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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 Quarterly Period Ended Commission File Number
June 30, 2002 0-22920
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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 August 8, 2002, an aggregate of 10,775,167 shares of the registrant's
Class A Common Stock, no par value (being the registrant's only class of common
stock outstanding), were outstanding.
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NUMEREX CORP. AND SUBSIDIARIES
INDEX
Page
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001 4
Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for
the three-month and six-month periods ended June 30, 2002 and 2001 5
Condensed Consolidated Statements of Cash Flows (unaudited) for the six-month periods
ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risks 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
Exhibits
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Forward-looking Statements
This document contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among other things, statements
regarding trends, strategies, plans, beliefs, intentions, expectations, goals
and opportunities. Forward-looking statements are typically identified by words
or phrases such as "believe," "expect," "anticipate," "intend," "estimate,"
"assume," "strategy," "plan," "outlook," "outcome," "continue," "remain,"
"trend," and variations of such words and similar expressions, or future or
conditional verbs such as "will," "would," "should," "could," "may," or similar
expressions. All statements and information herein and incorporated by reference
herein, other than statements of historical fact, are forward-looking statements
that are based upon a number of assumptions concerning future conditions that
ultimately may prove to be inaccurate. Many phases of the Company's operations
are subject to influences outside its control. The Company cautions that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, which change over time. These forward-looking statements speak
only as of the date of this report, and the Company assumes no duty to update
forward-looking statements. Actual results could differ materially from those
anticipated in these forward-looking statements and future results could differ
materially from historical performance.
Any one or any combination of factors could have a material adverse effect on
the Company's results of operations or could cause actual results to differ
materially from forward-looking statements or historical performance. These
factors include: the pace of technological change; variations in quarterly
operating results; delays in the development, introduction and marketing of new
wireless products and services; customer acceptance of products and services;
economic conditions; the inability to attain revenue and earnings growth;
changes in interest rates; inflation; the introduction, withdrawal, success and
timing of business initiatives and strategies; competitive conditions; the
extent and timing of technological changes; changes in customer spending; the
loss of intellectual property protection; general economic conditions and
conditions affecting the capital markets. Actual events, developments and
results could differ materially from those anticipated or projected in the
forward-looking statements as a result of certain uncertainties set forth below
and elsewhere in this document. Subsequent written or oral statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the cautionary statements in this report and
those in the Company's reports previously and subsequently filed with the
Securities and Exchange Commission.
-3-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NUMEREX CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,252 $ 5,401
Accounts receivable, net 12,372 7,974
Inventory 5,049 5,077
Prepaid taxes 12 48
Prepaid expenses 464 1,045
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TOTAL CURRENT ASSETS 20,149 19,545
PROPERTY AND EQUIPMENT, NET 2,831 3,107
GOODWILL, NET 10,983 10,983
INTANGIBLE ASSETS, NET 10,318 9,222
OTHER ASSETS 427 117
-------- --------
TOTAL ASSETS $ 44,708 $ 42,974
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,822 $ 6,652
Income taxes 0 0
Other current liabilities 972 758
Deferred revenues 522 658
Obligations under capital leases, current portion 314 145
-------- --------
TOTAL CURRENT LIABILITIES 9,630 8,213
LONG TERM LIABILITIES
Obligations under capital leases and other long term liabilities 1,330 327
-------- --------
MINORITY INTEREST 0 326
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock - no par value; authorized 3,000,000; issued 30,000 on
June 30, 2002 and December 31, 2001 3,000 3,000
Class A common stock - no par value; authorized 30,000,000; issued
12,530,197 on June 30, 2002 and 12,286,419 on December 31, 2001 33,718 32,590
Additional paid-in-capital 439 439
Treasury stock, at cost, 1,766,400 shares on June 30, 2002 and
December 31, 2001 (9,222) (9,222)
Class B common stock - no par value; authorized 5,000,000; none issued 0 0
Accumulated other comprehensive income (12) (27)
Retained earnings 5,825 7,328
-------- --------
33,748 34,108
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,708 $ 42,974
======== ========
See accompanying notes to condensed consolidated financial statements
-4-
NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTH FOR THE SIX MONTH
PERIOD ENDED JUNE 30, PERIOD ENDED JUNE 30,
------------------------------ ----------------------------
2002 2001 2002 2001
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ----------
Net sales $ 7,508 $ 6,090 $ 14,602 $ 11,392
Cost of sales 3,569 3,862 7,105 7,044
Depreciation and amortization 54 73 102 145
-------- -------- -------- --------
Gross Profit 3,885 2,155 7,395 4,203
Research and development expenses 188 689 790 1,533
Selling, general, administrative and other
expenses 2,952 2,828 5,407 5,458
Depreciation and amortization 549 744 1,069 1,488
Costs related to non-recurring acquisition
activity 1,714 0 1,714 0
Business restructuring charges 0 508 0 609
-------- -------- -------- --------
Operating loss (1,518) (2,614) (1,585) (4,885)
Interest and other income, net (54) 295 (54) 659
Minority interest 0 867 326 1,749
-------- -------- -------- --------
Earnings (loss) before income taxes (1,572) (1,452) (1,313) (2,477)
Income Taxes 70 115 70 115
-------- -------- -------- --------
Net earnings (loss) (1,642) (1,337) (1,383) (2,362)
Preferred stock dividend 60 60 120 120
-------- -------- -------- --------
Net earnings (loss) applicable to
common shareholders (1,702) (1,397) (1,503) (2,482)
======== ======== ======== ========
Other comprehensive income (loss),
net of income taxes
Foreign currency translation adjustment 15 0 15 (7)
======== ======== ======== ========
Comprehensive earnings (loss) $ (1,687) $ (1,397) $ (1,488) $ (2,489)
======== ======== ======== ========
Basic earnings (loss) per common share $ (0.16) $ (0.13) $ (0.14) $ (0.24)
======== ======== ======== ========
Diluted earnings (loss) per common share (0.16) (0.13) (0.14) (0.24)
======== ======== ======== ========
Number of shares used in per share
calculation
Basic 10,729 10,396 10,656 10,394
======== ======== ======== ========
Diluted 10,729 10,396 10,656 10,394
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements
-5-
NUMEREX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE SIX MONTH
PERIOD ENDED JUNE 30,
2002 2001
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows from operating activities:
Net earnings (loss) $(1,383) $ (2,362)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,170 1,488
Business restructuring charges 0 191
Minority interest (326) (1,749)
Changes in assets and liabilities which provided (used) cash:
Accounts receivable (4,398) 434
Inventory 28 474
Prepaid expenses and interest receivable 581 (353)
Accounts payable 1,170 251
Income taxes 36 (128)
Other assets and liabilities (44) (64)
------- --------
Net cash provided by (used in) operating activities (3,166) (1,818)
------- --------
Cash flows from investing activities
Purchase of property and equipment (347) (339)
Purchase of intangible and other assets (1,641) (28)
Long term receivables and deposits (310) 0
Investment in business 0 (133)
------- --------
Net cash provided by (used in) investing activities (2,298) (500)
------- --------
Cash flows from financing activities
Proceeds from exercise of stock options 1,128 46
Proceeds net of payments from capital lease obligations and other long
term liabilities 1,172 (19)
------- --------
Net cash provided by (used in) financing activities 2,300 27
------- --------
Effect of foreign exchange differences on cash 15 (16)
------- --------
Net increase (decrease) in cash and cash equivalents (3,149) (2,307)
Cash and cash equivalents, beginning of period 5,401 10,567
------- --------
Cash and cash equivalents, end of period $ 2,252 $ 8,260
======= ========
See accompanying notes to condensed consolidated financial statements
-6-
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
accounting principles generally accepted in the United States of
America 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 periods ended June
30, 2002 may not be indicative of the results that may be expected for
the year ending December 31, 2002. For further information, reference
is also made to the Numerex Corp.'s (the "Company's") Annual Report on
Form 10-K for the year ended December 31, 2001 and the consolidated
financial statements contained therein.
2. Summary of significant accounting policies
A summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
2.1. Nature of Business
The Company is a technology company comprised of operating
subsidiaries that develop and market a wide range of communications
products and services. The Company's primary focus is wireless data
communications utilizing proprietary network technologies. The Company
primarily offers products and services in wireless data communications
through Cellemetry(R) and Data1Source(TM), and digital multimedia
networking through PowerPlay(TM). These services enable customers
around the globe to monitor and move information for a variety of
applications from home and business security to distance learning. In
addition, the Company offers wireline alarm security products and
services, as well as telecommunications network operational support
systems.
2.2. Principles of Consolidation
The consolidated financial statements include the results of
operations and financial position of the Company and its wholly owned
or controlled subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
2.3. Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly
liquid investments purchased with original maturities of less than
three months to be cash equivalents. As of June 30, 2002, cash and cash
equivalents include $667,000 restricted cash to support letters of
credits.
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2.4. Intangible Assets
Amortization is provided on all intangible assets at rates calculated
to write off the cost of each over its expected life as follows:
- Patents and acquired intellectual property - straight-line
over 7 to 16 years
- Developed software - straight-line over 3 to 5 years
- Goodwill - for the three and six month periods ending June
30, 2001 - straight-line over 12 to 20 years.
Goodwill represents the excess of the cost of net assets acquired over
fair value. Starting January 1, 2002 goodwill is no longer amortized
(see Note 7).
The Company capitalizes software development costs when project
technical feasibility is established and concludes capitalization when
the product is ready for release. Software development costs incurred
prior to the establishments of technical feasibility are expensed as
incurred.
2.5. Property and Equipment
Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service
lives. Leased property under capital leases is amortized over the
lives of the respective leases or over the service lives of the assets
for those leases, whichever is shorter. Depreciation for property,
equipment and buildings is calculated using the straight-line method
over the following estimated lives.
- Short-term leasehold improvements over the term of the lease 3-10 years
- Plant and machinery 4-10 years
- Equipment, fixtures and fittings 3-10 years
2.6. Impairment of Long-lived Assets
The Company periodically evaluates the recoverability of its
long-lived assets or when a specific event indicates that the carrying
value of a long-lived asset may not be recoverable. Recoverability is
assessed based on estimates of future cash flows expected to result
from the use and eventual disposition of the asset. If the sum of
expected undiscounted cash flows is less than the carrying value of
the asset, an impairment loss is recognized for the amount of such
deficiency, using discounted cash methodologies. No such impairment
losses have been recognized during the six months ended June 30, 2002,
and 2001 respectively.
2.7. Income Taxes
The Company accounts for income taxes using the asset and liability
method in accordance with SFAS 109, Accounting for Income Taxes. Under
the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax
-8-
bases of existing assets and liabilities. A valuation allowance is
provided for deferred tax assets when it is more likely than not that
the assets will not be realized.
2.8. Inventory
Inventory and work-in progress are stated at the lower of cost
(first-in, first-out method) or market.
2.9. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts based upon
the expected collectibility of the accounts receivable. When amounts
are determined to be uncollectible, they will be charged to operations
when that determination is made.
2.10. Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable
and accounts payable. The carrying value of the financial instruments
approximates fair value due to the relatively short period to
maturity.
2.11. Use of Estimates
In preparing the Company's financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2.12. Concentration of Credit Risk
The Company maintains its cash balances in financial institutions,
which at times may exceed federally insured limits. The Company has
not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
2.13. Revenue Recognition
The Company's revenue is generated from three sources:
- The supply of product, under non recurring agreements,
- The provision of services, under non recurring agreements,
and,
- The provision of data transportation services, under
recurring or multi-year contractually based agreements.
Revenue is recognized when persuasive evidence of an agreement exists,
the product or service has been delivered, fees and prices are fixed
and determinable, collectibility is probable and when all other
significant obligations have been fulfilled.
The Company recognizes revenue from product sales at the time of
shipment and passage of title. The Company offers customers the right
to return products that do not function properly within a limited
-9-
time after delivery. The Company continuously monitors and tracks such
product returns and records a provision for the estimated amount of
such future returns, based on historical experience and any
notification received of pending returns. While such returns have
historically been within expectations and the provisions established,
the Company cannot guarantee that it will continue to experience the
same return rates that it has experienced in the past. Any significant
increase in product failure rates and the resulting credit returns
could have a material adverse impact on operating results for the
period or periods in which such returns materialize.
The Company recognizes revenue from the provision of services at the
time of the completion, delivery or performance of the service. In the
case of revenue derived from maintenance services the Company
recognizes revenue ratably over the contract term. In certain
instances the Company may, under an appropriate agreement, advance
charge for the service to be provided. In these instances the Company
recognizes the advance charge as deferred revenue (classified as a
liability) and releases the revenue ratably over future periods in
accordance with the contract term as the service is completed,
delivered or performed.
The Company also recognizes revenue from the provision of `multiple
element service agreements', which involve both the supply of product
and the provision of services over a multi-year arrangement.
Accounting principles for agreements involving multiple elements
require the Company to allocate earned revenue to each element based
on the relative fair value of the elements. The arrangement fee for
multiple-element arrangements is allocated to each element, such as
design, product supply, product integration, installation,
maintenance, support and warranty services, based on the relative fair
values of the elements. The Company determines the fair value of each
element in multi-element arrangements based on vendor-specific
objective evidence ("VSOE"). VSOE for each element is based on the
price charged when the same element is sold separately or could be
purchased from an unrelated supplier. If evidence of fair value of all
delivered elements exists but evidence does not exist for one or more
undelivered elements, then revenue is recognized using the residual
method. Under the residual method, the fair value of the undelivered
element is deferred and is recognized ratably over the contract term
on an earned basis. Regarding the supply of product the Company
maintains title to the product and transfers title at the completion
of the contract term.
The Company's arrangements do not generally include acceptance
clauses. However, arrangements involving multiple element service
agreements include certain milestones and levels of certification,
acceptance occurs upon the Company's certification of its completion
of each of the various elements.
The Company recognizes revenue from the provision of its data
transportation services when the Company performs the services or
processes transactions in accordance with contractual performance
standards. Revenue is earned monthly on the basis of the contracted
monthly fee and an excess message fee charge, should it apply, that is
volume based. In certain instances the Company may, under an
appropriate agreement, advance charge for the data transport service
to be provided. In these instances the Company recognizes the advance
charge (even if nonrefundable) as deferred revenue (classified as a
liability) and releases the revenue over future periods in accordance
with the contract term as the data transport service is delivered or
performed.
-10-
2.14. Foreign Currency Transactions
Some transactions of the Company and its subsidiaries are made in
British pounds sterling, Canadian dollars and Australian dollars.
Gains and losses from these transactions are included in income as
they occur.
2.15. Research and Development
Research and development expenses are charged to operations in the
period in which they are incurred.
2.16. Provision for Warranty Claims
Estimated warranty expense is charged over the warranty period of the
warranted products. Warranty expenses have not been significant to the
Company.
2.17. Stock-Based Compensation
Effective November 1, 1996, the Company adopted the provisions of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123
encourages, but does not require, companies to record compensation
cost for stock-based compensation plans at fair value. The Company has
elected to continue to account for stock-based compensation in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting For Stock Issued to Employees, and related interpretations,
as permitted by SFAS 123. Compensation expense for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock (see Note 5).
3. Reclassification
Certain prior year amounts have been reclassified to conform to the
current period presentation.
4. Inventory
($'000's omitted) June 30, 2002 December 31, 2001
------------- -----------------
Raw materials $1,480 $2,404
Work-in-progress 148 186
Finished goods 3,421 2,487
------ ------
$5,049 $5,077
====== ======
5. Shareholders' Equity
Shareholders' Equity decreased by $1,404,000 in the three-month period
ending June 30, 2002. The decrease in Shareholders' Equity is
attributable to the net loss recorded of $1,702,000 offset by the
receipt of $283,000 following the issue of 65,697 shares of Class A
Common Stock of the Company
-11-
resulting from (i) an election under the Directors' Stock Plan and
(ii) the exercise of stock options under the 1999 Long-Term Incentive
Plan and a foreign currency translation gain of $15,000.
In the six-month period to June 30, 2002 Shareholder's Equity
decreased by $360,000. The decrease in Shareholders' Equity is
attributable to the net loss recorded of $1,503,000, offset by the
receipt of $1,128,000 following the issue of 244,178 shares of Class A
Common Stock of the Company resulting from (i) an election under the
Directors' Stock Plan and (ii) the exercise of stock options under the
1999 Long-Term Incentive Plan and foreign currency translation gain of
$15,000.
6. Earnings (Loss) per Share
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, Earnings Per Share, which supercedes APB Opinion No. 15,
Earnings Per Share. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share as well as other disclosures. Basic
earnings per share excludes the dilutive impact of common stock
equivalents and is computed by dividing net earnings (loss) by the
weighted average number of shares of common stock outstanding for the
period.
Diluted earnings (loss) 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 the average
market price of the Company's common stock for the period.
For the three months and six months ended June 30, 2002 and June 30,
2001, the Company's potential common shares have an anti-dilutive
effect on earnings (loss) per share and, therefore, have not been used
in determining the total weighted average number of common shares
outstanding. Potential common shares resulting from options and
warrants that would be used to determine diluted earning (loss) per
share were 849,623 and 860,831 for the three months and six months
ended June 30, 2002 and 2001, respectively.
7. Goodwill and Intangibles
In July 2001, the FASB issued SFAS 141, Business Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for
all business combinations completed after June 30, 2001. SFAS 142 is
effective for fiscal years beginning after December 15, 2001; however,
certain provisions of the statement apply to goodwill and other
intangible assets acquired between July 1, 2001, and the effective
date of SFAS 142. Major provisions of these statements and their
effective dates for the Company are as follows:
- all business combinations initiated after June 30, 2001, must
use the purchase method of accounting. The pooling of
interest method of accounting is prohibited except for
transactions initiated before July 1, 2001.
- intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a
related contract, asset or liability.
-12-
- goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized.
Effective January 1, 2002, all previously recognized goodwill
and intangible assets with indefinite lives will no longer be
subject to amortization.
- effective January 1, 2002, goodwill and intangible assets
with indefinite lives will be tested for impairment annually
and whenever there is an impairment indicator.
- all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
The Company continued to amortize goodwill and intangible assets
recognized prior to July 1, 2001, under its current method until
January 1, 2002, at which time annual and quarterly goodwill
amortization of $767,983 and $191,996 no longer is recognized. As of
June 30, 2002, management does not believe there is impairment of
goodwill or other intangible assets with indefinite lives. By December
31, 2002, the Company will have completed a transitional fair value
based impairment test of goodwill as of January 1, 2002. By December
31, 2002, the Company will have completed a transitional impairment
test of all intangible assets with indefinite lives.
8. Cost Related to Non-recurring Acquisition Activity
In the three-month period ended June 30, 2002, the Company expensed
$1,714,000 of costs relating to a potential business acquisition.
These costs were primarily legal and accounting services incurred
during due diligence. During the three-month period ended June 30,
2002, management determined that consummation of the business
acquisition was unlikely; as a result, these costs were expensed.
Portions of these costs were deferred in prior periods, $727,000 was
deferred during the three-month period ended March 31, 2002 and
$172,000 was deferred in the year ended December 31, 2001. The balance
of the costs of $815,000 was incurred in the three-month period ended
June 30, 2002.
9. Business Restructuring Charges
Business restructuring charges amounted to $609,000 in the six-month
period ended June 30, 2001.
The business restructuring charges of $508,000 in the three-month
period ended June 30, 2001 comprised a charge of $317,000 to cover
employee separation costs and a one-time non-cash charge of $191,000
to cover the write down of excess and obsolete Digital Multimedia
analog product inventory.
The business restructuring charges of $609,000 in the six-month period
ended June 30, 2001 comprised the charges taken in the three-month
period to June 30, 2001 of $508,000 and an additional charge of
$101,000 incurred in the three-month period to March 31, 2001 to cover
employee separation costs.
10. Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145. This Statement rescinds
FASB Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, and an amendment of that Statement, FASB Statement No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
This Statement
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also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statement amends FASB Statement No. 13,
Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. The Company does not believe
SFAS 145 will have a material effect on its financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal. SFAS No. 146 eliminates the
definition and requirements for recognition of exit costs in EITF
Issue No. 94-3. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value only when the liability is incurred.
SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not believe SFAS
146 will have a material effect on its financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
For additional information regarding the Company's critical accounting policies
see Note 2 to the Consolidated Financial Statements included in Part 1, Item 1
above.
GENERAL
The following tables set forth, for the periods indicated the amounts and
percentages of net sales represented by selected items in the Company's
Condensed Consolidated Statements of Operations.
-15-
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
--------------------------------------- --------------------------------------
% %
2002 2001 CHANGE 2002 2001 CHANGE
-------- -------- ------ -------- -------- ------
Net sales:
Wireless Data Communications
Product $ 2,211 $ 1,314 68.3% $ 4,869 $ 2,609 86.6%
Service 2,303 1,402 64.3% 3,895 2,145 81.6%
-------- -------- ------ -------- -------- ------
Sub-total 4,514 2,716 66.2% 8,764 4,754 84.4%
Digital Multimedia and Networking
Product 1,748 2,735 (36.1%) 3,967 5,161 (23.1%)
Service 987 474 108.2% 1,404 1,064 32.0%
-------- -------- ------ -------- -------- ------
Sub-total 2,735 3,209 (14.8%) 5,371 6,225 (13.7%)
Wireline Security
Product 173 105 64.8% 263 269 (2.2%)
Service 86 60 43.3% 204 144 41.7%
-------- -------- ------ -------- -------- ------
Sub-total 259 165 57.0% 467 413 13.1%
Total net sales
Product 4,132 4,154 (0.5%) 9,099 8,039 13.2%
Service 3,376 1,936 74.4% 5,503 3,353 64.1%
-------- -------- ------ -------- -------- ------
Total net sales 7,508 6,090 23.3% 14,602 11,392 28.2%
Cost of sales 3,569 3,862 (7.6%) 7,105 7,044 0.9%
Depreciation and amortization 54 73 (26.0%) 102 145 (29.7%)
-------- -------- ------ -------- -------- ------
Gross profit (loss) 3,885 2,155 80.3% 7,395 4,203 75.9%
% 51.7% 35.4% 50.6% 36.9%
Research and development expenses 188 689 (72.7%) 790 1,533 (48.5%)
Selling, general, administrative and
other expenses 2,952 2,828 4.4% 5,407 5,458 (0.9%)
Depreciation and amortization 549 744 (26.2%) 1,069 1,488 (28.2%)
Costs related to non-recurring
acquisition activity 1,714 0 100.0% 1,714 0 100.0%
Business restructuring charges 0 508 (100.0%) 0 609 (100.0%)
-------- -------- ------ -------- -------- ------
Operating profit (loss) (1,518) (2,614) 41.9% (1,585) (4,885) 67.6%
======== ======== ====== ======== ======== ======
Net earnings (loss) (1,642) (1,337) (22.8%) (1,383) (2,362) 41.4%
======== ======== ====== ======== ======== ======
Net earnings (loss) applicable to
common shareholders (1,702) (1,397) (21.8%) (1,503) (2,482) 39.4%
======== ======== ====== ======== ======== ======
Net earnings (loss) applicable to
common shareholders excluding
non-recurring expenses 12 (889) 101.3% 211 (1,873) 111.3%
======== ======== ====== ======== ======== ======
Basic earnings per share (0.16) (0.13) (0.13) (0.24)
======== ======== ======== ========
Basic earnings per share excluding
non-recurring expenses 0.00 (0.09) 0.02 (0.18)
======== ======== ======== ========
Weighted average shares outstanding 10,729 10,396 10,656 10,394
======== ======== ======== ========
-16-
THREE MONTH PERIOD SIX MONTH PERIOD
ENDED JUNE 30, ENDED JUNE, 30
---------------------- ----------------------
2002 2001 2002 2001
----- ----- ----- -----
Net sales:
Wireless Data Communications
Product 29.4% 21.6% 33.3% 22.9%
Service 30.7% 23.0% 26.7% 18.8%
----- ----- ----- -----
Sub-total 60.1% 44.6% 60.0% 41.7%
Digital Multimedia and Networking
Product 23.3% 44.9% 27.2% 45.3%
Service 13.1% 7.8% 9.6% 9.3%
----- ----- ----- -----
Sub-total 36.4% 52.7% 36.8% 54.6%
Wireline Security
Product 2.3% 1.7% 1.8% 2.4%
Service 1.1% 1.0% 1.4% 1.3%
----- ----- ----- -----
Sub-total 3.4% 2.7% 3.2% 3.6%
Total net sales
Product 55.0% 68.2% 62.3% 70.6%
Service 45.0% 31.8% 37.7% 29.4%
----- ----- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.5% 63.4% 48.7% 61.8%
Depreciation and amortization 0.7% 1.2% 0.7% 1.3%
----- ----- ----- -----
Gross profit (loss) 51.7% 35.4% 50.6% 36.9%
Research and development expenses 2.5% 11.3% 5.4% 13.5%
Selling, general, administrative and
other expenses 39.3% 46.4% 37.0% 47.9%
Depreciation and amortization 7.3% 12.2% 7.3% 13.1%
Costs related to non-recurring
acquisition activity 22.8% 0.0% 11.7% 0.0%
Business restructuring charges 0.0% 8.3% 0.0% 5.3%
----- ----- ----- -----
Operating profit (loss) (20.2%) (42.9%) (10.9%) (42.9%)
===== ===== ===== =====
Net earnings (loss) (21.9%) (22.0%) (9.5%) (20.7%)
===== ===== ===== =====
Net earnings (loss) applicable to
common shareholders (22.7%) (22.9%) (10.3%) (21.8%)
===== ===== ===== =====
Net earnings (loss) applicable to
common shareholders excluding
non-recurring expenses 0.2% (14.6%) 1.4% (16.4%)
===== ===== ===== =====
-17-
RESULTS OF OPERATIONS
Net sales increased 23.3% to $7,508,000 for the three-month period ended June
30, 2002 as compared to $6,090,000 in the comparable period in 2001. In the
six-month period ended June 30, 2002 net sales increased 28.2% to $14,602,000
as compared to $11,392,000 in the comparable period in 2001. The net sales
increase for both periods was primarily attributable to increased revenues from
Wireless Data Communication of 66.2% for the second quarter and 84.4% for the
first six months of the year. Partially offsetting this increase in net sales
was a decrease in revenues from Digital Multimedia and Networking of 14.8% for
the second quarter and 13.7% for the first six months of the year. As a
percentage of total net sales Wireless Data Communication increased to 60.1%
for the second quarter this year compared to 44.6% for the second quarter of
last year and to 60.0% for the first six months of this year compared to 41.7%
for the first six months of last year.
The Wireless Data Communication net sales increase was primarily due to higher
product sales of fixed wireless devices, the introduction of a mobile wireless
device and higher services revenues from increased network connections and
mobile message services, with both new and existing customers. The decrease in
Digital Multimedia and Networking net sales was due to lower product sales due
to decreases in capital spending in the telecommunication industry and with
distant learning customers, partially offset by an increase in service revenues
from system integrations and network monitoring. Net sales of Wireline Security
for both periods reported for this year were comparable to those of the prior
year.
Gross profit as a percentage of net sales increased to 51.7% in the three-month
period ended June 30, 2002 as compared to 35.4% for the comparable period in
2001. In the six-month period ended June 30, 2002 gross profit as a percentage
of sales increased to 50.6% as compared to 36.9% in the comparable period in
2001. The principal reason for the increase in the gross profit rate for both
periods was primarily attributable to the higher product and service sales
activities of Wireless Data Communications, lower product costs due to the
redesign of certain wireless devices, the introduction of a mobile wireless
product, and to a lesser extent, higher gross profit service sales activity in
Digital Multimedia and Networking.
Research and development expenses decreased 72.7% to $188,000 in the
three-month period ended June 30, 2002 as compared to $689,000 for the
comparable period in 2001. In the six-month period ended June 30, 2002 research
and development expenses decreased 48.5% to $790,000 as compared to $1,533,000
in the comparable period in 2001. The principal reasons for the decrease in
research and development expenses for both periods resulted from the
capitalization of development costs for new products that reached technical
feasibility during the period and for internal use software developed for
system backup and for load sharing capabilities.
Selling, general, administrative and other expenses increased 4.4% to
$2,952,000 in the three-month period ended June 30, 2002 as compared to
$2,828,000 for the comparable period in 2001. In the six-month period ended
June 30, 2002 selling, general, administrative and other expenses decreased
0.9% to $5,407,000 as compared to $5,458,000 in the comparable period in 2001.
As a percentage of sales, selling, general, administrative and other expenses
decreased to 39.3% for the second quarter of this year compared to 46.4% for
the second quarter of last year and to 37.0% for the first six months of this
year compared to 47.9% for the first six months of last year. The primary
reason for the decrease in the percentage rate for each period is the relative
fixed nature of these expenses to the Company at its current operating level
and continued focus by management on cost containment.
Depreciation and amortization expense decreased 26.2% to $549,000 for the
three-month period ended June 30, 2002 compared to $744,000 for the comparable
period of 2001. In the six-month period ended June 30, 2002 depreciation and
amortization expenses decreased 28.2% to $1,069,000 as compared to $1,488,000
in the
-18-
comparable period in 2001. The principal reason for the decrease is due to the
reduction in goodwill amortization expense resulting from the implementation of
SFAS 142 on January 1, 2002.
Cost of non-recurring acquisition activity were $1,714,000 for the three-month
and six-month periods ended June 30, 2002. This write-off was the result of the
Company reaching an impasse in its negotiations with BT Group plc to acquire
their RedCARE division, its security products and service business. These costs
were primarily related to legal and accounting expenses incurred during
diligence and negotiations.
Business restructuring charges amounted to $508,000 in the three-month period
ended June 30, 2001. In the six-month period ended June 30, 2001 business
restructuring charges amounted to $609,000. The business restructuring charges
of $508,000 in the three-month period ended June 30, 2001 comprised a charge of
$317,000 to cover employee separation costs and a one-time non-cash charge of
$191,000 to cover the write down of excess and obsolete Digital Multimedia
analog product inventory. The business restructuring charges of $609,000 in the
six-month period ended June 30, 2001 comprised the charges taken in the
three-month period to June 30, 2001 of $508,000 and an additional charge of
$101,000 incurred in the three-month period to March 31, 2001 to cover employee
separation costs.
Interest and other income for the three-month period ended June 30, 2002 was
$(54,000) compared to $295,000 in the comparable period in 2001. In the
six-month period ended June 30, 2002 interest and other income was $(54,000) as
compared to $659,000 in the comparable period in 2001. These decreases in
interest and other income were the result of a decrease in income earned on
cash balances and an increase in interest expense from capital leases.
Minority interest in the three-month period ended June 30, 2002 was $0.00 as
compared to $867,000 in the comparable period in 2001. In the six-month period
ended June 30, 2002 minority interest was $326,000 as compared to $1,749,000 in
the comparable period in 2001. The principle reason for the decrease in
Minority interest is the depletion of Minority Interest on the Company's
balance sheet.
The Company, due to the loss position from operations, did not record a tax
provision in the three-month and six-month periods ended June 30, 2002 and
2001, respectively. The $70,000 in income tax recorded during the three-month
period ended June 30, 2002 relates to an income tax withholding on a
international product and service sale during the quarter. A provision for the
recovery of income tax of $115,000 was recorded in the three-month period ended
June 30, 2001 following the completion and submittal of the Company's federal
income tax returns in connection with an assessed over payment of federal
income tax installments in connection with the sale of the Company's Derived
Channel technology.
The Company recorded a net loss of $1,642,000 in the three-month period ended
June 30, 2002 as compared to net loss of $1,337,000 in the comparable period in
2001. In the six-month period ended June 30, 2002 the Company recorded a net
loss of $1,383,000 as compared to a net loss $2,362,000 in the comparable
period in 2001.
The Company recorded a net loss applicable to common shareholders of $1,702,000
in the three-month period ended June 30, 2002 as compared to net loss
applicable to common shareholders of $1,397,000 in the comparable period in
2001. In the six-month period ended June 30, 2002 the Company recorded a net
loss applicable to common shareholders of $1,503,000 as compared to a net loss
applicable to common shareholders of $2,482,000 in the comparable period in
2001.
Excluding the $1,714,000 in cost related to non-recurring acquisition activity
and the $508,000 for business restructuring charges, the Company would have
recorded net earnings applicable to common shareholders of $12,000 for the
three-month period ended June 30, 2002 as compared to net loss of $1,397,000 in
the comparable period in 2001. In the six-month period ended June 30, 2002 the
Company would have recorded net
-19-
earnings applicable to common shareholders of $211,000 as compared to a net
loss $1,873,000 in the comparable period in 2001.
Basic and diluted earnings (loss) per common share decreased to $(0.16) in the
three-month period ended June 30, 2002 as compared to $(0.13) in the comparable
period in 2001. In the six-month period ended June 30, 2002 basic and diluted
earnings (loss) per share increased to $(0.14) as compared to $(0.24) in the
comparable period in 2001.
Excluding the cost related to non-recurring acquisition activity and business
restructuring charges, basic and diluted earnings (loss) per common share
increased to $0.00 in the three-month period ended June 30, 2002 as compared to
$(0.09) in the comparable period in 2001. In the six-month period ended June
30, 2002 basic and diluted earnings (loss) per share increased to $0.02 as
compared to $(0.18) in the comparable period in 2001.
The weighted average and diluted shares outstanding increased to 10,729,000 for
the period ended June 30, 2002 as compared to 10,396,000 in the comparable
period in 2001. In the six-month period ended June 30, 2002 weighted average
and diluted shares outstanding increased to 10,656,000 as compared to
10,394,000 in the comparable period in 2001. For both periods the increase in
shares was due to the exercise of stock options.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
The Company has been able to fund its operations and working capital
requirements from cash flow generated by operations, the proceeds from a public
offering completed in April 1995, the proceeds from the sale of its Derived
Channel technology in November 1999, the proceeds from capital leases and the
proceeds from the exercise of stock options.
Net cash used in operating activities increased to $3,166,000 for the six-month
period ended June 30, 2002 as compared to $1,818,000 in the comparable period
in 2001. The increase in cash used was primarily due to changes in working
capital partially offset by a decrease in net losses. The largest contributor
to the use of working capital was an increase in accounts receivable of
$4,398,000 due principally to product and service sales in Digital Multimedia
and Networking during the first six months of this year, a significant portion
of which are expected to be collected during the third quarter of this year.
Net cash used in investing activities increased to $2,298,000 in the six-month
period ended June 30, 2002 as compared to $500,000 in the comparable period in
2001. The increase in cash used was primarily the result of increased
investment in intangible assets, including the purchase of a software license
and, to a lesser extent, the capitalization of internally developed software
for customer product and service applications and for internal use.
Net cash provided by financing activities increased to $2,300,000 in the
six-month period ended June 30, 2002 as compared to net cash provided by
financing activities of $27,000 in the comparable period in 2001. The increase
in cash was primarily due to the receipt of $1,128,000 in the six-month period
to June 30, 2002 from the exercise of stock options which resulted in the
issuance of an additional 244,178 shares of the Company's Class A Common Stock
against the receipt of $46,000 in the six-month period to June 30, 2001 from
the exercise of stock options which resulted in the issuance of an additional
8,360 shares of the Company's Class A Common Stock, respectively. In addition,
the Company received proceeds, net of payments, of $1,172,000 during the first
six months of the year from capital leases and other obligations related to
assets purchases.
The Company had working capital balances of $10,519,000 and $11,332,000,
respectively, as of June 30, 2002 and December 31, 2001.
The Company's business has traditionally not been capital intensive and,
accordingly, capital expenditures have not been material. To date, the Company
has funded all capital expenditures from working capital, capital lease
-20-
and other long-term obligations, proceeds from the public offering and the
proceeds from the sale of its Derived Channel technology in November 1999.
The Company is obligated under the First Amendment to the Operating Agreement
of Cellemetry LLC ("Cellemetry") to fund the operations of Cellemetry to an
amount of $5,500,000 by way of interest bearing debt financing to be available
to fund the operations of Cellemetry and its wholly owned subsidiary Uplink
Security, Inc.
The Company has provided the full amount of the facility to Cellemetry and the
Company may, but is not obligated to continue to fund Cellemetry with
additional interest bearing debt financing. All borrowings carry the Prime Rate
of interest. At June 30, 2002 the Company had provided total interest bearing
debt-financing amounting to $17,616,000.
Expansion of the Company's business in fiscal 2002, including increased market
penetration and increased product and service sales based on recurring revenue,
may require greater working capital needs and capital investments than in the
past. While the Company believes that its balance of cash and cash equivalents
are sufficient to meet its present operating and capital requirements, it does
plan to secure access to additional funding sources. Therefore, it is in
discussions with financial institutions to establish a line of credit to be
used for future growth in working capital and capital expenditures.
Additionally, cash requirements for future expansion of the Company's
operations will be evaluated on an as-needed basis and may involve additional
external financing, beyond the establishment of a line of credit. The Company
does not expect that such additional financing, should it occur, will have a
materially negative impact on the Company's ability to fund its existing
operations.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
At June 30, 2002 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. At June
30, 2002 the Company had no outstanding borrowings payable except for
obligations under capital leases. 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.
-22-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is involved in routine legal
proceedings in the normal course of its business. The Company believes
that no currently pending legal proceedings will have a materially
adverse effect on its business, its financial condition or results of
operations.
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 OF FORM 8-K.
a. Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K during the quarter ended June 30, 2002.
None - not applicable.
-23-
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: August 14, 2002 By: /s/ Stratton J. Nicolaides
------------------ -------------------------------------
STRATTON J. NICOLAIDES
Chairman and Chief Executive Officer
Date: August 14, 2002 By: /s/ Kenneth W. Taylor
------------------- -------------------------------------
KENNETH W. TAYLOR
Executive Vice President,
Chief Financial Officer, and
Principal Financial and Accounting
Officer
-24-