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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year ended October 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-22920
NUMEREX CORP.
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 11-2948749
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1600 Parkwood Circle
Suite 200
Atlanta, Georgia 30339-2119
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (770) 693-5950
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock, no par value 10,343,092
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(Title of Class) (Number of Shares Outstanding
as of January 20, 2000)
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 $68,888,704 (1)
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Annual Report to Shareholders for the
year ended October 31, 1999 are incorporated by reference in Part I and Part II
of this Report and certain provisions of the Company's Proxy Statement to be
filed in connection with its 2000 Annual Meeting of Shareholders are
incorporated by reference in Part III of this Report.
Other documents incorporated by reference are listed in the Exhibit
Index.
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(1) The aggregate dollar amount of the voting stock set forth equals the
number of shares of the Company's Common Stock outstanding, reduced by
the amount of Common Stock held by officers, directors and shareholders
owning 10% or more of the Company's Common Stock, multiplied by $11.875
the last reported sale price for the Company's Common Stock on January
20, 1999. 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 and controlled
subsidiaries, (ii) all references to Common Stock in this report refer to the
Company's Class A Common Stock and (iii) all references in this report to fiscal
years are to the Company's fiscal year ended October 31 of each year.
TABLE OF CONTENTS
Page
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Table of Contents (i)
PART I
Item 1. Business 1
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financia1
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 11
PART III
Item 10. Directors and Executive Officers of the Registrant 11
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners and Management 11
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12
List of Financial Statements 12
List of Exhibits 12
Signatures 15
Index to Financial Statements F-1
(i)
This document contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements include, among other things,
statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. All statements and information herein and
incorporated by reference herein, other than statements of historical fact, are
forward-looking statements that are based upon a number of assumptions
concerning future conditions that ultimately may prove to be inaccurate. Many
phases of the Company's operations are subject to influences outside its
control. Any one or any combination of factors could have a material adverse
effect on the Company's results of operations. These factors include: the pace
of technological change, competitive pressures, changes in customer spending,
the loss of intellectual property protection, general economic conditions and
conditions affecting the capital markets. Actual events, developments and
results could differ materially from those anticipated or projected in the
forward-looking statements as a result of certain uncertainties set forth below
and elsewhere in this document. Subsequent written or oral statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this report and
those in the Company's reports previously and subsequently filed with the
Securities and Exchange Commission.
PART I
Item 1. Business
Overview
NumereX (the "Company") is a technology holding company comprised of
operating subsidiaries that develop and market a wide range of communication and
information products and services. The Company's primary focus is wireless
communication and information products and services utilizing proprietary
network technologies. Through its two major subsidiaries, the Company offers
products and services in wireless communications and digital multimedia
networking. In addition, the Company offers wireline alarm security equipment
and services as well as provides operational support systems, equipment, and
services to operating telephone companies.
The Company's primary strategic objectives are to:
o Implement a wireless data transport strategy which incorporates the
development, marketing and sale of Cellemetry(R), Data1Source(TM) and
related wireless network technology, applications, products, and services,
including, Uplink Security, Inc. ("Uplink") products and services.
o Acquire technologies, which will complement and enhance the Company's
wireless data transport strategy.
o Acquire or develop lines of business, which complement Company technology
strategies, and are designed to enhance strategic objectives, and augment
shareholder value.
o Expand all business lines with a focus on a financial model of recurring
revenues.
The Company, through its Cellemetry LLC ("Cellemetry") joint venture
with BellSouth Wireless, Inc. ("BellSouth Wireless"), provides a cost effective,
two-way wireless data transport in the U.S. and Canada, with plans to further
expand to international markets. The cornerstone of the Company's wireless
strategy is the service, product and networks provided and developed by
Cellemetry.
The Company is currently providing through Uplink, now a wholly owned
subsidiary of Cellemetry(R), cost effective, alarm security products, services,
and related technical support utilizing Cellemetry(R) wireless data transport
technology. Cellemetry(R), as a means of data transport, combined with
proprietary message processing and interface technologies, and believes that it
has positioned Uplink to become an industry leader for cost effective wireless
alarm transport. The Cellemetry(R) interface technology provides the foundation
of design and development of applications and solutions in certain business
sectors other than fixed alarm security. In addition, the Uplink products and
services complement the Company's wireline technology for the fixed alarm
security market.
Data1Source(TM), a proprietary and patent pending technology, provides
the Company another cost-effective means of transporting data over wireless data
networks. Through a centralized service bureau, the Data1Source offering of
Short Message Service ("SMS") provides, TDMA, CDMA and GSM wireless data
carriers with a broad range of services including web-based and e-mail-based
text messaging, SMS Touch-Tone(TM) paging, subscriber-customized Internet
content services such as news headlines, sports scores, stock quotes, and other
customer-specific information. The Company plans to increase the market
penetration of the current Data1Source(TM) service to wireless data carriers.
Data1Source(TM) development and marketing efforts derive from and leverage the
Company's core wireless data technology Cellemetry(R) and its existing
relationships with wireless data carriers.
The Company's Broadband Networks, Inc. ("Broadband") principally
designs, develops, markets, and sells its PowerPlay(TM) digital multimedia
networking system. PowerPlay(TM) is designed for a wide range of applications,
which require high quality interactive video, audio and data communication.
Corporate, educational or medical Intranets can schedule or produce `on-demand'
multimedia conferencing between any combination of desktop workstations, mobile
rollabout projection units, or dedicated conference rooms. Each station has
access to all of the resources of the entire network. This includes: secure
point-to-point, or
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multiple participants full motion video conferencing with far end device
control; central media libraries or servers, which provide media retrieval and
video-on-demand capability; secure on-demand gateways to national sites, public
switched networks and the Internet; compatibility/connectivity between any
combination of desktops, conference rooms, servers, or gateways; data and
document collaboration combined with real time full motion video; voice over IP
from any station to any station, or the world via a central gateway.
The Company's Broadband business unit also provides systems design,
products, integration services, installation, and operator training for
interactive voice, video, and data via fiber optic transport. This integration
of the Company's fiber optic transport expertise, to date, has been in the area
of educational enhancement through distance learning.
As an adjunct to its main focus, the Company also provides operational
support through its subsidiary Digilog, Inc. ("Digilog"), and equipment and
services to operating telephone companies through its subsidiaries, DCX Systems,
Inc. ("DCX Systems") and DCX Systems (Australia) Pty Limited.
Traditionally, the Company has derived significant revenues from its
derived channel technology. This derived channel technology creates an inaudible
frequency on an existing telephone line below the voice communications spectrum
for data transmission ("Derived Channel"). In November 1999, the Company sold it
Derived Channel technology to British Telecommunications plc ("BT") for
(pound)12,500,000 (approximately $20,000,000). The terms of the transaction were
negotiated between the Company and BT at arm's length.
The Company determined that divesting the wireline technology to BT
strengthened the financial position of the Company while promoting its wireless
data transport strategic focus. In addition to the purchase price, the Company
retained, in exchange for services, certain commercial interests in a telemetry
venture on a revenue sharing basis and a right to continue to market its Derived
Channel technology in North, Central and South America, South Korea and
Australia. The Company also entered into an agency agreement whereby it has the
rights to market BT's digital services platform ("DSP") a multi-functional
gateway product for wireless and wireline including its GSM wireless product in
certain territories.
The sale to BT caused a material loss of the future revenues and
earnings associated with the Company's Derived Channel technology. The Company
determined, however, that the transition and focus to its wireless data strategy
coupled with increased liquidity outweighed a substantial reduction of its
wireline revenues and earnings. The Company also has significantly reduced its
dependence upon BT. There can be no assurance that the Company will recover its
revenues and earnings through its remaining lines of business or successfully
transition its business to a financial model of recurring revenues.
In connection with the divestiture of its Derived Channel business, the
Company made certain representations and warranties to BT. Although the Company
is not aware of any material event that could cause a material diminution of the
value it received upon the sale of its Derived Channel business, if BT were to
seek recovery with regard to the warranties, the purchase price for the
technology would be adversely affected.
Background
The Company's business began in July 1992 with the acquisition of the
Derived Channel wireline business, including certain proprietary intellectual
property rights, rights to Derived Channel technology and rights to market such
technology in certain countries, including the United Kingdom. The Company has
expanded its business primarily through the acquisition of complementary
businesses, product lines, and proprietary technologies, including its
investments in Digilog and DCX Systems in 1994, Uplink and Broadband in 1997,
and subsequent investments in Uplink in 1998.
In May 1998, the Company, BellSouth Wireless and BellSouth Corporation
completed a transaction whereby Cellemetry, a joint venture between the Company
and BellSouth Wireless, was formed. Cellemetry is a Delaware limited liability
company owned 60% by the Company and 40% by BellSouth Wireless. The parties
entered into an operating agreement (the "Operating Agreement") which deals
with, among other things, the conduct of the business of Cellemetry. In
addition, the Operating Agreement provides certain restrictions as to
distributions and the right to transfer ownership interests in Cellemetry.
Cellemetry is taxed as a partnership for federal, state, and foreign income tax
purposes.
As previously reported, in June 1999 the Company and BellSouth Wireless
signed a non-binding memorandum of understanding expressing the intent of the
Company and BellSouth Wireless to restructure certain economic and other
provisions of the Operating Agreement of Cellemetry. The Company completed the
restructuring in November 1999. Under the terms of the restructuring, the
Operating Agreement has been modified ("First Amendment to the Operating
Agreement") and the Cellemetry Business Plan has been modified, revised and
extended through November 1, 2004 ("Modified Business Plan"). All respective
rights under the Operating Agreement that previously triggered on May 15, 2001,
three years from the date of the formation of Cellemetry, have been revised to
trigger on November 1, 2002 and all financial performance tests have been
amended to reflect the Modified
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Business Plan. In addition, the price at which the Company may, at its sole
option, elect that BellSouth Wireless put its ownership interest in Cellemetry
to the Company has been revised and set at $17,000,000.
The restructuring also permits Cellemetry to seek to find a strategic
investor ("Third Party Investment") to invest new capital in exchange for up to
15% of Cellemetry. In connection with any such Third Party Investment, the
Company's ownership interest in Cellemetry will not be diluted below 51% and
BellSouth Wireless's will not be diluted below 34%.
Under the First Amendment to the Operating Agreement, the Company, from
and including May 15, 1999, is no longer under an obligation to make any
additional capital contributions to Cellemetry. The Company, however, has
committed to provide up to $5,500,000 in interest bearing debt financing to
Cellemetry.
Also, under the First Amendment to the Operating Agreement, the Company
conveyed Uplink to Cellemetry. In addition, the Company issued to BellSouth
Wireless 30,000 shares of Series A Convertible Redeemable Preferred Stock of the
Company ("Preferred Stock"). The Preferred Stock is redeemable, at the Company's
option, commencing November 1, 2000, on the basis of a pre-set annual redemption
price per share. Also, the Preferred Stock, at BellSouth Wireless's option,
commencing November 1, 2003 or November 1, 2002 should the Company's common
stock exceed a pre-set market price for a given period of time, is convertible
into 625,000 shares of common stock of the Company, approximately 6% of the
Company's common stock. The Preferred Stock carries certain registration rights
for the common stock upon such conversion.
Also, in November 1999, the Company sold its entire holdings in its
wholly owned subsidiary, Bronzebase Limited ("Bronzebase") to BT. Bronzebase is
an English limited liability company, which owns all of the stock of Versus
Technology Limited ("Versus Technology"). The consideration for the sale was
(pound)12,500,000 (approximately $20,000,000). The terms of the transaction were
negotiated between the Company and BT at arm's length.
WIRELESS COMMUNICATIONS
Cellemetry(R)
Cellemetry(R) is means of wireless data transport that uses excess
capacity of the cellular telephone network's overhead control channels and the
SS7/IS-41 network protocol to deliver two-way short data messages, without
affecting the voice channels of the cellular network.
Using Cellemetry(R) technology, remote equipment or vehicles can be
polled, time-set, or autonomously exchange information with a customer's central
locations through the cellular network's control channels. Information gathered
is relayed to and from the customer's designated site for collection or for
response. Based on remote conditions, control actions can be relayed as well.
That means, for example, equipment can be turned on or off remotely, switches
and gates can be closed, and pumps triggered.
When used in combination with low-cost Global Positioning System (GPS)
applications, Cellemetry(R) radios can pinpoint the precise geographic location
of trucks, automobiles, railroad cars, barges, containers, or other movable
assets and signal control actions or operator response messages.
Cellemetry(R) Data Service a patented technology of Cellemetry(R), is
telemetry, or remote monitoring, over the cellular telephone network. It
provides a means of sending short, telemetry-like messages over the cellular
telephone system in a manner that is virtually transparent to the cellular
operator. Cellemetry(R) Data Service does not use or impact voice channels.
Licensing agreements have been negotiated with cellular carriers throughout the
U.S. and Canada to make Cellemetry(R) services widely available. Licensing
agreements have also been negotiated with application developers and radio
manufacturers to provide Cellemetry(R) applications and equipment across urban,
rural, and industrial markets.
Cellemetry(R) Data Service enables messaging for many different
businesses. It can, for example, report alarm messages, utility meter readings,
vehicle and trailer location, and vending machine status. It is unique because
it uses the underutilized portion of the cellular system, the overhead control
channels, to convey short data messages without impacting or using the voice
channels. These control channels are used to transmit necessary information for
all call initiations (both incoming and outgoing) between the cellular system
and the cellular customer's equipment. The message handling capacity of these
control channels is far greater than is
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required by the existing cellular system, even during the busiest times of the
day.
Cellemetry(R) Data Service operates in the same manner in which roaming
telephones operate in the cellular system. A roaming cellular telephone is
defined as a cellular telephone operating in any system other than its home
system. When a roaming cellular telephone is turned on, it recognizes the fact
that it is not in its home system and accordingly "registers" by sending its
Mobile Identification Number (MIN) and its Electronic Serial Number (ESN) to the
cellular system via one of the control channels. The cellular system recognizes
the roamer number and routes the MIN and ESN to the roamer's home system for
validation via a special network (SS7/IS41) which links all of the cellular
systems together across the United States, Canada and parts of South and Central
America.
Cellemetry(R) radios behave exactly like roaming telephones except the
cellular telephone switch's database is set to route the "registrations" (MIN
and ESN data) to the Cellemetry(R) Service Bureau, ("the Service Bureau")
connected to the same intra-cellular network. The MIN serves to identify the
Cellemetry(R) radio and the ESN is the data field, which contains the 32-bit
telemetry message. In addition, Cellemetry(R)'s centralized Service Bureau adds
a timestamp and the SS7/IS41 network adds point of origin data. The entire
Cellemetry(R) message, if expressed in binary, is 112 bits.
The centralized Service Bureau processes, stores, and routes the
Cellemetry(R) Data Service messages according to customer requirements. Some
applications may require immediate processing, as is the case with alarm
monitoring, while an application such as vending machine status may only need
the messages stored and transferred in a batch once a day.
Uplink
Uplink, designs, develops and markets interface and routing
technologies that use Cellemetry(R) for security alarm transport applications.
Because Cellemetry(R) utilizes the existing cellular network and inexpensive
radio transmitters, Cellemetry(R) applications can quickly and economically
monitor and control equipment at remote locations.
Uplink markets wireless alarm transmission equipment which is installed
at customer premises, administers and offers air time packages on a consistent
price basis, and provides technical services that route alarm signals from the
cellular networks to any central station in the country without requiring
modifications to the station's receiving equipment.
The Company believes that Uplink's products and airtime transport
charges are competitively priced. As a result of combining Cellemetry(R)
technology with low cost transmission equipment and routing technologies,
significant improvements in security transport services are now available to the
industry. The Company also believes that Cellemetry(R) and Derived Channel
technology, as security alarm transport platforms, may be complementary. As a
result, the technologies can be implemented independently or collectively.
Data1Source(TM)
Data1Source(TM), a service offering through Cellemetry(R), is a
wireless means of data transport that utilizes the Short Message Service (SMS)
messaging capability of digital (TDMA, CDMA and GSM) cellular telephone networks
and the SS7/IS-41 network protocol to deliver digital data packets of
approximately 200 bytes each, although multiple packets can be concatenated.
Data1Source(TM)'s new proprietary and patent pending centralized
service processes, buffers, and routes the Data1Source(TM) Service messages to
enable a broad range of services for wireless data carriers, including web-based
and e-mail-based text messaging, SMS Touch-Tone(TM) paging,
subscriber-customized Internet content services such as news headlines, sports
scores, stock quotes, and other customer-specific information.
Sales and Marketing
The Company markets its wireless data services directly to
participating cellular carriers who share in the recurring revenue generated
from within their territories. The services are also marketed directly to
application providers who are offered transport capability, and varying degrees
of router services, radio development and other ongoing support services. A
network operations center provides customer support twenty-four hours a day,
seven days a week.
The Company currently offers Cellemetry(R) service in the continental
United States and Canada. The Company intends to offer Cellemetry(R) in various
international markets through direct sales, partnerships, and other channels of
distribution.
The Company markets "SMS" to cellular carriers on the basis of a
competitive pricing model based upon a connection and a usage fee structure,
which is content and traffic volume related. The major benefit to cellular
carriers of the Company's service offering which is emphasized is the limited
capital investment cost of establishing the service within the cellular carriers
territories due to the available centralized Service Bureau and existing
Cellemetry(R) based wireless data network. The service is available to
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all cellular carriers, including those carriers with existing relationships to
Cellemetry.
DIGITAL MULTIMEDIA NETWORKING
Through Broadband, the Company designs, develops, and markets complete
system solutions for high bandwidth broadband communications networks. The
Company both manufactures the products upon which its systems are based and
incorporates third party products where appropriate.
Broadband transmission systems permit network operators to provide a
wide range of video and data services, including internet access, high speed
data transfer, interactive video conferencing and voice service. The use of
fiber optics in the broadband transmission network provides improved signal
quality for long distance transmission, increased bandwidth, immunity to
interfering signals, and significant cost savings and reliability over coaxial
cable-based network technologies. The Company believes that its Broadband
systems enable the deployment of sophisticated architectures generally at lower
costs and with less hardware and complexity than competing offerings.
Products and Services
Broadband has developed and continues to enhance its line of software,
data, and fiber optic transmission products. In addition, the Company has
developed a new digital multimedia solution, PowerPlay(TM), which provides
capability for interactive videoconferencing over the same network platform that
carries standard data traffic. The Company believes that PowerPlay(TM)
represents a significant advance over Broadband's prior generation product,
which was targeted at the distance learning market, because of PowerPlay(TM)'s
broader range of potential uses.
System Solution Services. Broadband designs and implements systems
utilizing in-house manufactured products and products supplied by third parties.
It also trains the end-users as an integral aspect of providing complete system
solutions. The Company believes the Broadband total system solution focus
differentiates it from competitors while providing an additional source of
revenue growth.
PowerPlay(TM) Solution. PowerPlay(TM) is Broadband's digital multimedia
solution for high bandwidth private network applications. PowerPlay(TM) is an
integrated hardware-software system, which supports user-friendly control of all
network devices including VCRs, cameras, and switches. This product permits the
scheduling and conduct of video conferencing via a desktop workstation, a
rollabout cart or a configured classroom or business environment. The
PowerPlay(TM) system incorporates Broadband software; both Broadband and third
party developed hardware, and is compatible with all standards based
transmission networks. The Company believes that PowerPlay(TM) is unique with
respect to its capability to deliver full motion video signals while using a
relatively small amount of bandwidth.
Data Solution. Broadband also provides high speed wide area network, or
WAN, data solution. This solution is offered as a data only capability or as
part of delivering the PowerPlay(TM) application. The data product line consists
of two main components. First is the data switch product, which the Company
obtains from other vendors. Second is the transport converter device, which the
Company manufactures.
Analog Products. The Company also sells an analog transport product
line, EDCOMM(TM) that consists of a variety of fiber optic transmitters and
receivers. The typical application is for the delivery of video over a private
network. The Company manufactures all of these products and the great majority
of the sales of these products are to existing Broadband customers.
Sales and Marketing
The Company markets its Broadband products and services directly and
through a combination of manufacturers' representatives, system integrators, and
value added resellers. The Company believes it will be necessary to expand its
sales and marketing efforts in the future to remain competitive and take
advantage of market opportunities, as well as to extend into international
markets.
Broadband has established relationships with a number of multiple
system cable operators, or MSOs. MSOs have generally looked to these private
networks as a means of augmenting and extending their public networks, and as a
source of new revenues in the increasingly competitive environment.
Operating Telephone Companies compete with cable operators for the
delivery of distance learning and other private network services. Broadband has
successfully provided product to several Regional Bell Operating Companies and
hopes to replicate these efforts in other areas.
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The Company has developed relationships with a number of traditional
systems integrators under which Broadband has provided system design services
and has assisted with the installation. The Company believes that systems
integrators provide a viable avenue to the market and intends to continue to
expand its efforts in this area.
DERIVED CHANNEL SYSTEM
Although the Company sold its Derived Channel technology to BT, the
Company retains the right to market this service in North, Central and South
America, South Korea and Australia. The Company provides this service through
its DCX Systems subsidiaries.
As a result of technological advances in the telecommunications
industry, telephone companies ("Telecomms") are able to broaden their product
portfolios by offering enhanced services to their customers. The Company
believes that Telecomms can be attracted to niche technologies, such as the
Company's Derived Channel System, that offer a cost effective solution for
applications that typically require dedicated lines, thereby providing a more
productive use of the existing telephone network.
The Company's licensed technology creates a "Derived Channel" on an
existing telephone line by using an inaudible frequency below the voice
communications spectrum for data transmission. The Derived Channel technology
uses this inaudible or low tone frequency to transmit monitoring information
between a microprocessor at the user's protected premises and a microprocessor
located at the telephone company's central office. This creates a two-way
communication system that continuously monitors the integrity of a user's
telephone line and security system. The Derived Channel system operates over a
regular voice telephone line with no interference, whether or not the telephone
is in use. In addition, the low tone signal can be encrypted for additional
security.
The Company believes that its Derived Channel System differs from most
other alarm transport technologies in three meaningful ways: 1) Derived Channel
operates over existing telephone lines, eliminating the need for a dedicated
line service to the telephone customer; 2) Derived Channel communicates by means
of an encrypted, continuous and inaudible signal and is transmitted even while
the telephone is otherwise in use; 3) telephone line integrity and security
system operation are automatically monitored at frequent intervals through
polling generated by network equipment located at the telecommunication
company's central office. The continuous signaling originating at the protected
premises provides prompt reporting of line disruptions, telephone system
outages, or alarm conditions.
The Company believes that Derived Channel represents an improvement
over the most common monitored alarm signaling system, such as the automatic
dialer (also know as a digital communicator). These devices are reactive by
nature. When an intrusion is detected, an automatic dialer attempts to seize the
subscriber's telephone line and dial the number of the alarm monitoring company
to report the intrusion. Generally, in the event the telephone line is in use or
has been cut, a standard automatic dialer will be unable to report the alarm
condition. Unlike the standard automatic dialer, the Derived Channel System is
proactive. As such, it continuously monitors line and system integrity, and
automatically reports any line disruption or failure to the alarm monitoring
company.
Sales and Marketing
The Company intends to provide a level of marketing support to the
Telecomms and alarm system distributors, in its licensed territories, and to
seek more comprehensive associations with Telecomms, enabling the Company to
market its Derived Channel security alarm transport directly to the industry in
an effort to capture a share of the recurring revenue generated by the
applications. The Company has a presence in the private market sector
(non-publicly switched traffic), and serving customers who have control and
ownership of their own telephone facilities (i.e., the U.S. Navy). This segment
of the market needs smaller systems and has fewer connection points than the
systems, which have been marketed to the major telephone companies.
NETWORK OPERATIONAL SUPPORT SYSTEMS
In the last decade the telecommunications industry has changed the
implementation of its networks regarding methods used to establish, control, and
track connections. The new control network is responsible for most of the
enhanced services implemented in the last few years. Using Signaling System
Seven (SS7) protocol, the new packet switched control network has added call
forwarding, last number re-dial, call blocking and many other features. In
addition, Federal guidelines now mandate that Local Number Portability (LNP), a
capability that will allow customers to keep the same telephone number as they
change their operating environment, be implemented by local carriers in an
immediate time frame.
Products and Services
Digilog provides products, which assist the carriers in the
engineering, installation, and servicing of this new telecommunications control
network. These Network Operational Support Systems and Services can be broken
down into three
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categories - Test Access, Interconnecting Devices, and Services including System
Integration (rack and stack) and Installation.
Test Access. The Network Analysis and Monitoring System, or NAMS is a
network overlay system that enables a user to monitor the operation of the SS7
network from a central site. The system provides prompt alarm notification of a
network failure, automatic activation of backup devices, and a means to track
down operational database errors. Bell Atlantic Corporation is one of the
largest users of this system in its tier I and tier II support operations. In
this application, Digilog supplies the access products and the system software
in partnership with Agilent Technologies, which supplies the remote controlled
Protocol Analyzers.
Interconnecting Devices. The Digilog Channel Access Unit ("CAU") is a
product used to provide the physical interconnection between the SS7 network and
complex monitoring devices such as the AcceSS7 system from Agilent Technologies.
This product was developed to meet a strong need to interconnect several
applications monitoring computers to a single network tap point. In addition to
the CAU, Digilog interconnect products include resistor panels, special cables,
fuse panels, and the integration of other third-party equipment for unique
connection configurations.
System Integration (rack and stack) and Installation. Digilog is an
approved installer for Bell Atlantic. As such, it provides installation services
to Bell Atlantic both directly and indirectly through Agilent Technologies.
Digilog also provides System Integration services to both of these customers.
Integration Services are the assembly of both customer-supplied and
Digilog-manufactured components into rack and cabinet configurations for
installation in the telephone central office. Through a partnership with Agilent
Technologies, Digilog assembles and tests Agilent equipment prior to installing
it in central offices throughout the United States.
Sales and Marketing
The Company's Digilog products are sold by highly trained, direct sales
personnel. These individuals work within the telephone central office and are
encouraged to develop practical solutions to the customer's program managers.
The Company believes that this approach has proven to be very efficient. In
addition, Digilog has developed partnerships with Agilent Technologies and other
suppliers of monitoring equipment. Establishing relationships such as these
facilitates access to a much broader market without the additional expense of a
large and specialized sales force.
GENERAL
Suppliers
The Company relies on third party subcontractors to manufacture some of
the equipment used to provide its Uplink security alarm transport, Derived
Channel and Network Operational Support Systems equipment and products. In
addition, some of the Company's products are obtained from sole source
suppliers. The loss of a subcontractor or supplier could cause a disruption in
the Company's business due to the short lead-times demanded by certain of the
Company's customers.
Competition
The Company has one direct competitor for its Cellemetry(R)
technology - Aeris.net, formerly Aeris Communication, Inc., which uses the
service name Micro Burst. Numerous indirect competitors are actively pursuing
the short message wireless data transport market. Principally, two-way paging,
dedicated packet radio, private radio, low earth orbit satellites, and PCS.
The Company believes that its ubiquitous coverage, price points, and
system performance will enable it to effectively compete for market share.
However, many of the competitors have greater financial and other resources than
the Company.
The market for the Company's Broadband high bandwidth broadband
transmission equipment and software solutions has been characterized by rapid
technological change. The principle competitive factors in this market include
product performance, reliability, price, breadth of product line, sales and
distribution capability, technical support and service, customer relations, and
general industry and economic conditions. The ability to provide complete
systems solutions including system integration, network management capabilities,
and the expertise to migrate existing systems to more complete broadband
networks, have also become critically important vendor selection criteria in
recent years. Additionally, users require applications to make best use of these
networks.
The Company's competitors for Broadband's products and services include
a number of companies that have developed videoconferencing technology,
including PictureTel, VTEL, and Polycom. Broadband's primary competition is the
Grass Valley Group, which provides a high speed/high capacity (DS-3) distance
learning solution used by a number of telephone companies because it utilizes
the public network. Other competitors include manufacturers of fiber
transmission equipment, who offer comparable products but do not provide a
complete system solution, including software. Many of the competitors have
greater financial and other resources than the Company.
7
Because of its proprietary nature, the Company believes that it is the
only licensed provider 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. The Company believes that Derived Channel represents, from a price
performance perspective, the most secure and most reliable form of primary alarm
data transport.
The Company believes that Digilog is unique among vendors of support
systems for SS7 in that it has been a long-term provider of both diagnostic
equipment and testing systems. The Company believes that its presence in
telephone central offices on a day to day basis gives Digilog a unique
perspective on the needs of the central office project manager.
Research and Development
Technology is subject to rapid change, so that the introduction of new
products, technologies and applications in the Company's markets could adversely
affect the Company's business. The Company's success will depend, in part, on
its ability to enhance existing products and introduce new products and
applications on a timely basis.
Cellemetry continues to invest in improvements of its service
capability on an ongoing basis, through development of expanded service bureau
capabilities, further communications costs reductions, and additional
enhancement to application-specific capabilities.
The Company plans to continue to devote a substantial portion of its
resources to the research and development function. In the near term, Broadband
will continue to enhance its PowerPlay(TM) system, expand its data product
offerings to include high speed fiber transceivers, and introduce a version of
PowerPlay(TM) which will be capable of working in a relatively lower bandwidth
environment.
The Company will continue to be reliant upon BT to conduct research and
development for its Derived Channel technology.
Product Warranty and Service
The Company provides customers with limited one-year warranties on its
scanners and message switch software. Subscriber Terminal Units ("STUs") are
typically sold with a one- or two-year labor and materials 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 network management
products. Broadband provides either a one- or two-year warranty on parts and
labor, depending on the scale and type of network provided. Uplink and
Cellemetry provide three-year parts and labor warranties on all wireless radios.
To date, the cost to the Company of its warranty program has not been material.
Intellectual Property
The Company holds patents covering its Cellemetry(R) related technology
in the United States and various foreign countries. These patents expire between
2011 and 2016. The Company through Cellemetry licenses certain Cellemetry(R)
related technologies under licenses with BellSouth Corporation. The Company also
owns other intellectual property relating to its products. The Company also
holds patents through Cellemetry, which primarily cover the delivery of the
Cellemetry(R) wireless data transport service. These patents expire between 2010
and 2012. It is the Company's practice to apply for patents as new products or
processes suitable for patent protection are developed. No assurance can be
given as to the scope of the patent protection.
The Company believes that the rapid technological developments in the
telecommunications industry may limit the protection afforded by patents.
Accordingly, the Company believes that its success will also be dependent upon
its manufacturing, engineering and marketing know-how and the quality and
economic value of its products.
The mark Cellemetry(R) is a registered trademark of the Company. The
Company believes that no individual trademark or trade name is material to the
Company's competitive position in the industry.
Regulation
The Company's products are subject to a variety of standards and
certification requirements applicable to products connected to public telephone
networks in the countries in which it conducts business.
The provision of enhanced telecommunications services in the United
States by telephone companies is subject to the Federal Communications Act and
the regulations promulgated thereunder by the Federal Communications Commission
(the "FCC"), as well as to state statutes and regulations. These statutes and
regulations have not resulted in any significant impediments to the provision of
alarm reporting services by telephone companies using Derived
8
Channel technology or for the delivery of wireless data signals using the
Cellemetry(R) network. In addition, the Company's products, such as Derived
Channel STUs, Uplink radios and certain Broadband products require certification
from the FCC for compliance with standards designed to prevent damage to the
telephone network and to restrict radio frequency interference. The Company's
products currently used in the 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. Certain products of Broadband
also require certification from Underwriters Laboratories. The Company has
obtained all required Underwriters Laboratories certifications for products
currently marketed in the United States and expects that future certifications
will be obtained as necessary in the ordinary course of business.
Regulations similar to the above may exist in other countries. In the
event that the Company did not comply with any such regulations, or if the
Company's current or future products did not meet various regulatory standards
or receive and maintain all required certifications, the Company's business
could be adversely affected.
Employees
The Company, as of January 20, 2000, employs 127 employees in the
United States, consisting of 10 in manufacturing, 36 in sales and marketing and
customer service, 54 in engineering and operations and 27 in management and
administration. A union represents none of the Company's employees. The Company
believes that its relationship with its employees is satisfactory.
Item 2. Properties.
All of the Company's facilities are leased. Set forth below is certain
information with respect to the Company's leased facilities:
Location Principal Business Square Footage Lease Term
- -------- ------------------ -------------- ----------
Willow Grove, Network Operational 10,000 2000
Pennsylvania Support Systems and
Derived Channel Systems
State College, Digital Multimedia Networking 13,845 2000
Pennsylvania
West Conshohocken, Executive Office (1) 2,815 2002
Pennsylvania
Atlanta, Georgia Wireless Products and Services 14,027 2003
And Principal Executive Office
Atlanta, Georgia Wireless Products and Services 6,946 2003
(1) Executive office prior to relocation to Atlanta, presently sub-leased.
The Company conducts manufacturing, sales and marketing, engineering
and administrative activities at many of these locations. The Company believes
that its existing facilities are adequate for its current needs. As the Company
grows and expands into new markets and develops additional products, it will
require additional space, which the Company believes, will be available at
reasonable rates.
The Company engages in limited manufacturing, equipment and product
assembly and testing for certain of the Company's products. The Company also
uses contract manufacturers located near its facilities for production,
sub-assembly and final assembly of certain products. The Company believes there
are other manufacturers that could perform this work on comparable terms.
The semiconductors, microprocessors and other components used in the
Company's products are obtained from various suppliers and manufacturers, some
of which are the sole source of such component.
9
Item 3. Legal Proceedings.
From time to time, the Company is involved in routine legal proceedings
in the normal course of its business. The Company believes that no currently
pending legal proceeding will have a materially adverse effect on the financial
condition or results of operations of the Company.
In connection with the Company's acquisition of the entire equity
interest in Uplink a petition was filed by Uplink in the Superior Court of
Fulton County, Georgia seeking an appraisal of the value of a minority
stockholder's shares. The minority stockholder has alleged that the acquisition
of Uplink was procedurally improper and should be set aside, and that Uplink and
certain of its officers (together with the Company and certain of its officers)
conspired to oppress the minority stockholder of Uplink and acted fraudulently
in effectuating the acquisition. The case is entering the discovery phase.
Neither the Company nor its officers are parties to the litigation. The
Company believes, however, that the value the minority stockholder is claiming
for the shares is in excess of the fair value of those shares. The Company also
believes that the minority stockholder's other claims are without merit, and
Uplink intends to vigorously defend the litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
In September 1996, the Board of Directors discontinued paying cash
dividends. In deciding whether or not to declare or pay dividends in the future,
the Board of Directors will consider all relevant factors, including the
Company's earnings, financial condition and working capital, capital expenditure
requirements, any restrictions contained in loan agreements and market factors
and conditions.
The Operating Agreement and the terms of the Series A Convertible
Redeemable Preferred Stock held by BellSouth Wireless provide for certain
restrictions on dividends and distributions.
The Company's Common Stock is quoted on the NASDAQ National Market and
traded under the symbol "NMRX."
The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices per share for the Common Stock on the NASDAQ National
Market for the applicable periods.
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter (November 1, 1998 to January 31, 1999) $ 4.25 $ 1.75
Second Quarter (February 1, 1999 to April 30, 1999) 4.13 2.88
Third Quarter (May 1, 1999 to July 31, 1999) 4.38 3.00
Fourth Quarter (August 1, 1999 to October 31, 1999) 5.56 3.00
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter (November 1, 1997 to January 31, 1998) $ 7.50 $ 5.69
Second Quarter (February 1, 1998 to April 30, 1998) 7.38 5.13
Third Quarter (May 1, 1998 to July 31, 1998) 6.88 4.13
Fourth Quarter (August 1, 1998 to October 31, 1998) 4.38 2.56
As of January 20, 2000 there were 50 shareholders of record of the
Company's Common Stock, which include shares held in street name by brokers or
nominees.
Recent Sales of Unregistered Securities
In April 1999, to provide an incentive to certain cellular carriers,
the Company issued warrants to purchase 110,000 shares of Class A Common Stock
at an exercise price of $8.00 per share. The warrants were issued without
payment by these carriers. The term of the warrants is two years. The shares
underlying the warrants will be issued pursuant to an exemption from
registration
10
pursuant to Section 4(2) under the Securities Act of 1933.
In November 1999, the Company entered into the First Amendment to the
Operating Agreement and issued to BellSouth Wireless 30,000 shares of Series A
Convertible Redeemable Preferred Stock. The Preferred Stock is redeemable, at
the Company's option, commencing November 1, 2000, on the basis of a pre-set
annual redemption price per share. Also, the Preferred Stock, at BellSouth
Wireless's option, commencing November 1, 2003 or November 1, 2002 should the
Company's common stock exceed a pre-set market price for a given period of time,
is convertible into 625,000 shares of common stock of the Company, approximately
6% of the Company's common stock. The Preferred Stock carries certain
registration rights for the common stock upon such conversion. The Preferred
Stock was issued pursuant to an exemption from registration pursuant to Section
4(2) under the Securities Act of 1933.
Item 6. Selected Financial Data.
Incorporated by reference from the Company's 1999 Annual Report to
Shareholders, pursuant to General Instruction G (2) to Form 10-K, the relevant
portions of which are filed as Exhibit 13 hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Incorporated by reference from the Company's 1999 Annual Report to
Shareholders pursuant to General Instruction G (2) to Form 10-K, the relevant
portions of which are filed as Exhibit 13 hereto.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The Financial Statements and Supplementary Data of the Company required
by this Item are set forth at the pages indicated herein at Item 14(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating
to the 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement relating
to the 2000 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 2000 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 2000 Annual Meeting of Shareholders to be filed pursuant to General
Instruction G (3) to Form 10-K.
11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Consolidated Financial Statements. The following financial
statements and the notes thereto of the Company are attached
hereto beginning on page F-1.
Index to Financial Statements of the Company
Independent Auditors' Report
Consolidated Balance Sheets at October 31, 1999 and 1998
Consolidated Statements of Operations for the years ended October
31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
October 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended October
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule I - Condensed financial information of registrant (parent
company only)
Schedule II - Valuation and qualifying accounts
3. List of Exhibits filed pursuant to Item 601 of Regulation S-K. The
following exhibits are incorporated by reference herein, or are
being filed herewith:
2.1/1 Securities Purchase Agreement among Numerex Corp., Broadband Networks,
Inc. and the Shareholders of Broadband Networks, Inc. dated February
21, 1997
2.2/2 Shareholders' Agreement among Broadband Networks, Inc., Numerex Corp.
and the Shareholders of Broadband Networks, Inc. dated February 21,
1997
2.3/3 Numerex Corp. and British Telecommunications plc, Agreement Relating to
the sale and purchase of the whole of the issued shares capital of
Bronzebase Limited
12
3.1/4 Amended and Restated Articles of Incorporation of the Company, as
amended
3.2/4 Bylaws of the Company
10.1/4 The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan
Description (Management Compensation Plan)
10.2/5 Amended and Restated 1994 Employee Stock Option Plan (Management
Compensation Plan)
10.3/6 Amended and Restated Stock Option Plan for Non-Employee Directors
(Management Compensation Plan)
10.4/7 Registration Agreement between the Company and Dominion dated July 13,
1992
10.5/6 Letter Agreement between the Company and Dominion (now Gwynedd) dated
October 25, 1994 re: designation of director
10.6/4 Office Space Lease Agreement between the Company and LBA Associates
dated May 31, 1995.
10.7/8 Formation Agreement among Numerex Corp., BellSouth Wireless, Inc. and
BellSouth Corporation dated February 25, 1998.
10.8/9 Operating Agreement between Numerex Corp. and BellSouth Wireless, Inc.
dated May 15, 1998.
10.9/3 First Amendment to Operating Agreement of Cellemetry LLC between
Numerex Corp. and BellSouth Wireless, Inc. effective as of November 1,
1999.
11 Computation of Earnings Per Share
13 Pursuant to Note 2 of Instruction G (2) to Form 10-K, in response to
Item 6. Selected Financial Data, "Selected Consolidated Financial Data"
and in response to Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" are
incorporated by reference from the Company's 1999 Annual Report to
Shareholders' and are being filed in electronic format. No other
sections of the Company's 1999 Annual Report to Shareholders shall be
deemed "filed" as part of this filing.
21 Subsidiaries of Numerex Corp.
23.1 Consent of Grant Thornton LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule (electronic filing only)
- ------------------
/1 Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 7, 1997 (File No. 0-22920)
/2 Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1997 (File No. 0-22920)
/3 Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 12, 1999 (File No. 0-22920)
/4 Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1995 (File No. 0-22920)
/5 Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended October 31, 1996 (File No. 0-22920)
/6 Incorporated by reference to the Exhibits filed with the Company's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission (File No. 33-89794)
13
/7 Incorporated by reference to the Exhibit filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 20, 1994 (File No. 0-22920)
/8 Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 25, 1998 (File No. 0-22920)
/9 Incorporated by reference to the Exhibits filed with the Company's
Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 15, 1998 (File No. 0-22920)
(b) Reports on Form 8-K.
None.
14
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 28, 2000 By: /s/Stratton J. Nicolaides
-------------------------
Stratton J. Nicolaides, Chairman and
Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- -------------------------------------------------------------------------------------------
/s/Stratton J. Nicolaides
- ------------------------------------
Stratton J. Nicolaides Chairman and January 28, 2000
Chief Operating Officer
/s/Kenneth F. Manser
- ------------------------------------
Kenneth F. Manser Director January 28, 2000
/s/George Benson
- ------------------------------------
George Benson Director January 28, 2000
/s/Matthew J. Flanigan
- ------------------------------------
Matthew J. Flanigan Director January 28, 2000
/s/Andrew J. Ryan
- ------------------------------------
Andrew J. Ryan Director January 28, 2000
/s/Allan Liu
- ------------------------------------
Allan Liu Director January 28, 2000
/s/Peter J. Quinn
- ------------------------------------
Peter J. Quinn Executive Vice President January 28, 2000
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of the Company:
Independent Auditors' Report F-3
Consolidated Balance Sheets as of October 31, 1999 and 1998 F-4
Consolidated Statements of Operations for the Years Ended
October 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Shareholders' Equity for the
Years Ended October 31, 1999, 1998 and 1997 F-7
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-1
REPORT OF CERTIFIED INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Numerex Corp.:
We have audited the accompanying consolidated balance sheets of Numerex
Corp. and subsidiaries (the "Company") as of October 31, 1999 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended October 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Numerex Corp. and subsidiaries as of and for the years ended
October 31, 1998 and 1997, were audited by other auditors whose report dated
December 16, 1998, except for Note O, as to which the date is January 8, 1999,
expressed an unqualified opinion on those statements.
We also audited the adjustments described in Note A-2 that were applied
to restate the 1998 and 1997 financial statements. In our opinion, such
adjustments are appropriate and have been properly applied.
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 present fairly,
in all material respects, the consolidated financial position of Numerex Corp.
and subsidiaries at October 31, 1999 and the results of their operations and
their cash flows for the year ended October 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
- ----------------------
Grant Thornton LLP
Atlanta, Georgia
December 10, 1999.
F-2
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Numerex Corp.:
We have audited the accompanying consolidated balance sheets of Numerex
Corp. and subsidiaries (the "Company") as of October 31, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the two years ended October 31, 1998, all expressed in pounds sterling (not
presented separately herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with 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, (not presented separately herein), present fairly, in all
material respects, the consolidated financial position of Numerex Corp. and
subsidiaries at October 31, 1998 and 1997 and the results of their operations
and their cash flows for the two years in the period ended October 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
December 16, 1998, except for Note O, as to which the date is January 8, 1999.
F-3
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares)
ASSETS
October 31,
------------------------------
1999 1998
------------- ------------
CURRENT ASSETS
Cash and cash equivalents (Note A-4) $ 5,691 $ 18,800
Accounts receivable (net of allowance of
$167 in 1999 and $124 in 1998) (Note A-10) 11,015 5,237
Inventory (Notes A-9 and D) 4,525 4,253
Prepaid taxes (Notes A-8 and I) 311 1,320
Prepaid expenses 293 661
---------- ----------
Total current assets 21,835 30,271
Property and equipment, net (Notes A-6 and E) 3,792 2,874
Goodwill, net (Notes A-5 and F) 8,808 9,139
Intangible assets, net (Notes A-5 and G) 12,108 11,717
Other assets 85 405
---------- ----------
$ 46,628 $ 54,406
========== ==========
The accompanying notes are an integral part of these statements.
F-4
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Number of Shares)
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31,
---------------------------
1999 1998
------------ -----------
CURRENT LIABILITIES
Short-term debt (Note H) $ - $ 6,000
Accounts payable 4,159 2,172
Income taxes (Notes A-8 and I) 1,902 673
Accrued taxes, other than income 424 151
Other current liabilities 2,807 3,432
Obligations under capital leases, current portion 30 37
---------- ----------
Total current liabilities 9,322 12,465
LONG-TERM DEBT
Obligations under capital leases 84 76
MINORITY INTEREST (Note B) 7,201 9,619
COMMITMENTS AND CONTINGENCIES (Notes J, K, M and O) - -
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 11,609,492 and
11,609,492 shares 29,870 29,870
Class B common stock - no par value; authorized
5,000,000 shares; none issued - -
Additional paid-in capital 370 220
Treasury stock, at cost, 1,255,400 and 1,034,900 shares (5,222) (4,644)
Accumulated other comprehensive income 4 184
Retained earnings 4,999 6,616
---------- ----------
Total shareholders' equity 30,021 32,246
---------- ----------
$ 46,628 $ 54,406
========== ==========
The accompanying notes are an integral part of these statements.
F-5
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In Thousands, Except Per Share Data)
October 31,
-------------------------------------------------
1999 1998 1997
---------------- ------------- -----------
Net sales $ 33,736 $ 25,231 $ 29,066
Cost of sales 14,403 12,284 14,520
Inventory write-downs - 2,201 -
------------ ---------- ----------
Gross profit 19,333 10,746 14,546
Selling, general, administrative and
other expenses (including fees and
other expenses of $240 in 1997 to
the principal shareholder) 22,090 20,460 12,326
Special charges (Note C) - 1,598 -
------------ ---------- ----------
Operating profit (loss) (2,757) (11,312) 2,220
Interest and other income, net 404 1,074 2,488
Equity in net losses of affiliate - 422 -
Minority interest 2,418 736 -
------------ ---------- ----------
Earnings (loss) before income taxes 65 (9,924) 4,708
Income taxes (Notes A-8 and I) 1,682 1,279 1,112
------------ ---------- ----------
Net earnings (loss) $ (1,617) $ (11,203) $ 3,596
============ ========== ==========
Other comprehensive earnings (loss), net of income taxes
Foreign currency translation adjustment (Note A-15) $ (180) $ (559) $ 633
============ ========== ==========
Comprehensive earnings (loss) $ (1,797) $ (11,762) $ 4,229
============ ========== ==========
Basic and diluted earnings (loss) per share (Note A-19) $ (0.16) $ (1.04) $ 0.32
============ ========== ==========
Number of shares used in per share calculation (Note A-19):
Basic 10,378 10,818 11,077
============ ========== ==========
Diluted N/A N/A 11,139
============ ========== ==========
The accompanying notes are an integral part of these statements.
F-6
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Accumulated
Common Stock Additional Other
-------------------- Paid-in Treasury Comprehensive Retained
Shares Amount Capital Stock Earnings Earnings Total
------ ------ ---------- -------- ------------- -------- -----
Balance, October 31, 1996 11,597 $ 29,805 $ - $ (1,327) $ 110 $ 14,223 $ 42,811
Purchase of treasury stock - - - (1,776) - - (1,776)
Translation adjustment - - - - 633 - 633
Net earnings - - - - - 3,596 3,596
-------- -------- -------- -------- -------- -------- --------
Balance, October 31, 1997 11,597 29,805 - (3,103) 743 17,819 45,264
Issuance of shares in connection with the
exercise of stock options 12 65 - - - - 65
Issuance of common stock warrants - - 220 - - - 220
Purchase of treasury stock - - - (1,541) - - (1,541)
Translation adjustment - - - - (559) - (559)
Net loss - - - - - (11,203) (11,203)
-------- -------- -------- -------- -------- -------- --------
Balance, October 31, 1998 11,609 29,870 220 (4,644) 184 6,616 32,246
Issuance of common stock warrants - - 150 - - - 150
Purchase of treasury stock - - - (578) - - (578)
Translation adjustment - - - - (180) - (180)
Net loss - - - - - (1,617) (1,617)
-------- -------- -------- -------- -------- -------- --------
Balance, October 31, 1999 11,609 $ 29,870 $ 370 $ (5,222) $ 4 $ 4,999 $ 30,021
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this statement.
F-7
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
October 31,
------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $ (1,617) $(11,203) $ 3,596
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation 1,265 727 1,039
Amortization 2,069 2,224 1,075
Special charges - 1,151 -
Minority interest (2,418) (736) -
Equity in net losses of affiliate - 422 -
Disposition of business - - (1,105)
Gain on disposition of other assets (125) - -
Changes in assets and liabilities
which provided (used) cash:
Accounts receivable (5,778) 1,434 343
Inventory (272) 741 (1,109)
Prepaid expenses 368 (242) (112)
Other assets (55) - -
Accounts payable 1,987 (914) 1,551
Income taxes 2,238 726 (1,769)
Accrued taxes other than income 273 62 (494)
Other accrued liabilities (625) 2,142 (1,621)
-------- -------- --------
Net cash provided by (used in)
operating activities (2,690) (3,466) 1,394
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of business - - 3,800
Proceeds from disposition of other assets 500 - -
Purchase of property and equipment (2,137) (917) (554)
Purchase of intangible and other assets (2,148) (678) (1,955)
Acquisitions of businesses, net of cash - (1,225) (5,939)
Investment in business - (1,000) (2,089)
-------- -------- --------
Net cash used in investing activities (3,785) (3,820) (6,737)
-------- -------- --------
The accompanying notes are an integral part of these statements.
F-8
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
October 31,
------------------------------------------
1999 1998 1997
---- ---- ----
Cash flows from financing activities:
Net reduction in short-term borrowings - - (665)
Proceeds from revolving credit facility - 1,500 4,500
Proceeds from exercise of stock options - 65 -
Principal payment on revolving credit facility (6,000) - -
Principal payments on capital lease obligations (42) (24) (15)
Purchase of treasury stock (578) (1,541) (1,776)
-------- -------- --------
Net cash provided by (used in)
financing activities (6,620) - 2,044
-------- -------- --------
Effect of exchange differences on cash (14) (77) (586)
-------- -------- --------
Net (decrease) in cash and cash equivalents (13,109) (7,363) (3,885)
Cash and cash equivalents, beginning
of year 18,800 26,163 30,048
-------- -------- --------
Cash and cash equivalents, end of year $ 5,691 $ 18,800 $ 26,163
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 85 $ 369 $ 16
Income taxes (476) 701 4,249
The accompanying notes are an integral part of these statements.
F-9
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Nature of Business
Numerex Corp. and its subsidiaries (the "Company") is a technology holding
company comprised of operating subsidiaries that develop and market a wide range
of communication and information products and services. The Company's primary
focus is wireless communication and information products and services utilizing
proprietary network technologies. Through its two major subsidiaries, the
Company offers products and services in wireless communications and digital
multimedia networking. In addition, the Company offers wireline alarm security
equipment and services as well as provides operational support systems,
equipment, and services to operating telephone companies. The Company's
operating subsidiaries are located in North America and the United Kingdom (see
Note O).
2. Currency
The consolidated financial statements are stated in United States Dollars.
Historically, the Company's consolidated financial statements have been in
British Pounds Sterling. As a result of increased business activity in the
United States resulting from recent U.S. acquisitions, the U.S. Dollar has
become the unit of measure of the majority of the Company's operations.
Accordingly, the U.S. Dollar has been adopted as the Company's reporting
currency effective from the quarter ended January 31, 1999. The consolidated
financial statements and the notes thereto have been restated in U.S. Dollars
for all periods presented.
3. Principles of Consolidation
The consolidated financial statements include the results of operations and
financial position of the Company and its wholly owned or controlled
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
4. Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly liquid
investments purchased with original maturities of less than three months to be
cash equivalents.
5. Intangible Assets
Amortization is provided on all intangible assets at rates calculated to write
off the cost of each over its expected life as follows:
o Patents and acquired intellectual property - straight-line over 7 to 16
years
o Developed software - straight-line over 3 years
o Goodwill - straight-line over 12 to 20 years
Goodwill represents the excess of the cost of net assets acquired over fair
value.
The Company capitalizes software development costs when project technical
feasibility is established and concludes capitalization when the product is
ready for release. Software development costs incurred prior to the
establishments of technical feasibility are expensed as incurred.
6. Property and Equipment
Depreciation is provided for in amounts sufficient to related the cost of
depreciable assets to operations over their estimated service lives. Leased
property under capital leases is amortized over the lives of the respective
leases or over the service lives of the assets for those leases, which
substantially transfer ownership. Depreciation for property and equipment is
calculated using the declining balance method and buildings are depreciated
under the straight-line method over the following estimates lives.
F-10
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
o Short-term leasehold improvements over the term of the lease 3-10 years
o Plant and machinery 4-10 years
o Equipment, fixtures and fittings 3-10 years
7. Impairment of Long-lived Assets
The Company periodically evaluates the recoverability of its long-lived assets
or when a specific event indicates that the carrying value of a long-lived asset
may not be recoverable. Recoverability is assessed based on estimates of future
cash flows expected to result from the use and eventual disposition of the
asset. If the sum of expected undiscounted cash flows is less than the carrying
value of the asset, an impairment loss is recognized for the amount of such
deficiency, using discounted cash methodologies. No such impairment losses have
been recognized during the three years ended October 31, 1999.
8. Income Taxes
The company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards Number 109 ("SFAS
109") Accounting for Income Taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. A valuation allowance is provided for
deferred tax assets when it is more likely than not that the assets will not be
realized.
9. Inventory
Inventory and work-in progress is stated at the lower of cost (first-in,
first-out method) or market.
10. Allowance for Doubtful Accounts
The company maintains an allowance for doubtful accounts based upon the expected
collectability of the account receivable. When amounts are determined to be
uncollectible, they will be charged to operations when that determination is
made.
11. Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable and
accounts payable. The carrying value of the financial instruments approximates
fair value due to the relatively short period to maturity.
12. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
13. Concentration of Credit Risk
The Company maintains its cash balances in financial institutions, which at
times may exceed federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any significant credit
risk on cash and cash equivalents.
14. Revenue Recognition
The Company recognizes revenue on the basis of the utilization of its technology
by its customers and on sales of its products when title transfers to its
customers. Revenue for royalty agreements is recorded as sales when earned.
F-11
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
15. Foreign Currency Transactions
Some transactions of the Company and its subsidiaries are made in British pounds
sterling and Australian dollars. (Gains) and losses from these transactions are
included in income as they occur.
16. Research and Development
Research and development expenses are charged to operations in the period in
which they are incurred. Research and development expenses amounted to
$3,529,000, $3,113,000, and $2,746,000 in 1999, 1998 and 1997, respectively. The
research and development expenses are reported in the selling, general,
administrative and other expenses in the accompanying Financial Statements.
17. 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.
18. Stock-Based Compensation
Effective November 1, 1996, the Company adopted the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does not
require, companies to record compensation cost for stock-based compensation
plans at fair value. The Company has elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, Accounting For Stock Issued to Employees, and related
interpretations, as permitted by SFAS 123. Compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock (see Note L).
19. Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, SFAS No. 128, which supersedes APB No. 15, Earnings Per
Share, requires a dual presentation of basic and diluted earnings per share as
well as other disclosures. Basic earnings per share excludes the dilative impact
of common stock equivalents and is computed by dividing net earnings (loss) by
the weighted average number of shares of common stock outstanding for the
period.
Diluted earnings (loss) per share includes the effect of potential dilution from
the exercise of outstanding common stock equivalents into common stock, using
the treasury stock method at the average market price of the Company's common
stock for the period.
Effective with the first quarter ended January 31, 1998, the Company adopted
SFAS No. 128. The Company has computed its earnings (loss) per share in
accordance with SFAS No. 128 for the year ended October 31, 1999 and has
restated 1998 and 1997 earnings (loss) per share information on a comparable
basis, with no material differences.
For the years ended October 31, 1999 and 1998, the Company's potential common
shares have an anti-dilutive effect on earnings (loss) per share and, therefore,
have not been used in determining the total weighted average number of common
shares outstanding. Potential common shares resulting from options and warrants
that would be used to determine diluted earnings per share were 1,739,213,
1,156,713 and 748,750 for the years ended October 31, 1999, 1998 and 1997,
respectively.
20. Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement, which establishes standards
for the reporting of information about operating segments and requires the
reporting of selected information about operating segments in interim financial
statements, is effective for fiscal years beginning after December 15, 1997,
although earlier application is permitted.
Reclassification of segment information for earlier periods presented for
comparative periods is required under SFAS No. 131. The Company has evaluated
the adoption of the statements and has concluded that there are no changes
necessary to its presentation of financial information for interim and annual
periods.
F-12
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
21. Recent Accounting Pronouncements - Continued
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts collectively referred to as derivatives,
and for hedging activities. It requires that any entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those statements at fair value. This statement is effective
for fiscal years beginning after June 15, 1999, although early adoption is
encouraged. The Company is evaluating the effect that the adoption of SFAS No.
133 will have on its consolidated financial position or results of operation.
21. Reclassification
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE B - INVESTMENTS AND DIVESTITURES
On February 28, 1997, the Company acquired 100% of the outstanding common stock
of Broadband Networks, Inc. ("Broadband") for approximately $5,867,000. The
acquisition was accounted for using the purchase method of accounting. In
addition, the Company invested $1,654,000 directly into Broadband for working
capital purposes. Certain employees of Broadband will continue to hold Broadband
incentive stock options, which upon exercise, would entitle them to own
approximately 18% of Broadband's currently outstanding common shares. Such
options become exercisable in 2001 and, upon exercise, the Company has certain
rights, but is not obligated to purchase the shares.
The purchase price of Broadband was allocated to the assets purchased and the
liabilities assumed based upon their fair values at the date of acquisition. The
excess of the purchase price over the fair values of the net assets acquired was
recorded as goodwill and is amortized on a straight-line basis over 20 years
In May 1997 the Company recognized a credit of $1,105,000, which is included in
"interest and other income" in the accompanying consolidated statements of
operations, in connection with the sale of the stock of its wholly owned
subsidiary, Digital Audio Limited ("DA Systems"), to Detection Systems, Inc.
("DSI") of Rochester, NY. In exchange for the stock of DA, the Company received
a $3,800,000 note receivable, secured by shares of DSI common stock. In
September 1997, the Company received cash for the full amount of the note
receivable plus interest. In a companion transaction, a subsidiary of the
Company entered into a License Agreement with DSI whereby DSI may manufacture
and supply certain products in return for royalty payments.
On July 17, 1997, the Company invested $1,000,000 in return for 19.5% of the
common stock of Uplink Security, Inc. ("Uplink"). Various options contained in
the agreements provided the Company a means of acquiring a controlling interest
in Uplink.
As a result of the acquisition of a controlling interest in Uplink, the Company
under generally accepted accounting principles restated its investment in Uplink
from the cost method to the equity method of accounting for the first and second
quarters of the fiscal year ending October 31, 1998. The effect of the
restatement, which is included in the line item `Equity in net losses of
affiliate' in the consolidated statements of operations for the fiscal year
ending October 31, 1998, was $422,000. The financial statement effect of the
change in method on periods prior to fiscal 1998 was not significant.
On May 18, 1998, the Company acquired additional 78,795 shares of Uplink from
certain existing shareholders for approximately $1,444,000 including 89,763
Numerex common stock warrants with a strike price of $6.00. This stock purchase
increased the Company's ownership interest in Uplink to 85%.
The purchase price of Uplink was allocated to the assets purchased and the
liabilities assumed based upon their fair values at the date of acquisition. The
excess of the purchase price over the fair values of the net assets acquired was
recorded as goodwill, and is amortized on a straight-line basis over 20 years.
F-13
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE B - INVESTMENTS AND DIVESTITURES - Continued
The following summarized unaudited pro forma information for the years ended
October 31, 1999 and 1998 has been presented as if the Broadband and Uplink
acquisitions had occurred on November 1, 1997. The unaudited pro forma
information is based on historical results of operations adjusted for
acquisition costs and has been prepared for comparative purposes only. This
unaudited pro forma information does not purport to be indicative of the results
of operations which actually would have resulted had the acquisitions been made
on the date indicated or which may result in the future.
October 31,
---------------------------
1999 1998
----- ----
(unaudited, in thousands)
Revenues $ 33,736 $ 25,960
Operating (loss) (2,757) (12,517)
Net (loss) (1,617) (12,493)
(Loss) per share (0.16) (1.16)
On December 1, 1998 the Company subscribed for and was issued additional 56,468
shares of Uplink common stock. This stock purchase increased the Company's
ownership interest in Uplink to in excess of 90%.
On December 30, 1998 under a `Plan of Merger' Uplink merged with and into US
Acquisition, Inc., a corporation organized under the laws of the State of
Georgia. Subsequently the surviving entity was renamed Uplink. The completion of
the transaction increased the Company's ownership interest in Uplink to 100% of
the common stock of Uplink (see Note M).
On May 15, 1998, the Company, BellSouth Wireless, Inc. ("BellSouth Wireless")
and BellSouth Corporation completed a transaction whereby Cellemetry LLC
("Cellemetry") a joint venture between the Company and BellSouth Wireless was
formed. Cellemetry is a Delaware limited liability company owned 60% by the
Company and 40 % by BellSouth Wireless. The parties entered into an operating
agreement (the "Operating Agreement") which deals with, among other things, the
conduct of the business of Cellemetry. Pursuant to the Operating Agreement, the
Company is scheduled to make cash contributions of up to $15,500,000 during the
first two years of Cellemetry's operations. According to the Operating
Agreement, at the end of the three years if Cellemetry has met certain revenue
targets no additional contribution from the Company will be required. However,
if, at the end of three years, the revenue targets are not met, the Company is
required to make an additional $3,750,000 cash contribution or contribute
certain equity interests it has in Uplink. Also, according to the Operating
Agreement, Cellemetry must achieve certain specific cumulative revenue and
operating goals by the third anniversary of the formation date. If these
performance goals are not met, the Company may, at its sole option, elect that
BellSouth Wireless put its ownership interest in Cellemetry to the Company for
$15,330,000, plus interest at a 13% annual compound rate or begin a process to
dissolve Cellemetry which would include a transfer of the initially contributed
intellectual property to BellSouth. In addition, the Operating Agreement
provides certain restrictions as to distributions and the right to transfer
ownership interest in Cellemetry. Cellemetry has elected to be taxed as a
partnership for income tax purposes.
The Company's subsidiary recorded the assets contributed by BellSouth Wireless
to Cellemetry at fair value on the date of contribution. The fair value of the
patents contributed to Cellemetry was $10,603,000, which is being amortized over
their remaining life of 16 years. In addition, BellSouth Wireless contributed
property and equipment to Cellemetry valued at $285,000. The results of
operations and financial position of Cellemetry were consolidated with the
Company effective May 15, 1998, since the Company controls the operations of
Cellemetry.
At October 31, 1999 and 1998 Cellemetry's net assets, included in these
Financial Statements were $11,456,000 and $13,500,000, respectively. In
accordance with a schedule of capital contribution, the Company as of October
31, 1999 contributed cash totaling $9,000,000 to Cellemetry out of a total cash
commitment of $15,500,000 (see Note O).
NOTE C - SPECIAL CHARGES
During the year ended October 31, 1998, the Company recorded a pre-tax special
charge of $1,598,000. Charges of $1,151,000 related to the write off of
intangible assets, principally developed software costs and territorial rights,
which have been rendered
F-14
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE C - SPECIAL CHARGES - Continued
obsolete as a result of the Company's decision to abandon certain specific
Derived Channel sales and marketing initiatives for which future direct revenues
are no longer expected. Charges of $447,000 result from severance and
termination benefit costs for five employees who had principally corporate
responsibilities. At October 31, 1999 and 1998 payments under the aforementioned
severance and termination benefits amounted to $309,000 and $0, respectively.
NOTE D - INVENTORY
Inventory consisted of the following: (In thousands)
October 31,
---------------------------
1999 1998
---- ----
Raw materials $ 1,871 $ 1,592
Work in progress 698 749
Finished goods 1,956 1,912
--------- ---------
$ 4,525 $ 4,253
========= =========
The inventory write-downs of $2,201,000 for the year ended October 31, 1998 were
the result of two non- performing contracts and the decision to abandon specific
sales initiatives for certain Derived Channel markets.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(In thousands)
October 31,
---------------------------
1999 1998
---- ----
Leasehold improvements $ 678 $ 496
Plant and machinery 5,681 3,623
Equipment, fixtures and fittings 1,302 1,421
--------- ---------
Total property and equipment 7,661 5,540
Accumulated depreciation (3,869) (2,666)
--------- ---------
Property and equipment, net $ 3,792 $ 2,874
========= =========
NOTE F - GOODWILL (In thousands)
October 31,
---------------------------
1999 1998
---- ----
Goodwill $ 10,624 $ 10,248
Accumulated amortization (1,816) (1,109)
--------- ---------
Goodwill, net $ 8,808 $ 9,139
========= =========
F-15
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE G - INTANGIBLE ASSETS
Intangible assets consisted of the following: (In thousands)
October 31,
---------------------------
1999 1998
---- ----
Developed software $ 3,069 $ 4,559
Patents 11,875 11,749
Intangible and other assets 315 357
--------- ---------
Total intangible assets 15,259 16,665
Accumulated amortization (3,151) (4,948)
--------- ---------
Intangible assets, net $ 12,108 $ 11,717
========= ==========
NOTE H - REVOLVING CREDIT FACILITY
In February 1997, the Company entered into an U.S. Dollar revolving credit
facility, which provided for maximum borrowings of $10,000,000, collateralized
by certain assets of the Company. The facility included the option to convert,
at maturity, the outstanding balance to an amortizing term loan payable over a
maximum period of up to three years, with a maximum five-year amortization. At
the Company's option, interest was charged at the bank's prime lending rate less
.25% or LIBOR plus 1.25%. The Company had average borrowings of $6,000,000 and
$5,250,000 during 1999 and 1998 at an average interest rate of 6.96% and 6.72%,
respectively. Maximum borrowings during 1999 and 1998 were $6,000,000 and
$4,500,000, respectively.
At October 31, 1998, there were outstanding borrowings of $6,000,000 at an
interest rate of 6.54%.
On January 8, 1999, the Company terminated its revolving credit facility and
repaid amounts due, including interest, totaling $6,008,733.
NOTE I - INCOME TAXES
The Company's provision for income taxes is incurred primarily in the United
Kingdom. For the years noted below, the provision for income taxes consists of
the following: (In thousands)
October 31,
--------------------------------
1999 1998 1997
---- ---- ----
Currently payable $ 1,682 $ 1,425 $ 1,039
Deferred - (146) 73
------- ------- -------
$ 1,682 $ 1,279 $ 1,112
======= ======= =======
F-16
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES -Continued
Income taxes recorded by the Company differ from the amounts computed by
applying the statutory U.S. federal income tax rate to income before income
taxes. The following schedule reconciles income tax expense (benefit) at the
statutory rate and the actual income tax expense as reflected in the
consolidated statements of operations: (In thousands)
Otober 31,
---------------------------------
1999 1998 1997
---- ---- ----
Income tax (benefit) computed at
U.S. corporate tax rate of 34% $ 22 $ (3,375) $ 1,600
Adjustments attributable to
- Valuation allowance 2,751 4,677 (122)
- State Tax benefit (910) - -
- ACT refund - State Tax benefit - (149) (405)
- Non deductible expenses 21 65 36
- Foreign income taxed in the U.S. - 149 141
income tax differential
between the United States and
the United Kingdom (202) (88) (138)
------- -------- -------
Total $ 1,682 $ 1,279 $ 1,112
======= ======== =======
The components of the Company's net deferred tax assets and (liabilities) as of
October 31 are as follows: (In thousands)
October 31,
-------------------------
1999 1998
---- ----
Deferred tax liability:
Differences between book and tax basis
of property equipment $ (147) $ (65)
Other - -
-------- --------
(147) (65)
Deferred tax asset:
Intangibles 506 656
Net operating loss carryforward 3,146 2,455
Tax credit carryforwards 5,598 3,071
Other 157 101
Inventories 918 1,212
Accruals 639 636
-------- --------
10,964 8,131
Net deferred tax asset 10,817 8,066
Valuation allowance (10,345) (7,594)
-------- --------
Total $ 472 $ 472
======== ========
F-17
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE I - INCOME TAXES - Continued
Net operating loss carry forwards for federal and state income taxes available
at October 31, 1999, expire as follows:
Amount Years of Expiration
------ -------------------
Federal operating losses $ 2,800,000 2004-2113
State operating losses $ 25,000,000 2003-2113
The financial statements reflect the deferred tax effects of the undistributed
earnings of the Company's United Kingdom subsidiaries at October 31, 1999
because the Company expects to recover the undistributed earnings in the
foreseeable future in a taxable manner. The accumulated net undistributed
earnings of the Company's United Kingdom subsidiaries included in the retained
earnings were $2,433,000 and $13,844,000 at October 31, 1999 and 1998,
respectively.
NOTE J - SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
Approximately 27%, 19% and 16% of sales in 1999, 1998 and 1997, respectively,
were to British Telecommunications plc, ("BT"). The account receivable from BT
was $2,958,000 and $534,000 as of October 31, 1999 and 1998, respectively, and
was collected pursuant to normal credit terms.
The Company's principal shareholder provided financial advisory, investment
banking and other services under a two-year agreement through December 31, 1996.
Under the Agreement, 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: (In
thousands)
October 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Fees $ - $ - $ 233
Out of pocket expenses - - 7
-------- -------- --------
$ - $ - $ 240
======== ======== ========
NOTE K - COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment under noncancelable operating
leases with initial terms in excess of one year. Future minimum lease payments
under such noncancelable operating leases subsequent to October 31, 1999 (in
thousands) are as follows:
2000 $ 812
2004 561
2004 555
2004 466
2004 175
Thereafter 254
--------
Total $ 2,823
========
Rent expense, including short-term leases, amounted to approximately $992,000,
$626,000 and $472,000 in 1999, 1998 and 1997, respectively.
F-18
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLANS
Employee Plan.
- --------------
The Company has an Employee Stock Option Plan (the "Employee Plan"), which
provides 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 1998, is 1,500,000 shares of Class A Common Stock.
Options issued under the Employee Plan typically vest ratably over a five-year
period. Certain options issued to senior management employees under the Employee
Plan have cliff vesting terms at the end of a five-year period and terms which
provide for the acceleration of vesting upon the attainment of specified market
prices for the Company's common stock for a period of 60 days. In the event of a
"change in control" as defined in the 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 typically expire from three months to one year from
the date of employment termination.
At October 31, 1999 and 1998, 759,500 and 234,500, respectively, ratably vesting
common share options under the Employee Plan have been granted to key employees
of the Company at prices ranging between $3.50 and $7.50. Of these options none
have been exercised, 75,500 have expired and been cancelled, 166,800 are
currently exercisable, and the remaining options will become exercisable in 2000
through 2003. At October 31, 1999 and 1998, 685,000 and 685,000, respectively,
cliff vesting options under the Employee Plan have been granted to senior
management employees of the Company at prices ranging between $4.44 and $7.13.
Of these options none have been exercised, 110,000 have expired and been
cancelled and none of these options are currently exercisable. They will become
exercisable beginning in 2002 or earlier if the accelerated vesting conditions
are met.
NOTE L - STOCK OPTION PLANS - Continued
Director Plan.
- --------------
The Company has a Non-Employee Director Stock Option Plan (the "Director Plan"),
which provides for the granting of stock options to non-employee members of the
Company's Board of Directors at the closing market price at the grant dates. On
April 1, 1996, and each anniversary date thereafter, each non-employee director,
who has served as a director for at least one year, will receive an option to
purchase 2,500 shares of the Company's common stock. On December 5, 1997, the
Director Plan was amended, and on February 26, 1998, shareholders approved an
increase to 4,000 the annual number of shares that each director would receive.
The aggregate number of shares, which may be issued upon the exercise of options
granted under the Director Plan, is 62,500 shares of common stock. Options
issued under the Director Plan fully vest one year after the grant date.
In the event of a "change in control" as defined in the Director Plan, all
outstanding options become fully vested and are subject to exercise. Options
granted under the Director Plan expire 10 years after the grant date, unless an
option holder ceases to be a director of the Company. Under such circumstances,
the options expire three months from the date that the option holder ceases to
be a director.
At October 31, 1999 and 1998, 36,700 and 28,700, respectively, options under the
Director Plan have been granted to directors of the Company at prices ranging
between $3.38 and $6.63. Of these options, 28,700 are currently exercisable and
the remaining will become exercisable in 2000.
At October 31, 1999 and 1998 options to purchase 143,750 and 18,750 shares,
respectively, of Class A Common Stock at prices ranging from $3.50 to $10.00
were granted as Non Qualified Options in connection with services rendered or to
be rendered to the Company. Of these options 18,750 are currently exercisable
and the remaining will become exercisable beginning 2000.
F-19
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLANS - Continued
In February 1997, the Company re-priced 191,000 options with exercise prices
ranging between $9.00 and $15.00 to $4.50 which represented the closing market
price. The options, as re-priced, are reflected in all periods in the above
table.
The fair value of each option on the date of grant for 1999, 1998 and 1997 was
estimated using the Black-Scholes options pricing model with the following
weighted average assumptions: no dividend yield for all years; expected
volatility of 83% for 1999, 51% for 1998 and 59% for 1997; risk-free interest
rate of 6.33% for 1999, 4.54% for 1998 and 5.82% for 1997; expected option lives
of 7 years for all years; and a forfeiture rate of 2% for all years.
The exercise price for options outstanding at October 31, 1999 is between $2.63
and $10.00. Such options will expire on average in 8.3 years. The weighted
average fair value of options granted during 1999, 1998 and 1997 was $2.97,
$2.54 and $3.52, respectively, on the date of grant.
The following table summarizes the activity of the stock option plans as of and
for the years ended October 31, 1999, 1998 and 1997.
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
Outstanding, beginning
of year 966,950 $ 5.12 748,450 $ 5.54 373,450 $ 5.51
Options granted 658,000 3.79 333,500 4.39 415,000 5.51
Options exercised - - (12,000) 5.44 - -
Options cancelled (185,500) 6.71 (103,000) 5.75 (40,000) 4.97
---------- -------- ---------- -------- ---------- --------
Outstanding, end of year 1,439,450 4.31 966,960 5.12 748,450 5.54
---------- -------- ---------- -------- ---------- --------
Exercisable, end of year 214,250 $ 4.90 153,750 $ 5.83 100,100 $ 5.96
========== ======== ========== ======== ========== ========
Cellemetry Plan.
- ----------------
The Company's subsidiary, Cellemetry, adopted a Share Option Plan on June 1,
1998, which provides for the granting of nonqualified stock options to officers
and employees of Cellemetry at a pre-determined price. The aggregate number of
shares, which may be issued upon the exercise of options under the Share Option
Plan, is 1,000,000 shares of Class III Common Stock.
Options issued under the Share Option Plan vest ratably over a five-year period.
In the event of a "change in control" as defined in the Share Option Plan, all
outstanding options become fully vested and are subject to exercise. The options
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.
On June 1, 1998, 612,000 options under the Share Option Plan were granted to
employees of Cellemetry at $4.00 per share.
At October 31, 1999 and 1998, 612,000 and 612,000, respectively, options under
Share Option Plan have been granted. Of these options none have been exercised,
308,000 have been forfeited and cancelled and the remaining options will become
exercisable the beginning June of 2000.
The fair value of each option on the date of grant for 1998 was estimated using
the Black-Scholes options pricing model with the following weighted average
assumptions: no dividend yield; expected volatility of 51%; risk free interest
rate of 4.54%; expected option lives of 7 years; and a forfeiture rate of 2%.
Such options will expire on average in 8.7 years. The weighted average fair
value of options granted during 1998 was $2.31 on the date of grant.
F-20
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE L - STOCK OPTION PLANS - Continued
Had compensation expense for the Company's aforementioned stock option plans
been determined based on the fair value at the grant dates for awards under
those plans under the provisions of SFAS No. 123, the Company's net earnings
(loss) and earnings (loss) per share would have been changed to the following
pro forma amounts:
1999 1998 1997
---- ---- ----
Net earnings (loss)--As reported $ (1,617) $ (11,203) $ 3,596
Net earnings (loss)--Pro Forma (2,362) (11,904) 3,006
Earnings (loss) per share--As reported (0.16) (1.04) 0.32
Earnings (loss) per share--Pro Forma (0.23) (1.10) 0.27
The pro forma effect on net earnings (loss) and earnings (loss) per share for
1999, 1998 and 1997, by applying SFAS No. 123, may not be indicative of the pro
forma effect on net earnings (loss) in future years since SFAS No. 123 does not
take into consideration pro forma compensation expense related to awards made
prior to November 1, 1995, and since additional awards in future years are
anticipated.
NOTE M - LEGAL
A settlement, effective October 24, 1996, was reached among the parties in
connection with a securities lawsuit regarding the Company's 1995 public
offering. Certain defendants paid to a settlement fund approximately $2,100,000,
which after certain costs and expenses was paid to a class. The Company's
contribution to the settlement fund of $1,033,000 which together with related
legal costs were expensed in 1996. Amounts due under the settlement were paid in
December 1996.
In connection with the Company's acquisition of the entire equity interest in
Uplink a petition was filed by Uplink in the Superior Court of Fulton County,
Georgia, seeking an appraisal of the value of a minority stockholder's shares.
The minority stockholder has alleged that the acquisition of Uplink was
procedurally improper and should be set aside, and that Uplink and certain of
its officers (together with the Company and certain of its officers) conspired
to oppress the minority stockholder of Uplink and acted fraudulently in
effectuating the acquisition. The case is entering the discovery phase.
Neither the Company nor its officers are parties to the litigation. The Company
believes, however, that the value the minority stockholder is claiming for the
shares are in excess of the fair value of those shares. The Company also
believes that the minority stockholder's other claims are without merit, and
Uplink intends to vigorously defend the litigation.
NOTE N - GEOGRAPHIC INFORMATION
The Company operates in a single industry segment. Information about the
Company's operations in different geographic areas for the years ended October
31,1999, 1998 and 1997, respectively, are as follows: (In thousands)
United Kingdom/
United States Australia Elimination Consolidated
------------- --------- ----------- ------------
Net sales:
1999 $ 19,848 $ 13,888 $ - $ 33,736
1998 13,804 11,427 - 25,231
1997 11,083 17,983 - 29,066
Operating profit (loss:)
1999 (8,279) 5,522 - (2,757)
1998 (14,471) 3,159 - (11,312)
1997 (3,131) 5,351 - 2,220
Identifiable assets:
1999 38,037 8,591 - 46,628
1998 37,098 20,006 (2,698) 54,406
1997 37,884 18,650 (2,104) 54,430
F-21
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE O - SUBSEQUENT EVENTS
On January 8, 1999 the Company terminated it's revolving credit facility and
repaid amounts due, including interest, totally $6,008,733 as reported as a
Subsequent Event in Note 16 to the Company's consolidated financial statements
for the year ended October 31, 1998.
On June 11, 1999 the Company and BellSouth Wireless signed a non-binding
memorandum of understanding expressing the intent of the Company and BellSouth
Wireless to restructure certain economic and other provisions of the Operating
Agreement of Cellemetry.
On November 18, 1999, effective as of November 1, 1999, the Company and
BellSouth Wireless completed the restructuring of the Cellemetry Operating
Agreement.
Under the terms of the restructuring, the operating agreement of Cellemetry has
been modified ("First Amendment to the Operating Agreement") and the Cellemetry
Business Plan has been modified, revised and extended through November 1, 2004
("Modified Business Plan"). All respective rights under the Operating Agreement
that triggered on May 15, 2001, three years from the date of the formation of
Cellemetry, have been revised to trigger on November 1, 2002 and all financial
performance tests have been amended to reflect the Modified Business Plan. In
addition, the price at which the Company may, at its sole option, elect that
BellSouth Wireless put its ownership interest in Cellemetry to the Company has
been revised and set at $17,000,000. Additionally, the agreement provided for
the cancellation of the Cellemetry Share Option Plan with the intent that the
Company exchange all outstanding options for options to acquire shares of the
capital stock of the Company.
The restructuring also provided for Cellemetry to seek to find either a foreign
carrier or strategic investor ("Third Party Investment") to invest new capital
in exchange for up to 15% of Cellemetry. In connection with any such Third Party
Investment, the Company's ownership interest in Cellemetry will not be diluted
below 51% and BellSouth Wireless's will not be diluted below 34%.
Pursuant to the First Amendment to the Operating Agreement the Company, from and
including May 15, 1999, is no longer under an obligation to make any additional
capital contributions to Cellemetry. The Company, however, has committed to
provide up to $5,500,000 in interest bearing debt financing to Cellemetry.
Also, pursuant to the First Amendment to the Operating Agreement the Company
conveyed 100% of the capital stock of its wholly owned subsidiary, Uplink
Security, Inc., a Georgia corporation, to Cellemetry. In addition, the Company
issued to BellSouth Wireless 30,000 shares of Series A Convertible Redeemable
Preferred Stock of the Company ("Preferred Stock"). The Preferred Stock is
redeemable, at the Company's option, commencing November 1, 2000, on the basis
of a pre-set annual redemption price per share. Also, the Preferred Stock, at
BellSouth Wireless's option, commencing November 1, 2003 or November 1, 2002
should the Company's common stock exceed a pre-set market price for a given
period of time, is convertible into 625,000 shares of common stock of the
Company, approximately 6% of the Company's common stock. The Preferred Stock
carries certain registration rights for the common stock upon such conversion.
On November 12, 1999, the Company sold its entire holdings in its wholly owned
subsidiary, Bronzebase Limited ("Bronzebase"), to BT. Bronzebase is an English
limited liability company which owns all of the stock of Versus Technology
Limited ("Versus Technology"). The consideration for the sale was
(pound)12,500,000 (approximately $20,000,000), payable in cash at closing.
However, (pound)750,000 has been retained and placed in escrow pending a
post-closing net asset statement. The terms of the transaction were negotiated
between the Company and BT at arm's length.
F-22
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE O - SUBSEQUENT EVENTS - Continued
The following summarized unaudited pro forma financial information has been
presented as if the above referenced transactions had been completed at November
1, 1998. The unaudited pro forma information is based on historical results of
operations adjusted for income and expenditure directly related to the
transactions and has been prepared for comparative purposes only. This unaudited
pro forma information does not purport to be indicative of the results of
operations which would have resulted had the transactions been completed on the
date indicated or which may result in the future.
October 31, Pro Forma Pro Forma
1999 Adjustments Consolidated
---- ----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,691 $ 17,986 (i) $ 23,677
Accounts receivable, net 11,015 (3,740)(i) 7,275
Inventory 4,515 (1,336)(i) 3,189
Prepaid taxes 311 - 311
Prepaid expenses 293 (19) 274
-------- -------- --------
Total current assets 21,835 12,891 34,726
PROPERTY AND EQUIPMENT, net 3,792 (875)(i) 2,917
GOODWILL, net 8,808 2,614 (i,ii) 11,422
INTANGIBLE ASSETS, NET 12,108 (1,557)(i) 10,551
OTHER ASSETS 85 - 85
-------- -------- --------
Total assets $ 46,628 $ 13,073 $ 59,701
======== ======== ========
F-23
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE O - SUBSEQUENT EVENT - Continued
October 31, Pro Forma Pro Forma
1999 Adjustments Consolidated
---- ----------- ------------
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,159 $ (634)(i) $ 3,525
Income taxes 1,902 530 (i) 2,432
Other current liabilities 3,231 (925) 2,306
Obligations under capital leases, current period 30 - 30
-------- -------- --------
Total current liabilities 9,322 (1,029) 8,293
LONG-TERM LIABILITIES
Obligations under capital leases 84 - 84
MINORITY INTERESTS IN NET
ASSETS OF SUBSIDIARY 7,201 - 7,201
SHAREHOLDERS' EQUITY
Common stock 28,870 - 28,870
Additional paid-in capital 370 3,000 (ii) 3,370
Treasury stock (5,222) - (5,222)
Accumulated translation adjustment 4 (27)(i) (23)
Retained earnings 4,999 11,129 16,128
-------- -------- --------
30,021 14,102 44,123
-------- -------- --------
$ 46,628 $ 13,073 $ 59,701
======== ======== ========
(i) Record the sale of Bronzebase and estimated tax liability on the gain on
the sale.
(ii) Record the issue of Preferred Stock to BellSouth Wireless.
F-24
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years ended October 31, 1999, 1998 and 1997
NOTE O - SUBSEQUENT EVENT - Continued
October 31, Pro Forma Pro Forma
1999 Adjustments Consolidated
---- ----------- ------------
STATEMENT OF OPERATIONS
Net sales $ 33,736 $ (13,658)(i) $ 20,078
Cost of sales 14,403 (4,869)(i) 9,534
-------- -------- --------
Gross profit 19,333 (8,789) 10,544
Selling, general, administrative
and other expenses 22,090 (3,204)(i) 18,886
-------- -------- --------
Operating income (loss) (2,757) (5,585) (8,342)
Interest and other income, net 404 738 (i,ii) 1,142
Equity in net losses of affiliate - - -
Minority interest 2,418 - 2,418
-------- -------- --------
Earnings (loss) before income taxes 65 (4,847) (4,782)
Income taxes 1,682 (1,682)(i) -
-------- -------- --------
Net earnings (loss) $ (1,617) $ (3,165) $ (4,782)
======== ======== ========
Basic and diluted earnings (loss) per share $ (0.16) $ (0.46)
======= ========
Number of shares used in per share calculation
Basic 10,378 10,378
======== ========
Diluted N/A N/A
======== ========
(i) Record the sale of Bronzebase.
(ii) Record the estimated interest income on cash at an approximately 5% rate.
NOTE P - YEAR 2000 ISSUE
The Year 2000 issue related to a limitation in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
this issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.
F-25
NUMEREX CORP.
Condensed Financial Information of Registrant
Condensed Balance Sheet
(Parent Company Only)
(in thousands, except share amounts) SCHEDULE 1
- --------------------------------------------------------------------------------
Years ended October 31,
--------------------------
1999 1998
---- ----
ASSETS
Current assets $ 4,361 $ 2,582
Other assets 486 652
Intercompany receivables 17,114 17,357
Investment in equity of subsidiaries 31,150 29,666
-------- --------
Total Assets $ 53,111 $ 50,257
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ - $ 6,000
Intercompany loan and payables 6,664 8,541
Other liabilities 1,210 1,520
-------- --------
Total Current Liabilities $ 7,874 $ 16,061
-------- --------
LONG-TERM LIABILITIES
Intercompany loan and payables - long-term - $ 2,000
Class A common stock - no par; authorized 30,000,000 shares;
Issues 11,609,492 and 11,609,492 shares 29,870 29,870
Additional paid-in capital 370 220
Treasury stock, at cost, 1,266,400 and 1,034,900 shares (5,222) (4,644)
Retained earnings` 20,750 6,616
Other (531) 134
-------- --------
Total shareholders' equity $ 45,237 $ 32,196
-------- --------
Total liabilities and shareholders' equity $ 53,111 $ 50,257
======== ========
S-1
NUMEREX CORP.
Condensed Financial Information of Registrant
Condensed Statements of Operations
(Parent Company Only)
(in thousands) SCHEDULE 1
- --------------------------------------------------------------------------------
Years ended October 31,
------------------------------------------
1999 1998 1987
---- ---- ----
Equity in net earnings (loss) of subsidiaries $ (668) $ (8,290) $ 3,562
Operating expenses (1,077) (3,792) (2,060)
Interest and other income (net) 128 879 2,094
-------- -------- --------
Earnings (loss) before provision for income taxes $ (1,617) $(11,203) $ 3,596
Income taxes - - -
-------- -------- --------
Net Earnings (loss) $ (1,617) $(11,203) $ 3,596
======== ======== ========
S-2
NUMEREX CORP.
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
(Parent Company Only) SCHEDULE 1
- --------------------------------------------------------------------------------
Years ended October 31,
------------------------------------------
1999 1998 1997
---- ---- ----
Operating Activities:
Equity in net earnings (loss) of subsidiaries $ (668) $ (8,290) $ 3,562
Other adjustments, net 13,746 (4,656) 1,983
-------- -------- --------
Net cash provided by (used in) operating activities $(13,078) $(12,946) $ 5,545
-------- --------
Investing Activities:
Contribution to capital of subsidiaries, net (4,615) (3,820) (6,737)
-------- -------- --------
Financing Activities:
Proceeds from (payment of) revolving credit facility $ (6,000) $ 1,500 $ 4,500
Proceeds from exercise of stock options - 65 -
Purchase of treasury stock (578) (1,541) (1,776)
-------- -------- --------
Net cash provided by (used in) financing activities $ (6,578) $ 24 $ 2,724
-------- -------- --------
Net change in cash $ 1,885 $(16,742) $ 1,532
Cash, beginning of year 2,441 19,183 17,651
-------- -------- --------
Cash, end of year $ 4,326 $ 2,441 $ 19,183
======== ======== ========
S-3
NUMEREX CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Only)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed financial statements include the accounts of Numerex
Corp. (the" Parent") and on an equity basis its subsidiaries and should be read
in conjunction with the consolidated financial statements of Numerex Corp. and
its subsidiaries (the "Company") and the notes thereto.
2. INCOME TAXES
The Parent and its wholly owned subsidiaries file a consolidated tax return. The
Parent participates in a tax sharing agreement with the consolidated group
whereby consolidated income tax expense or benefit is allocated to the Parent.
3. SUBSEQUENT EVENTS
On June 11, 1999 the Company and BellSouth Wireless signed a non-binding
memorandum of understanding expressing the intent of the Company and BellSouth
Wireless to restructure certain economic and other provisions of the Operating
Agreement of Cellemetry.
On November 18, 1999, effective as of November 1, 1999, the Company and
BellSouth Wireless completed the restructuring of the Cellemetry Operating
Agreement.
Under the terms of the restructuring, the operating agreement of Cellemetry has
been modified ("First Amendment to the Operating Agreement") and the Cellemetry
Business Plan has been modified, revised and extended through November 1, 2004
("Modified Business Plan"). All respective rights under the Operating Agreement
that triggered on May 15, 2001, three years from the date of the formation of
Cellemetry, have been revised to trigger on November 1, 2002 and all financial
performance tests have been amended to reflect the Modified Business Plan. In
addition, the price at which the Company may, at its sole option, elect that
BellSouth Wireless put its ownership interest in Cellemetry to the Company has
been revised and set at $17,000,000.
The restructuring also provided for Cellemetry to seek to find either a foreign
carrier or strategic investor ("Third Party Investment") to invest new capital
in exchange for up to 15% of Cellemetry. In connection with any such Third Party
Investment, the Company's ownership interest in Cellemetry will not be diluted
below 51% and BellSouth Wireless's will not be diluted below 34%.
Pursuant to the First Amendment to the Operating Agreement the Company, from and
including May 15, 1999, is no longer under an obligation to make any additional
capital contributions to Cellemetry. The Company, however, has committed to
provide up to $5,500,000 in interest bearing debt financing to Cellemetry.
Also, pursuant to the First Amendment to the Operating Agreement the Company
conveyed 100% of the capital stock of its wholly owned subsidiary Uplink to
Cellemetry. In addition, the Company issued to BellSouth Wireless 30,000 Series
A Convertible Redeemable Preferred Stock of the Company ("Preferred Stock"). The
Preferred Stock is redeemable, at the Company's option, commencing November 1,
2000, on the basis of a pre-set annual redemption price per share. Also, the
Preferred Stock, at BellSouth Wireless's option, commencing November 1, 2003 or
November 1, 2002 should the Company's common stock exceed a pre-set market price
for a given period of time, is convertible into 625,000 shares of common stock
of the Company, approximately 6% of the Company's common stock. The Preferred
Stock carries certain registration rights for the common stock upon such
conversion.
On November 12, 1999, the Company sold its entire holdings in its wholly owned
subsidiary, Bronzebase to BT. Bronzebase is an English limited liability
company, which owns all of the stock of Versus Technology. The consideration for
the sale was (pound)12,500,000 (approximately U.S. $20,000,000), payable in cash
at closing. The terms of the transaction were negotiated between the Company and
BT at arm's length.
S-4
NUMEREX CORP.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands) SCHEDULE 11
- --------------------------------------------------------------------------------
Additions
Balance at -------------------------
Beginning of Charges to Balance at
Description Period Provisions Expense Deductions End of Period
--------------------------------------------------------------------------
Year Ended October 31, 1997:
Accounts Receivable
Allowance for uncollectible accounts $ 103 $ 0 $ 0 $ (48) $ 57
Inventory
Allowance for obsolescence 2,530 33 0 (1475) 1,088
Year ended October 31, 1998:
Accounts Receivable
Allowance for uncollectible accounts 57 266 2,159 (2,159) 323
Inventory
Allowance for obsolescence 1,088 251 2,201 0 3,540
Other Liabilities
Accrued severance 0 0 447 0 447
Year ended October 31, 1999:
Accounts Receivable
Allowance for uncollectible accounts 323 83 0 (230) 167
Inventory
Allowance for obsolescence 3,540 0 0 (1,187) 2,353
Other Liabilities
Accrued severance 447 0 0 (309) 138
(a) Amounts were the result of determining certain inventory items to be
obsolete and/or under performing due to market conditions.
(b) Amounts were net recoveries from the sale of subsidiary
(c) Amounts resulted from the write-off of certain uncollectible receivables
resulting from non-performing contractual relationships
(d) Amounts were the result of non-performing contracts and the decision to
abandon specific sales initiatives for certain Derived Channel markets.
(e) Amounts resulted from the severance and termination benefits for certain
corporate employees.
S-5