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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 [NO FEE REQUIRED]
For the Fiscal Year ended October 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission File No. 0-22920
NUMEREX CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 11-2948749
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Rose Tree Corporate Center II
1400 North Providence Road
Suite 5500
Media, Pennsylvania 19063
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 892-0316
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 11,202,492
- ---------------------------------------- ---------------------------------
(Title of Class) (Number of Shares Outstanding
as of January 20, 1997)
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 26,061,490. (1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement to be filed in connection
with its 1997 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.
- ----------
(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 $4.0625, the last
reported sale price for the Company's Common Stock on January 17, 1997. 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
recordkeeping 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 subsidiaries, (ii) all
references to Common Stock in this report refer to the Company's Class A Common
Stock, (iii) all information in this report has been adjusted to reflect a
five-for-two stock split paid in October 1994, (iv) all references in this
report to fiscal years are to the Company's fiscal year ended October 31 of each
year and (v) all references in this report to "pounds sterling" or "(pounds)"
are to British pounds sterling.
TABLE OF CONTENTS
Page
----
Table of Contents.......................................................... (i)
Exchange Rate Data......................................................... (i)
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 21
Item 3. Legal Proceedings................................................. 22
Item 4. Submission of Matters to a Vote of Security Holders............... 22
Item 4.1 Certain Executive and Key Employees of the Registrant ............ 23
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters............................................. 23
Item 6. Selected Financial Data........................................... 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 26
Item 8. Financial Statements and Supplementary Data....................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 31
PART III
Item 10. Directors and Executive Officers of the Registrant................ 31
Item 11. Executive Compensation............................................ 31
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 31
Item 13. Certain Relationships and Related Transactions.................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K..................................................... 32
List of Financial Statements...................................... 32
List of Exhibits.................................................. 32
Signatures........................................................ 36
Index to Financial Statements..................................... F-1
EXCHANGE RATE DATA
The following table sets forth certain exchange rates for British pounds
sterling based on the noon buying rate in New York City for cable transfers, as
certified for customs purposes by the Federal Reserve Bank of New York. Such
rates are set forth as U.S. dollars per British pound sterling. On January 17,
1997, the noon buying rate was U.S. $1.6602 per (pounds)100.
Fiscal Years Ended October 31,
------------------------------------------
1993 1994 1995 1996
---------- ---------- ---------- ---------
Exchange rate at end of period........ 1.4882 1.6350 1.5805 1.6278
Average exchange rate during period... 1.5018 1.5250 1.5884 1.5506
Highest exchange rate during period... 1.5975 1.6368 1.6355 1.6278
Lowest exchange rate during period.... 1.4175 1.4615 1.5505 1.5083
The Company currently publishes its consolidated financial statements in
British pounds sterling, the functional currency of the country in which
substantial majority of the Company's revenues are presently generated. All
references in this Prospectus to "pounds sterling" or "(pounds)" are to British
pounds sterling, unless otherwise specified.
(i)
PART I
Item 1. Business.
THE COMPANY
Numerex Corporation (the "Company") designs, manufactures, and markets a
proprietary technology (the Derived Channel System) which enables the
transmission of data over existing telephone lines to perform alarm reporting
and other monitoring functions without interfering with normal voice
communications. The Company's derived channel products include network equipment
traditionally sold to operating telephone companies, and related subscriber
terminal units ("STUs") sold to alarm system distributors and installers for use
at protected premises. In addition, the Company currently offers a family of
intrusion alarm products and a line of network management products.
The Company's primary strategic objectives are to:
o Increase derived channel penetration in existing markets and open new
markets for derived channel technology.
o Develop and/or acquire applications which can capitalize on and make
derived channel technology even more attractive to the market.
o Enter the derived channel services market and establish a recurring
revenue stream from these activities and broaden derived channel
availability.
o Acquire complimentary businesses, products and/or services which can
expand the Company's base of product and service offerings.
The Company's largest customer, British Telecommunications plc ("British
Telecom"), has been successfully implementing the Company's Derived Channel
System by offering British Telecom's "RedCARE" enhanced alarm reporting service
to customers through its telephone network in the United Kingdom. In addition,
at the end of 1994, the Company acquired the rights to market its Derived
Channel System in North America, South America, parts of the Pacific Rim and
Eastern Europe. Along with these rights, the Company assumed customer
relationships with six of the seven Regional Bell Operating Companies and GTE
Corporation in the United States, each of which has purchased and installed
systems using earlier versions of the derived channel technology. In October
1996, the Company announced Bell Canada's intention to trial the Company's
Derived Channel System for potential national deployment. Building upon the
success of British Telecom's RedCARE system, the Bell Canada trial opportunity
and sales and marketing activities in other territories, the Company believes it
is well positioned to expand the subscriber base of existing Derived Channel
Systems and to sell new Derived Channel Systems into various other worldwide
markets.
1
The Company's intrusion alarm product line consists of a broad range of
control panels and detection and communications devices for commercial and
residential use. The Company sells its intrusion alarm products in the United
Kingdom and parts of Western Europe primarily to alarm system distributors and
installers. In the second half of fiscal 1996, the Company successfully launched
a wire-free line of intrusion alarm products.
The Company's network management products are used to test and monitor the
performance of data and voice communications networks. During fiscal 1996, the
Company discontinued several performance measurement products to focus solely on
the high-end network fault management product line. This product line is
marketed to customers in North America, South America, Western Europe and the
Pacific Rim. Through its network management products the Company has developed
direct selling relationships with a number of major telecommunications companies
throughout the world.
The Company's history began in July 1992 when Bronzebase Limited
("Bronzebase"), a newly formed corporation acquired 90% of the outstanding stock
of Versus Technology Limited ("Versus Technology UK") and certain proprietary
intellectual property rights, including rights to derived channel technology and
rights to market such technology in certain countries, including the United
Kingdom. Bronzebase acquired the remaining Versus Technology UK stock in
September 1993. In February 1994, as a result of such stock exchange, Bronzebase
and its subsidiary Versus Technology UK, became subsidiaries of Numerex Corp.
In July 1994, the Company acquired all of the outstanding stock of Digital
Audio Limited ("DA Systems") in exchange for 1,625,000 shares of the Company's
Common Stock. Also in July 1994, the Company purchased certain network
management assets, through a newly formed subsidiary of the Company, Digilog
Inc. ("Digilog"). In November 1994, the Company's subsidiary, DCX Systems, Inc.
("DCX Systems"), completed the acquisition of certain derived channel business
assets, including the rights to manufacture, market and sell the Company's
Derived Channel System in North America, South America and parts of the Pacific
Rim and Eastern Europe. See "Item 1. Business -- Recent Developments."
The Company is a Pennsylvania corporation with its executive offices
located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite
5500, Media, Pennsylvania 19063 and its telephone number is (610) 892-0316.
RISK FACTORS
All statements and information 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. Any one, or any combination of factors could have a material adverse
effect on the Company's results of operations. These factors include:
competitive pressures, economic conditions, changes in consumer spending,
currency exchange fluctuations, tariffs, political instability, interest rate
fluctuations, trade restrictions, and other conditions affecting capital
markets. The following factors should be carefully considered, in addition to
other information contained in this document. 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
2
include, among other things, statements regarding trends, strategies, plans,
beliefs, intentions, expectations, goals and opportunities. Also, they include
statements regarding increases in user and customer base (see Item 1. "Business"
- - "The Company", "Derived Channel System" and "Intrusion Alarm Products");
statements relating to geographic expansion (see Item 1. "Business" - "The
Company", "Derived Channel System" and "Intrusion Alarm Products"); statements
related to growth through a variety of sales and marketing efforts,
technological developments, the introduction of new and enhanced products and
new product applications (see Item 1. "Business" - "The Company", "Derived
Channel Systems", "Intrusion Alarm Products" and "Network Management Products");
statements regarding positive results relating to acquisitions (see Item 1.
"Business" - "The Company", "Acquisition History" and "Derived Channel System");
statements regarding various aspects of competition (see Item 1. "Business" -
"Derived Channel System" - "Competition", "Intrusion Alarm Products" -
"Competition" and "Network Management Products" - "Competition"); statements
regarding future results of operations, profitability, exchange rates and
activities relating thereto (see Item 7. "Management's Discussion and Results of
Operations" "General" and "Foreign Currency"); statements regarding increased
interest and growth in security and alarm industries and markets and demand for
the Company's product offerings (see Item 1. "Business" - "The Company",
"Derived Channel Systems" and "Intrusion Alarm Products"); statements regarding
sufficiency of cash flow, funding operations and availability of additional
capital (see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operation" - "Liquidity and Capital Resources");
statements regarding the Company's ability to retain key employees (see Item 1.
"Business" - "Derived Channel Systems" - "Sales and Marketing"); statements
concerning the nature of applicable regulatory restrictions and limitations (see
Item 1. "Business" - "General" - "Regulation"); and statements relating to the
availability of supplies used in the Company's business (see Item 2.
"Properties.") 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.
Any investment in the Company's securities involves a high degree of risk.
The following factors, in addition to the other information contained in
this report should be considered carefully in evaluating an investment in the
Company.
Limited Operating History; Acquisition History. The Company commenced
operations in July 1992 with the acquisition of Versus Technology UK, which
conducts the Company's Derived Channel System business in the United Kingdom.
The Company acquired both its intrusion alarm products and its network
management products businesses in July 1994. In November 1994, the Company
acquired the rights to market its Derived Channel System in North America and
several other worldwide markets. Due to the Company's limited operating history,
there can be no assurance as to the level of gross profit margin or operating
results which the Company will achieve, nor can there be any assurance that the
Company's operations will be profitable in the future.
Dependence Upon British Telecom. Direct sales to the Company's major
customer, British Telecom, accounted for approximately 31.6% and 37.6% of the
Company's sales for the fiscal years ended October 31, 1996 and 1995,
respectively. Such sales, in fiscal 1995 and 1996 consisted of network equipment
deployed by British Telecom in connection with its RedCARE alarm reporting
service and revenues pursuant to a software contract between the Company and
British Telecom. The Company's agreement to supply certain network equipment to
British Telecom relating to its RedCARE service will expire on January 31, 1997.
Under such agreement, British Telecom is not required to purchase any minimum
amount of equipment. Although no assurances can be given, the Company believes
that a new agreement will be entered into prior to the end of the term of the
present agreement. In addition to direct sales to British Telecom, a substantial
majority of the Company's remaining Derived Channel System sales consists of
STUs sold to alarm system distributors
3
and installers for resale to British Telecom's RedCARE subscribers. The Company
is dependent upon the marketing efforts of British Telecom to generate demand
for the enhanced alarm reporting service, which in turn results in sales of the
Company's network equipment to British Telecom and customer premises equipment
(STUs) to alarm system distributors and installers. There can be no assurance
that British Telecom will take any further steps to increase the market
penetration of its RedCARE service by attracting additional subscribers or by
offering its RedCARE service in new regions of the United Kingdom or that any
market development or geographic expansion efforts undertaken by British Telecom
will be successful. In the event that British Telecom fails to attract
additional RedCARE subscribers or does not otherwise expand its RedCARE service
in the United Kingdom, the Company's sales of Derived Channel System products
would be expected to decrease over time. Also, as market penetration approaches
more complete coverage, the Company believes sales will grow at a lower rate. A
reduction of sales to British Telecom, a reduction by British Telecom in its
marketing efforts for its RedCARE service, a failure by British Telecom to offer
its RedCARE service in new regions, or an impairment of British Telecom's
ability to add new subscribers for its RedCARE service, would have a material
adverse effect on the Company. See "Item 1. Business -- Sales and Marketing --
United Kingdom Security Market for the Derived Channel System."
Risks of the Company's Geographic Expansion Program. To date, a substantial
majority of the Company's revenues has been generated from product sales within
the United Kingdom. The Company has undertaken efforts to increase its market
penetration in North America, South America and the Pacific Rim and to expand
into other parts of Western Europe. Each country typically has its own technical
certification and network standards, local distribution channels, and local
competitive dynamics. Additionally, technical infrastructure differences in each
country will likely increase the cost associated with expansion efforts. In
order for the Company's expansion efforts to be successful, the Company's
products will need to be selected for use in the new geographic markets by
telephone companies and alarm system distributors and installers. There can be
no assurance that the Company's products will be selected for deployment in
these markets or that the Company will be able to successfully expand into new
geographic markets. Unless, and until, the Company is able to generate new sales
from these efforts, the start-up costs and other expenses arising from the
Company's expansion activities may adversely affect the Company's future results
of operations.
Risks Associated with the Availability, Funding, Timing, Terms and Effects
of Possible Acquisitions. One of the elements of the Company's strategy is to
consider the acquisition of complementary businesses and or product lines. There
can be no assurance that appropriate acquisition opportunities will be
identified or available; that the Company will have, or be able to obtain,
sufficient resources to fund any such acquisition; that financing for any such
acquisition will be available to the Company on acceptable terms, if at all;
that any such acquisition will be consummated, or, if consummated, the timing
thereof; or that any such acquisition will be beneficial to the Company. In the
event that the Company obtains financing for any such acquisition, the Company
may become subject to restrictive loan covenants or other unfavorable terms. In
addition, the diversion of senior management's time and attention associated
with any future acquisitions could have an adverse effect on the Company's
operations. Further, once acquired these acquired businesses must be integrated
by the Company. Such integration will place further demands on management and
may require the Company to increase staffing at the management level. There can
be no assurance that these acquisitions can be successfully integrated or that
additional management personnel will be available to the Company.
4
Reliance on Key Personnel. The Company's future performance depends in
large part upon the services of certain executive officers and other key
personnel. The Company has entered into employment agreements with some, but not
all, of such persons. The loss of the services of one or more of these
individuals could have an adverse effect upon the Company. The Company's future
performance will also depend upon its ability to attract and retain other highly
qualified management, engineering, marketing, finance and sales personnel. There
can be no assurance that the Company will be able to continue to attract and
retain such persons. See "Item 4.1 -- Certain Executive Officers of the
Registrant" and "Proposal One -- Election of Directors" contained in and
incorporated by reference from the Company's Proxy Statement relating to the
1997 Annual Meeting of Shareholders.
Potential Adverse Effect of Competition in Products and Technologies. The
Company's operations are characterized by significant competition with other
companies offering alternative products and/or technologies. In certain cases,
competing products and technologies may offer price or performance
characteristics rendering them more attractive to potential customers than the
Company's products. Many of the Company's competitors have greater financial,
technical, manufacturing and marketing resources than the Company. There can be
no assurance that customers will not elect to use alternatives to the Company's
products or that the Company's competitors will not develop new products,
product features or pricing policies which are more attractive to customers than
those offered by the Company. The Company's financial results may be negatively
impacted as a result of increased competition. See "Item 1. Business."
Failure to Effect Technological Changes. Technology is subject to rapid
change, and the introduction of new products and technologies in the Company's
markets could adversely affect the Company's business. Also, technical
infrastructure differences within each market will increase the cost of
deployment. The Company's success will be dependent upon its ability to enhance
existing products and introduce new products on a timely basis. The Company is
in the process of upgrading existing systems using derived channel technology in
North America to the latest technology platform used in the United Kingdom and
expects to implement additional enhancements to the Derived Channel System. Full
compatibility may be constrained by regulations covering the telephony services
offered in the United States. If the Company is unable to upgrade its Derived
Channel System or to design, develop, manufacture and introduce additional
enhancements to existing products and competitive new products on a timely
basis, its business could be adversely affected.
Foreign Exchange Translation and Liquidity Risk. A substantial majority of
the Company's operations currently is conducted in the United Kingdom. Most of
the Company's transactions are denominated in pounds sterling and do not involve
routine exchange into other currencies. However, a portion of the Company's
production costs are denominated in United States dollars even though the bulk
of its revenues currently are denominated in pounds sterling. As a result, the
Company is exposed to fluctuations in exchange rates in the event these
transactions are not properly hedged. Although the Company does not have an
on-going currency hedging program, it occasionally hedges its operations
selectively against fluctuations in foreign currency as needed, using forward
U.S. dollar contracts. The Company anticipates that it may utilize additional
forward U.S. dollar contracts as needed to hedge against fluctuations in the
exchange rate between the U.S. dollar and the British pound sterling. The
exchange rate between United States dollars and the British pound sterling has
varied significantly over the last several years and may continue to vary
significantly in the future. In addition, any appreciation in the value of the
dollar relative to the pound sterling (i.e., a decrease in the number of dollars
into which pounds sterling may be exchanged) will have the effect of reducing
the Company's reported earnings in dollars when compared to pounds sterling, the
result of which could have an adverse effect on the market price for the
Company's Common Stock. As the Company
5
enters new geographic markets outside the United States, the Company will be
subject to additional foreign exchange translation and liquidity risks.
Product and Other Liability Risks. The Company's products involve the risk
of liability to the telephone company employing a Derived Channel System, in the
event the Company's products damage the telephone company's network or
equipment, and to the end-user of the Company's alarm reporting and intrusion
detection equipment, in the event the Company's products malfunction and fail to
report an intrusion. In the event of a product liability claim, other
manufacturers, distributors and installers of the Company's products may bear
some or all of the liability. Although the Company maintains product liability
insurance, there can be no assurance that if the Company were to incur
substantial liability for product claims, its insurance would provide adequate
coverage against such liability. Accordingly, the Company's results of
operations could be materially adversely affected in the event of any product
liability judgment or settlement in excess of available insurance coverage.
Possible Lack of Patent Protection. The Company holds patents covering
primary derived channel technology used by the Company in systems installed in
the United Kingdom, the United States and various foreign countries. The United
Kingdom patent expires in October 2002 and the United States patent expires in
December 2001. There can be no assurance that any additional patents will be
issued to the Company in any or all appropriate jurisdictions, that litigation
will not be commenced seeking to challenge such patent protection or that any
such challenges will not be successful, that processes or products of the
Company do not or will not infringe upon the patents held by third parties or
that the scope of the patents issued to the Company will successfully prevent
third parties from developing similar or competitive products or technologies.
See "Item 1. Business -- Intellectual Property."
Reliance on Limited Manufacturing Facilities and Sources of Supply. A fire
or other disaster at the Company's manufacturing facilities or those of its
subcontractors would cause major disruptions to the Company's operations due to
the short lead-times demanded by certain of the Company's customers. A
substantial disruption at the Company's manufacturing facilities or those of its
subcontractors could have a material adverse effect on the Company's business.
In addition, certain of the components used in the Company's products are
obtained from sole source suppliers. In the event that the Company could not
obtain any of these components on a timely basis or at all, the Company's
business could be adversely affected. See "Item 2. Properties."
Failure to Comply with Standards and Certification Requirements. The
Company's products are subject to a variety of standards and certification
requirements applicable to products connected to the public telephone network in
the countries in which it conducts business. In the event that the Company's
current or future products did not comply with any such standards or in the
event that all required certifications were not received and maintained, the
sale of such products would be delayed and the Company's operating results could
be adversely affected. See "Item 1. Business -- Regulation."
Relationship with Dominion and Gwynedd; Conflicts of Interest. The Company
has entered into various transactions and arrangements with Dominion Group
Limited, a Member Company of Dominion Holdings or a related corporation which
previously carried on certain activities of such entity (collectively,
"Dominion"). Dominion is an investment and merchant banking firm which has
provided financial advisory and investment banking services to the Company.
Gwynedd Resources, Ltd. ("Gwynedd"), at October 31, 1996, owned approximately
29.6% of the outstanding Common Stock of the Company. The shareholders of
Dominion are also the shareholders of Gwynedd. Richard L. Mooers, who was a
director of the Company and Gwynedd's designee to the Board, until May 1996, was
also a director and officer of each of Gwynedd and Dominion. Mr. Mooers was
replaced by
6
Andrew J. Ryan, who is presently serving as Gwynedd's designee. During the
fiscal years ended October 31, 1995 and 1996, the Company paid Dominion fees of
$469,942 and expense reimbursements of $54,730 and $240,000 and expense
reimbursement of $88,038, respectively, for services performed by Dominion. The
Company was party to an agreement with Dominion, which terminated on December
31, 1996, under which Dominion provided financial advisory and other services
through December 31, 1996, including identifying acquisition opportunities in
the security and telecommunications areas. Under this agreement, the Company
paid to Dominion a fee of $20,000 per month, plus certain expense reimbursements
and was required to pay to Dominion a negotiated finder's fee, comparable to
that which the Company would pay to an unaffiliated party, for any transaction
resulting from an investment opportunity identified by Dominion, although none
was paid. The Company was indebted to Dominion in the amount of $136,000, which
amount bore interest at 9.5% per year and was payable in monthly installments
through December 1995. This loan was repaid in January 1995. The Company had
sub-leased its principal executive offices from Dominion. In addition, during
fiscal 1995 DA manufactured products for a company in which Dominion owns a
controlling interest. Sales by DA to that entity for fiscal 1995 were $368,500.
In October 1996 Numerex invested $375,000 in return for an initial 10% equity
interest in CellTel. These funds were used by CellTel to repay the account
receivable relating to the 1995 product sales. In 1999 Numerex has the right to
put its initial equity interest to Dominion and Dominion can call this interest
for $500,000. In addition, in 1999, if the above-referenced call is not
exercised by Numerex, it may acquire an additional 10% interest in CellTel for
$1.00. There can be no assurance that conflicts of interest will not arise in
connection with present and future transactions and arrangements between the
Company, Dominion and Gwynedd that may have a material adverse effect on the
Company. See "Item 12. Security Ownership of Certain Beneficial Owners and
Management', "Proposal One -- Election of Directors" and "Certain Relationships
and Related Transactions" contained in and incorporated by reference from the
Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
Concentration of Share Ownership. At October 31, 1996 Gwynedd owned
approximately 29.6% of the outstanding Common Stock of the Company. Accordingly,
Gwynedd at October 31, 1996 had the ability to substantially influence the
outcome of the election of directors of the Company as well as other proposals
requiring shareholder approval by a simple majority. Such influence by Gwynedd
may be considered to have anti-takeover effects and may delay, defer or prevent
a takeover attempt that a shareholder might consider in its best interest. In
addition, the Company has entered into an agreement which gives Gwynedd the
right to designate one director on the Board of Directors (two directors if the
Board consists of more than seven directors) as long as Gwynedd owns at least
ten percent of the outstanding Common Stock. In addition to Gwynedd's ownership
of Common Stock, Kenneth F. Manser, a director and executive officer of the
Company, at October 31, 1996, owned approximately 11.8% of the outstanding
Common Stock . See "Item 12. Security Ownership of Certain Beneficial Owners and
Management," "Proposal One -- Election of Directors" and "Certain Relationships
and Related Transactions" contained in and incorporated by reference from the
Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
"Anti-Takeover" and "Anti-Greenmail" Provisions. The Company's Articles of
Incorporation and Bylaws, as well as the laws of the Company's state of
incorporation, contain provisions which may have the effect of deterring
takeovers and making it more difficult to gain control of the Company, including
provisions restricting the right of any person or entity, other than current ten
percent shareholders, to hold or vote more than ten percent of the Company's
outstanding voting securities without the approval of the Board of Directors. In
addition provisions on certain employment and severance agreements as well as
certain provisions under the Company Employee Stock Option Plan and Non-Employee
Director Option Plan may be deemed to have an "anti-takeover" effect. See
7
"Executive Compensation - Employment and Related Agreements" and "Stock Option
Plans" contained in and incorporated by reference from the Company's Proxy
Statement relating to the 1997 Annual Meeting of Shareholders.
Potential Adverse Effect on Market Price Due to Shares Eligible for Sale.
At October 31, 1996, the Company had a total of 11,202,492 shares of Common
Stock outstanding which were freely tradeable without restriction or
registration under the Securities Act by persons other than "affiliates" of the
Company as defined under the Securities Act. Approximately 5,724,992 and
1,635,000 shares, which were deemed "restricted shares" as that term is defined
by Rule 144 promulgated under the Securities Act became eligible for sale under
Rule 144 beginning in February 1996 and July 1996, respectively, subject, in
certain cases, to the volume and other limitations set forth in Rule 144. The
Company has granted Gwynedd the right to one demand and an unlimited number of
"piggyback" registrations with respect to 1,228,905 restricted shares of Common
Stock held by Gwynedd which became eligible for sale under Rule 144 beginning in
July 1996. The Company at October 31, 1996 had outstanding options to purchase
355,700 shares of Common Stock, of which 103,700 are currently exercisable.
Sales of substantial amounts of Common Stock could adversely affect the
prevailing market price of the Common Stock.
DERIVED CHANNEL SYSTEM
Industry Background
As a result of technological advances in the telecommunications industry,
telephone companies are able to broaden their product portfolios by offering
enhanced services to telephone customers. Many of these new services, such as
call waiting, call forwarding, voice mail and security monitoring services, are
being offered by telephone companies to customers on a fee basis across
substantial portions of their user base, creating opportunities for incremental
sources of recurring revenue. The Company believes that of particular interest
to telephone companies and their customers are those add-on services which can
be offered using existing equipment on an overlay basis without requiring
additional telephone line construction. In addition, the Company believes that
telephone companies are attracted to technologies, such as the Company's Derived
Channel System, that offer a cost-effective solution for applications that
typically require dedicated telephone lines, thereby providing a more productive
use of the existing telephone network.
At the same time, the Company believes crime rates are rising in various
parts of the world and that this has increased the demand for improved security
systems. Additionally, in recent years, more sophisticated methods have been
used to defeat security systems that use a telephone line to signal an alarm.
Intruders are increasingly cutting telephone lines and disabling other portions
of the security system. Under these circumstances, many security systems are not
able to function, thereby providing the intruder undetected access to the
premises. In an effort to better manage underwriting risk, insurance companies,
especially in the United Kingdom, have begun requiring commercial and high-end
residential users to incorporate security systems meeting certain
specifications, such as a line interrupt detection capability, as a condition to
providing insurance. Consequently, more sophisticated alarm signaling systems
are being utilized, including wireless communication devices, dedicated lines
and the Company's Derived Channel System.
8
Technology
The Company's patented technology creates a "derived channel" on an
existing telephone line by using an inaudible frequency below the voice
communication spectrum (below 50 Hz) 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. The Derived
Channel System operates over a regular voice telephone line whether or not the
telephone is in use and does not interfere with a voice telephone call. In
addition, the low tone signal can be encrypted for additional security. The
Derived Channel System is a two-way communication system that continuously
monitors the integrity of a user's telephone line and security system. The
Company has recently completed development of an In Band signaling capability
which utilizes a bi-directional modulated signal in the 200-300 Hz band thus
enabling the Company's family of derived channel products to become compatible
with the new digital transmission equipment (i.e. fiber optics) presently being
installed on various communication networks.
The Company believes that its Derived Channel System differs from most
other technologies in three important aspects: (1) the Derived Channel System
operates over existing telephone lines, thereby sparing the telephone company
the cost of additional line installation and system overhead and eliminating the
need for costly dedicated line service to the telephone customer; (2) the
Derived Channel System communicates by means of a continuous and inaudible
signal, which can be encrypted, and is transmitted whether or not the telephone
is in use; and (3) telephone line integrity and security system operation are
automatically monitored at frequent intervals through polling generated by the
network equipment located at the telephone company's central office and
continuous signaling originating at the protected premises, thereby providing
continuous protection and prompt reporting of line disruptions, telephone system
outages or alarm conditions.
The Company believes that the Derived Channel System represents marked
improvement over the most common monitored alarm signaling system, which is an
automatic dialer (also known as a digital communicator). After an intrusion is
detected, an automatic dialer attempts to seize the subscriber's telephone line
and dial the telephone 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 an intrusion. Unlike the
standard automatic dialer, the Derived Channel System works whether or not the
telephone line is in use, continuously monitoring line integrity and
automatically reporting any line disruption or failure to the alarm monitoring
company.
The Company believes that in addition to alarm monitoring services, the
Derived Channel System can be used for other applications in which a remote site
needs to be monitored or signaled via an existing telephone line. These
applications may include fire alarming; line integrity monitoring (e.g.,
critical phone lines to a nuclear power plant); energy management; critical
event monitoring (e.g., changes in environmental conditions such as
refrigeration temperatures); and automatic utility meter reading. The Company
intends to adapt its derived channel technology to emerging communications
networks if market conditions warrant. For example, the Company has demonstrated
through alpha testing that its derived channel technology can be adapted to
Integrated Systems Digital Networks ("ISDN"), GSM (cellular) networks, as well
as cable distribution networks used by cable television companies. See "Item 1.
Business -- Research and Development."
9
Products
The Company's Derived Channel System permits a telephone company to
implement a secure alarm reporting service using existing telephone lines. The
Derived Channel System links the protected premises, message switch software
residing on a minicomputer in a telephone company's central office and the
customer's alarm monitoring company over standard telephone lines. The Derived
Channel System consists of (1) the message switch -- two minicomputers (one of
which is redundant) located at the telephone company which use the Company's
switching software to receive messages from the scanner and transmit them to an
alarm monitoring company; (2) the scanner -- a pair of microprocessors situated
in the telephone company's central office which monitor multiple subscriber
terminal units and transmit alarm conditions to the message switch; and (3) the
subscriber terminal unit or STU -- a microcomputer located at the protected
premises that connects the alarm panel to the scanner through the end user's
telephone line and continuously communicates with the scanner to indicate that
the telephone line and the STU are working.
The following illustrates the Derived Channel System as used in intrusion
alarm and other applications:
[DIAGRAM SHOWING DERIVED CHANNEL SYSTEM]
[GRAPHIC OMITTED]
10
Message Switch. The message switch consists of two minicomputers located at
the telephone company which use the Company's switching software to transmit
information to the appropriate alarm monitoring company following receipt of an
alarm signal from a scanner. The use of two minicomputers, which are often
housed separately, provides redundancy since either minicomputer is capable of
maintaining system performance in the event the other minicomputer fails. The
Company typically sells or licenses the switching software while the
minicomputers used in the message switch are independently manufactured and are
either purchased by the telephone company directly from the manufacturer or
purchased by the Company for resale to the telephone company.
Alpha Platform. The Company, through equipment upgrades and software
enhancements, recently increased the capacity of its message switch
approximately fivefold to enable it to accommodate approximately 190,000 STUs.
The original software utilized by the Derived Channel System has been rewritten
to operate on a new generation computer platform and is operational at several
sites in the United Kingdom. The Company believes this platform, with certain
modifications, will be transportable to other markets, including the United
States. The Company has also enhanced the features and functions offered by the
message switch software. The Company also intends to incorporate networking
capabilities in its message switches so that message switches at different
locations can be interconnected, thereby permitting the telephone company or
service provider to expand an alarm reporting service into new regions without
installing new message switches.
Scanner. The scanner is comprised of a pair of microprocessors and
associated circuits that interrogate or poll each STU using the user's regular
telephone line. The scanner also relays information from the STU to the message
switch. Multiple scanners typically are installed in racks at the telephone
company's central office and each scanner can communicate with up to 1,024 STUs.
The scanner's polling frequency, which is set by the telephone company, can be
as often as several times a minute; however, a scanner is typically set to poll
each STU once every three minutes. Following its poll, the scanner awaits the
STU's response indicating that the security system is functioning or that there
is an alarm condition. If it receives a response indicating an alarm condition
or receives no response, the scanner quickly polls the STU for confirmation. If
an alarm condition exists, the scanner transmits appropriate information to the
message switch for routing to the appropriate alarm monitoring company. The
scanner is sold to telephone companies for installation in secure locations
within the telephone company's central office.
STU. The STU is a single printed circuit board microcomputer containing a
microprocessor, signal recognition circuits and terminals for multiple alarm
inputs. Typically, the STU is connected to an alarm panel located in the
protected premises which, in turn, is connected to various intrusion or other
detection devices. The STU sends a continuous and inaudible signal, which may be
encrypted, to the scanner by means of the user's existing telephone line. In
addition, the scanner periodically polls the STU to confirm that the system is
functioning. The Company sells STUs to alarm system distributors and installers
for resale to owners of the protected premises.
The Company's Derived Channel System operates continuously without regard
to whether the telephone is in use. In the event the telephone line is not in
service or the STU malfunctions, the scanner transmits a message via the message
switch to the alarm monitoring company to indicate that an out-of-service
condition exists, allowing the alarm monitoring company to take appropriate
action.
11
Sales and Marketing
In marketing its Derived Channel System, the Company typically sells
network equipment (consisting of message switches and scanners) to a telephone
company for installation on its telephone network. Historically, the Company has
concentrated its marketing efforts on major telephone companies in the United
Kingdom and, more recently, in the United States, Australia, Canada, South
America and Western Europe. To date, ten telephone companies have installed
systems using derived channel technology, including British Telecom, six of the
seven Regional Bell Operating Companies in the United States, and Telecom
Australia. See "Item 1. Business -- Recent Developments."
Once a system has been installed, the Company directly markets customer
premises equipment (STUs) primarily to alarm system distributors and installers
for resale to end-users. Historically, the Company has depended upon telephone
companies and alarm system distributors and installers to market the Derived
Channel System alarm reporting service. In the future, the Company intends to
expand its level of marketing support provided to telephone companies and alarm
system distributors and installers.
Set forth below is a summary of telephone companies with systems using
derived channel technology and the Company's estimate of the installed STU base
worldwide:
Derived Channel Technology Worldwide
- --------------------------------------------------------------------------------
Telephone Company Estimated Installed STU Base
- ------------------------------------------------- ----------------------------
Ameritech Corporation Manitoba Telephone System Australia 25,000
Bell Atlantic Corp. NYNEX Corporation North America 55,000
BellSouth Corporation Pacific Telesis Group United Kingdom 222,000
British Telecom Telecom Australia
GTE Corporation US West Inc.
The United Kingdom Security Market for the Derived Channel System
The Company's largest customer, British Telecom, has been successful in
implementing the Company's Derived Channel System by offering RedCARE, an
enhanced alarm reporting service, through its telephone network in the United
Kingdom. The Company believes that the RedCARE system is available in
approximately 90% of British Telecom's telephone exchanges, including London,
Manchester and Birmingham, England, and that British Telecom plans to extend the
availability of the service to other areas of the United Kingdom. As market
penetration approaches more complete coverage, the Company believes sales will
grow at a slower rate. There are approximately 220,000 RedCARE subscribers, most
of which are commercial subscribers.
While the Company believes that its Derived Channel System has been used
primarily in the commercial sector, management believes that growth potential
exists in both the commercial and residential sectors. The Company believes that
there are approximately 625,000 alarm systems with communication capabilities
(of which approximately 35% are presently RedCARE customers) of a total 2.7
million alarm systems installed in the United Kingdom. The Company believes that
additional United Kingdom growth opportunities are available in the fire alarm
reporting, telemetry and energy management markets.
12
The Company and its predecessors have had a business relationship with
British Telecom since 1984. British Telecom purchases message switches and
scanners from the Company for use in its RedCARE alarm reporting service. The
Company is party to an agreement with British Telecom that establishes terms of
purchase for Derived Channel System network equipment from the Company. Under
the agreement, British Telecom is required to provide rolling forecasts of the
quantity of network equipment likely to be ordered during specific periods, but
is not required to order any minimum amount of such equipment. This agreement
expires on January 31, 1997. Although no assurances can be given, the Company
believes that a new agreement will be entered into prior to the end of the term
of the present agreement. The Company is also party to a software contract (the
"Software Contract") with British Telecom whereby the Company is obligated to
provide software ("Developed Software") and related services, including
maintenance and support, to British Telecom in connection with RedCARE by
various dates ranging between March 1995 through October 1996 and in return
therefor will receive licensing and software development fees totaling
(pounds)3,360,000. During fiscal 1996 the Company recognized (pounds)1,934,000
in license fees hereunder. Under the agreement British Telecom is granted an
exclusive, non-transferable and irrevocable license in the United Kingdom
relating to the Developed Software. This license becomes non-exclusive in the
United Kingdom five years after British Telecom's acceptance of the Developed
Software. Certain warranties and indemnities are also provided by the Company.
Direct sales to British Telecom for the fiscal years ended October 31, 1996
and 1995, were approximately (pounds)5.8 million and (pounds)7.9 million,
respectively. Direct sales to British Telecom accounted for approximately 31.6%
and 37.6% of the Company's net sales for the fiscal years ended October 31, 1996
and 1995, respectively. The Company and British Telecom maintain a continuous
dialogue concerning the development of enhancements to the Derived Channel
System used in connection with the RedCARE system.
British Telecom is the primary marketer of RedCARE service to its
customers. In addition, several major insurance companies in the United Kingdom
have required as a condition to policy renewal the use of an alarm reporting
service, such as the RedCARE system, that can detect telephone line disruption.
As a result, the Company does not direct an extensive marketing effort to
end-users and primarily markets STUs to alarm system distributors and
installers. Accordingly, the Company is dependent upon the direct sales efforts
of British Telecom to attract RedCARE subscribers and resulting sales of network
equipment and STUs. Approximately 54.8% of Derived Channel System sales over the
last three fiscal years represented sales to British Telecom. STU sales to alarm
system distributors and installers for use with the RedCARE system and all sales
in the United States by DCX Systems accounted for substantially all of the
balance.
The United States and other Security Markets for the Derived Channel System
In conjunction with the Company's acquisition of assets and territorial
rights to manufacture, market and sell its Derived Channel System in North
America, South America, parts of the Pacific Rim and Eastern Europe, the Company
assumed customer relationships with telephone companies in the United States
that have deployed systems using earlier versions of derived channel technology.
These companies include Ameritech Corporation, Bell Atlantic Corp., BellSouth
Corporation, GTE Corporation, NYNEX Corporation, Pacific Telesis Group and US
West, Inc. These systems have an installed base of approximately 50,000 STUs.
Although the Company's Derived Channel System used in the United Kingdom
and the systems using derived channel technology deployed in North America are
based upon the same fundamental
13
technology, the systems are not fully compatible. As a result of a technical
evaluation of systems using derived channel technology in the United States, the
Company is in the process of upgrading this technology to the latest generation
of its Derived Channel System deployed in the United Kingdom and expects to
implement additional modifications and enhancements to its Derived Channel
System, some of which may require meeting local technical certification
requirements. Full compatibility may be constrained by regulations covering the
telephony services offered in the United States as well as technical
infrastructure differences within this marketplace. The Company believes these
efforts will increase the demand for network equipment and STUs in the United
States.
The Company believes the United States market represents a significant
growth opportunity for sales of Derived Channel Systems for use in alarm
reporting services. According to an industry source, approximately 24 million
alarm systems have been installed in the United States through 1996 of which 55%
are in residential premises and 45% are in commercial and other premises. Of the
alarm systems that have been installed, approximately 53% are monitored systems.
The Company believes that the United States residential customer is increasingly
turning to a monitored security system.
The Company's immediate derived channel market expansion strategy is two
dimensional. First, it is using the Company's success with British Telecom in
the United Kingdom as a model for increasing market penetration in the United
States and other markets; and second, it is seeking to expand the derived
channel market in the United States in cooperation with the operating telephone
companies.
In implementing the first part of this strategy, the Company is in the
process of upgrading existing systems using derived channel technology to the
latest technology platform utilized in the United Kingdom, and plans to continue
to introduce new derived channel products. For example, the Company has
introduced a Fire STU (an industry standard fire alarm signaling system) and is
working on the development of a GSM (cellular) STU and a Serial (packet data
transmitter) STU.
Secondly, the Company plans to develop new and expand existing
relationships with Regional Bell Operating Companies and other international
telephone companies for the purpose of expanding the use of the Derived Channel
System. Efforts during fiscal 1996 produced the Bell Canada trial of the
Company's Derived Channel System, and initiatives in South America and Western
Europe are being well received. The Company intends to continue to expand its
sales activities geographically to market its Derived Channel System to
telephone companies worldwide, and to alarm systems installers and distributors,
and may establish regional sales offices to support its expansion efforts.
In implementing this aspect of the derived channel market expansion
strategy, the Company plans to continue to develop relationships with Regional
Bell Operating Companies in the United States. which will enable it to directly
provide derived channel services to the marketplace. Under this scenario, it is
contemplated that an operating telephone company would provide the physical
connection to the subscriber's telephone line and the remainder of the service
would be provided by the Company. Management believes that entrance into the
services side of the business will position the Company to participate in future
growth opportunities associated with the recurring revenue stream aspects of the
services business and enable the Company to better predict revenue performance
associated therewith.
14
Strategy
Increase derived channel penetration in existing markets and open new
markets for the technology. The Company's objective is to expand its existing
Derived Channel System business, particularly in the United Kingdom, and to open
new markets for this technology. At British Telecom's request, the Company has
significantly expanded the capacity of its Derived Channel System network
equipment, and is supporting British Telecom's efforts to increase the number of
subscribers to its RedCARE service. In October 1996, the Company announced Bell
Canada's intention to trial the Company's Derived Channel System for potential
national deployment. In addition, the Company is in the process of strengthening
its Telecom Australia relationship and is actively exploring deployment
opportunities in South America and in major Western European countries.
In order to implement its Derived Channel System in countries outside the
United Kingdom, the Company does not expect to rely on insurance companies to
mandate the use of specific alarm reporting systems. As a result, the Company
believes it will be necessary to direct greater marketing efforts to telephone
companies and alarm system distributors and installers in these markets.
Develop and/or acquire applications which can capitalize on and make
derived channel technology even more attractive to the marketplace. The Company
seeks to exploit new market opportunities by broadening the monitoring and/or
reporting activities available through its derived channel technology. The
Company believes attractive market opportunities exist for other applications
which can take advantage of the Derived Channel Systems's ability to perform
monitoring and/or reporting functions on an overlay basis using existing
telephone lines without interfering with voice communications. Some examples of
these applications are fire alarm reporting, automatic utility meter reading,
and energy management systems.
Enter the derived channel services market to establish a recurring revenue
stream and to broaden derived channel availability. The Company plans to develop
relationships with Regional Bell Operating Companies in the United States. which
will enable it to directly provide derived channel services to the marketplace.
Under the arrangements contemplated by this component of the strategy, the
operating telephone company would provide the physical connection to the
subscriber's telephone line and the remainder of the service would be provided
by the Company.
Acquire complimentary businesses, products and/or services which can expand
the Company's base of offerings. A significant element of the Company's growth
strategy includes acquisition activity designed to enhance the Company's product
and service offerings and to strengthen the Company's position in the data
transport market.
Competition
Because of its proprietary technology, management believes that the Company
and its two licensees are the only providers of derived channel system 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 System. Additionally, various wireless communication systems,
including long-range radio, digital packet radio and various cellular systems,
are alternatives to the Company's Derived Channel System. Management believes
that these alternatives are more expensive yet less reliable than the Company's
Derived Channel System because they do not continuously monitor security system
15
integrity and they can be compromised through jamming and other techniques
without alerting an alarm monitoring company. While the automatic dialer
typically used in an alarm system is less expensive than the Company's STU, it
lacks the ability to communicate when the telephone line is cut or becomes
inoperable, it can not communicate the existence of a line problem to an alarm
monitoring center, and it can not be polled to determine the status of the alarm
system. In those security applications where communication integrity and
constant monitoring are important, the Company believes that its Derived Channel
System competes effectively in terms of price and performance.
Research and Development
The Company historically has contracted with third parties to conduct,
under the Company's supervision, research and development projects related to
the Derived Channel System. The Company anticipates that an increase in future
research and development expenditures will be necessary to remain competitive in
the rapidly changing telecommunications industry and that more development work
will be done in-house. The Company's principal development programs include the
following:
In Band Signaling. The Company has recently completed development of an In
Band signalling capability which utilizes a bi-directional modulated signal in
the 200-300 Hz band, thus enabling the Company's family of derived channel
products to become compatible with the new digital transmission equipment (i.e.
fiber optics) presently being installed in various communication networks.
Emerging Communication Platforms. The Derived Channel System is designed to
accommodate mixed telephone network environments and cable distribution
networks. For example, the Company is currently developing enhancements to the
Derived Channel System that will be compatible with ISDN and certain cellular
networks.
INTRUSION ALARM PRODUCTS
The Company acquired DA Systems in July 1994. DA Systems offers a broad
range of intrusion alarm products, including control panels, detection and
communication devices, primarily in the United Kingdom.
Industry Background
The Company believes that generally rising crime rates and interest
generated by law enforcement agencies seeking to deter crime will have the
effect of increasing the demand for security systems. Additionally, the demand
for security systems products is being influenced by insurance companies, which
often offer incentives to those insured that have security systems installed at
their premises. The Company's market for security systems in the United Kingdom
primarily consists of commercial and high-end residential users, who require a
more reliable and comprehensive system, and low-end residential users, who
require a less expensive system that is easy to install and use.
Products
The Company offers a broad range of intrusion alarm products for commercial
and residential use, including a full line of control panels and detection and
communication products. The Company's
16
intrusion alarm products are marketed to distributors and installers principally
in the United Kingdom. The Abacus family of products, the Company's principal
intrusion alarm product group, is compatible with most United Kingdom security
systems, including the Company's Derived Channel System.
Control Panels. A control panel is a keypad operated device located at the
protected premises which maintains contact with the detectors and signals an
alarm condition when indicated by a detector. Because the Abacus family of
control panels is designed with common features throughout the product line,
once an installer becomes familiar with a particular control panel installation,
he can follow the same procedure for the entire Abacus product family. This
universal installation procedure makes the Abacus family an attractive choice.
The control panel family of products includes the Abacus 6 (a 6-zone control
panel); Abacus 8; Abacus 15; and the Abacus 64. The Pulsar family of control
panels is designed to appeal to the price sensitive segments of the residential
market which require fewer features.
Detection Products. The Company's Abacus line of detectors includes a broad
range of passive infra-red devices, which detect the infra-red heat emitted by
the human body, and other detection products including active infra-red devices
which consist of an infra-red beam transmitter and a separate detector which
senses when the beam is broken. The product family includes: the Comet, a line
of passive infra-red detectors; low-cost active infra-red beam devices which are
designed for interior use; and vibration detectors.
Communication Products. These devices signal an alarm monitoring company
upon receipt of an alarm condition from the control panel. The Company's Abacus
line of communication products historically has consisted primarily of automatic
dialers. The Company's STU product line includes its Blu STU which is used on
the British Telecom RedCARE network in conjunction with the Company's Derived
Channel System. The Blu STU is fully compatible with the Company's Abacus family
of intrusion alarm products.
Sales and Marketing
The Company's intrusion alarm products are marketed in the United Kingdom
and parts of Western Europe to alarm system distributors and installers who are
the primary decision makers regarding security product selection. The Company
employs a direct sales force to maintain and enhance relationships with alarm
system distributors and installers. Intrusion alarm products are sold on a
component basis or as complete security systems consisting of an alarm panel and
detection and communication devices and are typically configured and installed
at the protected premises by alarm system installers. Sales of intrusion alarm
products accounted for 22% and 21% of the Company's total net sales for the
fiscal years ended October 31, 1996 and 1995, respectively. For the fiscal year
ended October 31, 1996, the Company's top four intrusion alarm customers
accounted for over 44% of intrusion alarm product sales.
The Company plans to continue to focus on customer service to alarm system
distributors and installers to engender continuing customer loyalty. Also, the
Company plans to work more closely with insurance industry representatives, law
enforcement agencies and alarm system installers to ensure that its product
designs offer solutions that address current market needs.
In order to enhance its competitiveness in the marketplace, the Company has
broadened its intrusion alarm product family by developing and introducing
various wireless products and other product enhancements.
17
Competition
The intrusion alarm products manufacturing industry is characterized by a
high level of competition both within the United Kingdom and worldwide. Many of
the Company's competitors have substantially greater resources than the Company.
The Company believes that competition based upon product differentiation and
technical features is more important in high-end products, while competition
based upon price is of greater significance in low-end products. Strong
distribution channels are important to compete effectively in each of these
markets. The Company's ability to successfully compete depends on various
factors, including the development of enhanced and/or new products on a timely
basis, product performance versus price characteristics, product quality,
cost-effective manufacturing and customer service.
Research and Development
The Company has developed wireless detection and communication devices
which will facilitate installation by eliminating the need to wire the security
system at the protected premises. These development efforts are principally
being performed by a third party contractor under the Company's direction.
NETWORK MANAGEMENT PRODUCTS
The Company entered the network management products business in July 1994
with its acquisition of Digilog. Digilog historically designed, manufactured and
marketed products used to test and monitor the performance of data and voice
communication networks. During fiscal 1996, the Company discontinued a number of
under-performing products in this area to focus on NAMS, the Company's
network/fault management product line.
Industry Background
With the development of smaller and more powerful computers, companies are
becoming increasingly reliant upon networks consisting of multiple personal
computers and work stations, each of which is capable of processing data and
sharing information with other users on the network. Many companies link
computer equipment by means of local area networks or "LANs" or wide area
networks or "WANs." At the same time, to realize greater efficiencies, the
management and maintenance of computer networks has become increasingly
centralized even though the networks may be global in scope. The increased
complexity of computer networks has created a need for cost-effective network
management software and hardware which can assist companies in the operation of
their computer networks to minimize network failures and improve efficiency. A
network administrator, typically located at a central site, must be able to
effectively pinpoint a network problem and take appropriate action to keep the
network operating efficiently. The Company offers solutions to these network
analysis and fault management requirements.
Products
The Company's principal network management products monitor and perform
tests to determine whether data and protocols are being accurately transmitted
and received over WANs. This particular product allows multiple network
administrators remote access to a widely dispersed network from a central
control center. The Company's products are sold either on a stand-alone basis or
as integrated systems.
18
Network Analysis and Management System (NAMS). The Company's network
management system, is a network overlay that enables a user to monitor the
continuous operation of a WAN from a central control site. The system provides
prompt alarm notification of network failure or degradation, automatic
activation of backup devices or facilities upon failure detection and a means to
accurately identify defective network components. Because WANs often contain
system components from a variety of vendors. NAMS is designed to function with a
variety of manufacturers' products.
Sales and Marketing
The Company provides its network management products and services to
certain Regional Bell Operating Companies and certain private network operators.
NAMS products are sold by the Company's technically trained direct sales force
which works with customers to determine the optimal testing solution for their
particular network. This initial sales effort usually involves customization of
the NAMS system to match the customer's network design. Considerable technical
support is provided to NAMS users over an extended period of time. The Company
provides training, help desk, installation and project management services to
its customers. For those selling efforts which involve applications of WAN test
products and NAMs as integrated systems, the Company's direct sales force works
in conjunction with the independent sales representatives to facilitate the
sale.
The Company, in its network management products business, is focusing on
the complex test and analysis needs of emerging large scale public and private
data and voice communication networks. The Company believes that operations of
complex telecommunication networks are migrating to a centralized network
management systems architecture which requires permanently installed test and
analysis products, such as those offered by the Company.
Competition
The network management products market is highly competitive and is
comprised primarily of providers of either test equipment and software or
providers of intelligent network equipment that come with self-diagnostic
capability. Many of the Company's competitors have substantially greater
resources than the Company. The Company believes that it is unique among vendors
in that it has a long history of being a provider of both diagnostic equipment
and testing systems. The Company also believes that its ability to successfully
integrate both of these technologies enables it to compete effectively in this
marketplace.
GENERAL
Product Warranty and Service
The Company provides customers with limited one-year warranties on its
scanners and message switch software. In addition, under the terms of the
contract with British Telecom, the Company has agreed to maintain and support
its scanners for a period of up to ten years after the expiration of the
warranty period on a time and materials basis. STUs are typically sold with a
one or two year labor and materials warranty. Intrusion alarm products are sold
with a one to five year warranty. The Company provides a one year warranty on
all network management products. In addition, a "help desk" and training support
is offered to all users of intrusion alarm and network management products. To
date, the cost to the Company of its warranty program has not been material.
19
License Agreements
The Company has granted licenses to two alarm manufacturers/distributors,
Radionics, Inc. ("Radionics") and Alcatel Australia Limited ("Alcatel"). The
licenses generally permit the licensee to make, use and sell within prescribed
territories, certain products used in the Derived Channel System. The Radionics
agreement provides a non-exclusive license to sell STUs in the United States and
Canada while the Alcatel license is exclusive in the territories of Australia,
New Zealand and New Guinea. The license agreements terminate December 31, 1997
and May 29, 1997, respectively, and are subject to possible extension based upon
the achievement of certain performance criteria on the part of the licensee.
Under the license agreements, the Company indemnifies the licensee for certain
circumstances, including allegations of patent infringement. Royalty payments
from these licenses have not been material nor does the Company expect material
royalty payments in the future. In addition, the Company has granted to British
Telecom a non-exclusive, non-transferable and irrevocable license in the United
Kingdom for Developed Software pursuant to the Software Contract. See "Item 1.
Business - Sales and Marketing."
Intellectual Property
The Company holds patents covering primary derived channel technology used
by the Company in systems installed in the United Kingdom, the United States and
various foreign countries. The United Kingdom patent expires October 2002 and
the United States patent expires December 2001. In addition, the Company holds
other patents relating to the Derived Channel System in certain of the foregoing
jurisdictions. The Company also owns other intellectual property relating to its
products. It is the Company's practice to apply for patents as new products or
processes suitable for patent 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 marks STU(Registered) and Subscriber Terminal Unit(Registered) are
registered trademarks of the Company. The Company believes that no individual
trademark or trade name is material to the Company's competitive position in the
industry.
Employees
The Company currently employs 139 employees (of which 107 are based in the
United Kingdom and 32 in the United States), consisting of 74 in manufacturing
and customer service, 17 in sales and marketing, 26 in engineering and 22 in
management and administration. None of the Company's employees is represented by
a union. The Company believes that its relationship with its employees is
satisfactory.
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. For example, in the
United Kingdom, any product that is intended to be connected to the public
switched telephone network requires compliance with certain British standards
and must be
20
approved by the British Approval Board for Telecommunications ("BABT").
Currently, each of the Company's products that requires BABT approval has
received such approval. There are new European Union regulations on
electromagnetic compatibility which took effect in January 1996. The Company's
products comply with such European Union regulations. Additionally, it is
expected that the European Union will issue compliance standards for
telecommunications and intrusion alarm equipment in the future.
The provision of enhanced telecommunications services in the United States
by telephone companies is subject to regulations promulgated by the Federal
Communications Commission (the "FCC") and to restrictions imposed by the United
States District Court for the District of Columbia in its decree divesting the
Bell companies from AT&T Corporation. These regulations and restrictions have
not resulted in any significant impediments to the provision of alarm reporting
services by telephone companies using derived channel technology. In addition,
the Company's products, such as STUs, that are connected to subscribers'
telephone lines require certification from the FCC for compliance with standards
designed to prevent damage to the telephone network and to restrict radio
frequency interference. Derived channel products currently used in the United
States which are subject to these requirements have received all required
certifications. However, anticipated design changes to products sold in the
United States will require compliance testing and certification.
In addition, in the United States, the Company's products require
certification from Underwriters Laboratories in order to serve monitoring
applications with higher levels of insurance risk. The Company has obtained
Underwriters Laboratories certifications for all products currently marketed in
the United States and expects that future certifications will be obtained 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.
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
-------- ------------------ -------------- ----------
Farnborough, England Derived Channel System 14,000 2006(1)
Southall, England Intrusion Alarm Products 10,400 1998(1)
Willow Grove, Network Management 10,000 1997(1)
Pennsylvania Products and Derived
Channel System
Media, Principal Executive Offices 2,500 2000
Pennsylvania(2)
21
- ----------
(1) Assumes the exercise of any renewal options.
(2) Until May 31, 1995 office space was leased on a month-to-month basis from
Dominion. See "Certain Relationships and Related Transactions" contained in
and incorporated by reference from the Company's Proxy Statement relating
to the 1997 Annual Meeting of Shareholders. The Company entered into a new
leasing arrangement which commenced in June 1995.
The Company conducts manufacturing, sales and marketing, engineering and
administrative activities at all locations except Media, Pennsylvania, where its
principal executive offices are located. The Company's total annual rent expense
for the year ended October 31, 1996 was (pounds)248,000. 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 will
require additional space which the Company believes will be available at
reasonable rates.
The Company engages in limited manufacturing for certain Derived Channel
System network equipment and STUs, manufacturing for many intrusion alarm
products and final equipment assembly and testing for the Company's products.
The Company also uses contract manufacturers located near its facilities for
production, sub-assembly and final assembly of certain products and one contract
manufacturer in the Far East for certain high volume surface mount electronics
manufacturing used in certain intrusion alarm products. The Company believes
there are other manufacturers that could perform this work on comparable terms.
The chips, 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.
In July and August 1995, the Company received complaints in three separate
purported lawsuits. The complaints, which were consolidated into a single
amended complaint, sought class action status and alleged violations arising
under certain federal securities laws for alleged material misstatements and
omissions in the prospectus associated with the Company's 1995 public offering.
The Company and the individual defendants believe the allegations are untrue and
without merit. The complaint was filed against certain of the Company's
directors and executive officers, principal shareholder and underwriters. The
complaint sought rescission and/or damages against all defendants, including the
awarding of costs and disbursements. The defendants filed a Motion to Dismiss
and in January 1996, the defendants' Motion to Dismiss was granted and the case
was dismissed. In February 1996, the plaintiffs appealed the Order of the U.S.
District Court to the United States Court of Appeals, where it is pending. A
settlement, effective October 24, 1996 and subject to final court approval, was
reached among the parties and preliminarily approved by the court. Given the
preliminary court approval, certain defendants paid $2.1 million to a settlement
fund, which after the payment of certain costs and expenses, and subject to
final court approval at a hearing set forth February 14, 1997, will be paid to a
class. Numerex's contribution to the settlement fund was $1,033,340.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
22
Item 4.1 Certain Executive Officers and Key Employees of the Registrant.
Set forth below is certain information concerning the executive officers
and key employees of the Company who are not also directors.
Name Age Position
---- --- --------
Donald M. Hooton............... 46 Vice President -- Sales and Marketing
Charles L. McNew............... 45 Vice President and Chief Financial Officer
Peter I. Pritchett............. 39 Managing Director of DA Systems
Donald M. Hooton has been Vice President -- Sales and Marketing since
February 1995. From February 1993 to January 1995, Mr. Hooton held the position
of Strategic Marketing Director at Dominion and provided certain marketing
related consulting services to the Company. From April 1992 to January 1993, he
was Vice President of Marketing at Teltronics, Inc., a manufacturer of
telecommunications products and software. From 1985 to 1992, Mr. Hooton served
in a variety of positions with Versus Technology, Incorporated (the company
which sold certain derived channel assets to the Company in 1994) and its
predecessor, most recently as President and Chief Executive Officer.
Charles L. McNew has been Vice President and Chief Financial Officer of the
Company since July 1994. Mr. McNew served as Vice President -- Finance, Chief
Financial Officer and Treasurer of InterDigital Communications Corporation, a
company engaged in the development of advanced digital wireless
telecommunications systems, from June 1993 to July 1994. From March 1990 to May
1993, Mr. McNew served as the Chief Financial Officer of International
Computaprint Corporation, a company engaged in electronic publishing. From 1982
to 1990, Mr. McNew held various positions with the Digilog Division of CXR
Telecom Corporation, or its predecessor, most recently as Vice President and
Chief Financial Officer.
Peter I. Pritchett has been Managing Director of European Operations since
June 1995, and Managing Director of DA Systems, since May 1990. From May 1988 to
April 1990 he served as Managing Director of Tripower Ltd., a manufacturer of
electrical power distribution equipment for the construction industry.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
During fiscal 1996 three quarterly cash dividends on its Common Stock of
$.05 per share each were declared and paid. In September 1996, the Board of
Directors discontinued this cash dividend. 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
any loan agreements into which the Company may enter in the future and market
factors and conditions.
The Company's Common Stock was included in on the Nasdaq SmallCap Market
under the symbol "NMRX" from March 3, 1994 through April 20, 1995. Commencing on
April 21, 1995 the Company's Common Stock has been included in the Nasdaq
National Market. The following table sets
23
forth, for the fiscal quarters indicated, the high and low sales prices per
share for the Common Stock on the Nasdaq SmallCap Market and the Nasdaq National
Market for the applicable periods.
Fiscal 1995 High Low
- ----------- ---- ---
First Quarter (November 1, 1994 to January 31, 1995) $ 18.50 $ 13.38
Second Quarter (February 1, 1995 to April 30, 1995) 18.75 13.50
Third Quarter (May 1, 1995 to July 31, 1995) 15.25 7.50
Fourth Quarter (August 1, 1995 to October 31, 1995) 9.63 5.75
Fiscal 1996 High Low
- ----------- ---- ---
First Quarter (November 1, 1995 to January 31, 1996) $ 7.25 $ 4.25
Second Quarter (February 1, 1996 to April 30, 1996) 6.50 4.13
Third Quarter (May 1, 1996 to July 31, 1996) 7.00 3.75
Fourth Quarter (August 1, 1996 to October 31, 1996) 4.75 3.50
As of January 17, 1997 there were 109 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.
The following selected consolidated financial data for the periods
commencing November 1, 1991 have been derived from (i) the financial statements
of Versus Technology UK for the period from November 1, 1991 to July 12, 1992,
which have been audited by Deloitte & Touche, and (ii) the consolidated
financial statements of the Company for the period from July 13, 1992 to October
31, 1992 and the fiscal years ended October 31, 1993, 1994, 1995 and 1996, which
have been audited by Deloitte & Touche LLP.
The information contained in this section should be read in conjunction
with "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements of the Company,
related Notes and other financial information included elsewhere in this Annual
Report on Form 10-K.
24
SELECTED CONSOLIDATED FINANCIAL DATA
Predecessor(1) The Company
----------- -----------------------------------------------------------------------
Period Period Years Ended October 31,
From From -----------------------------------------------------
November July 13,
1, 1991 to 1992 to
July 12, October 31, 1993 1994 1995
1992 1992 (2) (2)(3) (4)
----------- ----------- ------------- ------------- -------------
(in thousands, except per share data)
Statement of Income Data:
Net sales:
Derived Channel Systems (pounds)1,484 (pounds) 830 (pounds)9,048 (pounds)15,645 (pounds)14,879
Intrusion alarm and network
management and products -- -- 1,247 5,592 6,166
------------- ------------- ------------- ------------- -------------
Total net sales 1,484 830 10,295 21,237 21,045
Cost of sales (968) (231) (5,360) (8,405) 8,432
------------- ------------- ------------- ------------- -------------
Inventory obsolescence
charge -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Gross profit 516 599 4,935 12,832 12,613
Selling, general,
administrative and
other (364) (453) (1,265) (3,889) (5,704)
------------- ------------- ------------- ------------- -------------
Special charges -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Operating income (loss) 152 146 3,670 8,943 6,909
Net interest and other
income (expense) (59) (35) (78) 71 762
------------- ------------- ------------- ------------- -------------
Income (loss) before
income taxes 93 111 3,592 9,014 7,671
Income taxes (34) (122) (1,128) (3,129) 2,531
------------- ------------- ------------- ------------- -------------
Net income (loss) (pounds) 59 (pounds) (11) (pounds)2,464 (pounds)5,885 (pounds)5,140
============= ============= ============= ============= =============
Earnings (loss) per
share(6) n.a. -- (pounds) 0.35 (pounds) 0.62 (pounds) .48
============= ============= =============
Weighted average shares
outstanding n.a. 6,400 7,021 9,499 10,633
Cash dividend declared
per Common Stock -- -- -- -- --
Balance Sheet Data (at
period end):
Working capital (pounds) 52 (pounds) (195) (pounds)2,642 (pounds)7,741 (pounds)28,252
Total assets 1,555 2,814 8,576 17,115 37,353
Long-term debt, less current
portion 466 807 70 12 --
Shareholders' equity 107 323 4,521 10,389 32,076
The Company
---------------------------------
Years Ended October 31,
---------------------------------
U.S. $
1996 1996
(5) (2)(3)(4)(5)
------------- -------------
(in thousands, except per share data)
Statement of Income Data:
Net sales:
Derived Channel Systems (pounds)13,258 $ 21,581
Intrusion alarm and network
management and products 4,934 8,032
-------------- -------------
Total net sales 18,192 29,613
Cost of sales (9,961) (16,215)
-------------- -------------
Inventory obsolescence
charge (1,473) (2,398)
-------------- -------------
Gross profit 6,758 11,000
Selling, general,
administrative and
other (7,707) (12,545)
Special charges (2,721) (4,429)
-------------- -------------
Operating income (loss) (3,670) (5,974)
Net interest and other
income (expense) 1,060 1,725
-------------- -------------
Income (loss) before
income taxes (2,610) (4,249)
Income taxes (995) (1,620)
-------------- -------------
Net income (loss) (pounds)(3,605) $ (5,869)
============== =============
Earnings (loss) per
share(6) (pounds) (.31) $ (.51)
============== =============
Weighted average shares
outstanding 11,532 11,532
Cash dividend declared
per Common Stock (pounds) .10 $ .16
Balance Sheet Data (at
period end):
Working capital (pounds)23,187 $ 37,744
Total assets 29,982 48,805
Long-term debt, less current
portion -- --
Shareholders' equity 26,300 42,811
- ----------
(1) Reflects the operations of Versus Technology UK, the Company's predecessor.
See "Item 1. Business -- The Company."
(2) The Company acquired DA Systems on July 13, 1994. Because the Company and
DA Systems were under common control as of July 28, 1993, the statement of
income data for the Company include the results of operations for DA
Systems for all periods subsequent to that date. See Notes 1 and 4 of the
Notes to the Consolidated Financial Statements of the Company.
(3) The Company acquired the assets comprising its Digilog subsidiary on July
20, 1994. The statement of income data for the Company include the results
of operations for Digilog for periods since the acquisition. See Note 1 of
the Notes to the Consolidated Financial Statements of the Company.
(4) The Company acquired certain assets comprising its DCX Systems subsidiary
on November 30, 1994. The statement of income data for the Company include
the results of operations of DCX Systems for periods since the acquisition.
See Note 1 to the Notes to the Consolidated Financial Statements of the
Company.
(5) British pounds sterling amounts have been translated into U.S. dollars at
the exchange rate of U.S. $1.6278 per (pounds)1.00 based on the noon buying
rate in New York City on October 31, 1996 for cable transfers as certified
for customs purposes by the Federal Reserve Bank of New York.
(6) No cash dividends were declared or paid by the Company during any of the
periods presented, other than three quarterly cash dividends of $.05 per
share which were paid in fiscal 1996.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the fiscal years ended October 31,
1996, 1995 and 1994. This discussion should be read in conjunction with the
Company's consolidated financial statements, the related notes thereto, and the
other financial information included elsewhere in this report.
Overview
The Company's history began on July 13, 1992 when Bronzebase acquired 90%
of the outstanding stock of Versus Technology UK and certain proprietary
intellectual property rights, including rights to derived channel technology and
the rights to market such technology in certain countries, including the United
Kingdom. Bronzebase acquired the remaining Versus Technology UK stock in
September 1993. In February 1994, as a result of a stock exchange, Bronzebase
and its subsidiary, Versus Technology UK, became subsidiaries of Numerex Corp.
For financial reporting purposes, the Company's results of operations prior to
the date of the Stock Exchange are those of Bronzebase and its predecessor,
Versus Technology UK.
In July 1994, the Company completed the stock for stock acquisition of DA
Systems. Because the shareholders of the Company and DA Systems were
substantially the same prior to the acquisition, the historical financial
statements for the Company have been restated to combine the Company with DA
Systems for all periods subsequent to July 28, 1993, the date on which common
control first existed. In July 1994 and November 1994, the Company acquired the
assets comprising its Digilog and DCX Systems subsidiaries, respectively. These
acquisitions were cash transactions and have been recorded under the purchase
accounting method.
The Company generates substantially all of its net sales from the sale of
various equipment, systems and software products to its customers. Products are
typically shipped soon after order placement. Therefore, sales order backlog
historically has not been a meaningful indicator for the Company. The Company
presently generates a significant amount of its net sales from product sales to
an established customer base, principally British Telecom, the Company's largest
customer, and to an established network of alarm system distributors and
installers.
The Company currently publishes its consolidated financial statements in
British pounds sterling, the functional currency of the country in which a
substantial majority of the Company's net sales are presently generated.
26
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by selected items in the Company's Consolidated
Statements of Operations.
Years Ended October 31,
----------------------------
1994 1995 1996
------ ------ ------
Net sales:
Derived Channel Systems 73.7% 70.7% 72.9%
Intrusion alarm and network management products 26.3 29.3 27.1
------ ------ ------
Total net sales 100.0 100.0 100.0
Cost of sales 39.6 40.1 54.8
Inventory write-downs -- -- 8.1
====== ====== ======
Gross profit 60.4 59.9 37.1
Selling, general, administrative and other 18.3 27.1 42.4
Special charges -- -- 14.9
====== ====== ======
Operating income (loss) 41.1 32.8 (20.2)
====== ====== ======
Net income (loss) 27.7% 24.4% (19.8)%
====== ====== ======
Fiscal Years Ended October 31, 1996 and 1995
Net sales decreased 13.6% to (pounds)18.2 million for the fiscal year ended
October 31, 1996 as compared to (pounds)21.0 million in fiscal 1995. Derived
Channel product sales declined by (pounds)1.6 million in fiscal 1996 as compared
to fiscal 1995. The principal reason for the decline was a reduction in network
equipment sales in the United Kingdom, which was partially offset by increased
sales in the United States market. The Company believes that the network
equipment coverage in the United Kingdom (greater than 90%) will limit the
potential for significant growth in the United Kingdom for network equipment
sales, although Subscriber Terminal Unit (STU) sales in the United Kingdom have
remained strong throughout fiscal 1996. Intrusion alarm and network management
products declined by (pounds)1.2 million in fiscal 1996 as compared to fiscal
1995, principally due to the elimination of certain underperforming products
from the network management product line.
Cost of sales increased 35.6% to (pounds)11.4 million for fiscal year 1996
as compared to (pounds)8.4 million for fiscal 1995. The inventory write-downs of
(pounds)1.5 million represented a pre-tax charge recorded in the third and
fourth quarters of fiscal 1996 as a result of determining certain inventory
items to be obsolete due to market conditions related primarily to network
management and intrusion alarm products. Gross profit, as a percentage of net
sales, decreased to 37.1% for fiscal 1996 as compared to 59.9% for fiscal 1995.
The decrease in the gross profit margin was primarily due to a shift in sales
mix to lower margin products as network equipment (a higher margin product)
sales to British Telecom declined, inclusion of the inventory obsolescence
charge, and, in addition, certain fixed costs related to manufacturing, which
did not decline in conjunction with net sales, caused a further decrease in the
gross profit margin.
Selling, general, administrative and other expenses increased 35.1% to
(pounds)7.7 million for fiscal 1996 as compared to (pounds)5.7 million for
fiscal 1995. The increase was principally related to a major expansion of
Company's sales and marketing efforts, product development expenses and an
increase in legal and other expenses. In addition, special charges of
(pounds)2.7 million were recorded in the third and fourth
27
quarters of fiscal 1996. These special charges related principally to fixed and
intangible asset impairment provisions for certain obsolete products and
settlement of litigation.
Other income and expenses increased 39.1% to (pounds)1.1 million for the
fiscal year ended October 31, 1996 as compared to (pounds)0.8 million in fiscal
1995. The increase was principally the result of interest income earned from
temporary investment of cash proceeds from a public offering. In fiscal 1996
these temporary investments earned income for a full twelve months versus fiscal
1995 (the year of the public offering), when the temporary investments earned
income for a partial year.
The Company recorded a tax provision of (pounds)1.0 million for fiscal 1996
despite the pre-tax loss. Certain losses arising from United States operations
were not deductible in fiscal 1996, while earnings from United Kingdom
operations were fully taxable. The Company expects to generate a tax benefit
from these losses in future periods. The effective income tax rate for fiscal
year 1995 was 33.0%.
The decrease in net sales, the inventory obsolescence charges and special
charges recorded in fiscal 1996 resulted in a net loss of (pounds)3.6 million as
compared to net income of (pounds)5.1 million in fiscal 1995.
Weighted average shares increased to 11.5 million in fiscal 1996 as
compared to 10.6 million in fiscal 1995, principally due to the new shares
issued in conjunction with a mid-year 1995 public offering being outstanding for
a full year in fiscal 1996.
Fiscal Years Ended October 31, 1995 and 1994
Net sales decreased 0.9% to (pounds)21.0 million for the fiscal year ended
October 31, 1995 as compared to (pounds)21.2 million in fiscal 1994. Derived
Channel product sales declined by (pounds)0.8 million in fiscal 1995 as compared
to fiscal 1994. The principal reason for this decline was a reduction in Derived
Channel network equipment and customer premises equipment (STUs) sales in the
United Kingdom. This decrease was partially offset by an increase in software
sales, which include revenues of (pounds)1.4 million recognized on a long-term
software development contract. Network equipment sales, which declined in the
third quarter, remained below historical levels for the duration of fiscal 1995,
while STU sales recovered from third quarter levels. Management believes fiscal
1995 sales were negatively affected by a slowdown in business within the U.K.
alarm industry which resulted in a reduction in demand for Derived Channel
products. The sales decline was also partially offset by a (pounds)0.6 million
increase in the Intrusion Alarm and Network Management products category,
principally due to the inclusion of a full year of network management product
sales in 1995 as compared to a partial year in 1994 following the acquisition of
the subsidiary engaged in this business.
Cost of sales increased 0.3% to (pounds)8.4 million for the fiscal year
ended October 31, 1995 as compared to (pounds)8.4 million for fiscal 1994. Gross
profit, as a percentage of net sales, declined to 59.9% for the fiscal year
ended October 31, 1995 as compared to 60.4% in fiscal 1994. The decrease in the
gross margin was primarily due to a shift in sales mix to lower margin products,
particularly in the second half of fiscal 1995, when network equipment sales (a
high margin product) to BT was a smaller component of the sales mix and the cost
of sales related to software sales increased, as a percentage of those sales,
when compared to the first half of fiscal 1995. In addition, the inclusion of
Network Management products for a full year, which due to a highly competitive
market environment do not generate gross profit margins comparable to the
Company's Derived Channel System products, also contributed to the gross profit
margin decline.
Selling, general, administrative and other expenses increased 46.7% to
(pounds)5.7 million for the fiscal year ended October 31, 1995 as compared to
(pounds)3.9 million in fiscal 1994. Selling, general, administrative and other
expenses, as a percentage of net sales, increased to 27.1% during the fiscal
year ended
28
October 31, 1995 as compared to 18.3% in fiscal 1994. The increase was
principally related to a major expansion of the sales and marketing effort and
product development primarily at DCX Systems (acquired in November 1994) and
Digilog Inc. (acquired in July 1994) and an increase in legal and other
expenses. Operating income decreased 22.7% to (pounds)6.9 million for the fiscal
year ended October 31, 1995 as compared to (pounds)8.9 million in fiscal 1994.
Other income and expense increased 973.2% to (pounds)0.8 million for the
fiscal year ended October 31, 1995 as compared to (pounds)0.1 million in fiscal
1994. The increase was principally the result of additional interest income
generated from temporary investment of cash proceeds from a public offering.
The effective income tax rate decreased to 33.0% for the fiscal year ended
October 31, 1995 as compared to 34.7% in fiscal 1994. The decrease was
attributable to changes in the periodic estimation of tax liabilities.
The slight decrease in net sales and the increase in both interest income
and selling, general, administrative and other expenses resulted in a net income
decline of 12.7% to (pounds)5.1 million for the fiscal year ended October 31,
1995, as compared to (pounds)5.9 million in fiscal 1994.
As a result of new shares issued in conjunction with a public offering the
weighted average shares outstanding increased to 10.6 million for the fiscal
year ended October 31, 1995 as compared to 9.5 million in fiscal 1994.
Selected Quarterly Financial Data; Seasonality
The following table shows certain unaudited financial data of the Company
for each quarter of the last two fiscal years. This information has been
prepared from the books and records of the Company in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (including only normal, recurring adjustments)
considered necessary for a fair presentation have been included. Interim results
for any quarter are not necessarily indicative of the results that may be
expected for any future period.
Selected Quarterly Financial Data (Unaudited)
Three Months Ended
-------------------------------------------------------------
January 31, April 30, July 31, October 31,
1995 1995 1995 1995
-------------------------------------------------------------
(in thousands)
Net sales:
Derived Channel Systems (pounds)4,309 (pounds)4,499 (pounds)2,807 (pounds)3,264
Intrusion alarm and network
management products 1,577 1,564 1,420 1,605
------------- ------------- ------------- -------------
Total net sales 5,886 6,063 4,227 4,869
Gross profit 3,533 3,985 2,834 2,261
Operating income 2,224 2,554 1,254 877
Net income 1,570 1,641 1,082 847
29
Three Months Ended
-------------------------------------------------------------
January 31, April 30, July 31, October 31,
1996 1993 1996(1) 1996(2)
-------------------------------------------------------------
(in thousands)
Net sales:
Derived Channel Systems (pounds)2,872 (pounds)4,116 (pounds)3,397 (pounds)2,873
Intrusion alarm and network
management products 1,267 1,258 1,301 1,108
------------- ------------- ------------- -------------
Total net sales 4,139 5,374 4,698 3,981
Gross profit 1,779 2,506 1,404 1,069
Operating income (loss) 16 544 (1,884) (2,346)
Net income (loss) 217 520 (1,653) (2,689)
- ----------
(1) Net income for the third quarter includes pre-tax special charges of
(pounds)1,151,000, primarily related to intangible asset impairment
provisions for certain obsolete products and inventory write-downs of
(pounds)927,000.
(2) Net income for the fourth quarter includes pre-tax special charges of
(pounds)473,000, primarily related to fixed asset impairment provisions
for certain obsolete products, (pounds)1,097,000 relating to an accrual
for settlement of shareholder litigation and inventory write-downs of
(pounds)546,000.
The Company's financial results may fluctuate from quarter to quarter as a
result of a number of factors, including the timing of product shipments and new
product introductions as well as certain major network equipment software sales
to telephone companies that historically have been of a non-recurring nature.
Liquidity and Capital Resources
The Company is presently able to fund its operations and working capital
requirements from cash flow generated by operations and the proceeds from a
public offering completed in April 1995. Net cash provided by operating
activities decreased to (pounds)0.2 million for the fiscal year ended October
31, 1996 as compared to (pounds)1.1 million in fiscal 1995. The decrease from
1995 was primarily due to lower earnings, increases in both accounts receivable
and inventory levels and the payment of tax obligations due on the prior year's
earnings.
Net cash used in investing activities decreased to (pounds)1.6 million for
the fiscal year ended October 31, 1996 as compared to (pounds)2.6 million in
fiscal 1995. The decrease was primarily due to lower purchases of fixed asset
investments and capitalized software costs.
Net cash used in financing activities was (pounds)2.0 million for the
fiscal year ended October 31, 1996 as compared to net cash provided by financing
activities of (pounds)15.8 in fiscal 1995. The principal reasons for fiscal 1996
usage was the payment of dividends and the implementation of a stock buy back
program. In fiscal 1995 net cash increased principally due to the proceeds
generated from the public offering.
The Company had working capital balances of (pounds)23.2 million and
(pounds)28.3 million as of October 31, 1996 and 1995, respectively.
The Company's business has not been capital intensive and, accordingly,
capital expenditures have not been material. To date, the Company has funded all
capital expenditures from cash provided by
30
operating activities. In order to fund an expansion of its Derived Channel
System business (including an effort to increase market penetration in North
America, South America, Western Europe and Australia and to acquire
complementary businesses, products or services), the Company may require
significantly greater capital investments than it has in the past. Presently,
other than one previously announced acquisition possibility, the Company has no
material commitments for capital expenditures.
The Company believes that its anticipated cash flow from operations,
together with its available cash, including the proceeds of its public offering
completed in April 1995, and funds available through an anticipated bank credit
facility, will be sufficient to finance its operating and capital requirements
at least through the fiscal year ending October 31, 1997. Cash requirements for
future expansion of the Company's operations will be evaluated on an as-needed
basis. The Company does not expect that such expansion will have a materially
negative impact on the Company's ability to fund its existing operations.
Effect of Inflation
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled the
Company to contain its production costs. The Company's general operating
expenses, such as salaries, employee benefits, and facilities costs, are subject
to normal inflationary pressures.
Foreign Currency
Currently, the Company's functional and reporting currency is British
pounds sterling because a substantial majority of the Company's net sales are
presently generated in the United Kingdom. Although the Company does not have an
ongoing currency hedging program in place, it occasionally hedges its operations
selectively against fluctuations in foreign currency as needed. This occasional
hedging is done primarily because a portion of the Company's production costs
associated with its off-shore contract manufacturing are denominated in U.S.
dollars while the bulk of its net sales are in British pounds sterling. The
Company uses forward U.S. dollar contracts which have a maximum term of six
months and which are not material to the Company. The Company anticipates that
it may utilize additional foreign currency contracts as needed to hedge against
fluctuations in the exchange rate between the U.S. dollar and the British pound
sterling. Fluctuations in foreign currency exchange rates are not expected to
have a material impact on the Company's results of operations or liquidity.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference from the financial statements and notes thereto
of the Company which are attached hereto beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None except for a previously reported change in accountants.
31
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G(3) to Form 10-K, except information concerning certain executive
officers of the Company which is set forth in Item 4.1 hereof.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement relating to
the 1997 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 1997 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 1997 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. List of Consolidated Financial Statements. The following financial
statements and the notes thereto of the Company which are attached hereto
beginning on page F-1, have been incorporated by reference into Item 8 of this
Report on Form 10-K:
Consolidated Financial Statements of the Company
Independent Auditors' Report
Consolidated Balance Sheets at October 31, 1996 and 1995
Consolidated Statements of Operations for the years ended October 31,
1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
32
2. 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) Agreement of Stock Exchange dated November 3, 1993 among the
stockholders of Bronzebase, Bronzebase and Numerex
2.2(6) Agreement and Plan of Merger dated as of March 8, 1994 between
Numerex Corp., a New York corporation, and Numerex Corp., a
Pennsylvania corporation
2.3(2) Agreement of Stock Exchange dated June 21, 1994 among Omega
Technology Ltd., Digital Audio Limited and the Company
2.4(3) Asset Purchase Agreement dated July 20, 1994 among CXR
Corporation, CXR Telecom Corporation and the Company related to
the purchase of certain assets of the Digilog division
2.5(4) Asset Purchase Agreement dated November 30, 1994 between Versus
Technology UK, Inc. and the Company.
3.1(7) Amended and Restated Articles of Incorporation of the Company, as
amended
3.2(7) Bylaws of the Company
10.1(1) Purchase Agreement between Versus Technology UK and Bronzebase
Limited dated July 13, 1992
10.2(1) Employment Agreement between Kenneth F. Manser and Versus
Technology UK (Management Compensation Contract)
10.3(1) $300,000 Promissory Note from Versus Technology UK to Dominion,
dated December 15, 1992
10.4(7) Amendment to License Agreement between Base Ten Systems, Inc. and
Radionics, dated February 28, 1989
10.5(1) License Agreement between Base Ten Systems, Inc. and Standard,
July 22, 1987
10.6(1) Assignment and Assumption Agreement between Versus Technology,
Incorporated and Bronzebase, dated August 19, 1993 regarding
Standard Telephone & Cables Pty.
10.7 (Intentionally left blank)
10.8(1) Assignment and Assumption Agreement between Versus Technology,
Incorporated and Bronzebase, dated August 19, 1993 regarding
Radionics
10.9(1) Agreement between British Telecom, Base Ten Systems Limited,
Versus Technology UK, Versus Technology, Incorporated and Base
Ten Systems Inc. dated December 17, 1990 regarding Telecom
RedCARE Network
33
10.10(7) Agreement between British Telecom and Versus Technology U.K.
dated September 26, 1995 relating to the supply of RedCARE system
products (certain confidential information contained in this
Agreement has been omitted pursuant to Rule 24b-2 and has been
filed separately with the Securities & Exchange Commission)
10.11(1) Amendment No. 1 to Loan Agreement between Versus Technology UK
and Dominion, dated October 18, 1993
10.12(1) Versus Technology UK Pension and Death Benefit Scheme (Management
Compensation Plan)
10.13(7) The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan
Description (Management Compensation Plan)
10.14 Amended and Restated 1994 Employee Stock Option Plan (Management
Compensation Plan)
10.15(6) Amended and Restated Stock Option Plan for Non-Employee Directors
(Management Compensation Plan)
10.16(2) Registration Agreement between the Company and Dominion dated
July 13, 1992
10.17(6) Engagement Letter Agreement between the Company and Dominion
effective January 1, 1995
10.18(6) Letter Agreement between the Company and Dominion (now Gwynedd)
dated October 25, 1994 re: designation of director
10.19(6) Service Agreement between Digital Audio Limited and Peter I.
Pritchett (Management Compensation Contract)
10.20 Employment Agreement between the Company and John J. Reis, as
amended (Management Compensation Contract)
10.21(6) Manufacturing Contract Agreement between Semiconductor Ventures
International Co., Ltd. and Digital Audio Limited
10.22(7) Agreement for the Provision of Software and Services between
British Telecom and Versus Technology U.K. dated September 7,
1995
10.23(7) Office Space Lease Agreement between the Company and LBA
Associates dated May 31, 1995.
10.24 Severance Agreement between the Company and Frederick C. Shay
(Management Compensation Contract)
10.25 Severance Agreement between the Company and Charles L. McNew
(Management Compensation Contract)
10.26 Severance Agreement between the Company and Donald M. Hooton
(Management Compensation Contract)
34
10.27 Incentive Compensation Program for fiscal 1997. (Management
Compensation Plan)
10.28 Letter Amendment dated September 24, 1996 to Agreement between
British Telecom and Versus Technology U.K. dated September 26,
1995.
10.29 Agreement between Dominion and the Company relating to CellTel
Data Services, Inc., dated October 15, 1996
21 Subsidiaries of Numerex Corp.
- ------------------
(1) Incorporated by reference to the Exhibits filed with the Company's Form 10
Registration Statement and Amendments No. 1 and No. 2 thereto (File No.
0-22920)
(2) 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)
(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
July 25, 1994 (File No. 0-22920)
(4) 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
December 6, 1994 (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 for
the year ended October 31, 1994 (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 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).
(b) Reports on Form 8-K.
None
35
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: January 27, 1997 By: /s/John J. Reis
----------------------------------------
John J. Reis, President
and Chief Executive Officer and Director
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/Kenneth F. Manser
- --------------------------
Kenneth F. Manser Chairman of the Board January 27, 1997
/s/Charles L. McNew
- --------------------------
Charles L. McNew Vice President and Chief January 27, 1997
Financial Officer (principal
financial officer and principal
accounting officer)
/s/George Benson
- --------------------------
George Benson Director January 27, 1997
/s/Matthew J. Flanigan
- --------------------------
Matthew J. Flanigan Director January 27, 1997
/s/Andrew J. Ryan
- --------------------------
Andrew J. Ryan Director January 27, 1997
/s/Gordon T. Ray
- --------------------------
Gordon T. Ray Director January 27, 1997
/s/Frederick C. Shay
- --------------------------
Frederick C. Shay Director January 27, 1997
36
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements of the Company:
Independent Auditors' Report F-2
Consolidated Balance Sheets as of October 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Years
Ended October 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended October 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended October 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the 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 October 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and of cash
flows for each of the three years in the period ended October 31, 1996, all
expressed in pounds sterling. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements, expressed in pounds
sterling, present fairly, in all material respects, the consolidated financial
position of the Company at October 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 23, 1996
F-2
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
- --------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2)
October 31, October 31,
------------------------
ASSETS 1996 1996 1995
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $30,048 (pounds) 18,459 (pounds) 22,271
Accounts receivable (net of allowances
of(pounds)63 in 1996 and(pounds)26 in 1995) 8,785 5,397 5,832
Inventory (Note 4) 4,620 2,838 5,293
Prepaid expenses 285 175 139
------- ------ ------
Total current assets 43,738 26,869 33,535
Property and equipment, net (Note 6) 1,258 773 1,248
Intangible and other assets, net (Note 5) 3,809 2,340 2,570
------- ------ ------
TOTAL ASSETS $48,805 (pounds) 29,982 (pounds) 37,353
======= ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,320 (pounds) 1,425 (pounds) 1,545
Income taxes 396 243 2,370
Accrued taxes other than income 583 358 526
Other accrued liabilities (Note 12) 2,695 1,656 836
------- ------ ------
Total current liabilities 5,994 3,682 5,277
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; authorized 3,000,000 shares;
none issued -- -- --
Class A common stock - no par value; authorized
30,000,000 shares; issued 11,597,492 shares
at October 31, 1996 and 1995 29,823 18,321 18,321
Class B common stock - no par value; authorized
5,000,000 shares; none issued -- -- --
Treasury stock, at cost, 310,000 shares at October 31, 1996 (1,380) (848) --
Accumulated translation adjustment 117 72 277
Retained earnings 14,251 8,755 13,478
------- ------ ------
Total shareholders' equity 42,811 26,300 32,076
------- ------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $48,805 (pounds) 29,982 (pounds) 37,353
======= ====== ======
See notes to consolidated financial statements.
F-3
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
- --------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2) Year Ended October 31,
October 31, ------------------------------------------
1996 1996 1995 1994
Net sales $ 29,613 (pounds) 18,192 (pounds) 21,045 (pounds) 21,237
Cost of sales (16,215) (9,961) (8,432) (8,405)
Inventory write-downs (Note 4) (2,398) (1,473) -- --
-------- ------- ------- -------
Gross profit 11,000 6,758 12,613 12,832
Selling, general, administrative and other
expenses (including fees and other
expenses of(pounds)212 in 1996,
(pounds)240 in 1995 and(pounds)594 in 1994
to the principal shareholder) (Note 8) (12,560) (7,716) (5,715) (3,964)
Special charges (Note 3) (4,429) (2,721) -- --
-------- ------- ------- -------
Operating profit (loss) (5,989) (3,679) 6,898 8,868
Interest income 1,740 1,069 773 146
-------- ------- ------- -------
Income (loss) before income taxes (4,249) (2,610) 7,671 9,014
Income taxes (Note 7) 1,620 995 2,531 3,129
-------- ------- ------- -------
Net income (loss) $ (5,869) (pounds) (3,605) (pounds) 5,140 (pounds) 5,885
======== ====== ===== =====
Earnings (loss) per share $ (0.51) (pounds) (0.31) (pounds) 0.48 (pounds) 0.62
======== ===== ==== ====
Weighted average shares outstanding 11,532 11,532 10,633 9,499
====== ====== ====== =====
See notes to consolidated financial statements.
F-4
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
- --------------------------------------------------------------------------------
Common Stock Accumulated
----------------------- Treasury Translation Retained
Shares Amount Stock Adjustment Earnings Total
BALANCE, OCTOBER 31, 1993 9,233 (pounds) 2,068 (pounds) -- (pounds) -- (pounds) 2,453 (pounds) 4,521
Issuance of shares in connection with the
February 28, 1994 Stock Exchange (Note 1) 392 (69) -- -- -- (69)
Issuance of shares 10 67 -- -- -- 67
Translation adjustment -- -- -- (15) -- (15)
Net income -- -- -- -- 5,885 5,885
------- ------- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1994 9,635 pound) 2,066 (pounds) -- (pounds) (15) (pounds) 8,338 (pounds) 10,389
Issuance of shares in connection with
the April 28, 1995 public offering and
May 31, 1995 underwriters overallotment
exercise, net of issuance costs 1,962 16,255 -- -- -- 16,255
Translation adjustment -- -- -- 292 -- 292
Net income -- -- -- -- 5,140 5,140
------- ------- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1995 11,597 (pounds) 18,321 (pounds) -- (pounds) 277 (pounds) 13,478 (pounds) 32,076
Purchase of treasury stock -- -- (848) -- -- (848)
Translation adjustment -- -- -- (205) -- (205)
Cash dividends -- -- -- -- (1,118) (1,118)
Net loss -- -- -- -- (3,605) (3,605)
------- ------- ------- ------- ------- -------
BALANCE, OCTOBER 31, 1996 11,597 (pounds) 18,321 (pounds) (848) (pounds) 72 (pounds) 8,755 (pounds) 26,300
======= ======= ======= ======= ======= =======
U.S. $ EQUIVALENT (Note 2), OCTOBER 31, 1996 N.A. $29,823 $(1,380) $ 117 $14,251 $42,811
======= ======= ======= ======= ======= =======
See notes to consolidated financial statements.
F-5
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- --------------------------------------------------------------------------------
U.S. $
Equivalent
(Note 2) Year Ended October 31,
October 31, ------------------------------------------------
1996 1996 1995 1994
OPERATING ACTIVITIES:
Net income (loss) $ (5,869) (pounds) (3,605) (pounds) 5,140 (pounds) 5,885
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,196 1,349 932 519
Special charges 2,644 1,624 -- --
Changes in assets and liabilities which
provided (used) cash:
Accounts receivable 708 435 (2,363) 247
Inventory 3,460 2,126 (1,855) (983)
Prepaid expenses (213) (131) 87 (200)
Accounts payable (195) (120) (102) 389
Income taxes (3,462) (2,127) (781) 1,922
Accrued taxes other than income (273) (168) (454) 620
Other accrued liabilities 1,335 820 459 57
-------- -------- -------- --------
Net cash provided by operating activities 331 203 1,063 8,456
-------- -------- -------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment (910) (559) (596) (280)
Purchase of intangible and other assets (1,638) (1,006) (1,039) (557)
Acquisitions of businesses, net of cash -- -- (947) (782)
-------- -------- -------- --------
Net cash used in investing activities (2,548) (1,565) (2,582) (1,619)
-------- -------- -------- --------
FINANCING ACTIVITIES:
Net reduction in short-term borrowings -- -- (489) (265)
Repayment of notes payable - principal shareholder -- -- (83) (78)
Proceeds from issuance of common stock,
net of issuance costs -- -- 16,330 67
Cash dividends paid (1,820) (1,118) -- --
Purchase of treasury stock (1,380) (848) -- --
-------- -------- -------- --------
Net cash provided by (used in) financing activities (3,200) (1,966) 15,758 (276)
-------- -------- -------- --------
EFFECT OF EXCHANGE DIFFERENCES ON CASH (788) (484) 263 (69)
-------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,205) (3,812) 14,502 6,492
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 36,253 22,271 7,769 1,277
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 30,048 (pounds) 18,459 (pounds) 22,271 (pounds) 7,769
======== ======== ======== ========
See notes to consolidated financial statements.
F-6
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF ACQUISITIONS AND STOCK SPLIT
Bronzebase Limited, now Numerex Corp. (the "Company"), was incorporated in
1992 and became an operating business on July 13, 1992 through the
acquisition of Versus Technology Limited ("Versus Technology UK"), a
company incorporated in the United Kingdom. On February 28, 1994, the
Bronzebase Limited shareholders exchanged all their shares of common stock
for 7,607,492 common shares of Numerex Corp. (the "Stock Exchange").
Numerex Corp. had been incorporated in 1988 for the purpose of seeking
potential business opportunities through the acquisition of existing
businesses and, prior to the Stock Exchange, had insignificant operations.
For financial reporting purposes, the Company's results of operations
prior to the date of the Stock Exchange are those of Bronzebase Limited.
The Stock Exchange has been accounted for as a capital transaction,
retroactively affecting the Company's outstanding common stock in 1992 and
its issuance of shares with respect to the acquisition of Versus
Technology UK during fiscal 1993. The Stock Exchange resulted in a
decrease in common stock in the amount of(pounds) 69,000 on February 28,
1994 representing the excess of transaction costs over the net assets
(cash less accrued expenses) of Numerex Corp.
On July 20, 1994, the Company acquired certain assets of CXR Corporation,
a company incorporated in the United States of America, to form a network
management business. The purchase price for the assets was $1,000,000, of
which $200,000 was paid at closing and $800,000 was paid on August 25,
1994. This transaction has been accounted for under the purchase method
and is reflected in the October 31, 1994 consolidated balance sheet. Pro
forma information is not provided as the asset purchase is not significant
to the Company.
On November 30, 1994, the Company acquired certain assets, licenses and
contract rights from Versus Technology, Incorporated, a company
incorporated in the United States of America, for approximately $1,300,000
cash. The transaction was accounted for under the purchase method of
accounting and is reflected in the October 31, 1995 consolidated balance
sheet. Pro forma information is not provided as the asset purchase is not
significant to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company designs, manufactures and markets Derived
Channel Systems, intrusion alarm products and network management systems.
Currency - These consolidated financial statements are stated in British
pounds sterling, the functional currency of the country in which
substantially all of the Company's sales are presently generated.
Principles of Consolidation - The consolidated financial statements
include the results of operations and financial position of the Company
and its wholly owned subsidiaries. All material intercompany transactions,
balances and profits are eliminated in consolidation.
F-7
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
Cash and Cash Equivalents - The Company considers all highly liquid
investments with maturities of three months or less when purchased as cash
equivalents.
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 straight-line over 7 years
(the remaining useful life of
patents acquired)
o Developed software straight-line over 3 years
o Costs in excess of the fair value
of net assets acquired straight-line over 12 years
o Territorial rights straight-line over 4 years
Costs in excess of the fair value of net assets acquired is the cost of
acquiring Versus Technology UK in excess of amounts allocated to specific
assets based upon their fair values. Territorial rights are associated
with the right to manufacture, market and sell product in certain
countries. These rights were acquired as a result of the November 30, 1994
purchase from Versus Technology, Incorporated.
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
establishment of technical feasibility are expensed as incurred.
Property and Equipment - Property and equipment is recorded at cost and is
depreciated or amortized over the estimated useful lives of the assets.
The rates of depreciation and amortization are as follows:
o Short-term leasehold improvements over the term of the lease (which
is less than the asset life)
o Plant and machinery 4 to 10 years
o Equipment, fixtures and fittings 3 to 10 years
Asset Impairment - Long-lived assets are reviewed by management for
impairment on an annual basis in conjunction with the preparation of the
annual budget or when a specific event indicates that the carrying value
of an 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.
Inventory - Inventory and work-in-progress are stated at the lower of cost
(first-in, first-out method) or market. Cost includes materials, direct
labor and production overheads appropriate to the relevant state of
production.
F-8
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
Income Taxes - The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109. Deferred
income taxes are provided on temporary differences arising from the
different treatment of items for financial statement and taxation
purposes, which are expected to reverse in the future, calculated using
enacted tax rates.
The Company does not provide deferred federal income taxes on the
undistributed earnings of its foreign subsidiaries since such earnings are
not expected to be remitted to the Company in the foreseeable future.
Fair Value of Financial Instruments - The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents, accounts
receivable and accounts payable approximate their fair value because of
the immediate or short-term maturity of these financial instruments.
Revenue Recognition - The Company recognizes sales of its products when
title transfers to its customers. Revenue for royalty agreements is
recorded as sales when earned.
The Company performed certain software development services under contract
for a significant customer during 1995 and 1996. Revenue from the
fixed-price contract was recognized on the percentage of completion method
which was measured by the percentage of costs incurred to date to the
estimated total costs for the contract. Service contract costs consisted
primarily of outside consultant and software engineering fees. Costs and
earnings in excess of billings on this contract were(pounds)0 and
(pounds)175,000 as of October 31, 1996 and 1995, respectively. Through
October 31, 1996, cumulative costs of(pounds)2,110,000, revenues of
(pounds)3,360,000 and billings of(pounds)3,360,000 have been recorded under
the contract.
Foreign Currency Transactions - Some transactions of the Company and its
subsidiaries are made in U.S. dollars. (Gains) and losses from these
transactions are included in income as they occur. Net currency
transaction losses included in determining selling, general,
administrative and other expenses amounted to(pounds)5,000,(pounds)109,000
and(pounds)85,000 in 1996, 1995 and 1994, respectively.
Research and Development - Research and development expenses are charged
to the statement of operations in the period in which they are incurred.
Research and development expenses amounted to(pounds)1,128,000,
(pounds)682,000 and(pounds)452,000, in 1996, 1995 and 1994, respectively.
Provision for Warranty Claims - Estimated warranty expense is charged at
the time of sale of the warranted products. Warranty expenses have not
been significant to the Company.
Earnings (Loss) Per Share - Earnings (loss) per share is computed using
the weighted average number of shares of common stock and common stock
equivalents, if dilutive, outstanding during the year.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may likely differ from those
estimates and assumptions, and such differences, if any, are not expected
to be significant.
F-9
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
Stock-Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123
defines a fair value method of accounting for stock options and other
equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Under SFAS No. 123, the Company is permitted to continue to account for
stock-based transactions under the previous accounting provisions provided
by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), but would be required to disclose in
a note to the consolidated financial statements pro forma net income and
income per share information as if the Company had applied the new method
of accounting.
The Company has determined that it will continue to account for
stock-based transactions under APB No. 25 and will provide the disclosures
required by SFAS No. 123 during the fiscal year ending October 31, 1997.
U.S. Dollar Equivalent Financial Information - The translation to U.S.
dollars as of and for the year ended October 31, 1996 is for convenience
only and was based on the noon buying rate in New York City for cable
transfers as certified for customs purposes by the Federal Reserve Bank of
New York as of October 31, 1996, the last trading day during the Company's
year ended October 31, 1996. This rate was $1.6278 to(pounds)1.00. This
translation should not be construed as a representation that the
(pounds)1.00 sterling amounts actually represented, have been, or could be,
converted into dollars at this or any other rate.
Reclassification - Certain prior year amounts have been reclassified to
conform with the current year presentation.
3. SPECIAL CHARGES
During the year ended October 31, 1996, the Company recorded pre-tax
special charges of(pounds)1,624,000 primarily relating to fixed and
intangible asset impairment provisions for certain obsolete and/or under
performing products and(pounds)1,097,000 primarily relating to an accrual
for settlement of shareholder litigation and related legal fees (see Note
12).
F-10
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
4. INVENTORY
October 31,
----------------------
1996 1995
(In Thousands)
Raw materials (pounds) 1,051 (pounds) 2,471
Work-in-progress 730 1,233
Finished goods 1,057 1,589
----- -----
(pounds) 2,838 (pounds) 5,293
===== =====
The inventory write-downs of(pounds)1,473,000 for the year ended October
31, 1996 are the result of determining certain inventory items to be
obsolete and/or under performing due to market conditions.
5. INTANGIBLE AND OTHER ASSETS
October 31,
----------------------
1996 1995
(In Thousands)
Developed software 2,463 2,070
Intangible and other assets 1,795 1,652
------ ------
Total intangible and other assets 4,258 3,722
Accumulated amortization (1,918) (1,152)
------ ------
Intangible and other assets, net (pounds) 2,340 (pounds) 2,570
===== =====
F-11
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
October 31,
-----------------------
1996 1995
(In Thousands)
Leasehold improvements (pounds) 218 (pounds) 111
Plant and machinery 717 1,459
Equipment, fixtures and fittings 380 422
----- -----
Total property and equipment 1,315 1,992
Accumulated depreciation and amortization (542) (744)
----- -----
Property and equipment, net (pounds) 773 (pounds) 1,248
===== =====
7. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109. Deferred income taxes are provided on temporary differences arising
from the different treatment of items for financial statement and taxation
purposes, which are expected to reverse in the future, calculated using
enacted tax rates. A valuation allowance is recorded to reduce deferred
tax assets to an amount which is more likely than not to be realized.
Substantially all of the Company's provision for income taxes is incurred
in the United Kingdom.
For the years noted below, the provision for income taxes consists of the
following:
October 31,
------------------------------------------
1996 1995 1994
(In Thousands)
Currently payable (pounds) 1,292 (pounds) 2,551 (pounds) 3,091
Deferred (297) (20) 38
----- ----- -----
(pounds) 995 (pounds) 2,531 (pounds) 3,129
===== ===== =====
F-12
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
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 income:
October 31,
---------------------------------------
1996 1995 1994
(In Thousands)
Income tax (benefit) computed at U.S. corporate
tax rate of 34% (pounds) (888) (pounds) 2,608 (pounds) 3,065
Adjustments attributable to:
Valuation allowance 1,790 (54) (106)
Nondeductible expenses 65 53 198
Foreign income taxed in the United States 60 - 63
Income tax rate differential between the United
States and the United Kingdom (32) (76) (91)
------ ------- -------
Total (pounds) 995 (pounds) 2,531 (pounds) 3,129
====== ======= =======
F-13
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
The components of the Company's net deferred tax assets and (liabilities)
as of October 31 are as follows:
1996 1995
------------- ------------
(In Thousands)
Deferred tax liability:
Differences between book and tax basis
of property and equipment (pounds) -- (pounds) (110)
Other -- (3)
------- -------
-- (113)
------- -------
Deferred tax asset:
Intangibles 306 --
Differences between book and tax basis
of property and equipment 300 --
Net operating loss carry forwards 219 28
Tax credits carry forwards 728 --
Warranty provision -- 5
Other 3 24
Inventories 404 --
Accruals 447 --
------- -------
2,407 57
Valuation allowance (2,166) --
------- -------
Total (pounds) 241 (pounds) (56)
======= =======
The Company has not recognized deferred tax liabilities of(pounds)56,000
for the undistributed earnings of its United Kingdom subsidiaries at both
October 31, 1996 and 1995, since the Company does not expect these
earnings to be remitted to the United States in the foreseeable future. A
deferred tax liability will be recognized when the Company expects that it
will recover the undistributed earnings in a taxable manner, such as
through receipt of dividends, a loan of the unremitted earnings to the
Company or one of its U.S. affiliates, or a sale of the United Kingdom
subsidiaries' stock. The accumulated net undistributed earnings of the
Company's United Kingdom subsidiaries included in retained earnings were
(pounds)7,300,000 and(pounds)6,700,000 at October 31, 1996 and 1995,
respectively.
F-14
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
8. SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
Approximately 32%, 38% and 49% of sales in 1996, 1995 and 1994,
respectively, were to British Telecommunications plc. The accounts
receivable from British Telecommunications plc were(pounds)2,108,000 and
(pounds)2,515,000 as of October 31, 1996 and 1995, respectively, and were
collected pursuant to normal credit terms.
The principal shareholder provided financial advisory, investment banking
and other services for the Company. Effective January 1, 1995, the Company
entered into a two-year agreement, which expired on December 31, 1996,
whereby the Company paid $20,000 per month plus certain reimbursable
expenses to the shareholder for financial advisory services.
Fees and other expenses relating to the principal shareholder are as
follows:
October 31,
----------------------------------
1996 1995 1994
(In Thousands)
Interest expense (pounds) -- (pounds) -- (pounds) 17
Fees 155 206 405
Out-of-pocket expenses 57 34 189
Costs incurred by the principal shareholder relating to the Stock Exchange
and charged to the Company including fees for services, amounted to
(pounds)98,000 in 1994. Costs incurred by the principal shareholder
relating to the public offering and charged to the Company including fees
for services, amounted to(pounds)90,000 in 1995.
F-15
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
9. COMMITMENTS
The Company leases certain property and equipment under noncancellable
operating leases with initial terms in excess of one year. Future minimum
lease payments under such noncancellable operating leases subsequent to
October 31, 1996 are as follows:
Years Ending October 31, (In Thousands)
1997 (pounds) 267
1998 221
1999 172
2000 132
2001 108
Thereafter 502
------
Total (pounds) 1,402
======
Rent expense, including short-term leases, amounted to approximately
(pounds)328,000,(pounds)277,000 and(pounds)168,000 in 1996, 1995 and 1994,
respectively.
10. STOCK OPTION PLANS
In April 1994, the Company's shareholders approved the Employee Stock
Option Plan (the "Employee Plan"), providing for the granting of
nonqualified and incentive stock options to all officers and key employees
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 Employee Plan, as amended
in February 1995, is 447,500 shares of Class A Common Stock.
Options issued under the Employee Plan typically vest ratably over a
five-year period. In the event of a "change in control" as defined in the
Employee Plan, all outstanding options become fully vested and are subject
to exercise. Incentive stock options and nonqualified stock options
granted under the Employee Plan expire 10 years after the grant date
unless an option holder's employment is terminated. Under such
circumstances, the options expire from three months to one year from the
date of employment termination.
F-16
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
In April 1994, the Company's shareholders also approved the Nonemployee
Director Stock Option Plan (the "Director Plan"), providing for the
granting of stock options to nonemployee members of the Company's Board of
Directors at the closing market price at the grant dates. On April 1, 1995
and each anniversary date thereafter, each nonemployee 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. 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 October 31, 1996 and 1995, 400,500 and 193,500 options under the
Employee Plan have been granted to key employees of the Company at prices
ranging between $5.75 and $15.00. Of these options, 55,000 have expired
and been canceled, 85,300 are currently exercisable and the remaining
options will become exercisable in 1997 through 2000 with the exception of
certain options granted to a senior management employee which become fully
exercisable upon the attainment of specified market prices for the
Company's common stock for a period of 60 days. At October 31, 1996, 9,200
options under the Director Plan have been granted to directors of the
Company at prices ranging between $4.63 and $5.13. None of these options
have expired or are currently exercisable and the remaining options will
become exercisable in 1997. Options to purchase 18,750 shares of Class A
common stock at a price of $10.00 were granted as a finder's fee in
connection with an acquisition. Of these options, 11,250 are currently
exercisable and the remaining will become exercisable in 1997 through
1999.
F-17
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
October 31,
-------------------------------------
1996 1995 1994
(In Thousands)
Cash payments for interest (pounds) 10 (pounds) 12 (pounds) 75
Cash payments for income taxes 2,859 3,274 1,244
Supplemental Disclosures of Noncash Investing Activities
October 31,
-------------------------------
1996 1995 1994
(In Thousands)
Assets acquired in connection with
capital leases (pounds) -- (pounds) 61 (pounds) --
Liabilities assumed in acquisitions -- -- 459
12. LITIGATION
In July and August 1995, the Company received complaints in three separate
purported lawsuits. The complaints which were consolidated into a single
amended complaint, sought class action status and alleged violations
arising under certain federal securities laws for alleged material
misstatements and omissions in the prospectus associated with the
Company's 1995 public offering. The Company and the individual defendants
believe the allegations are untrue and without merit. The complaint was
filed against certain of the Company's directors and executive officers,
principal shareholder and underwriters. The complaint sought rescission
and/or damages against all defendants including the awarding of costs and
disbursements. The defendants filed a Motion to Dismiss and in January
1996, the defendants' Motion to Dismiss was granted and the case was
dismissed. In February 1996, the plaintiffs appealed the Order of the U.S.
District Court to the United States Court of Appeals. A settlement,
effective October 24, 1996 was reached among the parties and has been
approved by the court. Certain defendants will pay to a settlement fund
approximately $2,100,000 ((pounds)1,290,000), which after certain costs
and expenses will be paid to a class. The Company's contribution to the
settlement fund will be $1,033,000 ((pounds)635,000), which together with
related legal costs was expensed in 1996 (see Note 3). Accordingly,
included in the line item "other accrued liabilities" on the accompanying
Consolidated Balance Sheet at October 31, 1996 are accruals for the
settlement of the litigation and related expenses amounting to $1,500,000
((pounds)921,000).
F-18
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED OCTOBER 31,1996
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
On December 11, 1996, the Company announced that it has entered into a
nonbinding Letter of Intent to acquire a majority interest in Broadband
Networks, Inc., a company located in State College, Pennsylvania.
Completion of the transaction is subject to satisfaction of various
conditions, including the parties entering into a definitive agreement,
satisfactory due diligence investigations and approval by the Boards of
Directors for both companies.
On December 12, 1996, the Company announced that it has signed a
commitment letter with a major regional bank for a $10,000,000 unsecured
revolving credit facility. Completion of the transaction is subject to
final approval by the Company's Board of Directors and execution of
definitive documents.
F-19
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended October 31, 1996
NUMEREX CORP.
(Exact name of registrant as specified in its charter)
Commission File No. 0-22920
================================================================================
EXHIBIT INDEX
Exhibit No. Page No.
----------- --------
2.1(1) Agreement of Stock Exchange dated November 3, 1993
among the stockholders of Bronzebase, Bronzebase and
Numerex
2.2(6) Agreement and Plan of Merger dated as of March 8,
1994 between Numerex Corp., a New York corporation,
and Numerex Corp., a Pennsylvania corporation
2.3(2) Agreement of Stock Exchange dated June 21, 1994
among Omega Technology Ltd., Digital Audio Limited
and the Company
2.4(3) Asset Purchase Agreement dated July 20, 1994 among
CXR Corporation, CXR Telecom Corporation and the
Company related to the purchase of certain assets of
the Digilog division
2.5(4) Asset Purchase Agreement dated November 30, 1994
between Versus Technology UK, Inc. and the Company.
3.197) Amended and Restated Articles of Incorporation of
the Company, as amended
3.2(7) Bylaws of the Company
10.1(1) Purchase Agreement between Versus Technology UK and
Bronzebase Limited dated July 13, 1992
10.2(1) Employment Agreement between Kenneth F. Manser and
Versus Technology UK (Management Compensation
Contract)
10.3(1) $300,000 Promissory Note from Versus Technology UK
to Dominion, dated December 15, 1992
10.4(7) Amendment to License Agreement between Base Ten
Systems, Inc. and Radionics, dated February 28, 1989
10.5(1) License Agreement between Base Ten Systems, Inc. and
Standard, July 22, 1987
10.69(1) Assignment and Assumption Agreement between Versus
Technology, Incorporated and Bronzebase, dated
August 19, 1993 regarding Standard Telephone &
Cables Pty.
10.7 (Intentionally left blank)
Exhibit No. Page No.
----------- --------
10.8(1) Assignment and Assumption Agreement between Versus
Technology, Incorporated and Bronzebase, dated
August 19, 1993 regarding Radionics
10.9(1) Agreement between British Telecom, Base Ten Systems
Limited, Versus Technology UK, Versus Technology,
Incorporated and Base Ten Systems Inc. dated
December 17, 1990 regarding Telecom RedCARE Network
10.10(7) Agreement between British Telecom and Versus
Technology U.K. dated September 26, 1995 relating to
the supply of RedCARE system products (certain
confidential information contained in this Agreement
has been omitted pursuant to Rule 24b-2 and has been
filed separately with the Securities & Exchange
Commission)
10.11(1) Amendment No. 1 to Loan Agreement between Versus
Technology UK and Dominion, dated October 18, 1993
10.12(1) Versus Technology UK Pension and Death Benefit
Scheme (Management Compensation Plan)
10.13(7) The Numerex Corp. Savings and Profit Sharing Plan --
Summary Plan Description (Management Compensation
Plan)
10.14 Amended and Restated 1994 Employee Stock Option Plan
(Management Compensation Plan)
10.15(6) Amended and Restated Stock Option Plan for
Non-Employee Directors (Management Compensation
Plan)
10.16(2) Registration Agreement between the Company and
Dominion dated July 13, 1992
10.17(6) Engagement Letter Agreement between the Company and
Dominion effective January 1, 1995
10.18(6) Letter Agreement between the Company and Dominion
(now Gwynedd) dated October 25, 1994 re: designation
of director
10.19(6) Service Agreement between Digital Audio Limited and
Peter I. Pritchett (Management Compensation
Contract)
10.20 Employment Agreement between the Company and John J.
Reis, as amended (Management Compensation Contract)
10.21(6) Manufacturing Contract Agreement between
Semiconductor Ventures International Co., Ltd. and
Digital Audio Limited
Exhibit No. Page No.
----------- --------
10.22(7) Agreement for the Provision of Software and Services
between British Telecom and Versus Technology U.K.
dated September 7, 1995
10.23(7) Office Space Lease Agreement between the Company and
LBA Associates dated May 31, 1995.
10.24 Severance Agreement between the Company and
Frederick C. Shay (Management Compensation Contract)
10.25 Severance Agreement between the Company and Charles
L. McNew (Management Compensation Contract)
10.26 Severance Agreement between the Company and Donald
M. Hooton (Management Compensation Contract)
10.27 Incentive Compensation Program for fiscal 1997.
(Management Compensation Plan)
10.28 Letter Amendment dated September 24, 1996 to
Agreement between British Telecom and Versus
Technology U.K. dated September 26, 1995.
10.29 Agreement between Dominion and the Company relating
to CellTel Data Services, Inc., dated October 15,
1996
21 Subsidiaries of Numerex Corp.