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
April 30, 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
----------------------------------
(Address of principal executive offices)
(770) 693-5950
----------------------------------
(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 June 11, 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.
<PAGE>
NUMEREX CORP. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at April 30,
1999 (unaudited) and October 31, 1998 4
Condensed Consolidated Statements of Operations and Comprehensive
Income (unaudited) for the six months and the three months ended
April 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended April 30, 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 13
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 15
<PAGE>
Forward-looking Statements
The information contained in the Quarterly Report on Form 10-Q for the quarter
ended April 30, 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.
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
-3-
<PAGE>
NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS U.S. DOLLARS)
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
(UNAUDITED)
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 5,889 $ 18,800
Accounts Receivable, net 8,445 5,237
Inventory 5,256 4,253
Prepaid Taxes 1,277 1,320
Prepaid Expenses 518 661
-------- --------
TOTAL CURRENT ASSETS 21,385 30,271
PROPERTY AND EQUIPMENT, NET 3,307 2,874
GOODWILL, NET 8,396 8,681
INTANGIBLE ASSETS, NET 11,488 12,175
OTHER ASSETS 383 405
-------- --------
TOTAL ASSETS $ 44,959 $ 54,406
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 0 $ 6,000
Accounts Payable 3,159 2,172
Income Taxes 1,345 673
Other Current Liabilities 3,140 3,582
Obligations under capital leases, current portion 38 37
-------- --------
TOTAL CURRENT LIABILITIES 7,682 12,465
-------- --------
LONG TERM LIABILITIES
Obligations under capital leases 99 77
-------- --------
MINORITY INTEREST 8,274 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 420 220
Treasury Stock, at cost, 1,266,400 shares
at April 30, 1999 and
1,034,900 shares at October 31, 1998 (5,222) (4,644)
Cumulative Translation Adjustment (73) 171
Retained Earnings 3,909 6,629
-------- --------
28,904 32,246
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 44,959 $ 54,406
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
-4-
<PAGE>
NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS U.S. DOLLARS,
EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
April 30, April 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 8,265 $ 5,671 $ 14,108 $ 12,496
Cost of Sales 3,595 2,547 6,287 5,990
Selling, General, Administrative
and Other Expenses 5,858 3,764 11,187 6,970
-------- -------- -------- --------
OPERATING INCOME (LOSS) (1,188) (640) (3,366) (464)
Interest and Other Income (Net) 69 304 192 666
Equity in Net Losses of Affiliate 0 (191) 0 (392)
Minority Interest 746 0 1,345 0
-------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES (373) (527) (1,829) (190)
Provision for Income Taxes 592 226 890 419
-------- -------- -------- --------
NET INCOME (LOSS) $ (965) $ (753) $ (2,719) $ (609)
======== ======== ======== ========
Other Comprehensive Income (Loss),
Net of Tax:
Foreign Currency Translation Adj. (128) (85) (244) 161
-------- -------- -------- --------
Comprehensive (Loss) $ (1,093) $ (838) $ (2,963) $ (448)
======== ======== ======== ========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE $ (0.09) $ (0.07) $ (0.26) $ (0.06)
======== ======== ======== ========
NUMBER OF SHARES USED IN PER SHARE
CALCULATION:
BASIC 10,343 10,880 10,413 10,899
======== ======== ======== ========
DILUTED 10,343 10,999 10,413 11,028
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
-6-
<PAGE>
NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS U.S. DOLLARS)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
April 30,
1999 1998
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss) $ (2,719) $ (609)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and Amortization 1,639 1,261
Minority Interest (1,345) 0
Equity in Net Losses of Affiliate 0 392
Changes in assets and liabilities which
provided (used) cash:
Accounts Receivable (3,208) 186
Inventory (1,003) (1,037)
Prepaid Expenses and taxes 858 (291)
Accounts Payable 987 (724)
Other Assets and Liabilities (242) 690
-------- --------
Net Cash Provided by (used in) Operating Activities (5,033) (132)
-------- --------
INVESTING ACTIVITIES
Investment in Fixed Assets (986) (394)
Increase in Intangible Assets (141) (313)
Investment in Business 0 (1,000)
-------- --------
Net Cash Used in Investing Activities (1,127) (1,707)
-------- --------
FINANCING ACTIVITIES
Repayment of short-term borrowings (6,000) 0
Proceeds from Exercise of Stock Options 0 56
Purchase of Treasury Stock (578) (583)
-------- --------
Net Cash Used in Financing Activities (6,578) (527)
-------- --------
EFFECT OF EXCHANGE DIFFERENCES ON
CASH AND CASH EQUIVALENTS (173) (85)
-------- --------
Net Increase (Decrease) in cash and cash equivalents (12,911) (2,451)
CASH AND CASH EQUIVALENTS, BEGINNING 18,800 26,163
-------- --------
CASH AND CASH EQUIVALENTS, ENDING $ 5,889 $ 23,712
======== ========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
-7-
<PAGE>
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 and six month period ended April 30, 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
April 30, October 3l,
l999 l998
--------- -----------
($000's omitted)
Raw materials $2,162 $1,591
Work-in-progress 474 749
Finished goods 2,620 1,912
----- -----
$5,256 $4,253
====== ======
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<PAGE>
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 as 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 losses for the three months ended April 30,
1999 and 1998 were $(1,093,000) and $(838,000), respectively.
Comprehensive losses for the six months ended April 30, 1999 and 1998
were $(2,963,000) and $(448,000), respectively. Total comprehensive
loss includes net income (loss) and foreign currency translation
losses for the periods presented.
-9-
<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 Six Months Ended
April 30, April 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Derived Channel Systems ................................... 57.9% 56.6% 55.6% 62.6%
Broadband and network products ............................ 31.2% 43.4% 31.8% 37.4%
Wireless products ......................................... 10.9% -- 12.6% --
----- ----- ----- ----
Total net sales ......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................................... 43.5% 44.9% 44.6% 47.9%
Gross profit ................................................ 56.5% 55.1% 55.4% 52.1%
Selling, general, administrative and other .................. 70.9% 66.4% 79.3% 55.8%
----- ----- ----- ----
Operating income (Loss) ..................................... (14.4%) (11.3%) (23.9%) (3.7%)
----- ----- ----- ----
Net income (Loss) ........................................... (11.7%) (13.3%) (19.3%) (4.9%)
===== ===== ===== ====
</TABLE>
Results of Operations
Net sales increased 45.7% to $8.3 million for the quarter ended April 30, 1999,
as compared to $5.7 million for the comparable period in 1998. For the six
months ended April 30, 1999, net sales increased 12.9% to $14.1 million as
compared to $12.5 million for the comparable period in 1998. The principal
reason behind the increase in sales was an increase in the level of Derived
Channel 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 broad band product and
services, slightly offset by decreased sales of network management products.
Total cost of sales increased by 41.1% to $3.6 million for the quarter ended
April 30, 1999, as compared to $2.5 million for the comparable period in 1998.
For the six months ended April 30, 1999, cost of sales increased by 5.0% to $6.3
million as compared to $6.0 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 56.5% and 55.4%, respectively,
for the three and six months ending April 30, 1999 as compared to 55.1% and
52.1%, respectively, for the comparable periods in 1998. The increase in gross
profit was primarily due to higher margin product mix.
-10-
<PAGE>
As a result of the Company's investment in it's Wireless Products companies
(Cellemetry LLC and Uplink Security, Inc.) and commitment to ongoing product
development and sales and marketing programs across all of it's businesses total
selling, general, administrative and other expenses increased 55.7% to $5.9
million for the quarter ended April 30, 1999, as compared to $3.8 million for
the comparable period in 1998. For the six months ended April 30, 1999, total
selling, general, administrative and other expenses increased 60.5% to $11.2
million as compared to $7.0 million for the comparable period in 1998.
As a result of the Company's investment in it's Wireless Products companies and
commitment to ongoing product development and sales and marketing programs
across all of it's businesses the Company recognized operating losses of $1.2
million and $3.4 million, respectively, for the three month and six month
periods ended April 30, 1999, as compared to operating losses of $0.6 million
and $0.5 million, respectively, for the comparable periods in 1998.
Interest and other income decreased 77.0% and 71.2%, respectively, to $0.1
million and $0.2 million, respectively, for the for the three and six months
ending April 30, 1999 as compared to $0.3 million and $0.7 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 April, 1998, a charge of $0.2 million for the
quarter ended April 30, 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 in May, 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 $0.6 million and $0.9 million,
respectively, for the three and six months ending April 30, 1999 despite the
reported loss. Certain losses arising in the Company's United States operations
were not deductible during the three and six months ending April 30, 1999, while
earnings from the Company's United Kingdom operations were fully taxable. The
effective income tax rate for both the three and six months ending April 30,
1999 was 30% as compared to 31% for the comparable periods in 1998.
The Company recorded net losses of $1.0 million and $2.7 million, respectively,
for the three and six months ending April 30, 1999. This compares to net losses
of $0.8 million and $0.6 million, respectively, for the comparable periods in
1998. The increase in net losses is primarily attributable to the Company's
investment in its Wireless Products companies and commitment to ongoing product
development and sales and marketing programs across all of its businesses.
As a result of the Company's stock buyback program from November 1996 to January
1999, inclusive, the weighted average shares and potential shares outstanding on
a diluted basis, declined to 10.4 million for the six months ended April 30,
1999 as compared to 10.9 million for the comparable period in 1998.
-11-
<PAGE>
Liquidity and Capital Resources of the Company
Net cash used by operating activities was $5.0 million for the six month period
ended April 30, 1999, as compared to net cash used of $0.1 million for the
comparable period in 1998. The increase in cash used was primarily due to net
losses and increases in working capital.
Net cash used in investing activities decreased to $1.1 million for the six
month period ended April 30, 1999, as compared to net cash used of $1.7 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 1999.
Net cash used in financing activities increased to $6.6 million for the six
month period ended April 30, 1999, as compared to net cash used of $0.5 million
for the comparable period in 1998. The increase in cash used was principally due
to the repayment of the revolving credit facility.
The Company had working capital balances of $13.7 million and $17.7 million,
respectively, as of April 30, 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.
Presently, the Company is obligated to fund the operations of Cellemetry LLC
(which will require $8.0 million in fiscal 1999 and $2.0 million in fiscal
2000). Of the $8.0 million funding to Cellemetry LLC in fiscal 1999, $4.0
million has been provided by the Company. Discussions with BellSouth Wireless,
Inc. and BellSouth Corp., the minority interest, on a modified operating
agreement are presently underway.
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 line may require greater capital investments than have been
required in the past.
In January 1999, the Company terminated its revolving credit facility and repaid
amounts due including interest. In order to meet the Company's expected 1999
funding requirements, additional financing may be necessary. 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. The Company continues to
have funding obligations to Cellemetry LLC and Uplink as both entities are
expected to be cash flow negative for the balance of fiscal year 1999. Cash
requirements for future expansion of the Company's operations will be evaluated
on an as-needed basis and may involve external financing.
-12-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
At April 30, 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 April 30, 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.
-13-
<PAGE>
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.
The Company filed Form 8-K on April 7, 1999, advising of changes in
the Company's certifying accountant.
Effective March 31, 1999, NumereX Corp. (the "Company") dismissed
Deloitte & Touche LLP as the Company's independent accountants. The
decision to dismiss Deloitte & Touche LLP was recommended by the
Audit Committee and approved by the Board of Directors. No report on
the financial statements of the Company by Deloitte & Touche LLP
contained an adverse opinion or disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope, or accounting
principles during either of the past two fiscal years or any
subsequent period through March 31, 1999.
In connection with its audits for the two most recent fiscal years
and through March 31, 1999, there have been no disagreements between
the Company and Deloitte & Touche LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements if not resolved to the
satisfaction of Deloitte & Touche LLP would have caused them to make
reference thereto in their report on the financial statements for
those years.
Also effective March 31, 1999, the Board of Directors selected the
accounting firm of Grant Thornton LLP as independent public
accountants for the Company based on the recommendation of the Audit
Committee.
-14-
<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: June 11, 1999 By: /s/ Gordon T. Ray
------------------------- ------------------------------
GORDON T. RAY
Chairman
Date: June 11, 1999 By: /s/ Charles L. McNew
------------------------- ------------------------------
CHARLES L. McNEW
Chief Financial Officer and
Chief Accounting Officer
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<CASH> 5,889
<SECURITIES> 0
<RECEIVABLES> 8,445
<ALLOWANCES> 0
<INVENTORY> 5,256
<CURRENT-ASSETS> 21,385
<PP&E> 3,307
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,959
<CURRENT-LIABILITIES> 7,682
<BONDS> 0
0
0
<COMMON> 29,870
<OTHER-SE> (73)
<TOTAL-LIABILITY-AND-EQUITY> 44,959
<SALES> 14,108
<TOTAL-REVENUES> 0
<CGS> 6,287
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,829)
<INCOME-TAX> 890
<INCOME-CONTINUING> (2,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,719)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
