ITEM 1. BUSINESS
OVERVIEW
Telular Corporation (“Telular”) develops products and services that utilize wireless networks to provide data connectivity among people and machines. Telular’s software-as-a-service (“SaaS”) offerings are created through Telular’s competence in developing complex software systems and cellular electronics that utilize the data transport capabilities of today’s commercial wireless networks. To enable these services, Telular is a significant reseller of such commercial wireless services.
Telular was established in 1986 when it acquired the intellectual property rights for its cellular terminal technology. Today, it creates solutions based on the development of multi-faceted software systems that work with specialized wireless terminals to provide integrated event monitoring and reporting services for M2M applications. M2M applications typically involve outfitting equipment with sensors and remotely reading those sensors to monitor or control such equipment in areas such as supply chain management, security monitoring, vehicle tracking and many other commercial and industrial situations. Telular’s substantial experience with wireless networking evolved from its original focus on developing fixed wireless products for use in North America and in developing countries around the world.
COMPANY STRATEGY
Strategically, Telular is focused on M2M market segments in which Telular can create a differentiated service offering which will allow it to earn recurring revenue as opposed to the non-recurring revenue generated by a one-time product sale.
Telular’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 that 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 or distributors 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 Telular’s Telguard solution can function as a backup to a traditional telephone line, it is more commonly 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.
Telular’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 Telular’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. Telular 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.
Historically, Telular has manufactured and sold fixed cellular terminals (“FCTs”). The FCT business targeted both commercial and residential consumers, who used FCTs for voice, fax, and Internet access over wireless networks. Telular has deemphasized its FCT business over the past several years since it is a one-time product sale and generates no recurring revenue. The FCT business has undergone significant competition from non-U.S. companies and it is subject to substitution by smartphones, which can be configured to tether computers and data devices to cellular networks, thereby eliminating the need for a separate FCT device.
Telular operates as a single-segment enterprise for financial reporting purposes. For financial information about geographic areas, see “Note 15. Major Customers” and “Note 16. 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 Telular is continuing its efforts to expand service to other North American countries during fiscal 2012.
Currently, the vast majority of M2M tank applications served by Telular are located within the United States, with some fiscal year 2011 sales to Latin America. Within the United States, these installations span the entire country and Telular expects to expand the number of tanks it monitors in Latin America during 2012, as well as possibly expanding into Europe and South America, where it has strong relationships with the leading wireless carriers.
Telular has FCT sales in North and South America, but also has had sales in Africa, Asia and the Middle East.
In total, 99% of Telular’s revenues are derived from customers within the United States.
TECHNOLOGY
Integral to our success 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 event-driven software systems, cellular transceiver devices and the resale of cellular data services to develop new products and services 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 present 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.
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. 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.
Research and development activities funded by Telular for the years ended September 30, 2011, 2010, and 2009, were $2,623, $3,010, and $2,974, 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 2011 and anticipated in fiscal 2012.
Telguard - Telular’s engineering team continues to update the Telguard product and service portfolio by addressing the growing demand for interactive capability in the security market. In fiscal 2011, Telular launched new features, such as Telguard Interactive Services which let end users remotely arm and disarm their security systems. In addition, we launched Telguard Voice which allowed security dealers to speak with their end user customers in the event that an alarm condition was triggered. Perhaps the most significant development activity was the conversion of a majority of our hardware product lines to 3G capability. While 3G service will launch in early fiscal 2012, most of the development was accomplished in fiscal 2011. Product innovation within this space is important for the long-term success of Telguard and we expect to continue to enhance our Telguard software platform and underlying hardware products going forward.
TankLink - The fiscal 2009 acquisition of TankLink Corp. (formerly known as SupplyNet Communications, Inc.) brought Telular a successful wireless communicator product line for tank level monitoring. In early fiscal 2011, the acquisition of TankLink end-user accounts from our key value added reseller, SmartLogix, Inc., gave Telular more direct control over the TankLink end users as well as improved profitability. Enhancements to the TankLink software platform, TankData Online, have been made during 2011. Telular plans to further enhance both the software platform and the hardware product during fiscal 2012 to support a wider array of applications.
Other M2M Solutions - During 2011, Telular evaluated a number of vertical and sub-vertical M2M markets to determine the viability of creating or acquiring a product and/or service in these markets. While Telular did not move forward with 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 Telguard products and services through an Atlanta-based inside sales group. Telguard customers are security equipment distributors, who sell to independent security dealers, and larger security service dealers to which Telular sells on a direct basis, totaling approximately 2,700 customers. Telular also utilizes a number of manufacturer’s representatives to provide local sales support for the Telguard products. Telular’s TankLink solutions are sold through a small, Chicago-based sales team which sells directly to large customers and supports key Value Added Resellers (“VARs”), which sell to smaller customers. In addition, Telular has a contractual arrangement with SmartLogix, Inc. to be the exclusive sales agent for TankLink products and services to users in the fuel and lubricant market. A majority of our unit volume is obtained through this sales agency agreement. For fiscal years 2011, 2010 and 2009 Telular’s domestic revenues were $50,215 (99%), $46,650 (99%) and $46,218 (98%) 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. Currently, the international sales team is focused on expanding TankLink in Mexico, Latin America, South America and Europe. In fiscal years 2011, 2010 and 2009 Telular’s international revenues were $283 (1%), $704 (1%) and $976 (2%) 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 M2M service 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.
MAJOR CUSTOMERS
In fiscal 2011, Telular derived 37% of its total revenues from ADT, a major U.S. securities systems provider. Telular has executed a supply agreement with ADT that dictates terms and conditions related to the sale of products or service to ADT, but there are no minimum purchase commitments placed upon ADT. The original agreement had a 12 month term with automatic renewals for 12 month periods unless either party provides written notice of termination more than 90 days before expiration.
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, 2011 are as follows:
Name Age Position
Joseph A. Beatty President, Chief Executive Officer and Director
Jonathan M. Charak Senior Vice President, Chief Financial Officer and Secretary
George S. Brody Senior Vice President, Telguard and Terminals
Robert L. Deering Controller, Treasurer and Chief Accounting Officer
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
Telular has 92 full time employees, of which 48% are in sales, customer service and marketing, 12% in manufacturing support, 28% in engineering and product development and 12% in finance and administration. None of Telular’s employees are represented by organized labor and all of Telular’s employees are located in the United States.
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 and real-time transaction processing software with the data transport capabilities of commercial wireless networks. This focus allows us to develop high functioning software and 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. Telular has been creating and operating real-time transaction processing software for over a decade and understands the importance of high reliability in that regard. 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 targeted software features and a more diverse set of hardware products than any of our competitors and we believe this gives our customers a greater selection of features and hardware devices from which to choose.
Economies of Scale -Telguard’s fully integrated end-to-end cellular solution is now utilized by over 563,000 individual subscribers, which helps to minimize costs on a per user basis. This large customer base also reflects our 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 Telular’s Telguard products and services. These primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Based on its own internal estimates, Telular believes it has a significant portion of the market share for all currently active cellular alarm communicators in the United States, having introduced the first such device for digital cellular networks in April 2005. Demand for cellular communicators has increased markedly over the past few years. 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, Telular 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 Telular’s proprietary message center, which interprets and forwards any alarms received to Telular’s security monitoring customers in near real-time. Telular 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.
There are numerous, small competitors to Telular’s TankLink offering. The most significant of these is Centeron, a division of Robertshaw Industries, which in turn is a subsidiary of Invensys, Inc. More often, the TankLink offering competes against the pre-existing, manual methods utilized by tank owners to determine the fill level and reorder timing for products held within tank vessels. Telular believes the key to growing its TankLink revenue is lowering its prices to the greatest extent possible in order to cost justify implementation of the TankLink solution.
With regard to the FCTs 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. The FCT business is not a primary focus of Telular.
Telular has granted a license for its patents to Ericsson and currently faces competition for FCT sales from Ericsson.
PATENTS AND OTHER INTELLECTUAL PROPERTY
Patents
Telular currently has twenty-two issued and active U.S. patents as well as four pending U.S. applications and four foreign patents (Australia (two patents), Canada and Mexico. The U.S patents expire on the following dates: April 15, 2012, March 2, 2014 (four patents), September 20, 2014 (two patents), March 15, 2016, August 31, 2016, June 17, 2017, April 1, 2018, March 29, 2019, June 3, 2019 (two patents), September 30, 2019, October 1, 2019, June 11, 2021, January 10, 2022, June 19, 2022(three patents), November 18, 2022 and November 25, 2022. The foreign patents expire beginning on April 15, 2012, March 2, 2014 (two patents) and May 8, 2020.Telular has successfully defended some of its patents in court. These have not had a material effect on Telular'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 14 registered and 1 application for U.S. trademarks, which are: Telular (Block) (3944350); Telular (Block) (1855592); TELULAR plus design (3861817); Hexagon Logo (1845080); PHONECELL (1852941); LOSE THE LINE KEEP THE CONNECTION (3662989); WIRELESSLY PROTECTED (3858563); WIRELESSLY PROTECTED (4039903); TANKLINK (3894792); TTTTTT Telguard (3976012); WiPATH (3468917); TELGUARD INTERACTIVE (4022028); Telular (1897417); Telguard (1855592). Telular has 1 pending U.S. trademark application, “SMARTank". Additionally, Telular has a total of 20 foreign trademark registrations covering the names and logos used for many of its products.
ITEM 1A.
ITEM 1A. RISK FACTORS
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. The risks and uncertainties described in this Annual Report on Form 10-K are not the only ones facing us. Additional risks and uncertainties that currently are not known to us or that we currently believe are immaterial also may adversely affect our businesses and operations.
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:
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proper product definition;
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component cost;
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resolving technical hurdles;
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timely completion and introduction to the market;
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differentiation from the products of our competitors; and
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market acceptance of our products.
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.
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.
Telular 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.
Telular 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.
A decline in the U.S. housing market may negatively impact sales and profitability of Telular’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.
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 2012. 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.
We rely on cellular networks for service revenue that may be affected by the following:
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service may be interrupted or limited due to carrier transmission limitations caused by atmospheric, terrain, other natural or artificial conditions adversely affecting transmission;
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interruption of service due to cellular carrier equipment modification, upgrades, repairs and other similar activities;
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service may be limited based on available coverage;.
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interruption of service may occur between various cellular network and participating carriers;
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the cost of this service could be increased such that it will affect our ability to compete while maintaining satisfactory margins; or,
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carriers disclaim all liability of any nature to customers, whether direct, indirect, incidental or consequential, arising out of our customer’s use of their service.
In the event that we experience significant cellular network delays or interruption of service, we would have difficulty maintaining customers and our revenues could decline substantially and harm our business.
AT&T Wireless provides the majority 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.
Cellular South and Numerex Inc. provide a meaningful portion of our network capability for Telguard and TankLink, respectively. A network malfunction or a contractual dispute between us and these carriers or among these carriers and other major U.S. carriers could materially impact the operation of our services and/or our financial results.
ADT is a highly significant customer and the loss of this particular customer may seriously harm our business.
ADT represented 37% of our total revenue in fiscal 2011. If ADT chooses to use fewer of our products and services or stops using our products and services in total, our financial results could be materially impacted. In addition, ADT influences the purchasing decisions of its authorized dealers by specifying which equipment must be installed in end user security systems. For example, in fiscal 2010 ADT implemented a monthly service charge to the end user for any system sold by an authorized dealer that included a Telguard product. Due to this surcharge, authorized dealers opted to choose other security products over Telguard products, which resulted in decreased sales volume. If ADT further disincentivizes its authorized dealers from purchasing our products or removes our products from its list of acceptable equipment, our financial results may 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 in the past, Telular has incurred net operating losses. 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, 2011, we had $12,642 in cash and cash equivalents and a working capital surplus of $15,515.
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:
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our reliance on certain significant customers for some of our product sales, which may result in volatility when those orders are filled and not immediately followed by comparable orders;
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variations in our distribution channels;
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the mix of products we sell;
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general economic conditions in our target markets;
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the timing of final product approvals from our customers or regulators;
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the timing of orders from and shipments to major customers;
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the timing of new product introductions by us or our competitors;
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changes in our pricing policies and the pricing policies of our suppliers and our competitors;
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changes in the terms of our arrangements with customers and suppliers;
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the availability and cost to us of the key components for our products;
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ability of our customers to accurately forecast demand for our products by their end users;
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delays or failures to fulfill orders for our products on a timely basis;
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our inability to accurately forecast our manufacturing needs;
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change in the financial position of our manufacturers;
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an increase in product warranty returns or in our allowance for doubtful accounts;
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operational disruptions, such as transportation delays or failures of our order processing system;
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the timing of personnel hirings; and
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delays in the introduction of new or enhanced versions of our existing products or market acceptance of these products.
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.
Our common stock price has been 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:
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shortfalls in our revenue or net income;
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the results of product trials or the introduction of new products by us or our competitors;
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market conditions in the telecommunications, technology and emerging growth sectors; and
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rumors related to us or our competitors.
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:
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antitrust;
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breach of contract;
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trade secret;
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copyright or patent infringement;
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patent or copyright invalidity; and
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unfair business practices.
Whether or not they have any merit, we may 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:
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cease selling, incorporating or using products that incorporate the challenged intellectual property;
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obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all; and
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redesign products that incorporate the disputed technology.
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 Telular by a party that has initiated litigation against Telular 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 may 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 due to quality-monitoring procedures that we have instituted. Most of our major subcontractors also have quality control procedures in place and are ISO-9001:2000 compliant. Notwithstanding the existence of these controls, our operations and our dependency on subcontractors subjects us to the risk that these controls may not be effective. Quality control failures by us or by our third-party subcontractors or changes in their financial or business condition that affect their production could disrupt our ability to supply quality products to our customers. If we fail to provide quality products to our customers, product sales, and thereby our business, could be materially harmed.
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 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.
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:
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foreign currency exchange fluctuations and instability of foreign currencies;
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political or economic instability and volatility in particular countries or regions;
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limited protection for intellectual property;
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difficulties in complying with foreign regulatory requirements applicable to our operations and products;
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difficulties in obtaining domestic and foreign export, import and other governmental approvals, permits and licenses and compliance with foreign laws, including employment laws;
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difficulties in staffing and managing international operations, including work stoppages or strikes and cultural differences in the conduct of business, labor and other workforce requirements and inadequate local infrastructure;
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trade restrictions or higher tariffs, quotas, taxes and other market barriers;
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transportation delays and difficulties of managing international distribution channels;
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longer payment cycles for, and greater difficulty in collecting accounts receivable; and
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public health emergencies such as SARS and avian bird flu.
To date, our sales have not been negatively affected by currency fluctuations. We currently seek prepayment or letters of credit 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.
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:
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problems assimilating the purchased technologies, products or business operations;
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problems maintaining uniform standards, procedures, controls and policies;
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inability to meet debt service obligations with any debt financing that may be undertaken in order to pay for an acquisition;
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dilution to existing common shareholders as a result of the issuance of equity securities for an acquisition which may not initially or ever contribute a pro-rata portion of earnings or cash flow to common shareholders;
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unanticipated costs associated with the acquisition;
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diversion of management’s attention from our core business;
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adverse effects on existing business relationships with suppliers and customers;
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risks associated with entering new markets in which we have no or limited prior experience; and
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potential loss of key employees of acquired businesses.
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.
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, 2011, there were outstanding options granted to employees and directors to purchase 2,054,458 shares of Telular’s common stock. Options to purchase 1,812,771 of these shares were exercisable at that time. The exercise prices for the exercisable options range from $1.48 to $7.99 per share, with a weighted average exercise price of $4.17. Options to purchase the remaining 241,687 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 $3.79.
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. These warrants have no expiration date.
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.
An interruption of our Telguard service by a failure of the Telguard Message Center software systems could be harmful to our business relationships and revenue stream.
Our Telguard service offering delivers a vast majority of our current revenue. Its success is based on the non-stop operation of the Telguard Message Center (“TMC”). This real-time transaction processing system is a complex software system and its architecture is fairly old. As the Company implements new features and growth and experiences an increase in message processing volumes, the TMC may be unable to accommodate this growth. If the TMC malfunctions and is out of service for an extended period (more than several hours), customers may view the Company as unreliable and may cease in adding additional end users to the Telguard service base or may remove existing end users. As normal churn occurs, the total Telguard subscriber base could shrink over time and a majority of our revenue may go away. This could occur abruptly if the service interruption is severe.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The following is a list of properties that Telular leases:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Telular 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 Telular’s consolidated results of operation, cash flows or financial position.
ITEM 4.
ITEM 4. Removed and Reserved
PART II
(Dollars in Thousands, Except Per Share Data)
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
Telular’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 2011 and 2010, 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 5, 2011, there were approximately 201 shareholders of record, approximately 5,569 beneficial shareholders and 15,180,504 shares of Common Stock outstanding.
Dividends were not declared during fiscal 2010. The following table summarizes Telular dividend payment history for fiscal 2011:
Telular has paid four quarterly dividends in fiscal year 2011, totaling $20,897. Telular plans to continue to pay cash dividends on its common stock in the future, however the Board will evaluate whether to declare a cash dividend and the amount of any such dividend on a quarterly basis.
(a) On November 4, 2010, the Board of Directors approved a special one-time cash dividend of $1.00 per share of common stock and initiated a quarterly dividend of $0.10 per share of common stock. Both the special one-time cash dividend and the quarterly dividend were paid on November 22, 2010 to shareholders of record on November 15, 2010.
TREASURY SHARES
Under the previously announced purchase program, Telular did not repurchase any shares of its common stock during fiscal year 2011. The approximate dollar value of shares that may yet be purchased under the program is $4,588 as of September 30, 2011.
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 Telular specifically incorporates it by reference into such filing.
The Telular Corporation Common Stock Performance Graph compares total shareholder returns of Telular since September 30, 2006, to three indices: the NASDAQ Stock Market (U.S.) Index, the NASDAQ Telecommunications Index and the Zach Industry Index - Computer and Technology Sector. The total return calculations assume the reinvestment of dividends, when appropriate, 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.
Telular's Common Stock is traded on the NMS and is a component of the NASDAQ Stock Market (U.S.) Index. Telular’s stock price on the last trading day of its fiscal year, September 30, 2011, was $5.90.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table is a summary of certain condensed statement of operations and balance sheet information of Telular. The table lists historical financial data of Telular for the fiscal years ended September 30, 2011, 2010, 2009, 2008 and 2007. 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.
(a)
In July 2007, Telular formulated a plan to sell the net assets of its FCP segment and exit the FCP market. During the third quarter of fiscal 2008, Telular determined it would be unable to secure a buyer for the FCP segment and made a strategic decision to abandon the FCP segment effective June 30, 2008. As a result, the FCP segment has been segregated and classified as discontinued operations and amounts for all periods presented have been reclassified to reflect this classification.
(b)
Income from operations for fiscal 2010 was significantly higher due to the reversal of the valuation allowance on net deferred tax assets of $34,505.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
INTRODUCTION
Telular develops products and services that utilize wireless networks to provide data connectivity among people and machines. Telular’s software-as-a-service (“SaaS”) offerings are created through Telular’s competence in developing complex software systems and cellular electronics that utilize the data transport capabilities of today’s commercial wireless networks. To enable these services, Telular is a significant reseller of such commercial wireless services.
Telular generates a majority of its revenue through the delivery of M2M and event monitoring services, such as its Telguard and TankLink services. A portion of its revenue comes from the sale of specialty cellular hardware products designed by Telular for use exclusively with its M2M services. Telular'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 Telular'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 “Forward Looking Information” and in Item 1A, Risk Factors.
The market for Telular’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 Value Added Resellers (“VARs”), distributors, representatives and agents along with in-house sales and customer support teams. A direct sales model is utilized for certain large customers.
Telular 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 Telular for the years ended September 30, 2011, 2010 and 2009 were $2,623, $3,010 and $2,974, respectively. Telular anticipates research and development activities to continue at approximately the same levels as in the past.
The following details areas of product delivery and research during fiscal 2011 and anticipated in fiscal 2012.
Telguard - Telular’s engineering team continues to update the Telguard product and service portfolio by addressing the growing demand for interactive capability in the security market. In fiscal 2011, Telular launched new features, such as Telguard Interactive Services which let end users remotely arm and disarm their security systems. In addition, we launched Telguard Voice, which allowed security dealers to speak with their end user customers in the event that an alarm condition was triggered. Perhaps the most significant development activity was the conversion of a majority of our hardware product lines to 3G capability. While 3G capability launched in early fiscal 2012, most of the development was accomplished in fiscal 2011. Product innovation within this space is important for the long-term success of Telguard and we expect to continue to enhance our Telguard software platform and underlying hardware products going forward.
TankLink - The fiscal 2009 acquisition of TankLink Corp. (formerly known as SupplyNet Communications, Inc.) brought Telular a successful wireless communicator product line for tank level monitoring. In early fiscal 2011, the acquisition of TankLink end-user accounts from our key value added reseller, SmartLogix, Inc., gave Telular more direct control over the TankLink end users as well as improved profitability. Enhancements to the TankLink software platform, TankData Online, have been made during 2011. Telular plans to further enhance both the software platform and the hardware product during fiscal 2012 to support a wider array of applications.
Other M2M Solutions - During 2011, Telular evaluated a number of vertical and sub-vertical M2M markets to determine the viability of creating or acquiring a product and/or service in these markets. While Telular did not move forward with any such solutions, it will continue to examine growth possibilities and new solutions in the M2M market space. Subsequent to September 30, 2011, Telular has entered into a tentative agreement to purchase a company providing M2M solutions. For further discussion, see Note 23. Subsequent Events, in Part II, Item 8 of this Form 10-K.
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 Telular’s Telguard products and services. These primary competitors include: Honeywell, DSC, Numerex and Alarm.com. Based on its own internal estimates, Telular believes it has a 15-20% market share of all currently active cellular alarm communicators in the United States, having introduced the first such device for digital cellular networks in March 2006. Demand for cellular communicators has once again 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, Telular believes that Telular and its competitors will continue to see substantial demand for products and related services.
There are numerous, small competitors to Telular’s TankLink offering. The most significant of these is Centeron, a division of Robertshaw Industries, which in turn is a subsidiary of Invensys, Inc. More often, the TankLink offering competes against the pre-existing, manual methods utilized by tank owners to determine the fill level and reorder timing for products held within tank vessels. Telular believes the key to growing its TankLink revenue is lowering its prices to the greatest extent possible in order to cost justify implementation of the TankLink solution.
With regard to the FCTs 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. The FCT business is not a focus of Telular for fiscal 2012.
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, Telular currently has 22 issued and active U.S. patents and 4 U.S patents pending. Telular 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.
Telular 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, as well as continuing to improve overall penetration in the tank level monitoring market through TankLink. Due to uncertainties in international markets and pending new product introductions, Telular is unable to forecast results and resource allocations for FCT products. Further, to the extent any components of FCT products are declared end-of-life from their manufacturer, Telular would assess overall demand for its product and either redesign the product to accommodate a replacement component part or potentially discontinue the manufacture of that particular product after offering customers a final chance to purchase them.
UNIT SALES
During fiscal 2011, Telular sold approximately 90,200 Telguard units, compared with approximately 103,100 Telguard units for fiscal 2010. We sold approximately 6,400 tank monitoring units in fiscal 2011, as compared to sales of 4,600 tank monitoring units in fiscal 2010. Our Telguard subscriber base decreased in fiscal 2011 to approximately 563,500, down from approximately 567,800 subscribers in fiscal 2010. This decrease was a result of lower demand as a result of a change in pricing terms within agreements between ADT, our largest security dealer customer, and its network of authorized dealers. ADT implemented a monthly service charge to the end user for any system sold by an authorized dealer that included a Telguard product. Due to this surcharge, the authorized dealers generally opted to choose other security products over Telguard products, which resulted in decreased sales volume. Telular expects this trend to continue and has implemented targeted pricing discount programs and will develop new customer relationships to maintain sales volumes. The Telguard Advantage Program (“TAP”) was implemented to offer security dealers the opportunity to achieve preferred pricing for Telguard products. We expect total product sales of between 20,000 and 30,000 units on a quarterly basis throughout fiscal 2012.
REVENUE TRENDS
Total product sales decreased slightly year over year while service revenues have grown consistently. This decrease was a result of lower demand as a result of a change in pricing terms within agreements between ADT and its authorized dealers as mentioned above. Service subscribers decreased, from approximately 567,800 subscribers at the end of fiscal 2010 to approximately 563,500 subscribers at the end of fiscal 2011, as a result of deactivations due to an ongoing account reconciliation project by a major customer. Even though the number of subscribers decreased, service revenues increased as we successfully added new subscribers at a higher average revenue per unit (“ARPU”). Service revenue was 62% of sales in both the fourth quarter and year to date.
Telguard service ARPU, was $4.14 for fiscal 2011, as compared to $3.97 for fiscal 2010. The increase in ARPU was due to the combination of adding new subscribers during the year while eliminating lower ARPU customers as a result of the account reconciliation project of a major customer.
TankLink service ARPU was $11.58 for fiscal 2011 as compared to $6.75 for fiscal 2010. The increase in ARPU is a result of the purchase of the higher ARPU customer base from SmartLogix early in the second quarter of fiscal 2011. TankLink is now dealing directly with end-user customers.
RECENT DEVELOPMENTS
On January 7, 2011, Telular acquired certain assets and assumed certain liabilities underlying the SMARTank line of business of SmartLogix, Inc. (“SmartLogix”), Telular’s largest value added reseller of TankLink tank monitoring solutions. Telular also entered into a Sales and Service Agreement (“Service Agreement”) with SmartLogix. Under the Service Agreement, Telular appointed SmartLogix as an exclusive sales representative for the purpose of selling tank monitoring equipment to customers in the fuels and lubricants market. Pursuant to the terms in the Service Agreement, Telular will pay SmartLogix a 20% commission on gross product revenue, as well as a commission on service revenue earned on the monitoring units sold, typically calculated as 3 months of related service revenue. The initial term of the Service Agreement is two years and may be renewed for an additional year.
On November 10, 2011, Telular announced an increase in its regular quarterly dividend from $.10 to $.11 per share on its common stock. The dividend will be payable on November 29, 2011 to shareholders of record as of the close of business on November 22, 2011.
On December 3, 2011, Telular entered into a Merger Agreement (the “Agreement”) to purchase 100% of the capital stock of SkyBitz, Inc. (“SkyBitz”). SkyBitz provides mobile resource management solutions focusing on over-the-road tracking via satellite. Skybitz’s satellite-based technology provides real-time visibility of many asset types, including truck trailer, intermodal containers, sea-going containers, rail cars, power generators and rental equipment. The purchase will be accounted for using the purchase method. Under the terms of the agreement, Telular will pay consideration of $42,000, comprised of $35,000 in cash and $7,000 of Telular’s common stock. The cash portion of the consideration is anticipated to be funded with a $30,000 five year term loan from Silicon Valley Bank (“SVB”) and $5,000 from Telular’s cash on hand. The acquisition is subject to the approval of a communications license transfer by the Federal Communications Commission (“FCC”) and is expected to close in 60-90 days. Estimated fair value of assets acquired and liabilities assumed and pro forma revenues and earnings are not yet available.
RESULTS OF OPERATIONS
(In Thousands, Except Share Data)
Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues and Costs of Sales
Revenues
Product revenues decreased 3% primarily due to decreased sales in Telguard monitoring equipment and terminal products, partially offset by an increase in TankLink product revenues. Revenues from sales of our Telguard monitoring equipment decreased 12% primarily due to lower demand as a result of a change in pricing terms within agreements between ADT, our largest security dealer customer and its network of authorized dealers. During the second half of fiscal 2010, the dealer implemented a monthly service charge to the end user for any system sold by an authorized dealer that included a Telguard product. Due to this surcharge, the authorized dealers generally opted to choose other security products over Telguard products which resulted in decreased sales volume; approximately 90,200 Telguard units were sold in fiscal 2011 compared with approximately 103,100 for fiscal 2010. Telular has implemented targeted pricing discount programs and will develop new customer relationships to maintain sales volumes. The Telguard Advantage Program (“TAP”) was implemented to offer security dealers the opportunity to achieve preferred pricing Telguard products. Telguard’s average selling price remained consistent year-over year. The decrease in terminal product revenues reflects continued depressed demand in both the U.S. and in the Central American Latin American (“CALA”) regions. Of the $3,248 of total terminal sales in fiscal 2011, only $283 were from international sales compared to $3,595 of total terminal sales in fiscal 2010, of which $491 were from international sales. TankLink product revenues increased 79% to $3,323 in fiscal 2011 from $1,859 in fiscal 2010. This increase is primarily due to the purchase of the SMARTank business unit from SmartLogix on January 7, 2011. TankLink is now dealing directly with the end-user customers, resulting in higher revenues. As a result of dealing directly with the end-user customers, TankLink’s average unit selling price increased 31%. Approximately 6,400 TankLink units were sold in fiscal 2011 compared to approximately 4,600 units in fiscal 2010.
Service revenues increased 13% as a result of increases in the ARPU for new Telguard and TankLink customers and increased activations for TankLink in fiscal 2011. Telguard experienced a net decrease in subscribers; declining from approximately 567,800 subscribers at the end of fiscal 2010 to approximately 563,500 subscribers at the end of fiscal 2011. This decrease was a result of subscribers being deactivated due to an ongoing account reconciliation project by a major customer. Telguard’s ARPU for fiscal 2011 was $4.14, a 4% increase over fiscal 2010’s annual ARPU of $3.97. TankLink’s ARPU rose to $11.58 in fiscal 2011 from $6.75 in fiscal 2010. This increase is primarily due to the purchase of the SMARTank business unit and being able to bill those customers directly.
Cost of Sales
The decrease in product cost of sales of 11% is primarily due to reduced production costs primarily from re-engineering of component parts. Telular cannot be certain that it will continue to be able to reduce production costs in the future. Service cost of sales decreased 2% due to a reduction in the cost of providing monitoring services. Telular has successfully migrated its customer base to a new carrier that has reduced rates based on volume.
Product margins, as a percentage of product revenues, increased to 25% in fiscal 2011 from 18% in fiscal 2010. This increase is a result of reduced cost of sales and increases in the TankLink product average selling price.
Service margins, as a percentage of service revenues, increased to 65% in fiscal year 2011 from 60% in fiscal year 2010. This increase was primarily due to reductions in fulfillment costs and higher ARPU’s.
Operating Expenses
Engineering and Development
Engineering and development expenses remained relatively consistent between fiscal years. The increase of $18 was primarily due to:
·
$75 in prototype materials and testing services; and,
·
$26 in facility costs primarily due to increased depreciation as a result of increased purchases of capital assets.
Offsetting these increases was a $36 decrease in payroll expenses resulting from $231 in decreases in salaries and benefits as a result of reduced headcount, partially offset by a $195 increase in bonuses as a result of a one-time bonus paid to holders of stock options in conjunction with the payment of Telular’s special dividend; and, a $47 decrease in consulting expenses as a result of reduced utilization of contract engineers. Telular expects to fill open positions in the fiscal 2012.
Selling and Marketing
Selling and marketing expenses increased by $1,236 (21%) primarily due to:
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$400 in payroll related expenses as a result of increased sales and marketing personnel and expenses such as commissions that fluctuate with sales volume and a one-time bonus paid to holders of stock options in conjunction with the payment of Telular’s special dividend;
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$431 in advertising and tradeshows as Telular increased its marketing efforts;
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$282 in outside services and third party commissions primarily related to a service agreement with SmartLogix in which Telular appointed SmartLogix as an exclusive sales representative for the purpose of selling tank monitoring equipment and services to customers in the fuels and lubricants market. Telular purchased the SMARTank business unit from SmartLogix on January 7, 2011;and,
·
$123 in travel expenses incurred in conjunction with increased marketing sales efforts.
General and Administrative (G&A)
G&A expenses increased by $937 (15%) primarily due to the following increases:
·
$415 in payroll related expenses primarily as a result of a one-time bonus paid to holders of stock options in conjunction with the payment of Telular’s special dividend;
·
$449 in amortization expense related to the intangibles recorded as a result of the purchase of the SMARTank business;
·
$64 in franchise tax fees related to the State of Delaware; and,
·
$60 in investor relations expenses, including increased travel and increased NASDAQ fees.
Offsetting these increases was a decrease in professional fees of $51, primarily due to reduced legal fees.
Other Income
Other income decreased by $293 primarily due to a decrease in interest income. In fiscal 2010 Telular was receiving interest on the outstanding trade receivable from SmartLogix. This trade receivable, approximately $4,484, was forgiven as part of the consideration for the purchase of the SMARTank business unit on January 7, 2011 from SmartLogix.
Income Taxes
Telular recorded a current income tax provision of $299 and a deferred income tax provision of $1,993 for fiscal year 2011 as compared with a current provision of $139 and a deferred income tax benefit of $34,505 for fiscal year 2010. The increase in the current provision was primarily due to the increase in federal and state taxable income in fiscal year 2011. The deferred tax benefit was due to the reversal of the valuation allowances on net deferred tax assets, primarily Telular’s net operating loss carryforwards.
Net Income
Telular recorded net income of $4,154 or $0.26 per fully diluted share for fiscal 2011 compared to net income of $38,121 or $2.49 per fully diluted share for fiscal year 2010. This decrease was primarily due to the income tax benefit recorded from the reversal of net deferred tax asset valuation allowances in fiscal 2010.
Fiscal Year 2010 Compared to Fiscal Year 2009
Revenues and Costs of Sales
Revenues
Product revenues decreased 20% primarily due to decreased sales in both Telguard monitoring equipment and terminal products. Revenues from sales of our Telguard monitoring equipment experienced lower demand as a result of a change in pricing terms within agreements between ADT and its network of authorized dealers. ADT implemented a monthly service charge to the end user for any system sold by an authorized dealer that included a Telguard product. Due to this surcharge, the authorized dealers generally opted to choose other security products over Telguard products which resulted in decreased sales volume; approximately 103,000 Telguard units were sold in fiscal 2010 compared with approximately 114,000 for fiscal 2009. Telular expects this trend to continue and has implemented targeted pricing discount programs to maintain sales volumes. The decrease in terminal product revenues reflects continued depressed demand in both the U.S. and in the Central American Latin American (“CALA”) regions. Of the $3,595 of total terminal sales in fiscal 2010, only $491 were from international sales compared to $6,638 of total terminal sales in fiscal 2009, of which $947 were from international sales. Telular has chosen to focus its sales efforts in the monitoring equipment and services market.
Service revenues increased 22% primarily due to increased activations in fiscal 2010. For each hardware unit sold, service revenue is generated when the unit is activated. ARPU increased slightly to $3.97 in fiscal 2010 as compared to $3.93 in fiscal 2009. As of September 30, 2010 the subscriber base was approximately 568,000, an increase of approximately 68,000 subscribers from approximately 500,000 subscribers as of September 30, 2009.
Cost of Sales
The decrease in product cost of sales of 10% reflects lower sales offset by reduced production costs primarily from re-engineering of component parts. Service cost of sales increased 10% over last year reflecting the increase of subscribers during the year offset by reduced internal cost of billing the service.
Product margins, as a percentage of product revenues, decreased from 26% in fiscal 2009 to 18% in fiscal 2010. This decrease is a result of pricing discount programs, such as the Telguard Advantage Program, offered during the year targeted to encourage increased sales volumes. Telular expects to continue these pricing discount programs.
Service margins, as a percentage of service revenues, increased to 60% in fiscal year 2010 from 56% in fiscal year 2009. This increase was primarily due to a reduction in fulfillment costs.
Operating Expenses
Engineering and Development
Engineering and development expenses decreased by $221 (5%) primarily due to reductions of:
·
$425 in consulting fees as a result of reduced utilization of contract engineers; and,
·
$62 in various office expenses and engineering testing expenses as a result of Telular’s overall initiative to reduce costs.
Offsetting these reductions was $266 increase in salary related expenses resulting from adding additional headcount in concert with the reduction of the utilization of contract engineers.
Selling and Marketing
Selling and marketing expenses decreased by $614 (9%) primarily due to:
·
$381 decrease in payroll related expenses as a result of decreased sales and marketing personnel and expenses such as commissions that fluctuate with sales volume;
·
$132 decrease in travel expenses related to reduced travel abroad;
·
$88 decrease in third party commission expenses related to decreased sales volume; and,
·
$68 decrease in various office and general expenses as a result of Telular’s overall initiative to reduce costs.
Offsetting these decreases was an increase of approximately $55 related to marketing efforts such as trade shows and brochures.
General and Administrative (G&A)
G&A expenses increased by $509 (9%) primarily due to the following increases:
·
$432 in legal expenses related primarily to increased efforts by outside counsel in defending Telular in a patent lawsuit;
·
$115 in director non-cash compensation as a result of valuing and recording the expense of the option component of restricted stock units;
·
$87 in business license fees and non-income taxes as a result of increased presence in certain states;
·
$77 in bank and credit card fees as a result of increased usage by customers of credit cards to pay for products and services; and,
·
$65 in payroll related expenses primarily due to increase in non-cash compensation related to stock options.
Offsetting these increases were decreases to the following expenses:
·
$159 in additional proxy costs related to a proxy contest in fiscal 2009. In fiscal 2010 there we no such additional costs
·
$61 in facility related costs such as phone, utilities and general maintenance; and,
·
$47 in travel and general office expenses as a result of Telular’s overall initiative to reduce costs.
Other Income
Other income increased by $73 primarily due to $47 increase in interest income, year over year, and $25 decrease in various miscellaneous expenses.
Income Taxes
Telular recorded a current income tax provision of $139 and a deferred income tax benefit of $34,505 for fiscal year 2010 as compared with a current provision of $65 and no deferred tax provision for fiscal year 2009. The increase in the current provision was primarily due to the increase in taxable income in fiscal year 2010. The increase in the deferred tax benefit was due to the reversal of the valuation allowances on net deferred tax assets. In the prior year, Telular’s net deferred tax assets had a full valuation allowance against them.
Net Income
Telular recorded net income of $38,121 or $2.49 per fully diluted share for fiscal year 2010 compared to net income of $1,866 or $0.11 per fully diluted share for fiscal year 2009. This increase was primarily due to the income tax benefit recorded from reversal of net deferred tax assets valuation allowances. In fiscal 2009, Telular’s net deferred tax assets had a full valuation allowance against them.
LIQUIDITY AND CAPITAL RESOURCES
Management regularly reviews Telular’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, 2011, Telular had cash and cash equivalents of $12,642 and working capital of $15,515, compared to cash and cash equivalents of $27,678 and net working capital of $34,046 a year earlier. Effective on January 22, 2011, Telular executed an Amended and Restated Loan and Security Agreement with SVB (the “Amended Loan Agreement”). Under the Amended Loan Agreement, the term was extended for a new two year period, and total maximum borrowings remain at $10 million. Though many of the terms and conditions were unchanged, including the maximum interest rates, some key differences include the ability for Telular to borrow up to $7 million under a revolving line of credit, with the ability to convert up to $5 million of borrowings under the revolver into a three year term loan. Additionally, the amount available under the facility is no longer limited by the amount of eligible accounts receivable. Instead, there are certain financial covenants that Telular must comply with in order to borrow. An $18 commitment fee was paid by Telular and is being amortized over the new term of the loan.
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 Telular has adequate resources to fund current and planned operations in a manner consistent with historical practices. The tables below discuss the liquidity components of continuing operations for fiscal years 2011 and 2010.
Capital expenditures for fiscal years 2011 and 2010 were $1,113 and $857, respectively. The 2011 expenditures were for improvements to internal network equipment, production equipment, such as test stations for new products, and product certification costs for new products. The 2010 expenditures were for improvements to the message center, test equipment for operations, product certification and leasehold improvements for the Atlanta office. Telular anticipates funding future capital additions with cash from operations.
On July 25, 2008, Telular’s Board approved a plan to repurchase up to $5,000 of Telular’s common stock on the open market. During fiscal 2011, there were no shares repurchased under the plan. During fiscal 2010, 123,816 shares were repurchased at a cost of $412. Cumulatively through September 30, 2011, Telular has repurchased 4,577,163 shares at a cost of $9,573.
Telular generally requires its foreign customers to prepay, obtain letters of credit or qualify for credit. Also, to mitigate the effects of currency fluctuations on Telular’s results of operations, Telular conducts all of its international transactions in US dollars.
The following table sets forth our total contractual obligations as of September 30, 2011:
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. Telular 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 Telular'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 Telular’s financial condition and results of operations.
Revenue Recognition
Telular’s revenue is primarily generated from three sources:
·
The sale of hardware units, under non-recurring agreements;
·
The provision of monitoring services, under recurring agreements; and,
·
The provision of ancillary services such as installation and non-warranty repairs and royalty revenue.
Revenue is recognized when persuasive evidence of an agreement exists, the hardware unit or the service has been delivered, fees and prices are fixed and determinable and collectability is probable when all other significant obligations have been fulfilled.
Telular recognizes revenue and associated costs from hardware unit sales at the time of shipment of products which is when title transfers. Hardware unit discounts are recorded as a reduction in revenue in the same period that the revenue is recognized. Telular offers customers the right to return hardware units that do not function properly within a limited time after delivery, see Warranty section below. Telular continuously monitors and tracks such hardware unit returns and records a provision for the estimated amount of such future returns, based on historical experience. While such returns have historically been within expectations, Telular cannot guarantee that it will continue to experience the same return rates that it has experienced in the past. Any significant increase in hardware unit failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize.
Monitoring service revenue is recognized at the time the service is provided. Payments received in advance of providing monitoring services are deferred and recognized over the period in which the service is delivered. Costs associated with providing the monitoring service are recorded when the service is provided.
For those arrangements that include multiple deliverables, Telular follows the guidance in Accounting Standard Codification (“ASC”) Subtopic 605-25, as amended by Accounting Standards Update (“ASU”) 2009-13. ASC Subtopic 605-25 established criteria for determining if a revenue arrangement has multiple deliverables. ASU 2009-13 amended the multiple-element revenue guidance to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item, and (2) eliminate the use of the residual method of allocation and instead required that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. Certain multiple-element revenue arrangements include both product and monitoring services. Telular has determined that the revenue from multiple-deliverable arrangements has met the criteria for treating each revenue source as a separate element. Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method, based on Telular’s best estimate of selling price. Key factors that are considered when establishing a selling price are the industry segment to which the products and services are sold, estimated selling price of our competitors, where available, and an internally established gross margin range. Product revenue is billed and recognized upon shipment to the customer while monitoring services revenue is billed periodically, usually monthly, and recognized when the service is provided.
Telular recognizes ancillary service revenues when the service is delivered. Costs associated with these services are recorded in the period the service is delivered. Royalty revenue, which is based on a percentage of sales by the licensee, is estimated by Telular, based upon historical data provided by the licensee, in the period in which management estimated the sales have taken place. Telular periodically reconciles these estimates to the actual payments received from the licensee, adjusting revenue accordingly. Historically, Telular’s estimates have not been materially different than the payments received from the licensee.
Allowance for Doubtful Accounts
Telular maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payment for products and services. Telular evaluates the collectability of customer receivables by considering the payment history and the financial stability of its customers. If Telular believes that an account receivable may not be collected, a charge is recorded to the allowance account. At September 30, 2011 and 2010, the allowance for doubtful accounts related to trades accounts receivable from continuing operations was $39 and $17, respectively.
Reserve for Inventory Obsolescence
Significant management judgment is required to determine the reserve for obsolete or excess inventory. Telular generally considers inventory quantities greater than a one-year supply, based on current year activity, to be excess, unless that inventory has alternative uses. Telular 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, 2011 and 2010, the inventory reserves were $649 and $408, 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.
Reserve for Warranty
Telular maintains a reserve for products that are returned within Telular’s warranty period due to inoperability. Telular has different warranty periods for its different product groups: the security monitoring products has a 24 month warranty period; the tank monitoring products have a 12 month warranty period; and, the terminal products have a 15 month warranty period. Significant management judgment is required to determine the warranty reserve. Telular utilizes historical information regarding units returned within the appropriate warranty period and the costs incurred to repair returned units. Telular then estimates required warranty reserves for future products that may be returned. As of September 30, 2011 and 2010, the warranty reserve was $115 and $95, respectively.
Goodwill
Telular 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, Telular makes projections regarding future cash flows. These projections are based on assumptions and estimates of:
·
growth rates for net revenues, cost of sales and operating expenses for the monitoring and terminal businesses;
·
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. As of September 30, 2011 and 2010, goodwill was not impaired.
Income Taxes
In determining income for financial statement purposes, Telular must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
In evaluating the ability to recover its deferred tax assets, Telular considers all available positive and negative evidence including its past operating results, the existence of cumulative losses and its forecast of future taxable income. In estimating future taxable income, Telular developed assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, the utilization of net operating loss carryforwards to offset taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates Telular is using to manage the underlying business.
Telular has recorded significant valuation allowances that are intended to be maintained until it is more likely than not the deferred tax asset will be realized. The current valuation allowance of $5,612 is for state net operating losses that will expire before they can be realized. The realization of the remaining deferred tax assets is primarily dependent on future taxable income in the appropriate state jurisdiction. Significant factors that could negatively impact Telular’s determination of the recognition of the net deferred tax assets would be changes in the ownership of Telular and changes in tax laws and rates. Based on Internal Revenue Code Section 382 (“Section 382”), changes in the ownership of Telular may limit the utilization of net operating loss carryforwards. Any Section 382 limitation may require that Telular record an additional valuation allowance against its deferred tax assets. Management is not aware, at this time, of any such ownership changes that would have a negative impact on the recognition of the net deferred tax assets. Any reduction in future taxable income may require that Telular record an additional valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in such period and could have a material impact on Telular’s future earnings.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. The State of Illinois increased its corporate income tax rate from 7.3% to 9.5% in January 2011. The State also suspended the use of net operating losses to offset current taxable income for three years. Telular implemented a tax strategy that would lower taxable income apportioned to Illinois, thereby lowering the current state tax payable. This strategy reduced Telular’s estimated use of future net operating losses in Illinois, resulting in the increase in the valuation allowance against the net deferred tax assets which increased Telular’s deferred tax provision. During fiscal 2010, Telular reversed $37.0 million of valuation allowance after a comprehensive assessment of deferred tax asset realizability that was triggered by the achievement of three years of cumulative book income. The primary rationale for the reversal of the valuation allowance and thus, the realization of deferred tax assets, is the assumption that Telular will generate sufficient future taxable income. This conclusion is based on forecasted taxable income over the period that existing net operating losses are scheduled to expire. Reasons that there is now sufficient forecasted taxable income include (1) the exit from the FCP market in fiscal 2007 which had been generating significant operating losses and (2) Telular’s continued focus in recent years towards growing its higher margin recurring service. With these key strategic changes, Telular’s current operating model provided the basis upon which it was reasonable to assume that taxable income would continue. Telular’s taxable income forecast that was used as the basis for this determination used a conservative estimate for taxable income growth from 2010 through 2016, and no growth thereafter. Further, it did not incorporate any new business lines or depend upon any material transaction such as an acquisition or any other unusual or non-routine event to achieve the results necessary in order to realize the estimated taxable income.
Under the uncertain tax position provisions of ASC 740, Income Taxes, Telular would recognize liabilities for tax issues in the U.S based on Telular’s estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities would be recorded in income taxes in the Consolidated Balance Sheets. As of September 30, 2011, Telular has no uncertain tax positions recorded in its financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The discussion of recently issued accounting pronouncements is hereby incorporated by reference from Item 8, notes to consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Telular 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 Telular’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. Telular believes its exposure to market risk fluctuations for these investments is not material as of September 30, 2011.
Financial instruments that potentially subject Telular to significant concentrations of credit risk consist principally of trade accounts receivable, particularly from international customers. To reduce its exposure to the credit risks of international customers, Telular generally seeks payment prior to shipment or receives irrevocable letters of credit that are confirmed by U.S. banks. In some instances when Telular extends credit to foreign customers without the protection of prepayment or letters of credit, Telular performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible.
To mitigate the effects of currency fluctuations on Telular’s results of operations, Telular conducts all of its international transactions in U.S. dollars.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1.
The following financial statements are included in this document.
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2011 and 2010
Consolidated Statements of Operations for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Telular Corporation
We have audited the accompanying consolidated balance sheets of Telular Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2011. Our audits of the basic consolidated financial statements included the financial statement schedules listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Telular Corporation and subsidiaries as of September 30, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2011, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 14, 2011 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Chicago, Illinois
December 14, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Telular Corporation
We have audited Telular Corporation’s (a Delaware Corporation) internal control over financial reporting as of September 30, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Telular Corporation’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, 2011, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Telular Corporation as of September 30, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended September 30, 2011, and our report dated December 14, 2011 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Chicago, Illinois
December 14, 2011
TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
See accompanying notes
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
See accompanying notes
TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
See accompanying notes
TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
See accompanying notes
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
1. Description of Business
Telular Corporation (“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 Telular’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 Telular 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
Telular’s revenue is primarily generated from three sources:
·
The sale of hardware units, under non-recurring agreements;
·
The provision of monitoring services, under recurring agreements; and,
·
The provision of ancillary services such as installation and non-warranty repairs and royalty revenue.
Revenue is recognized when persuasive evidence of an agreement exists, the hardware unit or the service has been delivered, fees and prices are fixed and determinable and collectability is probable when all other significant obligations have been fulfilled.
Telular recognizes revenue and associated costs from hardware unit sales at the time of shipment of products which is when title transfers. Hardware unit discounts are recorded as a reduction in revenue in the same period that the revenue is recognized. Telular offers customers the right to return hardware units that do not function properly within a limited time after delivery, see Warranty section below. Telular continuously monitors and tracks such hardware unit returns and records a provision for the estimated amount of such future returns, based on historical experience. While such returns have historically been within expectations, Telular cannot guarantee that it will continue to experience the same return rates that it has experienced in the past. Any significant increase in hardware unit failure rates and the resulting credit returns could have a material adverse impact on operating results for the period or periods in which such returns materialize.
Monitoring service revenue is recognized at the time the service is provided. Payments received in advance of providing monitoring services are deferred and recognized over the period in which the service is delivered. Costs associated with providing the monitoring service are recorded when the service is provided.
For those arrangements that include multiple deliverables, Telular follows the guidance in Accounting Standard Codification (“ASC”) Subtopic 605-25, as amended by Accounting Standards Update (“ASU”) 2009-13. ASC Subtopic 605-25 established criteria for determining if a revenue arrangement has multiple deliverables. ASU 2009-13 amended the multiple-element revenue guidance to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item, and (2) eliminate the use of the residual method of allocation and instead required that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. Certain multiple-element revenue arrangements include both product and monitoring services. Telular has determined that the revenue from multiple-deliverable arrangements has met the criteria for treating each revenue source as a separate element. Consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method, based on Telular’s best estimate of selling price. Key factors that are considered when establishing a selling price are the industry segment to which the products and services are sold, estimated selling price of our competitors, where available, and an internally established gross margin range. Product revenue is billed and recognized upon shipment to the customer while monitoring services revenue is billed periodically, usually monthly, and recognized when the service is provided.
Telular recognizes ancillary service revenues when the service is delivered. Costs associated with these services are recorded in the period the service is delivered. Royalty revenue, which is based on a percentage of sales by the licensee, is estimated by Telular, based upon historical data provided by the licensee, in the period in which management estimated the sales have taken place. Telular periodically reconciles these estimates to the actual payments received from the licensee, adjusting revenue accordingly. Historically, Telular’s estimates have not been materially different than the payments received from the licensee.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Telular’s revenues are recorded net of sales taxes.
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 Telular 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 Telular’s investments of cash in money market funds and the possibility that the per unit value of these funds may decline below $1.00. As of September 30, 2011 and 2010, the per unit value of these funds was $1.00.
At September 30, 2011 and 2010, the majority of Telular’s cash and cash equivalents are maintained at one institution, Silicon Valley Bank (“SVB”), and are federally insured only up to $250. Telular 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. Credit risks with respect to trade accounts receivables are limited due to the diversity of customers comprising Telular’s customer base. For international sales, Telular generally receives payment in advance of shipment or irrevocable letters of credit that are confirmed by U.S. banks. Telular performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible.
Inventories and Reserve for Obsolescence
Inventories include purchased raw materials and finished goods purchased from contract manufacturers. 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 method. Telular records a reserve for obsolete or excess inventory. Telular 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. Telular 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. Telular 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.
Telular reviews for impairment of intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Telular evaluates recoverability of 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, see list below, Telular measures the impairment based on a projected discounted cash flow using a discount rate that incorporates the risk inherent in the asset.
Potential Impairment Indicators:
·
Significant underperformance relative to expected historical or projected future operating results;
·
Significant changes in the manner of use of the acquired assets or the strategy for the overall business;
·
Significant negative industry or economic trends; and,
·
Significant decline in Telular’s stock price for a substantial period.
On January 7, 2011 Telular acquired certain assets and liabilities underlying the SMARTank line of business from SmartLogix, Inc. (“SmartLogix”) (see Note 21). Telular recorded goodwill of $4,343 as a result of the purchase.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Telular evaluated the impairment of goodwill in the third quarter of fiscal 2011 and 2010 as part of its annual review. Based upon the goodwill impairment test, Telular determined that the goodwill of $7,502 and $3,159 was not impaired in fiscal 2011 and 2010, respectively. Additionally, no triggering events occurred in either the first, second or fourth quarters of both fiscal 2011 and fiscal 2010.
Intangible assets consist of customer relationships, capitalized technology, licensing agreements, patents and trademarks. The customer relationships and capitalized technology were recorded as part of the acquisition of the SMARTank line of business or purchased during the fiscal year. They were recorded at fair value and 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, 2011 and 2010.
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 $1,045, $855 and $789 for 2011, 2010 and 2009, respectively.
Income Taxes
Telular 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. Telular recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Telular does not include interest and penalties related to income tax matters in income tax expense.
Earnings Per Share
Basic earnings 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 earnings 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. In the event of a net loss for the period, both basic and diluted earnings per share of common stock are computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
The following table reconciles the dilutive effect of common stock equivalents:
The following stock options and warrants were excluded as being antidilutive from the shares outstanding used to compute diluted earnings per share for the years ended September 30:
The weighted average exercise prices of the stock options for 2011, 2010 and 2009 were $4.13, $4.04 and $4.06, respectively.
Stock-Based Compensation
Telular has an officer and employee stock incentive plan and a non-employee director stock incentive plan (See Note 13). Telular calculates the cost of restricted stock awards and restricted stock units using the fair market value of Telular’s common stock as noted on the NASDAQ on the date of grant. Telular calculates the cost of stock option 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 Telular’s common stock, a risk-free interest rate, a dividend yield on Telular’s common stock, an estimated forfeiture rate and the expected term of the option.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Telular valued stock options granted using the Black-Scholes valuation method using the following assumptions for the years ended September 30:
Telular did not grant any stock options in fiscal year 2011.
Telular recognized stock-based compensation expense as follows for the years ended September 30:
Fair Value of Financial Instruments
At September 30, 2011 and 2010, Telular’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, 2011, 2010 and 2009, were $2,623, $3,010 and $2,974, respectively, and are included in engineering and development expense.
Shipping and Handling Costs
Shipping and handling costs of $468, $349, and $482 were included in cost of sales for the years ended September 30, 2011, 2010 and 2009, respectively.
Warranty
Telular provides warranty coverage for a period of 12 months on its tank monitoring equipment, 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.
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.
Segment Reporting
Telular presents its consolidated financial statements as one reportable segment. The determination of a single reporting segment was made under ASC 280, Segment Reporting, as substantially all of the Telular’s business operations have similar economic characteristics and general expenses are not allocable.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Reclassifications
As described in Note 22, the amounts in the accompanying Consolidated Balance Sheets, the Consolidated Statements of Operations and the Consolidated Statements of Cash Flows have been reclassed to reflect the discontinuance of the FCP segment. Certain general and administrative expenses approximating $510 for fiscal year 2009 have been reclassed to sales and marketing in the prior years to be consistent with the current year presentation. These expenses relate to a department whose focus and activities have changed and are more properly associated with the sales function. Additionally, non-income business tax expenses have been reclassed from other income and expenses to general and administrative expenses in the prior years to be consistent with the current year presentation.
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on impairment testing of goodwill. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting units is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350, Intangibles - Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. This update is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. This guidance is effective for Telular’s first quarter in fiscal year 2012. Telular does not anticipate the adoption of this update to have a significant impact on the results of operations or financial position.
3. 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:
As of September 30, 2010, Telular had a trade receivable balance outstanding past due of $3,781 from SmartLogix. This receivable balance became part of the consideration for the purchase of the SMARTank business line (see Note 21).
4. Inventories
Inventories consist of the following:
The reserve for obsolescence increased by $241 for older generation units that are no longer actively being marketed as Telular’s newer products have a lower production cost.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
5. Property and Equipment
Property and equipment consists of the following:
6. Goodwill and Intangible Assets
Goodwill as of September 30, 2011 and 2010 is as follows:
The increase in goodwill of $4,343 relates to the purchase of the SMARTank business unit from SmartLogix. See footnote 21 - Business Combination, for a further discussion of the purchase of the SMARTank business unit. The goodwill associated with this purchase is deductible for income tax purposes over a 15 year period.
As a result of purchasing the SMARTank line of business on January 7, 2011, Telular recorded $2,900 of intangible assets in accordance with generally accepted accounting principles for business combinations. The intangibles associated with this purchase are deductible for income tax purposes over a 15 year period. Additionally, in fiscal 2011, Telular incurred $14 of costs related to new patents and trademarks. These assets were not complete and therefore have not been amortized in fiscal 2011.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Telular is amortizing these intangible assets over a period of 24 to 96 months. The balances as of September 30, 2011 and 2010 are as follows:
Amortization expense for the remaining estimated useful life of the acquired intangible assets is as follows for the years ending September 30:
7. Accrued Liabilities
Accrued liabilities consist of the following:
8. Accrued Warranty
The following table is a summary of Telular’s accrued warranty obligation for continuing operations:
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
9. Line of Credit
On September 23, 2010 Telular executed the First Amendment to the Loan and Security Agreement (the “First Amendment”) with SVB. The First Amendment extended the terms and conditions of the New Agreement through December 23, 2010 which 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. Telular had 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%. In connection with the First Amendment, Telular paid an amendment fee of $4 subsequent to September 30, 2010.
On January 22, 2011, Telular executed an Amended and Restated Loan and Security Agreement with SVB (the “Amended Loan Agreement”). Under the Amended Loan Agreement, the term was extended for a new two year period, and total maximum borrowings remain at $10 million. Though many of the terms and conditions were unchanged, including the maximum interest rates, some key differences include the ability for Telular to borrow up to $7 million under a revolving line of credit, with the ability to convert up to $5 million of borrowings under the revolver into a three year term loan. Additionally, the amount available under the facility is no longer limited by the amount of eligible accounts receivable under the new agreement and the First Amendment, Telular 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, 2011 and 2010, Telular had no outstanding borrowings and was in full compliance with all financial covenants. An $18 commitment fee was paid by Telular and will be amortized over the new term of the loan.
10. Income Taxes
Telular’s has provided for income taxes based on U.S tax laws and rates. 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 2011, 2010 and 2009, income tax expense (benefit) consisted of the following:
In fiscal 2009, Telular did not record a deferred tax provision because a full valuation allowance has been provided against the net deferred tax assets. In fiscal 2010, Telular determined that it was more likely than not that it would be able to recognize, in the future, the benefits of certain deferred tax assets. Therefore, the valuation allowances associated with these deferred tax assets was reversed and a deferred tax benefit was recorded. The deferred tax provision for fiscal 2011 represents the utilization of deferred tax assets, primarily net operating loss carryforwards (“NOLs”). The valuation allowance associated with these deferred tax assets was reversed to reflect the utilization of the net deferred tax assets and the expiration of certain NOLs.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
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, 2011, Telular had net operating loss carryforwards (“NOLs”) of approximately $85,790 for income tax purposes that will expire in varying amounts from 2012 through 2028.
Telular accounts for uncertainties in income taxes pursuant to ASC 740 (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109), (“FIN 48”). The guidance 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, Telular 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, Telular measures the tax benefit at the percentage that is cumulatively greater than 50% likely of being realized upon ultimate settlement with the relevant tax authority. Accordingly, Telular has determined that there is a less than 50% likelihood that its research and development (R&D) tax credits would be sustained upon audit as Telular has not completed gathering the necessary documentation required by the taxing authority to substantiate the credit. In fiscal year 2009 Telular had a full valuation allowance against the net deferred tax assets. In fiscal 2010, Telular has eliminated this deferred tax asset because Telular does not plan on taking these credits on future tax returns. This has no impact on Telular’s effective tax rate.
In fiscal 2011, Telular had no reportable uncertain tax positions under FIN 48.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Telular does not include interest and penalties related to income taxes, including unrecognized tax benefits, within the provision for income taxes.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
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 Telular’s deferred tax assets are as follows:
In fiscal 2010, Telular, as a result of three years of cumulative book tax income, analyzed the need for a full valuation allowance against its net deferred tax assets. This analysis considered all available positive and negative evidence including Telular’s past operating results, the existence of cumulative losses and Telular’s forecast of future taxable income. In estimating future taxable income, Telular developed assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, the utilization of net operating loss carryforwards to offset taxable income and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates Telular is using to manage the underlying business. In fiscal 2010, the valuation allowance decreased by $37,014, primarily due to the valuation allowance reversal and the expiration of unused NOLs. In fiscal 2011, the valuation allowance decreased by $5,421 primarily due to expiring NOLs. The remaining valuation is for state NOLs that Telular anticipates will expire unutilized in future periods.
In connection with accounting for stock-based compensation, Telular elected to follow the tax ordering laws to determine the sequence in which deduction, net operating loss carryforwards and tax credits are utilized.
Telular files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. As of September 30, 2011, Telular is no longer subject to U.S. federal examination by taxing authorities for years prior to 2008. Income tax returns for fiscal years 2008, 2009 , 2010 and 2011 are still open for examination. However, utilization of net operating loss carryforwards that were generated in years prior to 2008 may result in a prior tax year being open for IRS examination.
Telular has concluded Illinois, New York and Texas state audits for years 2004 through 2006. Tax years 2007 through 2011 remain open to examination by multiple state taxing jurisdictions.
Telular also files sales and use tax returns in various states. Telular has concluded Illinois and California for the period October 1, 2007 through September 30, 2010 and New York sales and use tax audits for March 1, 2007 through February 28, 2010. Tax years 2007 through 2011 remain open to examination by multiple state taxing jurisdictions.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Based on Internal Revenue Code Section 382, changes in the ownership of Telular may limit the utilization of net operating loss carryforwards of Telular. Any limitation to the utilization of NOLs may result in the unused NOLs expiring and may require that Telular record an additional valuation allowance against its deferred tax assets.
11. Commitments
Telular occupies certain facilities and rents certain equipment under various operating lease agreements expiring at various dates through February 28, 2015. Telular leases office and warehouse facilities in Florida, Georgia and Illinois under operating leases that expire from December 2012 through February 2015. 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, 2011, 2010, and 2009 was $760, $788 and $875, respectively. Future minimum obligations for continuing operations under noncancelable operating leases are as follows:
On September 11, 2006, Telular entered into an agreement with Speedy-Tech Electronics Ltd. (Speedy) relating to the manufacturing of final assemblies of Telular’s products. Either party may terminate the agreement upon 90 days prior written notice to the other party. Under the agreement, Telular has the right to offset amounts due to Telular from Speedy against amounts owed to Speedy by Telular. As of September 30, 2011, Telular had $2,266 in open purchase commitments pursuant to this agreement.
On January 5, 2009, Telular entered into an agreement with Creation Technologies Wisconsin Inc. (“Creation”) under which Creation will provide fulfillment services and manufacture final assemblies of certain of Telular’s products. Either party may terminate the agreement upon six months prior written notice to the other party. Under the agreement, Telular has the right to offset amounts due to it from Creation against amounts owed to Creation by Telular. As of September 30, 2011, Telular had $1,348 in open purchase commitments with Creation.
12. Redeemable Preferred Stock and Preferred Stock
At September 30, 2011 and 2010, Telular 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, Stock Options and Stock Awards
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, Telular issued warrants to Wells Fargo convertible into 50,000 shares of Telular’s Common Stock. The warrants, which remain outstanding, have a strike price of $16.29 per share and do not have an expiration date.
On July 25, 2008, Telular’s Board approved a plan to repurchase up to $5,000 of Telular’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 fiscal 2010, 123,816 shares were repurchased under the plan at a cost of $412. No shares were repurchased in fiscal 2011. Treasury stock is recorded at cost and is presented as a reduction to stockholders’ equity.
Telular 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 and stock awards 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 Telular pursuant to the Plans.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
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. Stock awards in the form of restricted stock units (“RSUs”) have been issued to non-employee directors under the Non-Employee Stock Incentive Plan. Additionally, performance stock units (“PSUs”) have been issued to officers and employees under the Stock Incentive Plan and the 2008 Employee Stock Incentive Plan.
The following table summarizes the number of Common Shares reserved and available for issuance under the Plans at September 30, 2011:
Stock Options
The following table displays all stock option activity as of September 30, 2011 including stock options granted under the Plans and the Stock Option Agreements:
The following table summarizes information about options outstanding at September 30, 2011:
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Stock option activity for 2011 was as follows:
Total intrinsic value of options exercised for 2011, 2010 and 2009 was $302, $83 and $13 respectively. At September 30, 2011, the total compensation cost of non-vested awards not yet recognized was $746. The weighted-average period over which the total compensation cost of non-vested awards not yet recognized is expected to be 1.21 years as of September 30, 2011.
Stock Awards
The following tables summarize RSU and PSU activity under the Plans during the years ended September 30, 2011, 2010 and 2009:
(1) Represents dividend equivalent units credited to the directors and employees based upon their RSU
holdings on the dates Telular paid their quarterly dividends.
(2) Represents additional shares issued to employees after final performance metrics exceeded specified targets.
Additional shares were finalized and issued on November 8, 2011.
(3) Represents the number of shares expected to be issued after all PSUs are vested.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Telular issued 34,868, 48,353 and 188,202 RSUs to its directors, valued at $235, $235 and $284 for their services in fiscal years 2011, 2010 and 2009, respectively. In fiscal 2009, 30,202 RSUs were cancelled when one of the directors retired before his units were vested and 7,550 units became vested and were converted to Telular’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 Telular’s ownership. Telular calculates the cost of restricted stock awards and restricted stock units as the fair market value of Telular’s common stock on the date of grant. Additionally, under the terms of the Restricted Stock Agreement holders of RSUs will receive a dividend equivalent unit (“DEU”) each time a dividend is paid on Telular’s common stock. During fiscal 2011, Telular issued 55,377 DEUs to its directors valued at $303. These DEUs were recorded as a dividend on common stock.
On June 30, 2010, it was determined that the RSU’s include a provision that permits the directors to select either a cash payment in lieu of issuance of common stock or the conversion of the RSU into common stock. The cash payment feature is limited to the fair value of the common stock as of the date of grant. This provision created a tandem award where there are in effect two awards included within the RSU. The first part of the award is the cash payment limitation, which is accounted for as a liability, and the second part of the award is accounted for as an option. Accordingly, Telular revised its accounting for the RSU’s to reclassify $324 of stock compensation expense previously identified in shareholders’ equity to reflect this liability. As a result of this revision, Telular recorded an additional non-cash compensation charge to operations of $115, which is included in the stock based compensation expenses related to stock options. Subsequent to June 30, 2010, the Board of Directors approved a modification to the RSU agreement eliminating the cash payment provision. The modification eliminated the liability that was previously associated with the cash payment option and valued the RSUs as a new grant. Telular recorded a non-cash compensation charge of $90 to operations in the fourth quarter of fiscal 2010 and $124 in fiscal 2011 for the new grant.
In connection with the announcement of a special cash dividend in the first quarter of fiscal 2011, the Compensation Committee of Telular’s Board of Directors approved the distribution of a special compensation award to be distributed to the current employee and director holders of Telular’s stock options. The purpose of this award was to compensate such holders for the loss in value associated with the special cash dividend that was distributed. The amount of this special bonus was $1,136, of which $661 was paid in cash and $475 was paid in Telular common stock.
On February 1, 2011, Telular awarded 157,200 performance stock units (“PSUs”) to officers and employees, valued at $1,060, based on the price of Telular’s common stock on the date of issuance. These PSUs will be earned based on the level of achievement of certain fiscal 2011 performance measures and will vest ratably from the grant date through September 30, 2013. The actual number of performance based PSUs earned could fluctuate between 0% - 130% of the original grant, depending on the actual level of achievement of the performance targets. Each quarter, an estimate will be made as to the most likely level of achievement of the performance targets. The amount of expense will be adjusted accordingly until the final determination of earned PSUs is made subsequent to Telular’s fiscal 2011 year end. As of September 30, 2011, the determination date, it was determined that the officers and employees achieved 102% of the performance targets, resulting in 3,177 additional PSUs earned valued at $21. At the determination date, the earned performance based PSUs will vest as follows: one-third immediately, one-third on September 30, 2012 and the remaining one-third on September 30, 2013. Upon vesting, providing the recipient remains employed by Telular, Telular will issue common stock to the recipient. The expense will be recorded on a pro-rata basis over the vesting period. During fiscal 2011, Telular issued 7,376 DEUs to its officers and employees valued at $48. These DEUs were recorded as a dividend on common stock.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
14. Dividends
On November 4, 2010, the Board of Directors approved a special one-time cash dividend of $1.00 per share of common stock and a regular quarterly dividend of $0.10 per share of common stock, both of which were paid on November 22, 2010 to shareholders of record on November 15, 2010. In connection with the distribution of the dividends, Telular issued DEUs to director holders of RSUs at a total value of $219. The DEUs were then converted to RSUs at a per-unit value of $5.16, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of November 22, 2010. Telular paid $16,373 for the cash dividend and issued 42,422 RSUs.
On January 27, 2011, Telular declared a regular quarterly dividend of $0.10 per share of common stock payable on February 22, 2011 to shareholders of record on February 14, 2011. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $43. The DEUs were then converted to RSUs at a per-unit value of $7.42, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of February 21, 2011. Telular paid $1,504 for the cash dividend and issued 5,843 RSUs.
On May 5, 2011, Telular declared a regular quarterly dividend of $0.10 per share of common stock payable on May 23, 2011, to shareholders of record on May 16, 2011. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $44. The DEUs were then converted to RSUs at a per-unit value of $6.22, which represented the average of the high and low selling prices of Telular common stock traded on the dividend payment date of May 23, 2011. Telular paid $1,508 for the cash dividend and issued 7,068 RSUs.
On July 28, 2011, Telular declared a regular quarterly dividend of $0.10 per share of common stock payable on August 22, 2011, to shareholders of record on August 15, 2011. In connection with the distribution of the dividends, Telular issued DEUs to director and employee holders of RSUs at a total value of $45. The DEUs were then converted to RSUs at a per-unit value of $6.02, which represents the average of the high and the low selling prices of Telular common stock traded on the dividend payment date of August 22, 2011. Telular paid $1,512 for the cash dividend and issued 7,420 RSUs.
15. Major Customers
For the years ended September 30, 2011 and 2010, Telular derived approximately $18,915 (37%) and $17,782 (38%) respectively, of its total revenues from one customer located in the United States. Trade accounts receivable from this customer totaled $1,795 and $549 as of September 30, 2011 and 2010 respectively. For the year ended September 30, 2009 Telular derived approximately $20,981 (44%) of its total revenue from two customers located in the United States.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
16. Export Sales
Telular exports its products to three regions around the world: Central American/Latin American (CALA), Europe/ Africa (EA) and Asia/Middle East (AME). Export sales are summarized in the table below:
17. Contingencies
Telular is involved in various legal proceedings that arose in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of such proceedings will not have a material adverse effect on Telular’s consolidated results of operations, cash flows or financial position.
18. Employee Benefit Plan
Telular sponsors a defined contribution plan under section 401(k) of the Internal Revenue Code. The plan covers substantially all employees of Telular. Telular may match employee contributions on a discretionary basis. Telular matched $152, $129 and $93 for the years ended September 30, 2011, 2010 and 2009, respectively. The matched amounts are included in operational expenses for Telular.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
19. Supplemental Disclosures of Cash Flow Information
20. Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended September 30, 2011 and 2010.
Due to rounding in earnings per share, the sum of the quarters may not be equal to the full year.
21. Business Combinations
On January 7, 2011, Telular acquired certain assets and assumed certain liabilities underlying the SMARTank line of business of SmartLogix, Inc. (“SmartLogix”), Telular’s largest value added reseller of TankLink tank monitoring solutions. Telular also entered into a Sales and Service Agreement (“Service Agreement”) with SmartLogix. The purchase will be accounted for using the purchase method in accordance with Accounting Standards Update: Business Combinations (Topic 805), (“ASU 805”).
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
Pursuant to the Asset Purchase Agreement (the “Agreement”), the aggregate purchase price was $7,921, which consisted of: $2,294 of cash paid directly to SmartLogix, $4,484 applied to the existing trade receivable balance due to TankLink from SmartLogix, and $1,143 of accrued earn-outs. Under the Agreement, Telular agreed to purchase certain net working capital assets for cash, such as trade accounts receivables, inventory, leased monitoring equipment, and trade accounts payable and deferred revenue. The total value of the net working capital of approximately $678 is included in the total cash paid to SmartLogix. Pursuant to an earn-out provision contained in the Agreement, SmartLogix has the ability to earn a total of $2,400 over a two year period depending on the future performance of SMARTank. At September 30, 2011, Telular re-assessed the potential payments associated with the earn-out provisions and decreased the accrued earn-out balance $79 to $1,064. The benefit was recorded in selling and marketing expenses.
Under the Service Agreement, Telular appointed SmartLogix as an exclusive sales representative for the purpose of selling tank monitoring equipment to customers in the fuels and lubricants market. Pursuant to the terms in the Service Agreement, Telular will pay SmartLogix a 20% commission on gross product revenue, as well as a commission on service revenue earned on the monitoring units sold, typically calculated as 3 months of related service revenue. The initial term of the Service Agreement is two years and may be renewed for an additional year.
The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition:
The following summarized unaudited pro forma financial information for the full years ended September 30, 2010 and 2011, assumes the acquisition occurred as of October 1, 2009 and October 1, 2010, respectively:
The pro forma results included adjustments for depreciation of property and equipment acquired, amortization of intangibles acquired, the elimination of certain selling and marketing and general and administrative expenses, the reduction of interest income as a result of the elimination of accounts receivable due to TankLink that were forgiven as part of the consideration for the purchase and the adjustment of income tax expense. 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, 2009 or on October 1, 2010, nor are they necessarily indicative of future consolidated results of operations.
TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Share Data)
22. Discontinued Operations
During July 2007, Telular formulated a plan to sell the net assets of its Fixed Cellular Phone (“FCP”) segment and exit the cellular phone market. As required by the Property, Plant and Equipment Topic of the FASB Accounting Standards Codification, Telular 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, Telular determined it would be unable to secure a buyer of the FCP business unit. As a result, Telular made a strategic decision to abandon the FCP business effective June 30, 2008. As of September 30, 2010, all of the assets of the business have been disposed of or collected and there are no remaining liabilities. In fiscal 2011 and 2010, there were no operational transactions related to the discontinued business unit. In fiscal 2009, revenues, cost of sales and operating expenses for discontinued operations were $1,597, $1,877 and $139, respectively resulting in a $419 loss from discontinued operations.
The following table summarizes the components of discontinued operations reported on the Consolidated Statements of Cash Flow for the year ended September 2009:
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 Telular and would not be expected to be eliminated or reduced as a result of disposing of the FCP segment.
23. Subsequent Events
On November 10, 2011, Telular announced the declaration of a quarterly dividend. The dividend of $0.11 per share was paid on November 29, 2011 to shareholders of record at the close of business on November 22, 2011. The dividend was paid in cash and in additional RSUs, as required by the restricted stock agreement. The cash portion of the dividend was $1,670 and was paid to holders of Telular’s common stock on the date of record. Holders of RSUs, on the date of record, received an additional 7,146 RSUs valued at $51. The effect on Telular’s financial statements was to reduce cash for $1,670, increase non-cash compensation for $51 and decrease equity for $1,721.
On December 3, 2011, Telular entered into Merger Agreement (the “Agreement”) to purchase 100% of the capital stock of SkyBitz, Inc. (“SkyBitz”). SkyBitz provides mobile resource management solutions focusing on over-the-road tracking via satellite. Skybitz’s satellite-based technology provides real-time visibility of many asset types, including truck trailer, intermodal containers, sea-going containers, rail cars, power generators and rental equipment. The purchase will be accounted for using the purchase method in accordance with ASU 805.
Under the terms of the agreement, Telular will pay consideration of $42,000, comprised of $35,000 in cash and $7,000 of Telular’s common stock. The cash portion of the consideration is anticipated to be funded with a $30,000 five year term loan from SVB and $5,000 from Telular’s cash on hand. The rate on the term loan will either be based on LIBOR or Prime rate determined quarterly based upon the leverage ratio reported by Telular and at no time will the interest rate be less than 3%. The loan will be collateralized by all of Telular’s assets, including intellectual property. The number of shares to be issued at closing shall be determined based on a per share price equal to the 10-day weighted average share price prior to the date of the execution of the definitive agreement (the “Execution Date Price”); provided, however, if the 10-day weighted average share price prior to the closing date ( the “Closing Date Price”) is less than the Execution Date Price, the number of shares issued at closing shall be determined based on a per share price equal to the greater of (a) the Closing Date Price and (b) 85% of the Execution Date price; provided further, SkyBitz will not be obligated to close and may terminate the Agreement without further liability if the Closing Date Price is equal to or less than 50% of the Execution Date Price.
The acquisition is subject to the approval of a communications license transfer by the FCC and is expected to close in 60-90 days. Estimated fair value of assets acquired and liabilities assumed and pro forma revenues and earnings are not yet available.
PART III
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Telular maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by Telular 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. Telular’s management assesses the effectiveness of Telular’s internal control over financial reporting using the criteria set forth by the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 Telular’s disclosure controls and procedures. Based on this evaluation, Telular’s CEO and CFO have concluded that Telular’s disclosure controls and procedures were effective. The CEO’s and CFO’s conclusion regarding Telular’s disclosure controls and procedures is based on management’s conclusion that Telular’s internal control over financial reporting was effective as described below.
Management’s Report on Internal Control Over Financial Reporting
Telular’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. Telular’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. Our internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Telular’s management assessed the effectiveness of Telular’s internal control over financial reporting as of September 30, 2011, 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, Telular’s management concluded that, as of September 30, 2011, Telular’s internal control over financial reporting was effective based on those criteria.
Grant Thornton LLP, an independent registered public accounting firm, who audited our consolidated financial statements included in the Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as stated in this report.
Changes in Internal Control Over Financial Reporting
Except as otherwise discussed below, there were no significant changes in Telular’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, Telular’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF TELULAR
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Election of Directors in Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, which is incorporated herein.
The Directors’ names and occupations are listed in Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012. Names and information about executive officers are provided in Item 1 of this filing.
Telular 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 Telular’s website at www.telular.com/profile/codes.asp. or a copy can be obtained free of charge by mailing a request to Telular’s headquarters at 311 South Wacker Drive, Suite 4300, Chicago, Illinois 60606-6622.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Executive Compensation in Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, which is incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Security Ownership of Certain Beneficial Owners and Management in Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, 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 Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, which is incorporated herein.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), reference is made to the information contained under the caption Certain Transactions in Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, which is incorporated herein.
ITEM 14.
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 Telular’s definitive proxy statement for the Annual Meeting of Shareholders to be held January 31, 2012, which is incorporated herein.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
1.
The following financial statements are included in Part II, Item 8 of this Form 10-K. Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2011 and 2010
Consolidated Statements of Operations for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Stockholders’ Equity for the years ended September 30, 2011, 2010 and 2009
Consolidated Statements of Cash Flows for the years ended September 30, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
2.
The following financial statement schedule, Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2011, 2010 and 2009 is filed as part of this report. All other financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the financial statements or notes thereto contained in Part II, Item 8 of this annual report.
Schedule II - Valuation and Qualifying Accounts
(1)
Amount represents the amortization of intangible assets related to the acquisitions of TankLink on October 1, 2008 and the SMARTank business unit on January 7, 2011.
(2)
Amount represents the change in the valuation amount for deferred taxes principally due to the expiration and utilization of net operating loss carryforwards.
(3)
Inventory disposed.
(4)
Accounts receivable written-off.
(5)
Amount represents the amortization of intangible assets related to the acquisition of TankLink on October 1, 2008.
(6)
Amount represents the change in the valuation amount for deferred taxes due principally to the reversal of the valuation allowance as a result of Telular's anticipated utilization of net operating loss carryforwards in future periods.
(7)
Amount represents the change in the valuation amount for deferred taxes due principally to the origination and utilization of net operating loss carryforwards. The valuation amount reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
(8)
Amount represents the opening balance of TankLink's reserve for inventory obsolescence at date of acquisition.
3.
Exhibits
Number Description Reference
3.1 Certificate of Incorporation Filed as Exhibit 3.1 to Registration Statement No. 33-72096 (the RegistrationStatement)
3.2 Amendment No. 1 to Certificate of Incorporation Filed as Exhibit 3.2 to the Registration Statement
3.3 Amendment No. 2 to Certificate of Incorporation Filed as Exhibit 3.3 to the Registration Statement
3.4 Amendment No. 3 to Certificate of Incorporation Filed as Exhibit 3.4 to Form 10-Q filed February 16, 1999
3.5 Amendment No.4 to Certificate of Incorporation Filed as Exhibit 3.5 to Form 10-Q filed February 16, 1999
3.6 By-Laws Filed as Exhibit 3.4 to the Registration Statement
4.1 Certificate of Designations, Preferences, and Rights of Series A Convertible Preferred Stock Filed as Exhibit 99.2 Form 8-K filed April 25, 1997
10.1 Nonqualified Stock Option Agreement, dated as of October 30, 2001, by and between Telular and Larry J. Ford Filed as Exhibit 10.42 to Form 10-K filed December 21, 2001
10.2 Telular Corporation Non-employee Directors’ Stock Incentive Plan February 14, 2003 Filed as Exhibit 10.22 to Form 10-Q filed
10.3
Employment Agreement with Joseph A. Beatty dated December 14, 2007
Filed as Exhibit 10.1 to Form 8-K filed December 19, 2007
10.4 Retention and Severance Agreement with Jonathan M. Charak dated March 17, 2008 Filed as Exhibit 10.1 to Form 8-K filed on March 19, 2008
10.5 Retention and Severance Agreement with George S. Brody dated July 29, 2008 Filed as Exhibit 10.1 to Form 8-K Filed on August 4, 2008
10.6 Form of Nonqualified Stock Option Plan Agreement Pursuant to the Telular Stock Incentive Plans Filed as Exhibit 10.6 to Form 10-K Filed on December 14, 2010
10.7
Form of Telular Corporation Restricted Stock Unit Agreement
Filed as Exhibit 10.7 to Form 10-K Filed on December 14, 2010
10.8
First Amended and Restated Non-Employee Director Stock Incentive Plan
Filed as Appendix A to Schedule 14A Filed on December 24, 2007
10.9
2008 Employee Stock Incentive Plan
Filed as Appendix B to Schedule 14A Filed on December 24, 2007
10.10
First Amended and Restated 2008 Employee Stock Incentive Plan
Filed as Appendix A to Schedule 14A Filed on December 18, 2009
10.11
Second Amended and Restated Non-Employee Director Stock Incentive Plan
Filed as Appendix B to Schedule 14A Filed on December 18, 2009
Subsidiaries of Registrant
Filed herewith
23.1 Consent of Grant Thornton LLP
Filed herewith
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
101.INS** XBRL Instance
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB** XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
** XBRL
information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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.
Signature
Title Date
/s/ JOSEPH A. BEATTY
President, Chief Executive December 14, 2011
Joseph A. Beatty
Officer and Director
/s/ JONATHAN M. CHARAK
Senior Vice President, December 14, 2011
Jonathan M. Charak
Chief Financial Officer and Secretary
/s/ ROBERT L. DEERING
Chief Accounting Officer December 14, 2011
Robert L. Deering
/s/ BETSY J. BERNARD
Chairperson of the Board December 14, 2011
Betsy J. Bernard
/s/ LAWRENCE S. BARKER
Director December 14, 2011
Lawrence S. Barker
/s/ BRIAN J. CLUCAS
Director December 14, 2011
Brian J. Clucas
/s/ LARRY J. FORD
Director December 14, 2011
Larry J. Ford
/s/ JEFFREY JACOBOWITZ
Director December 14, 2011
Jeffrey Jacobowitz
/s/ M. BRIAN MCCARTHY
Director December 14, 2011
M. Brian McCarthy
Exhibit Index
Number Description
Reference
Subsidiaries of Registrant
Filed herewith
23.1 Consent of Grant Thornton LLP
Filed herewith
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
101.INS** XBRL Instance
101.SCH** XBRL Taxonomy Extension Schema
101.CAL** XBRL Taxonomy Extension Calculation
101.DEF** XBRL Taxonomy Extension Definition
101.LAB** XRL Taxonomy Extension Labels
101.PRE** XBRL Taxonomy Extension Presentation
** XBRL
information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.