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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended DECEMBER 31, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-22920
NUMEREX CORP.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 11-2948749
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1600 Parkwood Circle
Suite 200
Atlanta, Georgia 30339-2119
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (770) 693-5950
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value 10,391,104
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(Title of Class) (Number of Shares Outstanding
as of March 26, 2001)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (ii) has
been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
[ ] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of
the Registrant is $47,586,373(1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Annual Report to Shareholders for the
year ended December 31, 2000 are incorporated by reference in Part I and Part II
of this Report and certain provisions of the Company's Proxy Statement to be
filed in connection with its 2001 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit
Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Company's Common Stock outstanding, reduced by
the amount of Common Stock held by officers, directors and shareholders
owning 10% or more of the Company's Common Stock, multiplied by $6.75,
the last reported sale price for the Company's Common Stock on March
26, 2001. The information provided shall in no way be construed as an
admission that any officer, director or 10% shareholder in the Company
may be deemed an affiliate of the Company or that such person is the
beneficial owner of the shares reported as being held by him, and any
such inference is hereby disclaimed. The information provided herein is
included solely for record keeping purposes of the Securities and
Exchange Commission.
PRELIMINARY NOTE
UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES: (I) THE
"COMPANY" REFERS TO NUMEREX CORP. AND ITS WHOLLY-OWNED AND CONTROLLED
SUBSIDIARIES, (II) ALL REFERENCES TO COMMON STOCK IN THIS REPORT REFER TO THE
COMPANY'S CLASS A COMMON STOCK AND (III) ALL REFERENCES IN THIS REPORT TO FISCAL
YEARS ARE TO THE COMPANY'S FISCAL YEARS ENDED DECEMBER 31, 2000 AND OCTOBER 31
OF EACH PRECEDING YEAR.
TABLE OF CONTENTS
PAGE
Table of Contents (i)
PART I
Item 1. BUSINESS 1
Item 2. PROPERTIES 12
Item 3. LEGAL PROCEEDINGS 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 13
Item 6. SELECTED FINANCIAL DATA 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 14
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 14
Item 11. EXECUTIVE COMPENSATION 14
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 14
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14
LIST OF FINANCIAL STATEMENTS 14
LIST OF EXHIBITS 14
SIGNATURES 17
INDEX TO FINANCIAL STATEMENTS F-1
(i)
FORWARD-LOOKING STATEMENTS
THIS DOCUMENT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE, AMONG OTHER THINGS, STATEMENTS
REGARDING TRENDS, STRATEGIES, PLANS, BELIEFS, INTENTIONS, EXPECTATIONS, GOALS
AND OPPORTUNITIES. FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY WORDS
OR PHRASES SUCH AS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE,"
"ASSUME," "STRATEGY," "PLAN," "OUTLOOK," "OUTCOME," "CONTINUE," "REMAIN,"
"TREND," AND VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS, OR FUTURE OR
CONDITIONAL VERBS SUCH AS "WILL," "WOULD," "SHOULD," "COULD," "MAY," OR SIMILAR
EXPRESSIONS. ALL STATEMENTS AND INFORMATION HEREIN AND INCORPORATED BY REFERENCE
HEREIN, OTHER THAN STATEMENTS OF HISTORICAL FACT, ARE FORWARD-LOOKING STATEMENTS
THAT ARE BASED UPON A NUMBER OF ASSUMPTIONS CONCERNING FUTURE CONDITIONS THAT
ULTIMATELY MAY PROVE TO BE INACCURATE. MANY PHASES OF THE COMPANY'S OPERATIONS
ARE SUBJECT TO INFLUENCES OUTSIDE ITS CONTROL. THE COMPANY CAUTIONS THAT THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS AND
UNCERTAINTIES, WHICH CHANGE OVER TIME. THESE FORWARD-LOOKING STATEMENTS SPEAK
ONLY AS OF THE DATE OF THIS ANNUAL REPORT, AND THE COMPANY ASSUMES NO DUTY TO
UPDATE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AND FUTURE RESULTS COULD
DIFFER MATERIALLY FROM HISTORICAL PERFORMANCE.
ANY ONE OR ANY COMBINATION OF FACTORS COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S RESULTS OF OPERATIONS OR COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM FORWARD-LOOKING STATEMENTS OR HISTORICAL PERFORMANCE.
THESE FACTORS INCLUDE: THE PACE OF TECHNOLOGICAL CHANGE, VARIATIONS IN QUARTERLY
OPERATING RESULTS, DELAYS IN THE DEVELOPMENT, INTRODUCTION AND MARKETING OF NEW
WIRELESS PRODUCTS AND SERVICES; CUSTOMER ACCEPTANCE OF PRODUCTS AND SERVICES;
ECONOMIC CONDITIONS; THE INABILITY TO ATTAIN REVENUE AND EARNINGS GROWTH;
CHANGES IN INTEREST RATES; INFLATION; THE INTRODUCTION, WITHDRAWAL, SUCCESS AND
TIMING OF BUSINESS INITIATIVES AND STRATEGIES; COMPETITIVE CONDITIONS; THE
EXTENT AND TIMING OF TECHNOLOGICAL CHANGES; CHANGES IN CUSTOMER SPENDING, THE
LOSS OF INTELLECTUAL PROPERTY PROTECTION, GENERAL ECONOMIC CONDITIONS AND
CONDITIONS AFFECTING THE CAPITAL MARKETS. ACTUAL EVENTS, DEVELOPMENTS AND
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED OR PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN UNCERTAINTIES SET FORTH BELOW
AND ELSEWHERE IN THIS DOCUMENT. SUBSEQUENT WRITTEN OR ORAL STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS REPORT AND
THOSE IN THE COMPANY'S REPORTS PREVIOUSLY AND SUBSEQUENTLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
OVERVIEW
Numerex Corp. is a technology company comprised of operating
subsidiaries (the "Company") that develop and market a wide range of
communications products and services. The Company's primary focus is wireless
data communications utilizing proprietary network technologies. The Company
offers products and services in wireless data communications through
Cellemetry(R) and Data1Source(TM), and digital multimedia through PowerPlay(TM)
and IP Contact(TM). These services enable customers around the globe to monitor
and move information for a variety of applications from home and business
security to distance learning. In addition, the Company offers wireline alarm
security products and services, as well as telecommunications network
operational support systems.
The Company's primary strategic objectives are to:
o Implement a wireless data communications strategy which incorporates
the development, marketing and sale of Cellemetry(R), Uplink,
Data1Source(TM), Circuit Watch(TM), FastTrack Wireless Solutions(TM)
and related wireless network technology, applications, products, and
services.
o Acquire technologies, which complement and enhance the Company's
wireless data communications strategy.
o Acquire or develop lines of business, which complement the Company's
technology strategies, and are designed to enhance strategic
objectives, and augment shareholder value.
o Expand all business lines with a focus on a financial model of
recurring revenues.
The Company, through its Cellemetry LLC ("Cellemetry") joint venture
with BellSouth Wireless LLC ("BellSouth Wireless"), formerly BellSouth Wireless,
Inc., provides a cost effective, two-way wireless data
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communications network throughout Canada, Mexico, Paraguay and the U.S.A. with
plans to further expand in international markets. The cornerstone of the
Company's wireless strategy is the service, product and networks provided and
developed by Cellemetry.
The Company, through Uplink Security, Inc. ("Uplink"), a wholly owned
subsidiary of Cellemetry, provides a cost effective, alarm security products,
services, and related technical support utilizing Cellemetry(R) wireless data
communications technology. Utilizing Cellemetry(R), as a means of data
communications, combined with proprietary message processing and interface
technologies, the Company believes that it has positioned Uplink to be an
industry leader for cost effective wireless alarm communication. Cellemetry's(R)
interface technology provides the foundation of design and development of
applications and solutions in certain business sectors other than fixed alarm
security. In addition, the Uplink products and services complement the Company's
wireline technology for the fixed alarm security market.
Data1Source(TM), a proprietary and patent pending technology of the
Company, provides the Company another cost-effective means of transporting data
over digital wireless data networks. Through a centralized service bureau, the
Data1Source(TM) offering of Short Message Service ("SMS") provides TDMA, CDMA
and GSM wireless data carriers with a broad range of services including
web-based and e-mail-based text messaging, SMS Touch-Tone(TM) paging,
subscriber-customized Internet content services such as news headlines, sports
scores, stock quotes, and other customer-specific information. The Company plans
to increase the market penetration of its Data1Source(TM) service to wireless
data carriers. Data1Source(TM) development and marketing efforts derive from and
leverage the Company's core wireless data technology Cellemetry(R) and its
existing relationships with wireless data carriers.
Circuit Watch(TM) and Fast Track Wireless Solutions(TM), respectively
provide T-1 telecommunication network integrity monitoring and for users and
application developers a turnkey suite of interactive e-Web wireless telemetry
interface solutions, which monitor and control both fixed and mobile
geographically remote systems and applications both of which utilize the
Company's core wireless data technology Cellemetry(R) and deliver cost effective
and efficient product and service solutions.
The Company through its subsidiary, Broadband Networks, Inc.
("Broadband"), principally designs, develops, markets, and sells PowerPlay(TM)
and IP Contact(TM) digital multimedia products. PowerPlay(TM) and IP Contact(TM)
are designed for a wide range of applications, which require high quality
interactive video, audio and data communication. Corporate, educational or
medical Intranets can schedule or produce `on-demand' multimedia conferencing
between any combination of desktop workstations, mobile roll about projection
units, or dedicated conference rooms. Each station has access to all of the
resources of the entire network. This includes: secure point-to-point, or
multiple participants full motion video conferencing with far end device
control; central media libraries or servers, which provide media retrieval and
video-on-demand capability; secure on-demand gateways to national sites, public
switched networks and the Internet; compatibility/connectivity between any
combination of desktops, conference rooms, servers, or gateways; data and
document collaboration combined with real time full motion video; voice over IP
from any station to any station, or the world via a central gateway.
The Company's digital multimedia business also provides systems design,
products, integration services, installation, and operator training for
interactive voice, video, and data via fiber optic transport. This integration
of the Company's Broadband fiber optic transport expertise, to date, has been in
the area of educational enhancement through distance learning.
As an adjunct to its main focus, the Company also provides
telecommunications network operational support systems and services through its
subsidiary Digilog, Inc. ("Digilog"), to operating telephone companies and
equipment and services through its subsidiaries, DCX Systems, Inc. ("DCX
Systems") and DCX Systems (Australia) Pty Limited ("DCX Australia") to operating
telephone companies and the security industry.
Traditionally, the Company has derived significant revenues from
Derived Channel technology. This derived channel technology creates an inaudible
frequency on an existing telephone line below the voice communications spectrum
for data transmission ("Derived Channel"). In November 1999, the Company sold
its Derived Channel technology to British Telecommunications plc ("BT") for
(pound)12,500,000 (approximately $20,000,000). The terms of the transaction were
negotiated between the Company and BT at arm's length.
The Company determined that divesting the wireline technology to BT
strengthened the financial position
2
of the Company while promoting its wireless data communications strategic focus.
In addition to the purchase price, the Company retained, in exchange for
services, certain commercial interests in a telemetry venture on a revenue
sharing basis and a right to continue to market its Derived Channel technology
in North, Central and South America, South Korea and Australia. The Company also
entered into an agency agreement whereby it has the rights to market BT's
digital services platform ("DSP") a multi-functional gateway product for
wireless and wireline including its GSM wireless product in certain territories.
The sale to BT caused a material loss of the future revenues and
earnings associated with the Company's Derived Channel technology. The Company
determined, however, that the transition and focus to its wireless data
communications strategy coupled with increased liquidity outweighed a
substantial reduction of its wireline revenues and earnings. The Company also
reduced its dependence upon BT. There can be no assurance that the Company will
recover its revenues and earnings through its remaining lines of business or
successfully transition its business to a financial model of recurring revenues.
In connection with the divestiture of its Derived Channel business, the
Company made certain representations and warranties to BT. Although the Company
is not aware of any material event that could cause a material diminution of the
value it received upon the sale of its Derived Channel business, if BT were to
seek recovery with regard to the warranties, the purchase price for the
technology would be adversely affected.
BACKGROUND
The Company's business began in July 1992 with the acquisition of the
Derived Channel wireline business, including certain proprietary intellectual
property rights, rights to Derived Channel technology and rights to market such
technology in certain countries, including the United Kingdom. The Company has
expanded its business primarily through the acquisition of complementary
businesses, product lines, and proprietary technologies, including its
investments in Digilog and DCX Systems in 1994, Broadband and Uplink in 1997 and
subsequent investments in Uplink in 1998.
In May 1998, the Company, BellSouth Wireless and BellSouth Corporation
completed a transaction whereby Cellemetry, a joint venture between the Company
and BellSouth Wireless, was formed. Cellemetry is a Delaware limited liability
company owned 60% by the Company and 40% by BellSouth Wireless. The parties
entered into an operating agreement (the "Operating Agreement"), which deals
with, among other things, the conduct of the business of Cellemetry. In
addition, the Operating Agreement provides certain restrictions as to
distributions and the right to transfer ownership interests in Cellemetry.
Cellemetry is taxed as a partnership for federal, state, and foreign income tax
purposes.
In November 1999, the Company and BellSouth Wireless completed the
restructuring of the Cellemetry Operating Agreement. Under the terms of the
restructuring, the Operating Agreement has been modified ("First Amendment to
the Operating Agreement") and the Cellemetry Business Plan has been modified,
revised and extended through November 1, 2004 ("Modified Business Plan"). All
respective rights under the Operating Agreement that previously triggered on May
15, 2001, three years from the date of the formation of Cellemetry, have been
revised to trigger on November 1, 2002 and all financial performance tests have
been amended to reflect the Modified Business Plan. In addition, the price at
which the Company may, at its sole option, elect that BellSouth Wireless put its
ownership interest in Cellemetry to the Company has been revised and set at
$17,000,000.
The restructuring also permits Cellemetry to seek to find a strategic
investor ("Third Party Investment") to invest new capital in exchange for up to
15% of Cellemetry. In connection with any such Third Party Investment, the
Company's ownership interest in Cellemetry will not be diluted below 51% and
BellSouth Wireless's will not be diluted below 34%.
Under the First Amendment to the Operating Agreement, the Company, from
and including May 15, 1999, is no longer under an obligation to make any
additional capital contributions to Cellemetry. The Company committed to provide
up to $5,500,000 in interest bearing debt financing to Cellemetry.
Also under the First Amendment to the Operating Agreement, the Company
conveyed Uplink to Cellemetry. In addition, the Company issued to BellSouth
Wireless 30,000 shares of Series A Convertible Redeemable Preferred Stock of the
Company ("Preferred Stock"). The Preferred Stock is redeemable, at the
3
Company's option, commencing November 1, 2000, on the basis of a pre-set annual
redemption price per share. Also, the Preferred Stock, at BellSouth Wireless's
option, commencing November 1, 2003 or November 1, 2002 should the Company's
common stock exceed a pre-set market price for a given period of time, is
convertible into 625,000 shares of common stock of the Company, approximately 6%
of the Company's common stock. The Preferred Stock carries certain registration
rights for the common stock upon such conversion.
Also, in November 1999, as referred to above, the Company sold its
entire holdings in its wholly owned subsidiary, Bronzebase Limited
("Bronzebase") to BT. Bronzebase is an English limited liability company, which
owns all of the stock of Versus Technology Limited ("Versus Technology").
WIRELESS COMMUNICATIONS AND SECURITY
WIRELESS COMMUNICATIONS
PRODUCTS AND SERVICES
CELLEMETRY(R)
Cellemetry(R) is a means of wireless data communications that uses
excess capacity of the cellular telephone network's overhead control channels
and the SS7/IS-41 network protocol to deliver two-way short data messages,
without affecting the voice channels of the cellular network.
Using Cellemetry(R) technology, remote equipment or vehicles can be
polled, time-set, or autonomously exchange information with a customer's central
locations through the cellular network's control channels. Information gathered
is relayed to and from the customer's designated site for collection or for
response. Based on remote conditions, control actions can be relayed as well.
That means, for example, equipment can be turned on or off remotely, switches
and gates can be closed, and pumps triggered.
When used in combination with low-cost Global Positioning System (GPS)
applications, Cellemetry(R) radios can pinpoint the precise geographic location
of trucks, automobiles, railroad cars, barges, containers, or other movable
assets and signal control actions or operator response messages.
Cellemetry(R) Data Service is telemetry, or remote monitoring, over the
cellular telephone network. It provides a means of sending short, telemetry-like
messages over the cellular telephone system in a manner that is virtually
transparent to the cellular operator. Cellemetry(R) Data Service does not use or
impact voice channels, and is a patented technology of Cellemetry(R). Licensing
agreements have been negotiated with cellular carriers throughout Canada,
Mexico, Paraguay and the U.S.A. to make Cellemetry(R) services widely available.
Licensing agreements have also been negotiated with application developers and
radio manufacturers to provide Cellemetry(R) applications and equipment across
urban, rural, and industrial markets.
Cellemetry(R) Data Service enables messaging for many different
businesses. It can, for example, report alarm messages, utility meter readings,
vehicle and trailer location, and vending machine status. It is unique because
it uses the underutilized portion of the cellular system, the overhead control
channels, to convey short data messages without impacting or using the voice
channels. These control channels are used to transmit necessary information for
all call initiations (both incoming and outgoing) between the cellular system
and the cellular customer's equipment. The message handling capacity of these
control channels is far greater than is required by the existing cellular
system, even during the busiest times of the day.
The Cellemetry(R) Data Service operates in the same manner in which
roaming telephones operate in the cellular system. A roaming cellular telephone
is defined as a cellular telephone operating in any system other than its home
system. When a roaming cellular telephone is turned on, it recognizes the fact
that it is not in its home system and accordingly "registers" by sending its
Mobile Identification Number (MIN) and its Electronic Serial Number (ESN) to the
cellular system via one of the control channels. The cellular system recognizes
the roamer number and routes the MIN and ESN to the roamer's home system for
validation via a special network (SS7/IS41) which links all of the cellular
systems together across Canada, Mexico and the U.S.A. and parts of South and
Central America.
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Cellemetry(R) radios behave exactly like roaming telephones except the
cellular telephone switch's database is set to route the "registrations" (MIN
and ESN data) to the Cellemetry(R) Service Bureau, ("the Service Bureau")
connected to the same intra-cellular network. The MIN serves to identify the
Cellemetry(R) radio and the ESN is the data field, which contains the 32-bit
telemetry message. In addition, Cellemetry(R)'s centralized Service Bureau adds
a timestamp and the SS7/IS41 network adds point of origin data. The entire
Cellemetry(R) message, if expressed in binary, is 112 bits.
The centralized Service Bureau processes, stores, and routes the
Cellemetry(R) Data Service messages according to customer requirements. Some
applications may require immediate processing, as is the case with alarm
monitoring, while an application such as vending machine status may only need
the messages stored and transferred in a batch once a day.
UPLINK
Uplink, designs, develops and markets interface and routing
technologies that use Cellemetry(R) for security alarm communications
applications. Because Cellemetry(R) utilizes the existing cellular network and
inexpensive radio transmitters, Cellemetry(R) applications can quickly and
economically monitor and control equipment at remote locations.
Uplink markets wireless alarm communication equipment which is
installed at customer premises, administers and offers air time packages on a
consistent price basis, and provides technical services that route alarm signals
from the cellular networks to any central station in the country without
requiring modifications to the station's receiving equipment.
The Company believes that Uplink's products and airtime communications
charges are competitively priced. As a result of combining Cellemetry(R)
technology with low cost communication equipment and routing technologies,
significant improvements in security communication services are now available to
the industry.
The Company also believes that Cellemetry(R) and Derived Channel
technology, as security alarm communications platforms, may be complementary. As
a result, the technologies can be implemented independently or collectively.
DATA1SOURCE(TM)
Data1Source(TM), a service offering, is a wireless means of data
communications that utilizes the Short Message Service (SMS) messaging
capability of digital (TDMA, CDMA and GSM) cellular telephone networks and the
SS7/IS-41 network protocol to deliver digital data packets of approximately 200
bytes each, although multiple packets can be concatenated.
Data1Source(TM)'s proprietary and patent pending centralized service
processes, buffers, and routes the Data1Source(TM) Service messages to enable a
broad range of services for wireless data carriers, including web-based and
e-mail-based text messaging, SMS Touch-Tone(TM) paging, subscriber-customized
Internet content services such as news headlines, sports scores, stock quotes,
and other customer-specific information.
CIRCUIT WATCH(TM)
Circuit Watch(TM), a product and service offering, is a wireless
monitoring system for high-speed data lines. Utilizing the Cellemetry(R) data
network Circuit Watch(TM) facilitates the remote monitoring and reporting of T-1
circuit status.
The Company markets the Circuit Watch(TM) wireless monitoring product,
consisting of a master and upward of eight T-1 slave devices, which is installed
at customer premises, administers and offers air time packages on a consistent
price basis, and provides technical services that route alarm and status signals
through the cellular networks to a number of predetermined or designated
delivery points without requiring dedicated receiving equipment.
The Company believes that Circuit Watch's(TM) products and airtime
communications charges are competitively priced and that Circuit Watch(TM)
offers a cost effective and efficient method for remotely monitoring
5
or controlling equipment located onsite while enabling the reporting and
notification of any alarm or changes in condition to T-1 circuits that can be
vital to communications integrity.
As a result of combining Cellemetry(R) technology with cost effective
communication equipment and routing technologies, significant improvements in
T-1 circuit status communication services are now available to the industry.
FAST TRACK WIRELESS SOLUTIONS(TM)
Fast Track Wireless Solutions(TM), a product and service offering, is
designed to provide users and application developers with a turnkey suite of
interactive e-Web wireless telemetry interface solutions, which monitor and
control geographically remote systems and applications.
The Company markets Fast Track Wireless Solutions(TM) as a service
offering to Cellemetry(R) application and potential application partners as a
means to reduce the development and engineering time for applications by
providing the information and resources, including generic Cellemetry(R)
product, necessary to more speedily bring applications to market.
The Company believes that the Fast Track Wireless Solutions(TM) service
offers Cellemetry(R) application and potential application partners a cost
effective and efficient means of leveraging the benefits of the Cellemetry(R)
Data Service and providing speed to market for both fixed and mobile
applications.
SALES AND MARKETING
The Company markets its wireless data communications services directly
to participating cellular carriers who share in the recurring revenue generated
from within their territories. The services are also marketed directly to
application providers who are offered communications capability, and varying
degrees of router services, radio development and other ongoing support
services. A network operations center provides customer support twenty-four
hours a day, seven days a week.
The Company currently offers Cellemetry(R) service in Canada, Mexico
and the U.S.A. and in Paraguay through a licensed arrangement with a local
entity. The Company intends to offer Cellemetry(R) in various international
markets through direct sales, partnerships, and other channels of distribution.
The Company markets "SMS" to cellular carriers in the U.S.A. on the
basis of a competitive pricing model based upon a connection and a usage fee
structure, which is content and traffic volume related. The major benefit to
cellular carriers of the Company's service offering which is emphasized is the
limited capital investment cost of establishing the service within the cellular
carriers territories due to the available centralized Service Bureau and
existing Cellemetry(R) based wireless data network. The service is available to
all cellular carriers, including those carriers with existing relationships to
Cellemetry.
SECURITY - DERIVED CHANNEL TECHNOLOGY
Although the Company has sold its Derived Channel technology to BT, the
Company retains the right to market this service in North, Central and South
America, South Korea and Australia. The Company provides this service through
its DCX Systems and DCX Australia subsidiaries.
As a result of technological advances in the telecommunications
industry, telephone companies ("Telecomms") are able to broaden their product
portfolios by offering enhanced services to their customers. The Company
believes that Telecomms can be attracted to niche technologies, such as the
Company's Derived Channel technology that offer a cost effective solution for
applications that typically require dedicated lines, thereby providing a more
productive use of the existing telephone network.
The Company's licensed technology creates a "Derived Channel" on an
existing telephone line by using an inaudible frequency below the voice
communications spectrum for data transmission. The Derived Channel technology
uses this inaudible or low tone frequency to transmit monitoring information
between a microprocessor at the user's protected premises and a microprocessor
located at the telephone company's central office. This creates a two-way
communication system that continuously monitors the integrity of a user's
telephone line and security
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system. Derived Channel operates over a regular voice telephone line and
dedicated lines with no interference, whether or not the telephone is in use. In
addition, the low tone signal can be encrypted for additional security.
The Company believes that Derived Channel differs from most other alarm
transport technologies in three meaningful ways: 1) Derived Channel operates
over existing telephone lines, eliminating the need for a dedicated line service
to the telephone customer; 2) Derived Channel communicates by means of an
encrypted, continuous and inaudible signal and is transmitted even while the
telephone is otherwise in use; 3) telephone line integrity and security system
operation are automatically monitored at frequent intervals through polling
generated by network equipment located at the telecommunication company's
central office. The continuous signaling originating at the protected premises
provides prompt reporting of line disruptions, telephone system outages, or
alarm conditions.
The Company believes that Derived Channel represents an improvement
over the most common monitored alarm signaling system, such as the automatic
dialer (also know as a digital communicator). These devices are reactive by
nature. When an intrusion is detected, an automatic dialer attempts to seize the
subscriber's telephone line and dial the number of the alarm monitoring company
to report the intrusion. Generally, in the event the telephone line is in use or
has been cut, a standard automatic dialer will be unable to report the alarm
condition. Unlike the standard automatic dialer, Derived Channel is proactive.
As such, it continuously monitors line and system integrity, and automatically
reports any line disruption or failure to the alarm monitoring company.
SALES AND MARKETING
The Company intends to provide a level of marketing support to the
Telecomms and alarm system distributors, in its licensed territories, and to
seek more comprehensive associations with Telecomms, enabling the Company to
market its Derived Channel security alarm transport directly to the industry in
an effort to capture a share of the recurring revenue generated by the
applications. The Company has a presence in the private market sector
(non-publicly switched traffic), and serving customers who have control and
ownership of their own telephone facilities. This segment of the market needs
smaller systems and has fewer connection points than the systems, which have
been marketed to the major telephone companies.
DIGITAL MULTIMEDIA AND NETWORKING
DIGITAL MULTIMEDIA
PRODUCTS AND SERVICES
The Company designs, develops, and markets complete digital multimedia
system solutions for high bandwidth broadband communications networks. The
Company both manufactures the products upon which its systems are based and
incorporates third party products where appropriate.
The Company's digital multimedia systems permit network operators to
provide a wide range of video and data services, including internet access,
high-speed data transfer, and interactive video conferencing and voice service.
The use of fiber optics in the broadband transmission network provides improved
signal quality for long distance transmission, increased bandwidth, immunity to
interfering signals, and significant cost savings and reliability over coaxial
cable-based network technologies. The Company believes that its digital
multimedia systems enable the deployment of sophisticated architectures
generally at lower costs and with less hardware and complexity than competing
offerings.
The Company has developed and continues to enhance its line of
software, data, and fiber optic transmission products. In addition, the Company
has developed a new digital multimedia solution, PowerPlay(TM), which provides
capability for interactive videoconferencing over the same network platform that
carries standard data traffic. The Company believes that PowerPlay(TM)
represents a significant advance over the prior generation product EDCOMM(TM),
which was targeted at the distance learning market, because of PowerPlay(TM)'s
broader range of potential uses.
SYSTEM SOLUTION SERVICES. The Company designs and implements systems
utilizing in-house manufactured products and products supplied by third parties.
It also trains the end-users as an integral aspect of providing complete system
solutions. The Company believes its total system solution focus differentiates
it from competitors
7
while providing an additional source of revenue growth.
POWERPLAY(TM) SOLUTION. PowerPlay(TM) is the Company's digital
multimedia solution for high bandwidth private network applications.
PowerPlay(TM) is an integrated hardware-software system, which supports
user-friendly control of all network devices including VCRs, cameras, and
switches. This product permits the scheduling and conduct of video conferencing
via a desktop workstation, a roll about cart or a configured classroom or
business environment. The PowerPlay(TM) system incorporates proprietary
software; both Company and third party developed hardware, and is compatible
with all standards based transmission networks. The Company believes that
PowerPlay(TM) is unique with respect to its capability to deliver full motion
video signals while using a relatively small amount of bandwidth.
DATA SOLUTION. The Company also provides high-speed wide area network,
or WAN, data solution. This solution is offered as a data only capability or as
part of delivering the PowerPlay(TM) application. The data product line consists
of two main components. First is the data switch product, which the Company
obtains from other vendors. Second is the transport converter device, which the
Company manufactures.
ANALOG PRODUCTS. The Company also offers an analog transport product
line, EDCOMM(TM) that consists of a variety of fiber optic transmitters and
receivers. The typical application is for the delivery of video over a private
network. The Company manufactures all of these products and the great majority
of the sales of these products are to existing customers.
SALES AND MARKETING
The Company markets its digital multimedia products and services
directly and through a combination of manufacturers' representatives, system
integrators, and value added resellers. The Company believes it will be
necessary to expand its sales and marketing efforts in the future to remain
competitive and take advantage of market opportunities, as well as to extend
into international markets.
The Company has established relationships with a number of multiple
system cable operators, or MSOs. MSOs have generally looked to these private
networks as a means of augmenting and extending their public networks, and as a
source of new revenues in the increasingly competitive environment.
Operating Telephone Companies compete with cable operators for the
delivery of distance learning and other private network services. The Company
has successfully provided product to several Regional Bell Operating Companies
and hopes to replicate these efforts in other areas.
The Company has developed relationships with a number of traditional
systems integrators under which it has provided system design services and has
assisted with the installation. The Company believes that systems integrators
provide a viable avenue to the market and intends to continue to expand its
efforts in this area.
NETWORKING
PRODUCTS AND SERVICES
In the last decade the telecommunications industry has changed the
implementation of its networks regarding methods used to establish, control, and
track connections. The new control network is responsible for most of the
enhanced services implemented in the last few years. Using Signaling System
Seven (SS7) protocol, the new packet switched control network has added call
forwarding, last number re-dial, call blocking and many other features. In
addition, Federal guidelines now mandate that Local Number Portability (LNP), a
capability that will allow customers to keep the same telephone number as they
change their operating environment, be implemented by local carriers in an
immediate time frame.
The Company provides products, which assist the carriers in the
engineering, installation, and servicing of this new telecommunications control
network. These telecommunications network operational support systems and
services can be broken down into three categories: Test Access, Interconnecting
Devices, and Services including System Integration (rack and stack) and
Installation.
TEST ACCESS. The Digilog(TM)Network Analysis and Monitoring System, or
NAMS, is a network overlay
8
system that enables a user to monitor the operation of the SS7 network from a
central site. The system provides prompt alarm notification of a network
failure, automatic activation of backup devices, and a means to track down
operational database errors. Verizon is one of the largest users of this system
in its tier I and tier II support operations. In this application, the Company
supplies the access products and the system software in partnership with Agilent
Technologies, which supplies the remote controlled Protocol Analyzers.
INTERCONNECTING DEVICES. The Digilog(TM) Channel Access Unit ("CAU") is
a product used to provide the physical interconnection between the SS7 network
and complex monitoring devices such as the AcceSS7 system from Agilent
Technologies.
This product was developed to meet a strong need to interconnect
several applications monitoring computers to a single network tap point. In
addition to the CAU, the Company's interconnect products include resistor
panels, special cables, fuse panels, and the integration of other third-party
equipment for unique connection configurations.
SYSTEM INTEGRATION (RACK AND STACK) AND INSTALLATION. The Company is an
approved installer for Verizon. As such, it provides installation services to
Verizon both directly and indirectly through Agilent Technologies. The Company
also provides System Integration services to both of these customers.
Integration Services are the assembly of both customer-supplied and Digilog(TM)
manufactured components into rack and cabinet configurations for installation in
the telephone central office. Through a partnership with Agilent Technologies,
the Company assembles and tests Agilent Technologies' equipment prior to
installing it in central offices throughout the U.S.A.
SALES AND MARKETING
The Company's Digilog(TM) networking products are sold by highly
trained, direct sales personnel. These individuals work within the telephone
central office and are encouraged to develop practical solutions to the
customer's program managers. The Company believes that this approach has proven
to be very efficient. In addition, the Company has developed partnerships with
Agilent Technologies and other suppliers of monitoring equipment. Establishing
relationships such as these facilitates access to a much broader market without
the additional expense of a large and specialized sales force.
GENERAL
SUPPLIERS
The Company relies on third party subcontractors to manufacture some of
the equipment used to provide its Uplink security alarm communication service,
Derived Channel and networking equipment and products. In addition, some of the
Company's products are obtained from sole source suppliers. The loss of a
subcontractor or supplier could cause a disruption in the Company's business due
to the short lead-times demanded by certain of the Company's customers.
COMPETITION
The Company has one direct competitor for its wireless communications
business Cellemetry(R) technology - Aeris.net, formerly Aeris Communication,
Inc., which uses the service name Micro Burst. Numerous indirect competitors are
actively pursuing the short message wireless data transport market. Principally,
two-way paging, dedicated packet radio, private radio, low earth orbit
satellites, and PCS.
The Company believes that its ubiquitous North American coverage, price
points, and system performance will enable it to effectively compete for market
share. However, many of the competitors have greater financial and other
resources than the Company.
The market for the Company's digital multimedia high bandwidth
broadband transmission equipment and software solutions has been characterized
by rapid technological change. The principle competitive factors in this market
include product performance, reliability, price, breadth of product line, sales
and distribution capability, technical support and service, customer relations,
and general industry and economic conditions. The ability to provide complete
systems solutions including system integration, network management capabilities,
and the
9
expertise to migrate existing systems to more complete broadband networks, have
also become critically important vendor selection criteria in recent years.
Additionally, users require applications to make best use of these networks.
The Company's competitors for its digital multimedia products and
services include a number of companies that have developed videoconferencing
technology, including PictureTel, Polycom and VTEL. Other competitors include
manufacturers of fiber transmission equipment, who offer comparable products but
do not provide a complete system solution, including software. Many of the
competitors have greater financial and other resources than the Company.
Because of its proprietary nature, the Company believes that it is the
only licensed provider of Derived Channel products. The Company's principal
competition in the commercial security market consists of alternative methods of
monitoring line integrity, such as dedicated telephone line service. Although
security systems using a dedicated telephone line are considered reliable, they
are a more expensive alternative to the Company's Derived Channel. The Company
believes that Derived Channel represents, from a price performance perspective,
the most secure and most reliable form of primary alarm data transport.
The Company believes that its networking business is unique among
vendors of support systems for SS7 in that it has been a long-term provider of
both diagnostic equipment and testing systems. The Company believes that its
presence in telephone central offices on a day-to-day basis gives its networking
business a unique perspective on the needs of the central office project
manager.
RESEARCH AND DEVELOPMENT
Technology is subject to rapid change, so the introduction of new
products, technologies and applications in the Company's markets could adversely
affect the Company's business. The Company's success will depend, in part, on
its ability to enhance existing products and introduce new products and
applications on a timely basis. The Company plans to continue to devote a
substantial portion of its resources to the research and development function.
The Company continues to invest in improvements to Cellemetry(R) and
its service capability on an ongoing basis, through development of expanded
service bureau capabilities, further communications costs reductions, and
additional enhancement to application-specific capabilities.
In the near term, the Company will continue to enhance PowerPlay(TM),
expand its data product offerings to include high-speed fiber transceivers, and
introduce versions of PowerPlay(TM), which will be capable of working in a
relatively lower bandwidth environment.
The Company will continue to be reliant upon BT to conduct research and
development for Derived Channel technology.
PRODUCT WARRANTY AND SERVICE
The Company's wireless communications business provides three-year
parts and labor warranties on all wireless radios. The Company's security -
Derived Channel business provides customers with limited one-year warranties on
scanners and message switch software while Subscriber Terminal Units ("STUs")
are typically sold with a one- or two-year labor and materials warranty. The
Company's digital multimedia business provides either a one- or two-year
warranty on parts and labor, depending on the scale and type of product
provided. The Company's networking business provides a one-year warranty on all
telecommunications networking products. In addition, a "help desk" and training
support is offered to all users of telecommunications networking products. To
date, the cost to the Company of its warranty programs have not been material.
INTELLECTUAL PROPERTY
The Company holds patents covering its Cellemetry(R) related technology
in the U.S.A. and various foreign countries. These patents expire between 2011
and 2016. The Company through Cellemetry licenses certain Cellemetry(R) related
technologies under licenses with BellSouth Corporation. The Company also owns
other intellectual property relating to its products. The Company also holds
patents through Cellemetry, which primarily cover the delivery of the
Cellemetry(R) wireless data communications service. These patents expire between
2010 and 2012. It is the Company's practice to apply for patents as new products
or processes suitable for patent
10
protection are developed. No assurance can be given as to the scope of the
patent protection.
The Company believes that the rapid technological developments in the
telecommunications industry may limit the protection afforded by patents.
Accordingly, the Company believes that its success will also be dependent upon
its manufacturing, engineering and marketing know-how and the quality and
economic value of its products.
The mark Cellemetry(R) is a registered trademark of the Company. The
Company believes that no individual trademark or trade name is material to the
Company's competitive position in the industry.
REGULATION
The Company's products are subject to a variety of standards and
certification requirements applicable to products connected to public telephone
networks in the countries in which it conducts business.
The provision of telecommunications services in the U.S.A. is subject
to the Federal Communications Act and regulations promulgated by the Federal
Communications Commission (the "FCC"), as well as to state statutes and
regulations. These statutes and regulations have not resulted in any significant
impediments to the provision of alarm reporting services by telephone companies
using Derived Channel technology or for the delivery of wireless data signals
using the Cellemetry(R) network. The Company may be subject to certain taxes and
fees in connection with telecommunication services (including the federal
universal service charge).
In addition, the Company's products, such as Derived Channel STUs,
Uplink radios and certain digital multimedia products, require certification
from the FCC for compliance with standards designed to prevent damage to the
telephone network and to restrict radio frequency interference. The Company's
products currently used in the U.S.A., which are subject to these requirements,
have received all required certifications. However, anticipated design changes
to products sold in the U.S.A. will require compliance testing and
certification.
In addition, in the U.S.A. the Company's products require certification
from Underwriters Laboratories in order to serve monitoring applications with
higher levels of insurance risk. Certain products of the Company's digital
multimedia business also require certification from Underwriters Laboratories.
The Company has obtained all required Underwriters Laboratories certifications
for products currently marketed in the U.S.A. and expects that future
certifications will be obtained as necessary in the ordinary course of business.
Regulations similar to the above may exist in other countries. In the
event that the Company did not comply with any such regulations, or if the
Company's current or future products did not meet various regulatory standards
or receive and maintain all required certifications, the Company's business
could be adversely affected.
EMPLOYEES
The Company, as of March 26, 2001, employs 118 employees in the U.S.A.,
consisting of 6 in manufacturing, 37 in sales, marketing and customer service,
52 in engineering and operations and 23 in management and administration. A
union represents none of the Company's employees. The Company believes that its
relationship with its employees is satisfactory.
EXECUTIVE OFFICERS AND KEY EMPLOYEES OF REGISTRANT
The following sets forth the names, ages and positions of the executive
officers and certain key employees of the Company as of March 26, 2001:
Geoff W. Girdler, age 40, has been the Executive Vice President of the
Company since December 1999. From 1994 to 1997, Mr. Girdler was sales director
for Digital Audio Limited, a then wholly-owned subsidiary of the Company. From
1998 until 1999, Mr. Girdler served, as Managing Director of Versus Technology
Limited, a then indirect, wholly owned subsidiary of the Company, with
operational responsibility for derived channel technology worldwide.
Robert M. Madonna, age 47, has been the Executive Vice President of the
Company since December 1999. From 1996 until 1999, Mr. Madonna served as an
officer for various Company subsidiaries. Prior to 1996, Mr. Madonna was
employed by Bell Atlantic Corporation with responsibility in customer service,
product development
11
and project management.
Stratton J. Nicolaides, age 47, has served as Chief Executive Officer
of the Company from April 2000 having served as Chief Operating Officer from
April 1999 until March 2000 and as Chairman of the Board since December 1999.
From July 1994 until April 1999, Mr. Nicolaides managed a closely held
investment partnership and provided consulting services to Dominion Group
Limited.
Peter J. Quinn, age 44, has been the Chief Financial Officer of the
Company since December 1999. From 1987 to 1997, Mr. Quinn served as Chief
Financial Officer, Secretary, Treasurer, and Board Member of Europlex Holdings
Limited. From July 1997 until December 1999, Mr. Quinn served as Vice President,
Chief Financial Officer, Secretary and Treasurer of Uplink, a subsidiary of the
Company. From 1998 until December 1999, Mr. Quinn also held the same position at
Cellemetry LLC.
ITEM 2. PROPERTIES.
All of the Company's facilities are leased. Set forth below is certain
information with respect to the Company's leased facilities:
LOCATION PRINCIPAL BUSINESS SQUARE FOOTAGE LEASE TERM
- -------- ------------------ -------------- ----------
Willow Grove, Networking and 10,000 2003
Pennsylvania Security - Derived Channel
State College, Digital Multimedia 13,845 2002
Pennsylvania
West Conshohocken, Executive Office(1) 2,815 2002
Pennsylvania
Atlanta, Georgia Wireless Communications 14,027 2003
and Principal Executive Office
Atlanta, Georgia Wireless Communications 6,946 2003
(1) Executive office prior to relocation to Atlanta, presently sub-leased.
The Company conducts manufacturing, sales and marketing, engineering
and administrative activities at many of these locations. The Company believes
that its existing facilities are adequate for its current needs. As the Company
grows and expands into new markets and develops additional products, it may
require additional space, which the Company believes will be available at
reasonable rates.
The Company engages in limited manufacturing, equipment and product
assembly and testing for certain of the Company's products. The Company also
uses contract manufacturers located near its facilities for production,
sub-assembly and final assembly of certain products. The Company believes there
are other manufacturers that could perform this work on comparable terms.
The semiconductors, microprocessors and other components used in the
Company's products are obtained from various suppliers and manufacturers, some
of which are the sole source of such component.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in routine legal proceedings
in the normal course of its business. The Company believes that no currently
pending legal proceeding will have a materially adverse effect on its business.
The Company believes that no currently pending legal proceeding will have a
materially adverse effect on the financial condition or results of operations of
the Company.
In connection with the acquisition of the entire equity interest in
Uplink a petition was filed by Uplink in the Superior Court of Fulton County,
Georgia seeking an appraisal of the value of a minority shareholder's shares.
12
The minority stockholder has alleged that the acquisition of Uplink was
procedurally improper and should be set aside, and that Uplink and certain of
its officers conspired to oppress the minority stockholder of Uplink and acted
fraudulently in effectuating the acquisition. The case is in the discovery
phase.
Neither the Company nor its officers are parties to the litigation. The
Company believes, however, that the value the minority stockholder is claiming
for the shares is in excess of the fair value of those shares. The Company also
believes that the minority stockholder's other claims are without merit, and
Uplink intends to vigorously defend the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company does not currently pay any cash dividends. In deciding
whether or not to declare or pay dividends in the future, the Board of Directors
will consider all relevant factors, including the Company's earnings, financial
condition and working capital, capital expenditure requirements, any
restrictions contained in loan agreements and market factors and conditions.
The Operating Agreement and the terms of the Series A Convertible
Redeemable Preferred Stock held by BellSouth Wireless provide for certain
restrictions on dividends and distributions.
The Company's Common Stock is quoted on the NASDAQ National Market and
traded under the symbol "NMRX."
The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices per share for the Common Stock on the NASDAQ National
Market for the applicable periods.
FISCAL 2000 HIGH LOW
First Quarter (January 1, 2000 to March 31, 2000) $ 17.00 $ 9.38
Second Quarter (April 1, 2000 to June 30, 2000) 13.31 7.06
Third Quarter (July 1, 2000 to September 30, 2000) 13.75 9.75
Fourth Quarter (October 1, 2000 to December 31, 2000) 12.75 7.06
FISCAL 1999 HIGH LOW
First Quarter (November 1, 1998 to January 31, 1999) $ 4.25 $ 1.75
Second Quarter (February 1, 1999 to April 30, 1999) 4.13 2.88
Third Quarter (May 1, 1999 to July 31, 1999) 4.38 3.00
Fourth Quarter (August 1, 1999 to October 31, 1999) 5.56 3.00
As of March 26, 2001 there were 62 shareholders of record of the Company's
Common Stock, which include shares held in street name by brokers or nominees.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference from the Company's 2000 Annual Report to
Shareholders, pursuant to General Instruction G (2) to Form 10-K, the relevant
portions of which are filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference from the Company's 2000 Annual Report to
Shareholders pursuant to General
13
Instruction G (2) to Form 10-K, the relevant portions of which are filed as
Exhibit 13 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements and Supplementary Data of the Company required
by this Item are set forth at the pages indicated herein at Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Company's Proxy Statement relating
to the 2001 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Company's Proxy Statement relating
to the 2001 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Company's Proxy Statement relating
to the 2001 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Company's Proxy Statement relating
to the 2001 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Consolidated Financial Statements. The following financial
statements and the notes thereto of the Company are attached
hereto beginning on page F-1.
Index to Financial Statements of the Company
Report of Certified Independent Public Accountants Independent
Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999 and
October 31, 1999
Consolidated Statements of Operations for the year ended December
31, 2000; the two-month period ended December 31, 1999 and the
years ended October 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the year
ended December 31, 2000; the two-month
14
period ended December 31, 1999 and the years ended October 31,
1999 and 1998
Consolidated Statements of Cash Flows for the year ended December
31, 2000; the two-month period ended December 31, 1999 and the
years ended October 31, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed financial information of registrant
(parent company only)
Schedule II - Valuation and qualifying accounts
3. List of Exhibits filed pursuant to Item 601 of Regulation S-K.
The following exhibits are incorporated by reference herein, or
are being filed herewith:
2.1(1) Securities Purchase Agreement among Numerex Corp., Broadband Networks,
Inc. and the Shareholders of Broadband Networks, Inc. dated February
21, 1997
2.2(2) Shareholders' Agreement among Broadband Networks, Inc., Numerex Corp.
and the Shareholders of Broadband Networks, Inc. dated February 21,
1997
2.3(3) Numerex Corp. and British Telecommunications plc, Agreement Relating to
the sale and purchase of the whole of the issued shares capital of
Bronzebase Limited
3.1(4) Amended and Restated Articles of Incorporation of the Company, as
amended
3.2(4) Bylaws of the Company
10.1(4) The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan
Description (Management Compensation Plan)
10.2(5) Amended and Restated 1994 Employee Stock Option Plan (Management
Compensation Plan)
10.3(6) Amended and Restated Stock Option Plan for Non-Employee Directors
(Management Compensation Plan)
10.4(7) Registration Agreement between the Company and Dominion dated July 13,
1992
10.5(6) Letter Agreement between the Company and Dominion (now Gwynedd) dated
October 25, 1994 re: designation of director
10.6(4) Office Space Lease Agreement between the Company and LBA Associates
dated May 31, 1995.
10.7(10) 1999 Long-Term Incentive Plan (Management Compensation Plan).
10.8(8) Formation Agreement among Numerex Corp., BellSouth Wireless, Inc. and
BellSouth Corporation dated February 25, 1998.
10.9(9) Operating Agreement between Numerex Corp. and BellSouth Wireless, Inc.
dated May 15, 1998.
10.10(3) First Amendment to Operating Agreement of Cellemetry LLC between
Numerex Corp. and BellSouth Wireless, Inc. effective as of November 1,
1999.
11 Computation of Earnings Per Share
13 Pursuant to Note 2 of Instruction G (2) to Form 10-K, in response to
Item 6. Selected Financial Data, "Selected Consolidated Financial Data"
and in response to Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Management's Discussion
and Analysis of Financial
15
Condition and Results of Operations" are incorporated by reference from
the Company's 2000 Annual Report to Shareholders' and are being filed
in electronic format. No other sections of the Company's 2000 Annual
Report to Shareholders shall be deemed "filed" as part of this filing.
21 Subsidiaries of Numerex Corp.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney
(1) Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 5, 1997 (File No. 0-22920)
(2) Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on January 29, 2000 for the year ended October 31, 1997
(File No. 0-22920)
(3) Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 26, 1999 (File No. 0-22920)
(4) Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1995 (File No. 0-22920)
(5) Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on January 27, 1997 for the year ended October 31, 1996
(File No. 0-22920)
(6) Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission (File No. 33-89794)
(7) Incorporated by reference to the Exhibit filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 20, 1994 (File No. 0-22920)
(8) Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 26, 1998 (File No. 0-22920)
(9) Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 1, 1998 (File No. 0-22920)
(10) Incorporated by reference to the Exhibits filed with the Company's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on August 14, 2000 (File No. 0-22920)
(b) Reports on Form 8-K.
None.
16
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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
NUMEREX CORP.
Date: March 28, 2001 By: /S/STRATTON J. NICOLAIDES
------------------------------------
Stratton J. Nicolaides, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------------------------------------------------------------------------------
/S/STRATTON J. NICOLAIDES
- -------------------------
Stratton J. Nicolaides Chairman and March 28, 2001
Chief Executive Officer
/S/ GEORGE BENSON
- -------------------------
George Benson Director March 28, 2001
/S/ MATTHEW J. FLANIGAN
- -------------------------
Matthew J. Flanigan Director March 28, 2001
/S/ ALLAN LIU
- -------------------------
Allan Liu Director March 28, 2001
/S/ JOHN RAOS
- -------------------------
John Raos Director March 28, 2001
/S/ ANDREW J. RYAN
- -------------------------
Andrew J. Ryan Director March 28, 2001
/S/PETER J. QUINN
- -------------------------
Peter J. Quinn Executive Vice President, March 28, 2001
Chief Financial Officer,
Principal Financial and
Accounting Officer
17
C O N T E N T S
Page
Consolidated Financial Statements of the Company:
Report of Certified Independent Public Accountants F-2
Independent Auditors' Report F-3
Consolidated Balance Sheets as of December 31, 2000 and
1999 and October 31, 1999 F-4
Consolidated Statements of Operations and Comprehensive
Income for the year ended December 31, 2000, the
two-month period ended December 31, 1999 and the years
ended October 31, 1999 and 1998 F-6
Consolidated Statements of Shareholders' Equity for the
year ended December 31, 2000, the two-month period
Ended December 31, 1999 and the years ended October 31,
1999 and 1998 F-7
Consolidated Statements of Cash Flows for the year ended
December 31, 2000, the two-month period ended
December 31, 1999 and the years ended October 31,
1999 and 1998 F-8
Notes to Consolidated Financial Statements F-10
F-1
REPORT OF CERTIFIED INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of
Directors of Numerex Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Numerex Corp.
and subsidiaries (the "Company") as of December 31, 2000 and 1999 and October
31, 1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year ended December 31, 2000, the two-month period
ended December 31, 1999 and the year ended October 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Numerex Corp. and subsidiaries as of and
for the year ended October 31, 1998, were audited by other auditors whose report
dated December 16, 1998, except for Note H, as to which the date is January 8,
1999, expressed an unqualified opinion on those statements.
We also audited the adjustments described in Note A-2 that were applied to
restate the 1998 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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 statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of Numerex
Corp. and subsidiaries as of December 31, 2000 and 1999 and October 31, 1999,
and the results of their operations and their cash flows for the year ended
December 31, 2000, the two-month period ended December 31, 1999 and the year
ended October 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/S/ GRANT THORNTON
- ------------------
Grant Thornton LLP
Atlanta, Georgia
February 13, 2001
F-2
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors of Numerex Corp.:
We have audited the accompanying consolidated statements of operations and
comprehensive income, shareholders' equity, and cash flows of Numerex Corp. and
subsidiaries (the "Company") for the year ended October 31, 1998, all expressed
in pounds sterling (not presented separately herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements, expressed in pounds
sterling, (not presented separately herein), present fairly, in all material
respects, the consolidated results of operations and cash flows of Numerex Corp.
and subsidiaries for the year ended October 31, 1998 in conformity with
accounting principles standards generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE LLP
- -------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 16, 1998, except for the last paragraph of Note H, as to which the date
is January 8, 1999.
F-3
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares)
ASSETS
DECEMBER 31, October 31,
---------------------
2000 1999 1999
------- ------- -----------
CURRENT ASSETS
Cash and cash equivalents (Note A-4) $10,567 $21,490 $ 5,691
Accounts receivable (net of allowances of
$431, $237 and $167, respectively (Note A-10) 7,153 6,241 11,015
Inventory (Notes A-9 and D) 4,117 3,618 4,525
Prepaid taxes (Notes A-8 and I) 16 - 311
Prepaid expenses & interest receivable 450 259 293
------- ------- -------
Total current assets 22,303 31,608 21,835
Property and equipment, net (Notes A-6 and E) 2,917 2,899 3,792
Goodwill, net (Notes A-5 and F) 10,789 11,404 8,808
Intangible assets, net (Notes A-5 and G) 9,845 10,410 12,108
Other assets 88 84 85
------- ------- -------
$45,942 $56,405 $46,628
======= ======= =======
The accompanying notes are an integral part of these statements.
F-4
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares)
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, October 31,
------------------------
2000 1999 1999
-------- -------- -----------
CURRENT LIABILITIES
Accounts payable $ 3,316 $ 2,823 $ 4,159
Income taxes (Notes A-8 and I) 10 854 1,902
Accrued taxes, other than income - - 424
Other current liabilities
Deferred revenues 425 257 259
Other accrued liabilities 1,640 2,837 2,548
Obligations under capital leases, current portion 36 25 30
-------- -------- --------
Total current liabilities 5,427 6,796 9,322
LONG-TERM DEBT
Obligations under capital leases 102 85 84
MINORITY INTEREST (Note B) 3,511 6,616 7,201
COMMITMENTS AND CONTINGENCIES
(Notes J, K and M) - - -
SHAREHOLDERS' EQUITY
Preferred stock - no par value; authorized
3,000,000 shares; issued 30,000, 30,000 and 0 shares 3,000 3,000 -
Class A common stock - no par value; authorized
30,000,000 shares; issued 12,157,504, 11,609,492 and
11,609,492 shares 32,064 29,870 29,870
Class B common stock - no par value; authorized
5,000,000 shares; none issued - - -
Additional paid-in capital 370 370 370
Treasury stock, at cost, 1,766,400, 1,266,400 and
1,266,400 shares (9,222) (5,222) (5,222)
Accumulated other comprehensive income (20) (20) 4
Retained earnings 10,710 14,910 4,999
-------- -------- --------
Total shareholders' equity 36,902 42,908 30,021
-------- -------- --------
$ 45,942 $ 56,405 $ 46,628
======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMOME
(In Thousands, Except Per Share Data)
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
---------- ------------ -------------------
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ ------------------------
2000 1999 1999 1998
-------- --------- -------- --------
Net sales $ 20,290 $ 2,301 $ 33,736 $ 25,231
Cost of sales 12,290 1,746 14,403 12,284
Inventory write-downs - - - 2,201
-------- --------- -------- --------
Gross profit 8,000 555 19,333 10,746
Research and development expenses 3,430 473 3,468 3,113
Selling, general, administrative and
other expenses 13,576 2,681 18,622 17,347
Special charges (Note C) - - - 1,598
-------- --------- -------- --------
Operating profit (loss) (9,006) (2,599) (2,757) (11,312)
Interest and other income, net 1,900 100 404 1,074
Gain on disposition of assets and business
(Note B) - 12,680 - -
Equity in net losses of affiliate - - - 422
Minority interest 3,146 591 2,418 736
-------- --------- -------- --------
Earnings (loss) before income taxes (3,960) 10,772 65 (9,924)
Income taxes (Notes A-8 and I) - 861 1,682 1,279
-------- --------- -------- --------
Net earnings (loss) (3,960) 9,911 (1,617) (11,203)
Preferred stock dividend 240 - - -
-------- --------- -------- --------
Net earnings (loss) applicable to
common shareholders $ (4,200) $ 9,911 $ (1,617) $(11,203)
======== ========= ======== ========
Other comprehensive earnings (loss),
net of income taxes
Foreign currency translation
adjustment (Note A-15) $ - $ (24) $ (180) $ (559)
======== ========= ======== ========
Comprehensive earnings (loss) $ (4,200) $ 9,887 $ (1,797) $(11,762)
======== ========= ======== ========
Basic earnings (loss) per share
(Note A-19) $ (0.40) $ 0.96 $ (0.16) $ (1.04)
======== ========= ======== ========
Diluted earnings (loss) per share $ (0.40) $ 0.85 $ (0.16) $ (1.04)
======== ========= ======== ========
Number of shares used in per share
calculation (Note A-19):
Basic 10,512 10,343 10,378 10,818
======== ========= ======== ========
Diluted N/A 11,679 N/A N/A
======== ========= ======== ========
The accompanying notes are an integral part of these statements.
F-6
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Treasury Comprehensive Retained
Shares Amount Shares Amount Capital Stock Earnings Earnings Total
--------- ------ ------ ------ ---------- -------- ------------- -------- --------
Balance, October 31, 1997 - $ - 11,597 $ 29,805 $ - $ (3,103) $ 743 $ 17,819 $ 45,264
Issuance of shares in connection with - - 12 65 - - - - 65
exercise of stock options
Issuance of common stock warrants - - - - 220 - - - 220
Purchase of treasury stock - - - - - (1,541) - - (1,541)
Translation adjustment - - - - - - (559) - (559)
Net loss - - - - - - - (11,203) (11,203)
---------------------------------------------------------------------------------------------
Balance, October 31, 1998 - - 11,609 29,870 220 (4,644) 184 6,616 32,246
Issuance of common stock warrants - - - - 150 - - - 150
Purchase of treasury stock - - - - - (578) - - (578)
Translation adjustment - - - - - - (180) - (180)
Net loss - - - - - - - (1,617) (1,617)
---------------------------------------------------------------------------------------------
Balance, October 31, 1999 - - 11,609 29,870 370 (5,222) 4 4,999 30,021
Issuance of preferred stock 30 3,000 - - - - - - 3,000
Translation adjustment - - - - - - (24) - (24)
Net earnings - - - - - - - 9,911 9,911
---------------------------------------------------------------------------------------------
Balance, December 31, 1999 30 3,000 11,609 29,870 370 (5,222) (20) 14,910 42,908
Issuance of shares in connection with
exercise of stock options and warrants - - 548 2,194 - - - - 2,194
Purchase of treasury stock - - - - - (4,000) - - (4,000)
Net loss - - - - - - - (4,200) (4,200)
---------------------------------------------------------------------------------------------
Balance, December 31, 2000 30 $ 3,000 12,157 $ 32,064 $ 370 $ (9,222) $ (20) $ 10,710 $ 36,902
=== ======= ====== ======== ======= ======== ====== ======== =======
The accompany notes are an integral part of this statement.
F-7
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ -----------------------
2000 1999 1999 1998
-------- ---------- ------- --------
Cash flows from operating activities:
Net earnings (loss) $ (3,960) $ 9,911 $ (1,617) $(11,203)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used in)
operating activities:
Depreciation 1,374 231 1,265 727
Amortization 1,488 239 2,069 2,224
Special charges - - - 1,151
Minority interest (3,146) (591) (2,418) (736)
Equity in net losses of affiliate - - - 422
Gain on disposition of business - (12,605) - -
Gain on disposition of other assets - (75) (125) -
Deferred taxes - 472 - -
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (912) 1,034 (5,778) 1,434
Inventory (499) (429) (272) 741
Prepaid expenses &
interest receivable (191) 310 368 (242)
Other assets - - (55) -
Accounts payable 493 (701) 1,987 (914)
Income taxes (860) 1,258 2,238 726
Accrued taxes other than income - - 273 62
Other accrued liabilities (1,029) 788 (625) 2,142
-------- -------- -------- --------
Net cash provided by (used in)
operating activities (7,242) (158) (2,690) (3,466)
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of business - 16,721 - -
Proceeds from disposition of other assets - 161 500 -
Purchase of property and equipment (1,325) (209) (2,137) (917)
Purchase of intangible and other assets (245) (61) (2,148) (678)
Acquisitions of businesses, net of cash - - - (1,225)
Investment in business (58) (95) - (1,000)
-------- -------- -------- --------
Net cash provided by (used in)
investing activities (1,628) 16,517 (3,785) (3,820)
-------- -------- -------- --------
The accompanying notes are an integral part of these statements.
F-8
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ ------------------------
2000 1999 1999 1998
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from revolving credit facility - - - 1,500
Proceeds from exercise of stock options 2,232 - - 65
Principal payment on revolving
credit facility - - (6,000) -
Principal payments on capital lease
obligations (38) (9) (42) (24)
Payment of preferred dividends (240) - - -
Purchase of treasury stock (4,000) - (578) (1,541)
-------- -------- -------- --------
Net cash provided by (used in)
financing activities (2,046) (9) (6,620) -
-------- -------- -------- --------
Effect of exchange differences on cash (7) - (14) (77)
-------- -------- -------- --------
Net (decrease) in cash and cash equivalents (10,923) 16,350 (13,109) (7,363)
Cash and cash equivalents,
beginning of year 21,490 5,140 18,800 26,163
-------- -------- -------- --------
Cash and cash equivalents, end of year $ 10,567 $ 21,490 $ 5,691 $ 18,800
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash (receipts) payments for:
Interest $ 916 $ 58 $ 85 $ 369
Income taxes 536 - (476) 701
The accompanying notes are an integral part of these statements.
F-9
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 2000; two-month period ended December 31, 1999 and the
years ended October 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
1 . NATURE OF BUSINESS
Numerex Corp. is a technology company comprised of operating subsidiaries
(the "Company") that develop and market a wide range of communications
products and services. The Company's primary focus is wireless data
communications utilizing proprietary network technologies. The Company offers
products and services in wireless data communications through Cellemetry(R)
and Data1Source(TM), and digital multimedia networking through PowerPlay(TM)
and IP Contact(TM). These services enable customers around the globe to
monitor and move information for a variety of applications from home and
business security to distance learning. In addition, the Company offers
wireline alarm security products and services, as well as telecommunications
network operational support systems.
2. CURRENCY
The consolidated financial statements are stated in U.S. Dollars.
Historically, the Company's consolidated financial statements have been in
British Pounds Sterling. As a result of increased business activity in the
U.S.A. resulting from recent U.S. acquisitions, the U.S. Dollar has become
the unit of measure of the majority of the Company's operations. Accordingly,
the U.S. Dollar has been adopted as the Company's reporting currency
effective for the quarter ended January 31, 1999. The consolidated financial
statements and the notes thereto have been restated in U.S. Dollars for all
periods presented.
3. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the results of operations and
financial position of the Company and its wholly owned or controlled
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
4. CASH AND CASH EQUIVALENTS
For purposes of financial reporting, the Company considers all highly liquid
investments purchased with original maturities of less than three months to
be cash equivalents.
5. INTANGIBLE ASSETS
Amortization is provided on all intangible assets at rates calculated to
write off the cost of each over its expected life as follows:
o Patents and acquired intellectual property - straight-line over 7 to 16
years
o Developed software - straight-line over 3 to 5 years
o Goodwill - straight-line over 12 to 20 years
Goodwill represents the excess of the cost of net assets acquired over fair
value.
The Company capitalizes software development costs when project technical
feasibility is established and concludes capitalization when the product is
ready for release. Software development costs incurred prior to the
establishments of technical feasibility are expensed as incurred.
6. PROPERTY AND EQUIPMENT
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. Leased
property under capital leases is amortized over the lives of the respective
leases or over the service lives of the assets for those leases, whichever is
shorter. Depreciation for property, equipment and buildings is calculated
using the straight-line method over the following estimated lives.
F-10
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
o Short-term leasehold improvements over the term of the lease 3-10 years
o Plant and machinery 4-10 years
o Equipment, fixtures and fittings 3-10 years
7. IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets or when a specific event indicates that the carrying value of a
long-lived asset may not be recoverable. Recoverability is assessed based on
estimates of future cash flows expected to result from the use and eventual
disposition of the asset. If the sum of expected undiscounted cash flows is
less than the carrying value of the asset, an impairment loss is recognized
for the amount of such deficiency, using discounted cash methodologies. No
such impairment losses have been recognized during the year and two-month
period ended December 31, 2000 and 1999 and the years ended October 31, 1999
and 1998, respectively.
8. INCOME TAXES
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards Number 109 ("SFAS
109") ACCOUNTING FOR INCOME TAXES. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the
assets will not be realized.
9. INVENTORY
Inventory and work-in progress are stated at the lower of cost (first-in,
first-out method) or market.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of the accounts receivable. When amounts are
determined to be uncollectible, they will be charged to operations when that
determination is made.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable and
accounts payable. The carrying value of the financial instruments
approximates fair value due to the relatively short period to maturity.
12. USE OF ESTIMATES
In preparing the Company's financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
13. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances in financial institutions, which at
times may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
14. REVENUE RECOGNITION
The Company recognizes revenue on the basis of the utilization of its
technology by its customers and on sales of its products when title transfers
to its customers. Revenue for recurring service and royalty agreements is
recorded as sales when earned.
F-11
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, in December 1999. SAB
101 summarizes certain of the SEC staff's views in applying accounting
principles generally accepted in the United States of America to revenue
recognition in financials statements. The Company reviewed its revenue
recognition policies and determined that they are in compliance with SAB 101.
15. FOREIGN CURRENCY TRANSACTIONS
Some transactions of the Company and its subsidiaries are made in British
pounds sterling, Canadian dollars and Australian dollars. Gains and losses
from these transactions are included in income as they occur.
16. RESEARCH AND DEVELOPMENT
Research and development expenses are charged to operations in the period in
which they are incurred.
17. PROVISION FOR WARRANTY CLAIMS
Estimated warranty expense is charged over the warranty period of the
warranted products. Warranty expenses have not been significant to the
Company.
18. STOCK-BASED COMPENSATION
Effective November 1, 1996, the Company adopted the provisions of SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 encourages, but
does not require, companies to record compensation cost for stock-based
compensation plans at fair value. The Company has elected to continue to
account for stock-based compensation in accordance with Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations, as permitted by SFAS 123. Compensation expense for
stock options is measured as the excess, if any, of the quoted market price
of the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock (see Note L).
19. EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, EARNINGS PER SHARE, SFAS No. 128, which supersedes APB No. 15, EARNINGS
PER SHARE, requires a dual presentation of basic and diluted earnings per
share as well as other disclosures. Basic earnings per share excludes the
dilutive impact of common stock equivalents and is computed by dividing net
earnings (loss) by the weighted average number of shares of common stock
outstanding for the period.
Diluted earnings (loss) per share includes the effect of potential dilution
from the exercise of outstanding common stock equivalents into common stock,
using the treasury stock method at the average market price of the Company's
common stock for the period.
Effective with the first quarter ended January 31, 1998, the Company adopted
SFAS No. 128. The Company has computed its earnings (loss) per share in
accordance with SFAS No. 128 for the year ended October 31, 1999 and has
restated 1998 earnings (loss) per share information on a comparable basis,
with no material differences.
For the years ended December 31, 2000, October 31, 1999 and 1998, the
Company's potential common shares have an anti-dilutive effect on earnings
(loss) per share and, therefore, have not been used in determining the total
weighted average number of common shares outstanding. For the two-month
period ended December 31, 1999 the Company's potential common shares have a
dilutive effect on earnings (loss) per share and, therefore, have been used
in determining the total weighted average number of shares of common shares
outstanding. Potential common shares resulting from options and warrants that
would be used to determine diluted earnings (loss) per share were 1,739,384,
2,289,213, 1,739,213 and 1,156,713 for the year and two-month period ended
December 31, 2000 and 1999 and the years ended October 31, 1999 and 1998,
respectively
F-12
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
20. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts collectively referred to as
derivatives, and for hedging activities. It requires that any entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measures those statements at fair value.
In June 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF EFFECTIVE DATE OF FASB
STATEMENT NO. 133. This statement amended the effective date of SFAS No. 133
for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
SFAS No. 138, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
AN AMENDMENT OF FASB STATEMENT 133. This statement clarifies provisions of
SFAS No. 133 based on interpretations developed in the FASB's Derivatives
Implementation Group process and cleared by the FASB.
The Company has evaluated the effect that the adoption of SFAS Nos. 133 and
138 will have on its consolidated financial position or results of operation
and has concluded that there are no changes necessary to its presentation of
financial information.
21. CHANGE IN YEAR END AND RECLASSIFICATION
The Company on April 28, 2000 determined to change its fiscal year-end from a
fiscal year ending October 31 to a calendar fiscal year ending on December
31. Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE B -INVESTMENTS AND DIVESTITURES
On February 28, 1997, the Company acquired 100% of the outstanding common
stock of Broadband Networks, Inc. ("Broadband"), a Delaware corporation, for
approximately $5,867,000. In addition, the Company invested $1,654,000
directly into Broadband for working capital purposes. Certain employees of
Broadband will continue to hold Broadband incentive stock options, which upon
exercise would entitle them to own approximately 18% of Broadband's currently
outstanding common shares. Such options become exercisable in 2001 and, upon
exercise, the Company has certain rights, but is not obligated to purchase
the shares.
On July 17, 1997, the Company invested $1,000,000 in return for 19.5% of the
common stock of Uplink Security, Inc. ("Uplink"), a Georgia corporation.
Various options contained in the agreements provided the Company a means of
acquiring a controlling interest in Uplink. On May 18, 1998, the Company
acquired an additional 78,795 shares of Uplink from certain existing
shareholders for approximately $1,444,000 including 89,763 Numerex common
stock warrants with a strike price of $6.00. This stock purchase increased
the Company's ownership interest in Uplink to 85%.
As a result of the acquisition of a controlling interest in Uplink, the
Company under generally accepted accounting principles restated its
investment in Uplink from the cost method to the equity method of accounting
for the first and second quarters of the fiscal year ending October 31, 1998.
The effect of the restatement, which is included in the line item `Equity in
net losses of affiliate' in the consolidated statements of operations for the
fiscal year ending October 31, 1998, was $422,000. The financial statement
effect of the change in method on periods prior to fiscal 1998 was not
significant.
On December 1, 1998 the Company subscribed for and was issued an additional
56,468 shares of Uplink common stock. This stock purchase increased the
Company's ownership interest in Uplink to in excess of 90%.
On December 30, 1998 under a `Plan of Merger' Uplink merged with and into US
Acquisition, Inc., a corporation organized under the laws of the State of
Georgia. Subsequently the surviving entity was renamed Uplink. The completion
of the transaction increased the Company's ownership interest in Uplink to
100% of the common stock of Uplink. See Note M - Legal.
On May 15, 1998, the Company, Bellsouth Wireless LLC ("BellSouth Wireless"),
formerly BellSouth Wireless, Inc., and Bellsouth Corporation completed a
transaction whereby Cellemetry LLC ("Cellemetry") a joint venture between the
Company and BellSouth Wireless, was formed. Cellemetry, a Delaware limited
liability company, is owned 60% by the Company and 40% by BellSouth Wireless.
The parties entered into an operating agreement (the "Operating Agreement"),
which deals with, among other things, the
F-13
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE B -INVESTMENTS AND DIVESTITURES - CONTINUED
conduct of the business of Cellemetry.
Pursuant to the Operating Agreement, the Company was scheduled to make cash
contributions of up to $15,500,000 during the first two years of Cellemetry's
operations. According to the Operating Agreement, at the end of three years
if Cellemetry had met certain revenue targets no additional contribution from
the Company would be required. However, if, at the end of three years, the
revenue targets had not been met, the Company would be required to make an
additional $3,750,000 cash contribution or contribute certain equity
interests it had in Uplink. Also, according to the Operating Agreement,
Cellemetry must achieve certain specific cumulative revenue and operating
goals by the third anniversary of the formation date. If these performance
goals were not met, the Company may, at its sole option, elect that BellSouth
Wireless put its ownership interest in Cellemetry to the Company for
$15,330,000, plus interest at a 13% annual compound rate or begin a process
to dissolve Cellemetry which would include a transfer of the initially
contributed intellectual property to BellSouth Wireless. In addition, the
Operating Agreement provides certain restrictions as to distributions and the
right to transfer ownership interest in Cellemetry. Cellemetry has elected to
be taxed as a partnership for income tax purposes.
The Company's subsidiary recorded the assets contributed to Cellemetry by
BellSouth Wireless at fair value on the date of contribution. The fair value
of the patents contributed was $10,603,000, which is being amortized over
their remaining life of 16 years. In addition, BellSouth Wireless contributed
property and equipment valued at $285,000. The results of operations and
financial position of Cellemetry were consolidated with the Company effective
May 15, 1998, since the Company controls the operations of Cellemetry.
On November 18, 1999, effective as of November 1, 1999, the Company and
BellSouth Wireless completed the restructuring of the Cellemetry Operating
Agreement.
Under the terms of the restructuring, the operating agreement of Cellemetry
has been modified ("First Amendment to the Operating Agreement") and the
Cellemetry Business Plan has been modified, revised and extended through
November 1, 2004 ("Modified Business Plan"). All respective rights under the
Operating Agreement that triggered on May 15, 2001, three years from the date
of the formation of Cellemetry, have been revised to trigger on November 1,
2002 and all financial performance tests have been amended to reflect the
Modified Business Plan. In addition, the price at which the Company may, at
its sole option, elect that BellSouth Wireless put its ownership interest in
Cellemetry to the Company has been revised and set at $17,000,000.
Additionally, the agreement provided for the cancellation of the Cellemetry
Share Option Plan with the intent that the Company exchanges all outstanding
options for options to acquire shares of the capital stock of the Company.
The restructuring also provided for Cellemetry to seek to find either a
foreign carrier or strategic investor ("Third Party Investment") to invest
new capital in exchange for up to 15% of Cellemetry. In connection with any
such Third Party Investment, the Company's ownership interest in Cellemetry
will not be diluted below 51% and BellSouth Wireless's will not be diluted
below 34%.
Pursuant to the First Amendment to the Operating Agreement, the Company, from
and including May 15, 1999, is no longer under an obligation to make any
additional capital contributions to Cellemetry. The Company, however, has
committed to provide up to $5,500,000 in interest bearing debt financing to
Cellemetry.
Also, pursuant to the First Amendment to the Operating Agreement, the Company
conveyed 100% of the capital stock of its wholly owned subsidiary Uplink to
Cellemetry. In addition, the Company issued to BellSouth Wireless 30,000
Series A Convertible Redeemable Preferred Stock of the Company ("Preferred
Stock"). The preferred stock is redeemable, at the Company's option,
commencing November 1, 2000, on the basis of a pre-set annual redemption
price per share. Also, the Preferred Stock, at BellSouth Wireless's option,
commencing November 1, 2003 or November 1, 2002 should the Company's common
stock exceed a pre-set market price for a given period of time, is
convertible into 625,000 shares of common stock of the Company, approximately
6% of the Company's common stock. The Preferred Stock carries certain
registration rights for the common stock upon such conversion.
On November 12, 1999, the Company sold its entire holdings in its wholly
owned subsidiary, Bronzebase Limited ("Bronzebase"), to British
Telecommunications plc ("BT"). Bronzebase is an English limited liability
company, which owns all of the stock of Versus Technology Limited ("Versus
Technology"). The consideration for the sale was (pound)12,500,000 British
pounds (approximately $20,000,000), payable in cash at closing. The terms of
the transaction were negotiated between the Company and BT at arm's
F-14
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE B -INVESTMENTS AND DIVESTITURES - CONTINUED
length. As part of the transaction the Company retains the right to market
derived channel technology in North, Central and South America, South Korea
and Australia. Derived channel technology creates an inaudible frequency on
an existing telephone line below the voice communications spectrum for data
transmission ("Derived Channel").
NOTE C - SPECIAL CHARGES
During the year ended October 31, 1998, the Company recorded a pre-tax
special charge of $1,598,000. Charges of $1,151,000 related to the write off
of intangible assets, principally developed software costs and territorial
rights, which have been rendered obsolete as a result of the Company's
decision to abandon certain specific Derived Channel sales and marketing
initiatives for which future direct revenues were no longer expected. Charges
of $447,000 result from severance and termination benefit costs for five
employees who had principally corporate responsibilities. At December 31,
2000 and 1999 and October 31, 1999, payments under the aforementioned
severance and termination benefits amounted to $100,000, $31,000 and
$309,000, respectively.
NOTE D - INVENTORY
Inventory consisted of the following:
(In thousands)
DECEMBER 31, October 31,
------------------- -----------
2000 1999 1999
------ -------- ------
Raw materials $1,275 1,978 $1,871
Work in progress 174 70 698
Finished goods 2,668 1,570 1,956
------ ------ ------
$4,117 $3,618 $4,525
====== ====== ======
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(In thousands)
DECEMBER 31, October 31,
--------------------- -----------
2000 1999 1999
----- ------ ------
Leasehold improvements $ 416 $ 235 $ 678
Plant and machinery 5,324 4,816 5,681
Equipment, fixtures and fittings 699 695 1,302
------- ------- -------
Total property and equipment 6,439 5,746 7,661
Accumulated depreciation (3,522) (2,847) (3,869)
------- ------- -------
Property and equipment, net $ 2,917 $ 2,899 $ 3,792
======= ======= =======
NOTE F - GOODWILL
(In thousands)
DECEMBER 31, October 31,
--------------------- -----------
2000 1999 1999
------ ------ --------
Goodwill $ 12,693 $ 12,635 $ 10,624
Accumulated amortization (1,904) (1,231) (1,816)
-------- -------- --------
Goodwill, net $ 10,789 $ 11,404 $ 8,808
======== ======== ========
F-15
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE G - INTANGIBLE ASSETS
Intangible assets consisted of the following:
(In thousands)
DECEMBER 31, October 31,
------------------------ -----------
2000 1999 1999
-------- -------- -------
Developed software $ 686 $ 634 $ 3,069
Patents 10,865 10,724 11,875
Intangible and other assets 320 267 315
-------- -------- --------
Total intangible assets 11,871 11,625 15,259
Accumulated amortization (2,026) (1,215) (3,151)
-------- -------- --------
Intangible assets, net $ 9,845 $ 10,410 $ 12,108
======== ======== ========
NOTE H - REVOLVING CREDIT FACILITY
In February 1997, the Company entered into a U.S. Dollar revolving credit
facility, which provided for maximum borrowings of $10,000,000,
collateralized by certain assets of the Company. The facility included the
option to convert, at maturity, the outstanding balance to an amortizing term
loan payable over a maximum period of up to three years, with a maximum
five-year amortization. At the Company's option, interest was charged at the
bank's prime lending rate less .25% or LIBOR plus 1.25%. The Company had
average borrowings of $6,000,000 and $5,250,000 during 1999 and 1998 at an
average interest rate of 6.96% and 6.72%, respectively. Maximum borrowings
during 1999 and 1998 were $6,000,000 and $4,500,000, respectively.
At October 31, 1998, there were outstanding borrowings of $6,000,000 at an
interest rate of 6.54%.
On January 8, 1999, the Company terminated its revolving credit facility and
repaid amounts due, including interest, totaling $6,008,733.
NOTE I - INCOME TAXES
For the periods noted below, the provision for income taxes consists of the
following: (In thousands)
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ ---------------------
2000 1999 1999 1998
------- ------ ------- --------
Current
Federal $ - $ 389 $ - $ -
State - - - -
Foreign - - 1,682 1,425
Deferred
Federal - 472 - -
State - - - -
Foreign - - - (146)
------- ------- ------- -------
$ - $ 861 $ 1,682 $ 1,279
======= ======= ======= =======
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory U.S. federal income tax rate to income before income
taxes. The following schedule reconciles income tax expense (benefit) at the
statutory rate and the actual income tax expense as reflected in the
consolidated statements of operations for the respective periods: (In
thousands)
F-16
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE I - INCOME TAXES - CONTINUED
DECEMBER 31, OCTOBER 31,
---------------------- ----------------------
2000 1999 1999 1998
------- ------- ------ -------
Income tax (benefit) computed at
U.S. corporate tax rate of 34% $(1,346) $ 3,662 $ 22 $(3,375)
Adjustments attributable to
- Valuation allowance 1,346 861 2,751 4,677
- State tax benefit - - (910) -
- ACT refund - - - (149)
- Non deductible expenses - 5 21 65
- Foreign income taxed in the U.S. - - - 149
- Income tax rate differential between
the U.S.A. and the United Kingdom - - (202) (88)
- Utilization of foreign tax credits - (3,667) - -
------- ------- ------- -------
Total $ - $ 861 $ 1,682 $ 1,279
======= ======= ======= =======
The components of the Company's net deferred tax assets and (liabilities) are
as follows: (In thousands)
DECEMBER 31, October 31,
------------------------ -----------
2000 1999 1999
------- -------- --------
Deferred tax liability:
Differences between book and tax basis
of property and equipment $ (88) $ (111) $ (147)
Other - - -
-------- -------- ---------
(88) (111) (147)
Deferred tax asset:
Intangibles 292 126 506
Net operating loss carry forward 3,932 3,736 3,146
Tax credit carry forwards 4,123 4,123 5,598
Other 28 88 157
Inventories 414 897 918
Accruals 28 229 639
-------- -------- ---------
9,071 9,199 10,964
-------- -------- ---------
Net deferred tax asset 8,983 9,088 10,817
Valuation allowance (8,983) (9,088) (10,345)
-------- -------- ---------
Total $ - $ - $ 472
======= ======== =========
Net operating loss carry forwards for federal and state income taxes
available at December 31, 2000, expire as follows:
AMOUNT YEARS OF EXPIRATION
------ -------------------
Federal operating losses $ 3,573 2020
State operating losses $ 30,025 2003-2020
The financial statements reflect the deferred tax effects of the
undistributed earnings of the Company's United Kingdom subsidiaries at
October 31, 1999. The accumulated net undistributed earnings of the Company's
United Kingdom subsidiaries included in the retained earnings were $2,433,000
at October 31, 1999. As of December 31, 1999 there were no undistributed
earnings of the Company's United Kingdom subsidiaries in retained earnings.
F-17
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE J - SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
Approximately 27% and 19% of sales in the years ended October 31, 1999 and
1998, respectively, were to British Telecommunications plc. The accounts
receivable from "BT" was $2,958,000 and $534,000 as of October 31, 1999 and
1998, respectively. There were no such concentrations for the year ended
December 31, 2000 and the two-month period ended December 31, 1999. See Note
B - Investments and Divestitures.
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancelable
operating leases with initial terms in excess of one year. Future minimum
lease payments under such noncancelable operating leases subsequent to
December 31, 2000 (in thousands) are as follows:
2001 $ 781
2002 710
2003 461
2004 42
2005 32
Thereafter 0
---------
Total $ 2,026
=========
Rent expense, including short-term leases, amounted to approximately
$759,000, $156,000, $992,000 and $626,000 in the year ended December 31,
2000, the two-month period ended December 31, 1999 and the years ended
October 31, 1999 and 1998, respectively.
NOTE L - STOCK OPTION PLANS
The Company has a Long-Term Incentive Plan (the "1999 Plan"), which provides
for the granting of incentive stock options and nonqualified stock options to
employees, officers, directors and consultants of the Company and its
subsidiaries at prices, which represent the closing market price at the grant
dates. The aggregate number of shares, which may be issued upon the exercise
of options under the 1999 Plan, is 1,500,000 shares of Class A Common Stock.
The 1999 Plan replaced the Amended and Restated 1994 Employee Stock Option
Plan (the "1994 Plan") effective for options granted as and from October 25,
1999.
Options issued under the 1999 Plan typically vest ratably over a four-year
period.
Options issued under the 1994 Plan typically vest over a five-year period.
Certain options issued under the 1994 Plan have cliff vesting terms at the
end of a five-year period and terms which provide for the acceleration of
vesting upon the attainment of specified market prices for the Company's
common stock for a period of 60 days.
In the event of a "change in control" as defined in the 1999 and 1994 Plans,
respectively, all outstanding options become fully vested and are subject to
exercise.
Incentive stock options and nonqualified stock options granted under the 1999
and 1994 Plans, respectively, expire 10 years after the grant date unless an
option holder's employment is terminated. Under such circumstances, the
options typically expire from three months to one year from the date of
employment termination.
At December 31, 2000 and 1999 and October 31, 1999, 893,000, 784,500 and
759,500, respectively, ratably vesting common share options under the 1999
and 1994 Plans, respectively, have been granted at prices ranging between
$3.50 and $10.25. Of these options 157,197 have been exercised, 165,869 have
expired and been cancelled, 171,422 are currently exercisable, and the
remaining options will become exercisable in 2001 through 2004.
At December 31, 2000 and 1999 and October 31, 1999, 658,000, 658,000 and
658,000, respectively, cliff-vesting options under the 1994 Plan have been
granted at prices ranging between $4.44 and $7.13. Of these options 225,000
have been exercised, 183,000
F-18
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - CONTINUED
have expired and been cancelled and the remaining options will become
exercisable beginning in 2002 or earlier if the accelerated vesting
conditions are met.
The Company has a Non-Employee Director Stock Option Plan (the "Director
Plan"), which provides for the granting of stock options to non-employee
members of the Company's Board of Directors at the closing market price at
the grant dates. On April 1, 1996, and each anniversary date thereafter, each
non-employee director, who has served as a director for at least one year,
will receive an option to purchase 2,500 shares of the Company's common
stock. On December 5, 1997, the Director Plan was amended, and on February
26, 1998, shareholders approved an increase to 4,000 the annual number of
shares that each director would receive. The aggregate number of shares,
which may be issued upon the exercise of options granted under the Director
Plan, is 62,500 shares of common stock. Options issued under the Director
Plan fully vest one year after the grant date.
In the event of a "change in control" as defined in the Director Plan, all
outstanding options become fully vested and are subject to exercise. Options
granted under the Director Plan expire 10 years after the grant date, unless
an option holder ceases to be a director of the Company. Under such
circumstances, the options expire three months from the date that the option
holder ceases to be a director.
At December 31, 2000 and 1999 and October 31, 1999, 52,700, 36,700 and
36,700, respectively, options under the Director Plan have been granted to
directors of the Company at prices ranging between $3.38 and $12.94. Of these
options 9,000 have been exercised, 27,700 are currently exercisable and the
remaining will become exercisable in 2001.
At December 31, 2000 and 1999 and October 31, 1999 options to purchase
143,750, 143,750 and 143,750 shares, respectively, of Class A Common Stock at
prices ranging from $3.50 to $10.00 were granted as nonqualified stock
options in connection with services rendered to the Company. All of these
options are currently exercisable.
The fair value of each option on the date of grant for 2000, 1999 and 1998
was estimated using the Black-Scholes options pricing model with the
following weighted average assumptions: no dividend yield for all years;
expected volatility of 130% for 2000, 83% for 1999 and 51% for 1998;
risk-free interest rate of 5.28% for 2000, 6.33% for 1999 and 4.54% for 1998;
and expected option lives of 7 years for all years.
The exercise price for options outstanding at December 31, 2000 is between
$3.38 and $12.94. Such options will expire on average in 7.7 years. The
weighted average fair value of options granted during 2000, 1999 and 1998 was
$12.70, $2.97 and $2.54, respectively, on the date of grant.
The following table summarizes the activity of the stock option plans as of
and for the year ended December 31, 2000; the two-month period ended December
31, 1999 and for the years ended October 31, 1999 and 1998.
F-19
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - CONTINUED
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED For the years ended
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ ------------------------------------------------
2000 1999 1999 1998
----------------------- ----------------------- ----------------------- -----------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------- --------- ------ --------- ------ --------- ------ ---------
Outstanding,
beginning of year 1,364,450 $ 4.48 1,439,450 $ 4.31 966,950 $ 5.12 748,450 $ 5.54
Options granted 124,500 13.47 25,000 8.53 658,000 3.79 333,500 4.39
Options exercised (379,197) 4.34 - - - - (12,000) 5.44
Options cancelled (102,369) 4.32 (100,000) 3.06 (185,500) 6.71 (103,000) 5.75
---------- --------- ---------- -------- ---------- -------- ---------- --------
Outstanding, end of year 1,007,384 $ 5.66 1,364,450 $ 4.48 1,439,450 $ 4.31 966,950 $ 5.12
---------- --------- ---------- -------- ---------- -------- ---------- --------
Exercisable, end of year 342,872 $ 4.32 376,550 $ 4.13 214,250 $ 4.90 153,750 $ 5.83
========== ========= ========== ======== ========== ======== ========== ========
The Company's subsidiary, Cellemetry, adopted a Share Option Plan on June 1,
1998, which provided for the granting of nonqualified stock options to
officers and employees of Cellemetry at a pre-determined price. The aggregate
number of shares, which may have been issued upon the exercise of options
under the Share Option Plan, is 1,000,000 shares of Class III Common Stock.
Options issued under the Share Option Plan vested ratably over a five-year
period. In the event of a "change in control" as defined in the Share Option
Plan, all outstanding options became fully vested and were subject to
exercise. The options expired 10 years after the grant date unless an option
holder's employment was terminated. Under such circumstances, the options
expire from three months to one year from the date of employment termination.
On June 1, 1998, 612,000 options under the Share Option Plan were granted to
employees of Cellemetry at $4.00 per share.
At October 31, 1999 and 1998, 612,000 and 612,000, respectively, options
under Share Option Plan had been granted. Of these options none had been
exercised, 308,000 had been forfeited and cancelled and the remaining options
would have become exercisable the beginning June of 2000.
As part of the restructuring of the Cellemetry Operation Agreement between
the Company and BellSouth Wireless the agreement provided for the
cancellation of the Cellemetry Share Option Plan with the intent that the
Company exchange all outstanding options for options to acquire shares of the
capital stock of the Company. Effective November 1, 1999 all options granted
under the Cellemetry Share Option Plan were cancelled and exchanged for
options under the Company's 1999 Plan. See Note B - Investments and
Divestitures.
Had compensation expense for the Company's aforementioned stock option plans
been determined based on the fair value at the grant dates for awards under
those plans under the provisions of SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been changed to the following
pro forma amounts:
F-20
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE L - STOCK OPTION PLANS - CONTINUED
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ ----------------------
2000 1999 1999 1998
--------- --------- --------- -------
Net earnings (loss) - as reported $ (4,200) $ 9,911 $ (1,617) $(11,203)
Net earnings (loss) - pro forma (5,096) 9,818 (2,362) (11,904)
Earnings (loss) per share - as reported (0.40) 0.96 (0.16) (1.04)
Earnings (loss) per share - pro forma (0.48) 0.95 (0.23) (1.10)
The pro forma effect on net earnings (loss) and earnings (loss) per share for
the year ended December 31, 2000, two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998, respectively, by applying SFAS
No. 123, may not be indicative of the pro forma effect on net earnings (loss)
in future years since SFAS No. 123 does not take into consideration pro forma
compensation expense related to awards made prior to November 1, 1995, and
since additional awards in future years are anticipated.
NOTE M - LEGAL
In connection with the acquisition of the entire equity interest in Uplink, a
petition was filed by Uplink. The minority shareholder has alleged that the
acquisition of Uplink was procedurally improper and should be set aside, and
that Uplink and certain of its officers conspired to oppress the minority
stockholder of Uplink and acted fraudulently in effectuating the acquisition.
The case is in the discovery phase.
Neither the Company nor its officers are parties to the litigation. The
Company believes, however, that the value the minority shareholder is
claiming for the shares is in excess of the fair value of those shares. The
Company also believes that the minority shareholder's other claims are
without merit, and Uplink intends to vigorously defend the litigation.
NOTE N - GEOGRAPHIC INFORMATION
The Company operates in a single industry segment. Information about the
Company's operations in different geographic areas for the year ended
December 31, 2000, the two-month period ended December 31, 1999 and the years
ended October 31,1999 and 1998, respectively, are as follows: (In thousands)
UNITED KINGDOM/
U.S.A. AUSTRALIA ELIMINATION CONSOLIDATED
------ --------------- ----------- ------------
Net sales:
2000 - year $ 18,795 $ 1,495 $ - $ 20,290
1999 - two-month period 2,268 33 - 2,301
1999 - year 19,848 13,888 - 33,736
1998 - year 13,804 11,427 - 25,231
Operating profit (loss):
2000 - year $ (9,040) $ 34 $ - $ (9,006)
1999 - two-month period (2,627) 28 - (2,599)
1999 - year (8,279) 5,522 - (2,757)
1998 - year (14,471) 3,159 - (11,312)
F-21
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Year ended December 31, 2000; two-month period ended December 31, 1999
and the years ended October 31, 1999 and 1998
NOTE N - GEOGRAPHIC INFORMATION - CONTINUED
Identifiable assets:
2000 - year $ 45,702 $ 240 $ - $ 45,942
1999 - two-month period 56,267 138 - 56,405
1999 - year 38,037 8,591 - 46,628
F-22
NUMEREX CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
(PARENT COMPANY ONLY)
(in thousands, except share amounts) SCHEDULE 1
- --------------------------------------------------------------------------------
DECEMBER 31, OCTOBER 31,
------------ -----------
2000 1999 1999
-------- -------- --------
ASSETS
Current assets $ 10,541 $ 21,279 $ 4,361
Other assets 171 170 486
Intercompany receivables 25,308 16,890 17,114
Investment in equity of subsidiaries 29,102 29,044 31,150
-------- -------- --------
Total Assets $ 65,122 $ 67,383 $ 53,111
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Intercompany loan and payables $ 6 $ 25 $ 6,664
Other liabilities 750 2,555 1,210
-------- -------- --------
Total Current Liabilities $ 756 $ 2,580 $ 7,874
-------- -------- --------
LONG-TERM LIABILITIES - - -
Preferred stock - no par value; authorized
3,000,000 shares; issued 30,000, 30,000 and 0 shares 3,000 3,000 -
Class A common stock - no par value; authorized
30,000,000 shares; issued 12,157,504, 11,609,492 and
11,609,492 shares 32,064 29,870 29,870
Additional paid-in capital 370 370 370
Treasury stock, at cost, 1,766,400, 1,266,400 and
1,266,400 shares (9,222) (5,222) (5,222)
Retained earnings 38,308 37,235 20,750
Other (154) (450) (531)
-------- -------- --------
Total shareholders' equity $ 64,366 $ 64,803 $ 45,237
-------- -------- --------
Total liabilities and shareholders' equity $ 65,122 $ 67,383 $ 53,111
======== ======== ========
S-1
NUMEREX CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
(in thousands) SCHEDULE 1
- --------------------------------------------------------------------------------
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------- ------------------------
2000 1999 1999 1998
-------- -------- -------- --------
Equity in net earnings (loss) of subsidiaries $ (5,274) $ (1,803) $ (668) $ (8,290)
Operating expenses (2,582) (358) (1,077) (3,792)
Gain on sale of subsidiary - 12,605 - -
Interest and other income (net) 3,896 328 128 879
-------- -------- -------- --------
Income (loss) before provision for income taxes (3,960) 10,772 (1,617) (11,203)
Income taxes - 861 - -
Preferred stock dividend (240) - - -
-------- -------- -------- --------
Net earnings (loss) $ (4,200) $ 9,911 $ (1,617) $(11,203)
-------- -------- -------- --------
S-2
NUMEREX CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
(In thousands) SCHEDULE 1
- --------------------------------------------------------------------------------
FOR THE
FOR THE TWO-MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED
DECEMBER 31, DECEMBER 31, OCTOBER 31,
------------ ------------ -----------
2000 1999 1999 1998
---- ---- ---- ----
Operating activities:
Equity in net earnings (loss)
of subsidiaries $ (5,274) $ (1,803) $ (668) $ (8,290)
Other adjustments, net (3,666) 4,095 13,746 (4,656)
-------- -------- --------- --------
Net cash provided by (used in)
operating activities (8,940) 2,292 13,078 (12,946)
-------- -------- --------- --------
Investing activities:
Proceeds from sale of subsidiary - 16,721 - -
Contribution to capital of subsidiaries, net (58) (2,106) (4,615) (3,820)
-------- -------- --------- --------
Net cash provided by (used in)
investing activities (58) 14,615 (4,615) (3,820)
-------- -------- --------- --------
Financing activities:
Proceeds from revolving credit facility - - - 1,500
Proceeds from exercise of stock options 2,232 - - 65
Principal payment on revolving credit facilty - - (6,000) -
Payment of preferred dividends (240) - - -
Purchase of treasury stock (4,000) - (578) (1,541)
-------- -------- --------- --------
Net cash provided by (used in)
financing activities (2,008) - (6,578) 24
-------- -------- --------- --------
Net change in cash (11,006) 16,907 1,885 (16,742)
Cash, beginning of year 21,233 4,326 2,441 19,183
-------- -------- --------- --------
Cash, end of year $ 10,227 $ 21,233 $ 4,326 $ 2,441
-------- -------- --------- --------
S-3
NUMEREX CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY ONLY)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of
Numerex Corp. (the" Parent") and on an equity basis its subsidiaries and
should be read in conjunction with the consolidated financial statements of
Numerex Corp. and its subsidiaries (the "Company") and the notes thereto.
2. INCOME TAXES
The Parent and its wholly owned subsidiaries file a consolidated tax return.
The Parent participates in a tax sharing agreement with the consolidated
group whereby consolidated income tax expense or benefit is allocated to the
Parent.
S-4
NUMEREX CORP.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands) SCHEDULE 11
- --------------------------------------------------------------------------------
ADDITIONS
BALANCE AT ----------------------- BALANCE AT
BEGINNING OF CHARGES END OF
DESCRIPTION PERIOD PROVISIONS TO EXPENSE DEDUCTIONS PERIOD
----------------------------------------------------------------
Year ended October 31, 1998:
Accounts receivable
Allowance for uncollectible accounts (a) (b) 57 266 2,159 (2,159) 323
Inventory
Allowance for obsolescence (c) 1,088 251 2,201 0 3,540
Other liabilities
Accrued severance (d) 0 0 447 0 447
Year ended October 31, 1999:
Accounts receivable
Allowance for uncollectible accounts 323 83 0 (239) 167
Inventory
Allowance for obsolescence 3,540 0 0 (1,187) 2,353
Other liabilities
Accrued severance 447 0 0 (309) 138
Two-months ended December 31, 1999:
Accounts receivable
Allowance for uncollectible accounts 167 88 0 (18) 237
Inventory
Allowance for obsolescence 2,353 0 0 (143) 2,210
Other liabilities
Accrued severance 138 0 0 (31) 107
Year ended December 31, 2000:
Accounts receivable
Allowance for uncollectible accounts 237 194 105 (105) 431
Inventory
Allowance for obsolescence 2,210 30 0 (1,220) 1,020
Other liabilities
Accrued severance 108 0 0 (108) 0
(a) Amounts resulted from the write-off of certain uncollectible receivables
resulting from non-performing contractual relationships
(b) Amounts resulted from the write-off of non-performing contracts and the
decision to abandon specific sales initiatives for certain Derived Channel
markets.
(c) Amounts resulted from determining certain inventory items to be obsolete
and/or under performing due to market conditions.
(d) Amounts resulted from severance and termination benefits for certain
corporate employees.
S-5