Telular Corporation 2001 Annual Report

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except per share data)1. DESCRIPTION OF BUSINESSTelular Corporation (the Company) operates in twobusiness segments, divided among its two principal productlines: PHONECELL ® , a line of cellular Fixed WirelessTerminals (FWTs), and TELGUARD ® , a line of Cellular AlarmTransmission Systems (Security Products). The Companydesigns, engineers, and manufactures component elementsand complete telecommunications equipment assembliesand other complementary products and markets suchproducts domestically and internationally by sale, lease,or license.2. SUMMARY OF SIGNIFICANTACCOUNTING POLICIESConsolidationThe consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries,Telular-Adcor Security Products and Telular International,Inc. All significant intercompany balances and transactionshave been eliminated.Revenue RecognitionProduct sales and associated costs are recognized at thetime of shipment of products or performance of services.Royalty revenue is calculated as a percentage of sales bythe licensee and is recognized by the Company uponnotification of sales by the licensee.Cash EquivalentsCash equivalents consist of highly liquid investmentsthat have maturities of three months or less from the dateof purchase.Financial InstrumentsFinancial instruments that potentially subject the Companyto significant concentrations of credit risk consist principallyof trade accounts receivable. Credit risks with respectto trade receivables are limited due to the diversity ofcustomers comprising the Company’s customer base.For international sales, the Company generally receivespayment in advance of shipment, irrevocable letters ofcredit that are confirmed by U.S. banks or purchasesinternational credit insurance to reduce its credit risk.The Company performs ongoing credit evaluations andcharges amounts to operations when they are determinedto be uncollectible.InventoriesInventories are stated at the lower of first in, first out(FIFO) cost or market.Business Combinations, Goodwill andOther Intangible AssetsIn 2001, the FASB issued Statement of Financial AccountingStandards (SFAS) 141, “Business Combinations” (SFAS 141)effective July 1, 2001, and SFAS 142, “Goodwill andOther Intangible Assets” (SFAS 142), effective for fiscalyears beginning after December 15, 2001. These standardschange the accounting for business combinations by,among other things, prohibiting the prospective use ofpooling-of-interests accounting and requiring companies tostop amortizing goodwill and certain intangible assets withan indefinite useful life created by business combinationsaccounted for using the purchase method of accounting.Under the new rules, goodwill and intangible assetsdeemed to have indefinite lives will no longer be amortizedbut will be subject to annual impairment tests in accordancewith the new standards. Other intangible assets willcontinue to be amortized over their useful lives.The Company is planning to early adopt and willapply the new rules on accounting for goodwill and otherintangible assets beginning in the first quarter of fiscalyear 2002. Application of the nonamortization provisionsof the new standards is expected to result in an increasein pretax income of $519 for the year ended 2002.ReclassificationsCertain amounts in the September 30, 2000 and 1999financial statements have been reclassified to conform tothe September 30, 2001 presentation.Reverse Stock SplitThe number of shares of the Company’s Common Stock(Common Stock) outstanding, the weighted averagenumber of Common shares outstanding and basic anddiluted net income (loss) per share amounts have all beenrestated to reflect the one-for-four (1:4) reverse stock splitof the Company’s Common Stock on January 27, 1999.Property and EquipmentProperty and equipment are stated at cost. Depreciationand amortization are computed using straight-line andaccelerated methods over the assets’ useful lives rangingfrom 3 to 10 years.24 TELULAR CORPORATION