U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB/A
Amendment #1
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
for the Fiscal Year Ended December 31, 1999
Commission file number 0-14724
TELEMETRIX INC.
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(formerly Arnox Corporation)
(Exact Name of Registrant as Specified in its Charter)
Delaware 59-345-3156
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(Jurisdiction of incorporation) (I.R.S. Employer Identification Number)
Telemetrix Inc.
1225 Sage Street
Gering, Nebraska 69341
(308) 436-4090
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(Address, including zip code, & telephone number,
of Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchanges on which registered
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Common Stock, par value $0.001 Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark whether Registrants (1) 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 Registrants were required
to file such reports), and (2) were 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 Registrants' 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 Registrant's common stock ("Shares") held by
non-affiliates as of March 31, 2000 was approximately $12.0 million based on the
March 31, 2000, closing price of $6.625 per Share.
There were 14,192,147 Shares outstanding on March 31, 2000.
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TABLE OF CONTENTS
PART I
Item 1. Business ......................................................... 2
Item 2. Properties ....................................................... 16
Item 3. Legal Proceedings ................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders .............. 17
PART II ................................................................... 18
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters ........................................... 18
Item 6. Management's Discussion & Analysis of Financial
Condition or Plan of Operation ................................. 19
Item 7. Financial Statements and Supplementary Data ..................... 26
Item 8. Changes in & Disagreements with Accountants on
Accounting & Financial Disclosure .............................. 26
PART III
Item 9. Directors and Executive Officers of Registrants .................. 29
Item 10. Executive Compensation ........................................... 29
Item 11. Security Ownership of Certain Beneficial Owners and Management ... 30
Item 12. Certain Relationships and Related Transactions ................... 31
PART IV
Item 13. Exhibits and Reports on Form 8-K ................................. 32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ................................ 34
POWER OF ATTORNEY ......................................................... 35
SIGNATURES ................................................................ 35
NOTE CONCERNING FORWARD-LOOKING INFORMATION. This Report contains statements
that anticipate the future and therefore are "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995. Such "forward-looking
statements" include statements about the future of our industry, statements
about our business plans and statements about our strategies; i.e., any
statements other than statements of historical facts. Forward-looking words such
as "may", "will", "expect", "anticipate", "believe", "estimate", and "continue"
or similar words indicate such statements. Investors should read statements with
these terms carefully because they:
o discuss the Company's future expectations;
o contain projections of the Company's future results of operations or
of its financial condition; or
o contain other "forward-looking" information.
We believe that it is important to communicate such future expectations to our
investors. However, the accuracy of our expectations and forward-looking
statements could be affected by:
o our limited operating history and commercial experience;
o market acceptance of T3000;
o availability of additional capital;
o protection of our intellectual property rights;
o evolving technologies and markets;
o competitive developments;
o telecommunications regulatory environment; and
o our ability to manage growth.
These factors might cause actual results to differ materially from the
forward-looking statements as well as materially and adversely affecting our
business, operating results and financial condition.
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In this Report, "Telemetrix" refers to Telemetrix Inc., a Delaware
corporation (formerly Arnox Corporation; we use "Arnox" and "Telemetrix" for
activities before and after, respectively, the Combination in which Arnox
acquired TRG and WTC), "Telemetrix Solutions" collectively refers to Telemetrix
Solutions Ltd. (formerly Telemetrix Resource Group Inc.) and Telemetrix Resource
Group Ltd., collectively (we use "TRG" and "Telemetrix Solutions" for activities
before and after, respectively, the Combination), "Telemetrix Technologies"
refers to Tracy Corporation II dba Western Total Communications, to be renamed
Telemetrix Technologies Inc.; we use "WTC" and "Telemetrix Technologies" for
activities before and after, respectively, the Combination), while the terms
"Company" and "we" mean Telemetrix, Telemetrix Solutions and Telemetrix
Technologies, collectively (see "Business--Corporate History").
PART I
Item 1. Business
We offer solutions for wireless telemetry and telecommunications services
businesses and telecommunications carriers, particularly wireless Personal
Communications Services ("PCS"). Telemetry involves data collection and analysis
using remote devices such as measurement and transceiver devices, transmission
services, central control devices and management software. Telemetry systems
permit businesses to monitor activity at numerous, remote and dispersed
locations, detect situations requiring intervention and promptly respond to such
situations. With a telemetry system, an electric utility can read meters,
monitor usage, anticipate excessive demand and conduct load-shedding to avoid a
brown-out. Businesses using telemetry ("Telemetry Users") currently include
electric utilities, alarm companies and vending machine operations; as the
technology advances, potential applications multiply. With widespread coverage
and easy mobility, wireless telecommunications are especially suitable for
telemetry applications. By offering our wireless telemetry technology in their
service area, PCS carriers can create a new and potentially significant market
for their wireless transmission services.
We are developing the T3000 system for wireless telemetry. The T3000 uses
our patented method for automatically collecting and transmitting telemetry data
over the Short Message Service channel of PCS networks. We also expect to
receive another patent covering this proprietary technology by Summer 2000. With
T3000, Telemetry Users can:
- acquire data from remote devices;
- control, poll and activate the remote devices;
- manage the entire wireless telemetry system;
- offer access to telemetry data; and
- provide a Wireless Local Loop.
We currently are beta testing T3000 on our wireless facilities in western
Nebraska and southeastern Wyoming (the "WTC Network"), and we expect to commence
full scale production in June 2000. The T3000 utilizes existing PCS
infrastructure to provide its capabilities. For example, the current T3000
prototype employs the Short Message Channel for data transmission and voice
channel for wireless local loop. Using existing infrastructure speeds deployment
of telemetry services and significantly reduces costs.
We will first offer T3000 on the WTC Network, to enhance service for our
existing paging and PCS customers and to showcase our new products and services.
We signed a letter of intent to deploy T3000 over the southwest Colorado
wireless network being installed by REAnet and also offered to deploy T3000 over
a proposed PCS network in Manitoba, Canada. In conjunction with the T3000, we
intend to offer support services to both Telemetry Users and carriers; such
services include telemetry network management, billing support, system design
consulting and service bureau capabilities. We will offer individual components
or package solutions to our customers, and enable them to add value, bundle
services and expand their businesses.
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The Telemetrix Technologies subsidiary is developing the T3000 wireless
telemetry product for data collection, system monitoring, distribution and
billing. T3000 can be used in a wide variety of applications, such as automatic
utility meter reading, home security, home health alarms, monitoring vending
machines and other specialty applications. The Optical Meter Reader component is
a data acquisition device that permits companies to retain legacy metering
equipment in their telemetry systems. For example, with the Optical Meter
Reader, an electric utility need not replace existing meters, which could
significantly lower the cost of a telemetry system. The COMM Center is our
proprietary communications hardware and software gateway. Its digital wireless
technology can bypass existing local telephone wiring and thereby communicate
with the monitoring station. The COMM Center also can function as a wireless
local loop interface to replace, bypass or supplement existing wireline
telephone service equipment or to provide primary or additional telephone
service. The COMM Center's wireless local loop interface will provide wireless
basic telephone service over existing telephone wiring at the subscribers'
premises. Using these products, PCS operators (particularly operators in rural
or less populated areas) can offer additional services and thereby increase
their revenue potential. We expect to deploy T3000 in our own wireless and PCS
networks to demonstrate their efficacy and to generate additional PCS revenue.
Telemetrix Technologies currently offers paging and PCS services over the
WTC Network, which consists of two separate wireless communications networks
whose aggregate coverage area encompasses portions of western Nebraska,
southeastern Wyoming and northeastern Colorado. Paging services have been
provided since 1982 and we are currently deploying the PCS network in western
Nebraska and eastern Wyoming. Telemetrix Technologies holds two PCS licenses and
34 paging and mobile telephone licenses serving 27 locations in the service
area; the licensed PCS service areas encompass approximately 138,000 persons. We
intend to expand these wireless services to include PCS Wireless Local Loop
services (i.e., local exchange services), wireless telemetry and mobile PCS. Our
wireless network showcases our new products and services, so potential customers
can watch the T3000 system and COMM Center in operation.
The Telemetrix Solutions subsidiary provides customer management services
(our "Service Bureau") for long distance carriers using its suite of proprietary
software. These packages, TRACCS (Telemetrix Revenue Awareness Customer Care
System) and Intro CCB, have integrated database-driven components for managing
order processing, provisioning, customer care, account development, billing,
financial management, fraud control, network management, performance reporting
and related and supporting office products software. Using the built-in
reporting capabilities of this Billing Software to sort, organize and present
data, our Service Bureau can effectively and efficiently help carriers utilize
their customer and billing information. We consult each carrier customer to
identify that customer's particular needs and, using TRACCS or Intro CCB, then
develop billing and customer care solutions tailored to those needs. Management
recently reviewed the Company's business plan, decided to focus on the T3000 and
consequently is downsizing the Service Bureau (See "Management's Discussion &
Analysis of Financial Condition or Plan of Operation--Description of Financial
Components--Depreciation & Amortization").
INDUSTRY OVERVIEW
The U.S. telecommunications industry has approximately 3,604 service
providers, serving more than 96 million households and 25 million businesses
(approximately 180 million access lines), and generated revenues approaching
$246 billion in 1998. Telecommunications wireline services involve three
principal markets: long distance, local exchange and data products & services.
Wireless communications services include cellular telephone service, PCS
(Personal Communications Services), Specialized Mobile Radio and paging. We
believe that service providers in each of these market segments can benefit from
these value-added carrier support services. The T3000 and COMM Center technology
should appeal to both wireless carriers as well as original equipment
manufacturers ("OEMs") that sell their products to telecommunications carriers.
Our Service Bureau enables carriers to focus on developing and enhancing their
services without sacrificing customer care and administration.
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The Long Distance Market. The FCC's Trends in Telephone Service reports
that the domestic long distance industry generated revenue of approximately
$94.6 billion in 1998. The long distance market is comprised of three tiers. The
first tier consists of facilities-based long distance carriers, such as AT&T,
MCI, WorldCom and Sprint, who provide long distance communications services
using their own equipment to transmit telephone calls. These carriers
collectively accounted for approximately 79% of all 1998 toll revenues. "Second
tier" carriers, consisting primarily of switched resellers such as Excel
Communications Inc., Cable and Wireless, plc., LCI International Inc. and
Frontier Company, accounted for approximately 9% of toll revenue in 1998. The
"third tier", primarily switchless resellers, hold the remaining market share.
The Local Exchange Market. According to FCC data, total revenue from local
telecommunications services in 1998 was approximately $104 billion. The U.S.
federal Telecommunications Act of 1996 ("Telecommunications Act") seeks to
increase competition in the local telecommunications industry and provide a
framework for other carriers to compete with incumbent local exchange carriers
("ILECs") by reselling local telephone service, leasing unbundled elements of
the ILECs' networks or building new local service facilities. The
Telecommunications Act seeks to create many opportunities for new providers to
enter the local services market.
The Data Products and Services Market. Data products and services has been
the highest growth segment of the telecommunications industry in the 1990s.
According to Data Communications, data-related products and services accounted
for revenues of almost $79.0 billion in 1997--a growth rate of approximately 17%
from 1996. According to the Yankee Group, current trends suggest that data
revenues will double over the next three years and will grow five times faster
than voice revenues.
The Wireless Services Market. The wireless communications market, which
includes cellular telephone service, Personal Communications Services ("PCS"),
Specialized Mobile Radio ("SMR"), paging, and other applications has grown
dramatically in recent years. For example, U.S. cellular telephone service
revenues grew from $5.7 billion in 1991 to $33.1 billion in 1998, and the number
of subscribers increased from 7.6 million in 1991 to 70 million in 1998. The
growth in wireless communications results from lower prices for consumer
equipment (e.g., cellular telephones and pagers), more comprehensive service
coverage, lower rates and technological advances that have improved transmission
quality and reliability. For example, by June 1999, the price of cellular
services had dropped to 82.9% of December 1997 prices. While the major PCS
operators will likely focus on mobile telephone services that will compete with
cellular telephone services, small and rural PCS operators must offer additional
"niche" PCS service offerings in order to increase utilization of their
services.
Wireless Telemetry. Developments in computing, Internet and wireless
technologies have created an opportunity for a new business, wireless telemetry.
The need for accurate and timely data is rapidly increasing, especially with the
advent of techniques such as "just-in-time" inventory management. As measurement
and transceiving devices become smaller and more robust, companies will install
telemetry devices into more products. Just as use of microprocessors expanded
well beyond computing applications (e.g., from automobiles to toasters),
telemetry devices could become ubiquitous. As a recent Yankee Group report
explains, each person uses so many devices (such as computers, electronics,
vehicles and meters) that even if only a few products contain telemetry devices,
people could activate hundreds of telemetry devices daily without even knowing
it. Telemetry creates demand for measurement and transceiver devices,
transmission services, control devices and management software. The Yankee Group
forecasts that revenue for wireless telemetry devices to grow from $1.2 billion
in 1999 to $5 billion in 2004, while revenue for wireless telemetry airtime will
grow to $1.7 billion.
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Billing Systems. With continued deregulation, increased complexity of
products and features, bundled Internet services and the drive to combining
multimedia (voice, data and video), telecommunications carriers' billing needs
are becoming increasingly complicated. According to a leading consulting firm,
the number of bills for telecommunications services are expected to grow from
3.9 billion in 1996 to 5.5 billion in 2000, a 9.1% growth rate. This situation
requires a market response with provision of a more robust billing system that
is stable and easy to both modify and implement across a multitude of carrier
services. The total North American market for billing software is about $3
billion per year and is growing at approximately 25% per year. We will initially
target smaller carriers, which represent about 25% of the total market. Thus, we
estimate a potential North American billing software market of $700 million,
rising to $900 million in 2000.
TECHNOLOGY OVERVIEW
To assist understanding of the Company's products and services, we briefly
describe PCS networks, wireless telemetry and local loops.
PCS Networks. Certain wireless communications networks, such as cellular
telephone and PCS, use a cellular architecture, where the service region is
divided into multiple cells. Each cell contains a Base Station (including a
transmitter, receiver and signaling equipment) which is connected to the
wireless network switch and which, in turn, is connected to the public switched
telephone network. Within a cell, the mobile units (e.g., the handset)
communicate with the Base Station using radio waves; to prevent interference,
adjacent cells use different radio frequencies. As a mobile unit moves away from
the Base Station in a particular cell, the network switch monitors the signal
strength of the call and transfers the call to a new Base Station in another
cell where the signal strength is greater. PCS licensed services use higher
radio frequencies than traditional cellular telephone, which reduces the
distance PCS transmissions can travel without significant degradation.
Consequently, PCS networks require smaller operating cells and more Base
Stations than cellular telephone networks. When a mobile unit leaves the
wireless carrier's service area, the call will be disconnected unless the
wireless carrier in the new service area accepts and handles ("carries") the
call. This "roaming" among different wireless carriers requires both technical
compatibility and agreements between carriers to carry calls from other
carriers' subscribers. Cellular carriers generally have roaming agreements,
however, since PCS is still developing and PCS operators utilize varying
technical standards, roaming between PCS systems is limited.
PCS Signaling Standards. PCS systems generally use one of three digital
signal transmission technologies: General System for Mobile Communications
("GSM"), Code Division Multiple Access ("CDMA") and Time Division Multiple
Access ("TDMA"). Each of these signaling standards, which are incompatible with
each other, has been adopted by least two different PCS carriers in major U.S.
markets. Each standard has distinct advantages and disadvantages. TDMA resembles
the signaling standard used by many cellular carriers, CDMA should require fewer
Cell Sites and offer greater capacity, call quality and hand-off advantages,
while GSM is the leading digital wireless technology worldwide with systems in
110 countries serving over 30 million subscribers. GSM uses an open system
architecture that allows carriers to purchase network equipment from a wider
variety of vendors. Open architecture provides significant flexibility for the
carrier in vendor cost leveraging and provisioning of features, products and
services. T3000 initially will use the GSM standard and we are currently
obtaining GSM certification. We also intend to develop versions of the T3000
that will be compatible with CDMA and TDMA.
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Wireless Telemetry. Telemetry involves the use of remote devices for data
collection and analysis, and encompasses the following activities:
o installing a measurement device at a remote location;
o controlling the device from a central station;
o obtaining data with the device;
o transmitting the data to the central station;
o collecting and analyzing the data; and
o responding to the results of the analysis.
For example, a device in a vending machine can transmit the amount of cash
receipts and a nightly inventory to the owner's monitoring computer; the owner
can then decide whether to refill the machine, order more products and add that
vending machine to the delivery truck's itinerary. A photocopier might contain a
telemetry device that forwards copy totals to the service company for billing
and notifies the company about any mechanical problems requiring repairs.
Telemetry thus requires measurement and transceiver devices, transmission
services, central control devices and management software. Since it offers
widespread coverage and permits mobility, wireless telecommunications can
provide the transmission component for telemetry.
Local Loop: Local wireline telephone systems consist of a network of
switches, transmission facilities between switches and the "local loop"
connections between subscribers' premises and the nearest local exchange switch.
The local exchange switches route calls initiated by subscribers either directly
to recipients served by the same switch or, for more remote recipients, to the
long distance carriers' points of presence. Wireline local loops generally
consist of telephone wires that run along aerial or underground rights-of-way to
each subscriber premise. Older wireline local loops generally carry analog
transmissions and have relatively low capacity, sufficient to carry only a
single two-way voice conversation. CLECs generally do not develop their own
local loops, due to the expense and effort of obtaining rights-of-way and
installing a telephone line to each telephone user. These difficulties are
magnified in rural or less populated areas. Consequently, CLECs must utilize the
ILECs' local loops, which inhibits competition. This large expense and effort
also deters ILECs from upgrading the transmission capacity of the local loop.
Thus, the local loop constitutes a significant hindrance to competition and
better quality service. We designed the proposed COMM Center to incorporate
Wireless Local Loop capability. With this feature, CLECs and wireless service
providers can replicate the local loop using wireless technology and thereby
avoid costly and extensive infrastructure.
PRODUCTS AND SERVICES
The Company will provide customer service capabilities and enabling
technologies for telecommunications networks. Our complementary products and
services include:
- T3000 system for wireless telemetry (polling, monitoring and
controlling remote devices such as electrical meters and burglar
alarms), whose components include:
- COMM Center, the local gateway for controlling, polling and activating
remote devices;
- Optical Meter Reader for data acquisition;
- T-NOC (Network Operations Center) for monitoring and controlling the
remote devices;
- T-Server Software for access to telemetry data;
- Wireless Local Loop capability through the T3000's COMM Center;
- Rural PCS and mobile telecommunications services; and
- Service Bureau for customer care.
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The T3000 System. Telemetrix Technologies is developing the T3000, a new
wireless telemetry technology for integrated data collection, transmission,
storage, and compilation. With T3000, a customer can install measurement devices
(Optical Readers) at remote and dispersed locations, collect data from several
measurement devices (COMM Center), transmit data to a central station (Wireless
Local Loop), compile, analyze and distribute the data (T-NOC) and control the
remote devices (T-Server software). The T3000 system supports numerous
applications such as automatic utility meter reading (with load-shedding
controls), voice communications, home security, home health alarms and vending
machine monitoring. This range of applications should interest utilities and PCS
carriers, because T3000 will reduce costs in their existing operations and
provides the opportunity to create new revenue streams. We believe that T3000
offers a reliable, flexible and inexpensive solution for monitoring events,
collecting and distributing data, and controlling systems. We are currently beta
testing the T3000 in Gering, Nebraska, and expect T3000 to become available for
full deployment in the second quarter of 2000.
The main components of T3000 are the COMM Center, Readers, T-NOC (Network
Operations Center) and T-Server software. The simple Readers (Optical Meter,
Level Meter and Alarm Meter devices), placed on electric meters, fire detectors
or motion sensors, perform data acquisition and control. The COMM Center serves
as the local gateway and command center for numerous Readers at subscribers'
premises (e.g., a building or office park). With its optional Wireless Local
Loop capability, the COMM Center also can provide telephone service (e.g., a
second line) over existing customer premises telephones and wiring. With Short
Message Service wireless transmissions over local PCS networks, the COMM Center
establishes various two-way data and telemetry applications into the
subscribers' premises. The T-Server software provides the T3000 customer access
and control of their telemetry data. Our North American T-NOC manages, monitors,
controls all COMM Centers, and through them, each Reader. The T-NOC collects,
compiles and distributes the data generated by the Readers, translates the data
into the appropriate formats, prepare reports requested by the T3000 customer
(e.g., electric company), provides billing data and, if requested, generates
bills to subscribers. T3000 is a gateway technology that the customer can
control. The following diagram illustrates a deployment at a private residence:
[Graphic shows meter readers & COMM center deployed at the residence; through
the PCS Network, the COMM Center is connected to Telemetry users such as
electric utility, water company, alarm company, police & fire department.]
With the T3000, utilities can monitor meters, obtain complete telemetry
functionality and manage consumption. Current schemes for monitoring electric,
gas and water consumption are not compatible with each other. The Optical Meter
Reader can read a variety of meter types and the COMM Center acts as the single
source for collection, storage and transmission of data. Since utility
deregulation initiatives have not addressed ownership of the meters at customer
sites, utility companies are reluctant to install new meters. However, the
Optical Meter Reader reads through the glass covers of current meters, which
allows utilities to continue using existing equipment within a telemetry system,
and lessens concerns about stranded investment. The T3000 uses standard PCS
digital infrastructure so T3000 customers can rapidly deploy telemetry systems
without installing their own communications infrastructure.
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The T3000 also presents new, potentially significant, revenue streams for
PCS carriers and utilities. GSM-based PCS carriers receive additional revenue by
carrying the Short Message Service transmissions used by the COMM Center.
Moreover, Short Message Service transmissions do not tie up network resources,
so numerous COMM Centers in a carrier's service region could generate
significant airtime revenue without affecting overall network capacity.
Furthermore, the COMM Center's Wireless Local Loop capability integrates the
building's existing telephone wiring into the PCS carrier's network. When so
connected, the COMM Center, using Wireless Local Loop, can replace or supplement
service from the incumbent LEC. After installing the T3000 system, utilities can
readily expand their operations beyond meter-reading and offer their subscribers
additional services such as home security and local telephone service.
Alternatively, a T3000 customer can obtain additional revenue by performing
wireless telemetry services for other businesses, such as vending machine
operators. T3000's services and applications, when combined with the Wireless
Local Loop capability, present significant new revenue sources.
COMM Center. At the heart of the T3000 system is the COMM Center, an
intelligent device located at a subscriber's premises. The COMM Center has 40
access ports: 20 intelligent ports and 20 data registers (bi-directional I/O
ports). The intelligent ports can collect, store and forward data from various
sources such as utility meters, while the data registers can detect and transmit
a signal when devices, such as fire alarms, burglar alarms or temperature
monitors, have been set off. The COMM Center can work with a variety of devices,
not just our Optical Meter Reader. The COMM Center also can remotely control
on-premise devices (e.g,. turn off heat or air conditioning), for utilities to
perform load shedding or for whole home or building management services
currently under development. It can collect data from multiple sources, such as
gas, water and electric meters, store the data in memory and release the data
upon request from an authorized polling point (e.g., utility). The COMM Center
communicates with the measurement devices and the T-NOC using the Short Message
Service channel of GSM-based PCS networks. The COMM Center effectively creates a
localized wireless network that eliminates any need for on-premises wiring
between the measurement devices (e.g., wireless Optical Meter Readers) and the
COMM Center. We recently received a patent for our proprietary method for
automatically collecting and transmitting telemetry data using short message
technology. We also received a Notice of Allowance of a U.S. patent for our
method and device for transmitting data over the digital control channel of
wireless networks: we should soon receive the official U.S. patent.
The COMM Center's PCS RF Module provides the Voice Channel and Short
Message Service connection to the local PCS carrier's network. The COMM Center
performs all communications functions via the Short Message Service system
without affecting the overall traffic (data or voice) capacity of a GSM-based
PCS system. The COMM Center also can be configured for compatibility with
different types of transmission media (e.g., wireless and wireline) and
communications protocols (e.g., GSM, CDMA or TDMA). T3000 customers can obtain
the Short Message Service airtime by arrangement with the local GSM-based PCS
carrier or we can provide the airtime through our roaming agreements with PCS
carriers that utilize the GSM protocol.
Optical Meter Reader. The Optical Meter Reader can accurately read
utility meters through the glass or plastic meter cover. The Optical Meter
Reader can be adapted to provide the same low cost monitoring for anything
measured or monitored by a mechanical or electro-mechanical display. The reading
can be transmitted to the COMM Center's intelligent ports by either a wired or
wireless connection. This low cost Optical Meter Reader eliminates the need for
costly meter retrofit or meter removal and replacement. Moreover, the optional
wireless connection from the meter to the COMM Center eliminates the need for
costly on-premise wiring. Together, these capabilities can dramatically reduce
utilities' costs for automatic meter reading and resource management.
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Level Reader and Alarm Reader. When the installed meter or sensor uses
a level indicator (e.g., zero to 5 volts) instead of a mechanical device, the
T3000 uses our simplified Level or Alarm Reader. The Level Reader, which can
read up to 255 levels, is used with electronic output meters such as a
commercial utility meter or an oil tank meter. The Alarm Reader simply senses a
change in state, such as when a security alarm is tripped by a broken window or
door.
T3000 NOC. Just as the COMM Center controls the local premises, our
T-NOC manages and controls the entire T3000 System. All COMM Centers will
interface with the T-NOC, which thereby can collect all data transmitted from
the customers' various premise-based sources (e.g., alarms or utility meters).
The T-NOC will monitor the data from the COMM Centers, send any control signals
or respond to the data (e.g., contact police if burglar alarm goes off). The
T-NOC also will translate the data into the appropriate format and prepare
reports requested by the T3000 customer (utility or service provider). The
formatted data and reports are then distributed, with appropriate security
measures, to the T3000 customer. The T3000 customer can select billing options,
request raw data and specify data formatting, and even have us create and
distribute invoices to their subscribers. Through the Telemetrix Solution's
Service Bureau, our T-NOC can provide comprehensive subscriber care and
management for T3000 customers.
The T-Server Software. The T-Server software gives T3000 customers
access to the T3000 system. This software, which operates on a standard personal
computer at the customer's office, provides a radio or Internet-based interface
to the T-NOC and from there to the COMM Centers and Readers. The customer thus,
at any time, has access to telemetry data and real-time control over Readers.
Unlike the traditional monthly meter reading, customers can poll the Readers at
any time and as often as they like. When they need to control Remote Devices
(e.g., Load Shedding by electric utilities), customers instruct the T3000 Server
Software, which sends the appropriate control signals to activate the on/off
ports in the COMM Center. Customer can also devise unique reporting formats and
data analysis. The following diagram shows how the T3000 components integrate to
form a complete wireless telemetry solution.
[Graphic shows the Application Hardware linked to the COMM Center, through the
PCS Network, the COMM Center is connected to the T-NOC, T-Server Software and
Telemetry User Software Applications.]
Wireless Local Loop. The COMM Center has Wireless Local Loop capability,
which can serve as a voice channel to a subscriber's home or business premises.
The COMM Center contains a Subscriber Line Interface Circuit and related
proprietary circuitry, which allows the COMM Center to connect directly to the
existing premises telephone wiring. This connection supports up to five
extensions and allows some or all of the subscriber's existing telephone sets to
be provided with wireless local service. T3000 customers can offer local
telephone service to their subscribers simply by integrating existing building
wiring into the local PCS network infrastructure. In this configuration, the
COMM Center can replace existing service from the incumbent LEC or provide a
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second line. Wireless Local Loop also can be used as a "follow-me" service,
whereby the call transfers to the subscriber's home or office telephone system
when the PCS mobile telephone does not answer. Unlike other Wireless Local Loop
technologies, T3000 also contains an integrated method to monitor utility meters
and security systems, provide complete telemetry functionality and manage
utility consumption. These incremental features can become a significant new
source of revenue for the PCS carrier. T3000's services and applications, when
combined with the Wireless Local Loop capabilities, can create a significant new
source of revenue for PCS carriers.
Mobile PCS. Telemetrix Technologies currently holds two PCS licenses
covering a population of 138,000, primarily in western Nebraska and eastern
Wyoming. Telemetrix Technologies constructed six PCS sites covering a population
base of 56,000, and is now testing PCS services for commercial use. We recently
executed a letter of intent to deploy T3000 over the southwest Colorado wireless
network being installed by REAnet. REAnet is owned by a consortium of electric
utilities, who serve approximately 45,000 customers in the Four Corners region
(the intersection of Colorado, New Mexico, Arizona and Utah). We also have
offered to deploy T3000 over a proposed PCS Network in Manitoba and
Saskatchewan, Canada. Our T-NOC would service the T3000 deployed in each of
these wireless networks.
By deploying the T3000 system, the Company will expand its PCS and paging
service offerings to include Wireless Local Loop, remote monitoring and access,
meter reading, and other data collection and distribution services. Enhanced
features available to PCS and paging customers include:
o Enhanced Features - Caller identification, call hold, voice mail,
numeric paging, plus custom calling features such as call waiting,
conference calling and call forwarding.
o Messaging and Wireless Telemetry (T3000) - Digital networks offer
voice and data communications, including text messaging, through a
single handset, including short message or alphanumeric paging
service, mobile office applications (e.g., facsimile, electronic mail
and connecting notebook computers with computer/data networks), access
to stock quote services, transmission of text, connections of wireless
point-of-sale terminals to host computers, monitoring of alarm
systems, automation of meter reading and monitoring of status or
inventory levels.
o Call Security and Privacy - GSM Encryption algorithms provide
increased call security, encouraging users to make private, business
and personal calls with significantly lower risk of eavesdropping than
on analog-based cellular systems.
o Smart Card - "SIM" cards, programmed with the user's billing
information and a specified service package, allow subscribers to
obtain GSM technology based PCS connectivity automatically, simply by
inserting their SIM cards into compatible PCS handsets. If we have a
roaming agreement with a local GSM technology based PCS provider then
SIM cards can also enable subscribers to obtain service in that
region.
o Over-the-Air Activation and Over-the Air Subscriber Profile Management
- We could transmit changes in the subscriber's feature package,
including mobile number assignment and personal directory numbers,
directly to the subscriber's handset. This capability eliminates the
need to manually program the handset and simplifies the activation
process for both the sales agent and the subscriber.
10
<PAGE>
o Roaming - We are obtaining roaming agreements with carriers that use
GSM based technology. Subscribers should be able to roam in
substantial portions of the United States, either on other technically
compatible PCS systems by using dual-mode handsets that permit
operation on systems using different signal transmission technologies
or even on existing cellular systems.
o Zoned Calling Areas - We will offer zoned calling areas whereby
subscribers pay a flat monthly service fee for calls to different
coverage areas (zones) outside the subscriber's base coverage area.
We hope to start offering PCS service, with these enhanced features, in western
Nebraska during early 2000. By providing these enhanced services on our own
networks, we showcase the T3000 System.
Local Telephone Service. The Nebraska Public Service Commission recently
authorized us to operate as a competitive local exchange carrier, which permits
us to offer local telephone service to residential and business customers
throughout Nebraska.
Customer Care Service Bureau. Through Telemetrix Solutions, we can manage a
long distance carrier's order fulfillment, customer care, fraud control,
billing, remittance, and accounts receivable processes. Carriers are moving away
from treating billing as simply an isolated medium for revenue collection and
towards using billing as the basis for effective marketing and customer service.
Through our Service Bureau, our customers have that capability without the
associated costs for developing in-house customer management facilities. Our
TRACCS software was originally developed and implemented as an in-house
integrated customer care system that supported 124,000 accounts and over 225,000
active access lines for facilities-based long distance telecommunications
service providers. TRG acquired this system in 1995 and intends to develop
TRACCS into a fully integrated suite of applications designed for large Tier II
through Tier IV telecommunication carriers and providers. TRG also acquired
Intro CCB, a PC-based integrated billing and customer care solution suitable for
customers who have sophisticated functional demands but do not require the
processing power of a mainframe hardware platform. The Management Network Group,
a recognized industry expert, independently evaluated TRACCS and concluded that
it was more advanced, functionally robust, and performed better than existing
billing software products. By hiring us to provide customer care services, our
carrier customers can focus on their primary operations and leave the
administrative matters to us. As previously explained, we intend to focus on the
T3000 and de-emphasize the Service Bureau.
POTENTIAL CUSTOMERS AND MARKETS
We believe that T3000 can be deployed by a broad range of utilities and
telecommunications service providers in the United States, Canada and worldwide.
Potential customers include PCS operators, ILECs (Incumbent Local Exchange
Carriers), CLECs (Competitive Local Exchange Carriers), cable companies, ISPs
(Internet Service Providers), gas and electric utilities and long distance
carriers. OEMs (Original Equipment Manufacturers) also may wish to incorporate
the T3000 into products such as PBX systems and vending machines.
With the COMM Center's Wireless Local Loop capability, PCS carriers and
ILECs can extend their local service area coverage rapidly through wireless
technology, and thereby avoid substantial capital investments. T3000 provides
carriers an opportunity to:
o add value to their existing services;
o bundle services for additional revenue opportunities;
o enter new markets; and
o increase their subscriber bases.
11
<PAGE>
We also believe that T3000 will appeal to small and rural PCS operators needing
additional "niche" PCS service offerings in order to increase utilization of
their services. Supplementing their services with wireless telemetry also may
enable such carriers to expand their coverage into areas where PCS alone would
not be financially viable.
While utility and energy companies should be the initial customers, the
quick, low-cost data gathering provided by the T3000, COMM Center and the
Optical Meter Reader will interest industries that must monitor consumption of
any commodity that requires periodic replenishment. A T3000 customer can
supplement its revenue by performing wireless telemetry services for other
businesses with equipment at the same remote locations, such as vending machine
operators. Utilities can readily expand their operations beyond meter-reading
and offer their subscribers additional services such as home security or, in
partnership with the local wireless carrier, over wireless local loop, even
telephone service.
The Telemetrix Solutions Service Bureau can offer comprehensive subscriber
billing, care and management for T3000 users, as well as other carriers. Since
many large telecommunications carriers perform billing and customer care
in-house, Telemetrix Solutions will first target smaller carriers, principally
those with annual sales under $100 million. Such carriers generate approximately
25% of all billing records, and constitute a $700 million market expected to
grow to $900 million by 2000. We believe such carriers are more likely to
outsource billing and customer care to our Service Bureau or to have marginal
and inefficient in-house customer care operations that could be improved by
TRACCS or Intro CCB. We also may also offer specific service packages to
incumbent LECs and larger companies.
MARKETING & SALES
Since Telemetrix products and services are innovative and relatively
unknown, we must conduct considerable "missionary" work to create awareness of
our products and services. We therefore intend to bring T3000 to market in a
phased approach. We initially will provide "proof of concept" by deploying the
T3000 in the WTC Network and offer services to approximately 138,000 potential
subscribers in that service area. The WTC Network is designed to meet the needs
of smaller markets, to show the scalability of the infrastructure equipment and
to demonstrate the data gathering operations and services. The WTC network will
demonstrate to potential customers how the T3000 system operates, the costs for
installing the equipment and the revenues from each service segment. To obtain
PCS subscribers in the WTC Network territory, we will offer several attractive
rate packages based on a monthly fixed fee. The PCS offerings include features
not offered by cellular competitors that, in combination with T3000, should
create significant subscriber interest for our PCS services. We also will deploy
T3000 into the proposed REAnet and Canadian wireless networks as they become
operational.
While we will first deploy the T3000 on these networks, we have commenced
our initial marketing efforts. We intend to participate in regional and national
trade shows, conferences and seminars, providing demonstrations using the local
wireless network. We envision three principal distribution channels for T3000:
o Large Telemetry Users (e.g., electric utilities and alarm companies),
especially in major markets;
o PCS Carriers, CLECs and long distance carriers; and
o OEMs (Original Equipment Manufacturers), especially those with
international sales and distribution infrastructure in place.
Each of these channels will target different geographic markets (i.e., major
metropolitan areas, smaller markets and international), so that we can address
most of our potential markets. We also will offer Service Bureau support to
T3000 customers, as well as direct marketing of the Service Bureau to carriers,
initially long distance carriers.
12
<PAGE>
T3000 customers generally will purchase the T3000 equipment plus pay recurring
license fees. The license fee for Telemetry Users could be a transmission charge
(e.g., each time the COMM Center sends data or receives instructions) while the
license fee for PCS carriers could be based on the total revenue generated on
their network by the T3000. Particularly in the 50 largest markets, we may use
joint ventures with the T3000 customer, where we provide the T3000 equipment,
the customer provides the capital and markets the telemetry services, with the
joint venturers splitting the revenue. Such joint ventures could provide
ubiquitous coverage of that market for T3000 and allow us to sell T3000 to other
Telemetry Users in that market. OEMs probably will pay an initial license fee
for the T3000 technology plus a per-unit royalty. For Service Bureau activities,
we expect to charge a fee of 3%-5% of the customer's annual revenue, lower than
the customary 4%-6% fee for telecommunications billing services.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. There are numerous
companies offering wireless services and local exchange services; we expect more
competitors in the future and we believe that existing competitors will continue
expanding their service offerings. Most of our competitors have greater
financial, personnel, brand recognition and other resources.
Wireless Telemetry. As relatively new markets, there are few actual
standard wireless telemetry providers but numerous companies are positioned to
enter this market. Immediate competition to T3000 comes from existing utility
meter reading companies that read utility meters manually or use the control
channel of cellular companies or 800 MHz radio systems. The following chart
identifies significant competitors to T3000:
<TABLE>
<CAPTION>
1997
Competitor Product Technology Installed Base Revenue Ownership
---------- ------- ---------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
3.4 million end points Publicly traded
CellNet .... CellNet 900 MHz 80,000 new end points $53.5M NASDAQ - CNDS
per month
1500 utility companies Publicly traded
ITRON ...... Datameter Radio (over 11 million end $216M NASDAQ - ITRI
points)
Cellemetry.. Cellemetry Cellular - via Not Available Not Numerex
digital control Available subsidiary
channel of AMPS
Aeris ...... Microburst Cellular - via Not Available Not Private Company
digital control Available
channel of AMPS
</TABLE>
Mobile, Personal and Wireless Communications. Numerous carriers offer
wireless communications, presenting significant competition. Competition for
wireless service subscribers is based principally upon the services and
available features, the technical quality of the wireless system, customer
service, system coverage, capacity and price. Such competition may increase to
the extent that licenses are transferred from smaller, stand-alone operators to
large, better capitalized and more experienced wireless communications operators
who may be able to offer subscribers certain network advantages similar to those
we offer. We expect to face increased competition from companies providing other
communications technologies and services.
13
<PAGE>
The FCC can license six PCS licensees in each PCS market. Within the WTC
Network territory, Alltel Cellular and Cellular One currently offer cellular
service; Sprint Spectrum, U S West and Western Wireless Communications have FCC
licenses but have not yet installed systems or infrastructure. We also compete
with paging, dispatch and landline telephone service providers. One-way or
two-way paging or beeper services that feature voice messaging and data display
as well as tone only service may be adequate for potential subscribers who do
not need to speak to the caller. The FCC has licensed Specialized Mobile Radio
dispatch system operators to construct digital mobile communications systems on
their existing SMR frequencies throughout the United States. When constructed,
such systems could compete with our wireless service, but we expect significant
delay before systems are constructed; even then, systems probably will be
constructed only along interstate highways. Similarly, several companies have
announced plans to design, construct, deploy and operate satellite-based
telecommunications systems worldwide. Continuing technological advances and FCC
policies encouraging development of new spectrum-based technologies may result
in new competing technologies.
Wireless Local Loop. Numerous carriers, particularly AT&T, are attempting
to deploy wireless local loop technology. Due to the expense of most techniques
($600 to $1,100 per installation), wireless local loop has not been widely
deployed.
Billing Systems. There are more than 10 large billing system providers,
such as CBIS, Billing Concepts, LHSG, ITDS, USCS and Saville, all public
companies with sales exceeding $100 million. Other large billing systems
companies include privately-held Kenan Systems and EDS which has many other
non-billing activities; numerous small suppliers also offer billing services and
software. We believe that there is no dominant supplier for smaller carriers,
our target market.
REGULATION
Wireless telecommunications services are subject to significant regulation
and we could become subject to additional regulatory requirements as our
services grow. Pursuant to the Communications Act of 1934, as amended (the
"Communications Act") including amendments by the Telecommunications Act of
1996, the FCC regulates the facilities and services we use to provide,
originate, or terminate interstate or international communications. Provision of
PCS and other wireless services requires radio frequency licenses from the FCC
or a contractual arrangement with a licensee. The provision of local exchange
service through wireless local loop may be subject to state regulation.
Approvals from state and local governments may be required to utilize public
rights-of-way necessary to install and to operate networks, transmission towers,
equipment, and other facilities. Furthermore, transfers of control of
certificated carriers and assignments of regulatory authorizations often require
prior approval from the FCC and state regulatory agencies.
We hold the FCC radio frequency licenses needed for the WTC Network and we
must obtain FCC certification for T3000 since it operates over radio
frequencies. We have roaming agreements with other PCS carriers so that our
customers can obtain the PCS airtime needed for the T3000. The Communications
Act restricts foreign ownership of companies that directly or indirectly hold
radio frequency licenses. However, the FCC has authority to approve certain
levels of foreign ownership and recently approved substantial foreign ownership
in PCS licenses when the public interest is served. Since a principal Company
shareholder is not a U.S. "person", there is significant indirect foreign
ownership of our radio frequency licenses. The FCC consented to such foreign
ownership. These foreign ownership limits might prevent us from acquiring other
radio frequency licenses in the future, which could make us dependent upon other
parties that hold radio frequency licenses.
14
<PAGE>
The Company's telecommunications services also must comply with federal and
state common carrier regulations, including certification, notification,
registration and tariffing requirements. Although the FCC eliminated the
tariffing requirements for interstate non-dominant carriers, such carriers must
continue to file interstate tariffs until a federal court completes reviewing
such detariffing and declares that the detariffing order is lawful. When
necessary, we will file interstate tariffs with the FCC and state tariffs with
the State of Nebraska and any other states where the Company is certified to
provide wireless local exchange services. The FCC and numerous state agencies
also impose prior approval requirements on transfers of control of certificated
carriers and assignments of regulatory authorizations. States also often require
prior approvals or notifications for the issuance of stock, bonds or other forms
of indebtedness. The FCC and state regulatory agencies generally retain the
right to sanction a carrier, impose forfeitures, mandate refunds or impose other
penalties in the event of regulatory non-compliance by a carrier. There can be
no assurance that future regulatory, judicial or legislative activities will not
have a material adverse effect on the business, operating results and financial
condition of the Company or that domestic or international regulators or third
parties will not raise material issues with regard to the Company's compliance
or non-compliance with applicable laws and regulations.
EMPLOYEES
The Company had 42 full-time employees on December 31, 1999. The Company
employs certain employees pursuant to offer letters, which might lead to
employment contracts. See "Management". No Company employees are members of
labor unions. The Company also utilizes independent contractors and consultants.
CORPORATE HISTORY
Telemetrix was recently formed through a corporate combination ("Combination")
between Arnox Corporation, Telemetrix Resource Group Inc. ("TRG-US") and Tracy
Corporation II d/b/a Western Total Communications ("WTC"). Arnox was originally
formed in 1983 to develop, manufacture, market and license fire retardant
products and technology, and Arnox's stock was listed for trading on the NASDAQ
system. However, a 1989 bankruptcy left Arnox as an inactive shell without
material assets, liabilities or operations. WTC was formed in 1982 as a paging
company operating in western Nebraska; TRG-US was formed in 1998 after its
founders acquired the rights to an initial version of the TRACCS Software;
TRG-US's principal activity was licensing the TRACCS Software to Telemetrix
Resource Group Ltd., which offered some Customer Care Services in Canada; TRG-US
then acquired TRG-Canada ("TRG-Canada") in early 1999. In a "reverse takeover"
during the second and third quarters of 1999, the stockholders of WTC and TRG-US
("Principal Stockholders") acquired 11,500,000 Shares (approximately 90%) from
Arnox in exchange for all WTC and TRG-US stock; as a result, the Principal
Stockholders acquired control of Arnox. After the Combination, the companies
changed their names to reflect their complementary businesses:
- Arnox became Telemetrix Inc. ("Telemetrix"; "Arnox"; we use "Arnox"
and "Telemetrix" for activities before and after, respectively, the
Combination));
- TRG-US will become Telemetrix Solutions Ltd. ("Telemetrix Solutions";
for the collective activities of Both TRG-US and TRG-Canada, we use
"TRG" and "Telemetrix Solutions" for activities before and after,
respectively, the Combination);
- WTC will become Telemetrix Technologies Inc. ("Telemetrix
Technologies"; we use "WTC" and "Telemetrix Technologies" for
activities before and after, respectively, the Combination).
[Organizational Chart]
15
<PAGE>
Item 2. Properties
We share office space in Toronto with two affiliated companies pursuant to
a lease expiring in April 2008. Our 6,800 square foot section of this office
space contains the Telemetrix Solutions operations. Telemetrix Technologies
leases 5,168 square feet of office space in Gering, Nebraska from Mr. Tracy (our
President, Treasurer and Director), pursuant to a lease expiring in October
2002. See "Certain Relationships and Affiliated Transactions.
Telemetrix Technologies holds various FCC radio frequency licenses: two PCS
licenses for Scottsbluff, Nebraska, and 34 paging and mobile telephone licenses
serving 27 locations in western Nebraska, eastern Wyoming and northeastern
Colorado. In September 1999, Telemetrix Technologies sold a PCS license for
McCook, Nebraska, to Pinpoint Communications.
Intellectual Property Rights. We believe our technologies provide a competitive
advantage. We own all intellectual property rights in TRACCS and Intro CCB
software and we have two pending U.S. patent applications for the T3000, COMM
Center and associated technologies. We recently received a U.S. patent for our
method of automatically collecting and transmitting telemetry data using short
message technology. We also received a Notice of Allowance of a U.S. patent for
our method and device for transmitting data over the digital control channel of
wireless networks: we provided the required documentation and paid the fee, so
we expect to receive the official patent soon. Our Optical Meter Reader is an
enhancement of an existing optical meter reader. Our pending agreement with the
patent holder allows us to enhance that device, file a patent for the enhanced
Optical Meter Reader, include it in the T3000 system, and sell our enhanced
Optical Meter Reader to that patent holder at a profitable price. We expect to
execute a definitive written contract in the near future. As our technologies
develop, we will file additional patent applications and amendments. We also use
other intellectual property protections such as patents, copyrights, trademarks,
trade secrets and non-disclosure agreements, to protect our technologies and
prevent competitors from duplicating our products. However, we believe our
expertise in developing technology confers a significant competitive advantage.
While we will vigorously protect our intellectual property rights, we intend to
challenge our competition with superior technology and better products.
Patents are "intellectual property" conferred by federal legislation and
authorized by the U.S. Constitution. Utility patents are available for new,
useful and non-obvious processes, methods, machines, manufactured articles,
compositions of matter or improvements of these items. U.S. patents are awarded
on a first-to-invent basis, rather than a first-to-file basis. Patent
applications must be filed by the first and original inventor no later than one
year after any commercial exploitation of the invention. Patent application
processing usually requires 18 months from the filing date to issuance or
abandonment, although some applications remain pending for more than a decade.
Patent applications are usually kept strictly secret until the patent is allowed
to issue. Patents allow the holders to exclude others from making, using, or
selling the patented invention in the United States; the duration of utility
patents is 17 years. The protection provided by a patent is determined by the
scope of the invention identified in the claims. Patent holders may file suit in
the federal district courts to enforce patents; as a defense to an infringement
action, a purported infringer may attack the patent's validity. Infringement of
a valid patent can result in injunctive relief, a monetary award for up to three
times the amount of damages, together with interest and costs, and in
exceptional cases, attorney fees.
16
<PAGE>
Item 3. Legal Proceedings
Neither Telemetrix nor any Subsidiary is currently engaged in any legal
proceedings. A pending bankruptcy proceeding by an equipment supplier to the PCS
network potentially could involve Telemetrix Technologies. In re Silicon
Wireless, 99-51866-ASW-11 & 99-51867-ASW-11 (N.D. Cal.). As part of the WTC
Network, we contracted with Silicon Wireless for $1.4 million of base station
radio equipment and paid $170,000 for the initial equipment delivery. Silicon
Wireless defaulted on the contract and then declared bankruptcy, so we may need
to obtain the equipment from another manufacturer. Silicon Wireless or the
bankruptcy trustee might demand additional payment from Telemetrix Technologies.
We have never received any notice of a claim and we contend that Silicon
Wireless's default bars any recovery. Prior to the Combination, we agreed to a
business combination with Suncom Telecommunications, Inc. (renamed
VirtualSellers.com, Inc.), which operates a call center. Although we never
consummated the combination because Suncom failed to satisfy certain conditions,
Suncom recently demanded that we pay expenses (e.g., travel and legal fees) it
incurred prior to termination of the transaction. We cannot evaluate this claim
until Suncom provides an itemized accounting and explains how the expenses
resulted from the unsuccessful transaction. Apart from these matters, we are not
aware of any threatened or pending material litigation that could involve the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
We did not hold a shareholders' meeting in 1999, so security holders did
not vote on any matters.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.
The Shares are quoted on the NASD's Over-The-Counter Bulletin Board
("OTC-BB"), but there currently is a very limited market for the resale of the
Shares, which have not traded actively since the late 1980s. Although we intend
to apply for a NASDAQ listing in the future, Telemetrix currently does not
qualify for listing. Since listing depends on our future financial condition,
there is no assurance that we will ever qualify. Without a NASDAQ listing,
trading in the Shares probably will remain light and the Shares will be
illiquid.
The following table lists the range of high and low closing prices in U.S.
dollars on NASDAQ electronic bulletin board for the years ended December 31,
1998 and 1999. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
----------------------- ----------------------
Arnox(1) Telemetrix(2) Arnox(1) Telemetrix(2)
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Fiscal year ended December 31, 1998
First Quarter .......................... 0.60 6.94 0.60 6.94
Second Quarter ......................... 2.16 24.80 0.72 8.27
Third Quarter .......................... 0.72 8.27 0.46 5.29
Fourth Quarter ......................... 0.36 4.13 0.36 4.13
Fiscal year ending December 31, 1999
First Quarter .......................... 0.36 4.13 0.36 4.13
Second Quarter ......................... -- 6.50 -- 1.80
Third Quarter .......................... -- 4.75 -- 2.25
Fourth Quarter ......................... -- 2.75 -- 1.19
</TABLE>
---------------------
(1) Price for shares of Arnox Corporation prior to the Combination on
April 5, 1999.
(2) Prices prior to the Combination represent the Arnox share price
adjusted for 11.5 to 1 reverse stock split on April 5, 1999;
thereafter represents closing price for Telemetrix Shares.
(3) There was no trading activity prior to the fourth quarter of 1997.
The last reported trade of the Shares on December 31, 1999, was executed at a
price of $1.75. On December 31, 1999, there were 12,880,897 Shares outstanding
(911,342 held by non-affiliates) held by 199 record shareholders.
We have not paid dividends on the Shares and the Board intends to continue
a policy of retaining earnings to finance its growth and for general corporate
purposes. Future loan agreements also could limit our ability to pay cash
dividends. We therefore do not anticipate paying any dividends in the
foreseeable future.
Issuance of Unregistered Securities. The following tables summarize all
securities that the Company issued or sold during the fiscal year ended December
31, 1999, that were not sold in registered offerings:
<TABLE>
<CAPTION>
Deemed Per
Date Title Amount Purchaser Exemption Share Price Consideration
---- ----- ----- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
4/5/99 Common Stock 6,127,200 Hartford Holdings Ltd. Sec. 4(2) $ 3.16 100% of TRG's stock
9/22/99 Common Stock 772,800 Hartford Holdings Ltd. Sec. 4(2) $ 2.27 14% of WTC's stock
9/22/99 Common Stock 4,140,000 Michael J. Tracy Sec. 4(2) $ 2.27 77% of WTC's stock
9/22/99 Common Stock 460,000 Michael L. Glaser Sec. 4(2) $ 2.27 9% of WTC's stock
</TABLE>
18
<PAGE>
Item 6. Management's Discussion & Analysis of Financial Condition or Plan of
Operation
Please read the following discussion in conjunction with the Consolidated
Financial Statements and related notes. The results presented in this discussion
do not necessarily indicate the results to be expected in any future periods.
This discussion contains forward-looking statements based on our current
expectations, which involve risks and uncertainties. These risks and
uncertainties mean that future events could dramatically differ from our
forward-looking statements. See the cautionary note about forward-looking
statements that follows the "Table of Contents". Financial data in this
discussion was rounded.
OVERVIEW. We offer solutions for wireless telemetry and telecommunications
services to businesses and telecommunications carriers, particularly wireless
Personal Communications Services ("PCS"). We are developing the T3000 wireless
telemetry product for data collection, system monitoring, distribution and
billing. The T3000 can be used in a wide variety of applications, such as
automatic utility meter reading, home security, home health alarms, monitoring
vending machines and other specialty applications. Our T3000 wireless telemetry
system includes equipment (e.g., the COMM Center and Optical Reader), network
monitoring services, billing and other support services. We will provide each of
these components of the T3000. We also provide wireless telecommunications
services over our wireless communications network (the "WTC Network"), which
includes two separate wireless communication networks and the total coverage
area encompasses portions of western Nebraska and southeastern Wyoming. Our
Service Bureau located in Toronto provides billing and customer management
services for long distance carriers. Our operations consequently will encompass
research & development, product design, manufacturing, telecommunications
services and carrier support services. Management recently reviewed the
Company's business plan, decided to focus on the T3000 and consequently is
downsizing the Service Bureau.
We entered the telecommunications industry through a corporate combination
("Combination") between Arnox Corporation, Telemetrix Resource Group, Inc.
("TRG", now renamed Telemetrix Solutions, Inc.) and Tracy II Corporation d/b/a
Western Total Communications ("WTC", to be renamed Telemetrix Technologies
Inc.). Before the Combination (when the companies operated separately), the only
significant business activity was the WTC paging operations. Otherwise, Arnox
was inactive, WTC was inventing T3000 and TRG was just commencing operations. At
this early stage for the various businesses, these constituent companies spent
over $30 million to acquire products and equipment (billing support Software,
the T3000 technology and PCS Licenses) and then to refine and ready those
products for sale. Funding for these development activities was provided by the
Company's principal stockholders through loans ($5.4 million) and equity
contributions ($25.5 million). As TRG launched its services, it incurred
additional costs to set up corporate infrastructure and hire operations staff.
Since our Company, products and services are innovative and relatively unknown,
we are conducting "missionary" marketing to create awareness of our products and
services. The Service Bureau has commenced regular operations, but the T3000
system and our other wireless communications services require further
development.
T3000. Telemetrix's immediate objective is getting T3000 into production.
We are beta-testing the T3000 in western Nebraska, and integrating the devices
with the controlling software. We also are modifying the product to integrate a
GSM-PCS radio into the system as a module and to add the "Subscriber Line
Interface" for interconnecting the GSM-PCS radio with household telephony
wiring. Prototypes for the beta-testing use off-the-shelf GSM-PCS handsets and
manually-produced circuitry components and customized connecting cables. After
completing testing and software integration, we must obtain the necessary type
19
<PAGE>
approvals, acceptances and certifications, such as FCC certification of the
radio module, and demonstrate compliance with various technical standards (e.g.,
GSM, UL, ITU, ANSI). Then we must develop the manufacturing process and obtain
components; constraints imposed by the manufacturing process and availability of
components may require further modification of the T3000. We estimate that
bringing T3000 to market will require approximately $6.4 million: $1.7 million
for product development (both internal and by third parties), $1.0 million for
technology licensing, $1.0 million for manufacturing, $0.9 million for testing
and certification and $2.0 million for working capital. We hope to obtain FCC
and GSM certification in mid-2000, build initial production units in July 2000
and commence volume production of T3000 units in August 2000. This schedule,
illustrated below, depends upon successfully completing testing and obtaining
the necessary manufacturing contracts.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000
Jan. Feb. March April May June July August Sept. Oct.
| | | | | | |
| | | | | | |
| --Beta-testing on WTC Network | | | ---Begin volume production
| | | |--Build first production units
---Software integration & development--| |
|--FCC/GSM certification
</TABLE>
After initial deployment, T3000 development will focus on integrating other
wireless technologies (CDMA, TDMA, Local Multipoint Distribution System and
satellite) to expand the coverage both in North America and around the world.
Future T3000 enhancements will provide utility companies with flexible billing
solutions and features such as customer energy use profiling and targeted load
shedding.
We recently executed a letter of intent to deploy T3000 over the southwest
Colorado wireless network being installed by REAnet Corporation. REAnet
Corporation is owned by two rural electric cooperatives, who serve approximately
45,000 customers in the Four Corners region (the intersection of Colorado, New
Mexico, Arizona and Utah).
Wireless Services. Our wireless communications services currently consist
of paging operations in Nebraska and Wyoming over the WTC Network. These
operations (paging services plus equipment sales, rentals and repairs) now
generate approximately $30,000 in monthly revenue. Prior to 1997, monthly
revenue was approximately $40,000, but WTC has concentrated on developing T3000,
which sharply curtailed marketing of the paging operations, which in turn
resulted in lower revenue. Also, the market penetration and decreasing cost of
cellular service has affected the paging industry. We will not expand the paging
operations but instead will integrate them into the PCS operations. We acquired
the PCS licenses in 1996, began network deployment in late 1997 and finished
network deployment in April 1999. Testing is underway, and we hope to commence
commercial PCS operations in early 2000.
Service Bureau. TRG acquired its TRACCS software in April 1998 and the
Intro CCB software in June 1998, and completed development of that software
(collectively, "Billing Software") in third quarter 1998. TRG began Service
Bureau customer care operations (where TRG performs customer management services
for long distance carrier customers) in late 1998. During 1998, TRG obtained
four Service Bureau customers and billed them $18,000. To accommodate increased
business, TRG's staff expanded from six to thirty five.
20
<PAGE>
For Service Bureau activities, we expect to charge a fee of 3%-5% of the
customer's annual revenue, lower than the customary 4%-6% fee for
telecommunications billing services. Although we actively market the Service
Bureau to numerous carriers, especially those with annual sales under $100
million, transactions with affiliates will provide approximately 64% of 1999
Service Bureau revenue. As we expand our customer base, revenue from affiliates
should decline below 5% of total Service Bureau revenue.
TeleHub Communications Corporation ("TeleHub"), an affiliate of our
principal shareholder, hired us to help them design their billing and customer
care systems; during 1998 and 1999, we billed TeleHub approximately $1.3
million. We also had executed a letter of intent to license TRACCS to TeleHub
for approximately $2.5 million and received a $250,000 deposit for the site
license; however, in August 1999, TeleHub decided not to acquire the TRACCS
license. We applied the $250,000 deposit against billing services that we
rendered to TeleHub; those billing services would have been included in the site
license. On October 27, 1999, a TeleHub subsidiary petitioned for reorganization
under the U.S. Bankruptcy Code. At that time, the subsidiary owed the Company
approximately $606,000 for billing and consulting services. Given the
preliminary stage of this bankruptcy case, the Company has reserved for the
entire amount owed. Until completion of this bankruptcy case, we will not
receive any payment.
DESCRIPTION OF FINANCIAL COMPONENTS
Revenue and Cost of Sales: The following chart summarizes the anticipated
components of revenue and the associated cost of sales (excluding depreciation)
from our proposed operations:
<TABLE>
<CAPTION>
Costs of Sales
Activity Revenue Source (excluding depreciation)
-------- -------------- -----------------------
<S> <C> <C>
Service Bureau Service Bureau Compensation for Service
Consulting income Representatives & fulfillment charges.
Wireless telecommunications PCS Services Carrier settlements for airtime charges
Equipment Sales Equipment costs
Wireless Telemetry Licensing T3000 Manufacturing costs; license fees
T3000 Equipment sales Manufacturing costs; license fees
T3000 software sales License fees
</TABLE>
Operating Expenses. As we develop our products and services and ready them for
market, the operating expenses principally consist of research & development,
pre-production, license and general & administrative costs. When we launch
products and services, then sales & marketing expenses substantially increase,
while research & development, pre-production and license costs decrease. After
sales of products and services reach "regular" levels, the principal operating
expenses will be research & development, sales & marketing, manufacturing,
general & administrative. Since we are still in the initial stages of our
business plan, we believe that operating expenses, particularly for wireless
telemetry and wireless telecommunications, will continue to increase during the
next year as we continue research & development, pre-production manufacturing
and expands our operations.
Research & Development. Our research & development activities will
principally focus on completing T3000 for release in June 2000. We expect
research & development always will constitute a significant operating
expense because we must continually enhance and upgrade our products and
services. For example, we must enhance T3000 to integrate other wireless
technologies such as TDMA and CDMA.
21
<PAGE>
Capital Expenditures. The Service Bureau has volume-based capital
requirements and as this business grows the Company will have to invest in
larger computers and more service representatives to support the growth.
The most significant capital expenditure will be deploying and equipping
the T3000 Network Operation Center ("T-NOC"). The T-NOC is the central
repository of telemetry information and acts as the gateway between the PCS
service providers and the Telemetry Users of T3000 (e.g., utilities and
alarm companies). We estimate that deployment of the T-NOC could require a
total of $1.5 million; we also are exploring potential outsourcing for the
T-NOC.
Licensing. Our products and services utilize intellectual property of other
parties, which generally requires us to pay license fees. Such license fees
can take the form of initial payments, continuing royalties or both types
of payments. Our current license fees include a lump sum payment to Plextek
Inc. for the right to use their GSM-PCS 1900 radio design and a recurring
license to The Technology Partnership ("TTP") to use their GSM protocol
software in that embedded radio. We also must reserve funds to pay licenses
on "essential patents" on the GSM radio and protocols, which is a standard
practice in the industry. The Service Bureau uses several IBM AS/400
computers and smaller PC-based computing systems, which will require
periodic maintenance fees and upgrade license fees.
Pre-Production. Pre-production costs include certification by the FCC,
Underwriters Laboratory, Canadian Standards Association ("CSA") and GSM
standards organizations, to prove that our T3000 device complies with
electronic emissions, safety and system interoperability standards. A
principal pre-production expense are the costs incurred to develop
manufacturing processes and custom test equipment, as well as the cost of
customized manufacturing test equipment for radio components.
Sales & Marketing. Sales & Marketing expenses include salaries and
commissions for sales staff, trade show expenses, consulting fees and
advertising. Since our Company, products and services are innovative and
relatively unknown, we must conduct considerable "missionary" marketing to
create awareness of our products and services. Similarly, we will incur
high initial marketing expenses when addressing new categories of
customers; for example, when we expand the Service Bureau's target market
from smaller carriers to LECs and utility companies. Such missionary work
will entail significant initial marketing costs. We anticipate lower sales
volumes for 6-12 months before our "missionary" work takes root and sales
reach "regular" levels.
Manufacturing. The largest manufacturing expense will be carrying inventory
on the T3000 units. Since T3000 will include some customized components
(such as Integrated Circuits), we must commit to large volume purchases to
ensure timely delivery and to lower costs. In a similar manner, large
production runs avoid multiple set-up charges and therefore are more
economical, especially since third parties will manufacture the T3000 units
for us. We anticipate building to inventory rather than building to actual
orders, which should satisfy our shipping commitments while stabilizing the
demand on our manufacturer. We will maintain an inventory of finished
products to ensure a reliable flow of T3000 units to customers.
General & Administrative. General & administrative expenses primarily
consist of salaries and related expenses of management, support personnel,
occupancy fees, professional fees, non-capitalized research & development,
general corporate and administrative expenses. As the size and scope of our
business grow, we may expand our corporate and administrative staff,
especially accounting and contract management.
22
<PAGE>
Depreciation and Amortization. These non-cash expenses include depreciation of
tangible property, networks and equipment plus amortization of intangible assets
(such as FCC Licenses, patents and Billing Software) and goodwill. In the year
ended December 31, 1998, depreciation primarily consisted of TRG--Canada's fixed
assets and computer equipment. When the Billing Software was acquired, an
independent consulting firm reviewed the functionality of the Billing Software
and determined its fair market value. Subsequent to the Combination, management
changed its operating plans and accordingly determined that the historical cost
attributed to the Billing Software would not be recoverable through future cash
flows. Thus, in December 1999, the Board approved the impairment of the
remaining portion of the Billing Software.
Interest Expense. Interest expense includes interest incurred from debt. Our
principal interest expense results from amounts we borrowed from our principal
shareholder, which incur interest at annual rates ranging from 7.5% to 8%.
RESULTS OF OPERATIONS
Year ended December 31, 1999, compared to year ended December 31, 1998
We acquired TRG on April 5, 1999; prior to that acquisition, Arnox was
inactive. The consolidated balance sheet as of December 31, 1999, includes the
accounts of Telemetrix and its wholly-owned subsidiaries. The statement of
operations for the year ended December 31, 1999 ("Recent Period") includes the
operations of TRG/Telemetrix Solutions for 1999 and of Telemetrix Technologies
from its date of acquisition.
During the year ended December 31, 1998, TRG acquired the Billing Software
and began initial marketing of Billing Software licenses and Service Bureau
operations. WTC continued to provide paging services but devoted most of its
resources on research, development, testing and marketing for the T3000 system.
The operating results for this period reflect the early stage of our business
and our significant research and development activities. The financial
statements for the year ended December 31, 1998 ("Prior Period") show only the
operations of TRG-Canada (Arnox was inactive during the Prior Period). All
significant intercompany transactions and balances have been eliminated.
The following discussion contains only minimal comparisons between the
Recent Period and Prior Period. The financial statements for the Prior Period
include only TRG-Canada because the Combination occurred only in 1999; however,
the financial statements for the Recent Period include Telemetrix, Telemetrix
Solutions and Telemetrix Technologies. Since the Prior Period did not include
any operations of TRG-USA or WTC, the results of operations for the Recent
Period are not comparable to the Prior Period. We also expect that results of
operations in future periods will not be comparable to past periods on a
going-forward basis.
Revenue totaled $1.6 million during the Recent Period, compared to $0.5
million during the Prior Period. During the Recent Period, we received $107,000
from equipment sales and rentals, $601,000 from Service Bureau clients and
$867,000 from fees for implementation and consulting services. We expect revenue
to increase substantially over the next 12 to 18 months as TRG obtains new
customers and we launch the T3000 system.
Operating expenses (excluding impairment of the Billing Software) were
$18.4 million during the Recent Period. These expenses are primarily due to
salary and consulting costs incurred to build the infrastructure to support a
growing client base.
Costs of Revenue were approximately $2.0 million for the Recent
Period. The primary component of these expenses include salaries and wages
for the sales staff and consulting fees related to implementation of new
customers.
Research & Development expenses were approximately $5.5 million for
the Recent Period. The primary component of this expense is the $4.5
million we expensed as In-process Research & Development valued as part of
the acquisition of WTC assets. Salaries and consulting costs also increased
to service and support the growing client base. Research & development
expenses will increase until fourth quarter of 2000, principally for
developing the T3000 technology.
23
<PAGE>
Pre-Production expenses were not incurred during the Recent Period or
Prior Period. We expect to incur pre-production expenses during the second
quarter as we start to build T3000 units; these expenses should increase in
third quarter 2000 as we commence volume production.
Licensing expenses were approximately $500,000 during the Recent
Period, primarily the fees to Plextek and TTP for their GSM-related
technology. We expect licensing fees to increase when production and sale
of T3000 units commences.
Manufacturing expenses were not incurred during the Recent Period or
the Prior Period. We will start incurring manufacturing expenses for the
T3000 in the second quarter of 2000.
Selling, General & Administrative expenses were $11.0 million for the
Recent Period, principally $9.0 million for non-recurring expenses:
organizational expenses ($2.0 million) and software amortization ($7.0
million). The non-recurring organizational expenses are the legal and
formation costs for the Combination that we incurred by issuing 1,067,000
Shares to advisors and consultants. The non-recurring software amortization
costs represented three-quarters of the annual expense on the Billing
Software. In December 1999, management determined that the Billing Software
was impaired, so we impaired the remaining net book value of the Billing
Software. We expended the remaining $1.9 million for salary and promotional
expenses to create awareness of our products and to build our client base.
The $0.9 million SG&A expenses for the Prior Period were primarily salaries
in the Service Bureau operations.
Non-recurring Research & Development expenses were $4.5 million for
the Recent Period. These represent the in-process research & development
expenses of WTC when it was acquired by the Company.
Interest expense was $537,000 for the Recent Period. This expense
represents primarily the interest charges on related party loans, principally
the loans from Hartford Holding Ltd. Interest expense for the Prior Period was
$145,000, which also was interest on loans from Hartford Holdings Ltd.
Impairment of Software was approximately $13.2 million. When we acquired
the Billing Software, an independent consulting firm reviewed the functionality
of the Billing Software and determined its fair market value. Subsequent to the
Combination, management changed its operating plans and accordingly determined
that the historical cost attributed to the Billing Software would not be
recoverable through future cash flows. Thus, in December 1999 the Board approved
the impairment of the remaining portion of the Billing Software.
Net loss. We reported a net loss of $30.4 million for the Recent Period.
The principal component of this net loss was impairment of the Billing software,
the amounts we expensed for In-process Research & Development from the
acquisition of WTC assets and the costs incurred for the corporate
restructuring. We did not record any benefit for income taxes due to the
uncertainty surrounding the realization of the favorable tax attributes in
future tax returns. Accordingly, we recorded a valuation allowance against its
total net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES. TRG's principal stockholders have financed our
activities through loans and equity contributions. The Service Bureau operations
have also provided some funding for operations and development. During the
Recent Period, we used $2.5 million in cash for operations, primarily for
employee salaries. We used $383,000 of cash for investment purposes primarily to
purchase equipment. During the Recent Period we generated cash flow from
financing activities of $2.8 million mostly through additional financing we
obtained from related parties. In March 2000, we completed a private placement
of Shares that raised proceeds of $2.5 million, which we are using for working
capital. We must obtain additional financing in order to fund our operations and
would require even more financing if we fail to operate within the planned
operational budget or fail to obtain revenue from operations. No assurance can
be given that additional financing will be available or that such funds would be
available on acceptable terms or in the amounts or time periods we require.
FUNDING REQUIREMENTS. In order to pay operating expenses and achieve
self-sustaining operations, we expect to require substantial funding during the
next two years. We will need funds for:
24
<PAGE>
Research and Development projects include completing the T3000 system,
particularly a tightly coupled billing solution for the utility markets and the
integration of other PCS radio technologies to expand the potential markets for
the T3000 product. We estimate that our research and development activity over
the next two years will require $1.6 million.
Working Capital. As demand for the T3000 product grows, we must build an
inventory of equipment to allow for load balancing the manufacturing demand
while maintaining a short delivery period. This inventory will also serve as a
supply of spare units to cover immediate shipment for warranty purposes.
Manufacturing capacity. Projected demand growth of T3000 units will require
additional manufacturing capacity. This includes expending capital on additional
test stations with sophisticated telephony and radio test gear. Developing
manufacturing capacity sufficient to meet our estimated maximum demand during
the next two years will require $2 million in test equipment, custom jigs and
molds.
T3000 Network Operation Center. Capital will be required to equip the T3000
Network Operation Center ("T-NOC"). The T-NOC is the central repository of
telemetry information and acts as the gateway between the PCS service providers
and the Telemetry Users of T3000 (e.g., utilities and alarm companies). We
estimate that deployment of the T-NOC will require $1.5 million; we also are
exploring potential outsourcing for the T-NOC.
YEAR 2000 READINESS. The term "Year 2000 Issue" generally describes the various
problems that might result from improper processing of dates and date-sensitive
calculations involving dates in the Year 2000 and beyond. The "Year 2000 Issue"
results from computer programs using two digits rather than four digits to
define the applicable year, so that all dates are interpreted as occurring
between 1900 and 1999. Computers and other equipment using such programs will
incorrectly interpret dates after the year 1999. Such misinterpretation might
cause system failures or miscalculations and thereby disrupt operations, for
example, temporary inability to process transactions, to send invoices, or to
engage in other normal business activities. Year 2000 Issues could affect us
through the Year 2000 incompatibility of our own computer systems and equipment
as well as the Year 2000 incompatibility of third parties, such as vendors,
suppliers or customers. We have not yet encountered any Year 2000 problems, we
do not expect to incur significant expenditures to resolve Year 2000 Issues and
we have allocated sufficient resources for remediating any Year 2000 Issues.
25
<PAGE>
Item 7. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are filed under this
Item, beginning on page F-1 of this Report. Any financial data schedules
required by Regulation S-X are filed as Exhibit 27.
Item 8. Changes in & Disagreements with Accountants on Accounting & Financial
Disclosure
The 1999 Combination resulted in TRG and WTC becoming Company subsidiaries
and changed control of the Company. With these significant changes, the Company
selected new independent auditors to replace the prior certifying accountants
("Auditors") for Arnox, WTC and TRG.
o Want & Ender CPA, P.C. ("Want & Ender") audited Arnox's financial
statements for 1998 and prior years. After the 1999 business
combination ("Combination") that changed control of the Company, Want
& Ender ceased to serve as the Company's Auditor (see Current Report
on SEC Form 8-K filed May 17, 1999).
o Prior to the Combination, TRG had engaged BDO Dunwoody LLP ("BDO") to
audit TRG's 1998 financial statement. Since BDO's engagement was
limited solely to TRG's 1998 financial statements, BDO will not audit
Telemetrix Solution's future financial statements (see Current Report
on SEC Form 8-K dated March 8, 2000, as further amended April 20,
2000).
o Fred A. Lockwood & Co., P.C. ("Lockwood"), audited WTC's 1998 & 1997
financial statements but will not audit Telemetrix Technologies'
future financial statements (see Current Report on SEC Form 8-K dated
March 8, 2000, as amended March 21, 2000).
During the two most recent fiscal years and subsequent interim periods preceding
the change in Auditors, the Company and the former Auditors did not disagree on
any matter of accounting principle or practices, financial statement disclosure,
or auditing scope or procedure that would have caused the former Auditors to
refer to the subject matter of the disagreement(s) in connection with their
report. The former Auditors' reports on the financial statements of Arnox, TRG
and WTC for the past two years were modified only to express uncertainty about
the Company's ability to continue as a "going concern". The Company previously
reported the change in auditors on SEC Form 8-K.
Effective March 8, 2000, the Company engaged the accounting firm of
Ehrhardt Keefe Steiner & Hottman, Certified Public Accountants and Consultants,
7979 East Tufts Avenue, Denver, Colorado ("EKS&H"), as its Auditor for the year
ending December 31, 1999. Prior to engaging EKS&H, the Company did not consult
them concerning any matter concerning the application of accounting principles
to any specific transactions, either completed or proposed, or the type of audit
opinion that might be rendered with respect to Company's financial statements.
The Company's Board of Directors recommended and approved the appointment of the
new Auditor.
26
<PAGE>
PART III
Item 9. Directors and Executive Officers of Registrants
Telemetrix's shareholders elect the Board of Directors at each annual
general meeting. Directors hold office until their successors have been elected
and qualified or until their death, resignation or removal. The incumbent
Directors fill vacancies occurring between annual general meetings of the
shareholders. Telemetrix's Officers are appointed by, and serve at the pleasure
of, the Board. No Director or Executive Officer was selected pursuant to any
arrangement or understanding between that person and any other person.
Telemetrix's current directors and executive officers are listed below.
Name Appointed Age Positions
---- --------- --- ---------
William W. Becker April 1999 70 Chairman of the Board of Directors
Michael Tracy April 1999 53 Director and Chief Executive
Officer of Telemetrix; President
of WTC
James Doyle March 2000 44 Chief Financial Officer
Marguerite A. McKee February 2000 49 President of Telemetrix Solutions
Michael L. Glaser April 1999 60 Secretary & Director
William W. Becker, Chairman of the Board. Mr. Becker is a principal of Hartford
Holdings Ltd. ("HHL"), our largest shareholder. He also serves a Chairman of The
Becker Group of Companies and Transdigital Communications Corporation, and
served as the Chairman of TeleHub Communications Corporation ("TeleHub") from
March 1996 through June 1999 and then from September 1999 to the present. He
also serves on the Board of Directors for nCUBE Corporation, AirCell
Communications, Inc., Transdigital Communications Corporation, Earth Satellite
Telecommunications Advanced Research, Inc. ("e*star") and TeleHub Communications
Corporation ("TeleHub"). Prior to joining us, Mr. Becker founded a number of
companies in telecommunications, cable TV, oil and gas, real estate development,
and other industries. From 1993 to 1995, Mr. Becker was a principal of WWB Oil &
Gas Ltd. (now Cigar Oil & Gas Ltd.). Mr. Becker was a significant investor of
IntelCom Group, Inc. (now, ICG Communications, Inc.), a CLEC, for which he
served as chairman and CEO from 1987 to June 1995.
Michael Tracy, Director and Chief Executive Officer of Telemetrix and President
- Telemetrix Technologies. Mr. Tracy has over 20 years of broadcasting and
communications experience and is President of Tracy Broadcasting Corporation,
the licensee of radio Stations KMOR, KOAQ and KOLT AM/FM in Scottsbluff and
Gering, Nebraska; KFBZ, Kimball, Nebraska; KASX, Pine Bluffs, Wyoming; and KAHL,
Bridgeport, Nebraska. He founded Tracy Broadcasting Corporation in 1976. In
1982, Mr. Tracy formed WTC (now called Telemetrix Technologies) which provides
paging, PCS and mobile telephone services in Western Nebraska, Eastern Wyoming
and Northern Colorado. His experience with Telemetrix Technologies led to the
origination and development of the T3000 system which provides a unique package
of communications services for home and business that includes wireless local
loop applications, utility meter reading, alarm monitoring, appliance control
and much more. Mr. Tracy has a Bachelor of Arts degree from The Hiram Scott
College, has held various elected civic and local positions including the city
council and president of the chamber of commerce. Mr. Tracy is a member of
several professional, industry and representative boards in Nebraska.
Michael L. Glaser, Secretary & Director. Mr. Glaser has 33 years legal and
regulatory experience in the telecommunications industry. Mr. Glaser currently
is a shareholder of Haligman Lottner Rubin & Fishman, P.C., Company's legal
counsel, based in Denver, Colorado, which he joined in January 1996. Previously,
Mr. Glaser was a director and shareholder of Hopper and Kanouff, P.C., a law
firm in Denver, Colorado, from July 1992 to January 1996, and a partner at Holme
Roberts & Owen, another Denver, Colorado law firm, from July 1990 through June
1992. Mr. Glaser was Chairman of the Telecommunications Law Forum of the
Colorado Bar Association, and is licensed to practice in Colorado, Maryland and
the District of Columbia. Mr. Glaser received both his undergraduate degree and
law degree (with honors) from the George Washington University, Washington, D.C.
27
<PAGE>
James Doyle, Chief Financial Officer. Mr. Doyle has extensive experience in
corporate fiscal management. He most recently served as Vice President and CFO
of the Regional West Medical Center in Scottsbluff, Nebraska. He previously
served as Controller for Provenant Health Partners and Hospital Controller for
National Medical Enterprises, both in Denver, Colorado. He also held executive
positions with Rocky Mountain Health Care Corporation/Blue Cross and Blue Shield
of Colorado, serving as Director, Corporate Planning; Supervisor, Corporate
Budget and Financial Planning and Senior Financial Analyst. Mr. Doyle received
his Bachelor's degree in Earth Science from the University of Northern Colorado
in 1977 and his MBA from the University of Nebraska-Lincoln in 1983. He was
licensed as a Certified Public Accountant in 1987.
Marguerite McKee, President-Telemetrix Solutions. Ms. McKee has over 20 years
experience in the telecommunications industry. She originally joined the Company
in June 1999 as Vice President of Product Commercialization for the T3000 and
then became President of Telemetrix Solutions in February 2000. From June 1980
until she joined us, Ms. McKee served in a variety of positions for Nortel
Networks, from Product Specialist to Director of Research & Development. Her
experience in Product Management, Marketing, New Product Introduction, Design,
Development and Customer Service, familiarized her with numerous
telecommunications technologies, such as digital switching, Common Channel
Signaling, ISDN 3rd Generation Wireless and Internet Routing. She also had
significant responsibility for developing and launching new products. Ms. McKee
received her Bachelor of Electrical Engineering degree from Carleton University
in 1974.
BOARD COMMITTEES
The Board currently does not have any committees but intends to form an
Audit Committee and a Compensation Committee. The proposed Audit Committee will
review the services provided by the Company's independent accountants, consult
with the independent accountants on audits and proposed audits of the Company
and review certain filings with the SEC and the need for internal auditing
procedures and the adequacy of internal controls. The Compensation Committee
will determine executive compensation and review transactions between the
Company and its affiliates, including any associates of affiliates.
LITIGATION INVOLVING OFFICERS & DIRECTORS
Mr. William Becker served as the Chairman of TeleHub Communications
Corporation ("TeleHub") from March 1996 through June 1999 and then from
September 1999 to the present. On October 27, 1999, a TeleHub subsidiary
petitioned for reorganization under the U.S. Bankruptcy Code. At that time, that
subsidiary owed the Company approximately $606,000 for billing and consulting
services. Given the preliminary stage of this bankruptcy case, the Company has
reserved for the entire amount owed. Until completion of this bankruptcy case,
we will not receive any payment.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires our directors, executives
officers and significant shareholders ("Reporting Persons") to report their
Share ownership and transactions in Shares. The following table lists the
Reporting Persons and the number of late reports filed by each Reporting Person
during 1999:
Reporting Person Late Reports
---------------- ------------
Hartford Holdings Ltd. (10% Shareholder).................... 1 (Form 3)
Vintage Investments Ltd. (10% Shareholder) ................. None
William W. Becker (Chairman) ............................... 1 (Form 3)
Michael J. Tracy (Chief Executive Officer & Director) ...... 1 (Form 3)
Michael L. Glaser (Secretary & Director) ................... l (Farm 3)
Oz Pedde (former CEO & Director) ........................... 1 (Form 3)
The late filings of the Form 3s resulted from inadvertence. Except as set forth
above, we believe that our Reporting Persons complied with all Section 16(a)
filing requirements.
28
<PAGE>
Item 10. Executive Compensation
Executive Compensation. The following table provides certain summary information
concerning compensation paid or accrued by the Company and its subsidiaries to
Michael J. Tracy, the Company's CEO, and the three most highly compensated
executive officers of the Company (the "Named Officers") for the fiscal years
ended December 31, 1997, 1997 & 1999. The Company has not granted options,
warrants, stock appreciation rights or other long-term compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Fiscal -------------------------- Long-Term All Other
Name & Principal Position Year Salary Bonus Other Compensation Compensation
------------------------- ------ ------ ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Tracy ........... 1999 $ 9,700 None None None None
Chief Executive Officer 1998(1) $ 12,000 None None None None
1997(1) $ 12,000 None None None None
Oz Pedde ................... 1999 $183,000 None None None None
Former CEO 1998 $ 61,000 None None None None
1997 -- -- -- -- --
Jeff Gilchrist.............. 1999(2) $104,000 None None None None
Former President of TRG 1998 $ 88,000 None None None None
1997 -- -- -- -- --
Bernard Gillies............. 1999(3) $ 28,000 None None None None
Former President of 1998 -- -- -- -- --
Telemetrix Solutions 1997 -- -- -- -- --
</TABLE>
--------------------------
(1) Mr. Tracy received this compensation as President of WTC prior to the
Combination.
(2) Mr. Gilchrist left the Company in July 1999.
(3) Mr. Gillies was employed from July to September 1999.
Stock Option Plans. The Board adopted an incentive stock option plan to award
stock options for officers, directors, employees and consultants; the Board
reserved 1.4 million Shares for issuance under the Plan. The Plan permits both
Incentive Stock Options and Non-statutory Stock Options (as described in the
Internal Revenue Code). Either the Board or a Board Committee will select option
recipients and will set the terms, such as exercise price, the number of shares
purchasable and vesting, for any options; the terms of an option will be
specified in a specific option certificates.
Executive Employment Contracts. The Company employs Mr. Doyle, the Company's
Chief Financial Officer pursuant to an employment contract. This employment
contract has an initial three-year term and two one-year renewal terms unless
either party notifies the other of the non-renewal at least 60 days before the
renewal term. The agreement provides for a $90,000 annual base salary. If the
Company terminates the employment agreement without cause then Mr. Doyle shall
receive a termination fee equal to 1/3 of his annual salary plus benefits plus a
specified bonus. Payments shall only be made after Mr. Doyle executes a standard
release waiving all claims against the Company. Mr. Doyle is subject to a
confidentiality covenant.
29
<PAGE>
Director Compensation. We currently do not provide cash compensation to
Directors who are not also employees for attendance at Board or committee
meetings, but does reimburse expenses related to such attendance (e.g., airfare
or telephone charges). After we formulate and begin implementing the business
plans, the Board's Compensation Committee will address director compensation.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions. Since the Board does not have a Compensation Committee, the Board has
responsibility for all Executive Officer compensation issues. The Board will
establish a Compensation Committee to adopt executive compensation policies.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of Shares beneficially owned on
December 31, 1999, by (i) each person beneficially owning more than five percent
(5%) of Telemetrix's outstanding Shares; (ii) each executive officer and
director; and (iii) executive officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares Percent(1)
------------------------------------ ------ ---------
<S> <C> <C>
Hartford Holdings Ltd. ("HHL") .................................... 5,175,000(2) 40.2%
Box 143,Cayman Islands, British West Indies
Vintage Investments Ltd. .......................................... 1,725,000(3) 13.4%
Box 143,Cayman Islands, British West Indies
William W. Becker (Chairman of the Board of Directors) ........... 6,900,000(4) 53.5%
Box 143, Cayman Islands, British West Indies
Michael J. Tracy (Chief Executive Officer, Treasurer & Director) .. 4,328,500 33.6%
1225 Sage, Gering, Nebraska 69341
Michael L. Glaser (Secretary & Director) .......................... 747,158 5.8%
633 17th Street, Suite 2700, Denver, Colorado 80202
James Doyle (Chief Financial Officer) ............................. 0 --
1225 Sage, Gering, Nebraska 69341
Marguerite McKee (President-Telemetrix Solutions) ................. 0 --
4 King Street West, Suite 1400, Toronto, Ontario M5H 1B6
Executive Officers and Directors as a Group (3 persons) ........... 11,975,658 92.9%
</TABLE>
---------------------------
* Less than one percent of outstanding Shares.
(1) Based on 12,880,897 issued and outstanding Shares on December 31, 1999.
Beneficial ownership is calculated according to the SEC's rules.
(2) William W. Becker is empowered to exercise sole voting and investment
control over shares held by HHL.
(3) William W. Becker is empowered to exercise sole voting and investment
control over shares held by Vintage.
(4) Includes all Shares held by HHL and by Vintage.
There currently are no arrangements that could result in a change in control of
the Company.
30
<PAGE>
Item 12. Certain Relationships and Related Transactions
TeleHub Communications Corporation ("TeleHub", an affiliate of HHL) hired
Telemetrix Solutions to provide billing processing and consulting services.
Telemetrix Solutions billed TeleHub approximately $458,000 for these services
during 1998, and continued to provide such services during 1999. We also had
executed a letter of intent to license TRACCS to TeleHub for approximately $2.5
million and received a $250,000 deposit for the site license; however, in August
1999, TeleHub decided not to acquire the TRACCS license. We applied the $250,000
deposit against billing services that we rendered to TeleHub; those billing
services would have been included in the site license. TeleHub also owes us
$203,500 for services provided by TRG/Telemetrix Solutions.
The Becker Group of Companies, owned by HHL (our largest shareholder),
advised us on various issues concerning the Combination and currently is
providing various consulting services for Telemetrix Solutions. The costs of
these services were recorded as expenses of the Company. The Becker Group also
advanced us $260,000, which is due on demand.
At December 31, 1999 HHL had advanced a total of $5.8 million, evidenced by
various promissory notes. Unsecured notes totaling $3.6 million accrue interest
at 7.5% annually and are due on dates ranging from August 2000 to November 2001.
Unsecured notes for the remaining $2.2 million accrue interest at 8.25% annually
and mature on dates ranging from March 2001 to April 2001. HHL also advanced
$250,000 to the Company, which is due on demand.
Northern Cablevision Ltd. (an HHL affiliate) is the nominal lessee of our
Toronto office space, which rents at the current market rate for Toronto office
space. We share that office space with two other HHL affiliates, the Becker
Group and Mondetta Telecommunications. We pay $240,000 annual rent based on our
portion of the entire office space plus an allowance for common areas.
BGC Investments, LLC ("BGC", beneficially owned by the adult children of
Mr. William Becker, our Chairman), lent us approximately $1 million, as
evidenced by 12% convertible promissory notes due in varying amounts on dates
ranging from December 2000 to March 2001.
Mr. Tracy (President, Treasurer and Director) owns the building in Gering,
Nebraska, where Telemetrix Technologies conducts its operations. Telemetrix
Technologies pays rent of $2,500 per month, which is the current market rate.
As part of the Combination, Capston Network Company (an affiliate of Ms.
Fonner, a former director and officer) received 300,000 Shares for its
administrative and management services.
Mr. Michael Glaser (Vice President, Secretary and Director) and his law
firm, Haligman Lottner Rubin & Fishman, P.C., received 90,000 and 60,000 Shares,
respectively, for legal services relating to the Combination. That firm now
provides legal services to the Company at the firm's customary hourly rates.
The Principal Stockholders (Messrs. Becker, Glaser and Tracy) provided
initial funding to WTC for developing the T3000 system. Messrs. Becker and
Glaser each lent $250,000 to WTC in December 1997, and converted those loans
into WTC stock in January 1999.
We believe that each of these transactions were on terms no less favorable
than we could have obtained in transactions with unrelated third parties.
31
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
13(a)(1) List of Exhibits
(1) Underwriting Agreement. No Exhibit Required.
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession.
++ (2.1) Reorganization Agreement, dated March 22, 1999, between Arnox,
TRG, WTC and the stockholders of TRG and WTC.
(3) Corporate Organization.
+ (3.1) Amendment to Certificate of Incorporation dated March 22, 1999.
(4) Instruments defining the rights of security holders.
+ (4.1) Specimen Certificate for $0.001 par value Common Stock.
(5) Letter regarding Legality. No Exhibit Required.
(6) No Exhibit Required.
(7) No Exhibit Required.
(8) Opinion regarding Tax Matters. No Exhibit Required.
(9) Voting Trust Agreement. None.
(10) Material Contracts. None.
(11) Statement regarding Computation of Per Share Earnings. None.
(12) No Exhibit Required.
(13) Annual Report to Security Holders. None.
(14) No Exhibit Required.
(15) Letter regarding Unaudited Interim Financial Information. Not
Applicable.
(16) Letter regarding Change in Certifying Accountant
+++ (16.1) Letter from Want & Ender C.P.A., dated May 11, 1999, regarding
change in certifying accountants.
++++ (16.2) Letter from Fred A. Lockwood & Co., P.C., dated March 21, 2000,
regarding change in certifying accountants.
++++ (16.3) Letter from BDO Dunwoody LLP, dated April 5, 2000, regarding
change in certifying accountants.
(17) Letter regarding Director Resignation. None
(18) Letter regarding Change in Accounting Principles. None
(19) Report furnished to Security Holders. No Exhibit Required.
32
<PAGE>
(20) Other Documents or Statements to Security Holders. No Exhibit
Required.
(21) No Exhibit Required.
(22) Published Report regarding Matters Submitted to Vote of Security
Holders. None
(23) Consents. No Exhibit Required.
(24) Power of Attorney.
! (24.1) Power of Attorney for Officers and Directors of Company
(Signature Page to this Annual Report).
(25) Statement of Eligibility of Trustee. No Exhibit Required.
(26) Invitation for Competitive Bids. No Exhibit Required.
! (27) Financial Data Schedule.
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities. None.
(99) Other Exhibits. None.
----------------------------
+ Previously filed and incorporated by reference to Company's Current Report
on SEC Form 8-K as filed April 5, 1999.
++ Previously filed and incorporated by reference to Company's Current Report
on SEC Form 8-K as filed April 23, 1999.
+++ Previously filed and incorporated by reference to Company's Current Report
on SEC Form 8-K as filed May 17, 1999.
++++ Previously filed and incorporated by reference to Company's Current Report
on SEC Form 8-K as filed March 8, 2000, as amended March 21, 2000, as
further amended April 20, 2000.
! Filed with this Annual Report on SEC Form 10-K for the year ended December
31, 1999.
13(b)Reports on Form 8-K. The Company filed an amended Current Report on Form
8-K/A on November 23, 1999 (amending the October 7, 1999, Current Report on
SEC Form 8-K), reporting:
Item 4: Changes in the Company's Certifying Accountant (BDO as TRG's
Auditor); and
Item 7: Financial Statements of Acquired Businesses (TRG & WTC) and
pro forma financial statements for the Combination.
On March 8, 2000 (subsequent to the period covered by this Report), the
Company filed a Current Report on Form 8-K reporting:
Item 4: Changes in the Company's Certifying Accountants (see Item 8
above).
This Report was amended March 21, 2000, and further amended April 20, 2000,
to include the comment letters from the former certifying accountants.
33
<PAGE>
TELEMETRIX, INC.
Consolidated Financial Statements
and Independent Auditors' Report
December 31, 1998 and 1999
Table of Contents
Page
Independent Auditors' Reports..............................................F - 1
Consolidated Financial Statements
Consolidated Balance Sheets................................................F - 3
Consolidated Statements of Operations and
Comprehensive Loss-Restated...........................................F - 4
Consolidated Statement of Stockholders' Equity (Deficit)-Restated..........F - 5
Consolidated Statements of Cash Flows-Restated.............................F - 6
Notes to Consolidated Financial Statements.................................F - 8
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Telemetrix, Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Telemetrix, Inc.
(the Company) as of December 31, 1999, and the related consolidated statements
of operations and comprehensive loss (restated), stockholders' equity (deficit)
(restated), and cash flows (restated) for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements for the
Company for the year ended December 31, 1998 were audited by other auditors
whose report dated August 6, 1999 expressed an unqualified opinion on those
statements.
We conducted our audit 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telemetrix, Inc. and
its subsidiaries at December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
April 6, 2000
Denver, Colorado
F-1
<PAGE>
To the Shareholders of
Telemetrix, Inc. and Subsidiaries
We have audited the statement of loss and comprehensive loss, stockholders'
deficit and cash flows of Telemetrix, Inc. for the year ended December 31, 1998.
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 audit.
We conducted our audit in accordance with Canadian 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.
In our opinion, these financial statements present fairly, in all material
respects, the results of operations and cash flows of the Company for the year
ended December 31, 1998 in conformity with Canadian generally accepted
accounting principles.
/s/ BDO Dunwoody LLP
BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 6, 1999
F-2
<PAGE>
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
Note 2 to the financial statements. Our report to the shareholders dated August
6, 1999 is expressed in accordance with Canadian reporting standards which do
not permit a reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
/s/ BDO Dunwoody LLP
BDO Dunwoody LLP
Chartered Accountants
Toronto, Ontario
August 6, 1999
F-3
<PAGE>
<TABLE>
<CAPTION>
TELEMETRIX, INC.
Consolidated Balance Sheets
December 31,
1999
-----------
<S> <C>
Assets
Current assets
Cash ........................................................................... $ 16,000
Accounts receivable, net of allowance for doubtful accounts $653,000 (1999) .... 259,000
Note receivable - related party (Note 11) ...................................... 348,000
Due from related companies (Note 11) ........................................... 54,000
Prepaid expenses ............................................................... 3,000
------------
Total current assets ....................................................... 680,000
Property and equipment, net (Note 4) .............................................. 2,317,000
Intangibles, net (Notes 3, 5 and 9) ............................................... 8,545,000
------------
Total assets ...................................................................... $ 11,542,000
============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Line-of-credit (Note 7) ........................................................ $ 195,000
Accounts payable ............................................................... 709,000
Accrued expenses (Note 6) ...................................................... 1,264,000
Due to related companies (Note 11) ............................................. 354,000
Current portion - long term debt - related parties (Note 8) .................... 2,157,000
Current portion - long-term debt (Note 9) ...................................... 8,000
------------
4,687,000
Deferred rent liability ........................................................ 130,000
Long term debt - related party (Note 8) ........................................ 4,588,000
Long term debt (Note 9) ........................................................ 836,000
------------
5,554,000
------------
10,241,000
------------
Commitments and Contingencies (Note 12)
Stockholders' equity (deficit) (Note 3)
Preferred stock $. 001 par value, 5,000,000 shares authorized, none
issued or outstanding ......................................................... --
Common stock, $.001 par value, 25,000,000 shares authorized, 12,880,897
issued and outstanding ........................................................ 13,000
Additional Paid in capital-Restated (Note 15) .................................. 33,466,000
Accumulated foreign currency translation adjustment ............................ 31,000
Accumulated deficit-Restated (Noted 15) ........................................ (32,209,000)
------------
Total stockholders' equity (deficit) ......................................... 1,301,000
------------
Total liabilities and stockholders' equity (deficit) .............................. $ 11,542,000
============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TELEMETRIX, INC.
Consolidated Statements
of Loss and Comprehensive Loss
For the Years Ended
December 31,
1998 1999
---- ----
Restated
<S> <C> <C>
Revenue
Equipment sales and rental .................................... $ -- $ 107,000
Consulting income ............................................. 480,000 867,000
Service bureau income (Note 11) ............................... 18,000 601,000
------------ ------------
Total revenues .............................................. 498,000 1,575,000
------------ ------------
Expenses
Cost of revenue ............................................... 840,000 1,955,000
Research and development ...................................... -- 5,462,000
Selling, general and administrative ........................... 851,000 10,980,000
Impairment of software ........................................ -- 13,194,000
------------ ------------
Total operating expenses ......................................... 1,691,000 31,591,000
------------ ------------
Net loss from operations ...................................... (1,193,000) (30,160,000)
------------ ------------
Other
Interest expense .............................................. 145,000 537,000
Other expense (income) ........................................ (4,000) (152,000)
------------ ------------
Total other ................................................. 141,000 385,000
------------ ------------
Net loss before comprehensive loss ............................... (1,334,000) (30,401,000)
Other comprehensive income (loss)
Foreign currency translation adjustments ...................... 80,000 (62,000)
------------ ------------
Comprehensive loss ............................................... $ (1,254,000) $(30,463,000)
============ ============
Earnings (loss) per common share - basic and diluted ............. $ (21.99) $ (3.53)
============ ============
Weighted average common shares outstanding ....................... 60,665 8,620,685
============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
TELEMETRIX, INC.
Consolidated Statement of Stockholders' Equity (Deficit)
Foreign Currency
Common Stock Translation
Shares Amount Adjustment
------ ------ ----------------
<S> <C> <C> <C>
Balance - December 31, 1997 ................... 1 $ -- $ 13,000
Foreign currency translation adjustment ....... -- -- 80,000
Net loss ...................................... -- -- --
------------ ------------ ------------
Balance - December 31, 1998 ................... 1 -- 93,000
Common stock acquired through reverse-merger
(Note 3) .................................... 313,896 -- --
Common stock issued in connection with business
reorganization (Note 3 ) ................... 6,127,200 6,000 --
Stock issued to advisors ...................... 1,067,000 1,000 --
Stock issued in acquisition (Note 3) .......... 5,372,800 6,000 --
Foreign currency translation adjustment ....... -- -- (62,000)
Net loss ...................................... -- -- --
------------ ------------ ------------
Balance - December 31, 1999 ................... 12,880,897 $ 13,000 $ 31,000
============ ============ ============
<CAPTION>
Total
Additional Stockholders'
Paid-in Accumulated Equity
Capital Deficit (Deficit)
---------- ----------- ------------
<S> <C> <C> <C>
Balance - December 31, 1997 ................... $ -- $ (474,000) $ (461,000)
Foreign currency translation adjustment ....... -- -- 80,000
Net loss ...................................... -- (1,334,000) (1,334,000)
------------ ------------ ------------
Balance - December 31, 1998 ................... -- (1,808,000) (1,715,000)
Common stock acquired through reverse-merger
(Note 3) .................................... -- -- --
Common stock issued in connection with business
reorganization (Note 3 ) ................... 19,341,000 -- 19,347,000
Stock issued to advisors-Restated (Note 15) ... 1,920,000 -- 1,921,000
Stock issued in acquisition (Note 3) .......... 12,205,000 -- 12,211,000
Foreign currency translation adjustment ....... -- -- (62,000)
Net loss-Restated (Note 15).................... -- (30,401,000) (30,401,000)
------------ ------------ ------------
Balance - December 31, 1999 ................... $ 33,466,000 $(32,209,000) $ 1,301,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
TELEMETRIX, INC.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
1998 1999
---- ----
Restated
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,334,000) $ (30,401,000)
--------------- ---------------
Adjustments to reconcile net loss to net cash used by operating activities
Depreciation and amortization .............................................. 79,000 7,386,000
Deferred rent .............................................................. (16,000) (15,000)
Stock issued for services .................................................. -- 1,921,000
Impairment of software ..................................................... -- 13,194,000
Purchased in process research and development .............................. -- 4,530,000
Changes in assets and liabilities
Accounts receivable ...................................................... (279,000) 83,000
Prepaid expenses and other assets ........................................ (6,000) 6,000
Accounts payable ......................................................... 542,000 231,000
Accrued expenses ......................................................... 24,000 544,000
------------ ------------
344,000 27,880,000
------------ ------------
Net cash used by operating activities .................................. (990,000) (2,521,000)
------------ ------------
Cash flows from investing activities
Purchase of equipment ........................................................ (729,000) (467,000)
Net advances to related parties .............................................. (118,000) 84,000
------------ ------------
Net cash used by investing activities .................................. (847,000) (383,000)
------------ ------------
Cash flows from financing activities
Proceeds on line-of-credit ................................................... -- 195,000
Net payments on related party advances ....................................... -- (13,000)
Payments on long-term debt ................................................... (3,000) (59,000)
Proceeds on long-term debt - related parties ................................. 1,707,000 2,746,000
Increase in leasehold inducement ............................................. 162,000 --
------------ ------------
Net cash provided by financing activities .............................. 1,866,000 2,869,000
------------ ------------
Effect of foreign currency translation on cash .................................. 80,000 (62,000)
Net increase (decrease) in cash ................................................. 28,000 (97,000)
Cash - beginning of year ........................................................ 5,000 113,000
------------ ------------
Cash - end of year .............................................................. $ 113,000 $ 16,000
============ ============
</TABLE>
Continued on the following page.
See notes to consolidated financial statements.
F-7
<PAGE>
TELEMETRIX, INC.
Consolidated Statements of Cash Flows
Continued from the previous page.
Supplemental disclosure of cash flow information:
Total cash paid for interest for the years ended December 31, 1998 and
1999 was $2,602 and $105,000, respectively.
Supplemental disclosure of non-cash investing and financing activities:
During the year ending December 31, 1999, the Company issued 1,607,000
shares of common stock in conjunction with the reorganization of the
Company. Total expense recognized in 1999 was $5,535,000.
During 1999, the Company completed a plan of reorganization through the
combination of three companies. (Note 3)
See notes to consolidated financial statements.
F-8
<PAGE>
TELEMETRIX, INC.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Description of Business
Telemetrix Inc. (the "Company") was formed through a series of corporate
combinations. On January 2, 1999, Telemetrix Resource Group Inc., a Colorado
Corporation ("TRG, Inc."), acquired Telemetrix Resource Group Limited (TRG
Ltd.), a Nova Scotia corporation from Hartford Holdings Ltd., TRG Ltd.'s sole
shareholder, pursuant to a share exchange and plan of reorganization. On March
22, 1999, Arnox Corporation (an inactive public corporation), TRG Inc. and Tracy
Corporation II d/b/a Western Total Communication ("WTC") executed a Plan of
Reorganization, which contemplated a share exchange and reorganization
transaction (the "Combination"). On April 5, 1999, the first phase of the
combination occurred, whereby Arnox acquired 100% of the issued and outstanding
common shares of TRG Inc. in exchange for 6,127,200 shares of Arnox `s common
stock. Arnox's historical financial statements become those of TRG Ltd., as TRG
Ltd.'s operations were the ongoing operations of the combined companies. All of
the transactions comprising the Combination, with the exception of WTC, have
been accounted for as reverse acquisitions and no goodwill has been recorded. On
September 22, 1999, the final phase of the combination closed, whereby, the
Company acquired 100% of the issued and outstanding common shares of WTC in
exchange for 5,372,800 shares of Arnox's common stock. Through these
combinations, the stockholders of WTC and TRG, Inc. acquired a total of
11,500,000 shares of Arnox common stock (approximately 90%) and therefore
acquired control of Arnox. After the Combination, the companies changed their
names to reflect their complementary businesses:
- Arnox become Telemetrix Inc.
- TRG Inc. became Telemetrix Solutions Inc. (TSI)
- WTC is to become Telemetrix Technologies
The Company offers wireless paging service, PCS service, telemetry systems,
hardware and software and communications software and technology to
telecommunications carriers and other businesses.
Telemetry involves the use of remote devices for data collection and analysis.
For example, a telemetry device in a vending machine can transmit the amount of
cash receipts and a nightly inventory to the owner's monitoring computer. The
owner can then decide whether to refill the machine, order more products and add
that vending machine to the delivery truck's itinerary. Telemetry thus requires
measurement and transceiver devices, transmission services, central control
devices and management software. Businesses requiring telemetry applications
include electric utilities, alarm companies and vending machine operations.
Telecommunications carriers, such as Personal Communications Services ("PCS")
carriers can use our technology to provide transmission services for Telemetry
Users. With widespread coverage and easy mobility, wireless telecommunications
are especially suitable for telemetry applications. Wireless telemetry thus
presents a new and potentially significant market for wireless communication
service providers.
F-9
<PAGE>
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Principals of Consolidation
The consolidated balance sheet as of December 31, 1999 includes the accounts of
the parent Company, Telemetrix, Inc. and its wholly-owned subsidiaries, TSI, TRG
Ltd., and WTC (Note 3). The statement of operations for the year ended December
31, 1999 includes the operations of TRG Ltd. and TSI and the operations of
Telemetrix, Inc, and WTC from the date of acquisition. The 1998 financial
statements are the operations of TRG Ltd. for the year then ended. All
significant intercompany transactions and balances have been eliminated.
Property and Equipment
Equipment is recorded at cost and depreciated by the straight-line method over
the estimated useful lives of the assets ranging from 3 to 31.5 years. Leasehold
improvements are recorded at cost and amortized by the straight-line method over
the terms of the leases, or the estimated useful lives of the assets.
FCC Licenses, Patents and Patents pending and Goodwill
Intangibles are capitalized and amortized utilizing the straight-line method
over their economic life.
Construction in Progress
Construction in progress consists of costs incurred December 31, 1999 related to
the construction of a PCS network in western Nebraska, which was not yet
operational at December 31, 1999. Negotiations are in process with an equipment
vendor that filed bankruptcy, and upon the conclusion of those negotiations
which involve issues of technical support, it is anticipated that the network
will commence providing commercial service to the general public. Currently the
system and network is used primarily for the testing and development of
components and products related to the continuing development of GSM technology
based telemetry products and devices.
Long-Lived Assets
The Company assesses valuation of long-lived assets in accordance with Statement
of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
The Company periodically evaluates the carrying value of long-lived assets to be
held and used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. During 1999, the Company impaired the value of the
TRACCS software (Note 3).
F-10
<PAGE>
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Deferred Rent
Rent expense is recorded on a straight-line basis over the terms of the
respective lease. Differences between rent expenses recorded in the accompanying
financial statements and the actual payments made under each lease is recorded
as deferred rent.
Revenue Recognition
Paging service revenue consists of the monthly fees charged to subscribers.
Revenue is recognized as service is provided. Consulting revenues are earned as
time in incurred by the Company. Service Bureau income in recognized as monthly
services are provided.
Research and Development
Research and development costs related to both present and future products are
charged to operations in the year ended.
In Process Research & Development (IPR&D)
IPR&D acquired is distinguished between assets resulting from research and
development activities and assets to be used in research and development
activities. The amount of purchase price allocated to assets to be used in
research and development activities is expensed as IPR&D unless those assets
have an alternative future use.
Software Development Costs
Direct costs incurred in the development of software are capitalized once the
preliminary project stage is complete, management has committed to funding the
project and completion and use of the software for its intended purpose are
probable. The Company ceases capitalization of development costs once the
software has been substantially completed and is ready for its intended use.
Software development costs are amortized over their estimated useful lives of 3
years. Costs associated with upgrades and enhancements that result in additional
functionality are capitalized.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs to date
have not been significant.
F-11
<PAGE>
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the date.
Foreign Currency Translation
The functional currency of one of the Company's subsidiaries is the applicable
local currency. The translation from the applicable foreign currency to U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains and losses, net of
applicable deferred income taxes, resulting from translation are included in the
stockholders' equity.
The Company's subsidiary located in Toronto, Canada had revenues for the years
ended December 31, 1998 and 1999 of $498,000 and $1,500,000, respectively. Total
long-lived assets were $792,000 and $839,000 and net assets were a deficit of
$1,715,000 and $3,940,000, at December 31, 1998 and 1999, respectively.
Net Loss Per Share
Basic earnings per share is computed by dividing net income by the number of
weighted average common shares outstanding during the year. Diluted earnings per
share is computed by dividing net income by the number of weighted average
common shares outstanding during the year, including potential common shares.
For the years ended December 31, 1998 and 1999 all potential common shares were
antidilutive and therefore were excluded from these calculations.
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 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.
Concentration of Credit Risk
The Company through a partnership investment and subsequent acquisition of the
entire interest, was the successful bidder for an FCC License for wireless
communications. In order for this license to be profitable, a substantial sum of
capital will be required before any return on investment is realized. Start up
costs will be substantial before any revenue is received. Management has
estimated the time frame for realization of revenue to be up to three years from
the acquisition of the franchise license.
F-12
<PAGE>
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk (continued)
The Company has applications pending for additional patents which operate in
conjunction with various types of digital communications systems and system
technologies. The number of patent claims which will ultimately be granted is
not known and it is not possible to place a value on the patent applications.
The patents deal with systems and technologies that reduce the overall cost of
consolidating and delivering data, including such things as electrical and gas
meter information, security services, and vending replenishment information.
Upon successful deployment, the Company will license the use of the technology
and equipment to other digital communications providers throughout the world.
Approximately 96% and 63% of the Company's sales for the years ended December
31, 1998 and 1999, respectively, were derived from one customer who was a
related party. During 1999, the customer filed for bankruptcy. Therefor the
Company fully reserved for the accounts receivable from this related party of
approximately $650,000.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable and accounts payable
approximates fair value due to the short term maturity of these instruments. The
Company's bank credit facilities bear interest at rates which adjust frequently
based on market rate changes. Accordingly, management believes that the fair
value of that debt approximates its carrying value.
Recently Issued Accounting Pronouncement
During June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes new standards
by which derivative financial instruments must be recognized in any entity's
financial statements. Besides requiring derivatives to be included on balance
sheets at fair value, Statement No. 133 generally requires that gains and losses
from later changes in a derivative's fair value be recognized currently in
earnings. Statement No. 133 also unifies qualifying criteria for hedges
involving all kinds of derivatives, requiring that a Company document, designate
and assess the effectiveness of its hedges. Statement No. 133 is required to be
adopted by the Company in 2001. Management, however, does not expect the impact
from this Statement to have a material impact on the financial statement
presentation, financial position or results of operations.
Reclassifications
Certain balances in the December 31, 1998 financial statements have been
reclassified to conform to the December 31, 1999 presentation.
F-13
<PAGE>
Note 2 - Going Concern
The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. During the year ended December 31, 1999, the
Company incurred a consolidated net loss of approximately $30,000,000, including
negative cash flow from operations of approximately $2,500,000. Obligations were
met through additional financing provided by related parties.
During 1999, approximately 63% of the Company's sales were derived from Telehub
Network Services Corporation ("TNS") which is a related party. TNS filed for
bankruptcy in late 1999 (Note 11).
The Company will require substantial additional funds to satisfy its working
capital requirements and to meet the objectives of its business plan. Management
plans to obtain these funds primarily from debt and equity placements with
institutional investors and wealthy individuals until such time as its cash
requirements can be satisfied from operations. However, no assurance can be
given that the Company will be able to raise sufficient funds from such sources
or to generate sufficient cash flow from operations to meet its working capital
requirements. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
Note 3 - Acquisitions
On January 2, 1999, TRG Inc. acquired 100% of the issued and outstanding shares
of TRG Ltd. from their common parent, Hartford Holdings, Ltd. The Combination
was accounted for as a combination of companies under common control and all
assets and liabilities assumed are carried at historical costs. For accounting
purposes, TRG Ltd. acquired TRG Inc. as the operations of TRG Ltd. continued.
The assets and liabilities of TRG Inc. prior to the Combination were as follows:
Current assets $ 1,000
Software 19,444,000
Liabilities assumed (98,000)
------------
Net assets acquired $ 19,347,000
============
On April 5, 1999 Arnox acquired all of the issued and outstanding common shares
of TRG Inc. in exchange for 6,127,200 shares of Arnox common stock
(approximately 48%). The Company accounted for this transaction as a reverse
merger with TRG Inc. as the acquirer, since TRG Inc.'s former shareholder
acquired 81.5% of Arnox's shares in this transaction. At the time of the merger,
Arnox had no assets, liabilities, equity or operations. After completion of the
first phase of the Combination the shareholders of TRG Inc. held 82% of the
issued and outstanding common stock of the Company. Prior to consummation of the
Combination Arnox had 313,897 shares of common stock issued and outstanding. The
transaction was accounted for at historical cost as Arnox was a shell company.
F-14
<PAGE>
Note 3 - Acquisitions (continued)
Subsequent to the transaction, management changed its future plans and in
accordance with its new operating plans determined that the historical cost
attributed to the software would not be recoverable through future cash flows.
The focus of future operations are related to other technology the Company is
developing. In December 1999, the Board of Directors determined it was
appropriate to impair the remaining portion of its software.
The Company approved on 11.5 to 1 reverse stock split to be effective May 3,
1999. All share and per share amounts have been restated to reflect the above
stock splits.
On September 22, 1999 the Company closed on the second and final phase of the
Combination, whereby it issued 5,372,800 shares of common stock to WTC in
exchange for all of the issued and outstanding stock of WTC. Prior to this
acquisition, an entity that owned 9% of the issued and outstanding common stock
in WTC also owned 100% of the issued and outstanding common stock of TSI. The
acquisition of 9% of WTC has been accounted for as a combination of companies
under common control. The acquisition of the unrelated interest of 91% has been
accounted for under the purchase method and accordingly, the results of
operations of WTC are included in the Company's financial statements only from
the applicable date of acquisition.
The components of the purchase price for WTC and its allocation to assets and
liabilities of the Company are as follows:
Current assets $ 369,000
Property and equipment 150,000
Construction in progress 1,181,000
Intangible assets 808,000
Other assets 298,000
Liabilities assumed (3,471,000)
----------------
Net liabilities assumed (665,000)
Consideration given 12,211,000
----------------
12,876,000
Value of In-process R&D (4,530,000)
----------------
Goodwill $ 8,346,000
================
The following unaudited pro forma data summarizes the results of operations for
the year indicated as if the acquisition of WTC had been completed as of the
beginning of the period presented. The proforma data gives effect to actual
operating results prior to the acquisition, adjusted to include depreciation of
fixed assets and amortization of intangibles. These pro forma amounts do not
purport to be indicative of the results that would have actually been obtained
if the acquisitions occurred as of the beginning of the periods presented of
that may be obtained in the future.
F-15
<PAGE>
Note 3 - Acquisitions (continued)
Year ended December 31, 1999 (unaudited)
Revenues $ 2,451,000
Net (loss) $ (35,847,000)
Basic (loss) per share $ (2.78)
Year Ended December 31, 1998 (unaudited)
Revenues $ 778,000
Net (loss) $ (19,302,000)
Basic (loss) per share $ (1.50)
Note 4 - Property and Equipment
Major classes of property and equipment at December 31, 1999 are as follows:
Land $ 13,000
Building and Improvements 233,000
Office equipment 145,000
Computer equipment and software 899,000
Communication equipment 701,000
Vehicles 32,000
Construction in Progress 1,354,000
----------------
3,377,000
Less accumulated depreciation (1,060,000)
----------------
$ 2,317,000
================
Note 5 - Intangible assets
Intangible assets subject to amortization include patents, licenses and
goodwill. These assets are amortized on a straight-line basis using the
following economic lives at December 31, 1999:
<TABLE>
<CAPTION>
Accumulated
Term Cost Amortization Net
---- ---- ------------ ---
<S> <C> <C> <C> <C>
Goodwill 5 Years $ 8,346,000 $ 478,000 $ 7,868,000
Patent and patent applications 15 Years 57,000 8,000 49,000
FCC Licenses 10 Years 923,000 295,000 628,000
--------------- --------------- ---------------
$ 9,326,000 $ 781,000 $ 8,545,000
=============== =============== ===============
</TABLE>
Amortization expense for 1998 and 1999 was $0 and $6,823,000 for the years ended
December 31, 1998 and 1999, respectively.
F-16
<PAGE>
Note 6 - Accrued Expenses
Accrued expenses at December 31, 1999 consist of the following:
Accrued interest - related party $ 689,000
Accrued interest 110,000
Accrued contract costs 385,000
Other 80,000
----------------
$ 1,264,000
================
Note 7 - Line-of-Credit
The Company has a $200,000 line-of-credit with a bank. Interest accrues at the
prime rate (8.5% at December 31, 1999). All outstanding principal and accrued
interest is due on demand. The note matures in May 2000. The balance outstanding
at December 31, 1999 was $195,000.
Note 8 - Long Term Debt - Related Parties
Long-term debt - related parties consists of the following at December 31, 1999:
Notes payable to Hartford Holdings, interest at 7.5% per annum; principal and
accrued interest due on varying dates from August, 2000 to November 2001,
unsecured.
$ 3,593,000
Notes payable to Hartford Holdings, interest at 8.25%; principal and accrued
interest due on varying dates from March 2001 to April 2001, unsecured.
2,196,000
Notes payable to BGC Investments, LLC, interest at 12% per annum; principal and
interest due at varying amounts from December 2000 through March 2001,
unsecured. At the option of BGC Investments, LLC the outstanding loan balance is
convertible into common stock at pricing ranging from $1.50 to $3.02 per share.
The conversion price equaled the fair market value of the stock at the date of
the note.
956,000
-----------
6,745,000
Less current portion (2,157,000)
-----------
$ 4,588,000
===========
F-17
<PAGE>
Note 8 - Long Term Debt - Related Parties (continued)
Long-term debt - related parties matures as follows:
Year Ending December 31,
2000 $ 2,157,000
2001 4,588,000
---------------
$ 6,745,000
===============
Interest expense for the years ended December 31, 1998 and 1998 to related
parties was $145,000 and $465,000, respectively.
Note 9 - Long-Term Debt
Long-term debt consists of the following at December 31, 1999:
Note payable - Federal Communications Commission (C Block). Interest accrues at
7% per annum. Interest only payments of $13,543 due on a quarterly basis
through September 30, 2002. Quarterly principal and interest payments of
$55,875 beginning December 2002 until maturity at September 2000. The note is
secured by the FCC License No. PBB411C.
$ 774,000
Note payable - Federal Communications Commission (F Block). Interest accrues at
6.25% per annum. Interest only payment of $1,163 due on a quarterly basis
through April 1999. Quarterly principal and interest payments of $2975
beginning July 1999 until maturity at April 2007. The note is secured by the
FCC License No. CWB411F.
70,000
------------
844,000
Less current maturities (8,000)
------------
$ 836,000
============
F-18
<PAGE>
Note 9 - Long-Term Debt (continued)
Long-term debt matures as follows:
Year Ending December 31,
2000 $ 8,000
2001 8,000
2002 51,000
2003 186,000
2004 199,000
Thereafter 392,000
----------------
$ 844,000
================
Note 10 - Income Taxes
No provision for federal and state income taxes has been recorded as the Company
has incurred net operating losses through December 31, 1999. The following table
sets forth the primary components at December 31, 1999:
Deferred tax asset:
Net operating loss carryforwards $ 5,900,000
Impairment of Software 4,000,000
Valuation allowance (9,900,000)
----------------
$ -
================
At December 31, 1999, the Company fully reserved its deferred tax assets. The
Company believes sufficient uncertainty exists regarding the reliability of tax
assets such that a full valuation is appropriate.
At December 31, 1999, the Company had approximately $17,200,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income subject to certain limitations due to change in control.
These net operating losses expire through 2009.
Note 11 - Related party transactions
During 1999, approximately 63% of the Company's sales were derived from TNS
Communications Corporation, a related party. In late 1999 TNS filed for
bankruptcy. The Company had an outstanding receivable from TNS of approximately
$652,000, which has been reflected in the accompanying financial statements as a
reduction of service bureau income.
F-19
<PAGE>
Note 11 - Related party transactions (continued)
Due from related parties
Mondetta Telecommunications Inc. (Mondetta") $ 9,000
Web CCB Systems Inc. ("WEB") 22,000
Software Factory Inc. 23,000
-----------------
$ 54,000
=================
Due to related parties
Becker Group of Companies (BGC) $ (252,000)
Software Factory Inc. (102,000)
-----------------
$ 354,000
=================
The amounts due from related companies are non-interest bearing and due on
demand. The amounts due to related companies are due on demand bearing interest
at US prime.
Hartford Holdings Ltd. is the Parent of WEB, BGC, and Telemetrix Software
Factory Inc. Mondetta is controlled by a person related to the shareholder of
Hartford Holdings Ltd.
The Company has a note receivable from the Software Factory, which matured May
1999. The outstanding balance at 12/31/99 was $348,000. The note accrues
interest at 7.5% until maturity at which time the interest rate was adjusted to
15% and a penalty of 15% of the outstanding balance was incurred. The note is
being renegotiated in order for Hartford Holdings to assume the note and allow
the Company to offset its note payable to Hartford Holdings.
Note 12 - Commitments and Contingencies
Software Agreements
The Company entered into an agreement to license software from a third party.
The agreement required payment of $500,000 in Canadian dollars (at December 31,
1999 it was $347,000 in US dollars) by March 31, 1999. If not paid in full at
such time, the agreement outlined a conversion into common shares of the
Company. The terms of the agreement are currently under review by management.
The Company entered into an agreement with a vendor for the research and
development of software to be used in conjunction with the Company's telemetry
technology. The total contract amount was $500,000 USD and is payable as certain
milestones in the project are completed. During 1999, the Company paid $336,000
to the vendor. The remaining is due upon completion of the software.
F-20
<PAGE>
Note 12 - Commitments and Contingencies (continued)
Operating Leases - Related Parties
The facility occupied by the Company in Gering, Nebraska is being leased at
$2,500 per month from an officer of the Company. The lease requires WTC to pay
for utilities and taxes and contains no provisions for renewal.
The facilities currently utilized by the Company in Toronto, Canada are leased
by Northern Cablevision Ltd., which is controlled by a person related to the
shareholder of Hartford Holdings Ltd. The lease agreement expires in May 2008.
No written agreement exists between the Company and the related party. The
current rent being allocated to the Company is $28,0000 per month. The rent
payment is based upon an allocation of space utilized by several related
parties.
Future minimum lease payments are as follows:
Related
Year Ending December 31, Party
-------
2000 $ 366,000
2001 366,000
2002 361,000
2003 336,000
2004 336,000
Thereafter 1,148,000
---------------
$ 2,913,000
===============
Total rent expense to related parties for the years ended 1998 and 1999 was
$119,000 and $198,000.
Legal Proceedings
The Company is party to various negotiations and legal proceedings regarding
claims on contracts in the normal course of its business. Management believes
that the outcome of such negotiations and legal proceedings, as well as
commitments, will not have a material adverse effect on the Company's
consolidated and combined financial statements.
Joint Venture
In August 1999, the Company signed a letter of intent to deploy its telemetry
technology over the southwest Colorado wireless network being installed by
Tri-Corners Telecommunications. Tri-Corners Telecommunications is owned by a
consortium of electric utilities, who serve approximately 45,000 customers. No
activity has occurred through year end.
F-21
<PAGE>
Note 12 - Commitments and Contingencies (continued)
Employment Contracts
The Company is party to 2 employment contracts. The contracts indicate that
options to purchase 75,000 shares of the Company's common stock were granted at
an exercise price of $5. These contracts are currently under review by counsel.
Note 13 - Subsequent Events
Related Party Notes
In January 2000, the Company entered into various notes payable to a stockholder
for $76,000 at a rate of 9.5% per annum due on demand.
Employment Contracts
In early 2000, the Company entered into various employment agreements with
certain officers for terms ranging from 3-4 years. The agreements call for a
minimum annual salary, aggregating $1,297,000
Private Placement
In April 2000, the Company issued 1,250,000 shares of common stock and warrants
to purchase 625,000 shares of the Company's common stock for total proceeds of
$2,500,000. Finders' fees of $25,000 are due which are convertible to 12,500
shares of common stock. In addition, warrants were issued for the purchase of
6,250 shares at a total purchase price of $81,250. Additional warrants to
purchase 38,750 shares of the Company's common stock are to be issued in
conjunction with the private placement.
Note 14 - Reconciliation of Results Reported in Accordance with Generally
Accepted Accounting Principles (GAAP) in Canada with United States ("U.S.")
GAAP.
There are no significant adjustments required to give effect to the differences
between United States GAAP and Canadian GAAP which is the basis of presentation
of the financial statements of the Company for 1998.
Note 15 - Restatement of Financial Statements
The accompanying statements of operations and comprehensive loss, stockholders'
equity (deficit) and cash flows for the year ended December 31, 1999 have been
restated to reflect the issuance of 1,067,000 shares which were previously
reflected at the market value on April 5, 1999 of $5.19, which was the date the
shares were issued. The value of the shares issued have been restated to reflect
the market value of the common stock as of March 31, 1999 of $1.80 per share,
which was the date the Company was obligated to issue such shares. This
restatement had no impact on the overall balance sheet presentations. The
restatement reduced the net loss from $34,015,000 to $30,401,000 and loss per
share from $3.95 to $3.52.
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, Registrant have duly caused this Annual Report to be signed on its
behalf by the undersigned officer, thereunto duly authorized, in the City of
Gering, Nebraska.
TELEMETRIX INC.,
a Delaware corporation
June 6, 2000 By: /s/ JAMES DOYLE
------------------------------
James Doyle
Chief Financial Officer and
Principal Accounting Officer
Pursuant to the requirements of the Securities Act, this Annual Report has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ WILLIAM W. BECKER* Chairman of the Board of Directors June 6, 2000
William W. Becker
/s/ MICHAEL J. TRACY* Director & Chief Executive Officer June 6, 2000
Michael J. Tracy
/s/ MICHAEL L. GLASER* Director June 6, 2000
Michael L. Glaser
*By /s/ JAMES DOYLE June 6, 2000
------------------------------
James Doyle, Attorney-in-Fact
35
<PAGE>
TELEMETRIX INC.
(COMMISSION FILE NO. 0-14724)
ANNUAL REPORT ON SEC FORM 10-KSB/A#1 FOR FISCAL YEAR ENDED DECEMBER 31, 1999
INDEX TO EXHIBITS FILED WITH THIS ANNUAL REPORT
Exhibit Exhibit Page
------- ------------
(24) Power of Attorney.
(24.1) Power of Attorney for Officers and Directors of
Company ....................................................... 2
(27) Financial Data Schedule ............................................ 3
