UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
- --------------------- ----------------------
July 31, 1999 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.)
1600 Parkwood Circle, Suite 200
Atlanta, Georgia 30339-2119
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(Address of principal executive offices)
(770) 693-5950
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(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 September 9, 1999, an aggregate of 10,343,092 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 July 31,
1999 (unaudited) and October 31, 1998 4
Condensed Consolidated Statements of Operations and Comprehensive Income
(unaudited) for the three month and the nine month period ended
July 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine month period ended July 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
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Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for the
quarter ended July 31, 1999 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, 1998.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS U.S. DOLLARS)
July 31, October 31,
1999 1998
(UNAUDITED)
----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,566 $ 18,800
Accounts receivable, net 9,775 5,237
Inventory 5,695 4,253
Prepaid taxes 323 1,320
Prepaid expenses 329 661
-------- --------
TOTAL CURRENT ASSETS 20,688 30,271
PROPERTY AND EQUIPMENT, NET 3,566 2,874
GOODWILL, NET 8,277 8,681
INTANGIBLE ASSETS, NET 11,860 12,175
OTHER ASSETS 383 405
-------- --------
TOTAL ASSETS $ 44,774 $ 54,406
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 0 $ 6,000
Accounts payable 3,632 2,172
Income taxes 1,679 673
Other current liabilities 2,593 3,582
Obligations under capital leases, current portion 30 37
-------- --------
TOTAL CURRENT LIABILITIES 7,934 12,464
-------- --------
LONG TERM LIABILITIES
Obligations under capital leases 99 77
-------- --------
MINORITY INTEREST 7,652 9,619
-------- --------
SHAREHOLDERS' EQUITY
Class A, common stock - no par value;
authorized 30,000,000; issued 11,609,492 29,870 29,870
Additional paid-in-capital 370 220
Treasury stock, at cost, 1,266,400 shares at July 31, 1999 and
1,034,900 shares at October 31, 1998 (5,222) (4,644)
Cumulative translation adjustment (150) 171
Retained earnings 4,221 6,629
-------- --------
29,089 32,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,774 $ 54,406
======== ========
See accompanying notes to condensed consolidated financial statements
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NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
FOR THE THREE FOR THE NINE
MONTH PERIOD ENDED MONTH PERIOD ENDED
July 31, July 31,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
Net sales $ 8,833 $ 7,221 $ 22,941 $ 19,717
Cost of sales 3,255 3,248 9,542 9,238
Selling, general, administrative
and other expenses 5,395 4,812 16,582 11,782
-------- -------- -------- --------
OPERATING INCOME (LOSS) 183 (839) (3,183) (1,303)
Interest and other income (net) 35 233 227 899
Equity in net losses of affiliate 0 (30) 0 (422)
Minority interest 622 300 1,967 300
-------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES 840 (336) (989) (526)
Provision for income taxes 528 482 1,418 901
-------- -------- -------- --------
NET INCOME (LOSS) $ 312 $ (818) $ (2,407) $ (1,427)
======== ======== ======== ========
Other comprehensive income (loss),
Net of tax:
Foreign currency translation adjustment (77) (420) (321) (259)
-------- -------- -------- --------
Comprehensive income (loss) $ 235 $ (1,238) $ (2,728) $ (1,686)
======== ======== ======== ========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ 0.03 $ (0.08) $ (0.23) $ (0.13)
======== ======== ======== ========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION:
BASIC 10,343 10,822 10,390 10,873
======== ======== ======== ========
DILUTED 10,414 10,877 10,390 11,008
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
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NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS U.S. DOLLARS)
FOR THE NINE
MONTH PERIOD ENDED
July 31,
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (2,407) $ (1,427)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Depreciation and amortization 2,398 2,044
Minority interest (1,967) (300)
Equity in net losses of affiliate 0 422
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (4,538) (499)
Inventory (1,442) (1,336)
Prepaid expenses and taxes 2,479 162
Accounts payable 1,460 (1,334)
Other assets and liabilities (1,140) 844
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Net cash provided (used) by operating activities (5,157) (1,424)
-------- --------
INVESTING ACTIVITIES
Investment in fixed assets (1,569) (626)
Increase in intangible assets (810) (477)
Acquisition of business; net of cash 0 (2,513)
Investment in business 0 (216)
-------- --------
Net cash provided (used) by investing activities (2,379) (3,832)
-------- --------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 0 1,500
Repayment of short-term borrowings (6,000) 0
Proceeds from exercise of stock options 0 69
Purchase of treasury stock (578) (691)
-------- --------
Net cash provided (used) by financing activities (6,578) 878
-------- --------
EFFECT OF EXCHANGE DIFFERENCES ON
CASH AND CASH EQUIVALENTS (120) (285)
-------- --------
Net increase (decrease) in cash and cash equivalents (14,234) (4,663)
CASH AND CASH EQUIVALENTS, BEGINNING 18,800 26,163
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 4,566 $ 21,500
======== ========
See accompanying notes to condensed consolidated financial statements
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NUMEREX CORP.
NOTES TO CONDENSED 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 and nine month period ended
July 31, 1999 may not be indicative of the results that may be expected for the
year ending October 31, 1999. For further information, reference is also made to
the Company's Annual Report on Form 10-K for the year ended October 31, 1998 and
the consolidated financial statements contained therein.
2. Reporting Currency
Historically, the Company's consolidated financial statements have been
expressed in British Pounds Sterling. As a result of increased business activity
in the United States ("U.S.") resulting principally from recent U.S.
acquisitions, the U.S. dollar has become the unit of measure of the large
majority of the Company's operations. Accordingly, the U.S. dollar has been
adopted as the Company's reporting currency effective for the quarter ended
January 31, 1999. The condensed consolidated financial statements and the notes
thereto have been restated in U.S. dollars for all periods presented.
3. Inventory
July 31, October 31,
1999 1998
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($000'S OMITTED)
Raw materials $2,774 $1,592
Work-in-progress 456 749
Finished goods 2,465 1,912
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$5,695 $4,253
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4. Revolving Credit Facility
The Company had a revolving credit facility which provided for maximum
borrowings of $10.0 (Pounds 6.1) million and included the option to convert, at
maturity, the outstanding balance to an amortizing term loan payable over a
maximum period of up to three years, with a maximum five year amortization.
Interest was charged at the bank's prime lending rate less .25% or LIBOR plus
1.25%.
On January 8, 1999, the Company terminated its revolving credit facility
and repaid amounts due including interest totaling $6,008,733.
5. New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement, which establishes
standards for the reporting of information about operating segments and requires
the reporting of selected information about operating segments in interim
financial statements in the second year of implementation, is effective for
fiscal years beginning after December 15, 1997, although earlier application is
permitted. The Company is evaluating whether the adoption of this statement will
result in any changes to its presentation of financial data. The Company will
adopt SFAS No. 131 in the annual financial statements for the year ending
October 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts collectively referred to as derivatives,
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those statements at fair value. This statement is effective for fiscal
years beginning after June 15, 1999, although early adoption is encouraged. The
Company is evaluating the effect that the adoption of SFAS No. 133 will have on
its consolidated financial position or results of operation.
6. Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, which established standards for reporting and
disclosure of comprehensive income effective November 1998. Total comprehensive
income (loss) for the three month period ended July 31, 1999 and 1998 was
$235,000 and $(1,238,000), respectively. Comprehensive income (loss) for the
nine month period ended July 31, 1999 and 1998 was $(2,728,000) and
$(1,686,000), respectively. Total comprehensive income (loss) includes net
income (loss) and foreign currency translation losses for the periods presented.
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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 NINE MONTHS ENDED
July 31, July 31,
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales:
Derived Channel Systems 46.0% 48.6% 51.9% 57.5%
Broadband and Network Products 43.9% 44.5% 36.4% 40.0%
Wireless Products 10.1% 6.9% 11.7% 2.5%
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 36.9% 45.0% 41.6% 46.9%
----- ----- ----- -----
Gross profit 63.1% 55.0% 58.4% 53.1%
Selling, general, administrative and other 61.0% 66.5% 72.3% 59.7%
----- ----- ----- -----
Operating income (loss) 2.1% (11.5%) (13.9%) (6.6%)
----- ----- ----- -----
Net income (loss) 3.5% (11.3%) (10.5%) (7.2%)
===== ===== ===== =====
RESULTS OF OPERATIONS
Net sales increased 22.3% to $8.8 million for the quarter ended July 31,
1999, as compared to $7.2 million for the comparable period in 1998. For the
nine month period ended July 31, 1999, net sales increased 16.4% to $22.9
million as compared to $19.7 million for the comparable period in 1998. The
principal reason behind the increase in sales was an increase in the level of
Derived Channel Systems sales in both the United States and United Kingdom
resulting from general product sales coupled with the inclusion of Wireless
Product sales in fiscal year 1999, augmented by increased sales of Broadband
Product technology and related services and decreased sales of Network Products.
Total cost of sales were static quarter on quarter at $3.2 million for both
the quarter ended July 31, 1999 and for the comparable period in 1998. For the
nine month period ended July 31, 1999, cost of sales increased by 3.3% to $9.5
million as compared to $9.2 million for the comparable period in 1998. The
increase in cost of sales resulted primarily from the increase in sales.
Gross profit as a percentage of net sales increased to 63.1% and 58.4%,
respectively, for the three and nine month period ended July 31, 1999 as
compared to 55.0% and 53.1%, respectively, for the comparable periods in 1998.
The increase in gross profit was primarily due to higher margin product mix.
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Resulting from the Company's investment in its Wireless Products companies
(Cellemetry LLC and Uplink Security, Inc.), the ongoing commitment to product
development and sales and marketing programs across all of it's businesses total
selling, general, administrative and other expenses increased 12.1% to $5.4
million for the quarter ended July 31, 1999, as compared to $4.8 million for the
comparable period in 1998. For the nine month period ended July 31, 1999, total
selling, general, administrative and other expenses increased 40.7% to $16.6
million as compared to $11.8 million for the comparable period in 1998.
Interest and other income decreased 84.6% and 74.1%, respectively, to $0.1
million and $0.2 million, respectively, for the for the three and nine month
period ended July 31, 1999 as compared to $0.2 million and $0.9 million,
respectively, for the comparable periods in 1998. The decrease was primarily
related to a decline in interest income on temporary cash investments.
As a result of the Company's 19.5% investment in Uplink Security, Inc.
('Uplink') from July, 1997 to May 15, 1998, a charge of $0.1 million for the
quarter ended July 31, 1998 arose representing the Company's equity in Uplink's
net losses. The charge resulted from the Company's acquisition of a controlling
interest in Uplink on May 15, 1998 which required a restatement of its
investment in Uplink from the cost method to the equity method of accounting for
investments in companies.
The Company recorded tax provisions of $0.5 million and $1.4 million,
respectively, for the three and nine month period ended July 31, 1999. Certain
losses arising in the Company's United States operations were not deductible
during the three and nine month period ended July 31, 1999, while earnings from
the Company's United Kingdom operations were fully taxable. The effective income
tax rate for both the three and nine month period ended July 31, 1999 was 30% as
compared to 31% for the comparable periods in 1998.
The Company recorded net income of $0.3 million for the quarter ended July
31, 1999, as compared to a net loss of $0.8 million for the comparable period in
1998. For the nine month period ended July 31, 1999 the Company recorded a net
loss of $2.4 million as compared to a net loss of $1.4 million for the
comparable period in 1998.
As a result of the Company's stock buyback program, the weighted average
shares and potential shares outstanding on a diluted basis, declined to 10.4
million for the nine month period ended July 31, 1999 as compared to 10.9
million for the comparable period in 1998.
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LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
Net cash used by operating activities amounted to $5.2 million for the nine
month period ended July 31, 1999, as compared to net cash used of $1.4 million
for the comparable period in 1998. The increase in cash used was primarily due
to the reported net loss and increases in working capital.
Net cash used by investing activities decreased to $2.4 million for the
nine month period ended July 31, 1999, as compared to net cash used of $3.8
million for the comparable period in 1998. The decrease was primarily
attributable to the Company's investment in Uplink in 1998 and was somewhat
offset by larger fixed asset investments in fiscal year 1999.
Net cash used by financing activities increased to $6.6 million for the
nine month period ended July 31, 1999, as compared to net cash provided of $0.9
million for the comparable period in 1998. The increase in cash used was
principally due to the repayment of amounts due under the Company's revolving
credit facility and the purchase of treasury stock.
The Company had working capital balances of $12.8 million and $17.8
million, respectively, as of July 31, 1999 and October 31, 1998.
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, proceeds from the public offering and
funds that had been available under a revolving credit facility.
Any expansion of the Company's Derived Channel Systems business in the UK
and certain other international markets and the potential expansion of the
Company's Broadband Product business may require greater capital investments
than have been required in the past.
The Company is required, under the terms of the Cellemetry LLC Operating
Agreement with BellSouth Wireless, to make certain additional capital
contributions to Cellemetry. On June 11, 1999, the Company and BellSouth
Wireless signed a non-binding memorandum of understanding to restructure certain
aspects of the Operating Agreement, including the Company's obligation to make
additional capital contributions to the joint venture. Although the
restructuring of the Operating Agreement is subject to the execution of
definitive agreements, the Company has suspended its making of additional
capital contributions. The Company continues to fund the operations of Uplink,
and both Cellemetry and Uplink are expected to be cash flow negative for the
remainder of fiscal year 1999.
In January 1999, the Company terminated its revolving credit facility and
repaid amounts due including interest. Management believes that the Company will
be able to meet its 1999 funding needs.
The Company believes that its available cash and funds from potential
lending sources, will be sufficient to finance its operating and capital
requirements at least through the fiscal year ending October, 31, 1999. Cash
requirements for future expansion of the Company's operations will be evaluated
on an as-needed basis and may involve external financing.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
At July 31, 1999, the Company was not invested in any material balances of
market risk sensitive instruments held for either trading purposes or for
purposes other than trading. As a result, the Company is not subject to interest
rate risk, foreign currency rate risk, commodity price risk, or other relevant
market risks, such as equity price risk.
The Company invests cash balances in excess of operating requirements in an
overnight investment account. The Company also has an investment in a foreign
subsidiary which operates in British Pounds Sterling. At July 31, 1999, the
Company has no outstanding borrowings payable. The Company believes that the
effect, if any, of reasonably possible near-term changes in interest rates or
foreign currency exchange rates on the Company's financial position, results of
operations and cash flows should not be material.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In connection with the Company's acquisition of the entire equity interest
in Uplink Security, Inc. ("Uplink"), Pamela van de Poll, a minority stockholder
of Uplink, filed a petition in the Superior Court of Fulton County, Georgia
seeking an appraisal of the value of her shares. Ms. van de Poll also has
alleged that the acquisition of Uplink was procedurally improper and should be
set aside, and that Uplink and certain of its officers (together with the
Company and certain of its officers) conspired to oppress her as a minority
stockholder of Uplink and acted fraudulently in effectuating the acquisition.
The case is entering the discovery phase.
Neither the Company nor its officers are parties to the litigation. The
Company believes, however, that the value Ms. van de Poll is claiming for her
shares is in excess of the fair value of those shares. The Company also believes
that Ms. van de Poll's other claims are without merit, and Uplink intends to
vigorously defend the litigation.
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.
The Annual Meeting of Shareholders of the Company was held on June 11, 1999
(the "Meeting"). Two proposals were presented for a vote at the Meeting.
Proposal 1 - The election of six directors, George Benson, Matthew J.
Flanigan, Kenneth F. Manser, Stratton J. Nicolaides, Gordon T. Ray and Andrew J.
Ryan, each to serve as a director of the Company for a one-year term expiring at
the annual meeting of shareholders to be held in 2000 and until the election and
qualification of each successor.
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Proposal 1 - To elect a Board of Directors consisting of six persons
to serve until the next annual meeting of shareholders and until their
respective successors have been duly elected and qualified.
The proposal was approved as follows:
For Against Abstain
George Benson 9,938,400 14,591 0
Matthew J. Flanigan 9,938,400 14,591 0
Kenneth F. Manser 9,938,400 14,591 0
Stratton J. Nicolaides 9,938,400 14,591 0
Gordon T. Ray 9,938,400 14,591 0
Andrew J. Ryan 9,938,400 14,591 0
Proposal 2 - The ratification of the appointment of Grant Thornton LLP as
the Company's independent public accountants for the current fiscal year ending
October 31, 1999.
Proposal 2 - To consider and vote upon the ratification of the
selection by the Board of Directors of Grant Thornton LLP as independent
accountants to the Company for the current fiscal year ending October 31,
1999.
The proposal was approved as follows:
For Against Abstain
--- ------- --------
9,938,050 13,141 1,800
ITEM 5. OTHER INFORMATION.
None - not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The Company filed Form 8-K on June 25, 1999, advising that on June 11,
1999, NumereX Corp. and BellSouth Wireless, Inc. signed a non-binding memorandum
of understanding ("MOU") by which NumereX will restructure certain aspects of
their Cellemetry joint venture Operating Agreement. Under the terms of the MOU,
BellSouth will acquire a convertible redeemable preferred stock interest in
NumereX, convertible to approximately 6% of NumereX common stock. In addition,
under the terms of the MOU certain obligations of NumereX to meet specified
expected capital contributions are no longer required.
The restructuring of the Cellemetry Operating Agreement is subject to
execution of definitive agreements.
-14-
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: September 13, 1999 By: /s/ Gordon T. Ray
----------------------------- ----------------------
GORDON T. RAY
Chairman
Date: September 13, 1999 By: /s/ Peter J. Quinn
----------------------------- ----------------------
PETER J. QUINN
V.P. Finance
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