Item 1. Business.
THE COMPANY
Numerex Corporation (the "Company") designs, manufactures, and markets a proprietary technology (the Derived Channel System) which enables the transmission of data over existing telephone lines to perform alarm reporting and other monitoring functions without interfering with normal voice communications. The Company's derived channel products include network equipment traditionally sold to operating telephone companies, and related subscriber terminal units ("STUs") sold to alarm system distributors and installers for use at protected premises. In addition, the Company currently offers a family of intrusion alarm products and a line of network management products.
The Company's primary strategic objectives are to:
o Increase derived channel penetration in existing markets and open new markets for derived channel technology.
o Develop and/or acquire applications which can capitalize on and make derived channel technology even more attractive to the market.
o Enter the derived channel services market and establish a recurring revenue stream from these activities and broaden derived channel availability.
o Acquire complimentary businesses, products and/or services which can expand the Company's base of product and service offerings.
The Company's largest customer, British Telecommunications plc ("British Telecom"), has been successfully implementing the Company's Derived Channel System by offering British Telecom's "RedCARE" enhanced alarm reporting service to customers through its telephone network in the United Kingdom. In addition, at the end of 1994, the Company acquired the rights to market its Derived Channel System in North America, South America, parts of the Pacific Rim and Eastern Europe. Along with these rights, the Company assumed customer relationships with six of the seven Regional Bell Operating Companies and GTE Corporation in the United States, each of which has purchased and installed systems using earlier versions of the derived channel technology. In October 1996, the Company announced Bell Canada's intention to trial the Company's Derived Channel System for potential national deployment. Building upon the success of British Telecom's RedCARE system, the Bell Canada trial opportunity and sales and marketing activities in other territories, the Company believes it is well positioned to expand the subscriber base of existing Derived Channel Systems and to sell new Derived Channel Systems into various other worldwide markets.
The Company's intrusion alarm product line consists of a broad range of control panels and detection and communications devices for commercial and residential use. The Company sells its intrusion alarm products in the United Kingdom and parts of Western Europe primarily to alarm system distributors and installers. In the second half of fiscal 1996, the Company successfully launched a wire-free line of intrusion alarm products.
The Company's network management products are used to test and monitor the performance of data and voice communications networks. During fiscal 1996, the Company discontinued several performance measurement products to focus solely on the high-end network fault management product line. This product line is marketed to customers in North America, South America, Western Europe and the Pacific Rim. Through its network management products the Company has developed direct selling relationships with a number of major telecommunications companies throughout the world.
The Company's history began in July 1992 when Bronzebase Limited ("Bronzebase"), a newly formed corporation acquired 90% of the outstanding stock of Versus Technology Limited ("Versus Technology UK") and certain proprietary intellectual property rights, including rights to derived channel technology and rights to market such technology in certain countries, including the United Kingdom. Bronzebase acquired the remaining Versus Technology UK stock in September 1993. In February 1994, as a result of such stock exchange, Bronzebase and its subsidiary Versus Technology UK, became subsidiaries of Numerex Corp.
In July 1994, the Company acquired all of the outstanding stock of Digital Audio Limited ("DA Systems") in exchange for 1,625,000 shares of the Company's Common Stock. Also in July 1994, the Company purchased certain network management assets, through a newly formed subsidiary of the Company, Digilog Inc. ("Digilog"). In November 1994, the Company's subsidiary, DCX Systems, Inc. ("DCX Systems"), completed the acquisition of certain derived channel business assets, including the rights to manufacture, market and sell the Company's Derived Channel System in North America, South America and parts of the Pacific Rim and Eastern Europe. See "Item 1. Business -- Recent Developments."
The Company is a Pennsylvania corporation with its executive offices located at Rose Tree Corporate Center II, 1400 North Providence Road, Suite 5500, Media, Pennsylvania 19063 and its telephone number is (610) 892-0316.
RISK FACTORS
All statements and information herein, other than statements of historical fact, are forward-looking statements that are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Many phases of the Company's operations are subject to influences outside its control. Any one, or any combination of factors could have a material adverse effect on the Company's results of operations. These factors include: competitive pressures, economic conditions, changes in consumer spending, currency exchange fluctuations, tariffs, political instability, interest rate fluctuations, trade restrictions, and other conditions affecting capital markets. The following factors should be carefully considered, in addition to other information contained in this document. This document contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements
include, among other things, statements regarding trends, strategies, plans, beliefs, intentions, expectations, goals and opportunities. Also, they include statements regarding increases in user and customer base (see Item 1. "Business" - - "The Company", "Derived Channel System" and "Intrusion Alarm Products"); statements relating to geographic expansion (see Item 1. "Business" - "The Company", "Derived Channel System" and "Intrusion Alarm Products"); statements related to growth through a variety of sales and marketing efforts, technological developments, the introduction of new and enhanced products and new product applications (see Item 1. "Business" - "The Company", "Derived Channel Systems", "Intrusion Alarm Products" and "Network Management Products"); statements regarding positive results relating to acquisitions (see Item 1. "Business" - "The Company", "Acquisition History" and "Derived Channel System"); statements regarding various aspects of competition (see Item 1. "Business" - "Derived Channel System" - "Competition", "Intrusion Alarm Products" - "Competition" and "Network Management Products" - "Competition"); statements regarding future results of operations, profitability, exchange rates and activities relating thereto (see Item 7. "Management's Discussion and Results of Operations" "General" and "Foreign Currency"); statements regarding increased interest and growth in security and alarm industries and markets and demand for the Company's product offerings (see Item 1. "Business" - "The Company", "Derived Channel Systems" and "Intrusion Alarm Products"); statements regarding sufficiency of cash flow, funding operations and availability of additional capital (see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operation" - "Liquidity and Capital Resources"); statements regarding the Company's ability to retain key employees (see Item 1. "Business" - "Derived Channel Systems" - "Sales and Marketing"); statements concerning the nature of applicable regulatory restrictions and limitations (see Item 1. "Business" - "General" - "Regulation"); and statements relating to the availability of supplies used in the Company's business (see Item 2.
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:
- ---------- (1) Assumes the exercise of any renewal options.
(2) Until May 31, 1995 office space was leased on a month-to-month basis from Dominion. See "Certain Relationships and Related Transactions" contained in and incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders. The Company entered into a new leasing arrangement which commenced in June 1995.
The Company conducts manufacturing, sales and marketing, engineering and administrative activities at all locations except Media, Pennsylvania, where its principal executive offices are located. The Company's total annual rent expense for the year ended October 31, 1996 was (pounds)248,000. The Company believes that its existing facilities are adequate for its current needs. As the Company grows and expands into new markets and develops additional products, it will require additional space which the Company believes will be available at reasonable rates.
The Company engages in limited manufacturing for certain Derived Channel System network equipment and STUs, manufacturing for many intrusion alarm products and final equipment assembly and testing for the Company's products. The Company also uses contract manufacturers located near its facilities for production, sub-assembly and final assembly of certain products and one contract manufacturer in the Far East for certain high volume surface mount electronics manufacturing used in certain intrusion alarm products. The Company believes there are other manufacturers that could perform this work on comparable terms.
The chips, microprocessors and other components used in the Company's products are obtained from various suppliers and manufacturers, some of which are the sole source of such component.
Item 3.
Item 3. Legal Proceedings.
In July and August 1995, the Company received complaints in three separate purported lawsuits. The complaints, which were consolidated into a single amended complaint, sought class action status and alleged violations arising under certain federal securities laws for alleged material misstatements and omissions in the prospectus associated with the Company's 1995 public offering. The Company and the individual defendants believe the allegations are untrue and without merit. The complaint was filed against certain of the Company's directors and executive officers, principal shareholder and underwriters. The complaint sought rescission and/or damages against all defendants, including the awarding of costs and disbursements. The defendants filed a Motion to Dismiss and in January 1996, the defendants' Motion to Dismiss was granted and the case was dismissed. In February 1996, the plaintiffs appealed the Order of the U.S. District Court to the United States Court of Appeals, where it is pending. A settlement, effective October 24, 1996 and subject to final court approval, was reached among the parties and preliminarily approved by the court. Given the preliminary court approval, certain defendants paid $2.1 million to a settlement fund, which after the payment of certain costs and expenses, and subject to final court approval at a hearing set forth February 14, 1997, will be paid to a class. Numerex's contribution to the settlement fund was $1,033,340.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.1 Certain Executive Officers and Key Employees of the Registrant.
Set forth below is certain information concerning the executive officers and key employees of the Company who are not also directors.
Name Age Position ---- --- -------- Donald M. Hooton............... 46 Vice President -- Sales and Marketing Charles L. McNew............... 45 Vice President and Chief Financial Officer Peter I. Pritchett............. 39 Managing Director of DA Systems
Donald M. Hooton has been Vice President -- Sales and Marketing since February 1995. From February 1993 to January 1995, Mr. Hooton held the position of Strategic Marketing Director at Dominion and provided certain marketing related consulting services to the Company. From April 1992 to January 1993, he was Vice President of Marketing at Teltronics, Inc., a manufacturer of telecommunications products and software. From 1985 to 1992, Mr. Hooton served in a variety of positions with Versus Technology, Incorporated (the company which sold certain derived channel assets to the Company in 1994) and its predecessor, most recently as President and Chief Executive Officer.
Charles L. McNew has been Vice President and Chief Financial Officer of the Company since July 1994. Mr. McNew served as Vice President -- Finance, Chief Financial Officer and Treasurer of InterDigital Communications Corporation, a company engaged in the development of advanced digital wireless telecommunications systems, from June 1993 to July 1994. From March 1990 to May 1993, Mr. McNew served as the Chief Financial Officer of International Computaprint Corporation, a company engaged in electronic publishing. From 1982 to 1990, Mr. McNew held various positions with the Digilog Division of CXR Telecom Corporation, or its predecessor, most recently as Vice President and Chief Financial Officer.
Peter I. Pritchett has been Managing Director of European Operations since June 1995, and Managing Director of DA Systems, since May 1990. From May 1988 to April 1990 he served as Managing Director of Tripower Ltd., a manufacturer of electrical power distribution equipment for the construction industry.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters.
During fiscal 1996 three quarterly cash dividends on its Common Stock of $.05 per share each were declared and paid. In September 1996, the Board of Directors discontinued this cash dividend. In deciding whether or not to declare or pay dividends in the future, the Board of Directors will consider all relevant factors, including the Company's earnings, financial condition and working capital, capital expenditure requirements, any restrictions contained in any loan agreements into which the Company may enter in the future and market factors and conditions.
The Company's Common Stock was included in on the Nasdaq SmallCap Market under the symbol "NMRX" from March 3, 1994 through April 20, 1995. Commencing on April 21, 1995 the Company's Common Stock has been included in the Nasdaq National Market. The following table sets
forth, for the fiscal quarters indicated, the high and low sales prices per share for the Common Stock on the Nasdaq SmallCap Market and the Nasdaq National Market for the applicable periods.
Fiscal 1995 High Low - ----------- ---- --- First Quarter (November 1, 1994 to January 31, 1995) $ 18.50 $ 13.38 Second Quarter (February 1, 1995 to April 30, 1995) 18.75 13.50 Third Quarter (May 1, 1995 to July 31, 1995) 15.25 7.50 Fourth Quarter (August 1, 1995 to October 31, 1995) 9.63 5.75
Fiscal 1996 High Low - ----------- ---- --- First Quarter (November 1, 1995 to January 31, 1996) $ 7.25 $ 4.25 Second Quarter (February 1, 1996 to April 30, 1996) 6.50 4.13 Third Quarter (May 1, 1996 to July 31, 1996) 7.00 3.75 Fourth Quarter (August 1, 1996 to October 31, 1996) 4.75 3.50
As of January 17, 1997 there were 109 shareholders of record of the Company's Common Stock which include shares held in street name by brokers or nominees.
Item 6.
Item 6. Selected Financial Data.
The following selected consolidated financial data for the periods commencing November 1, 1991 have been derived from (i) the financial statements of Versus Technology UK for the period from November 1, 1991 to July 12, 1992, which have been audited by Deloitte & Touche, and (ii) the consolidated financial statements of the Company for the period from July 13, 1992 to October 31, 1992 and the fiscal years ended October 31, 1993, 1994, 1995 and 1996, which have been audited by Deloitte & Touche LLP.
The information contained in this section should be read in conjunction with "Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
General
The following is a discussion of the consolidated financial condition and results of operations of the Company for the fiscal years ended October 31, 1996, 1995 and 1994. This discussion should be read in conjunction with the Company's consolidated financial statements, the related notes thereto, and the other financial information included elsewhere in this report.
Overview
The Company's history began on July 13, 1992 when Bronzebase acquired 90% of the outstanding stock of Versus Technology UK and certain proprietary intellectual property rights, including rights to derived channel technology and the rights to market such technology in certain countries, including the United Kingdom. Bronzebase acquired the remaining Versus Technology UK stock in September 1993. In February 1994, as a result of a stock exchange, Bronzebase and its subsidiary, Versus Technology UK, became subsidiaries of Numerex Corp. For financial reporting purposes, the Company's results of operations prior to the date of the Stock Exchange are those of Bronzebase and its predecessor, Versus Technology UK.
In July 1994, the Company completed the stock for stock acquisition of DA Systems. Because the shareholders of the Company and DA Systems were substantially the same prior to the acquisition, the historical financial statements for the Company have been restated to combine the Company with DA Systems for all periods subsequent to July 28, 1993, the date on which common control first existed. In July 1994 and November 1994, the Company acquired the assets comprising its Digilog and DCX Systems subsidiaries, respectively. These acquisitions were cash transactions and have been recorded under the purchase accounting method.
The Company generates substantially all of its net sales from the sale of various equipment, systems and software products to its customers. Products are typically shipped soon after order placement. Therefore, sales order backlog historically has not been a meaningful indicator for the Company. The Company presently generates a significant amount of its net sales from product sales to an established customer base, principally British Telecom, the Company's largest customer, and to an established network of alarm system distributors and installers.
The Company currently publishes its consolidated financial statements in British pounds sterling, the functional currency of the country in which a substantial majority of the Company's net sales are presently generated.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of net sales represented by selected items in the Company's Consolidated Statements of Operations.
Years Ended October 31, ---------------------------- 1994 1995 1996 ------ ------ ------ Net sales: Derived Channel Systems 73.7% 70.7% 72.9% Intrusion alarm and network management products 26.3 29.3 27.1 ------ ------ ------ Total net sales 100.0 100.0 100.0 Cost of sales 39.6 40.1 54.8 Inventory write-downs -- -- 8.1 ====== ====== ====== Gross profit 60.4 59.9 37.1 Selling, general, administrative and other 18.3 27.1 42.4 Special charges -- -- 14.9 ====== ====== ====== Operating income (loss) 41.1 32.8 (20.2) ====== ====== ====== Net income (loss) 27.7% 24.4% (19.8)% ====== ====== ======
Fiscal Years Ended October 31, 1996 and 1995
Net sales decreased 13.6% to (pounds)18.2 million for the fiscal year ended October 31, 1996 as compared to (pounds)21.0 million in fiscal 1995. Derived Channel product sales declined by (pounds)1.6 million in fiscal 1996 as compared to fiscal 1995. The principal reason for the decline was a reduction in network equipment sales in the United Kingdom, which was partially offset by increased sales in the United States market. The Company believes that the network equipment coverage in the United Kingdom (greater than 90%) will limit the potential for significant growth in the United Kingdom for network equipment sales, although Subscriber Terminal Unit (STU) sales in the United Kingdom have remained strong throughout fiscal 1996. Intrusion alarm and network management products declined by (pounds)1.2 million in fiscal 1996 as compared to fiscal 1995, principally due to the elimination of certain underperforming products from the network management product line.
Cost of sales increased 35.6% to (pounds)11.4 million for fiscal year 1996 as compared to (pounds)8.4 million for fiscal 1995. The inventory write-downs of (pounds)1.5 million represented a pre-tax charge recorded in the third and fourth quarters of fiscal 1996 as a result of determining certain inventory items to be obsolete due to market conditions related primarily to network management and intrusion alarm products. Gross profit, as a percentage of net sales, decreased to 37.1% for fiscal 1996 as compared to 59.9% for fiscal 1995. The decrease in the gross profit margin was primarily due to a shift in sales mix to lower margin products as network equipment (a higher margin product) sales to British Telecom declined, inclusion of the inventory obsolescence charge, and, in addition, certain fixed costs related to manufacturing, which did not decline in conjunction with net sales, caused a further decrease in the gross profit margin.
Selling, general, administrative and other expenses increased 35.1% to (pounds)7.7 million for fiscal 1996 as compared to (pounds)5.7 million for fiscal 1995. The increase was principally related to a major expansion of Company's sales and marketing efforts, product development expenses and an increase in legal and other expenses. In addition, special charges of (pounds)2.7 million were recorded in the third and fourth
quarters of fiscal 1996. These special charges related principally to fixed and intangible asset impairment provisions for certain obsolete products and settlement of litigation.
Other income and expenses increased 39.1% to (pounds)1.1 million for the fiscal year ended October 31, 1996 as compared to (pounds)0.8 million in fiscal 1995. The increase was principally the result of interest income earned from temporary investment of cash proceeds from a public offering. In fiscal 1996 these temporary investments earned income for a full twelve months versus fiscal 1995 (the year of the public offering), when the temporary investments earned income for a partial year.
The Company recorded a tax provision of (pounds)1.0 million for fiscal 1996 despite the pre-tax loss. Certain losses arising from United States operations were not deductible in fiscal 1996, while earnings from United Kingdom operations were fully taxable. The Company expects to generate a tax benefit from these losses in future periods. The effective income tax rate for fiscal year 1995 was 33.0%.
The decrease in net sales, the inventory obsolescence charges and special charges recorded in fiscal 1996 resulted in a net loss of (pounds)3.6 million as compared to net income of (pounds)5.1 million in fiscal 1995.
Weighted average shares increased to 11.5 million in fiscal 1996 as compared to 10.6 million in fiscal 1995, principally due to the new shares issued in conjunction with a mid-year 1995 public offering being outstanding for a full year in fiscal 1996.
Fiscal Years Ended October 31, 1995 and 1994
Net sales decreased 0.9% to (pounds)21.0 million for the fiscal year ended October 31, 1995 as compared to (pounds)21.2 million in fiscal 1994. Derived Channel product sales declined by (pounds)0.8 million in fiscal 1995 as compared to fiscal 1994. The principal reason for this decline was a reduction in Derived Channel network equipment and customer premises equipment (STUs) sales in the United Kingdom. This decrease was partially offset by an increase in software sales, which include revenues of (pounds)1.4 million recognized on a long-term software development contract. Network equipment sales, which declined in the third quarter, remained below historical levels for the duration of fiscal 1995, while STU sales recovered from third quarter levels. Management believes fiscal 1995 sales were negatively affected by a slowdown in business within the U.K. alarm industry which resulted in a reduction in demand for Derived Channel products. The sales decline was also partially offset by a (pounds)0.6 million increase in the Intrusion Alarm and Network Management products category, principally due to the inclusion of a full year of network management product sales in 1995 as compared to a partial year in 1994 following the acquisition of the subsidiary engaged in this business.
Cost of sales increased 0.3% to (pounds)8.4 million for the fiscal year ended October 31, 1995 as compared to (pounds)8.4 million for fiscal 1994. Gross profit, as a percentage of net sales, declined to 59.9% for the fiscal year ended October 31, 1995 as compared to 60.4% in fiscal 1994. The decrease in the gross margin was primarily due to a shift in sales mix to lower margin products, particularly in the second half of fiscal 1995, when network equipment sales (a high margin product) to BT was a smaller component of the sales mix and the cost of sales related to software sales increased, as a percentage of those sales, when compared to the first half of fiscal 1995. In addition, the inclusion of Network Management products for a full year, which due to a highly competitive market environment do not generate gross profit margins comparable to the Company's Derived Channel System products, also contributed to the gross profit margin decline.
Selling, general, administrative and other expenses increased 46.7% to (pounds)5.7 million for the fiscal year ended October 31, 1995 as compared to (pounds)3.9 million in fiscal 1994. Selling, general, administrative and other expenses, as a percentage of net sales, increased to 27.1% during the fiscal year ended
October 31, 1995 as compared to 18.3% in fiscal 1994. The increase was principally related to a major expansion of the sales and marketing effort and product development primarily at DCX Systems (acquired in November 1994) and Digilog Inc. (acquired in July 1994) and an increase in legal and other expenses. Operating income decreased 22.7% to (pounds)6.9 million for the fiscal year ended October 31, 1995 as compared to (pounds)8.9 million in fiscal 1994.
Other income and expense increased 973.2% to (pounds)0.8 million for the fiscal year ended October 31, 1995 as compared to (pounds)0.1 million in fiscal 1994. The increase was principally the result of additional interest income generated from temporary investment of cash proceeds from a public offering.
The effective income tax rate decreased to 33.0% for the fiscal year ended October 31, 1995 as compared to 34.7% in fiscal 1994. The decrease was attributable to changes in the periodic estimation of tax liabilities.
The slight decrease in net sales and the increase in both interest income and selling, general, administrative and other expenses resulted in a net income decline of 12.7% to (pounds)5.1 million for the fiscal year ended October 31, 1995, as compared to (pounds)5.9 million in fiscal 1994.
As a result of new shares issued in conjunction with a public offering the weighted average shares outstanding increased to 10.6 million for the fiscal year ended October 31, 1995 as compared to 9.5 million in fiscal 1994.
Selected Quarterly Financial Data; Seasonality
The following table shows certain unaudited financial data of the Company for each quarter of the last two fiscal years. This information has been prepared from the books and records of the Company in accordance with generally accepted accounting principles for interim financial information. In the opinion of management, all adjustments (including only normal, recurring adjustments) considered necessary for a fair presentation have been included. Interim results for any quarter are not necessarily indicative of the results that may be expected for any future period.
Selected Quarterly Financial Data (Unaudited)
- ---------- (1) Net income for the third quarter includes pre-tax special charges of (pounds)1,151,000, primarily related to intangible asset impairment provisions for certain obsolete products and inventory write-downs of (pounds)927,000.
(2) Net income for the fourth quarter includes pre-tax special charges of (pounds)473,000, primarily related to fixed asset impairment provisions for certain obsolete products, (pounds)1,097,000 relating to an accrual for settlement of shareholder litigation and inventory write-downs of (pounds)546,000.
The Company's financial results may fluctuate from quarter to quarter as a result of a number of factors, including the timing of product shipments and new product introductions as well as certain major network equipment software sales to telephone companies that historically have been of a non-recurring nature.
Liquidity and Capital Resources
The Company is presently able to fund its operations and working capital requirements from cash flow generated by operations and the proceeds from a public offering completed in April 1995. Net cash provided by operating activities decreased to (pounds)0.2 million for the fiscal year ended October 31, 1996 as compared to (pounds)1.1 million in fiscal 1995. The decrease from 1995 was primarily due to lower earnings, increases in both accounts receivable and inventory levels and the payment of tax obligations due on the prior year's earnings.
Net cash used in investing activities decreased to (pounds)1.6 million for the fiscal year ended October 31, 1996 as compared to (pounds)2.6 million in fiscal 1995. The decrease was primarily due to lower purchases of fixed asset investments and capitalized software costs.
Net cash used in financing activities was (pounds)2.0 million for the fiscal year ended October 31, 1996 as compared to net cash provided by financing activities of (pounds)15.8 in fiscal 1995. The principal reasons for fiscal 1996 usage was the payment of dividends and the implementation of a stock buy back program. In fiscal 1995 net cash increased principally due to the proceeds generated from the public offering.
The Company had working capital balances of (pounds)23.2 million and (pounds)28.3 million as of October 31, 1996 and 1995, respectively.
The Company's business has not been capital intensive and, accordingly, capital expenditures have not been material. To date, the Company has funded all capital expenditures from cash provided by
operating activities. In order to fund an expansion of its Derived Channel System business (including an effort to increase market penetration in North America, South America, Western Europe and Australia and to acquire complementary businesses, products or services), the Company may require significantly greater capital investments than it has in the past. Presently, other than one previously announced acquisition possibility, the Company has no material commitments for capital expenditures.
The Company believes that its anticipated cash flow from operations, together with its available cash, including the proceeds of its public offering completed in April 1995, and funds available through an anticipated bank credit facility, will be sufficient to finance its operating and capital requirements at least through the fiscal year ending October 31, 1997. Cash requirements for future expansion of the Company's operations will be evaluated on an as-needed basis. The Company does not expect that such expansion will have a materially negative impact on the Company's ability to fund its existing operations.
Effect of Inflation
Inflation has not been a material factor affecting the Company's business. In recent years, the cost of electronic components has remained relatively stable due to competitive pressures within the industry, which has enabled the Company to contain its production costs. The Company's general operating expenses, such as salaries, employee benefits, and facilities costs, are subject to normal inflationary pressures.
Foreign Currency
Currently, the Company's functional and reporting currency is British pounds sterling because a substantial majority of the Company's net sales are presently generated in the United Kingdom. Although the Company does not have an ongoing currency hedging program in place, it occasionally hedges its operations selectively against fluctuations in foreign currency as needed. This occasional hedging is done primarily because a portion of the Company's production costs associated with its off-shore contract manufacturing are denominated in U.S. dollars while the bulk of its net sales are in British pounds sterling. The Company uses forward U.S. dollar contracts which have a maximum term of six months and which are not material to the Company. The Company anticipates that it may utilize additional foreign currency contracts as needed to hedge against fluctuations in the exchange rate between the U.S. dollar and the British pound sterling. Fluctuations in foreign currency exchange rates are not expected to have a material impact on the Company's results of operations or liquidity.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference from the financial statements and notes thereto of the Company which are attached hereto beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None except for a previously reported change in accountants.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to General Instruction G(3) to Form 10-K, except information concerning certain executive officers of the Company which is set forth in Item 4.1 hereof.
Item 11.
Item 11. Executive Compensation.
Incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to General Instruction G(3) to Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to General Instruction G(3) to Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Incorporated by reference from the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders to be filed pursuant to General Instruction G(3) to Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. List of Consolidated Financial Statements. The following financial statements and the notes thereto of the Company which are attached hereto beginning on page, have been incorporated by reference into Item 8 of this Report on Form 10-K:
Consolidated Financial Statements of the Company
Independent Auditors' Report
Consolidated Balance Sheets at October 31, 1996 and 1995
Consolidated Statements of Operations for the years ended October 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended October 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. List of Exhibits filed pursuant to Item 601 of Regulation S-K. The following exhibits are incorporated by reference herein, or are being filed herewith:
2.1(1) Agreement of Stock Exchange dated November 3, 1993 among the stockholders of Bronzebase, Bronzebase and Numerex
2.2(6) Agreement and Plan of Merger dated as of March 8, 1994 between Numerex Corp., a New York corporation, and Numerex Corp., a Pennsylvania corporation
2.3(2) Agreement of Stock Exchange dated June 21, 1994 among Omega Technology Ltd., Digital Audio Limited and the Company
2.4(3) Asset Purchase Agreement dated July 20, 1994 among CXR Corporation, CXR Telecom Corporation and the Company related to the purchase of certain assets of the Digilog division
2.5(4) Asset Purchase Agreement dated November 30, 1994 between Versus Technology UK, Inc. and the Company.
3.1(7) Amended and Restated Articles of Incorporation of the Company, as amended
3.2(7) Bylaws of the Company
10.1(1) Purchase Agreement between Versus Technology UK and Bronzebase Limited dated July 13, 1992
10.2(1) Employment Agreement between Kenneth F. Manser and Versus Technology UK (Management Compensation Contract)
10.3(1) $300,000 Promissory Note from Versus Technology UK to Dominion, dated December 15, 1992
10.4(7) Amendment to License Agreement between Base Ten Systems, Inc. and Radionics, dated February 28, 1989
10.5(1) License Agreement between Base Ten Systems, Inc. and Standard, July 22, 1987
10.6(1) Assignment and Assumption Agreement between Versus Technology, Incorporated and Bronzebase, dated August 19, 1993 regarding Standard Telephone & Cables Pty.
10.7 (Intentionally left blank)
10.8(1) Assignment and Assumption Agreement between Versus Technology, Incorporated and Bronzebase, dated August 19, 1993 regarding Radionics
10.9(1) Agreement between British Telecom, Base Ten Systems Limited, Versus Technology UK, Versus Technology, Incorporated and Base Ten Systems Inc. dated December 17, 1990 regarding Telecom RedCARE Network
10.10(7) Agreement between British Telecom and Versus Technology U.K. dated September 26, 1995 relating to the supply of RedCARE system products (certain confidential information contained in this Agreement has been omitted pursuant to Rule 24b-2 and has been filed separately with the Securities & Exchange Commission)
10.11(1) Amendment No. 1 to Loan Agreement between Versus Technology UK and Dominion, dated October 18, 1993
10.12(1) Versus Technology UK Pension and Death Benefit Scheme (Management Compensation Plan)
10.13(7) The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan Description (Management Compensation Plan)
10.14 Amended and Restated 1994 Employee Stock Option Plan (Management Compensation Plan)
10.15(6) Amended and Restated Stock Option Plan for Non-Employee Directors (Management Compensation Plan)
10.16(2) Registration Agreement between the Company and Dominion dated July 13, 1992
10.17(6) Engagement Letter Agreement between the Company and Dominion effective January 1, 1995
10.18(6) Letter Agreement between the Company and Dominion (now Gwynedd) dated October 25, 1994 re: designation of director
10.19(6) Service Agreement between Digital Audio Limited and Peter I. Pritchett (Management Compensation Contract)
10.20 Employment Agreement between the Company and John J. Reis, as amended (Management Compensation Contract)
10.21(6) Manufacturing Contract Agreement between Semiconductor Ventures International Co., Ltd. and Digital Audio Limited
10.22(7) Agreement for the Provision of Software and Services between British Telecom and Versus Technology U.K. dated September 7,
10.23(7) Office Space Lease Agreement between the Company and LBA Associates dated May 31, 1995.
10.24 Severance Agreement between the Company and Frederick C. Shay (Management Compensation Contract)
10.25 Severance Agreement between the Company and Charles L. McNew (Management Compensation Contract)
10.26 Severance Agreement between the Company and Donald M. Hooton (Management Compensation Contract)
10.27 Incentive Compensation Program for fiscal 1997. (Management Compensation Plan)
10.28 Letter Amendment dated September 24, 1996 to Agreement between British Telecom and Versus Technology U.K. dated September 26, 1995.
10.29 Agreement between Dominion and the Company relating to CellTel Data Services, Inc., dated October 15, 1996
21 Subsidiaries of Numerex Corp.
- ------------------
(1) Incorporated by reference to the Exhibits filed with the Company's Form 10 Registration Statement and Amendments No. 1 and No. 2 thereto (File No. 0-22920)
(2) Incorporated by reference to the Exhibit filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 1994 (File No. 0-22920)
(3) Incorporated by reference to the Exhibits filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 1994 (File No. 0-22920)
(4) Incorporated by reference to the Exhibits filed with the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on December 6, 1994 (File No. 0-22920)
(5) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended October 31, 1994 (File No. 0-22920)
(6) Incorporated by reference to the Exhibits filed with the Company's Registration Statement on Form S-1 filed with the Securities and Exchange Commission (File No. 33-89794)
(7) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended October 31, 1995 (File No. 0-22920).
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
NUMEREX CORP.
Date: January 27, 1997 By: /s/John J. Reis ---------------------------------------- John J. Reis, President and Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date --------- -------- ----
/s/Kenneth F. Manser - -------------------------- Kenneth F. Manser Chairman of the Board January 27, 1997
/s/Charles L. McNew - -------------------------- Charles L. McNew Vice President and Chief January 27, 1997 Financial Officer (principal financial officer and principal accounting officer)
/s/George Benson - -------------------------- George Benson Director January 27, 1997
/s/Matthew J. Flanigan - -------------------------- Matthew J. Flanigan Director January 27, 1997
/s/Andrew J. Ryan - -------------------------- Andrew J. Ryan Director January 27, 1997
/s/Gordon T. Ray - -------------------------- Gordon T. Ray Director January 27, 1997
/s/Frederick C. Shay - -------------------------- Frederick C. Shay Director January 27, 1997
Consolidated Financial Statements of the Company:
Independent Auditors' Report
Consolidated Balance Sheets as of October 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended October 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended October 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Numerex Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Numerex Corp. and subsidiaries (the "Company") as of October 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and of cash flows for each of the three years in the period ended October 31, 1996, all expressed in pounds sterling. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements, expressed in pounds sterling, present fairly, in all material respects, the consolidated financial position of the Company at October 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Philadelphia, Pennsylvania December 23, 1996
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
NUMEREX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF ACQUISITIONS AND STOCK SPLIT
Bronzebase Limited, now Numerex Corp. (the "Company"), was incorporated in 1992 and became an operating business on July 13, 1992 through the acquisition of Versus Technology Limited ("Versus Technology UK"), a company incorporated in the United Kingdom. On February 28, 1994, the Bronzebase Limited shareholders exchanged all their shares of common stock for 7,607,492 common shares of Numerex Corp. (the "Stock Exchange"). Numerex Corp. had been incorporated in 1988 for the purpose of seeking potential business opportunities through the acquisition of existing businesses and, prior to the Stock Exchange, had insignificant operations. For financial reporting purposes, the Company's results of operations prior to the date of the Stock Exchange are those of Bronzebase Limited.
The Stock Exchange has been accounted for as a capital transaction, retroactively affecting the Company's outstanding common stock in 1992 and its issuance of shares with respect to the acquisition of Versus Technology UK during fiscal 1993. The Stock Exchange resulted in a decrease in common stock in the amount of(pounds) 69,000 on February 28, 1994 representing the excess of transaction costs over the net assets (cash less accrued expenses) of Numerex Corp.
On July 20, 1994, the Company acquired certain assets of CXR Corporation, a company incorporated in the United States of America, to form a network management business. The purchase price for the assets was $1,000,000, of which $200,000 was paid at closing and $800,000 was paid on August 25, 1994. This transaction has been accounted for under the purchase method and is reflected in the October 31, 1994 consolidated balance sheet. Pro forma information is not provided as the asset purchase is not significant to the Company.
On November 30, 1994, the Company acquired certain assets, licenses and contract rights from Versus Technology, Incorporated, a company incorporated in the United States of America, for approximately $1,300,000 cash. The transaction was accounted for under the purchase method of accounting and is reflected in the October 31, 1995 consolidated balance sheet. Pro forma information is not provided as the asset purchase is not significant to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - The Company designs, manufactures and markets Derived Channel Systems, intrusion alarm products and network management systems.
Currency - These consolidated financial statements are stated in British pounds sterling, the functional currency of the country in which substantially all of the Company's sales are presently generated.
Principles of Consolidation - The consolidated financial statements include the results of operations and financial position of the Company and its wholly owned subsidiaries. All material intercompany transactions, balances and profits are eliminated in consolidation.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
Cash and Cash Equivalents - The Company considers all highly liquid investments with maturities of three months or less when purchased as cash equivalents.
Intangible Assets - Amortization is provided on all intangible assets at rates calculated to write off the cost of each over its expected life as follows:
o Patents straight-line over 7 years (the remaining useful life of patents acquired)
o Developed software straight-line over 3 years
o Costs in excess of the fair value of net assets acquired straight-line over 12 years
o Territorial rights straight-line over 4 years
Costs in excess of the fair value of net assets acquired is the cost of acquiring Versus Technology UK in excess of amounts allocated to specific assets based upon their fair values. Territorial rights are associated with the right to manufacture, market and sell product in certain countries. These rights were acquired as a result of the November 30, 1994 purchase from Versus Technology, Incorporated.
The Company capitalizes software development costs when project technical feasibility is established and concludes capitalization when the product is ready for release. Software development costs incurred prior to the establishment of technical feasibility are expensed as incurred.
Property and Equipment - Property and equipment is recorded at cost and is depreciated or amortized over the estimated useful lives of the assets. The rates of depreciation and amortization are as follows:
o Short-term leasehold improvements over the term of the lease (which is less than the asset life)
o Plant and machinery 4 to 10 years
o Equipment, fixtures and fittings 3 to 10 years
Asset Impairment - Long-lived assets are reviewed by management for impairment on an annual basis in conjunction with the preparation of the annual budget or when a specific event indicates that the carrying value of an asset may not be recoverable. Recoverability is assessed based on estimates of future cash flows expected to result from the use and eventual disposition of the asset. If the sum of expected undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized for the amount of such deficiency.
Inventory - Inventory and work-in-progress are stated at the lower of cost (first-in, first-out method) or market. Cost includes materials, direct labor and production overheads appropriate to the relevant state of production.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
Income Taxes - The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109. Deferred income taxes are provided on temporary differences arising from the different treatment of items for financial statement and taxation purposes, which are expected to reverse in the future, calculated using enacted tax rates.
The Company does not provide deferred federal income taxes on the undistributed earnings of its foreign subsidiaries since such earnings are not expected to be remitted to the Company in the foreseeable future.
Fair Value of Financial Instruments - The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair value because of the immediate or short-term maturity of these financial instruments.
Revenue Recognition - The Company recognizes sales of its products when title transfers to its customers. Revenue for royalty agreements is recorded as sales when earned.
The Company performed certain software development services under contract for a significant customer during 1995 and 1996. Revenue from the fixed-price contract was recognized on the percentage of completion method which was measured by the percentage of costs incurred to date to the estimated total costs for the contract. Service contract costs consisted primarily of outside consultant and software engineering fees. Costs and earnings in excess of billings on this contract were(pounds)0 and (pounds)175,000 as of October 31, 1996 and 1995, respectively. Through October 31, 1996, cumulative costs of(pounds)2,110,000, revenues of (pounds)3,360,000 and billings of(pounds)3,360,000 have been recorded under the contract.
Foreign Currency Transactions - Some transactions of the Company and its subsidiaries are made in U.S. dollars. (Gains) and losses from these transactions are included in income as they occur. Net currency transaction losses included in determining selling, general, administrative and other expenses amounted to(pounds)5,000,(pounds)109,000 and(pounds)85,000 in 1996, 1995 and 1994, respectively.
Research and Development - Research and development expenses are charged to the statement of operations in the period in which they are incurred. Research and development expenses amounted to(pounds)1,128,000, (pounds)682,000 and(pounds)452,000, in 1996, 1995 and 1994, respectively.
Provision for Warranty Claims - Estimated warranty expense is charged at the time of sale of the warranted products. Warranty expenses have not been significant to the Company.
Earnings (Loss) Per Share - Earnings (loss) per share is computed using the weighted average number of shares of common stock and common stock equivalents, if dilutive, outstanding during the year.
Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may likely differ from those estimates and assumptions, and such differences, if any, are not expected to be significant.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
Stock-Based Compensation - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 defines a fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period.
Under SFAS No. 123, the Company is permitted to continue to account for stock-based transactions under the previous accounting provisions provided by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), but would be required to disclose in a note to the consolidated financial statements pro forma net income and income per share information as if the Company had applied the new method of accounting.
The Company has determined that it will continue to account for stock-based transactions under APB No. 25 and will provide the disclosures required by SFAS No. 123 during the fiscal year ending October 31, 1997.
U.S. Dollar Equivalent Financial Information - The translation to U.S. dollars as of and for the year ended October 31, 1996 is for convenience only and was based on the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York as of October 31, 1996, the last trading day during the Company's year ended October 31, 1996. This rate was $1.6278 to(pounds)1.00. This translation should not be construed as a representation that the (pounds)1.00 sterling amounts actually represented, have been, or could be, converted into dollars at this or any other rate.
Reclassification - Certain prior year amounts have been reclassified to conform with the current year presentation.
3. SPECIAL CHARGES
During the year ended October 31, 1996, the Company recorded pre-tax special charges of(pounds)1,624,000 primarily relating to fixed and intangible asset impairment provisions for certain obsolete and/or under performing products and(pounds)1,097,000 primarily relating to an accrual for settlement of shareholder litigation and related legal fees (see Note 12).
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
4. INVENTORY
October 31, ---------------------- 1996 1995 (In Thousands)
Raw materials (pounds) 1,051 (pounds) 2,471 Work-in-progress 730 1,233 Finished goods 1,057 1,589 ----- -----
(pounds) 2,838 (pounds) 5,293 ===== =====
The inventory write-downs of(pounds)1,473,000 for the year ended October 31, 1996 are the result of determining certain inventory items to be obsolete and/or under performing due to market conditions.
5. INTANGIBLE AND OTHER ASSETS
October 31, ---------------------- 1996 1995 (In Thousands)
Developed software 2,463 2,070 Intangible and other assets 1,795 1,652 ------ ------ Total intangible and other assets 4,258 3,722 Accumulated amortization (1,918) (1,152) ------ ------
Intangible and other assets, net (pounds) 2,340 (pounds) 2,570 ===== =====
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
October 31, ----------------------- 1996 1995 (In Thousands)
Leasehold improvements (pounds) 218 (pounds) 111 Plant and machinery 717 1,459 Equipment, fixtures and fittings 380 422 ----- -----
Total property and equipment 1,315 1,992 Accumulated depreciation and amortization (542) (744) ----- -----
Property and equipment, net (pounds) 773 (pounds) 1,248 ===== =====
7. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109. Deferred income taxes are provided on temporary differences arising from the different treatment of items for financial statement and taxation purposes, which are expected to reverse in the future, calculated using enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to an amount which is more likely than not to be realized. Substantially all of the Company's provision for income taxes is incurred in the United Kingdom.
For the years noted below, the provision for income taxes consists of the following:
October 31, ------------------------------------------ 1996 1995 1994 (In Thousands)
Currently payable (pounds) 1,292 (pounds) 2,551 (pounds) 3,091 Deferred (297) (20) 38 ----- ----- -----
(pounds) 995 (pounds) 2,531 (pounds) 3,129 ===== ===== =====
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
Income taxes recorded by the Company differ from the amounts computed by applying the statutory U.S. federal income tax rate to income before income taxes. The following schedule reconciles income tax expense (benefit) at the statutory rate and the actual income tax expense as reflected in the consolidated statements of income:
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
The components of the Company's net deferred tax assets and (liabilities) as of October 31 are as follows:
1996 1995 ------------- ------------ (In Thousands) Deferred tax liability: Differences between book and tax basis of property and equipment (pounds) -- (pounds) (110) Other -- (3) ------- ------- -- (113) ------- ------- Deferred tax asset: Intangibles 306 -- Differences between book and tax basis of property and equipment 300 -- Net operating loss carry forwards 219 28 Tax credits carry forwards 728 -- Warranty provision -- 5 Other 3 24 Inventories 404 -- Accruals 447 -- ------- ------- 2,407 57 Valuation allowance (2,166) -- ------- ------- Total (pounds) 241 (pounds) (56) ======= =======
The Company has not recognized deferred tax liabilities of(pounds)56,000 for the undistributed earnings of its United Kingdom subsidiaries at both October 31, 1996 and 1995, since the Company does not expect these earnings to be remitted to the United States in the foreseeable future. A deferred tax liability will be recognized when the Company expects that it will recover the undistributed earnings in a taxable manner, such as through receipt of dividends, a loan of the unremitted earnings to the Company or one of its U.S. affiliates, or a sale of the United Kingdom subsidiaries' stock. The accumulated net undistributed earnings of the Company's United Kingdom subsidiaries included in retained earnings were (pounds)7,300,000 and(pounds)6,700,000 at October 31, 1996 and 1995, respectively.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
8. SIGNIFICANT CUSTOMER, CONCENTRATION OF CREDIT RISK AND RELATED PARTIES
Approximately 32%, 38% and 49% of sales in 1996, 1995 and 1994, respectively, were to British Telecommunications plc. The accounts receivable from British Telecommunications plc were(pounds)2,108,000 and (pounds)2,515,000 as of October 31, 1996 and 1995, respectively, and were collected pursuant to normal credit terms.
The principal shareholder provided financial advisory, investment banking and other services for the Company. Effective January 1, 1995, the Company entered into a two-year agreement, which expired on December 31, 1996, whereby the Company paid $20,000 per month plus certain reimbursable expenses to the shareholder for financial advisory services.
Fees and other expenses relating to the principal shareholder are as follows:
October 31, ---------------------------------- 1996 1995 1994 (In Thousands)
Interest expense (pounds) -- (pounds) -- (pounds) 17 Fees 155 206 405 Out-of-pocket expenses 57 34 189
Costs incurred by the principal shareholder relating to the Stock Exchange and charged to the Company including fees for services, amounted to (pounds)98,000 in 1994. Costs incurred by the principal shareholder relating to the public offering and charged to the Company including fees for services, amounted to(pounds)90,000 in 1995.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
9. COMMITMENTS
The Company leases certain property and equipment under noncancellable operating leases with initial terms in excess of one year. Future minimum lease payments under such noncancellable operating leases subsequent to October 31, 1996 are as follows:
Years Ending October 31, (In Thousands)
1997 (pounds) 267 1998 221 1999 172 2000 132 2001 108 Thereafter 502 ------ Total (pounds) 1,402 ======
Rent expense, including short-term leases, amounted to approximately (pounds)328,000,(pounds)277,000 and(pounds)168,000 in 1996, 1995 and 1994, respectively.
10. STOCK OPTION PLANS
In April 1994, the Company's shareholders approved the Employee Stock Option Plan (the "Employee Plan"), providing for the granting of nonqualified and incentive stock options to all officers and key employees of the Company and its subsidiaries at prices which represent the closing market price at the grant dates. The aggregate number of shares which may be issued upon the exercise of options under the Employee Plan, as amended in February 1995, is 447,500 shares of Class A Common Stock.
Options issued under the Employee Plan typically vest ratably over a five-year period. In the event of a "change in control" as defined in the Employee Plan, all outstanding options become fully vested and are subject to exercise. Incentive stock options and nonqualified stock options granted under the Employee Plan expire 10 years after the grant date unless an option holder's employment is terminated. Under such circumstances, the options expire from three months to one year from the date of employment termination.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
In April 1994, the Company's shareholders also approved the Nonemployee Director Stock Option Plan (the "Director Plan"), providing for the granting of stock options to nonemployee members of the Company's Board of Directors at the closing market price at the grant dates. On April 1, 1995 and each anniversary date thereafter, each nonemployee director, who has served as a director for at least one year, will receive an option to purchase 2,500 shares of the Company's common stock. The aggregate number of shares which may be issued upon the exercise of options granted under the Director Plan is 62,500 shares of common stock.
Options issued under the Director Plan fully vest one year after the grant date. In the event of a "change in control" as defined in the Director Plan, all outstanding options become fully vested and are subject to exercise. Options granted under the Director Plan expire 10 years after the grant date, unless an option holder ceases to be a director of the Company. Under such circumstances, the options expire three months from the date that the option holder ceases to be a director.
At October 31, 1996 and 1995, 400,500 and 193,500 options under the Employee Plan have been granted to key employees of the Company at prices ranging between $5.75 and $15.00. Of these options, 55,000 have expired and been canceled, 85,300 are currently exercisable and the remaining options will become exercisable in 1997 through 2000 with the exception of certain options granted to a senior management employee which become fully exercisable upon the attainment of specified market prices for the Company's common stock for a period of 60 days. At October 31, 1996, 9,200 options under the Director Plan have been granted to directors of the Company at prices ranging between $4.63 and $5.13. None of these options have expired or are currently exercisable and the remaining options will become exercisable in 1997. Options to purchase 18,750 shares of Class A common stock at a price of $10.00 were granted as a finder's fee in connection with an acquisition. Of these options, 11,250 are currently exercisable and the remaining will become exercisable in 1997 through 1999.
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
11. SUPPLEMENTAL CASH FLOW INFORMATION
October 31, ------------------------------------- 1996 1995 1994 (In Thousands)
Cash payments for interest (pounds) 10 (pounds) 12 (pounds) 75 Cash payments for income taxes 2,859 3,274 1,244
Supplemental Disclosures of Noncash Investing Activities
October 31, ------------------------------- 1996 1995 1994 (In Thousands)
Assets acquired in connection with capital leases (pounds) -- (pounds) 61 (pounds) -- Liabilities assumed in acquisitions -- -- 459
12. LITIGATION
In July and August 1995, the Company received complaints in three separate purported lawsuits. The complaints which were consolidated into a single amended complaint, sought class action status and alleged violations arising under certain federal securities laws for alleged material misstatements and omissions in the prospectus associated with the Company's 1995 public offering. The Company and the individual defendants believe the allegations are untrue and without merit. The complaint was filed against certain of the Company's directors and executive officers, principal shareholder and underwriters. The complaint sought rescission and/or damages against all defendants including the awarding of costs and disbursements. The defendants filed a Motion to Dismiss and in January 1996, the defendants' Motion to Dismiss was granted and the case was dismissed. In February 1996, the plaintiffs appealed the Order of the U.S. District Court to the United States Court of Appeals. A settlement, effective October 24, 1996 was reached among the parties and has been approved by the court. Certain defendants will pay to a settlement fund approximately $2,100,000 ((pounds)1,290,000), which after certain costs and expenses will be paid to a class. The Company's contribution to the settlement fund will be $1,033,000 ((pounds)635,000), which together with related legal costs was expensed in 1996 (see Note 3). Accordingly, included in the line item "other accrued liabilities" on the accompanying Consolidated Balance Sheet at October 31, 1996 are accruals for the settlement of the litigation and related expenses amounting to $1,500,000 ((pounds)921,000).
NUMEREX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED OCTOBER 31,1996 - --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS
On December 11, 1996, the Company announced that it has entered into a nonbinding Letter of Intent to acquire a majority interest in Broadband Networks, Inc., a company located in State College, Pennsylvania. Completion of the transaction is subject to satisfaction of various conditions, including the parties entering into a definitive agreement, satisfactory due diligence investigations and approval by the Boards of Directors for both companies.
On December 12, 1996, the Company announced that it has signed a commitment letter with a major regional bank for a $10,000,000 unsecured revolving credit facility. Completion of the transaction is subject to final approval by the Company's Board of Directors and execution of definitive documents.
================================================================================
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended October 31, 1996
NUMEREX CORP. (Exact name of registrant as specified in its charter)
Commission File No. 0-22920
================================================================================
EXHIBIT INDEX
Exhibit No. Page No. ----------- --------
2.1(1) Agreement of Stock Exchange dated November 3, 1993 among the stockholders of Bronzebase, Bronzebase and Numerex
2.2(6) Agreement and Plan of Merger dated as of March 8, 1994 between Numerex Corp., a New York corporation, and Numerex Corp., a Pennsylvania corporation
2.3(2) Agreement of Stock Exchange dated June 21, 1994 among Omega Technology Ltd., Digital Audio Limited and the Company
2.4(3) Asset Purchase Agreement dated July 20, 1994 among CXR Corporation, CXR Telecom Corporation and the Company related to the purchase of certain assets of the Digilog division
2.5(4) Asset Purchase Agreement dated November 30, 1994 between Versus Technology UK, Inc. and the Company.
3.197) Amended and Restated Articles of Incorporation of the Company, as amended
3.2(7) Bylaws of the Company
10.1(1) Purchase Agreement between Versus Technology UK and Bronzebase Limited dated July 13, 1992
10.2(1) Employment Agreement between Kenneth F. Manser and Versus Technology UK (Management Compensation Contract)
10.3(1) $300,000 Promissory Note from Versus Technology UK to Dominion, dated December 15, 1992
10.4(7) Amendment to License Agreement between Base Ten Systems, Inc. and Radionics, dated February 28, 1989
10.5(1) License Agreement between Base Ten Systems, Inc. and Standard, July 22, 1987
10.69(1) Assignment and Assumption Agreement between Versus Technology, Incorporated and Bronzebase, dated August 19, 1993 regarding Standard Telephone & Cables Pty.
10.7 (Intentionally left blank)
Exhibit No. Page No. ----------- --------
10.8(1) Assignment and Assumption Agreement between Versus Technology, Incorporated and Bronzebase, dated August 19, 1993 regarding Radionics
10.9(1) Agreement between British Telecom, Base Ten Systems Limited, Versus Technology UK, Versus Technology, Incorporated and Base Ten Systems Inc. dated December 17, 1990 regarding Telecom RedCARE Network
10.10(7) Agreement between British Telecom and Versus Technology U.K. dated September 26, 1995 relating to the supply of RedCARE system products (certain confidential information contained in this Agreement has been omitted pursuant to Rule 24b-2 and has been filed separately with the Securities & Exchange Commission)
10.11(1) Amendment No. 1 to Loan Agreement between Versus Technology UK and Dominion, dated October 18, 1993
10.12(1) Versus Technology UK Pension and Death Benefit Scheme (Management Compensation Plan)
10.13(7) The Numerex Corp. Savings and Profit Sharing Plan -- Summary Plan Description (Management Compensation Plan)
10.14 Amended and Restated 1994 Employee Stock Option Plan (Management Compensation Plan)
10.15(6) Amended and Restated Stock Option Plan for Non-Employee Directors (Management Compensation Plan)
10.16(2) Registration Agreement between the Company and Dominion dated July 13, 1992
10.17(6) Engagement Letter Agreement between the Company and Dominion effective January 1, 1995
10.18(6) Letter Agreement between the Company and Dominion (now Gwynedd) dated October 25, 1994 re: designation of director
10.19(6) Service Agreement between Digital Audio Limited and Peter I. Pritchett (Management Compensation Contract)
10.20 Employment Agreement between the Company and John J. Reis, as amended (Management Compensation Contract)
10.21(6) Manufacturing Contract Agreement between Semiconductor Ventures International Co., Ltd. and Digital Audio Limited
Exhibit No. Page No. ----------- --------
10.22(7) Agreement for the Provision of Software and Services between British Telecom and Versus Technology U.K. dated September 7, 1995
10.23(7) Office Space Lease Agreement between the Company and LBA Associates dated May 31, 1995.
10.24 Severance Agreement between the Company and Frederick C. Shay (Management Compensation Contract)
10.25 Severance Agreement between the Company and Charles L. McNew (Management Compensation Contract)
10.26 Severance Agreement between the Company and Donald M. Hooton (Management Compensation Contract)
10.27 Incentive Compensation Program for fiscal 1997. (Management Compensation Plan)
10.28 Letter Amendment dated September 24, 1996 to Agreement between British Telecom and Versus Technology U.K. dated September 26, 1995.
10.29 Agreement between Dominion and the Company relating to CellTel Data Services, Inc., dated October 15,
21 Subsidiaries of Numerex Corp.