage approximately 3,500 customer relationships for the Telguard products. FCT
customers are either large cellular carrier or Value Added Resellers (VARs) dedicated to niche
market applications enabled by the Company’s FCT products. Telular’s TankLink solutions are sold
through a small, Chicago-based sales team which focuses on supporting key VARs, which distribute
the vast majority of the Company’s TankLink products and services. For fiscal years 2009, 2008 and
2007 the Company’s domestic revenues were $46,218 (98%), $56,786 (86%) and $64,769 (87%) of total
revenues, respectively.
International Sales
Our international sales team is based in Miami and covers key markets such as Latin America. These
markets include significant cellular carrier customers in countries such as Mexico. In
addition, Telular has built strong relationships with distributors and VARs in a number of these
and other markets. In fiscal years 2009, 2008 and 2007 the Company’s international revenues were
$976 (2%), $9,368 (14%) and $9,738 (13%) of total revenues, respectively.
Service and Support
Telular believes that providing customers with comprehensive product service and support is
critical to maintaining a competitive position in the mobile telecommunications equipment industry.
Telular offers warranty and repair service for its products through three primary methods: (1)
advance replacement kits shipped with orders, (2) in-house service and technical support, and (3)
authorized third-party service centers in various regions of the world.
MAJOR CUSTOMERS
In fiscal 2009, the Company derived 31% of its total revenues from ADT, a major U.S.
securities systems provider, and 13% of its total revenue from ADI, a large U.S. distributor of
security systems and related products.
4
MANUFACTURING
Telular’s products are manufactured by contract manufacturers in China and the United States
and are tested with proprietary testing suites that Telular creates and provides to these
manufacturers. We also conduct comprehensive quality control and quality assurance surveillance
during the manufacturing process. Telular contracts directly with a number of key suppliers to buy
certain, critical components of its products, including cellular transceiver modules.
EXECUTIVE OFFICERS
The executive officers of Telular and their ages as of December 14, 2009 are as follows:
Joseph A. Beatty has served as President, Chief Executive Officer and Director since January 2008
and Chief Financial Officer and Secretary from May 2007 to March 2008. From June 2003 until June
2006, he was President and Chief Executive Officer of Concourse Communications Group, a
privately-held developer and operator of distributed antenna systems and airport Wi-Fi networks.
From November 1996 until February 2001, Mr. Beatty was a co-founder and the CFO of Focal
Communications Corporation, a competitive local exchange carrier that is now part of Level 3
Communications. Earlier in his career, Mr. Beatty was a securities analyst and also held numerous
technical management positions for a local exchange carrier. Mr. Beatty has a BS in Electrical
Engineering and an MBA in Finance. In addition, he is a Chartered Financial Analyst.
Jonathan M. Charak has served as Senior Vice President, Chief Financial Officer and Secretary since
March 2008. From January 2007 through February 2008, he served as the Chief Financial Officer of
Vanderbilt Financial, LLC. From June 2003 through October 2006, Mr. Charak was Chief Financial
Officer at Concourse Communications Group, LLC. Prior to that, Mr. Charak served as Chief
Financial Officer of Language Stars, LLC and as Controller at iFulfillment, Inc., both of which
were early stage high growth companies. Mr. Charak began his career with 9 years of experience in
the audit practice of Arthur Andersen LLP. Mr. Charak has a B.S. degree in Accounting from Indiana
University and has a CPA certificate.
George S. Brody has served as Senior Vice President, Telguard and Terminals since June 2003.
Previously, Mr. Brody worked as a consultant in the telecommunications industry from 2002 to 2003.
From 2000 to 2002, Mr. Brody was Vice President of Sales and Marketing for Evolution Networks, Inc.
From 1995 to 2000, Mr. Brody served as Vice President, Sales and Marketing for Philips Electronics.
Prior to that, he was Vice President, Worldwide Marketing for Burle Industries (1987-1995). Mr.
Brody began his career at RCA in 1978.
Robert L. Deering was appointed Controller, Treasurer and Chief Accounting Officer in October 2005.
Mr. Deering had previously been the Corporate Controller for VASCO Data Security International,
Inc. from June 2002 to October 2005. Prior to that, he was the Controller for various technology
and manufacturing companies. Mr. Deering began his career in public accounting at
PricewaterhouseCoopers in 1979. He has a BA in Accounting and has a CPA certificate.
EMPLOYEES
The Company has 94 full time employees, of which 42% are in sales, customer service and
marketing, 13% in manufacturing support, 29% in engineering and product development and 16% in
finance and administration. None of the Company’s employees are represented by organized labor and
all of the Company’s employees are located in the United States.
5
COMPETITION
Telular believes its advantages over the competition include:
Greater
focus — Telular is focused on creating M2M solutions, which we develop by combining
our historical competency in designing cellular networking electronics with the data transport
capabilities of commercial wireless networks. This focus allows us to develop products best suited
to our customers’ needs, resulting in products that are easier to install and maintain and are more
reliable. Our primary competitors have the bureaucracy normally associated with large companies
and the management distraction associated with overseeing a broad array of products and services;
many of which are unrelated to one another.
More experience — Telular has been in the cellular electronics business for over 20 years.
We have deployed products in more than 130 countries worldwide, reflecting the quality, reliability
and innovation of our product portfolio.
Broader
product line — Telguard, our largest line of business, includes a more diverse set
of hardware products than any of our competitors and we believe this gives our customers a greater
selection of devices from which to choose.
Economies
of Scale — Telguard’s fully integrated end-to-end cellular solution is now
utilized by over 500,000 individual subscribers which help to minimize costs on a per user basis.
This large customer base also represents significant experience and demonstrates credibility to the
market.
Service and support — Telular provides customers with comprehensive customer service and
product support. We believe that our commitment and ability to provide superior service
differentiates us from our competition.
Financial strength — Telular is currently generating cash from operations; has no
indebtedness; and maintains a substantial cash balance. We believe that this financial strength
gives us an ability to develop new products and services and defend against competitive initiatives
very well.
There are several firms that compete with the Company’s Telguard products and services. These
primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Telular believes it has a
significant portion of the market share for cellular alarm communicators, having introduced the
first such device for digital cellular networks in March 2006. Demand for cellular communicators
has increased markedly over the past year. We believe this is due to consumers eliminating
traditional telephone lines and therefore, requiring a cellular communicator to enable a home
security system. If this trend continues, the Company believes that Telular and its competitors
will continue to see substantial demand for products and related services.
Telular’s Telguard hardware products will only interface with the Company’s proprietary message
center, which interprets and forwards any alarms received to the Company’s security monitoring
customers in near real-time. The Company believes its competitive advantages for this service are
the fact that its hardware products interface with the vast majority of alarm panels on the market
and that installers can quickly activate the hardware and service.
With regard to the other terminal products sold by Telular, there are a large number of competitors
that manufacture and sell FCTs. They include: Ericsson, Axesstel, YX and numerous other
manufacturers in Asia and elsewhere. Much of the demand for these terminals is outside the United
States and demand is concentrated among the large wireless carriers that operate in various
countries around the world. Competition is based on reputation, features and pricing. Telular’s
products have historically sold well in Latin America and the Company is able to realize an
acceptable selling price due to Telular’s reputation for quality products in that region. The FCT
business is not a primary focus of Telular but it continues to earn an acceptable contribution
margin and will be maintained for as long as it continues to do so.
Telular has granted a license for its patents to Ericsson and currently faces competition for FCT
sales from Ericsson.
6
PATENTS AND OTHER INTELLECTUAL PROPERTY
PATENTS
With respect to its intelligent interface technology, Telular currently has 22 issued and active
U.S. patents as well as 4 foreign patents. Telular has successfully defended some of its patents
in court. These law suits have not had a material effect on the Company’s financial position.
Although Telular 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.
TRADEMARKS AND OTHER PROPRIETARY INFORMATION
Telular has 6 registered U.S. trademarks, which are: Telular (block), TELULAR plus design,
CELJACK, Hexagon Logo, PHONECELL, TELGUARD and WiPATH. Telular has 4 pending U.S.
trademark applications (for “LOSE THE LINE KEEP THE CONNECTION”, “WIRELESSLY PROTECTED”, “TANKLINK”
and “TANKLINK” logo). In addition, Telular has a total of 21 foreign trademark registrations
covering the names and logos used for some of its products.
AVAILABLE INFORMATION
Internet Address
Telular’s
Internet address is www.telular.com.
Filings with the Securities and Exchange Commission
Telular makes available free of charge through a link on its Internet website its Code of Ethics,
Audit Committee Charter, Compensation Committee Charter, Nominating and Governance Committee
Charter, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the
Exchange Act as soon as reasonably practicable after the Company electronically files such material
with, or furnishes it to, the Securities and Exchange Commission.
You should carefully consider the following risks before you decide to buy our common stock.
If any one of these risks or uncertainties were to occur, our business, financial condition,
results and performance could be seriously harmed and/or the price of our common stock might
significantly decrease.
Technology changes rapidly in our industry and our future success will depend on our ability to
keep pace with these changes and meet the needs of our customers.
The wireless solutions industry is characterized by rapid technological advances, evolving
industry standards, changing customer needs and frequent new product introductions and
enhancements. The fixed cellular telecommunications industry also is experiencing significant
technological change. The introduction of products embodying new technologies and the emergence of
new industry standards could render our existing products and technology obsolete and unmarketable.
The process of developing new technology and products is complex, uncertain and expensive, and
success depends on a number of factors, including:
We may not be successful in developing and marketing new products and enhancements or we may
experience difficulties that prevent development of products and enhancements in a timely manner.
In addition, our products may fail to meet the needs of the marketplace or achieve market
acceptance. Any of these circumstances would seriously harm our results and financial condition.
7
Our results depend on our ability to develop and introduce new products and to reduce the costs to
produce existing products.
The process of developing new technology is complex and uncertain, and if we fail to
accurately predict the changing needs of our customers and emerging technological trends, our
results and financial condition may suffer. We must commit significant resources, including those
contracted from third parties, to develop new products before knowing whether our investments will
result in products the market will accept. There can be no assurance that we will successfully
identify new product opportunities, develop and bring new products to market in a timely manner,
and achieve market acceptance of our products, or that products and technologies developed by
others or new industry standards will not render our products or technologies obsolete or
noncompetitive. Furthermore, we may not successfully execute on new product opportunities because
of technical hurdles that we or our contractors fail to overcome in a timely fashion. This could
result in competitors providing a solution before we do, and loss of market share, revenues and
earnings.
Products from our investments in research and development of new products may not be realized for
an extended period of time, if at all.
The Company has made significant investments in research and development for new products,
services and technologies. Significant revenue from these investments may not be achieved for a
number of years, if at all. Further, we may be required to purchase licenses from third parties in
connection with the development of new products and these licenses may not be available on
commercially reasonable terms, or at all. Even if we successfully introduce new products and
technologies, our products may not be accepted by the market or we may be unable to sell our
products at prices that are sufficient to recover our investment in developing those new products.
Moreover, if these products are profitable, gross profit for these products may not be as high as
the margins historically experienced for our other products.
We must devote substantial resources to research and development to remain competitive and we may
not have the resources to do so.
For us to be competitive we must continue to dedicate substantial resources to research and
development of new products and enhancements of current and future products as described above. If
we are unable to devote sufficient resources to fund necessary research and development or if our
research and development efforts are unsuccessful, such failure may have a material adverse effect
on our business and our stock price may decline.
Unfavorable economic events including competitive pricing pressure in our target markets could lead
to lower sales of our products.
The Company has identified significant growth opportunities in a variety of markets, such as
the M2M market. Each of these markets will develop at a different pace, and
the sales cycle for these markets is likely to be several months or quarters.
Pricing for Fixed Cellular Terminals has been declining along with pricing in general for
telecommunications equipment and other technology products. We believe that these pricing trends
will continue in the future and perhaps accelerate, particularly if large companies with greater
purchasing power enter the market or other competitors enter the market with lesser quality
products or improper license rights.
In addition, unfavorable general economic conditions in any market will have a negative effect
on sales in that market. Because economic conditions in one region often affect conditions
globally, unfavorable general economic conditions in one market or region might result in damage to
industry growth and demand in other markets as well.
The decline in the U.S. housing market may negatively impact sales and profitability of the
Company’s Telguard products and services. Since end users oftentimes purchase security systems and
associated cellular alarm communicators, such as Telguard, when they are moving into a new
residence, a slowdown in the housing sector could cause purchases of Telguard products and services
to slow or decline. Furthermore, if general economic conditions slow
or if a recession occurs, end users may choose to eliminate the protection offered by Telguard
services as consumers re-examine discretionary expenditures.
8
We believe recent demand for our Telguard products has been driven in part by end users
eliminating traditional phone lines in favor of VoIP and cellular
telephones. If this trend does not continue, overall demand for the Telguard products could be
negatively affected.
Similarly, the adoption rate for our TankLink and other M2M solutions often depend upon the
prices at which we are able to sell our products and services relative to the potential cost
savings which end users anticipate. If we are unable to continually reduce our TankLink and other
M2M solution pricing, we may not experience sufficient demand for our TankLink and other M2M
products and solutions. Furthermore, if customers cannot obtain financing to fund the upfront
purchase of such products and services, our TankLink and other M2M sales, growth rates, and
profitability may be negatively impacted.
Our efforts to increase the focus of our production, marketing and sales efforts to the M2M market
may not be successful.
The success of our current efforts to increase our focus on the M2M market will depend on our
ability to develop and market solutions that are attractive to customers and to control our costs
for those solutions. We cannot assure that these efforts will be successful.
We rely on third parties to manufacture our products and others to manufacture components for our
products.
We use subcontractors to manufacture our products and product components, such as cellular
transceivers and radio modules, and to assemble our products, such as Fixed Cellular Terminals. In
the past, we experienced delays in receiving subcontracted components and assembled products that
resulted in delays in our ability to deliver products. We may experience similar delays in the
future.
Our inability to obtain sufficient quantities of raw materials and key components when
required could result in delays or reductions in product shipments and increased costs for affected
parts. In addition, production capacity constraints at our subcontractors could prevent us from
meeting production obligations.
Delays in product deliveries for any reason or our failure to deliver products could
significantly harm customer relationships and result in the loss of potential sales. Delivery
delays or failures could also be subject to litigation.
We rely on limited or sole sources for many of our components, and the loss of any such sources may
adversely impact our business.
It is not always possible to maintain multiple qualified suppliers for all of our components
and subassemblies. As a result, some key components are purchased only from a single supplier or a
limited number of suppliers. If demand for a specific component increases, we may not be able to
obtain an adequate supply of that component in a timely manner. In addition, if our suppliers
experience financial or other difficulties, the availability of these components could be limited.
It could be difficult, costly and time-consuming to obtain alternative sources for these components
or to change product designs to make use of alternative components. If we are unable to obtain a
sufficient supply of components, if we experience any interruption in the supply of components or
if the cost of our components increases, our ability to meet scheduled product deliveries could be
harmed, which could result in lost orders, harm to our reputation and reduced revenues.
Several of our sole sourced components in existing products are at end-of-life from their
manufacturers. We are attempting to source more of these components using brokers in the secondary
market but expect that we may run out of these components for several of our products during fiscal
2010. While we can design replacement products with available components, we cannot assure you
that we will successfully redesign these products and retain the revenue associated with the
existing products which are subject to end-of-life components.
9
We rely on cellular networks for service revenue that may be affected by the following:
In the event that we experience significant cellular networks delays or interruption of
service, we would have difficulty maintaining customers and our revenues could decline
substantially and harm our business.
Corr Wireless Communications, LLC provides a substantial portion of our network capability. A
network malfunction or a contractual dispute between us and this carrier or among this carrier and
other major U.S. carriers could materially impact the operation of our services and/or our
financial results.
AT&T Wireless also provides a substantial portion of our network capability. A network
malfunction or a contractual dispute between us and this carrier or among this carrier and other
major U.S. carriers could materially impact the operation of our services and/or our financial
results.
We
have two highly significant customers and the loss of these particular customers may seriously
harm our business.
ADT and ADI, customers of our Telguard products and services, represented 44% of our total
revenue in fiscal 2009. If these customers choose to use fewer of our products or stop using our
products in total, our financial results could be materially impacted. In addition, both customers
influence the purchasing decisions of many other of our customers by specifying which equipment
must be installed in end user security systems that it may purchase from these customers. If
these customers remove our products from its list of acceptable equipment, our financial results
may be materially impacted.
We have extended credit terms with one key customer.
In order to more rapidly grow our presence in the tank monitoring market, we have offered
extended payment terms to one key VAR customer. These extended payment terms have resulted in a
disproportionately large receivables balance in excess of $2,500 as of September 30, 2009. We have
executed a security agreement with the key customer but there is no guarantee that this security
agreement will allow us to realize our balance due should this customer become financially
distressed. If we are unable to collect our receivables balance from this customer, or other such
customers in the future, our financial results could be materially impacted.
If we cannot sustain profitable operations, we may not be able to obtain the funding we need to
operate our business.
At times during the recent past, the Company has incurred operating losses. We incurred a net
loss of $1,379 for the year ended September 30, 2008 and $1,946 for the year ended September 30,
2007. We cannot guarantee that we will be successful in maintaining profitability and our ability
to continue operations depends on having adequate funds to cover our expenses. Our current
operating plan provides for significant expenditures for research and development of
new products, development of new markets for our products, and marketing programs for our products.
At September 30, 2009, we had $17,904 in cash and cash equivalents and a working capital surplus
of $28,666.
10
In the future, we may need to utilize financing sources such as public or private sales of our
equity or debt securities. We cannot assure you that if we needed additional funds we would be
able to obtain them or obtain them on terms we find acceptable. If we could not obtain the
necessary financing we may cut back operations, which might include the scaling back or elimination
of research and development programs.
Our operating results may fluctuate greatly on a quarterly and annual basis, which may cause the
price of our common stock to be volatile.
Our quarterly and annual operating results may fluctuate greatly due to numerous factors, many
of which are beyond our control. Factors that could affect our quarterly and annual operating
results include those listed below as well as others listed in this “Risk Factors” section:
A substantial portion of our sales in a given quarter may depend on obtaining orders for
products to be manufactured and shipped in the same quarter in which those orders are received. As
a result of these factors, period-to-period comparisons of our operating results may not be meaningful, and you should not rely on them
as an indication of our future performance. In addition, our operating results may fall below the
expectations of public market analysts or investors. In this event, our stock price could decline
significantly. These period-to-period fluctuations may contribute to the volatility in the price
of our common stock, as described below.
11
Our common stock price has been extremely volatile, and extreme price fluctuations could negatively
affect your investment.
The market price of our common stock has been extremely volatile. Since October 1, 1999, the
price of our common stock has ranged from a high of $32.00 to a low of $1.00 per share.
Publicized events and announcements may have a significant impact on the market price of our
common stock. For example, the occurrence of any of the following events could have the effect of
temporarily or permanently driving down the price of our common stock:
In addition, the stock market from time to time experiences extreme price and volume
fluctuations that particularly affect the market prices for emerging growth and technology
companies, like Telular, and which often are unrelated to the operating performance of the affected
companies. These broad fluctuations may negatively affect your ability to sell your shares at a
price equal to or greater than the price you paid. In addition, a decrease in the price of our
common stock could cause it to be delisted from the NASDAQ National Market.
From time-to-time we face litigation that could significantly damage our business and financial
condition.
In the telecommunications equipment and other high technology industries, litigation
increasingly has been used as a competitive tactic by both established companies seeking to protect
their position in the market and by emerging companies attempting to gain access to the market. In
this type of litigation, complaints may be filed on various grounds, such as:
12
We are currently defending ourselves against several such claims. Whether or not they have
any merit, we incur substantial expense and management’s attention may be diverted from operations.
This type of litigation also may cause confusion in the market and make our licensees and
distributors reluctant to commit resources to our products. Any of these effects could have a
significant negative impact on our business and financial condition. In particular, an adverse
result from intellectual property litigation could force us to do one or more of the following:
If we are forced to take any of the foregoing actions, we could face substantial costs and
shipment delays and our business could be seriously harmed. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or be adequate to indemnify us
for all liability that may be imposed.
In addition, it is possible that our customers or end users may seek indemnity from us in the
event that our products are found or alleged to infringe the intellectual property rights of
others. Any such claim for indemnity could result in substantial expenses to us that could harm our
operating results. Our largest customer is entitled to indemnification for such claims and has, in
fact, sought such indemnification recently based on notice of infringement provided to this
customer and to the Company by a party that has recently begun litigation against the Company and
our customer based on this infringement claim.
Although our patents have been successfully defended in courts in the United States and New
Zealand, rulings in such cases may not apply to new products. In the event that any of our patents
or other intellectual property rights were deemed invalid or were determined not to prohibit
competing technologies as a result of litigation, our competitive position may be significantly
harmed.
Our costs may increase if we are unable to accurately forecast our needs.
Lead times for ordering components from our manufacturers vary significantly and depend on
various factors, such as the specific supplier, contract terms and demand for and availability of a
component at a given time. If our forecasts are less than our actual requirements, we may not be
able to obtain products in a timely manner. Furthermore, if we cannot produce our products in a
timely manner, the liquidated damages provisions in some of our contracts with our customers may
result in our selling our products at a loss. If our forecasts are too high, we and our
manufacturer will be unable to use the components that were purchased based on our forecasts. The
cost of the components used in our products tends to drop rapidly as volumes increase and
technologies mature. Therefore, if we are unable to use components purchased based on our
forecasts, our cost of producing products may be higher than our competitors’. Excess components
or inventory will tie up working capital and cause us to incur storage and other carrying costs,
which may cause us to borrow additional funds that may not be available on commercially reasonable
terms. Further, excess components or inventory not used or sold in a timely manner may become
obsolete, causing write-offs or write-downs, which could seriously harm our results of operations.
Quality control problems could harm our sales.
We believe that our products currently meet high standards of quality. We have instituted
quality-monitoring procedures. Most of our major subcontractors also have quality control
procedures in place and are ISO-9001:2000 compliant, but could experience quality control problems.
If this occurs, the quality of our products could suffer, which could significantly harm product
sales.
We may experience long sales cycles for our products, as a result of a variety of factors.
Our sales cycle depends on the length of time required for adoption of new technologies in our
target markets. In addition, the period between our initial contact with a potential customer and
its decision to purchase our products is relatively long. The evaluation, testing, acceptance,
proposal, contract negotiation, funding and implementation process can extend over many months.
Based on our limited operating history, it generally takes us between three and nine months to
complete a sale to a customer. However, in certain instances the sales cycle may be substantially
longer. If our sales cycle unexpectedly lengthens in general or for one or more large orders, the
timing of our revenues and results of operations could be harmed, which in turn could reduce our
revenues in any quarter. Therefore, period-to-period comparisons of our results of operations may
not necessarily be meaningful, and these comparisons should not be relied
upon as indications of future performance. Further, sales cycles that are longer than we expect
likely will harm our ability to generate sufficient cash to cover our working capital requirements
for a given period.
13
We operate in developing markets, which may subject us to volatile conditions not present in the
United States.
We target developing countries and some of our current and potential customers operate in
these markets. As we expand our operations and products in these countries, our business and
performance could be negatively affected by a variety of factors and conditions that businesses
operating in the United States may not have to contend with, such as:
To date, our sales have not been negatively affected by currency fluctuations. We currently
seek prepayment, letters of credit or qualification for export credit insurance underwritten by the
U.S. Export-Import Bank or other third-party insurers on a substantial portion of our international
orders, but some international customers are granted open credit terms and we are exposed to some
international credit risk. We also try to conduct all of our international transactions in U.S.
dollars to minimize the effects of currency fluctuations. However, if our international operations
were to grow, foreign exchange fluctuations and foreign currency inflation may pose greater risks
for us and we may need to develop and implement additional strategies to manage these risks. If we
are not successful in managing these risks our business and financial condition could be seriously
harmed.
Company products have limited patent protection.
Although the Company holds United States and foreign patents, core aspects of our technology
are not covered by patent protection. As a result, a competitor may be able to develop technologies
that are substantially similar to our products, which would have a material adverse effect on our
business and future prospects.
It also is possible that a competitor may independently develop and/or patent technologies
that are substantially equivalent to or superior to our technology. If this happens, our patents
will not provide protection and our competitive position may be significantly harmed.
As we expand our product line or develop new uses for our products, these products or uses may
be outside the protection provided by our current patents and other intellectual property rights.
In addition, if we develop new products or enhancements to existing products we cannot assure you
that we will be able to obtain patents to protect them. Even if
we do get patents for new products, these patents may not provide meaningful protection. Any
patent that we may obtain will expire, and it is possible that it may be challenged, invalidated or
circumvented.
14
In some countries outside of the United States, patent protection is not available. Moreover,
some countries that do allow registration of patents do not provide meaningful redress for
violations of patents. As a result, protecting intellectual property in these countries is
difficult. In addition, neither we nor any known competitors in the past obtained patent
protection for our core intelligent interface technology in many countries, including the principal
countries of Western Europe, and we and those competitors are now legally barred from obtaining
patents in these countries.
In countries where we do not have patent protection or where patents provide little, if any,
protection, we have to rely on other factors to differentiate our products from our competitors’
products.
Although we believe our products are superior to those of competitors, it may be easier for
competitors to sell products similar to ours in countries where we do not have meaningful patent
protection. This could result in a loss of potential sales.
We may initiate claims or litigation against third parties in the future for infringement of
our proprietary rights or to determine the scope and validity of our proprietary rights or the
proprietary rights of competitors. These claims could result in costly litigation and divert the
efforts of our technical and management personnel. As a result, our operating results could suffer
and our financial condition could be harmed.
We may not address successfully the problems encountered in connection with any potential future
acquisitions.
We expect to continue to consider opportunities to acquire or make investments in other
technologies, products and businesses that could enhance our capabilities, complement our current
products or expand the breadth of our markets or customer base. We have limited experience in
acquiring other businesses and technologies. Potential and completed acquisitions and strategic
investments involve numerous risks, including:
If we fail to properly evaluate and execute acquisitions and strategic investments, our
management team may be distracted from our day-to-day operations, our business may be disrupted and
our operating results may suffer. In addition, if we finance acquisitions by issuing equity or
convertible debt securities, our stockholders would be diluted.
Delaware law and our charter documents may inhibit a potential takeover bid that would be
beneficial to common stockholders.
Delaware law and our certificate of incorporation may inhibit potential acquisition bids for
Telular common stock at a price greater than the market price of the common stock. We are subject
to the anti-takeover provisions of the Delaware General Corporation Law, which could delay, deter
or prevent a change of control of Telular or make this type of transaction more difficult. In
addition, our board of directors does not need the approval of common stockholders to issue shares
of preferred stock having rights that could significantly weaken the voting power of the common
stockholders and, as a result, make a change of control more difficult.
15
Sales of common stock issuable on the exercise of outstanding and contemplated options and warrants
may depress the price of the common stock.
As of September 30, 2009, there were options granted to employees and directors to purchase
1,982,064 shares of the Company’s common stock. Options to purchase 1,110,289 of these shares were
exercisable at that time. The exercise prices for the exercisable options range from $1.95 to
$16.45 per share, with a weighted average exercise price of $4.23. Options to purchase the
remaining 871,775 shares will become exercisable over the next two years. The exercise prices for
the options that are not yet exercisable have a weighted average exercise price of $3.86.
In connection with a credit facility with Wells Fargo Bank (“Wells”) that matured on December
31, 2002, we issued to Wells warrants to purchase 50,000 shares of common stock at an exercise
price of $16.29 per share. In connection with the private placement of 2,650,000 shares to certain
shareholders on September 2, 2005, we issued warrants to purchase 1,324,996 shares of the Company’s
common stock at an exercise price of $4.50 per share and an additional 1,324,996 shares at an
exercise price of $5.00 per share. Finally, in connection with entering into a two-year Loan and
Security Agreement and a Non-Recourse Receivable Purchase Agreement with Silicon Valley Bank
(“SVB”) on June 27, 2006, we issued warrants to purchase 320,856 of the Company’s common stock at
an exercise price of $1.87 per share. In the future we may issue additional shares of common
stock, convertible securities, options and warrants.
The issuance of shares of common stock issuable upon the exercise of options or warrants could
cause substantial dilution to holders of common stock. It also could negatively affect the terms
on which we could obtain equity financing.
During fiscal 2008, SVB exercised 320,856 warrants in a cash-less transaction for 218,641
shares of the Company’s Common Stock. Additionally, certain shareholders, in connection with the
September 2, 2005 private placement, exercised warrants for 176,567 shares of the Company’s Common
Stock. Also, during fiscal 2008, holders of warrants issued in the private placement of common
stock on September 2, 2005 exercised 395,208 warrants for common stock of the Company.
None.
16
ITEM 2.
PROPERTIES
The following is a list of properties that Telular leases:
ITEM 3.
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, cash flows or financial position.
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, 2009.
17
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The Company’s Common Stock trades publicly on the NASDAQ National Market System under the symbol
WRLS. The following table sets forth the quarterly high and low sales prices for each quarter of
fiscal year 2009 and 2008, as reported by NASDAQ. Such quotations reflect inter-dealer prices
without retail markup, markdown or commissions and may not necessarily represent actual
transactions.
On December 7, 2009, there were approximately 231 shareholders of record, approximately 4,530
beneficial shareholders and 14,933,938 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.
TREASURY SHARES
Under the previously announced purchase program, there were no shares repurchased during the fourth
quarter of fiscal 2009. The approximate dollar value of shares that may yet be purchased under the
program is $1,225 as of September 30, 2009.
TELULAR CORPORATION COMMON STOCK PERFORMANCE GRAPH
The following Performance Graph and related information shall not be deemed “soliciting material”
or to be “filed” with the Securities and Exchange Commission, nor shall such information be
incorporated by reference into any future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that the Company specifically
incorporates it by reference into such filing.
The Telular Corporation Common Stock Performance Graph compares total shareholder returns of the
Company since September 30, 2004, to three indices: the NASDAQ Stock Market (U.S.) Index, the
NASDAQ Telecommunications Index and the Zach Industry Index — Computer and Technology Sector
replacing the Research Data Group (RDG) Technology Composite Index, which was used in prior years.
The Company determined that the new index includes companies that more closely matches our
company. The total return calculations assume the reinvestment of dividends, although dividends
have never been declared for the Company’s stock, and are based on the returns of the component
companies weighted according to their capitalizations as of the end of each monthly period. The
NASDAQ Stock Market (U.S.) Index tracks the aggregate return of all equity securities traded on the
NASDAQ National Market System (the NMS). The NASDAQ Telecommunications Index tracks the aggregate
return of equity securities of telecommunications companies traded on the NASDAQ National Market
System (the NMS). The Zach Industry Index — Computer and Technology Sector tracks the aggregate
return of technology companies, including electronics, medical and other related technology
industries.
18
The Company’s Common Stock is traded on the NMS and is a component of the NASDAQ Stock Market
(U.S.) Index. The Company’s stock price on the last trading day of its fiscal year, September 30,
2009, was $3.23.
19
The following table is a summary of certain condensed statement of operations and balance
sheet information of the Company. The table lists historical financial data of the Company for the
fiscal years ended September 30, 2009, 2008, 2007, 2006 and 2005. The selected financial data were
derived from audited financial statements. The summary should be read in conjunction with financial
statements and notes thereto appearing in Item 8 of this report.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
INTRODUCTION
Telular designs, develops and distributes products and services that utilize wireless networks to
provide data and voice connectivity among people and machines. Telular’s product and service
offerings combine the Company’s historical competency in developing cellular networking electronics
with the data transport capabilities of commercial wireless networks in order to create information
networking solutions.
The Company generates most of its revenue by designing, producing and selling products and through
the delivery of M2M and event monitoring services, such as its Telguard and
TankLink services. Although the Company has a wide base of customers in the Western Hemisphere,
much of its revenue is generated from a small number of major customers.
20
The Company’s operating expense levels are based in large part on its expectations for its 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 Item 1A, Risk Factors.
The market for the Company’s products is primarily in North and South America and consists of a
number of vertical applications including Telguard security alarm conveyance; TankLink storage tank
monitoring; and, general purpose wireless terminals for voice calls and Internet access. These
markets are addressed primarily through indirect channels consisting of third party VARs, distributors, representatives and agents along with in-house sales and customer
support teams. A direct sales model is utilized for certain large customers.
During June 2008, Telular abandoned its Fixed Cellular Phone (FCP) segment after unsuccessfully
marketing this unit for sale. Many of the segment’s assets were parts and finished goods inventory
which were sold prior to abandonment of the segment on June 30, 2008.
The Company believes that its future success depends on its ability to continue to meet customers’
needs through product innovation, including the creation of event monitoring services that can be
sold with products. Research and development activities sponsored by the Company for the years
ended September 30, 2009, 2008 and 2007 were $2,974, $4,448 and $6,076, respectively.
The following details areas of product delivery and research during fiscal 2009 and anticipated in
fiscal 2010.
Telguard
— Telular’s engineering team continues to update the Telguard digital product portfolio by
addressing the growing demand and technology changes in the electronics security market. In fiscal
2009, Telular enhanced the functionality of its TG-9 product and undertook a redesign of certain
other Telguard hardware devices. The launch of these redesigned products is expected to occur in
fiscal 2010 and will improve the Company’s ability to profitably serve the security markets. In
addition, Telular is designing a new hardware product for security dealers that it plans to release
in fiscal 2010.
TankLink — The fiscal 2009 acquisition of TankLink brought the Company a successful wireless
communicator product line for tank level monitoring. Enhancements to this hardware and its
supporting message center have been made during 2009. Telular plans to further enhance this
product line during fiscal 2010 to support a wider array of sensors and to add additional features
to the hardware products which enable the service offering.
Other M2M Solutions — During 2009, Telular evaluated a number of vertical and sub-vertical M2M
markets to determine the viability of creating or acquiring a product and/or service for these
markets. While the Company did not develop any such solutions, it will continue to examine growth
possibilities and new solutions in the M2M market space.
Fabrication of Telular’s products is accomplished through contract manufacturing. Contract
manufacturers in China and the United States make and test all hardware products.
There are several firms that compete with the Company’s Telguard products and services. These
primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Telular believes it has a
significant portion of the market share for cellular alarm communicators, having introduced the
first such device for digital cellular networks in March 2006. Demand for cellular communicators
has increased markedly over the past year. We believe this is due to consumers eliminating
traditional telephone lines and therefore, requiring a cellular communicator to enable a home
security system. If this trend continues, the Company believes that Telular and its competitors
will continue to see substantial demand for products and related services.
With regard to the other terminal products sold by Telular, there are a large number of competitors
that manufacture and sell FCTs. They include: Ericsson, Axesstel, YX and numerous other
manufacturers in Asia and elsewhere. Much of the demand for these terminals is outside the United
States and demand is concentrated among the large wireless carriers that operate in various
countries around the world. Competition is based on reputation, features and pricing. Telular’s
products have historically sold well in Latin America and the Company is able to realize an
acceptable selling price due to
Telular’s reputation for quality products in that region. The FCT business is not a primary focus
of Telular but it continues to earn an acceptable contribution margin and will be maintained for as
long as it continues to do so.
21
Telular has granted a license for its patents to Ericsson Radio Systems AB and currently faces
competition for FCT sales from Ericsson.
With respect to its interface technology, the Company currently has 22 issued patents and 4 issued
foreign patents. The Company has successfully defended some of its patents in court.
OUTLOOK
The statements contained in this outlook are based on current expectations. These statements
are forward looking, and actual results may differ materially.
The Company expects to expend most of its market and product development resources on the M2M
space, including continuing to capitalize on its favorable market position in the domestic security
alarm market by virtue of its well-regarded Telguard offering. Due to uncertainties in
international markets and pending new product introductions, the Company is unable to forecast
results and resource allocations for FCT products.
The amount and frequency of product shipments to the Company’s largest customers depends on many
factors, including market conditions and agreements with other suppliers. The outcome of pending
and future negotiations for orders with such customers and the timing of shipments may have a
significant impact on the Company’s future revenues and profitability.
RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Fiscal Year 2009 Compared to Fiscal Year 2008
Revenues and Costs of Sales
Revenues
Product revenues decreased 46% primarily due to decreased sales of both Telguard
monitoring equipment and terminal products as a result of lower customer demand. Demand for
our Telguard products during fiscal 2008 was heightened by an FCC mandated transition from
analog to digital cellular service in the first and second quarters of fiscal 2008. Sales of
our terminals products were primarily lower in the Central American Latin American (“CALA”)
region due to depressed economies resulting in decreased purchases.
22
Services revenues increased 11%, primarily due to continued increase of subscribers including
tank subscribers not included in fiscal 2008 results. As of September 30, 2009, the
subscriber base is approximately 500,000, an increase of approximately 74,000 subscribers
from approximately 426,000 subscribers as of September 30, 2008.
Cost of Sales
The decrease in total cost of sales of 32% reflects both lower sales volume and product mix.
Gross margin, as a percentage of sales was 40% for fiscal 2009 as compared to 37% for the
last year.
Product margins, as a percentage of product revenues, decreased slightly from 31% in fiscal
2008 to 26% in fiscal 2009. This decrease was a result of reduced product pricing due to
competitive pressures.
Service margins, as a percentage of service revenues, increased to 56% in fiscal year 2009
from 52% in fiscal year 2008. This increase was primarily due to a reduction in fulfillment
costs that were partially offset by a slight increase in carrier surcharge costs.
Operating Expenses
Engineering and Development
Engineering and development expenses decreased by $388 primarily due to reductions of:
These expense reductions were offset by a $50 increase in facility and office expenses
related to the acquisition of TankLink.
Selling and Marketing
Selling and marketing expenses decreased by $248 primarily due to reductions of:
Offsetting these expense reductions was a $1,116 increase in payroll-related expenses as a
result of the addition of sales and marketing staff and the addition of staff from the
acquisition of TankLink as well as a $76 increase in travel expenses.
23
General and Administrative (G&A)
G&A costs for fiscal 2008 have been reclassified to include general business taxes which were
previously included in Other Income. This is consistent with fiscal 2009’s presentation. G&A
expenses decreased by $1,291 primarily due to reductions of:
Offsetting these reductions is an increase of $282 for intangible amortization related to the
acquisition of TankLink and $159 of additional proxy costs related to the proxy contest in
fiscal 2009.
Other
Income
Other income decreased by $117 primarily from a $74 reduction of interest income as a result of reduced rates and a reduced investment balance, and a increase of $43 in various miscellaneous expenses. Income Taxes
The Company recorded an income tax provision of $65 for fiscal 2009 related to alternative minimum taxes. There was no income tax provision for 2008. Discontinued Operations
The loss from discontinued operations of $419 was due primarily to the return of phones previously sold to a customer in prior periods and the resale of those phones at a loss. The Company decided to take back the product in lieu of further attempts to collect on the outstanding account receivable from the prior period sale. The resulting account receivable from the resale was fully collected as of September 30, 2009. Net Income
The Company recorded net income of $1,866 or $0.11 per fully diluted share for fiscal 2009 compared to a net loss of $1,379 of ($.07) per fully diluted share for fiscal 2008. This increase was primarily due to reduced product costs and reduced operating costs. Fiscal Year 2008 Compared to Fiscal Year 2007
Revenues and Costs of Sales
24
Revenues
Total product revenues decreased 20% in fiscal 2008 due to decreased sales of our Telguard
products. Our dealers and distributors increased their inventory during the fourth quarter
of fiscal 2007 and the first two quarters of fiscal year 2008 anticipating a stronger demand
to convert from analog to digital. As that demand waned and the housing market continued to
weaken, our customers reduced their purchases during the last half of fiscal 2008. Terminal
product sales increased primarily due to sales increases in the domestic market.
The increase in service revenues is a result of the increase in the activation of monitoring
services related to additional Telguard unit sales in the fourth quarter of fiscal 2007 and
the first six months of fiscal 2008. Activations, which are dependent on Telguard unit
installations, will lag behind the sales of those units.
Cost of Sales
Total cost of sales decreased 16% in fiscal 2008. This was due to both a decrease in the
volume of sales and decreased cost of manufacturing products and delivering services.
Product cost of sales as a percentage of revenues was 69% for fiscal 2008 as compared to 71%
for fiscal 2007. This 2% decrease was attributed to decreased manufacturing costs.
Service cost of sales as a percentage of revenue decreased from 53% in fiscal 2007 to 49% in
fiscal 2008. This was primarily due to the lower cost of providing digital services as a
result of the transition from analog services.
Operating Expenses
Engineering and Development
The decrease of $1,759 in engineering and development costs was primarily due to reductions
of:
Offsetting these reductions was an increase of $224 in recruiting cost to replace
engineers who did not move to Atlanta.
Selling and Marketing
Selling and marketing costs increased $130 primarily due to increases of:
Offsetting these increases was a $980 decrease in external commissions related to reduced sales volumes.
General and Administrative (G&A)
G&A costs for fiscal 2008 and 2007 have been restated to include general business taxes which
were previously included in Other Income. This is consistent with fiscal 2009’s
presentation. G&A costs increased $1,150 in fiscal 2008 primarily due to increases of:
Partially
offsetting these increases was a decrease in facility costs as a result of moving the
corporate headquarters to Chicago.
25
Other Income
Other income for fiscal 2008 increased by $264 compared to fiscal 2007. This increase was primarily due to a $139 increase in interest income as a result of increased cash balances throughout the year, a decrease in interest expense of $105 as a result of reducing the Company’s borrowings to $0 and a $20 increase in various other miscellaneous expense items during the year. Income Taxes
The Company recorded no income tax benefit for both fiscal years 2008 and 2007 due to the uncertainty of the realizability of its deferred tax assets. Discontinued Operations
The loss from discontinued operations of $7,480 for the fiscal 2008 decreased $91 from a loss of $7,571 for fiscal 2007. Sales decreased significantly as the Company exited the FCP market and sold its remaining inventory. During the third quarter of fiscal 2008, the Company determined that it would be unable to find a buyer for the FCP business unit. As a result, the Company made a strategic decision to abandon the FCP business unit effective June 30, 2008. The majority of the assets of the business have been disposed of. The remaining assets as of September 30, 2008 consist of trade accounts receivable of $4,583, inventory held for warranty purposes, which has been fully reserved for, and $126 of test equipment which the Company intends to sell at auction. The following table summarizes the activity of the discontinued operations for the fiscal years 2008 and 2007. Also, see Note 21 of the Notes to Consolidated Financial Statements.
Net Loss
The Company recorded a net loss of $1,379 or $0.07 per share for fiscal 2008 compared to a net loss of $1,946 or $0.11 per share for fiscal 2007. The decrease in net loss was primarily due to the result of increased margins due to improved product mix and a reduction of manufacturing cost and containment of operational costs. LIQUIDITY AND CAPITAL RESOURCES
Management regularly reviews the Company’s working capital and available borrowings in
addition to its cash and cash equivalent balance to determine if it has enough cash to operate the
business. On September 30, 2009, the Company had cash
and cash equivalents of $17,904 and working capital of $28,666, compared to cash and cash
equivalents of $21,168 and net working capital of $36,009 a year earlier. The Company can draw upon
a Loan and Security Agreement with Silicon Valley Bank (SVB) that provides an aggregate working
capital line of credit up to $10,000. Management expects trade accounts receivable and inventory to
turn into cash in short periods of time. As such, given the level of cash and cash equivalents,
trade accounts receivable and inventory, management believes the Company has adequate resources to
fund current and planned operations in a consistent manner with historical practices. The tables
below discuss the liquidity components of continuing operations for fiscal years 2009 and 2008.
26
Fiscal 2009
The Company generated cash of $5,453 from continuing operations during fiscal 2009 compared to
cash generated of $7,084 during the same period of fiscal 2008. The components of the change for fiscal 2009 are as follows:
Fiscal 2008
The Company generated cash of $7,084 from continuing operations during fiscal year 2008 compared to
cash generated of $1,566 during the same period of fiscal 2007. The components of the change for fiscal 2008 are as follows:
Capital expenditures for fiscal years 2009 and 2008 were $932 and $1,090, respectively. The 2009
expenditures were for the purchase of a new ERP system, additional equipment for operations and for
new computers, replacing obsolete equipment. The 2008 expenditures were primarily for improvements
and upgrades to the Company’s message center, additional
equipment for operations and for new computers, replacing obsolete equipment. The Company
anticipates funding future capital additions with cash from operations.
27
On July 25, 2008, the Company’s Board approved a plan to repurchase up to $5,000 of the Company’s
common stock on the open market. During fiscal 2008, 383,207 shares were repurchased at a cost of
$1,127. During fiscal 2009, 1,725,283 shares were repurchased under the plan at a cost of $2,648.
In addition to the plan, on June 19, 2009, a modified “Dutch Auction” tender offer was completed
buying back 2,344,857 shares of common stock at a cost of $5,386.
The Company generally requires its foreign customers to prepay, obtain letters of credit or
qualify for export credit insurance underwritten by third party credit insurance companies prior to
making international shipments. Also, to mitigate the effects of currency fluctuations on the
Company’s results of operations, the Company conducts all of its international transactions in US
dollars.
The following table sets forth our total contractual obligations as of September 30, 2009:
Purchase commitments are for purchases made in the normal course of business to meet operational
requirements, consisting primarily of raw materials and finished goods inventory. The Company
expects to satisfy these commitments primarily from cash from the revenues generated by the
delivery of backlogged orders.
CRITICAL ACCOUNTING POLICIES
Management’s Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company’s consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
as of the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period.
On an on-going basis, management evaluates its estimates and judgments, including those related to
the net realizable value of inventories and intangible assets. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Management
believes the following critical accounting policies, among others, affect the presentation of the
Company’s financial condition and results of operations.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the
inability of customers to make payment for products and services. The Company evaluates the
collectability of customer receivables by considering the payment history and the financial
stability of its customers. If the Company believes that an account receivable may not be
collected, a charge is recorded to the allowance account. At September 30, 2009 and 2008, the
allowance for doubtful accounts related to trades accounts receivable from continuing operations
was $20 and $39, respectively.
Reserve for Obsolescence
Significant management judgment is required to determine the reserve for obsolete or excess
inventory. The Company generally considers inventory quantities greater than a one-year supply
based on current year activity as well as any additional specifically identified inventory to be
excess. The Company also provides for the total value of inventories that are determined to be
obsolete based on criteria such as customer demand and changing technologies. At September 30, 2009
and 2008, the inventory reserves were $91 and $84, respectively. Changes in strategic direction,
such as discontinuance or expansion of product lines, changes in technology or changes in market
conditions, could result in significant changes in required reserves.
28
Goodwill
The Company evaluates the fair value and recoverability of goodwill at least annually or whenever
events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
In determining fair value and recoverability, the Company makes projections regarding future cash
flows. These projections are based on assumptions and estimates of growth rates for the terminals
business segment, anticipated future economic conditions, the assignment of discount rates relative
to risk associated with companies in similar industries and estimates of terminal values. An
impairment loss is assessed and recognized in operating earnings when the fair value of the asset
is less than its carrying amount.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the differences between the
financial statement carrying amounts and the tax bases of assets and liabilities. Currently, the
Company has significant deferred tax assets principally related to net operating losses. Deferred
tax assets are reviewed regularly for recoverability and when necessary, valuation allowances are
based on historical tax losses, projected future taxable income, and expected timing of reversals
of existing temporary differences. Valuation allowances have been provided for all deferred tax
assets, due to uncertainty in the realizability of such deferred tax assets. Future profitable
operations and changes in the Company’s expectations could result in significant adjustments to the
valuation allowances, which would significantly impact the Company’s net income.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The discussion of recently issued accounting pronouncements is hereby incorporated by reference
from Item 8, notes to consolidated financial statements.
FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company includes certain estimates, projections and other
forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Exchange Act of 1934 in its reports and in other publicly
available material. Statements regarding expectations, including performance assumptions and
estimates relating to capital requirements, as well as other statements that are not
historical facts, are forward-looking statements. These statements reflect management’s
judgments based on currently available information and involve a number of risks and
uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. With respect to these forward-looking statements, management has
made assumptions regarding, among other things, customer growth and retention, pricing,
operating costs and the economic environment.
The words “estimate”, “project”, “intend”, “expect”, “believe”, “target” and similar expressions
are intended to identify forward-looking statements. Forward-looking statements are found
throughout Management’s Discussion and Analysis. The reader should not place undue reliance on
forward-looking statements, which speak only as of the date of this report. Except as required by
law, the Company is not obligated to publicly release any revisions to forward-looking statements
to reflect events after the date of this report or unforeseen events. Other risks and uncertainties
are discussed in Exhibit 99 to this 10-K.
29
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company frequently invests available cash and cash equivalents in short term instruments
such as certificates of deposit, commercial paper and money market accounts. Although the rate of
interest paid on such investments may fluctuate over time, each of the Company’s investments is
made at a fixed interest rate over the duration of the investment. All of these investments have
maturities of less than 90 days. The Company believes its exposure to market risk fluctuations for
these investments is not material as of September 30, 2009.
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of trade accounts receivable. To reduce its exposure to the credit risks
of international customers, the Company generally seeks payment prior to shipment, receives
irrevocable letters of credit that are confirmed by U.S. banks, or purchases commercial credit
insurance. In some instances, the Company extends credit to foreign customers without the
protection of prepayment, letters of credit or credit insurance. The Company performs ongoing
credit evaluations and charges amounts to operations when they are determined to be uncollectible.
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.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1. The following financial statements are included in this document.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Telular Corporation We have audited the accompanying consolidated balance sheet of Telular Corporation (a Delaware
corporation) as of September 30, 2009, and the related consolidated statements of operations,
shareholders’ equity and cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements and schedule are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Telular Corporation as of September 30, 2009, and
the results of its consolidated operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of America. Also, in
our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
/s/ Grant
Thornton LLP
Chicago, Illinois
December 14, 2009
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Telular Corporation We have audited the accompanying consolidated balance sheet of Telular Corporation as of September
30, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the two years in the period ended September 30, 2008. Our audits also included
the financial statement schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Telular Corporation at September 30, 2008, and the
consolidated results of its operations and its cash flows for each of the two years in the period
ended September 30, 2008, in conformity with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 20 to the financial statements, the Company adopted Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in the
Current Year Financial Statements effective October 1, 2006.
We also have audited, in accordance with the standards of the Public Accounting Oversight Board
(United States), the effectiveness of Telular Corporation’s internal control over financial
reporting as of September 30, 2008, based on the criteria established in the Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated December 10, 2008 expressed an unqualified opinion thereon.
Chicago, Illinois
December 10, 2008
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Telular Corporation We have audited Telular Corporation’s internal control over financial reporting as of September 30,
2008, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Telular
Corporation’s management is responsible for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Telular Corporation maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheet of Telular Corporation as of September 30,
2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows
for each of the two years in the period ended September 30, 2008 of Telular Corporation and our
report dated December 10, 2008, expressed an unqualified opinion thereon.
Chicago, Illinois
December 10, 2008
34
TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
See accompanying notes
35
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
See accompanying notes
36
TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In Thousands)
See accompanying notes
37
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes
38
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data) 1. Description of Business
Telular Corporation (Telular or the Company) designs, develops and distributes products and
services that utilize wireless networks to provide data and voice connectivity among people and
machines. Telular’s product and service offerings combine the Company’s historical competency in
developing cellular networking electronics with the data transport capabilities of commercial
wireless networks in order to create information networking solutions.
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, Inc., Telular International, Inc and TankLink
Corporation. All intercompany balances and transactions have been eliminated.
Revenue Recognition
Product sales and associated costs are recognized at the time of shipment of products which is when
title transfers. Service revenue is recognized when the services are performed. Royalty revenue,
which is based on a percentage of sales by the licensee, is recognized by the Company upon
notification of sales by the licensee.
Cash Equivalents
Cash equivalents consist of highly liquid investments that have original maturities of three months
or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair
value.
Financial Instruments
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of cash and cash equivalents and trade accounts receivable. The credit
risks related to cash and cash equivalents are limited to the Company’s investments of cash in
money market funds and the possibility that the per unit value of these funds may decline below
$1.00. At September 30, 2009 and 2008, the majority of the Company’s cash and cash equivalents are
maintained at one institution, Silicon Valley Bank, and are federally insured only up to $250. The
Company regularly reviews the investments that are included in the money market funds it invests in
and, when appropriate, limits its credit risk by diversifying its investments. At September 30,
2009 and 2008, the Company had approximately 12%, $2,148, and 23%, $4,868, of its cash and cash
equivalents invested in U.S. Treasury Reserves, respectively. Credit risks with respect to trade
accounts receivables are limited due to the diversity of customers comprising the Company’s
customer base. For international sales, the Company generally receives payment in advance of
shipment, irrevocable letters of credit that are confirmed by U.S. banks or purchases international
credit insurance to reduce its credit risk. The Company performs ongoing credit evaluations and
charges amounts to operations when they are determined to be uncollectible.
Inventories and Reserve for Obsolescence
Inventories are carried at the lower of cost or market and are charged to cost of sales based on
first in, first out (FIFO) costing. The Company records a reserve for obsolete or excess inventory.
The Company generally considers inventory quantities greater than a one-year supply based on
current year activity as well as any additional specifically identified inventory to be in excess
of needs. 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.
Goodwill and Intangibles
Goodwill represents the excess of cost over fair value of net assets of purchased businesses. The
Company does not amortize goodwill. The Company evaluates the impairment of goodwill each year in
the third quarter or whenever events or changes in circumstances indicate that the carrying value
may not be recoverable based on the fair value of the reporting unit.
39
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) The Company reviews for impairment of intangible assets whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. The Company evaluates
recoverability of other intangible assets by comparing the carrying amount of the intangible assets
to future net undiscounted cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets calculated using a discounted
future cash flow analysis. If one or more of the following indicators of impairment have occurred,
the Company measures the impairment based on a projected discounted cash flow using a discount rate
that incorporates the risk inherent in the cash.
On October 1, 2008, the Company purchased TankLink, formerly SupplyNet Communications, Inc. (see
Note 3). The Company recorded goodwill of $1,116 as a result of the purchase.
During the second quarter of fiscal 2009, the reduced trading price of Telular’s common stock
indicated that the carrying value of goodwill may be impaired. Based upon the impairment test
performed in March of 2009, the Company determined that the goodwill of $3,159 was not impaired.
The Company also evaluated the impairment of goodwill in the third quarter of fiscal 2009 as part
of its annual review. Based upon its June 2009 goodwill impairment test, the Company determined
that the goodwill of $3,159 was not impaired.
Intangible assets consist of customer relationships, capitalized technology and tradenames. These
assets were recorded as part of the acquisition of TankLink. They were recorded at fair value are
being amortized over their estimated useful lives over a period of 24 months to 96 months, using
the straight-line method. No indicators of impairment have occurred related to the intangible
assets as of September 30, 2009.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are computed using
straight-line methods over the assets’ useful lives ranging from 3 to 10 years. Depreciation
expense was $789, $674 and $732 for 2009, 2008 and 2007, respectively.
Income Taxes
The Company utilizes the liability method of accounting for income taxes whereby it recognizes
deferred tax assets and liabilities for future tax consequences of temporary differences between
the tax basis of assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets are reduced by a valuation allowance if, based upon management’s estimates, it
is more likely than not, that a portion of the deferred tax assets will not be realized in a future
period. The estimates utilized in the recognition of deferred tax assets are subject to revision in
future periods based on new facts or circumstances.
40
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) Net Income Per Share of Common Stock
Basic net income per share of common stock is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted net income per
share of common stock is computed by dividing net income by the weighted average number of shares
of common stock and common stock equivalents, which relate entirely to the assumed exercise of
stock options and warrants. The following table presents the weighted average number of shares of
common stock outstanding for computation of basic and diluted earnings per share:
The following stock options and warrants were excluded as being antidilutive from the shares
outstanding used to compute diluted loss per share for the years ended September 30:
The weighted average exercise prices of the stock options for 2009, 2008 and 2007 were $4.06, $4.85
and $4.67, respectively.
Stock-Based Compensation
The Company has an officer and employee stock incentive plan and a non-employee director stock
incentive plan (See Note 13). The Company calculates the cost of restricted stock awards and
restricted stock units as the fair market value of the Company’s common stock on the date of grant.
The Company calculates the cost of stock options grants based on their grant date fair value and
recognizes these costs over the vesting period. The fair value of stock options granted and
warrants issued is estimated at the grant date or issuance date using a Black-Scholes stock option
valuation model. Key factors in determining the valuation of a grant under the Black-Scholes model
are: a volatility factor of the expected market price of the Company’s common stock, a risk-free
interest rate, a dividend yield on the Company’s common stock and the expected term of the option.
For the years ended September 30, 2009, 2008 and 2007, the Company valued stock options granted
using the Black-Scholes valuation method using the following assumptions:
41
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) The Company recognized stock-based compensation expense as follows for the years ended September
30:
Fair Value of Financial Instruments
At September 30, 2009 and 2008, the Company’s financial instruments included cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities. The carrying values
reported in the consolidated balance sheet for these financial instruments approximate their fair
values.
Research and Development Costs
Research and development costs for the years ended September 30, 2009, 2008 and 2007, were $2,974,
$4,448 and $6,067, respectively, and are included in engineering and development expense.
Shipping and Handling Costs
Shipping and handling costs of $482, $601, and $775 were included in cost of sales for the years
ended September 30, 2009, 2008 and 2007, respectively.
Warranty
The Company provides warranty coverage for a period of 15 months on terminal products and 24 months
on event monitoring products from the date of shipment. A provision for warranty expense is
recorded at the time of shipment and adjusted quarterly based on historical warranty experience.
The following table is a summary of the Company’s accrued warranty obligation for continuing
operations.
Use of Estimates
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.
Reclassifications
As described in Note 21, the amounts in the accompanying Consolidated Balance Sheets, the
Consolidated Statements of Operations and the Consolidated Statements of Cash Flows have been
stated to reflect the discontinuance of the FCP segment. Additionally, certain operating expenses and the increase in restricted cash have been
reclassified in the prior years to be consistent with the current year presentation.
42
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) Recently Issued Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance
related to accounting for assets acquired and liabilities assumed in a business combination that
arise from contingencies. This guidance requires an acquirer to recognize at fair value, at the
acquisition date, an asset acquired or a liability assumed in a business combination that arises
from a contingency if the acquisition-date fair value of that asset or liability can be determined
during the measurement period. There was no impact to the Company’s consolidated financial
statements as a result of adoption of this pronouncement.
In April 2009, the FASB issued authoritative guidance for interim disclosure about fair value of
financial instruments, which amended existing guidance. The guidance requires disclosure of the
methods and significant assumptions used to estimate the fair value of financial instruments on an
interim basis as well as changes of the methods and significant assumptions from prior periods.
There was no impact to the Company’s consolidated financial statements as a result of adoption of
this pronouncement.
In April 2009, the FASB issued authoritative guidance for the recognition and presentation of
other-than-temporary impairments. The guidance amends the other-than-temporary impairment guidance
in U.S. GAAP for debt securities to make the guidance more operational and to improve presentation
and disclosure of other-than-temporary impairments on debt and equity securities in the financial
statements. It does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. There was no impact to the Company’s
consolidated financial statements as a result of adoption of this pronouncement.
In April 2009, the FASB issued authoritative guidance for determining fair value when the volume
and level of activity for an asset or liability have significantly decreased and when the
identifying transactions are not orderly. The guidance provides additional guidance for estimating
fair value. There was no impact to the Company’s consolidated financial statements as a result of
adoption of this pronouncement.
In May 2009, the FASB issued authoritative guidance for subsequent events. The guidance sets forth
the period after the balance sheet date during which management should evaluate events or
transactions that may occur for a potential recognition or disclosure in the financial statements,
the circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that should be made about events
or transactions the occurred after the balance sheet date. The Company adopted the disclosure
provisions of this guidance on July 1, 2009. The adoption did not have an impact on the Company’s
financial position, results of operations or cash flows.
In June 2009, the FASB issued authoritative guidance which established the FASB Standards
Accounting Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB
to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as
authoritative GAAP for SEC registrants. The Codification supersedes all the existing non-SEC
accounting and reporting standards upon its effective date. The Company adopted this guidance
effective for its annual period ending after September 30, 2009. As the statement did not
substantively change GAAP, but
rather changed its organization and presentation, it will not have any effect on the Company’s
consolidated financial statements other than how the Company discloses some of its accounting
policies.
In August 2009, the FASB issued authoritative guidance for the accounting for redeemable equity
securities. The guidance requires preferred securities that are redeemable for cash or other assets
to be classified outside of permanent equity if they are redeemable at a fixed or determinable
price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an
event that is solely within the control of the issuer. There was no impact to the Company’s
consolidated financial statements as a result of adoption of this pronouncement.
43
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) In August 2009, the FASB issued authoritative guidance for fair value measurements and disclosures.
The guidance provides updated clarification for determining the fair value measurement of
liabilities in which a quoted price in an active market for the identical liability is not
available. The Company believes that adoption of this update will not have any effect on the
Company’s consolidated financial statements.
In October 2009, the FASB issues authoritative guidance for the accounting for revenue arrangements
with multiple deliverables. The guidance establishes a selling price hierarchy for determining the
selling price of a deliverable. The selling price for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if vendor-specific objective
evidence is not available, or estimated selling price if neither vendor-specific objective evidence
nor third-party evidence is available. The guidance requires arrangements under which multiple
revenue generating activities to be performed be allocated at inception. The residual method under
existing accounting guidance has been eliminated. The guidance expands the disclosure requirements
related to multiple-deliverable revenue arrangements. The guidance becomes effective for revenue
arrangements entered into or materially modified beginning in fiscal 2011, with early adoption
permitted. The Company is currently assessing what impact, if any, the guidance will have on its
financial position, results of operations or cash flows.
3. Business Combination
On October 1, 2008, the Company acquired all of the outstanding common stock of TankLink. TankLink
provides private label and branded tank monitoring solutions. Pursuant to the Merger Agreement, the
aggregate purchase price was $2,409 which consisted of: $964 in cash paid directly to shareholders
of TankLink; $215 of cash paid directly to the shareholders during fiscal 2009 related to
earn-outs; $851 temporary loan from the Company, which was forgiven; $290 of assumed liabilities
and $89 in direct costs related to the acquisition. The purchase has been accounted for using the
purchase method as required by the Business Combinations Topic of the FASB Accounting Standards
Codification. The Company’s Statements of Operations for the twelve months ended September 30, 2009
include the results of operations for the acquisition since October 1, 2008.
The following table summarizes the preliminary estimated fair value of the assets acquired and the
liabilities assumed at the date of acquisition:
44
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) The following summarized unaudited pro forma financial information assumes the acquisition occurred
as of October 1, 2007:
The pro forma results include adjustments for deferred revenue, depreciation of property and
equipment acquired, amortization of intangibles acquired and reduces interest income as a result of
the cash paid for the acquisition. The pro forma results are not necessarily indicative of the
results that would have occurred if the acquisition had actually been completed on October 1, 2007,
nor are they necessarily indicative of future consolidated results of operations.
4. Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable represents sales made to customers on credit. An allowance for doubtful
accounts is maintained based upon estimated losses resulting from the inability of customers to
make payments for goods and services. Trade accounts receivable, net of the allowance for doubtful
accounts are as follows:
5. Inventories
45
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 6. Property and Equipment
Property and equipment consists of the following:
7. Goodwill and Intangible Assets
Goodwill as of September 30, 2009 and 2008 is as follows:
As a result of purchasing TankLink on October 1, 2008, the Company recorded $1,620 of intangible
assets in accordance with generally accepted accounting principles for business acquisitions. The
Company is amortizing these intangible assets over a period of 24 to 96 months. The balances as of
September 30, 2009 and 2008 are as follows:
46
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) Amortization expense for the remaining estimated useful life of the acquired intangible assets is
as follows for the years ending September 30:
8. Accrued Liabilities
Accrued liabilities consist of the following:
9. Line of Credit
On June 27, 2006, the Company entered into a two year Loan and Security Agreement (the Agreement)
with Silicon Valley Bank (SVB). The Agreement provided for two borrowing facilities: a non-recourse
accounts receivable purchase facility and a working capital line of credit secured by accounts
receivable based upon eligible accounts receivable at 80% of their face value. Each component of
the Agreement had a credit limit of $10,000 and the Agreement, in aggregate, had a credit limit of
$15,000. Interest charged under the loan could vary from SVB’s prime rate to SVB’s prime rate plus
2%. As of September 30, 2007, the Company had no outstanding borrowings. This Agreement expired on
June 27, 2008.
In connection with the Agreement, the Company issued 320,856 warrants to purchase the Company’s
Common Stock. The warrants were immediately exercisable at $1.87 per share and were valued at $356
using the Black-Scholes pricing model. The value of the warrants was recorded as a loan
origination fee and was amortized over the term of the Agreement. During the first quarter of
fiscal 2008, SVB exercised all of their outstanding warrants in a cash-less transaction and were
issued 218,641 shares of the Company’s Common Stock.
On September 23, 2008 the Company entered into a new two year Loan and Security Agreement (the New
Agreement) with SVB. The New Agreement provides for a $5,000 base facility and an accordion option
that permits Telular to obtain an additional $5,000. Borrowings under the New Agreement are secured
by all of the assets of Telular and will be based on the level of eligible accounts receivable. The
Company has the option under the loan to have interest calculated on SVB’s prime rate (with a floor
of 5%) up to a maximum of prime plus 0.5% or calculated on the current LIBOR rate up to a maximum
of LIBOR plus 3%. Under the New Agreement, the Company is required to comply with certain
financial covenants such as maintaining certain levels of assets to liabilities and minimum levels
of cash flow generation. As of September 30, 2009 and 2008, the Company had no outstanding
borrowings and was in full compliance with all financial covenants.
In connection with the New Agreement, the Company recorded $49 as a loan origination fee which is
being amortized over the term of the New Agreement.
47
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 10. Income Taxes
The Company’s income tax expense is based on pretax income. Deferred tax assets and liabilities are
determined based on the difference between GAAP financial statements and the tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse. For the fiscal years 2009, 2008 and 2007, income tax expense consisted of the
following:
The Company recorded no tax provision in fiscal years 2008 and 2007 due to the current year losses.
The Company has no deferred tax provision for the periods presented because a full valuation
allowance has been provided against the deferred tax assets and liabilities.
The provision for income taxes differs from the amount obtained by applying the statutory tax rate
as follows for the years ended September 30:
At September 30, 2009, the Company had net operating loss carryforwards (“NOLs”) of approximately
$130,655 for income tax purposes that begin expiring in 2009.
Approximately $11,684 of the NOL is
attributable to stock option deductions.
On October 1, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for the
financial statement recognition, measurement, classification and disclosure of uncertain tax
positions. In the first step of the two-step process prescribed in the interpretation, the Company
evaluates the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. In the second
step, the Company measures the tax benefit as the largest amount that is more than 50% likely of
being realized upon settlement.
The Company determined that there is a less than 50% likelihood that its research and development
(R&D) tax credits would be sustained upon audit as the Company has not completed gathering the
necessary documentation required by the taxing authority to substantiate the credit. The Company
has classified $2,486 of the valuation allowance for deferred tax assets as a tax reserve for an uncertain tax position. This has no impact on the Company’s
effective tax rate. The credits will expire at varying amounts through September 30, 2025.
48
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The Company does not include interest and penalties related to income taxes, including unrecognized
tax benefits, within the provision for income taxes. This policy did not change as a result of
implementing FIN 48.
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 Company has provided a full valuation allowance on the deferred tax assets due to the
uncertainty of their realizability. The valuation allowance decreased by $9,443 during fiscal 2009,
due principally to the decrease in the NOLs of $8,489 as a result of utilization and expiration, a decrease of $348 in R&D tax credits due to
their expiration, a decrease in intangible assets of $787, a decrease in fixed assets of $128 and
an increase in non-cash compensation of $353.
49
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) In connection with accounting for stock-based compensation, the Company elected to follow the tax
ordering laws to determine the sequence in which deduction, net operating loss carryforwards and
tax credits are utilized.
The Company files income tax returns in the U.S. federal jurisdiction and in various state
jurisdictions. As of September 30, 2009, the Company is no longer subject to U.S. federal
examination by taxing authorities for years prior to 2006. Income tax returns for fiscal years
2006, 2007 and 2008 are still open for examination. However, utilization of net operating loss
carryforwards that were generated in years prior to 2006 may result in a prior tax year being open
for IRS examination. The Company has concluded an Illinois, New York and Texas state audits for
years 2004 through 2006. Tax years 2007 through 2009 remain open to examination by multiple state
taxing jurisdictions.
Based on Internal Revenue Code Section 382, changes in the ownership of the Company may limit the
utilization of net operating loss carryforwards of the Company.
11. Commitments
The Company occupies certain facilities and rents certain equipment under various operating lease
agreements expiring at various dates through February 28, 2015. The Company leases office and
warehouse facilities in Florida, Georgia and Illinois under operating leases that expires from
December 2009 through February 2014. Many of the lease agreements include escalation clauses and
only the Florida lease has the option to renew. Rent expense for continuing operations for the
years ended September 30, 2009, 2008, and 2007 was $875, $690 and $751, respectively. Future
minimum obligations for continuing operations under noncancelable operating leases are as follows:
On September 11, 2006, the Company entered into an agreement with Speedy-Tech Electronics Ltd.
(Speedy) relating to the manufacturing of final assemblies of the Company’s products. Either party
may terminate the agreement upon 90 days prior written notice to the other party. Under the
agreement, the Company has the right to offset amounts due to the Company from Speedy against
amounts owed to Speedy by the Company. As of September 30, 2009, the Company had $2,486 in open
purchase commitments pursuant to this agreement.
On January 5, 2009, the Company entered into an agreement with Creation Technologies Wisconsin Inc.
(“Creation”) under which Creation will provide fulfillment services and manufacture final
assemblies of certain of the Company’s products. Either party may terminate the agreement upon six
months prior written notice to the other party. Under the agreement, the Company has the right to
offset amounts due to it from Creation against amounts owed to Creation by the Company. As of
September 30, 2009, the Company had $1,880 in open purchase commitments with Creation.
50
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 12. Redeemable Preferred Stock and Preferred Stock
At September 30, 2009 and 2008, 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.
13. Capital Stock and Stock Options
On September 2, 2005, the Company sold 2,650,000 shares of its Common Stock for $9,275 ($9,202 net
of offering costs), in a private placement that was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Regulation D. 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 October 21, 2005. In addition to the Common Stock, the
Company also issued Series A Warrants for a total of 1,324,996 shares of Common Stock at a strike
price of $4.50 per share and Series B Warrants exercisable for a total of 1,324,996 shares of
Common Stock at a strike price of $5.00 per share. Both the Series A and Series B Warrants vested
six months from the closing date, expire on September 2, 2010 and are callable by the Company based
on the performance of the Company’s Common Stock price. The Warrants were valued using the
Black-Scholes pricing model. Of the net proceeds from the sale, $2,717 was allocated to the Series
A
Warrants and $2,594 was allocated to the Series B Warrants. During fiscal 2008, 176,567 of the
Series A Warrants were exercised, leaving 1,148,429 outstanding. No warrants were exercised in
fiscal 2009.
On July 25, 2008, the Company’s Board approved a plan to repurchase up to $5,000 of the Company’s
common stock on the open market. During fiscal 2008, 383,207 shares were repurchased at a cost of
$1,127. In fiscal 2009, 1,725,283 shares were repurchased under the plan at a cost of $2,648.
Additionally, on June 19, 2009, Telular completed a modified “Dutch Auction” tender offer buying
back 2,344,857 shares of common stock at a cost of $5,386.
In connection with a Loan and Security Agreement with Wells Fargo Business Credit Inc. (Wells
Fargo) entered into during fiscal year 2000 that was repaid on December 30, 2002, the Company
issued warrants to Wells Fargo convertible into 50,000 shares of the Company’s Common Stock. The
warrants, which remain outstanding, have a strike price of $16.29 per share and do not have an
expiration date.
The Company has a Stock Incentive Plan, a 2008 Employee Stock Incentive Plan, and a Non-employee
Director Stock Incentive Plan (collectively the Plans). Under the Plans, options to purchase shares
of Common Stock may be granted to all officers, employees and non-employee directors. Stock options
have been granted at exercise prices as determined by the Compensation Committee of the Board of
Directors to officers, employees and non-employee directors of the Company pursuant to the Plans.
These stock options vest immediately or over a period of up to three years. All stock options, if
not exercised or terminated, expire either on the sixth or the tenth anniversary of the date of
grant. In addition, the Plans provide for the issuance of Common Stock or Common Stock equivalents
to certain employees for their work related performance.
The following table summarizes the number of Common Shares reserved and available for issuance
under the Plans at September 30, 2009:
The Company issued restricted stock to its directors for their services of 13,165 shares and 18,482
shares in 2008 and 2007 respectively. In fiscal 2009, the Company issued 188,202 restricted stock
units to its directors for their services; 30,201 were cancelled when one of the directors retired
before his units were vested and 7,550 units became vested and were converted to the Company’s
common stock. The restricted stock units vest 12 months from the grant date but are not exercisable until the
director terminates their position or if there is a change in the Company’s
ownership. The Company calculates the cost of restricted stock awards and restricted stock units
as the fair market value of the Company’s common stock on the date of grant.
51
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) The following table displays all stock option activity as of September 30, 2009 including stock
options granted under the Plans and the Stock Option Agreements:
The following table summarizes information about options outstanding at September 30, 2009:
52
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) Stock option activity for 2009 was as follows:
Total intrinsic value of options exercised for 2009, 2008 and 2007 was $13, $974 and $476,
respectively. At September 30, 2009, the total compensation cost of non-vested awards not yet
recognized was $458. The weighted-average period over which the total
compensation cost of non-vested awards not yet recognized is expected
to be 2.18 years as of September 30, 2009.
14. Major Customers
For the year ended September 30, 2009, the Company derived approximately $20,981 (44%) of its total
revenues from two customers located in the United States, and trade accounts receivable from these
customers totaled $2,042 at September 30, 2009. For the year ended September 30, 2008, the Company
derived approximately $28,868 (44%) of its total revenue from two customers located in the United
States and for the year ended September 30, 2007, the Company derived approximately $32,209 (43%)
of its total revenues from one customer located in the United States. Trade accounts receivable
from these customer totaled $1,091 at September 30, 2008.
53
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 15. Export Sales
The Company exports its products to three regions around the world: Central American/Latin American
(CALA), Europe/ Africa (EA) and Asia/Middle East (AME). Export sales for the years ended September
30, 2009, 2008 and 2007 are summarized in the table below.
16. Contingencies
17. Employee Benefit Plan
The Company sponsors a defined contribution plan under section 401(k) of the Internal Revenue Code.
The plan covers substantially all employees of the Company. The Company may match employee
contributions on a discretionary basis.
The Company matched $93, $0 and $0 for the years ended September 30, 2009, 2008 and 2007,
respectively. The matched amounts are included in operational expenses for the Company.
54
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 18. Supplemental Disclosures of Cash Flow Information
19. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended September 30,
2009 and 2008.
Due to rounding in earnings per share, the sum of the quarters may not be equal to the full
year.
55
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) 20. Cumulative Effect Adjustment to Retained Earnings
In September 2006, the SEC released Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in the Current Financial Statements (SAB
108). SAB 108 provides
guidance on how the effects of the carryover or reversal of prior year financial statement
misstatements should be considered in quantifying a current year misstatement. Specifically, SAB
108 requires that companies quantify errors using both a balance sheet (iron curtain) and income
statement (rollover) approach and evaluate whether either approach results in a misstated amount
that, when all relevant quantitative and qualitative factors are considered, is material. Prior
practice allowed the evaluation of materiality on the basis of either the balance sheet or the
income statement approach, but did not require both. In years prior to fiscal 2007, the Company
recorded certain service revenues in the period in which they were invoiced, though they related to
services yet to be performed and the Company recorded costs associated
with providing those services in the period subsequent to when they were incurred. The Company
believes that these revenues and costs were recorded in error. These errors were deemed to be
immaterial prior to fiscal year 2007, but after applying the guidance under SAB 108, the cumulative
effect of these errors was determined to be material to fiscal year 2007. In evaluating materiality
and determining the appropriateness of applying SAB 108 to these errors, the Company considered
materiality both qualitatively and quantitatively as prescribed by the SEC’s Staff Accounting
Bulletin No. 99. As a result, an after-tax adjustment of $810 was made to decrease the opening
balance of retained earnings as of October 1, 2006.
21. Discontinued Operations
During July 2007, the Company formulated a plan to sell the net assets of its FCP segment and exit
the cellular phone market. As required by the Property, Plant and Equipment Topic of the FASB
Accounting Standards Codification, the Company designated the assets and liabilities of this
segment as “held for sale”. The assets and liabilities in this disposal group were measured at the
lower of their carrying value or fair value less cost to sell and were separately identified in the
Consolidated Balance Sheets at September 30, 2007. During the third quarter of fiscal 2008, the
Company determined it would be unable to secure a buyer of the FCP business unit. As a result, the
Company made a strategic decision to abandon the FCP business effective June 30, 2008. All of the
assets of the business have been disposed of or collected. As of September 30, 2009, the remaining
liabilities consisted of accrued royalties and accrued warranty expenses. The remaining liabilities
are separately identified in the Consolidated Balances Sheets at September 30, 2009.
The following table summarizes certain operating data for discontinued operations for the years
ended September 30:
56
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Share Data) The following table summarizes the components of discontinued operations reported on the
Consolidated Statements of Cash Flows for the years ended September 30:
The following table summarizes the components of the assets and liabilities from discontinued
operations reported in the Consolidated Balance Sheets as of September 30:
Results from discontinued operations reflect directly attributable revenues, cost of sales,
engineering expenses and selling and marketing expenses. General and administrative expenses have
not been allocated to discontinued operations because those expenses are general to the continuing
operations of the Company and would not be expected to be eliminated or reduced as a result of
disposing of the FCP segment.
57
PART III
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are 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. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer’s management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decision-making regarding required disclosure. As of the end of the period covered by this
report management carried out, with the participation of the Chief Executive Officer (“CEO”) and
the Chief Financial Officer (“CFO”), an evaluation 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.
During the quarter ended September 30, 2009, there were no significant changes in the Company’s
internal control over financial reporting identified in connection with the evaluation required by
paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rules 13a-15(f) under the Securities Exchange
Act of 1934. The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States.
Processes have been updated and new ones put into place governing our internal controls but because
of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over
financial reporting as of September 30, 2009, using the criteria set forth by the Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, the Company’s management concluded that, as of September 30,
2009, the Company’s internal control over financial reporting was effective based on those
criteria.
For the year ended September 30, 2009, the Company was not required to have its independent
registered public accounting firm, Grant Thornton LLP, issue an attestation report on the
effectiveness of the Company’s internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
58
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3), reference is made to the information contained under the
caption Election of Directors in the Company’s definitive proxy statement for the Annual Meeting of
Shareholders to be held February 2, 2010, which is incorporated herein.
The Directors’ names and occupations are listed in the Company’s definitive proxy statement for the
Annual Meeting of Shareholders to be held February 2, 2010. Names and information about executive
officers are provided in Item 1 of this filing.
The Company has adopted a Code of Ethics for Senior Financial Officers that covers the principal
executive officer, the principal financial officer and the principal accounting officer. This Code
is available on the Company’s website at www.telular.com/profile/codes.asp. or a copy can be
obtained free of charge by mailing a request to the Company’s headquarters at 311 South Wacker
Drive, Suite 4300, Chicago, Illinois 60606-6622.
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 the Annual Meeting
of Shareholders to be held February 2, 2010, which is incorporated herein.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to the information contained under the
caption Security Ownership of Certain Beneficial Owners and Management in the Company’s definitive
proxy statement for the Annual Meeting of Shareholders to be held February 2, 2010, which is
incorporated herein.
Further, for the information required by Item 201(d) of Regulation S-K, reference is made to the
information contained under the caption “Option Exercise and Fiscal Year-End Option Values” in the
Company’s definitive proxy statement for the Annual Meeting of Shareholders to be held February 2,
2010, which is incorporated herein.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to the information contained under the
caption Certain Transactions in the Company’s definitive proxy statement for the Annual Meeting of
Shareholders to be held February 2, 2010, which is incorporated herein.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Pursuant to General Instruction G(3), reference is made to the information contained under the
caption Independent Public Accountants in the Company’s definitive proxy statement for the Annual
Meeting of Shareholders to be held February 2, 2010, which is incorporated herein.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
59
60
61
62
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.
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.
63
Exhibit Index
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