UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
January 31, 1998 0-22920
NUMEREX CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 11-2948749
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Four Falls Corporate Center, Suite 407
Route 23 & Woodmont Road
West Conshohocken, PA 19428-2961
(Address of principal executive offices)
(610) 941-2844
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No ___
As of the close of the period covered by this report, an aggregate of 10,907,592
shares of the registrant's Class A Common Stock no par value (being the
registrant's only class of common stock outstanding), were outstanding.
NUMEREX CORP. AND SUBSIDIARIES
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at January 31,
1998 (unaudited) and October 31, 1997 4
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended January 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended January 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
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This form 10-Q/A is being filed as a result of the acquisition of a controlling
interest in Uplink on May 15, 1998. The Company is required under generally
accepted accounting principles to restate its investment in Uplink from the cost
method to the equity method in the two quarters ended April 30, 1998. The
financial statement effect of the change in method on periods prior to fiscal
1998 was not significant. See Note 8 to the Company's Condensed Consolidated
Financial Statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
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NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS POUNDS STERLING)
January 31, October 31,
1998 1997
(UNAUDITED)
------------- -------------
(AS RESTATED,
SEE NOTE 8)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents (pound) 15,235 (pound) 15,626
Accounts Receivable, net 4,132 4,398
Inventory 2,985 2,929
Prepaid Taxes 1,250 1,250
Prepaid Expenses 315 251
------------- -------------
TOTAL CURRENT ASSETS 23,917 24,454
PROPERTY AND EQUIPMENT, NET 1,159 1,092
GOODWILL, NET 3,558 3,599
INTANGIBLE ASSETS, NET 1,648 1,892
OTHER ASSETS 2,408 1,472
------------- -------------
TOTAL ASSETS (pound) 32,690 (pound) 32,509
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable (pound) 1,152 (pound) 1,518
Income Taxes 569 430
Other Current Liabilities 905 839
------------- -------------
TOTAL CURRENT LIABILITIES 2,626 2,787
LONG-TERM DEBT 2,755 2,688
------------- -------------
TOTAL LIABILITIES 5,381 5,475
------------- -------------
SHAREHOLDERS' EQUITY
Class A, Common Stock - no par value;
authorized 30,000,000; issued 11,607,492 18,358 18,321
Treasury Stock, at cost, 699,900 shares at
January 31, 1998 and 684,900
shares at October 31, 1997 (1,976) (1,921)
Accumulated Translation Adjustment (101) (308)
Retained Earnings 11,028 10,942
------------- -------------
27,309 27,034
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY (pound) 32,690 (pound) 32,509
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
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NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS POUNDS STERLING,
EXCEPT PER SHARE AMOUNTS)
FOR THE THREE
MONTHS ENDED
JANUARY 31,
1998 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
(AS RESTATED,
SEE NOTE 8)
Net Sales (pound) 4,108 (pound) 4,143
Cost of Sales 2,073 2,201
------------- -------------
GROSS PROFIT 2,035 1,942
Selling, General, Administrative
and Other Expenses 1,930 1,800
------------- -------------
OPERATING INCOME 105 142
Interest and Other Income (Net) 218 223
Equity in Net Losses of Affiliate (121) --
------------- -------------
INCOME BEFORE
INCOME TAXES 202 365
Provision for Income Taxes 116 124
------------- -------------
NET INCOME (pound) 86 (pound) 241
============= =============
BASIC AND DILUTED EARNINGS PER SHARE (pound) .01 (pound) .02
============= =============
NUMBER OF SHARES USED IN PER SHARE
CALCULATION:
BASIC 10,918 11,231
============= =============
DILUTED 11,058 11,234
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
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NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS POUNDS STERLING)
FOR THE THREE
MONTHS ENDED
JANUARY 31,
1998 1997
(UNAUDITED) (UNAUDITED)
------------- -------------
AS RESTATED,
SEE NOTE 8)
OPERATING ACTIVITIES
Net Income (pound) 86 (pound) 241
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and Amortization 384 321
Equity in Net Losses of Affiliate 121 --
Changes in assets and liabilities which
provided (used) cash:
Accounts Receivable 266 (498)
Inventory (56) 237
Prepaid Expenses (64) 32
Accounts Payable (366) (520)
Other Assets and Liabilities (183) (460)
------------- -------------
Net Cash Provided by (used in)
Operating Activities 188 (647)
------------- -------------
INVESTING ACTIVITIES
Investment in Fixed Assets (176) (48)
Increase in Intangible Assets (3) (83)
Investment in Business (637) --
------------- -------------
Net Cash Used in Investing Activities (816) (131)
------------- -------------
FINANCING ACTIVITIES
Proceeds from Exercise of Stock Options 37 --
Purchase of Treasury Stock (55) (206)
------------- -------------
Net Cash Used in Financing Activities (18) (206)
------------- -------------
EFFECT OF EXCHANGE DIFFERENCES ON
CASH AND CASH EQUIVALENTS 255 145
------------- -------------
Net Increase (Decrease) in cash
and cash equivalents (391) (839)
CASH AND CASH EQUIVALENTS, BEGINNING
15,626 18,459
------------- -------------
CASH AND CASH EQUIVALENTS, ENDING (pound) 15,235 (pound) 17,620
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements
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NUMEREX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Financial Statement Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended January 31, 1998 may not be indicative of the
results that may be expected for the year ending October 31, 1998. For
further information, reference is also made to the Company's Annual Report
on Form 10-K for the year ended October 31, 1997 and the consolidated
financial statements contained therein.
On July 17, 1997, the Company invested (pound)612,000 ($1,000,000) in
return for 19.5% of the common stock of Uplink Security, Inc. In addition,
the Company has extended Uplink a $5,000,000 Line of Credit which can be
drawn against a defined set of milestones over a 24 month period. Various
options contained in the agreements provide the Company a means of
acquiring a controlling interest in Uplink.
As of January 31, 1998 and October 31, 1997, the Company had loans
outstanding to Uplink totaling (pound)1,224,000 ($2,000,000) and
(pound)612,000 ($1,000,000), respectively. The Company's investment and
loan to Uplink are included in "Other Assets" in the accompanying
consolidated balance sheets at January 31, 1998.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No.
128"). SFAS No. 128 specifies the computation, presentation, and disclosure
requirements of earnings per share and supersedes Accounting Principles
Board Opinion No. 15, Earnings Per Share. SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the
Company's consolidated statement of operations.
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Basic earnings per share, which replaces primary earnings per share,
excludes the dilutive impact of common stock equivalents and is computed by
dividing net income by the weighted-average number of shares of common
stock outstanding for the period.
Diluted earnings per share includes the effect of potential dilution from
the exercise of outstanding common stock equivalents into common stock
using the treasury stock method at an average market price for the
Company's common stock. The Company adopted SFAS No. 128 for the quarter
ended January 31, 1998 and has restated 1997 earnings per share information
on a comparable basis.
During the quarter ended January 31, 1998, the Company began shipments
under a significant contract in which it records revenue when product is
delivered to the customer. Payment for the receivables under the contract
will be made through a revenue sharing arrangement with the customer
wherein full payment of the receivables is anticipated within a three year
period. Accordingly, the receivables at January 31, 1998 have been recorded
as non-current and discounted to its present value assuming a three year
term.
2. Inventory.
January 31, October 3l,
l998 l997
-------------- --------------
(pounds in thousands omitted)
Raw materials (pound) 1,279 (pound) 1,129
Work-in-progress 294 411
Finished goods 1,412 1,389
-------------- --------------
(pound) 2,985 (pound) 2,929
============== ==============
3. Revolving Credit Facility
The Company has a revolving credit facility which provides for maximum
borrowings of $10.0 ((pound)6.1) million and includes the option to
convert, at maturity, the outstanding balance to an amortizing term loan
payable over a maximum period of up to three years, with a maximum five
year amortization. Interest is charged at the bank's prime lending rate
less .25% or LIBOR plus 1.25%.
On January 31, 1998, there were outstanding borrowings of approximately
(pound)2.8 ($4.5) million at an interest rate of 7.03%.
-8-
4. New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement, which establishes standards for reporting and
disclosure of comprehensive income, is effective for interim and annual
periods beginning after December 15, 1997, although earlier adoption is
permitted. Reclassification of financial information for earlier periods
presented for comparative purposes is required under SFAS No. 130. As this
statement only requires additional disclosures in the Company's
consolidated financial statements, its adoption will not have any impact on
the Company's consolidated financial position or results of operations. The
Company expects to adopt SFAS No. 130 effective November 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement, which establishes
standards for the reporting of information about operating segments and
requires the reporting of selected information about operating segments in
interim financial statements, is effective for fiscal years beginning after
December 15, 1997, although earlier application is permitted.
Reclassification of segment information for earlier periods presented for
comparative purposes is required under SFAS No. 131. The Company is
evaluating whether the adoption of this statement will result in any
changes to its presentation of financial data. The Company expects to adopt
SFAS No. 131 effective November 1, 1998.
5. Investment Considerations
In analyzing whether to make, or continue, an investment in the Company,
investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report
on Form 10-K for the year ended October 31, 1997, a copy of which can be
obtained from Charles L. McNew, Chief Financial Officer, NumereX Corp., 100
Four Falls Corporate Center, Suite 407, Route 23 & Woodmont Road, West
Conshohocken, PA 19428-2961.
6. Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for the
quarter ended January 31, 1998 contains forward-looking statements (as such
term is defined in the Securities Exchange Act of 1934 and the regulations
thereunder), including without limitation, statements as to trends or
management's beliefs, expectations or opinions, which are based upon a
number of assumptions concerning future conditions that ultimately may
prove to be inaccurate.
Such forward-looking statements are subject to risks and uncertainties and
may be affected by various factors which may cause actual results to differ
materially from those in the forward-looking statements. Certain of these
risks, uncertainties and other factors, are discussed in the Company's
Annual Report on Form 10-K for the year ended October 31, 1997.
-9-
7. Subsequent Events
On February 25, 1998, the Company, BellSouth Wireless, Inc. ("BellSouth")
and BellSouth Corporation ("BellSouth Corporation") have entered into an
agreement (the "Formation Agreement"), regarding the formation of
Cellemetry LLC, to be formed as a Delaware Limited Liability Company
("Cellemetry LLC"), which will be owned 60% by the Company and 40% by
BellSouth. The Formation Agreement contemplates that the parties will enter
into an Operating Agreement which will establish the terms of operation of
Cellemetry LLC. It is contemplated that under the Operating Agreement, the
Company will make initial in-kind and cash capital contributions valued at
$7,500,000, plus additional capital contributions during the first three
years in an aggregate amount of up to $15,500,000. BellSouth contemplates
making an initial in-kind capital contribution (primarily related to its
technology) valued at $15,333,000. The Company contribution will include
its stock ownership interest in Uplink Security, Inc. ("Uplink") as well as
various contractual and other rights presently held by the Company in
Uplink. It is contemplated that Cellemetry LLC will elect to be treated as
a partnership for tax purposes. It is further contemplated that the
Operating Agreement will include certain provisions whereby various rights
and obligations will exist between BellSouth and the Company to buy and
sell their respective interests in Cellemetry LLC, upon the occurrence of
certain events. The Operating Agreement will also include provisions
dealing with business arrangements, management, warranties and
representations, indemnifications, transfer of shares as well as
termination provisions.
Pursuant to the Formation Agreement, closing of the transaction is
conditioned upon the parties entering into various agreements, including a
Transition Agreement, Sublease Agreement, Registration Rights Agreement, a
BellSouth Cellular Corp. Services Agreement, the Uplink License Agreement,
as well as the Operating Agreement. Closing of the transaction is further
conditioned upon each party obtaining necessary consents and various other
conditions. The Formation Agreement contemplates a closing prior to May 20,
1998. The Company is presently considering financing alternatives with
regard to certain of its funding obligations.
8. Restatement
As a result of the acquisition of a controlling interest in Uplink on May
15, 1998, the Company is required under generally accepted accounting
principles to restate its investment in Uplink from the cost method to the
equity method in the quarter ended January 31, 1998. The effect of the
restatement, which is included in the line item equity in net losses of
affiliate in the Consolidated Statement of Operations for the three months
ended January 31, 1998, was a reduction in net income and retained earnings
of (pound)121,000 or (pound).01 per share. The financial statement effect
of the change in method on periods prior to fiscal 1998 was not
significant.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The following table sets forth, for the periods indicated, the percentage of net
sales represented by selected items in the Company's Consolidated Statements of
Income.
Three Months Ended
January 31,
-----------
1998 1997
---- ----
Net sales:
Derived Channel Systems ................ 67.6% 64.1%
Intrusion alarm, broadband and network
products (1) ......................... 32.4 35.9
----- -----
Total net sales .................... 100.0 100.0
Cost of sales ............................ 50.5 53.1
Gross profit ............................. 49.5 46.9
Selling, general, administrative and other 47.0 43.5
----- -----
Operating income ......................... 2.6 3.4
===== =====
Net income .............................. 2.0% 5.8%
===== =====
(1) The Company acquired BNI in March 1997 and sold DA in May 1997. The
above table includes sales of broadband products only for the quarter
ended January 31, 1998 and intrusion alarm products only for the
quarter ended January 31, 1997. Accordingly, future results of
operations will include broadband product sales, but will not include
any intrusion alarm product sales.
Results of Operations
Net sales were (pound)4.1 million for the quarter ended January 31, 1998,
virtually unchanged from the comparable period in 1997. There was a modest
improvement in sales of Derived Channel products principally due to the
completion of the Canadian field trial which was somewhat offset by a reduction
in network equipment sales in the United Kingdom. In addition, there was a
decrease in net sales of Subscriber Terminal Units (STUs) primarily due to a
shift from product sales to royalty revenue as a result of the sale of DA,
effective May 1997. Intrusion alarm product sales were eliminated due to sale of
DA. This was somewhat offset by the inclusion of sales of broadband products and
services (from BNI which was acquired in March, 1997) and an improvement in
sales of network management products.
Total cost of sales decreased 5.8% to (pound)2.1 million for the quarter ended
January 31, 1998 as compared to (pound)2.2 million for the comparable period in
1997. Gross profit as a percentage of net sales increased to 49.5% for the three
month period ended January 31, 1998 as compared to 46.9% for the comparable
period in 1997. The increase in the gross profit margin was primarily due to a
shift in sales mix to higher margin products principally due to the elimination
of DA and its intrusion alarm product line.
-11-
As a result of the Company's continuing investment in product development and
sales and marketing programs, total selling, general, administrative and other
expenses increased 7.2% to (pound)1.9 million for the three months ended January
31, 1998 as compared to (pound)1.8 million for the comparable period in 1997.
Operating income decreased 26.1% to (pound).011 million for the three month
period ended January 31, 1998 as compared to (pound).014 million for the
comparable period in 1997. The decrease in operating income was due to the
increase in selling, general, administrative and other expenses which was
somewhat offset by the increase in gross profit margins.
Interest and other income decreased 2.2% to (pound)0.218 million for the three
month period ended January 31, 1998 as compared to (pound)0.223 million for the
comparable period in 1997. The decrease was principally related to a decline in
interest income generated from temporary cash investments and the inclusion of
interest expense on the Revolving Credit Facility which was used in conjunction
with the BNI acquisition.
As a result of the Company's 19.5% investment in Uplink from July, 1997 to
January, 1998, there was a charge of (pound)0.1 million for the three month
period ended January 31, 1998 that represented the Company's equity in the net
losses of Uplink, inclusive of the effect of the restatement discussed in note 8
to the condensed consolidated financial statements.
The effective income tax rates was 36.0% for the three months ended January 31,
1998 as compared to 34% for the comparable period in 1997.
The increase in the Company's gross profit margins, and the increase in selling,
general, administrative and other expenses resulted in net income of (pound)0.1
million for the three month period ended January 31, 1998, as compared
(pound)0.2 million for the comparable period in 1997.
As a result of the Company's stock buyback program, the weighted average shares
and potential shares outstanding on a diluted basis, declined to 11.1 million
for the three month period ended January 31, 1998 as compared to 11.2 million
shares for the comparable period in 1997.
Liquidity and Capital Resources of the Company
- ----------------------------------------------
The Company is presently able to fund its operations and working capital
requirements from cash flow generated by operations and the proceeds from a
public offering completed in April 1995. Net cash provided by operating
activities was (pound)0.2 million for the three months ended January 31, 1998.
Net cash used was (pound)0.6 million for the comparable period in 1997. The
increase was primarily due to a settlement payment in conjunction with a
shareholder litigation matter paid in 1997.
Net cash used in investing activities increased to (pound)0.8 million for the
three months ended January 31, 1998 as compared to (pound)0.1 million for the
comparable period in 1997. The increase was primarily attributable to the
Company's investment in Uplink.
-12-
Net cash used in financing activities decreased to (pound)0.02 million for the
three months ended January 31, 1998 as compared to (pound)0.2 million for the
comparable period in 1997. The decrease was principally due to decreased
purchases of treasury stock.
The Company had working capital balances of (pound)21.3 million and (pound)21.7
million, respectively as of January 31, 1998 and October 31, 1997.
The Company's business has not been capital intensive and, accordingly, capital
expenditures have not been material. To date, the Company has funded all capital
expenditures from working capital and cash provided by operating activities. In
order to fund an expansion of its Derived Channel System business (including an
effort to increase market penetration in North America, Western Europe, and the
Pacific Rim and expand into other parts of the world), the Company may require
significantly greater capital investments than it has in the past. Presently,
the Company has no material commitments for capital expenditures. Presently, the
Company has commitments for funding its investment in Uplink and is also
committed to a network equipment deployment in conjunction with the previously
announced Bell Canada agreement. The Company will also have funding obligations
to Cellemetry LLC provided the transaction is completed as presently
contemplated.
The Company believes that its anticipated cash flow from operations, together
with its available cash, including the proceeds of its public offering completed
in April 1995, and funds available under its Revolving Credit Facility, will be
sufficient to finance its operating and capital requirements at least through
the fiscal year ending October 31, 1998. From these sources, the Company has
used approximately (pound)3.5 million to complete the purchase of BNI. Cash
requirements for future expansion of the Company's operations will be evaluated
on an as- needed basis and may involve external financing. The Company does not
expect that such expansion, should it occur, will have a materially negative
impact on the Company's ability to fund its existing operations.
Foreign Currency
- ----------------
Currently, the Company's functional and reporting currency is British pounds
sterling because a substantial majority of the Company's net sales are presently
generated in the United Kingdom. Although the Company does not have an ongoing
currency hedging program in place, it occasionally hedges its operations
selectively against fluctuations in foreign currency as needed. This occasional
hedging is done primarily because a portion of the Company's production costs
associated with its off-shore contract manufacturing are denominated in U.S.
dollars while the bulk of its net sales are in British pounds sterling. The
Company uses forward U.S. dollar contracts which have a maximum term of six
months and which are not material to the Company. The Company anticipates that
it may utilize additional foreign currency contracts as needed to hedge against
fluctuations in the exchange rate between the U.S. dollar and the British pound
sterling. Fluctuations in foreign currency exchange rates are not expected to
have a material impact on the Company's results of operations or liquidity.
-13-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None - not applicable.
Item 2. Changes in Securities.
None - not applicable.
Item 3. Defaults Upon Senior Securities.
None - not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None - not applicable.
Item 5. Other Information.
None - not applicable.
Item 6. Exhibits and Reports on Form 8-K.
None - not applicable.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUMEREX CORP.
---------------------------
(Registrant)
Date: October 27, 1998 By: /s/ Gordon T. Ray
-------------------------- ----------------------
GORDON T. RAY
Chairman, President and
Chief Executive Officer
Date: October 27, 1998 By: /s/ Charles L. McNew
--------------------------- -------------------------
CHARLES L. McNEW
Chief Financial Officer and
Chief Accounting Officer
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