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, 1996 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.)
1400 N. Providence Road, Suite 5500
Media, PA 19063
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 892-0316
----------------------------------------------------
(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 11,457,492
shares of the registrant's Class A Common Stock no par value (being the
registrant's only class of common stock outstanding), were outstanding.
<PAGE>
NUMEREX CORP.
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at July 31,
1996 (unaudited) and October 31, 1995 4
Consolidated Statements of Income (unaudited)
for the three months and the nine months ended July 31, 1996 and 1995 5
Consolidated Statements of Cash Flows (unaudited)
for the three months and the nine months ended July 31, 1996 and 1995 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
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 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
-3-
<PAGE>
NUMEREX CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS POUNDS STERLING)
<TABLE>
<CAPTION>
JULY 31, October 31,
1996 1995
(UNAUDITED)
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents 22,099 22,271
Accounts Receivable, net 5,768 5,832
Inventory 3,645 5,293
Prepaid Expenses 293 139
------- -------
31,805 33,535
PROPERTY AND EQUIPMENT, NET 1,390 1,248
INTANGIBLE ASSETS, NET 2,406 2,570
------- -------
TOTAL ASSETS 35,601 37,353
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable 1,233 1,545
Income Taxes 2,011 2,370
Other Current Liabilities 2,058 1,362
------- -------
TOTAL LIABILITIES 5,302 5,277
------- -------
SHAREHOLDERS' EQUITY
Class A, Common Stock - no par value;
authorized 30,000,000; issued and
outstanding 11,457,492 in 1996,
11,597,492 in 1995 18,321 18,321
Treasury Stock, at cost, 140,000 shares (419) --
Accumulated Translation Adjustment 589 277
Retained Earnings 11,808 13,478
------- -------
30,299 32,076
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 35,601 37,353
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
- 4 -
<PAGE>
NUMEREX CORP.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS POUNDS STERLING,
EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
JULY 31, JULY 31,
-------------------------- --------------------------
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales 4,698 4,227 14,211 16,176
Cost of Sales 2,367 1,393 7,595 5,824
Inventory Obsolescence Charge 927 -- 927 --
----------- ----------- ----------- -----------
GROSS PROFIT 1,404 2,834 5,689 10,352
Selling, General, Administrative
and Other Expenses 2,137 1,580 5,862 4,320
Special Charges 1,151 -- 1,151 --
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (1,884) 1,254 (1,324) 6,032
Interest and Other Income 285 374 843 473
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (1,599) 1,628 (481) 6,505
Income Tax Provision 54 546 435 2,212
----------- ----------- ----------- -----------
NET INCOME (LOSS) (1,653) 1,082 (916) 4,293
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE (.14) .09 (.08) .42
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,584,000 11,570,000 11,593,000 10,332,000
----------- ----------- ----------- -----------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
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<PAGE>
NUMEREX CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS POUNDS STERLING)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
JULY 31,
--------------------------
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) (916) 4,293
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities
Depreciation and Amortization 1,107 504
Inventory Obsolescence & special charges 2,078 --
Changes in current assets and liabilities which
provided (used) cash
Accounts Receivable 64 (1,659)
Inventory 720 (1,724)
Prepaid Expenses (249) 69
Accounts Payable (313) (152)
Other Liabilities (178) (2,028)
------- -------
Net Cash Provided by (Used in) Operating Activities 2,313 (697)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Business -- (828)
Investment in Fixed Assets (411) (214)
Increase in Intangible Assets (1,238) (487)
------- -------
Net Cash Used in Investing Activities (1,649) (1,529)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net Reduction in Debt -- (560)
Net Proceeds from Sale of Stock -- 16,310
Dividends Declared (753) --
Purchase of Treasury Stock (419) --
------- -------
Net Cash (Used in) Provided By Financing
Activities (1,172) 15,750
------- -------
EFFECT OF EXCHANGE DIFFERENCES ON
CASH AND CASH EQUIVALENTS 336 --
------- -------
Net (Decrease) Increase in cash (172) 13,524
CASH AND CASH EQUIVALENTS, BEGINNING 22,271 7,769
------- -------
CASH AND CASH EQUIVALENTS, ENDING 22,099 21,293
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
- 6 -
<PAGE>
NUMEREX CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Financial Statement Presentation
The accompanying unaudited 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 nine
month period ended July 31, 1996 may not be indicative of the results
that may be expected for the year ending October 31, 1996. For
further information, reference is also made to the Company's Annual
Report on Form 10-K for the year ended October 31, 1995 and the
consolidated financial statements contained therein.
2. Inventory. July 31, October 3l,
1996 1995
-------- -----------
(pounds 000's omitted)
Raw materials 1,544 2,471
Work-in-progress 937 1,233
Finished goods 1,164 1,589
----- -----
3,645 5,293
===== =====
The inventory obsolescence charge of pounds 927,000 in the third
quarter of 1996 is the result of determining certain inventory items
to be obsolete due to market conditions.
3. Long-Term Contract
The Company performs certain software development services under
contract for a significant customer. Revenue from the fixed-price
contract is recognized on the percentage of completion method which is
measured by the percentage of costs incurred to date to the estimated
total costs for the contract. Service contract costs consist primarily
of outside consultant and software engineering fees. Costs and
earnings in excess of billings on this contract were pounds 756,000 as
of July 31, 1996. Through July 31, 1996 total costs of pounds
1,841,000, revenues of pounds 2,596,000 and billings of pounds
1,840,000 have been recorded under the contract.
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<PAGE>
4. Special Charges
During the third quarter of 1996, the Company recorded pre-tax
special charges of pounds 1.2 million primarily relating to asset
write downs and accruals for certain obsolete products.
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,
1995, a copy of which can be obtained from Charles L. McNew, Chief
Financial Officer, NumereX Corp., Rose Tree Corporate Center II, 1400
North Providence Road, Suite 5500, Media, PA 19063.
6. Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for
the quarter ended July 31, 1996 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. 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, 1995.
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<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------- -----------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales:
Derived Channel Systems .................... 72.3% 66.4% 73.1% 71.8%
Intrusion alarm and network products ....... 27.7 33.6 26.9 28.2
----- ----- ----- -----
Total net sales ........................ 100.0 100.0 100.0 100.0
Cost of sales - Normal ....................... 50.4 33.0 53.4 36.0
- Non-recurring ................ 19.7 0.0 6.5 0.0
----- ----- ----- -----
Total Cost of Sales .......................... 70.1 33.0 59.9 36.0
----- ----- ----- -----
Gross profit ................................. 29.9 67.0 40.1 64.0
Selling, general, administrative and other
- Normal ....................... 45.5 37.4 41.2 26.7
- Non-recurring ................ 24.5 0.0 8.1 0.0
----- ----- ----- -----
Total Selling, general, & administrative ..... 70.0 37.4 49.3 26.7
----- ----- ----- -----
Operating income ............................. (40.1) 29.6 (9.2) 37.3
===== ===== ===== =====
Net income ................................... (35.2%) 25.6% (6.4%) 26.5%
===== ===== ===== =====
</TABLE>
Results of Operations
Net sales decreased 11.1% to pounds 4.7 million for the quarter ended July 31,
1996 as compared to pounds 4.2 million for the comparable period in 1995. For
the nine months ended July 31, 1996 net sales decreased 12.1% to pounds 14.2
million as compared to pounds 16.2 million for the comparable period in 1995.
The principal reason for the year-on-year increase in net sales for the third
quarter was an increase in STU sales in the U.K. and the shipment of network
equipment in the U.S. The principal reason for the net sales decline for the
nine months ended July 31, 1996 was the reduction in Derived Channel network
equipment sales in the U.K. from the comparable period in 1995. While the rate
of STU unit sales has recovered from an earlier slowdown, it is uncertain
whether network equipment sales in the U.K. will return to their historically
higher levels
.
-9-
<PAGE>
Cost of sales increased 69.9% to pounds 2.4 million for the quarter ended July
31, 1996 and increased 30.4% to pounds 7.6 million for the nine months ended
July 31, 1996 as compared to pounds 1.4 million and pounds 5.8 million,
respectively, for the comparable period in 1995. The inventory obsolescence
charge of pounds 0.9 million is a pre-tax charge recorded in the third quarter
of 1996 as a result of determining certain inventory items to be obsolete due to
market conditions related primarily to network management and, to a lesser
extent, intrusion alarm products. Gross profit as a percentage of net sales
decreased to 29.9% and 40.1%, respectively, for the three and nine month periods
ended July 31, 1996 as compared to 67.0% and 64.0%, respectively, for the
comparable periods in 1995. The decrease in the gross profit margin was
primarily due to a shift in sales mix to lower margin products as network
equipment (a higher margin product) sales to BT declined, inclusion of the
inventory obsolescence charge, and, in addition, certain fixed costs related to
manufacturing, which did not decline in conjunction with net sales, caused a
further decrease in the gross profit margin.
Selling, general, administrative and other expenses increased 35.3% and 35.7%,
respectively, to pounds 2.1 million and pounds 5.9 million, respectively, for
the three and nine months ended July 31, 1996 as compared to pounds 1.6 million
and pounds 4.3 million, respectively, for the comparable periods in 1995. The
increase was principally related to a major expansion of the sales and marketing
effort, product development expenses and an increase in legal and other
expenses. In addition, special charges of pounds 1.2 million were recorded in
the quarter ended July 31, 1996. These special charges relate principally to
asset write downs and accruals for certain obsolete products.
Operating income decreased 250.2% and 121.9%, respectively, to operating losses
of pounds 1.9 million and pounds 1.3 million, respectively, for the three and
nine month periods ended July 31, 1996 as compared to operating income of pounds
1.3 million and pounds 6.0 million, respectively, for the comparable period in
1995. The decreases in operating income were due to the decreases in net sales
and gross profit margins coupled with the increase in selling, general,
administrative and other expenses, and the recognition of the inventory
obsolescence and special charges in the third quarter of 1996.
For the three and nine months ended July 31, 1996 the Company reported pre-tax
losses. Tax provisions and liabilities were recorded for both periods despite
the pre-tax losses. The provisions were necessary because it is presently
uncertain that the United States portion of the pre-tax losses will result in
tax benefits. The losses may be recovered against earnings (if any) in future
periods. For comparative purposes, the three and nine months ended July 31,
1995, the effective tax rates were 33.5% and 34.0%, respectively.
The decline of the Company's net sales and gross profit margins, and the
increase in selling, general, administrative and other expenses and the
inventory obsolescence and special charges resulted in net income decreases of
252.8% and 121.3%, respectively, to net losses of pounds 1.7 million and
pounds 0.9 million, respectively, for the three and the nine month periods ended
July 31, 1996, as compared to net income of pounds 1.1 million and pounds 4.3
million, respectively, for the comparable periods in 1995.
-10-
<PAGE>
As a result of new shares issued in conjunction with an April 1995 public
offering, somewhat offset by the repurchase of 140,000 shares as of July 31,
1996 (220,000 shares as of September 9, 1996) in conjunction with the Company's
stock buyback program, the weighted average shares outstanding increased to 11.6
million for both the quarter and the nine months ended July 31, 1996 as compared
to 11.6 million and 10.3 million shares for the comparable periods in 1995.
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 pounds 2.3 million for the nine months ended July 31, 1996 as
compared to net uses of pounds 0.7 million for the comparable period in 1995.
The increase from 1995 was primarily due to decreases in accounts receivable and
inventories along with reduced tax obligations. This was somewhat offset by the
1996 loss net of asset write downs.
Net cash used in investing activities was unchanged at pounds 1.6 million for
the nine months ended July 31, 1996 as compared to pounds 1.5 million for the
comparable period in 1995. The 1996 investing activities were primarily due to
increases in capitalized software as compared to acquisition costs in 1995.
Net cash used in financing activities decreased to pounds 1.2 million for the
nine months ended July 31, 1996 as compared to cash provided of pounds 15.8
million for the comparable period in 1995. The principal reason for the decrease
was the inclusion of proceeds from a sale of stock in 1995 period. This was
partially offset by the payment of an quarterly dividends during the 1996 period
and the repurchase of Company stock.
The Company has working capital balances of pounds 26.5 million and pounds 28.3
million as of July 31, 1996 and October 31, 1995, respectively.
The Company's business has not been capital intensive and, accordingly, capital
expenditures have not been material. To date, the Company has funded all capital
expenditures from cash provided by operating activities. In order to fund an
expansion of its Derived Channel System business (including an effort to
increase market penetration in North America 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.
On February 9, 1996 the Company announced its intention to pay a cash dividend
on a quarterly basis. As of September 4, 1996 three quarterly dividends of $0.05
(five cents) per share have been declared and paid.
-11-
<PAGE>
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, will be sufficient to finance its operating and capital
requirements at least through the fiscal year ending October 31, 1996. Cash
requirements for future expansion of the Company's operations will be evaluated
on an as-needed basis. The Company does not expect that such expansion will have
a materially negative impact on the Company's ability to fund its existing
operations.
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.
-12-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In July and August of 1995, the Company received complaints in three
separate purported lawsuits. The complaints, which were consolidated
into a single amended complaint, sought class action status and
alleged violations arising under certain federal securities laws for
alleged material misstatements and omissions in the prospectus
associated with the Company's recent public offering. The complaint
was filed against certain of the Company's directors and executive
officers, principal shareholder and underwriters. The complaint
sought rescission and/or damages against all defendants, including
the awarding of costs and disbursements. The defendants filed a
Motion to Dismiss and on January 24, 1996, the defendants' Motion to
Dismiss was granted and the case was dismissed. On February 16, 1996
the plaintiffs appealed the Order of the U.S. District Court to the
United States Court of Appeals. Although oral arguments occurred on
August 8, 1996, no decision has been rendered by the Court of
Appeals. The Company and the individual defendants believe the
allegations are untrue and without merit and continue to vigorously
defend the action.
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
-13-
<PAGE>
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 12, 1996 By: /s/ John J. Reis
----------------------------- ---------------------
JOHN J. REIS
President and
Chief Executive Officer
Date: September 12, 1996 By: /s/ Charles L. McNew
----------------------------- -------------------------
CHARLES L. McNEW
Chief Financial Officer and
Chief Accounting Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> British Pounds Sterling
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JUL-31-1996
<EXCHANGE-RATE> 1.5561
<CASH> 22,099
<SECURITIES> 0
<RECEIVABLES> 5,768
<ALLOWANCES> 0
<INVENTORY> 3,645
<CURRENT-ASSETS> 31,805
<PP&E> 2,404
<DEPRECIATION> 1,014
<TOTAL-ASSETS> 35,601
<CURRENT-LIABILITIES> 5,302
<BONDS> 0
0
0
<COMMON> 18,321
<OTHER-SE> 11,978
<TOTAL-LIABILITY-AND-EQUITY> 35,601
<SALES> 0
<TOTAL-REVENUES> 14,211
<CGS> 0
<TOTAL-COSTS> 8,522
<OTHER-EXPENSES> 7,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (481)
<INCOME-TAX> 435
<INCOME-CONTINUING> (916)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (916)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
