10-Q 1 a10-q.txt FORM 10-Q 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, 2000 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 July 28, 2000, an aggregate of 10,368,213 shares of the registrant's Class A Common Stock, no par value (being the registrant's only class of common stock outstanding), were outstanding. NUMEREX CORP. AND SUBSIDIARIES INDEX
PAGE ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and October 31, 1999 5 Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month period ended March 31, 2000 and 1999 7 Pro Forma Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month period ended March 31, 2000 and 1999 8 Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month and six-month period ended June 30, 2000 and 1999 9 Pro Forma Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month and six-month period ended June 30, 2000 and 1999 10 Condensed Consolidated Statements of Cash Flows (unaudited) for the six-month period ended June 30, 2000 and 1999 11 Notes to Condensed Consolidated Financial Statements (unaudited) 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3. Quantitative and Qualitative Disclosures about Market Risks 19 Part II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20
- 2 - NUMEREX CORP. AND SUBSIDIARIES INDEX (Continued)
PAGE ---- Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 22 Signature Page 22
- 3 - FORWARD-LOOKING STATEMENTS The information contained in this Quarterly Report on Form 10-Q for the period ended June 30, 2000 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, 1999 and in other reports filed with the Securities and Exchange Commission. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. - 4 - NUMEREX CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS U.S. DOLLARS)
JUNE 30, DECEMBER 31, OCTOBER 31, 2000 1999 1999 (UNAUDITED) (UNAUDITED) ----------- ------------ ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 19,357 $ 21,490 $ 5,691 Accounts receivable, net 5,378 6,241 11,015 Inventory 3,986 3,618 4,525 Prepaid taxes 0 0 311 Prepaid expenses 129 259 293 -------- -------- -------- TOTAL CURRENT ASSETS 28,850 31,608 21,835 PROPERTY AND EQUIPMENT, NET 2,707 2,899 3,792 GOODWILL, NET 11,086 11,404 8,808 INTANGIBLE ASSETS, NET 10,131 10,410 12,108 OTHER ASSETS 84 84 85 -------- -------- -------- TOTAL ASSETS $ 52,858 $ 56,405 $ 46,628 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,056 $ 2,823 $ 4,159 Income taxes 444 854 1,902 Other current liabilities 2,396 3,094 3,231 Obligations under capital leases, current portion 26 25 30 -------- -------- -------- TOTAL CURRENT LIABILITIES 4,922 6,796 9,322 LONG TERM LIABILITIES Obligations under capital leases 64 85 84 -------- -------- -------- MINORITY INTEREST 5,370 6,616 7,201 -------- -------- -------- SHAREHOLDERS' EQUITY Preferred stock--no par value; authorized 3,000,000; issued 30,000 at June 30, 2000 and December 31, 1999 and 0 at October 31, 1999 3,000 3,000 0 Class A , common stock--no par value; authorized 30,000,000; issued 12,047,542 at June 30, 2000 and 11,609,492 at October 31, and December 1, 1999 31,425 29,870 29,870 Additional paid-in-capital 370 370 370 Treasury stock, at cost, 1,266,400 shares at June 30, 2000 and December 31 and October 31, 1999 (5,222) (5,222) (5,222) Accumulative other comprehensive income (47) (20) 4 Retained earnings 12,976 14,910 4,999 -------- -------- -------- 42,502 42,908 30,021 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 52,858 $ 56,405 $ 46,628 ======== ======== ========
- 5 - See accompanying notes to condensed consolidated financial statements - 6 - NUMEREX CORP.--DIRECT COMPARISON CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, --------------------------- 2000 1999 (UNAUDITED) (UNAUDITED) ----------- ----------- Net sales $ 5,139 $ 5,691 Cost of sales 2,426 3,506 Selling, general, administrative and other expenses 3,985 4,935 -------- -------- Operating profit (loss) (1,272) (2,750) Interest and other income, net 309 82 Gain on disposition of assets and business, net of income tax 0 0 Minority interest 581 713 -------- -------- Earnings (loss) before income taxes (382) (1,955) Provision for income taxes 0 323 Net earnings (loss) (382) (2,278) Preferred stock dividend 60 0 Net earnings (loss) applicable to common shareholders (442) (2,278) ======== ======== Other comprehensive earnings (loss), net of income taxes Foreign currency translation adjustment (17) 24 -------- -------- Comprehensive earnings (loss) $ (459) $ (2,254) ======== ======== Basic earnings (loss) per common share $ (0.04) $ (0.22) Diluted earnings (loss) per common share (0.04) (0.22) -------- -------- Number of shares used in per share calculation Basic 10,434 10,351 Diluted 10,434 10,351 -------- --------
The Direct Comparison Condensed Consolidated Statements of Operations and Comprehensive Income are presented inclusive of the impact of (i) the disposition of assets and business, net of income tax, relating to the Company's wireline Derived Channel (`Derived Channel') and, (ii) operations relating to certain of the Company's wireline Derived Channel, in the periods ended March 31, 2000 and 1999, respectively. See accompanying notes to condensed consolidated financial statements - 7 - NUMEREX CORP.--PRO FORMA COMPARISON CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, --------------------------- 2000 1999 (UNAUDITED) (UNAUDITED) ----------- ----------- Net sales $ 5,139 $ 2,865 Cost of sales 2,426 2,479 Selling, general, administrative and other expenses 3,985 4,199 -------- -------- Operating profit (loss) (1,272) (3,813) Interest and other income, net 309 54 Minority interest 581 713 -------- -------- Earnings (loss) before income taxes (382) (3,046) Provision for income taxes 0 0 -------- -------- Net earnings (loss) (382) (3,046) Preferred stock dividend 60 0 -------- -------- Net earnings (loss) applicable to common shareholders (442) (3,046) ======== ======== Other comprehensive earnings (loss), net of income taxes Foreign currency translation adjustment (17) 75 -------- -------- Comprehensive earnings (loss) $ (459) $ (2,971) ======== ======== Basic earnings (loss) per common share $ (0.04) $ (0.29) Diluted earnings (loss) per common share (0.04) (0.29) -------- -------- Number of shares used in per share calculation Basic 10,434 10,351 Diluted 10,434 10,351 -------- --------
The Pro Forma Comparison Condensed Consolidated Statements of Operations and Comprehensive Income are presented exclusive of the impact of (i) the disposition of assets and business, net of income tax, relating to the Company's wireline Derived Channel (`Derived Channel') and, (ii) operations relating to certain of the Company's wireline Derived Channel, in the periods ended March 31, 2000 and 1999, respectively. See accompanying notes to condensed consolidated financial statements - 8 - NUMEREX CORP.--DIRECT COMPARISON 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, ------------------------- ------------------------- 2000 1999 2000 1999 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------- ----------- ----------- ----------- Net sales $ 4,933 $ 10,011 $ 10,072 $ 15,702 Cost of sales 2,831 4,742 5,257 8,248 Selling, general, administrative and other expenses 4,668 5,029 8,653 9,964 -------- -------- -------- -------- Operating profit (loss) (2,566) 240 (3,838) (2,510) Interest and other income, net 431 25 740 107 Gain on disposition of assets and business, net of income tax 0 0 0 0 Minority interest 703 728 1,284 1,441 -------- -------- -------- -------- Earnings (loss) before income taxes (1,432) 993 (1,814) (962) Provision for income taxes 0 643 0 966 -------- -------- -------- -------- Net earnings (loss) (1,432) 350 (1,814) (1,928) Preferred stock dividend 60 0 120 0 -------- -------- -------- -------- Net earnings (loss) applicable to common shareholders (1,492) 350 (1,934) (1,928) ======== ======== ======== ======== Other comprehensive income (loss), net of income taxes Foreign currency translation adjustment (10) (399) (27) (375) -------- -------- -------- -------- Comprehensive earnings (loss) $ (1,502) $ (49) $ (1,961) $ (2,303) ======== ======== ======== ======== Basic earnings (loss) per common share $ (0.14) $ 0.03 $ (0.18) $ (0.19) Diluted earnings (loss) per common shar (0.14) 0.03 (0.18) (0.19) -------- -------- -------- -------- Number of shares used in per share calculation Basic 10,781 10,343 10,608 10,347 Diluted 10,781 10,401 10,608 10,347 -------- -------- -------- --------
The Direct Comparison Condensed Consolidated Statements of Operations and Comprehensive Income are presented inclusive of the impact of (i) the disposition of assets and business, net of income tax, relating to the Company's wireline Derived Channel (`Derived Channel') and, (ii) operations relating to certain of the Company's wireline Derived Channel, in the periods ended June 30, 2000 and 1999, respectively. See accompanying notes to condensed consolidated financial statements - 9 - NUMEREX CORP. - PRO FORMA COMPARISON 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, 2000 1999 2000 1999 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales $ 4,933 $ 6,087 $ 10,072 $ 8,952 Cost of sales 2,831 3,673 5,257 6,152 Selling, general, administrative and other expenses 4,668 4,281 8,653 8,480 -------- -------- -------- -------- Operating profit (loss) (2,566) (1,867) (3,838) (5,680) Interest and other income, net 431 16 740 70 Minority interest 703 728 1,284 1,441 -------- -------- -------- -------- Earnings (loss) before income taxes (1,432) (1,123) (1,814) (4,169) Provision for income taxes 0 0 0 0 -------- -------- -------- -------- Net earnings (loss) (1,432) (1,123) (1,814) (4,169) Preferred stock dividend 60 0 120 0 -------- -------- -------- -------- Net earnings (loss) applicable to common shareholders (1,492) (1,123) (1,934) (4,169) ======== ======== ======== ======== Other comprehensive income (loss), net of income taxes Foreign currency translation adjustment (10) (107) (27) (32) -------- -------- -------- -------- Comprehensive earnings (loss) $ (1,502) $ (1,230) $ (1,961) $ (4,201) ======== ======== ======== ======== Basic earnings (loss) per common share $ (0.14) $ (0.11) $ (0.18) $ (0.40) Diluted earnings (loss) per common share (0.14) (0.11) $ (0.18) $ (0.40) -------- -------- -------- -------- Number of shares used in per share calculation Basic 10,781 10,343 10,608 10,347 Diluted 10,781 10,343 10,608 10,347 -------- -------- -------- --------
The Pro Forma Comparison Condensed Consolidated Statements of Operations and Comprehensive Income are presented exclusive of the impact of (i) the disposition of assets and business, net of income tax, relating to the Company's wireline Derived Channel (`Derived Channel') and, (ii) operations relating to certain of the Company's wireline Derived Channel, in the periods ended June 30, 2000 and 1999, respectively. See accompanying notes to condensed consolidated financial statements - 10 - NUMEREX CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS U.S. DOLLARS)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, --------------------------- 2000 1999 (UNAUDITED) (UNAUDITED) ----------- ----------- Cash flows from operating activities: Net earnings (loss) $ (1,814) $ (1,928) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,405 1,701 Minority interest (1,284) (1,441) Gain on disposition of assets 0 0 Gain on disposition of business 0 0 Changes in assets and liabilities which provided (used) cash: Accounts receivable 863 (2,202) Inventory (366) (1,156) Prepaid expenses and taxes (280) 1,056 Accounts payable (768) 2,226 Other assets and liabilities (698) 106 -------- -------- Net cash provided by (used in) operating activities (2,942) (1,638) -------- -------- Cash flows from investing activities Proceeds from disposition of assets 0 0 Proceeds from disposition of business 0 0 Purchase of property and equipment (475) (1,028) Purchase of intangible and other assets (120) (349) Investment in business (22) 0 -------- -------- Net cash provided by (used in) investing activities (617) (1,377) -------- -------- Cash flows from financing activities Principal payment on revolving credit facility 0 (6,000) Proceeds from exercise of stock options 1,593 0 Principal payment on capital lease obligations (20) (2) Dividend payments (120) 0 Purchase of treasury stock 0 (158) -------- -------- Net cash provided by (used in) financing activities 1,453 (6,160) -------- -------- Effect of exchange differences on cash (27) (921) -------- -------- Net increase (decrease) in cash and cash equivalents (2,133) (10,096) Cash and cash equivalents, beginning of period 21,490 5,684 -------- -------- Cash and cash equivalents, end of period $ 19,357 $ 5,588 ======== ========
See accompanying notes to condensed consolidated financial statement - 11 - NUMEREX CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2000 may not be indicative of the results that may be expected for the year ending December 31, 2000. For further information, reference is also made to the Company's Annual Report on Form 10-K for the year ended October 31, 1999 and the consolidated financial statements contained therein. 2. REPORTING CURRENCY The condensed consolidated financial statements and the notes thereto are stated in U.S. Dollars for all periods presented. 3. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current period presentation. 4. INVENTORY
JUNE 30, 2000 DECEMBER 31, 1999 OCTOBER 31, 1999 ------------- ----------------- ---------------- ($'000's omitted) Raw materials $1,521 $1,978 $ 1,871 Work-in-progress 54 70 698 Finished goods 2,411 1,570 1,956 ------- ------- ------- Total $ 3,986 $ 3,618 $ 4,525 ------- ------- -------
5. REVOLVING CREDIT FACILITY The Company had a revolving credit facility, which provided for maximum borrowings of $10,000,000 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 0.25% or LIBOR plus 1.25%. - 12 - On January 8, 1999, the Company terminated its revolving credit facility and repaid amounts due including interest totaling $6,008,733. 6. SHAREHOLDER'S EQUITY The Company in the six-month period to June 30, 2000 issued 438,050 shares of Class A Common Stock of the Company following the exercise of stock options and warrants. - 13 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL This quarterly report on Form 10-Q for the period ended June 30, 2000 is the first quarterly report filed by the Company following its change in fiscal year end from October 31 to December 31. Under applicable SEC regulations, the Company is permitted to combine the information presented below for the quarter ended June 30, 2000 with the information for the two months of February 2000 and March 2000. To facilitate an understanding of the Company's financial condition and results of operations, however, the Company has chosen to present information for the combined period of January 1, 2000 to June 30, 2000. The Company also has included separate financial statements (unaudited) in this quarterly report for the three-month periods ended March 31, 2000 and March 31, 1999, respectively. The following tables set forth, for the periods indicated the amounts and percentages of net sales represented by selected items in the Company's Direct Comparison Condensed Consolidated Statements of Operations and Pro Forma Comparison Condensed Consolidated Statements of Operations.
SIX-MONTH PERIOD ENDED JUNE 30, (In Thousands U.S. Dollars) 2000 1999 1999 ---- ---- ---- PRO FORMA Net sales: Digital Multimedia and Networking $ 4,840 $ 5,587 $ 5,587 Wireless Communications and Security 5,232 10,115 3,365 -------- -------- -------- Total net sales 10,072 15,702 8,952 Cost of sales 5,257 8,248 6,152 -------- -------- -------- Gross profit (loss) 4,815 7,454 2,800 Selling, general, administrative and other expenses 8,653 9,964 8,480 -------- -------- -------- Operating profit (loss) $ (3,838) $ (2,510) $ (5,680) -------- -------- --------
(As a Percentages of Net Sales)
2000 1999 1999 ---- ---- ---- PRO FORMA Net sales: Digital Multimedia and Networking 48.1% 35.6% 62.4% Wireless Communications and Security 51.9% 64.4% 37.6% -------- -------- -------- Total net sales 100.0% 100.0% 100.0% Cost of sales 52.2% 52.5% 68.7% -------- -------- -------- Gross profit (loss) 47.8% 47.5% 31.3% Selling, general, administrative and other expenses 85.9% 63.5% 94.7% -------- -------- -------- Operating profit (loss) (38.1%) (16.0%) (63.4%) -------- -------- --------
- 14 - RESULTS OF OPERATIONS In November 1999 the Company divested its Derived Channel technology to British Telecommunications plc. The transaction comprised the sale of the Company's Derived Channel technology and wholly owned subsidiary, Bronzebase Limited, an English limited liability company, which owned all of the stock of Versus Technology Limited. As part of the transaction the Company retained the right to market, under license, derived channel in North, Central and South America, South Korea and Australia. The management discussion and analysis of financial condition and results of operations which follows covers the Company's six-month period ended June 30, 2000 comparing same against (i) the six-month period ended June 30, 1999 and (ii) on a pro forma basis the six-month period ended June 30, 1999 adjusted for income and expenditures directly related to the Company's divested Derived Channel technology. DIRECT COMPARISON Net sales decreased 35.9% to $10,072,000 for the six-month period ended June 30, 2000, as compared to $15,702,000 for the comparable period in 1999. Digital Multimedia and Networking product and service sales and revenues decreased by 13.4% to $4,840,000 for the six-month period ended June 30, 2000 as compared to the comparable period in 1999. The principal reason for the reduction in sales was a 36.2% decrease in Digital Multimedia product sales resulting from the transition from the marketing and sale of analog based product to the marketing and sale of the new digital hardware and software based product platform, `PowerPlay'. The reduction in sales was, however, partially offset by a 53.0% increase in Networking product and service sales resulting from growth in its core business activities. Wireless Communications and Security product and service sales and revenues decreased by 48.3% to $5,232,000 for the six-month period ended June 30, 2000 as compared to the comparable period in 1999. The principal reason for the reduction in sales was the loss, for the entire period, of Derived Channel Systems product sales resulting from the divestment of Derived Channel. The reduction in sales was, however, partially offset by the continued growth in Wireless Communications product and service revenues, an increase of 76.7%, resulting from the marketing and sales effort to establish the Company as a recognized national wireless data service. Cost of sales decreased by 36.3% to $5,257,000 for the six-month period ended June 30, 2000 as compared to $8,248,000 for the comparable period in 1999. The reduction in cost of sales resulted primarily from the loss, for the entire period, of Derived Channel Systems product sales resulting from the divestment of Derived Channel. - 15 - Gross profit as a percentage of net sales increased to 47.8% for the six-month period ended June 30, 2000 as compared to 47.5% for the comparable period in 1999. Selling, general, administrative and other expenses decreased by 13.2% to $8,653,000 for the six-month period ended June 30, 2000 as compared to $9,964,000 for the comparable period in 1999. The principal reason for the reduction resulted primarily from the loss, for the entire period, of Derived Channel Systems expenses resulting from the divestment of Derived Channel. Interest and other income increased by 591.6% to $740,000 for the six-month period ended June 30, 2000 as compared to $107,000 for the comparable period in 1999. The increase was primarily related to interest income earned on cash balances. Minority interest decreased by 10.9% to $1,284,000 for the six-month period ended June 30, 2000 as compared to $1,441,000 for the comparable period in 1999. The gain represents that portion of the losses of the Company's Wireless Communications business that is not accounted for by the Company. The Company, due to the loss position from operations, did not record a tax provision for the six-month period ended June 30, 2000 as compared to a tax provision of $966,000 for the comparable period in 1999. The change in tax provision resulted from the sale of the Company's United Kingdom Derived Channel business as part of the divestment of Derived Channel. The Company recorded a net loss of $1,814,000 for the six-month period ended June 30, 2000 as compared to a net loss of $1,928,000 for the comparable period in 1999. The weighted average and diluted shares outstanding increased to 10,608,000 for the period ended June 30, 2000 as compared to weighted average and diluted shares outstanding of 10,347,000 for the comparable period in 1999. PRO FORMA COMPARISON On a pro forma comparative basis, excluding sales of the divested Derived Channel for the six-month period ended June 30, 1999, net sales increased by 12.5% to $10,072,000 for the six-month period ended June 30, 2000 as compared to $8,952,000 for the comparable period in 1999. On a pro forma comparative basis, Wireless Communications and Security product and service sales and revenues increased by 55.5% to $5,232,000 for the six-month period ended June 30, 2000 as compared to the comparable period in 1999. The principal reason for the improvement was the continued growth in Wireless Communications product and service revenues, an increase of 76.7%, resulting from the marketing and sales effort to establish the Company as a recognized national wireless data service. Additionally, residual Derived Channel wireline Security product and service sales increased by 30.4%. The increase in Security revenues resulted from one-time product and service contract revenues earned in Australia that was reflected in the three-month period ended March 31, 2000. Excluding the Australian - 16 - product and services contract revenues, residual Derived Channel wireline Security product and service contract revenues decreased by 53.6%. On a pro forma comparative basis, excluding cost of sales of the divested Derived Channel for the six-month period ended June 30, 1999, cost of sales decreased by 14.6% to $5,257,000 for the six-month period ended June 30, 2000 as compared to $6,152,000 for the comparable period in 1999. The reduction in cost of sales was primarily accounted for by the decrease in Digital Multimedia product and service sales resulting from the transition from the marketing and sale of analog based product to the marketing and sale of the new digital hardware and software based product platform, `PowerPlay'. The reduction in cost of sales was also favorably impacted by the increase in Wireless Communication product and service sales and revenues, particularly from the continuing growth in recurring service revenues. On a pro forma comparative basis, excluding gross profit of the divested Derived Channel for the six-month period ended June 30, 1999, gross profit as a percentage of net sales increased to 47.8% for the six-month period ended June 30, 2000 as compared to 31.3% for the comparable period in 1999. The improvement in gross profit margin resulted from the combined impact of the increase in Company product and service sales revenues and the decrease in Company cost of sales expense. On a pro forma comparative basis, excluding the selling, general, administrative and other expenses of the divested Derived Channel for the six-month period ended June 30, 1999, selling, general, administrative and other expenses increased by 2.0% to $8,653,000 for the six-month period ended June 30, 2000 as compared to $8,480,000 for the comparable period in 1999. On a pro forma comparative basis, excluding interest and other income of the divested Derived Channel for the six-month period ended June 30, 1999, interest and other income increased to $740,000 for the six-month period ended June 30, 2000 as compared to $70,000 for the comparable period in 1999. The increase was primarily related to interest income earned on cash balances. Minority interest decreased by 10.9% to $1,284,000 for the six-month period ended June 30, 2000 as compared to $1,441,000 for the comparable period in 1999. The gain represents that portion of the losses of the Company's Wireless Communications business that is not accounted for by the Company. On a pro forma comparative basis, excluding the results of operations of the divested Derived Channel for the six-month period ended June 30, 1999, the net loss recorded by the Company decreased by 56.5% to $1,814,000 for the six-month period ended June 30, 2000 as compared to $4,169,000 for the comparable period in 1999. The reduction in net loss primarily resulted from the increased level of sales activity, composition of product and service sales revenues and the continuing growth of the Company's recurring service revenues. The weighted average shares and diluted shares outstanding increased to 10,608,000 for the period ended June 30, 2000 as compared to weighted average and diluted shares outstanding of 10,347,000 for the comparable period in 1999. - 17 - 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 and the proceeds from the sale of its Derived Channel technology in November 1999. Net cash used in operating activities increased by 79.6% to $2,942,000 for the six-month period ended June 30, 2000 as compared to $1,638,000 for the comparable period in 1999. The increase in cash used was primarily due to changes in working capital. Net cash used in investing activities decreased by 55.2% to $617,000 for the six-month period ended June 30, 2000 as compared to net cash used in investing activities of $1,377,000 for the comparable period in 1999. The decrease was the result of reduced investment in tangible and intangible assets. Net cash provided by financing activities amounted to $1,453,000 for the six-month period ended June 30, 2000 as compared to net cash used in financing activities of $6,160,000 for the comparable period in 1999. The change in cash position was primarily accounted for by the receipt of $1,593,000 of proceeds from the exercise of stock options which resulted in the issue of an additional 438,050 shares of the Company's Class A Common Stock in the period to June 30, 2000 and the repayment, in full in January 1999, of amounts due under the Company's then Revolving Credit Facility and the buy-back of the Company's common stock in the corresponding period in 1999. The Company had working capital balances of $23,928,000 and $12,513,000, respectively, as of June 30, 2000 and October 31, 1999. 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 the proceeds from the sale of Derived Channel in November 1999. The Company is obligated under the First Amendment to the Operating Agreement of Cellemetry LLC to fund the operations of Cellemetry LLC to an amount of $5,500,000 by way of interest bearing debt financing. The financing will be used to fund the operations of Cellemetry LLC and Uplink Security, Inc. as both operations are expected to be cash flow negative in fiscal 2000. Expansion of the Company's Digital Multimedia Networking business in fiscal 2000, including the establishment and increased market penetration of PowerPlay-TM-, may require greater capital investments than in the past. - 18 - The Company believes that its cash and cash equivalents, including funds available from the divestment of its Derived Channel technology will be sufficient to finance its operating and capital requirements in fiscal 2000. Cash requirements for future expansion of the Company's operations will be evaluated on an as-needed basis and may involve external financing. The Company does not expect that such expansion, should it occur, will have a materially negative impact on the Company's ability to fund its existing operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. At June 30, 2000 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. At June 30, 2000 the Company has 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. - 19 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. As previously reported in the Company's Form 10 - Q for the three-month period ended January 31, 2000, in connection with the Company's acquisition of the entire equity interest in Uplink Security, Inc. ("Uplink") a petition was filed by Uplink in the Superior Court of Fulton County, Georgia seeking an appraisal of the value of a minority stockholders shares. The minority stockholder has alleged that the acquisition of Uplink was procedurally improper and should be set aside and that Uplink and certain of its officers (together with the Company and certain of its officers) conspired to oppress the minority stockholder of Uplink and acted fraudulently in effectuating the acquisition. The case is entering the discovery phase. Neither the Company nor its officers are parties to the litigation. The Company believes however, that the value the minority stockholder is claiming for the shares is in excess of the fair value of those shares. The Company also believes that the minority stockholder's other claims are without merit, and Uplink intends to vigorously defend the litigation. ITEM 2. CHANGES IN SECURITIES. None--not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None--not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Annual Meeting of Shareholders of the Company was held on April 28, 2000 (the "Meeting"). Three proposals were presented for a vote at the Meeting. Proposal 1--The election of six directors, George Benson, Matthew J. Flanigan, Allan H. Liu, Stratton J. Nicolaides, John G. Raos and Andrew J. Ryan, each to serve as a director of the Company for a one-year term expiring at the annual meeting of shareholders to be held in 2001 and until the election and qualification of each successor. - 20 - Proposal 1--To elect a Board of Directors consisting of six persons to serve until the next annual meeting of shareholders and until their respective successors have been duly elected and qualified. The proposal was approved as follows:
FOR WITHHELD --- -------- George Benson 8,782,267 459,700 Matthew J. Flanigan 8,782,267 459,700 Allan H. Liu 8,782,267 459,700 Stratton J. Nicolaides 8,782,242 459,725 John G. Raos 8,782,267 459,700 Andrew J. Ryan 8,782,267 459,700
Proposal 2--The approval of the Company's Long -Term Incentive Plan. Proposal 2--To approve the Company's Long-Term Incentive Plan. The proposal was approved as follows:
FOR AGAINST ABSTAIN --- ------- ------- 5,327,246 585,981 45,800
Proposal 3--The ratification of the appointment of Grant Thornton LLP as the Company's independent public accountants for the current fiscal year ending October 31, 2000. Proposal 3--To consider and vote upon the ratification of the selection by the Board of Directors of Grant Thornton LLP as independent accountants to the Company for the current fiscal year ending October 31, 2000. The proposal was approved as follows:
FOR AGAINST ABSTAIN --- ------- -------
9,237,417 2,850 1,700 ITEM 5. OTHER INFORMATION. None - not applicable. - 21 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.10 Numerex Corp. 1999 Long-term Incentive Plan 27 Financial Data Schedule (b) Reports on Form 8-K (i) On May 12, 2000, the Company filed an 8-K advising of its change in its fiscal year end from a fiscal year ending October 31 to a calendar fiscal year ending on December 31. - 22 - 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 11, 2000 By: /s/ STRATTON J. NICOLAIDES -------------------- ------------------------------------------ STRATTON J. NICOLAIDES Chairman and Chief Executive Officer Date: AUGUST 11, 2000 By: /s/ PETER J. QUINN -------------------- ------------------------------------------ PETER J. QUINN Executive Vice President, Chief Financial Officer, and Principal Financial and Accounting Officer - 23 -