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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-7336
RELM WIRELESS CORPORATION (formerly ADAGE, INC.)
(Exact name of registrant as specified in its charter)
Nevada (formerly Pennsylvania) 04-2225121
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7505 Technology Drive
West Melbourne, Florida 32904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (407) 984-1414
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.60
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(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the Registrant on March 31, 1998, based on the closing price
at which such stock was sold on the NASDAQ National Market on such date, was
$20,342,603.
As of March 31, 1998, 5,041,213 shares of the Registrant's only class of
Common Stock were outstanding.
Documents Incorporated by Reference: None
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PART I
ITEM 1. BUSINESS
Reincorporation of Adage, Inc. into RELM Wireless Corporation
RELM Wireless Corporation, a Nevada corporation ("RELM" or the "Company"),
is the resulting corporation from the January 30, 1998 reincorporation merger
(the "Reincorporation") of Adage, Inc., a Pennsylvania corporation ("Adage"),
into RELM, its wholly owned subsidiary. The Reincorporation was approved by the
shareholders of Adage at its annual meeting held on December 8, 1997. In
connection with the geographical transition of the business activities of Adage
out of Pennsylvania to its new headquarters in Florida and the refocusing of
Adage's resources and management on the manufacturing and sale of wireless
communications equipment its Board of Directors recommended approval of the
Reincorporation to change its State of Incorporation and to change its corporate
name to a name closely identified with the name of its principal subsidiary,
RELM Communications, Inc. and the wireless communications products which it
markets under the RELM identity.
Also as a result of the Reincorporation, each share of Adage common stock
outstanding immediately prior to the Reincorporation was converted, effective as
of January 30, 1998, into one share of RELM common stock and the trading symbol
for the shares was changed from "ADGE" to "RELM". Until RELM gives notice to its
shareholders to exchange their Adage share certificates for RELM share
certificates, the outstanding Adage share certificates shall continue to
represent the RELM shares into which they have been converted.
General
RELM Wireless Corporation (together with its subsidiaries, "RELM") is a
holding company that owns, directly or indirectly, at least 80% of the capital
stock of entities involved in the wireless communications equipment and
commercial real estate industry segments. During 1994, RELM (references herein
to RELM for periods prior to January 30, 1998 shall constitute references to its
predecessor, Adage) decided to discontinue and exit the commercial real estate
segment. Accordingly, it has been reported as a discontinued operation since
1994. Because RELM had not completed its
exit from this business within the 12 month time frame set forth by the
Securities and Exchange Commission, the financial statements have been restated,
classifying this operation as continuing for the years ended December 31, 1997,
1996 and 1995.
During the fourth quarter of 1997, RELM implemented significant restructuring
plans that resulted in charges to continuing operations of $9.6 million for the
year. The major components of these plans are to discontinue inadequately
profitable products and product lines, close the Indiana engineering center and
reestablish operations at the Florida facility, and downsize the Florida
manufacturing operation. Specific information regarding these actions and the
charges associated with each is contained in item 7 of this report.
Also during 1997, RELM sold its specialty manufacturing subsidiary,
Allister Manufacturing Company, Inc. ("Allister") to an entity formed by Robert
T. Holland, the former Chief Financial Officer of RELM. Allister manufactured
and sold automatic garage door and gate control systems. Also during 1997, RELM
sold its recycled paper-manufacturing subsidiary, Fort Orange Paper Company,
Inc. ("Fort Orange"). Fort Orange manufactured and sold recycled paperboard used
primarily in the folding paper box industry. Allister and Fort Orange are
reported as discontinued operations for the years ended December 31, 1997, 1996
and 1995. The principal executive offices of RELM were relocated during 1997
from West Chester, Pennsylvania to the present executive offices in West
Melbourne, Florida.
On December 1, 1997, RELM employed Richard K. Laird as President and Chief
Executive Officer. Mr. Laird came to RELM following a successful 20-year career
with high technology communications companies.
The principal executive offices of RELM are located at 7505 Technology
Drive, West Melbourne, Florida 32904 and the telephone number if (407) 984-1414.
As of December 31, 1997 RELM employed 370 people located primarily at the West
Melbourne, Florida facility. RELM also has facilities located in Indiana,
Virginia and Nebraska.
Sales Information about Industry Segments
As an aid to understanding the company's major product lines and their
sales, the following table summarizes sales information by major product lines
and industry segments.
$ IN MILLIONS
------------------------
1997 1996 1995
---- ---- ----
Land Mobile Radio $34.2 $38.9 $34.7
Digital Data Communications 3.1 4.1 4.9
Access Controls 2.3 3.9 2.6
Electronic Components 1.8 2.4 3.1
Inter-Segment Elimination -- (3.9) (2.6)
----- ----- -----
Total Wireless Comm. Equipment $41.4 $45.4 $41.9
Commercial Real Estate $ 4.0 $ 2.2 $ 2.6
----- ----- -----
Total Company $45.4 $47.6 $45.3
===== ===== =====
Audited financial statements and detailed supplementary financial
information are found in items 6, 7, and 8.
Principal Business and Products of Subsidiaries
Wireless Communications Equipment - RELM Communications, Inc.
RELM Communications, Inc. is a Florida corporation located in West
Melbourne, Florida. On January 24, 1992, RELM Wireless Corporation acquired all
of the outstanding stock of RELM Communications, Inc. in exchange for 1,946,183
shares of RELM Wireless Corporation common stock.
RELM operates exclusively in the wireless communications industry,
designing, manufacturing, and marketing wireless communications equipment
consisting of land mobile radios, utility load management systems, and base
station components and subsystems. Additionally, RELM is engaged in the contract
manufacture of radio control products for use in garage door and gate operators.
In September 1993, RELM purchased the assets and business of Bendix/King Mobile
Communications Division of Allied Signal. This product line (BK Radio) consists
of higher-specification land-mobile radios whose primary market focus is
professional radio users in the government and public safety sectors. The BK
products, with more extensive features and capabilities, provide a strong
compliment to the original line of RELM radios.
Description of Products & Markets
Land-Mobile Radios and Accessories
These products are marketed under two product lines. The RELM product line is
sold for use primarily by commercial business enterprises. The BK product line
is used by government customers, including the U. S. Army and the U. S. Forestry
Service, as well as public-safety customers, which include police, fire, and
emergency medical services. Both product lines include base stations, mobile
two-way radios for mounting in vehicles, portable (hand-held) radios, and
repeaters that enable two-way radios to operate over a wider area. RELM also
manufactures base station components and subsystems which are installed at radio
transmitter sites to improve performance by reducing or eliminating signal
interference and to enable the use of one antenna for both transmission and
reception. RELM sells land-mobile products to original equipment manufacturers,
government agencies, and dealers who resell the product to end-users. In 1996,
RELM introduced scanner products. A scanner is a radio receiver that allows the
user to listen to various radio frequencies. RELM sells scanners primarily to
dealers who resell the product to end-users.
Digital Data Communications Equipment
RELM manufactures load management systems for sale to electric utility
companies, dealers, and jobbers. A load management system enables its user to
limit usage of electricity during peak demand periods. Using radio transmitters,
a signal is sent by the utility company to individual receivers that are wired
to appliances such as air conditioners and water heaters. The power to the
appliances is momentarily turned-off which reduces power demand and shifts
consumption to non-peak hours.
Radio Controls for the Garage Door and Gate Operator Industry
RELM manufactures small, low-powered receivers, transmitters, and control
circuit boards designed by Allister Access Controls, a former subsidiary of
RELM. These products control the operation of automatic garage door and gate
operators and are manufactured under the Allister and Pulsar brand names.
Allister sells garage door and gate operators to distributors and dealers who
re-sell and install them for the end-user. The company was sold in 1997.
Electronic Components
RELM markets electronic components, primarily microprocessors and clock
oscillators, to electronic component distributors and original equipment
manufacturers through its RXD subsidiary. The components are used in various
electronic products including computers, electronic scales, organs, keyboards,
and toys.
Research and Development
RELM employed 30 people as of December 31, 1997 who devote all or a portion
of their time to research and development. Expenses for sustaining engineering
as well as research and development totaled $5.5 million, $3.1 million, and $2.9
million for the years ended December 31, 1997, 1996, and 1995 respectively.
Engineering expenses in 1997 include charges for closing the Indiana engineering
facility and reestablishing engineering and R&D operations in Florida. The
company has sharply focused its R&D efforts on two projects that will yield new
products in the second half of 1998 and beyond; 1) the development of APCO 25
compliant products, and 2) the replacement of aging BK analog products. As part
of the re-defined focus, engineering operations were consolidated from Indiana
to the company's Florida facility in February 1998 and non-strategic engineering
spending will be reduced by more than $2 million annually, including a reduction
in force of 16 employees.
Patents
RELM holds patents and patent licenses covering various land-mobile radio
products that are currently marketed. The company also holds patents covering
products in its digital communication product line. These patents cover the
decoding of digital data messages, retrieval of digital data, and high-speed
data transmission on FM sub-carrier frequencies. They have various expiration
dates out to the year 2001. It is difficult to precisely
assess the importance of the patents and licenses, however, RELM believes
that they enhance RELM's competitive position.
Raw Materials
RELM purchases component parts and raw materials for assembly into finished
products from both domestic and foreign suppliers. The primary foreign suppliers
are located in the pacific-rim. Certain components are only available from a
single source. The amount of these components is not material relative to total
component and raw material purchases. During the years ended December 31, 1995,
1996, and 1997 RELM's operations have not been impaired due to delays from
single source suppliers. However, the absence of a single source component may
delay the manufacture of finished products. The company manages the risk of such
delays by securing second sources and redesigning products in response to
component shortages or obsolescence.
Seasonal Impact
Demand for the RELM's BK land-mobile radio products is typically strongest
in the summer season. This is a reflection of the increased forest fire activity
during that time.
Significant Customers
In 1996, the company was awarded a contract to provide land mobile radios to
the United States Army. This contract is for a term of five years and totals in
excess of $40 million in revenue. Shipments commenced in 1997 and totaled $10.4
million, representing 22.9% of total sales for that year.
Backlog
The company's order backlog was approximately $4.5 million and $8.9 million as
of December 31, 1997 and 1996 respectively. This included only the current
portion of the U.S. Army contract.
Competition
The worldwide land mobile radio markets are estimated to be $7.5 billion
with annual growth of approximately 10%. RELM competes with many domestic and
foreign companies in these markets. One competitor holds an estimated market
share of about 70%. The principal methods of competition are price, quality, and
technology advances. The company believes that it is competitive with regard to
these factors.
Employees
The company employed 370 people as of December 31, 1997.
Information Relating to Domestic and Export Sales
($ In Millions)
1997 1996 1995
---- ---- ----
United States $36.9 $39.0 $38.4
South America $ 2.1 $ 1.8 $ .8
Europe $ 1.7 $ 4.1 $ 2.6
Other International $ .7 $ .4 $ .1
----- ----- -----
Total $41.4 $45.3 $41.9
===== ===== =====
Redgo Properties, Inc.
Redgo Properties, Inc. is a Pennsylvania Corporation engaged in developing
and managing real estate. In 1995, the company decided to discontinue this
segment. Real estate inventories are carried at their estimated liquidation
value as of December 31, 1997.
This segment has been reported as a discontinued operation since 1995. To
be classified as a discontinued operation, SEC Regulations require that the
business be exited or disposed of within twelve (12) months. Although the
company has made every effort to liquidate all of its Redgo holdings, several
properties remain. Consequently, this segment has been reclassified as a
continuing operation.
Management anticipates selling the remaining real estate assets and exiting
the business in 1998.
ITEM 2. PROPERTIES
Owned
A 130,000 square foot office and industrial building on 20 acres located in
West Melbourne, Florida, which includes a 30,000 square foot addition for
engineering and headquarters functions. This building is utilized for the
manufacture of wireless communications equipment. The facility was expanded to
allow the consolidation of all operations at the West Melbourne, Florida
location.
Leased
A 37,600 square foot facility located in Indianapolis, Indiana used
primarily for engineering. Engineering operations have been consolidated at the
Florida facility. The Indiana offices will close in April of 1998. The 1997
operating loss includes a reserve for the present value of the lease commitment.
Negotiations are underway to sublease the facility.
A 5,000 square foot facility located in Norfolk, Nebraska that is used for
the operations of RXD, Inc. (electronic components), a wholly owned subsidiary
of RELM. Lease payments are $1,000 per month.
A 792 square foot facility located in Vienna, Virginia that is used for the
company's government sales office. Lease payments are $1,848 per month.
ITEM 3. LEGAL PROCEEDINGS
On February 14, 1996, the Insurance Commissioner of the Commonwealth of
Pennsylvania (the "Insurance Commissioner"), in her capacity as statutory
liquidator for Corporate Life Insurance Company ("Corporate Life"), filed a
complaint against multiple defendants in the Commonwealth Court of Pennsylvania,
including RELM and Mr. Donald Goebert (in his capacity as an officer and
Director of RELM). The specific claims alleged against RELM and Mr. Goebert in
the complaint are for a preferential transfer, conspiracy and common law fraud
arising from a 1987 transaction between RELM and Corporate Investment Company
("CIC"), the parent company of Corporate Life, pursuant to which RELM and CIC
exchanged promissory notes in the amount of $1,700,000 (the "Note Transaction").
In connection with the Note Transaction, CIC pledged to RELM as security for
its note payment obligation its shares of stock of Corporate Life. CIC
subsequently defaulted on its note. In 1991, at the demand of the Insurance
Commissioner, CIC sold Corporate Life to American Homestead, Inc. ("AHI") and,
in connection with such sale; RELM assigned its note receivable from CIC along
with the collateral to AHI. As consideration for this assignment, AHI agreed to
assume RELM's obligations under its note to CIC in the amount of $1,700,000.
Accordingly, although the complaint alleges a claim for a preferential transfer.
RELM received no payment of funds from CIC. The conspiracy claims are
non-specific but pertain to the sale of Corporate Life to AHI in 1991. Mr.
Goebert was an officer and director of CIC.
In one of two related actions, in 1994 the Trustee and statutory liquidator
of CIC, in connection with the current bankruptcy proceedings of CIC, brought an
adversarial proceeding in the United States District Court for the Eastern
District of Pennsylvania against RELM, Mr. Goebert and other individuals and
entities that were involved in the sale of Corporate Life to AHI. This
adversarial proceeding alleges the same claims as in the action brought by the
Insurance Commissioner in connection with the Note Transaction and the sale of
Corporate Life. In the other related action, in 1993 two individual creditors of
CIC filed a complaint against, among others, RELM and Mr. Goebert in the United
States District Court for the Southern District of New York. The specific claims
alleged against RELM and Mr. Goebert in the complaint are for fraud, fraudulent
conveyance, securities fraud and RICO in connection with the Note Transaction,
the sale of Corporate Life and other investments made by CIC in an effort to
raise capital for Corporate Life. Each of the above-related matters is in civil
suspense. RELM believes that an adjudication of the action brought by the
Insurance Commissioner will in effect resolve both of the related matters on the
legal principals of collateral estoppel and/or issue preclusion.
There are approximately 10 pending claims for personal injury and or
property damages alleged to have resulted from the malfunction of a garage door
or gate operator. The company maintains product liability insurance with
coverage's of $2,000,000, subject to deductibles ranging from $75,000 to
$500,000. During the times that such claims were made, the Company maintained
umbrella coverage extending its insurance coverage for various periods by
$3,000,000 to $10,000,000.
RELM believes that there will be no material adverse effect on the financial
position of the Company as a result of these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
The 1997 Annual Meeting of Shareholders of RELM was held on December 8, 1997. Of
the 5,079,176 shares of common stock outstanding and entitled to vote at the
meeting, 4,258,799 shares were represented in person or by proxy.
Election of Directors
On the proposal to elect Donald F. U. Goebert, Buck Scott, Robert L.
MacDonald, Ralph R. Whitney, Jr., James Gale, Joel Schleicher, and George M.
Benjamin, III as directors to serve until the 1998 Annual Meeting of
Shareholders and until their successors are duly elected and qualified, the
nominees for Director received the number of votes as set forth below.
For Withheld
--- --------
Donald F. U. Goebert 4,234,939 23,860
Buck Scott 4,240,699 18,100
Robert L. MacDonald 4,240,709 18,090
Ralph R. Whitney, Jr. 4,241,597 17,202
James C. Gale 4,240,699 18,100
Joel A. Schleicher 4,240,699 18,100
George N. Benjamin, III 4,240,699 18,100
At a director's meeting following the annual shareholders meeting, Richard
K. Laird, who was employed as President & CEO of RELM on December 1, 1997, was
appointed by the Board of Directors as an additional Director.
Reincorporation
On the proposal to change the company's State of Incorporation from Pennsylvania
to Nevada and to change the name of the company from Adage, Inc. to RELM
Wireless Corporation, 2,568,378 shares were voted
for the proposal, 31,334 shares were voted against the proposal, and 11,797
shares abstained from the vote.
On the basis of the above vote, all of the Director nominees were elected
to serve until the next annual meeting of shareholders and until their
successors are duly elected and qualified. Also, the plan for re-incorporation
and the name change was approved, and became effective on January 30, 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT COMMON
EQUITY AND RELATED STOCKHOLDERS MATTERS
The company's stock is traded on the NASDAQ National Market. Formerly, the
symbol was "ADGE". The symbol changed to "RELM" effective on January 30, 1998.
The following table sets forth for the periods indicated the high and low
closing sale prices of the common stock as furnished by NASDAQ.
1997 Quarter Ended High Low
------------------ ---- ---
March 31, 1997 3.875 3.250
June 30, 1997 4.688 3.500
September 30, 1997 5.563 4.063
December 31, 1997 7.563 4.188
1996 Quarter Ended High Low
------------------ ---- ---
March 31, 1996 5.000 3.7500
June 30, 1996 5.6250 3.7500
September 30, 1996 5.6250 3.7500
December 31, 1996 4.4375 3.1875
On March 31, 1998, the closing sale price was $5.75. On that date, there
were 2,307 holders of record.
No cash dividends were paid with respect to the company's common stock
during the past five years. The company intends to retain its earnings to fund
growth and, therefore, does not intend to pay dividends in the foreseeable
future. Additionally, the company's revolving credit agreement restricts
dividend payments.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT
Net Sales & Revenues $45,376 $47,646 $45,266 $47,010 $35,718
Income (Loss) From
Continuing Operations (11,974) (1,347) (533) (759) 29
Income (Loss) From
Discontinued Operations (2,836) (2,679) 1,645 (299) (354)
Net Income (Loss) $(14,810) $(4,026) $1,112 $(1,058) $(325)
Earnings (Loss) Per Share From
Continuing Operations $(2.36) $(0.26) $(0.10) $(0.15) $0.01
Earnings (Loss) Per Share From
Discontinued Operations $(0.56) $(0.52) $0.32 $(0.06) $(0.07)
Net Earnings (Loss) Per Share $(2.92) $(0.78) $0.22 $(0.21) $(0.06)
BALANCE SHEET
Working Capital $10,307 $27,008 $29,904 $32,538 $32,450
Total Assets 31,665 54,028 64,916 87,494 87,474
Long-Term Debt 7,440 15,554 14,906 24,621 28,957
Total Shareholders Equity $14,034 $29,214 $32,620 31,236 $32,479
The earnings (loss) per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Standards No. 128, Earnings Per
Share. For further discussion of earnings per share and the impact of Statement
No. 128, see the notes to the consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR 1997 COMPARED WITH 1996
With the emergence of digital technology in wireless communications
applications, the company has implemented plans to reposition its products and
infrastructure to capitalize on new business opportunities. In connection with
these plans, the company recognized charges totaling $9.6 million in 1997.
Specifically, these charges relate to the following actions; 1) $2.9 million for
the removal of inadequately performing product lines and the associated
inventory, 2) $1.1 million for a reduction in force and related expenses at the
Florida operation, 3) $1.7 million for the closing and consolidation of the
company's Indiana research and development center and reestablishing research
and development activities in Florida, and 4) $3.9 million for establishing
additional deferred tax asset valuation allowances.
Additionally, the results of Redgo Properties, Inc., a loss of $591,000 were
reclassified as continuing operations from discontinued operations. This
reclassification is required because, despite the company's best efforts, its
exit from the business was not completed within the allowable twelve-month time
frame. The company anticipates that its exit will be completed in 1998.
The consolidated loss from continuing operations was $12.0 million for the
year ended December 31, 1997. Excluding the impact of the aforementioned
charges, the loss from continuing operations was $2.4 million.
As an aid to understanding the company's operating results, the following table
shows items from the consolidated statement of operations expressed as a percent
of sales.
Percent of Net Sales Year Ended December 31,
1997 1996 1995
---- ---- ----
Sales 100.0% 100.0% 100.0%
Cost of Sales 86.0 71.9 70.8
----- ----- -----
Gross Margin 14.0 28.1 29.2
Selling, General, and
Administrative Expenses (26.7) (26.3) (28.5)
Restructuring Charge (4.1) -- --
Impairment Loss -- (2.7) --
Interest Expense (2.0) (1.4) (3.3)
Other Income (Expense) .9 (1.1) .6
----- ----- -----
Pretax Income (Loss)
from Continuing Operations (17.9) (3.4) (2.0)
Income Tax (Expense) Benefit (8.5) .6 .8
----- ----- -----
Income (Loss)
from Continuing Operations (26.4%) (2.8%) (1.2%)
===== ===== =====
Net Sales
Net Sales for the year ended December 31, 1997 decreased $2.3 million or
4.8% from the prior year. The total decrease is comprised of a $4.1 million
decrease in the wireless communications equipment business and a $1.8 million
increase in the commercial real estate business.
The 1997 decrease in wireless communications equipment reflects lower
customer demand in the company's land mobile radio and demand side management
businesses. Land mobile radio sales were adversely impacted by reduced U. S.
Forestry Service purchases. Reportedly, this was the result of less-active fire
season. Also, sales of traditional analog radios slowed due to uncertainty in
the public safety markets as they contemplate migrating to digital technology.
Demand side management sales declined for the third consecutive year as the
electric utility industry approaches deregulation. Deregulation of utilities may
reduce the need for managing peak demand. The company's near term strategy is to
focus on the land mobile radio
business. Toward that end, products and product lines that do not fit this
strategy or are not adequately profitable, have been or will be discontinued.
Conversely, management anticipates introducing new product offers to replace the
existing analog product line in the fourth quarter of 1998. Furthermore, the
company's development of APCO 25 compliant digital products will yield
additional new products in the third quarter of 1998. Although management
believes the strategy of focusing in land mobile radios will yield reduced sales
in 1998, cost reduction actions expected to return the company to profitability,
while new product initiatives will position the company for sales growth going
forward.
Cost of Sales
Cost of Sales as a percent of net sales for the year ended December 31,
1997 increased to 86.0% from 71.9% in the prior year. This increase was
primarily the result of charges related to discontinuing inadequately profitable
products and lines. Other contributing factors were declining volumes in the
fourth quarter and the reclassification of the company's commercial real estate
business as a continuing operation.
As the company executes its strategy of focusing on land mobile radios, it is
anticipated that volumes will decrease in 1998. In response to these
developments, the company implemented its December, 1997 plan to reduce
manufacturing costs, in excess of $2.5 million annually, including a headcount
reduction of approximately 50 employees.
Selling; General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) consist of
commissions, marketing, sales, sustaining engineering, product development,
management information, accounting, and headquarters. For the year ended
December 31, 1997, SG&A expenses totaled $12.1 million or 26.7% of net sales
compared with $12.5 million or 26.3% for the prior year. The increase in SG&A
costs was primarily the result of charges associated with closing the Indiana
engineering center and reestablishing operations in Florida. Additionally, the
company incurred product development costs associated with the company's
engineering initiative for replacing its aging analog radio product offerings.
Also, headquarters expenses increased due to the re-incorporation from
Pennsylvania to Nevada and executive search and recruiting costs. Consistent
with the reduced volumes explained previously, management implemented its
December plan to reduce SG&A expenses by $3.4 million annually, including
headcount reductions of 28 employees.
Interest Expense
Interest expense increased $254,000 for the year ended December 31, 1997 to
$932,000 from $678,000 during the prior year. This increase was the result of
debt for the expansion of the Florida facility and to replace obsolete surface
mount manufacturing equipment. Cash flow from continuing operations and from the
sale of discontinued operations enabled the company to reduce its debt level
during the second half of the year. Accordingly, management expects that
interest expense for 1998 will decrease.
Income Taxes
Income Taxes represented effective tax rates of 47.8%, 15.4%, and 40.1% for the
years ended December 31, 1997, 1996, and 1995 respectively. These rates are made
up primarily of a 34% effective federal tax rate, the respective state tax rates
where the company does business, and changes in valuation allowances related to
deferred tax assets. The company evaluated the deferred tax assets on its
balance sheet and does not believe that it has met the more-likely-than-not
criteria of SFAS No. 109, Accounting for Income Taxes, for realizing the net
deferred tax assets. Therefore the company has established valuation allowances
against net deferred tax assets as of December 31, 1997.
Discontinued Operations
During 1997 the company sold its specialty manufacturing and recycled paper
manufacturing subsidiaries for $1.9 million and $8.6 million, respectively, in
cash, securities, and notes. A $1.8 million provision for loss on disposal was
recorded in 1996 with respect to the sale of the specialty manufacturing
business. The actual loss on the sale totaled $2.3 million. Accordingly, an
additional loss of $486,000 was recognized in 1997. A loss of $2.1 million was
recognized in 1997 on the sale of the company's recycled paper manufacturing
subsidiary. In 1995, the company sold its steel-processing subsidiary for $6.8
million in cash.
Liquidity and Capital Resources
The company had working capital totaling $10.3 million, a decrease of $16.7
million, from December 31, 1996. This decrease was the result of restructuring
charges for discontinuing the manufacture and sale of inadequately profitable
products, closing the Indiana engineering center and reestablishing operations
in Florida, downsizing the manufacturing operations, and establishing a
valuation allowance for deferred tax assets. Additionally, a portion of the real
estate assets held for sale were sold in 1997.
Inflation and Changing Prices
Inflation and changing prices for the years ended December 31, 1997, 1996,
and 1995 have contributed to increases in wages, facilites, and raw material
costs. Effects of these inflationary effects were partially offset by increased
prices to customers. The company believes that it will be able to pass on most
of its future inflationary increases to its customers. The company is also
subject to changing foreign currency exchange rates in its purchase of some raw
materials. The company employs several methods to protect against increases in
costs due to currency fluctuations. It is not always possible to pass on these
effects. Competitors in the land-mobile radio markets are subject to similar
fluctuations.
Pension Plans
RELM sponsors a participant contributory retirement plan (401K) that is
available to employees. The company's contribution to this plan is a percentage
of employees' contributions and totaled $248,000 $245,000 and $429,000 for 1997,
1996, and 1995 respectively.
Year 2000 Discussion
As the year 2000 approaches, an issue has emerged with many companies
regarding how existing application software programs and operating systems will
accommodate this date value. Many existing software products were designed to
accommodate only a two-digit date position that represents the year. As a
result, the year 1999 could be the maximum date value that the systems will be
able to process.
RELM installed a new enterprise-wide software package in 1997. This
software is able to process the year 2000. Consequently, management does not
expect to incur additional costs to resolve the year 2000 issue.
Dividends
No cash dividends were paid with respect to the company's common stock
during the past five years. The company intends to retain its earnings to fund
growth and, therefore, does not intend to pay dividends in the foreseeable
future.
Liquidity and Capital Resources
The company has a $10 million revolving line of credit. As of December 31, 1997
available credit on this line was approximately $8.5 million. Capital
expenditures for the year ended December 31, 1997, were $2.7 million. Of these
expenditures, $2.3 million was for the expansion of the West Melbourne, Florida
facility. The facility expansion allows the West Melbourne, Florida facility to
accommodate the consolidated operations
from Kansas and Indiana.
Capital expenditures for 1998 are expected to be approximately $1.4
million. These expenditures will support the company's two primary new product
initiatives. The current line of credit agreement contains capital expenditure
restrictions. The company believes that the restrictions will not impact the
execution of its capital investment plans. Capital expenditure will be funded
through operating cash flow and financing sources. Subsequent to the completion
of these new product initiatives, management expects that capital expenditures
will decrease.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended, and is subject to the safe-harbor created by such
sections. Such forward-looking statements concern the Company's operations,
economic performance and financial condition. Such statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; changes
in customer preferences; competition; changes in technology; the integration of
any acquisitons; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The forward-looking statements are made as of
the date of this Report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
Item 8. FINANCIAL STATEMENTS
(b) Reports on Form 8-K. The items reported and dates of reports on Form 8-K
filed by the Registrant during the last quarter of the period covered by
this Report were as follows:
1. Item 4, dated November 14, 1997.
2. Item 5, dated November 19, 1997.
3. Item 4, dated December 2, 1997.
4. Item 5, dated December 3, 1997.
RELM Wireless Corporation
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
Contents
Report of Independent Certified Public Accountants--Ernst & Young LLP........F-2
Report of Independent Certified Public Accountants--MacDade Abbott LLP.......F-3
Consolidated Financial Statements
Consolidated Balance Sheets..................................................F-4
Statements of Consolidated Operations........................................F-6
Statements of Consolidated Stockholders' Equity..............................F-7
Statements of Consolidated Cash Flows........................................F-8
Notes to Consolidated Financial Statements...................................F-9
F-1
Ernst & Young LLP
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheet of RELM Wireless
Corporation (formerly Adage, Inc.) and subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RELM
Wireless Corporation and subsidiaries at December 31, 1997, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Orlando, Florida
March 31, 1998
F-2
MacDade Abbott LLP
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheet of RELM Wireless
Corporation (formerly Adage, Inc.) and subsidiaries as of December 31, 1996, and
the related statements of operations, shareholders' equity and cash flows for
each of the two years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RELM Wireless
Corporation and subsidiaries at December 31, 1996, and the results of their
operations and their cash flows for each of the two years then ended, in
conformity with generally accepted accounting principles.
Paoli, Pennsylvania
March 7, 1997
F-3
RELM Wireless Corporation
Consolidated Balance Sheets
(In Thousands)
December 31
-----------------------
1997 1996
-----------------------
Assets
Current assets:
Cash and cash equivalents $ 213 $ 599
Accounts receivable (net of allowance for doubtful
accounts of $133 in 1997 and $165 in 1996) 5,379 11,536
Inventories 11,504 16,219
Investment securities--trading 881 723
Notes receivable 400 -
Real estate investments held for sale 1,833 4,710
Prepaid expenses and other current assets 288 511
Deferred income tax asset - 1,970
-----------------------
20,498 36,268
Property, plant and equipment:
Land 233 342
Buildings and improvements 4,150 5,455
Machinery and equipment 9,020 21,896
Accumulated depreciation (4,598) (15,165)
-----------------------
8,805 12,528
Capital projects in progress - 104
-----------------------
8,805 12,632
Notes receivable, less current portion 2,200 -
Other assets 162 251
Net assets of discontinued operations - 2,977
Deferred income tax asset - 1,900
-----------------------
Total assets $31,665 $54,028
=======================
See accompanying notes.
F-4
RELM Wireless Corporation
Consolidated Balance Sheets (continued)
(In Thousands, Except Share Data)
December 31
-----------------------
1997 1996
-----------------------
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term liabilities $ 1,584 $ 868
Accounts payable 1,935 4,986
Accrued compensation and related taxes 3,017 1,540
Accrued expenses and other current liabilities 756 1,866
Accrued restructuring liability 1,872 -
Accrued research costs 1,027 -
-----------------------
Total current liabilities 10,191 9,260
Long-term liabilities, less amounts classified as current
liabilities:
Loans, notes and mortgages 5,405 14,425
Capital lease obligations 2,035 1,129
-----------------------
7,440 15,554
Commitments and contingencies - -
Stockholders' equity:
Common stock; $.60 par value; 10,000,000 authorized
shares: issued and outstanding shares 5,035,779 at
December 31, 1997 and 5,129,150 at December 31, 1996 3,021 3,076
Additional paid-in capital 20,185 20,500
Retained earnings (deficit) (9,172) 5,638
-----------------------
Total stockholders' equity 14,034 29,214
-----------------------
Total liabilities and stockholders' equity $31,665 $54,028
=======================
See accompanying notes.
F-5
RELM Wireless Corporation
Statements of Consolidated Operations
(In Thousands, Except Share Data)
Year ended December 31
-----------------------------------------
1997 1996 1995
-----------------------------------------
Sales $45,376 $47,646 $45,266
Expenses:
Cost of products 39,003 34,252 32,055
Selling, general and administrative 12,099 12,537 12,908
Restructuring charge 1,872 - -
Impairment loss - 1,300 -
------------------------------------------
52,974 48,089 44,963
------------------------------------------
Operating income (loss) (7,598) (443) 303
Other income (expense):
Interest expense (932) (678) (1,463)
Net gains (losses) on investments 158 (643) 184
Other income 268 151 88
------------------------------------------
(506) (1,170) (1,191)
------------------------------------------
Loss from continuing operations before income taxes (8,104) (1,613) (888)
Income tax expense (benefit) 3,870 (266) (355)
------------------------------ ------------
Loss from continuing operations (11,974) (1,347) (533)
Discontinued operations:
Gain (loss) from discontinued operations net of
income taxes (benefit) (266) (847) 452
Gain (loss) on disposal of discontinued segments
net of income taxes (benefit) (2,570) (1,832) 1,193
------------------------------------------
(2,836) (2,679) 1,645
------------------------------------------
Net income (loss) $(14,810) $(4,026) $ 1,112
==========================================
Earnings (loss) per share--basic and diluted:
Continuing operations $ (2.36) $ (.26) $ (.10)
Discontinued operations (.56) (.52) .32
------------------------------------------
Net income (loss) $ (2.92) $ (.78) $ .22
==========================================
See accompanying notes.
F-6
RELM Wireless Corporation
Statements of Consolidated Shareholders' Equity
(In Thousands, Except Share Data)
Unrealized
Gains
(Losses) on
Common Stock Additional Retained Available
--------------------- Paid-In Earning For Sale
Shares Amount Capital (Deficit) Securities Total
------------------------------------------------------------------------
Balances at January 1, 1995 5,098,555 $3,059 $20,349 $ 8,552 $(724) $31,236
Sale of common stock 22,980 14 128 - - 142
Increase in aggregate market value
of available for sale securities - - - - 130 130
Net income - - - 1,112 - 1,112
------------------------------------------------------------------------
Balances at December 31, 1995 5,121,535 3,073 20,477 9,664 (594) 32,620
Sale of common stock 7,615 3 23 - - 26
Available for sale securities
reclassified as trading - - - - 594 594
Net loss - - - (4,026) - (4,026)
------------------------------------------------------------------------
Balances at December 31, 1996 5,129,150 3,076 20,500 5,638 - 29,214
Purchase of common stock (93,371) (55) (315) - - (370)
Net loss - - - (14,810) - (14,810)
------------------------------------------------------------------------
Balances at December 31, 1997 5,035,779 $3,021 $20,185 $(9,172) $ - $14,034
========================================================================
See accompanying notes.
F-7
RELM Wireless Corporation
Statements of Consolidated Cash Flows
(In Thousands)
Year ended December 31
-------------------------------------------
1997 1996 1995
-------------------------------------------
Cash flows from operating activities
Net income (loss) $(14,810) $(4,026) $1,112
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,796 2,762 2,375
Loss on disposal of discontinued segments 2,570 1,832 (1,992)
Gain on disposal of property and equipment, and
other assets - (354) (12)
Net (gain) loss on investment securities (158) 643 74
Deferred income taxes 3,870 (700) 449
Valuation allowance on real estate - 1,300 -
Other 39 39 14
Changes in current assets and liabilities:
Accounts receivable 3,327 (2,002) 1,634
Inventories 3,508 2,323 (1,109)
Accounts payable (2,049) (1,463) (3,034)
Other current assets and liabilities 1,898 183 (1,134)
Real estate investments held for sale 2,677 1,076 537
Discontinued segments--noncash charges and
working capital charges 545 (572) 321
-------------------------------------------
Cash provided by (used in) operating activities 3,213 1,041 (765)
Cash flows from investing activities
Purchases of property and equipment (2,694) (1,352) (734)
Proceeds from disposals of property and equipment - 700 18
Net cash from sale of subsidiaries 7,643 - 6,789
Sales of real estate - 100 -
Investing activities of discontinued segments - (182) -
-------------------------------------------
Cash provided by (used in) investing activities 4,949 (734) 6,073
Cash flows from financing activities
Repayment of debt and capital lease obligations (2,248) (3,079) (3,964)
Proceeds from debt 4,802
Net increase (decrease) in revolving credit lines (11,071) 3,195 (1,559)
Deferred financing charges - (100) (50)
Proceeds from issuance of common stock - 26 142
Retirement of stock (31) - -
Financing activities of discontinued segments - (87) -
-------------------------------------------
Cash used in financing activities (8,548) (45) (5,431)
-------------------------------------------
Increase (decrease) in cash (386) 262 (123)
Cash and cash equivalents, beginning of year 599 337 460
-------------------------------------------
Cash and cash equivalents, end of year $ 213 $ 599 $ 337
===========================================
Supplemental disclosure
Interest paid $ 1,266 $ 1,352 $1,835
Income taxes paid 12 4 42
Capital lease additions 1,755 355 920
See accompanying notes.
F-8
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
1. Summary of Significant Accounting Policies
Description of Business
The Company's primary business is the designing, manufacturing, and marketing of
wireless communications equipment consisting of land mobile radios, utility load
management systems, and base station components and subsystems. In 1995, the
Company formed a plan to discontinue its real estate development and management
business (see Note 5).
Principles of Consolidation
The accounts of the Company and its subsidiaries have been included in the
consolidated financial statements. All significant intercompany balances and
transactions have been eliminated.
Inventory
Inventories are stated at the lower of cost or market, determined by the average
cost method.
Investment Securities
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading securities" and carried at fair
value, with unrealized gains and losses included in earnings. Realized gains and
losses are computed by the specific identification method on a trade-date basis.
The classification of investment securities is determined by management at the
date of purchase. When the Company subsequently changes its purpose for holding
the security, it is transferred among classifications at the fair value at the
date reclassified.
Property and Equipment
Property and equipment is carried at cost. Expenditures for maintenance, repairs
and minor renewals are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and the resulting gain or loss is reflected in
operations for the period.
F-9
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
1. Summary of Significant Accounting Policies (continued)
Depreciation is generally computed on the straight-line method using lives of 3
to 20 years on machinery and equipment and 5 to 30 years on buildings and
improvements. The Company revised the estimated useful life of some of its
equipment from 5 to 8 years as of January 1, 1996. This decreased the Company's
1996 operating loss by $117, net loss by $73 and loss per share by $.02.
Depreciation expense on property, plant, and equipment for 1997, 1996 and 1995
was $1,220, $1,066 and $1,041, respectively.
Impairment of Long-Lived Assets
In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which establishes
criteria for the recognition and measurement of impairment losses associated
with long-lived assets.
Cash Equivalents
Cash and cash equivalents includes time deposits, certificates of deposit and
highly liquid marketable securities with original maturities of less than three
months.
Revenue Recognition
Revenues and expenses are recognized as goods are shipped. Real estate revenues
are recognized upon closing of a sale.
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries
in which it owns 80% or more of the outstanding capital stock. The Company
follows the liability method of accounting for income taxes.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of cash, accounts receivables and investments. The
Company places its cash
F-10
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
1. Summary of Significant Accounting Policies (continued)
and investments in accounts with major financial institutions. Concentrations of
credit risk with respect to accounts receivable are generally diversified due to
the large number of customers comprising the Company's customer base.
Accordingly, the Company believes that its accounts receivable credit risk
exposure is limited.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of 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.
Fair Value of Financial Instruments
The Company's management believes the carry amounts of cash, notes receivable,
investments and short-term and long-term debt approximates their fair values.
Advertising Costs
The cost for advertising is expensed as incurred. The total advertising expense
for 1997, 1996 and 1995 was $456, $319 and $270, respectively.
Research and Development Costs
Included in selling, general and administrative expenses for 1997, 1996 and 1995
are research and development costs of $5,466, $3,065 and $2,860, respectively.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employee and related interpretations in
accounting for its stock-based compensation plans rather than the alternative
fair value accounting provided under SFAS No. 123, Accounting for Stock-Based
Compensation.
F-11
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
1. Summary of Significant Accounting Policies (continued)
Earnings (Loss) Per Share
In 1997, the FASB issued SFAS No. 128, Earnings per Share. This statement
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings (loss) per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 becomes effective for fiscal years beginning after December 15, 1997 and
requires reclassification of earlier financial statements for comparative
purposes. SFAS No. 130 requires that changes in the amounts of certain items,
including foreign currency translation adjustments and gains and losses on
certain securities be shown in the financial statements. SFAS No. 130 does not
require a specific format for the financial statement in which comprehensive
income is reported, but does require that an amount representing total
comprehensive income be reported in that statement.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. This Statement will change the way public
companies report information about segments of their business in annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to stockholders. It also
F-12
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
1. Summary of Significant Accounting Policies (continued)
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenues,
and its major customers. The Statement is effective for fiscal years beginning
after December 15, 1997.
The Company intends to adopt the provisions of SFAS 130 and 131 in 1998 and
does not expect their application to have a material impact on the financial
statements of the Company.
Reclassifications
In accordance with Staff Accounting Bulletin No. 93, the Company's real estate
operations previously reported as discontinued operations in prior years have
been reclassified to continuing operations (see Note 5 and Note 15 for
reclassifications related to discontinued operations).
Certain other amounts in prior years have been reclassified to conform to
current year presentation.
2. Inventory
Inventory consisted of the following:
December 31
------------------------
1997 1996
------------------------
Raw materials $ 4,139 $ 7,424
Work in process 2,245 3,286
Finished goods 5,120 5,509
------------------------
$11,504 $16,219
========================
F-13
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
3. Allowance for Doubtful Accounts
The allowance for doubtful accounts is composed of the following:
Year ended December 31
-------------------------------
1997 1996 1995
-------------------------------
Balance, beginning of period $165 $381 $634
Provision for doubtful accounts 140 194 22
Uncollectible accounts written off (147) (200) (181)
Recoveries - 1 68
Discontinued operations (25) (211) (162)
-------------------------------
Balance, end of period $133 $165 $381
===============================
4. Investment Securities
Investment securities, which consist of marketable equity securities, had a
market value of $881 and $723 and a cost basis of $550 and $550 at December 31,
1997 and 1996, respectively. Realized gains and changes in unrealized gains or
losses included in investment income were as follows:
Year ended December 31
--------------------------------
1997 1996 1995
--------------------------------
Realized gains on investment securities $ - $ 39 $108
Reduction in cost of available for sale
investment transferred to trading - (855) -
Unrealized gains on trading investment
securities 158 173 76
--------------------------------
$158 $(643) $184
================================
During 1996, investment securities classified as available for sale, had a
market decline which was considered other than temporary and management
reclassified this investment as current trading. The market decline was
recognized as a reduction in cost and reported with net (gains) losses on
investments in the statement of consolidated operations.
During 1995, gross unrealized losses on investment securities classified as
available for sale and included in stockholders' equity totaled $594.
F-14
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
5. Real Estate Assets Held for Sale
In 1995, the Company formulated a plan to discontinue its real estate
development and management business and began accounting for the business as a
discontinued operation. The real estate business has not been completely
disposed of as of December 31, 1997. Staff Accounting Bulletin No. 93
stipulates, among other things, that a Company's disposal of a business must be
completed within one year of the adoption of the plan of disposal for purposes
of accounting for the business as a discontinued operation. Accordingly, the
Company has reclassified the operations of its real estate business to
continuing operations for all periods presented. Despite such treatment, the
Company continues its vigorous efforts to dispose of the real estate assets and
has classified such assets as real estate held for sale in the accompanying
balance sheets. The real estate assets include subdivided units of commercial
land, completed
F-15
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
5. Real Estate Assets Held for Sale (continued)
residential properties, and commercial properties, and are presented net of
valuation allowances of $1,005 and $2,920 at December 31, 1997 and 1996,
respectively. The real estate valuation allowances are composed of the
following:
Year ended December 31
--------------------------------
1997 1996 1995
-------------------------------
Balances, beginning of period $2,920 $ 1,620 $2,450
Provision for impairment losses - 1,300 -
Reduction due to sales (1,915) - (830)
-------------------------------
Balance, end of period $1,005 $ 2,920 $1,620
===============================
The summarized results of operations of the real estate business are as follows:
Year ended December 31
-------------------------------
1997 1996 1995
-------------------------------
Sales $3,937 $ 2,130 $2,615
Cost of sales 4,006 1,911 1,715
Impairment loss - 1,300 -
Selling, general and administrative expenses 522 269 543
-------------------------------
Operating income (loss) $ (591) $(1,350) $ 357
===============================
F-16
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
6. Debt
The debt consisted of the following:
December 31
------------------------
1997 1996
------------------------
Revolving line of credit. $1,500 $12,571
Notes payable to banks secured by real estate. Interest rate at
December 31, 1997 was 9.25%. Monthly interest payments are
due through July 1998 with the principal due in July 1998. 162 750
Note payable to bank secured by the fixtures, equipment, and
building bearing interest at LIBOR plus 1.75% (7.75% at
December 31, 1997) with monthly payments of $24 plus
interest due through August 2012. 4,193 -
Notes payable to third parties secured by real estate. Fixed
interest rate at December 31, 1997 was 10.5%. Payments due
upon sale of real estate units. 443 731
Financing obligations secured by equipment of the paper
manufacturing business due in monthly installments to 1999.
Interest rate was 9.95%. - 666
------------------------
Total debt 6,298 14,718
Amounts classified as current liabilities (893) (293)
------------------------
Long-term debt $5,405 $14,425
========================
The bank revolving line of credit agreement expires February 27, 1999 and
provides availability based on collateral levels to $10,000 reduced by
outstanding letters of credit and bank acceptances funded by the line. The
agreement is secured or guaranteed by substantially all the assets of the
Company. Interest varies according to a selection of market interest rates on
amounts outstanding (7.94% at December 31, 1997). There is an annual fee of .25%
on the unused portion of the line. The credit agreement requires, among other
things, maintenance of financial ratios and limits certain expenditures.
The $4,193 note agreement contains a cash flow and a net worth requirement. The
Company was in violation of these covenants at December 31, 1997. The bank has
provided a waiver of the
F-17
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
6. Debt (continued)
cash flow covenant for 1997 and a waiver of the tangible net worth requirement
through January 1, 1999.
As of December 31, 1997 and 1996, the Company had approximately $8,500 and $500
of unused lines of credit available.
The Company capitalized $38 of interest in 1997.
Maturities of long-term debt for years succeeding December 31, 1997 are as
follows:
1998 $ 893
1999 1,788
2000 287
2001 287
2002 288
Thereafter 2,755
------
$6,298
======
7. Leases
The Company occupied certain properties under long-term operating leases which
expire at various dates. Certain of these operating leases were assumed by the
buyers of the Company's paper and specialty manufacturing businesses which were
sold in 1997. The Company recorded charges of $345 in 1997 and $110 in 1996
related to the abandonment of certain leases and the write-off of leasehold
improvements. Total rental expenses for all operating leases for 1997, 1996 and
1995 was $397, $614 and $609, respectively.
Property, plant and equipment includes equipment purchased under capital leases
at December 31 as follows:
1997 1996
-----------------------
Cost $3,672 $2,058
Accumulated depreciation 1,098 403
-----------------------
$2,574 $1,655
=======================
F-18
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
7. Leases (continued)
Amortization of equipment under capital leases is included in depreciation
expense.
During 1997, the Company revised the estimated useful life of one of its leased
assets from eight to five years (the life of the lease) and recorded an
additional charge of $317 related to this change. This revision increased the
1997 net loss by $317 and loss per share by $.06.
At December 31, 1997, the future minimum payments for the capital leases are as
follows:
1998 $ 913
1999 757
2000 757
2001 593
2002 249
------
Total minimum lease payments 3,269
Less amounts representing interest (543)
------
Present value of net minimum lease payments 2,726
Less current maturities (691)
------
Long-term obligations under capital-leases $2,035
======
8. Income Taxes
The provisions for income taxes for the years ended December 31 are based on
income (loss) from continuing operations before income taxes as follows.
1997 1996 1995
----------------------------------------
Current:
Federal $ - $ - $255
State - - 40
----------------------------------------
- 295
Deferred:
Federal 3,309 (670) 371
State 561 (30) 78
----------------------------------------
3,870 (700) 449
----------------------------------------
$3,870 $(700) $744
========================================
F-19
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
8. Income Taxes (continued)
The provision for income taxes is provided in the statement of consolidated
operations as follows:
1997 1996 1995
-----------------------------
Income (loss) from continuing operations
$3,870 $(266) $(355)
Loss from discontinued operations - (434) 300
Gain (loss) on disposal of
discontinued segment - - 799
-----------------------------
$3,870 $(700) $ 744
=============================
The components of consolidated income taxes (benefit) for the years ended
December 31 are as follows:
1997 1996 1995
----------------------------
Federal income taxes (benefit) at
statutory rates (34.0)% (34.0)% 34.0%
State income taxes (benefit) net of
federal income tax benefit (3.5) (3.6) 4.0
Change in valuation allowance 86.0 18.1 -
Limited use capital losses - 1.9 -
Permanent differences and other (0.7) 2.2 2.1
----------------------------
Effective income tax rate 47.8% (15.4)% 40.1%
============================
F-20
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
8. Income Taxes (continued)
The deferred tax effect of temporary differences between financial and tax
reporting at December 31 is as follows:
1997 1996
------------------------
Deferred tax assets:
Operating loss carryovers $ 6,972 $3,388
Tax credits 129 -
Unrealized capital losses:
Disposal of segment 670 670
Investment losses - 230
Asset reserves:
Bad debts 50 123
Inventory reserve 1,073 388
Inventory capitalization 128 208
Real estate sales 378 988
Accrued expenses:
Compensated absences 171 318
Health insurance claims 752 161
Restructuring accrual 704 -
All other - 209
Valuation allowances (10,177) (2,200)
------------------------
850 4,483
Deferred tax liabilities:
Depreciation (726) (613)
Unrealized capital gain (124) -
------------------------
Net deferred tax assets $ - $3,870
========================
In accordance with SFAS Statement No. 109, Accounting for Income Taxes,
valuation allowances are provided against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The Company has evaluated the
realizability of the deferred tax assets on its balance sheet and has
established a valuation allowance in the amount of $10,177 against its net
deferred tax assets.
F-21
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
8. Income Taxes (continued)
Part of the federal loss carryforward is attributed to the prior operation of
the wireless electronic subsidiary. This loss carryforward is limited to a tax
benefit of approximately $320 per year. If unused, the federal and state tax
loss carryforward benefit (at current rates) expires in the following years:
2004--$1,177; 2005--$1,436; 2006--$363; 2009--$5; 2010--$81; 2011--$459;
2012--$3,451.
9. Pension Plans
The Company sponsors participant contributory retirement plans (401k) which are
available to employees not covered by union plans, the Company's contributions
to these plans is either a percentage of the participants salary (50% of the
participants' contributions up to a maximum of 6%) or a discretionary amount.
Total contributions made by the Company were $248, $245 and $429 for 1997, 1996
and 1995, respectively.
The Company participated in a multi-employer pension plan through June 16, 1997,
the date of sale of its paper manufacturing business. The plan provides defined
benefits for those employees covered by two collective bargaining agreements.
Contributions for employees are based on hours worked at rates set in the
bargaining agreements. If the Company curtailed employment or withdrew from the
multi-employer plans, a withdraw liability may be incurred. The buyer of the
paper manufacturing business agreed to assume such withdrawal liability, if any.
The Company agreed to be secondarily liable if the buyer withdraws from the plan
through June 16, 2002. The amount of such liability, if any, cannot presently be
determined. Total amounts charged to pension expense and contributed to the
multi-employer plan were $70, $145 and $174 for 1997, 1996 and 1995
respectively.
10. Related Party Transactions
The specialty manufacturing subsidiary leased its manufacturing and office
facility from a corporation controlled by an officer of the Company. This
subsidiary was sold on June 4, 1997. Rental payments under this lease were
approximately $88 for the period January 1, 1997 through the sale date. Rental
payments were $230 and $239 for 1996 and 1995, respectively.
During the years ended December 31, 1996 and 1995, the Company's commercial real
estate subsidiary managed rental properties that were owned by other entities
that were controlled by an
F-22
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data
10. Related Party Transactions (continued)
officer of the Company. For this service, the Company received fees related to a
percentage of gross rents plus a percentage of new leases signed. Property
management fees received by the Company during 1996 and 1995 from related
parties totaled $133 and $124, respectively. See Note 5.
During 1997, the Company's commercial real estate subsidiary sold real estate to
an entity that was controlled by the Company's principal shareholder for $1,733.
As part of the sale, unsecured notes receivable were established totaling $200
and are outstanding at December 31, 1997. Interest is payable quarterly at 7%
and the principal is due in 2004.
11. Restructuring
In 1997, the Company recorded a $1,872 charge related to restructuring. The
restructuring consisted of consolidating operations and reducing operating
expenses. In consolidating operations, the Company accrued $446 related to the
closing of a research and development facility in Indiana which will be moved to
Florida by June 1998. In addition, the Company accrued $1,426 relating to the
termination of both factory and support employees in Indiana and Florida.
These costs have been included in loss from continuing operations.
12. Significant Customers
Sales to the United States government and to foreign markets as a percentage of
the Company's total sales were as follows:
1997 1996 1995
---------------------------------------
U.S. government 32% 21% 21%
Foreign markets 10 13 7
F-23
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
13. Earnings (Loss) Per Share
The following table sets the computation of basic and diluted earnings (loss)
per share from continuing operations:
Year ended December 31
--------------------------------------------
1997 1996 1995
--------------------------------------------
Numerator:
Net income (numerator for basic and diluted
earnings (loss) per share) $ (11,974) $ (1,347) $ (533)
---------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted average shares 5,076,438 5,116,304 5,098,063
Effect of dilutive securities:
Options - - -
---------------------------------------------
Dilutive potential shares - - -
---------------------------------------------
Denominator for diluted earnings (loss) per
share-adjusted weighted average shares 5,076,438 5,116,304 5,098,063
=============================================
Basic earnings (loss) per share $ (2.36) $ (.26) $ (.10)
=============================================
Diluted earnings (loss) per share $ (2.36) $ (.26) $ (.10)
=============================================
Shares related to options are not included in the computation of earnings (loss)
per share because to do so would have been anti-dilutive for the periods
presented.
14. Stock Option and Other Stock Plans
The Company has two plans whereby eligible officers, directors and employees can
be granted options for future purchases of Company common stock at the market
price on the grant date. The options, if not exercised within a five year
period, expire. Other conditions and terms apply to stock option plans.
F-24
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
14. Stock Option and Other Stock Plans (continued)
The following is a summary of all stock option plans:
Weighted
Shares Option Average
Under Price Per Exercise
Option Share Price
---------------------------------------
Balance at January 1, 1995 329,295 $3.61-$7.87 $5.61
Options exercised (2,674) 3.61 3.61
Options expired or terminated (65,418) 7.87 7.87
---------------------------------------
Balance at December 31, 1995 261,203 3.61- 7.87 5.06
Options granted 33,191 4.00- 4.06 4.01
Options exercised (7,640) 3.61 3.61
Options expired or terminated (9,096) 5.62- 7.87 6.49
---------------------------------------
Balance at December 31, 1996 277,658 3.61- 6.88 4.90
Options granted 130,000 4.06- 6.25 5.74
Options expired or terminated (114,135) 3.61- 6.88 4.97
---------------------------------------
Balance at December 31, 1997 293,523 $4.00-$6.88 $5.28
=======================================
Exercisable at December 31, 1997 108,838 $4.00-$6.88 $5.04
=======================================
The weighted average contractual life of stock options outstanding at December
31, 1997 was 2.4 years.
At December 31, 1997, 338,061 of unissued options were available under the two
plans.
Pro forma information regarding net income or loss is required by SFAS Statement
123, Accounting for Stock-Based Compensation, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair values for these options were estimated at the date
of grant using the Black-Scholes option-pricing model minimum value method with
the following weighted-average assumptions for 1997: expected volatility of 44%;
risk-free interest rate of 6%; dividend yield of 0%; and a weighted-average
expected life of the options of 3.5 years.
F-25
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
14. Stock Option and Other Stock Plans (continued)
For purposes of pro forma disclosures, the estimated fair value is amortized to
expense over the options' vesting period. The Company's pro forma net loss for
1997 was $14,835 or $2.92 loss per share. The proforma net loss reflects only
options granted in 1995, 1996 and 1997. Therefore, the full impact of
calculating compensation cost for stock options under SFAS Statement No. 123 is
not reflected in the proforma net loss amounts because compensation cost is
reflected over the vesting periods and compensation cost for options granted
prior to January 1, 1995 is not considered. The weighted average fair value of
options granted during 1997 was $2.41. The option price equaled the market price
on the date of grant for all options granted in 1997.
Adoption of SFAS Statement No. 123 had no material effect on pro forma net
income or loss or earnings (loss) per share for 1996 and 1995.
15. Discontinued Operations
Paper Manufacturing
On June 16, 1997, the Company sold the assets and certain liabilities of its
paper manufacturing business, Fort Orange Paper Co., Inc. (Fort Orange), to the
former president of Fort Orange. The purchase price totaled $8,619 and consisted
of cash of $6,219 and a note for $2,400. A loss of $2,084 was recorded on the
transaction. The note is receivable over five years in annual payments of $400
for the first four years and $800 in the final year and is secured by the assets
of Fort Orange. Interest at 11.5% is receivable quarterly.
F-26
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
15. Discontinued Operations (continued)
The operations of Fort Orange were reclassified to discontinued operation for
all periods presented. Summarized results of Fort Orange's discontinued
operations were as follows:
Through Year ended December 31
June ----------------------
1997 1996 1995
--------------------------------------
Net revenues $10,335 $23,134 $28,585
Operating profit (loss) (415) 232 1,319
Income (loss) before income taxes (335) 459 1,319
Income taxes - (156) (528)
--------------------------------------
Net income (loss) from discontinued
operations $ (335) $ 303 $ 791
======================================
F-27
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
15. Discontinued Operations (continued)
Specialty Manufacturing
In December 1996, the Company agreed in principal to sell its specialty
manufacturing business, Allister Manufacturing Company, Inc. (Allister), to an
officer and director of the Company. The sale, which was conditional upon the
buyer obtaining the necessary financing, was finalized on June 4, 1997 for a
total purchase price of approximately $1,946 including cash of $1,592 and the
assignment of approximately 83,000 shares of common stock of the Company. The
book value of the net assets sold were $2,432 at the date of sale. A loss on the
sale of $1,832 (pre-tax and other tax) was recorded in 1996 and an additional
loss on sale of $486 was recorded in 1997.
The operations of Allister were reclassified to discontinued operations for all
periods presented. Summarized results of Allister's discontinued operations were
as follows:
Through Year ended December 31
May ----------------------
1997 1996 1995
-------------------------------------
Net revenues $4,332 $11,212 $10,952
Operating profit (loss) 69 (715) (898)
Income (loss) before income taxes 69 (1,738) (1,740)
Income tax benefits - (590) (698)
--------------------------------------
Net income (loss) from discontinued
operations $ 69 $(1,148) $(1,042)
=====================================
The net assets of Allister's discontinued operations at December 31, 1996 were
as follows:
Current assets $4,679
Net property and equipment 311
Current liabilities (1,113)
Valuation allowance (900)
------
Net assets of discontinued operations $2,977
======
F-28
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
15. Discontinued Operations (continued)
Steel Processing
In August 1995, the Company sold its steel processing business, Niagara Cold
Drawn Corporation (Niagara) for $6,789 in cash. A gain on the sale of $1,193
after income tax expense of $779 was recorded.
The operations of Niagara were reclassified to discontinued operations.
Summarized results of Niagara's discontinued operations were as follows:
Through
August
1995
-------
Net revenues $34,285
Operating profit 5,095
Income before income taxes 1,173
Income taxes 470
-------
Net income from discontinued operations $ 703
=======
16. Contingent Liabilities
From time to time, the Company may become liable with respect to pending and
threatened litigation, tax, environmental and other matters.
General Insurance
Under the Company's insurance programs, coverage is obtained for catastrophic
exposures as well as those risks required to be insured by law or contract. It
has been the policy of the Company to retain a significant portion of certain
expected losses related primarily to workers' compensation, physical loss to
property, business interruption resulting from such loss and comprehensive
general, product, and vehicle liability. Provisions for losses expected under
these programs were recorded based upon the Company's estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry and were included in accrued
compensation and related taxes in the balance sheets.
F-29
RELM Wireless Corporation
Notes to Consolidated Financial Statements
December 31, 1997
(In Thousands, Except Share Data)
16. Contingent Liabilities (continued)
Former Affiliate
In 1993, a civil action was brought against the Company by a plaintiff to
recover losses sustained on notes of a former affiliate. The plaintiff alleges
violations of federal security and other laws by the Company in collateral
arrangements with the former affiliate. In response, the Company filed a motion
to dismiss the complaint in the fall of 1993, which the court has yet to rule.
In February 1994, the plaintiff executed and circulated for signature, a
stipulation of voluntary dismissal. After the stipulation was executed the
plaintiff refused to file the stipulation with the court. Subsequently the
Company and others named in the complaint filed a motion to enforce their
agreement with the plaintiff. The court has also yet to rule on that motion.
In a second related action, an adversarial action in connection with the
bankruptcy proceedings of the former affiliate has been filed. In response to
that complaint the Company filed a motion to dismiss for failure to state a
cause of action. Although the motion for dismissal was filed during 1995, the
bankruptcy court has not yet ruled on the motion. The range of potential loss,
if any, as a result of these actions cannot be presently determined.
In February 1986, the liquidator of the former affiliate filed a complaint
claiming intentional and negligent conduct by the Company and others named in
the complaint caused the former affiliate to suffer millions of dollars of
losses leading to its ultimate failure. The complaint does not specify damages
but an unfavorable outcome could have a material adverse impact on the Company's
financial position. The range of potential loss, if any, cannot be presently
determined.
Management, with the advice of counsel, believes the Company has meritorious
defenses and the likelihood of an unfavorable outcome in each of these actions
is remote.
F-30
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company dismissed MacDade Abbott LLP as its certifying accountants on
November 7, 1997. Ernst and Young LLP was named as certifying accountants on
November 13, 1997. The information required by this item was included in the
company's 8-K filing dated December 2, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information regarding the Company's directors
and executive officers:
Principal Occupation
Name Age During Past Five Years Directorships
---- --- ---------------------- -------------
Donald F.U. Goebert 61 Chairman of the Board of Directors of the Progress Financial
Company and its predecessor since March Corporation; Investors
1968; President of the Company's predecessor Insurance Group, Inc.
from March 1968 to October 1988 and
President and CEO of the Company April 1993
to December 1997.
Richard K. Laird 50 President and CEO of the Company since
December 1997; Executive Vice President and
Chief Operating Officer of Antec Corp. From
January 1994 to December 1996; Chairman and
CEO of Keptel Inc. 1983 to January 1994.
Director since December 1997.
William P. Kelly 41 Vice President, Chief Financial Officer and
Secretary of the Company since June 30,
1997; Vice President and Chief Financial
Officer of RELM Communications, Inc. since
October 1995; International Operations
Financial Manager of Harris Corporation from
June 1992 to October 1995.
Buck Scott 68 Private investor since January 1995;
President of Electrical Energy Enterprises,
Inc. from 1991 through 1994. Director of
Company since 1980 (including its
predecessor).
Robert L. MacDonald 70 Retired, Director of Financial Aid Wharton
Graduate Division and Lecturer in
Management, Wharton School, University of
Pennsylvania 1953 to March 1993. Director
of Company since February 1991.
Ralph R. Whitney, Jr. 63 President and CEO of Hammond Kennedy Whitney IFR Systems, Inc.; Excel
& Co., Inc. a private investment banking Industries, Inc.; Baldwin
firm with offices at 230 Park Avenue. New Technologies Inc.; Control
York, New York. Director of Company since Devices, Inc.; Selas
January 1992. Corporation of America
James C. Gale 48 Managing Director of Gruntal & Co., LLC from Latshaw Enterprises, Inc.
1992 to present. Director of Company since
October 1993.
Joel A. Schleicher 45 Private investor and advisor to LBO firms NovAtel, Inc.
since July 1997 and for a period from July
1995 thru May 1996; President and CEO for
Pro Communications, Inc. from May 1996
to July 1997; Chief Operating Officer of
Nextel Communications, Inc. prior
to July 1995.
George N. Benjamin, III 60 Management Consultant of Trig Systems, LLC;
President and CEO of Tie/Communications,
Inc. from April 1992 to November 1995; Group
Vice President of The Marmon Group, Inc.
prior to April 1992; Director since January
1996.
Each of the members of the Board of Directors, other than Mr. Laird, was
elected at the annual meeting of shareholders. Mr. Laird, whose employment with
the Company commenced on December 1, 1997, after the distribution of the proxy
materials for the December 8, 1997 annual meeting, was appointed as a director
at the organizational meeting of the Board following the shareholders' meeting.
Mr. Laird's appointment as a director was made in accordance with the agreement
pursuant to which he was employed as the Company's President and Chief Executive
Officer. Each of the Executive Officers, including Mr. Laird, was elected to
office by the Board at its organizational meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than 10% of the Company's Common
Stock (collectively, the "Reporting Persons") to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
the Company with copies of these reports. Based on the Company's review of the
copies of these reports received by it, and from written representations
received from the Reporting Persons, the Company believes that, with the
exception of the filing by William P. Kelly and Richard K. Laird, in each case,
of an initial statement of beneficial ownership more than ten days after his
appointment as an executive officer of the Company, all filings required to be
made by the Reporting Persons for the period January 1, 1997 through December
31, 1997 were made on a timely basis.
Committees of the Board of Directors
The Board of Directors has a Compensation Committee and an Audit Committee.
The Company does not have an Executive Committee or Nominating Committee. During
1997, Messrs. Gale, Schleicher and Benjamin served as members of the
Compensation Committee and Messrs. Scott, MacDonald, Whitney, Gale and
Schleicher serve as members of the Audit Committee.
Compensation of Directors
During 1997 the Company paid to each of its non-employee directors meeting
fees of $1,000 for attendance at each Board meeting and $500 for attendance at
each meeting of any committee of the Board of Directors which is not held in
conjunction with a meeting of the Board. Beginning with the 1997 fiscal year, as
a result of approval by the shareholders of the 1996 Non-Employee Directors
Option Plan, compensation for non-employee directors was modified to provide for
the grant of stock options in lieu of a quarterly retainer for service as a
director. Pursuant to the terms of the 1996 Non-Employee Directors Option Plan,
beginning in 1997, a grant of a stock option for the purchase of 5,000 shares is
made to each non-employee director on the date of each annual meeting of
shareholders at which such person is elected or reelected as a director (or if
such annual meeting has not been held by June 30 of such year such grant is made
as of such June 30 to each such person who has been a non-employee director for
at least three months). Such options are granted at an exercise price equal to
the fair market value of the Common Stock on the date of grant and become
2
fully exercisable eleven months after the date of the grant or, if earlier,
upon a change of control as defined in the Plan. Such options were granted to
the Company's non-employee directors as of June 30, 1997 at an exercise price of
$4.06 per share. The expiration date of the options which were granted will be
June 29, 2002.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation
paid during each of the last three years to Messrs. Goebert and Laird, each of
whom served as the Company's President and Chief Executive Officer during 1997.
No other executive officer of the Company was paid salary and bonus compensation
which exceeded $100,000 during 1997.
Long-Term Compensation
----------------------
Annual Compensation Awards
------------------- ----------------------
Number of
Other Annual Securities All Other
Name and Principal Salary Bonus Compensation Underlying Compensation
Position Year ($) ($) ($)(1) Options(#) ($)
------------------ ---- ------- ----- ------------ ----------- ------------
Donald F. U. Goebert 1997 $150,000 $ -- $ -- $ -- $ --
President and CEO,
Chairman (2) 1996 150,000 -- -- -- --
1995 150,000 -- -- -- --
Richard K. Laird 1997 11,538 -- -- -- --
President and CEO (2)(3) 1996 -- -- -- -- --
1995 -- -- -- -- --
- -------------------
(1) Neither of the named executive officers received any other annual
compensation not categorized as salary or bonus except for perquisites and
other personal benefits which in the aggregate did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus reported for such named
executive officer.
(2) Mr. Goebert served as President and CEO until December 1, 1997, when Mr.
Laird assumed the office of President and CEO. Mr. Goebert continues to
serve as Chairman of the Board. Mr. Laird was employed at a salary rate of
$200,000 per year, effective December 1, 1997. Effective January 1, 1998,
Mr. Goebert's salary as Chairman of the Board became $50,000 per year.
3
(3) Under the terms of Mr. Laird's employment he was granted options under the
Company's 1997 Stock Option Plan for the purchase of 100,000 shares of
Common Stock upon the commencement of his employment and is to be granted
options for additional increments of 50,000 shares six months, twelve
months, eighteen months and twenty-four months thereafter. Such options
will be granted at the then current market value of the shares. The options
granted and to be granted will become exercisable as to increments of 25%
of the optioned shares on the first, second, third and fourth year
anniversaries of the date of the grant. In the event of a change in
control, as defined in the Plan agreement, 50% of any otherwise unvested
options shall become vested and exercisable. Mr. Laird shall also be
eligible to receive a bonus of up to 50% of his salary upon attaining
earnings per share and/or share price goals or other performance criteria
to be mutually agreed upon with the Board of Directors.
Stock Option Grants
The following table contains information concerning the grant of stock
options under the Company's 1997 Stock Option Plan to the executive officers
named in the Summary Compensation Table above (the "Named Officers") during
1997.
Option Grants in 1997
Individual Grants
Potential Realizable
Value (3) at Assumed
Number of Annual Rates of Stock
Securities % of Total Exercise Price Appreciation for
Underlying Options Granted or Base Option Term
Options Granted to Employees in Price Expiration -----------------------
Name (# of Shares)(1)(2) 1997 ($/Sh) Date(2) 5%($)(3) 10%($)(3)
- --------------------------------------------------------------------------------------------------------------------
Donald F.U. Goebert -- -- -- -- -- --
Richard K. Laird 100,000 100 $6.25 12/01/07 $393,059 $996,089
- -------------------
(1) These are options granted under the 1997 Stock Option Plan to acquire
shares of Common Stock. Options with respect to 64,000 shares are incentive
stock options ("ISOs") under ss.422 of the Internal Revenue Code of 1986,
as amended and options with respect to 36,000 shares are non-qualified
stock options. The options are exercisable with respect to increments of
25% of the optioned shares (prorated among the ISOs and the non-qualified
options) as of the first, second, third and fourth anniversaries of the
option grant date. These options were granted at fair market value on the
date of the grant.
(2) These options could expire earlier in certain situations.
4
(3) The potential realizable value of the options, if any, granted in 1997 was
calculated by multiplying those options by the excess of (a) the assumed
market value, at December 1, 2007, of Common Stock if the market value of
Common Stock were to increase 5% or 10% in each year of the option's
10-year term over (b) the base price shown. This calculation does not take
into account any taxes or other expenses which might be owed. The assumed
market value at a 5% assumed annual appreciation rate over the 10-year term
is $10.18 and such value at a 10% assumed annual appreciation rate over
that term is $16.21. At $ 10.18 the total market value of the shares of
Common Stock outstanding on March 31, 1998 would be $51,319,548 which would
be an increase of $13,192,854 from the market value of such shares at the
close of business on December 31, 1997. At $16.21, the total market value
of the shares of Common Stock outstanding on March 31, 1998 would be
$81,718,063 which would be an increase of $43,591,369 from the market value
of such shares at the close of business on December 31, 1997. The 5% and
10% appreciation rates are set forth in the Securities and Exchange
Commission Rules and no representation is made that the Common Stock will
appreciate at these assumed rates or at all.
The Company does not currently have (and has not previously had) any plan
pursuant to which any stock appreciation rights ("SARs") may be granted.
Stock Option Exercises and Holdings
The following table sets forth information relating to options exercised
during 1997 by each of the Named Officers and the number and value of options
held on December 31, 1997 by such individuals.
Aggregated Option Exercises in 1997 and Option Values at December 31, 1997
Shares
Acquired
on Number of Securities Value of Unexercised
Exercise Value Underlying Unexercised In-the-Money Options at
Name (#) Realized ($) Options at Dec. 31 1997 (#) Dec. 31, 1997 ($)(1)
---- ------ ------------ --------------------------- ---------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Donald F. U. Goebert 0 $ 0 87,500 12,500 $256,638 $36,663
Richard K. Laird (2) 0 0 0 100,000 0 131,300
(1) Total value of unexercised options is based upon the difference between the
last sales price of the Company's Common Stock on the NASDAQ on December
31, 1997, which was $7.563 per share, and the exercise price of the
options, multiplied by the number of option shares.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Company's compensation program for the Named Officers, as well as for
its other executive officers, is administered by the Board of Directors with the
advice and counsel of the Compensation
5
Committee of the Board. The members of the Compensation Committee provide
such advice and counsel through their participation as directors in meetings of
the Board and as members of the Committee in meetings of the Committee held
separate and apart from meetings of the Board. The Compensation Committee,
consists of three outside directors, James C. Gale, Chairman, Joel A. Schleicher
and George N. Benjamin, III. The Compensation Committee did not hold any
separate meetings during 1997.
The principal actions taken by the Board with respect to executive
compensation during 1997 were approval of the compensation package pursuant to
which Mr. Laird was employed as President and Chief Executive Officer on
December 1, 1997 and the approval of a change in the compensation of Mr. Goebert
for the year beginning January 1, 1998 to reflect the change in his
responsibilities from Chairman of the Board, President and Chief Executive
Officer to Chairman of the Board. All of the members of the Committee approved
these actions and neither Mr. Laird nor Mr. Goebert participated in the Board
action which affected his compensation.
The Company's officer compensation is composed of base salary, incentive
compensation in the form of an annual cash bonus and discretionary long-term
incentive compensation in the form of stock options. Each officer is also a
participant in medical life insurance, non-contributory 401(k) and other plans
which are generally made available to employees of the Company or of the
business units managed by such officer.
The Compensation Committee and the Board of Directors strive to offer to
the Company's officers a compensation package consisting of base salary and
incentive compensation which will attract, retain, motivate, and reward talented
executives. To achieve its objectives, the Committee and the Board evaluate the
performance of the Company's officers and consider data on other companies in
its industry which are comparable in size, location and financial performance.
The Committee and the Board intend to base a significant portion of the
compensation of senior executives upon the Company's financial success so that
the Company's officers are rewarded on the same basis as the Company's
shareholders.
Consistent with the compensation objectives of the Committee and the Board, the
use of stock options has been a material part of the compensation package for
the Company's President and Chief Executive Officer. The compensation package
agreed upon for the employment of Mr. Laird as President and Chief Executive
Officer included, in addition to his salary, the grant to him, upon commencement
of employment, of an option under the Company's 1997 Stock Option Plan for the
purchase of up to 100,000 shares of the Company's Common Stock, and for the
grant to him of additional options for increments of up to 50,000 shares each
six months, twelve months, eighteen months and twenty-four months thereafter.
Such options will vest and become exercisable during his employment at the rate
of 25% of the optioned shares on each of the first, second, third and fourth
anniversaries of the grant date. Similarly, in 1994, Mr. Goebert, who served as
President and Chief Executive Officer of the Company until December 1, 1997, was
granted options under the Company's 1988 Stock Option Plan for the purchase of
100,000 shares which became vested and exercisable over a five year period. In
light of the 1994 grants, the Committee determined for fiscal years since 1994
6
to maintain the 1994 level of base salary compensation for Mr. Goebert. Stock
options, constituting a less material element of overall compensation, have also
been granted to William P. Kelly, the other executive officer of the Company,
and to other key employees of the Company and its subsidiaries.
From time to time the Board, upon the recommendation of the Committee,
implements bonus plans or grants discretionary bonus payments to its executive
and other officers based upon performance criteria and the results of the
Company's operations. It is the continuing philosophy of the Compensation
Committee to include corporate goals, stock price, and financial results
measured by return on shareholder equity as determinants of total executive
compensation. The terms of Mr. Laird's employment provide for the payment of a
bonus of up to 50% of his salary based upon earnings and/or share price goals or
other performance criteria to be mutually agreed upon with the Board of
Directors.
Recent amendments to the Internal Revenue Code provide that publicly-held
corporations may not deduct, for federal income tax purposes, non-performance
based compensation for its chief executive officer and certain other executive
officers to the extent that such compensation exceeds $1,000,000 for the
executive. The Compensation Committee and the Board intend to take such actions
as are appropriate to qualify compensation paid to executives for deductibility
under these recent amendments. In this regard, base salary and bonus levels are
expected to remain well below the $1,000,000 limitation in the foreseeable
future. Options granted under the Company's Stock Option Plans are designed to
constitute performance-based compensation, which would not be included in
calculating compensation for purposes of the $1,000,000 limitation.
Members of the Compensation Committee
James C. Gale, Chairman George N. Benjamin, III Joel A. Schleicher
Compensation Committee Interlocks and Insider Participation
During 1997, the Compensation Committee of the Company's Board of Directors
was composed of Messrs. Gale, Benjamin and Schleicher, all of whom are
independent, outside directors of the Company. As noted above, the Company's
compensation program for its executives is administered by the Board of
Directors with the advice and counsel of the Compensation Committee. As a
result, Messrs. Goebert and Laird provide input to the deliberations by the
Committee and the Board concerning executive compensation. Neither Mr. Goebert
nor Mr. Laird, each of whom is a director of the Company, voted as a member of
the Board in the Board action which affected his compensation.
STOCK PERFORMANCE GRAPH
The graph below compares the five-year cumulative total shareholder return
on the Company's Common Stock with the five-year cumulative total return of the
Nasdaq Stock Index, U.S. ("Nasdaq") and the Nasdaq non-financial stocks index
("Composite").
7
[GRAPHIC]
In the printed document, there is a line chart representing the following:
Annual Returns Ending
December 31,
NASDAQ COMPOSITE RELM
------ --------- ----
1992 100 100 100
1993 114.7932 115.4545052 112.195122
1994 112.2085 111.0153274 95.12195122
1995 158.6839 154.7107292 82.92682927
1996 195.1942 187.9706742 65.85365854
1997 239.6321 220.7663684 147.5707317
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management
The table below sets forth certain information as of March 15, 1998
regarding the beneficial ownership, as defined in regulations of the Securities
and Exchange Commission, of Common Stock of (i) each person who is known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
the Company's Common Stock, (ii) each director of the Company, including the
Named Officers, and (ii) all directors and executive officers as a group. Unless
otherwise specified, the named beneficial owner has sole voting and investment
power. The information in the table below was furnished by the persons listed.
Amount Beneficially Percent
Name of Beneficial Owner Owned of Class(1)
------------------------ -------------------- -----------
Dimensional Fund Advisors 307,433(2) 6.1
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Donald F.U. Goebert ...................................... 1,711,234(3)(4) 33.4
400 Willowbrook Lane
West Chester, PA 19382
Richard K. Laird ......................................... 0 *
Ralph R. Whitney, Jr ..................................... 46,187 *
Buck Scott ............................................... 10,000 *
James C. Gale ............................................ 4,166(5) *
Joel A. Schleicher ....................................... 3,124(5) *
George N. Benjamin, III .................................. 1,922(6) *
Robert L. MacDonald ...................................... 0 *
All executive officers and directors as a group
(9 persons) ........................................... 1,777,883(3)(4)(5)(6) 34.6
- -----------------------
* Less than 1%
8
(1) Based upon 5,037,440 outstanding shares as of March 15, 1998 and, with
respect to each holder of options exercisable within 60 days, the shares
represented by such options.
(2) According to the Schedule 13G filed by Dimensional Fund Advisor Inc. (the
"Reporting Person") dated February 6, 1997, the Reporting Person had sole
voting power with respect to 193,738 of the reported shares and sole
investment power with respect to 307,433 of the reported shares and all of
the reported shares were owned by advisory clients of the Reporting Person.
(3) Includes 188,971 shares owned by Investors Insurance Group, Inc., a
subsidiary of a company controlled by Mr. Goebert; 85,942 shares owned by
Chester County Fund, Inc., the majority shareholder of which is Mr.
Goebert; and 60,000 shares owned by a partnership controlled by Mr.
Goebert. Also includes 87,500 shares subject to immediately exercisable
options or options exercisable within 60 days and 11,840 shares held in
trust for Mr. Goebert's children.
(4) Includes 23,366 shares held in a custodial account for the Company's
Employee Stock Purchase Program, of which Mr. Goebert is a Custodian, and
789 shares held in a Trust under the Adage, Inc. 401(k)
Retirement-Investment Plan, of which Mr. Goebert is a Trustee.
(5) Represents shares subject to immediately exercisable options or options
exercisable within 60 days.
(6) Includes 1,822 shares subject to immediately exercisable options or options
exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leased its headquarters and a manufacturing facility from entities
owned principally by Messrs. Goebert and Scott during 1997. The lease was
terminated on June 5, 1997 concurrently with the sale of the Allister assets
referred to in the following paragraph. Rentals under these leases were $83,000
for the year ended December 31, 1997.
On June 5, 1997 the Company sold all of the assets of its specialty
manufacturing subsidiary, Allister Manufacturing Company, Inc. ("Allister") to
c.p. Allstar Corporation ("Allstar"), a corporation owned by Robert T. Holland,
who was until that date a director and executive officer of the Company.
Allister was primarily engaged in the manufacturing of automatic garage door and
gate control systems. For the fiscal years ended December 31, 1994, 1995 and
1996 Allister had incurred operating losses of $395,000, $898,000 and $715,000,
respectively. Under the terms of the Asset Purchase Agreement dated April 22,
1997 (the AAgreement") between Allister and Allstar the assets of Allister were
purchased for an aggregate purchase price, after adjustments of $1,946,000 which
was paid at closing by payment in cash of $1,592,000 and delivery to the Company
of 83,327 shares of Common Stock and options for the purchase of 75,000 shares
of Common Stock at an agreed upon aggregate value of $696,029 based upon the
book value of the shares on the date of the Agreement. and the possible future
value of the options. The approximate book value and the market value of the
9
Common Stock on the date of the Agreement were $5.60 per share and $3.625 per
share, respectively, and the average exercise price under the options was $4.63
per share. The pre-adjustment purchase price of $1,800,000 was based upon an
assumed closing date net book value of $2,700,000 and adjusted to increase or
decrease the purchase price from $1,800,000 on a dollar for dollar basis to the
extent that the closing date net book value was greater than or less than
$2,700,000 and to increase or decrease the purchase price by any decrease or
increase in earnings before interest, taxes, depreciation and amortization for
the period from March 1, 1997 until June 5, 1997, the date of closing of the
purchase transaction. The Company's basis in the net assets was $3,763,681 and
the purchase price was determined by the Board of Directors based upon net book
value of tangible assets, less a discount. During 1996 the Board of Directors
determined to divest the Company of its specialty manufacturing and recycled
paper manufacturing subsidiaries in order to concentrate the Company's
management and financial resources on its principal business, the manufacture
and sale of wireless communications products. The sale of the assets of Allister
resulted in the disposition of the Company's specialty manufacturing business.
On June 16, 1997, the Company sold Fort Orange Paper Co., Inc., its recycled
paper manufacturing subsidiary to an unaffiliated third party.
During 1997 the Board of Directors approved the sale to affiliates of Mr.
Goebert of the real estate which consisted of most the remaining assets of the
Company's commercial real estate operations, which the Company elected to
discontinue in 1994. These properties constituted land located in the Naaman's
Creek Center. Four of the properties were sold during 1997 for an aggregate
purchase price, after adjustment of $1,733,000 which was paid at closing by
payment in cash of $ 1,533,000 and delivery to the Company of a seven year, 7%
promissory note in the amount of $ 200,000. The Company's cost basis in these
properties was $1,965,114 and the purchase price was determined based upon their
market value as determined by independent appraisal. In April, 1998 an
additional property was sold for $549,000. The remaining property is expected to
be sold during April, 1998. The Company's basis in these properties is
approximately the same as the selling proce.
In general, the Company believes that the terms of the transaction
described in this section are at least as favorable as those that might have
been obtained from unaffiliated third parties.
10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: See Index to the Consolidated Financial Statements on
Page F-1 hereof.
2. Financial Statement Schedules: All schedules have been omitted because they
are inapplicable or not material, or the information called for thereby is
included in the Consolidated Financial Statements and Notes thereto.
3. Exhibits: The Exhibits listed below are filed as a part of, or incorporated
by reference into this Report:
Number Exhibit
(2) * Articles of Merger merging Adage, Inc. with and unto RELM
Wireless Corporation effective January 30, 1998.
(3)(i) * Articles of Incorporation of RELM Wireless corporation filed
October 24, 1997.
(3)(ii)* By-Laws of RELM Wireless Corporation.
(10)(e)*** Adage, Inc. 1997 Stock Option Plan
(21) * Subsidiaries of the Registrant
(27.1) * Financial Data Schedule for the year ended December 31, 1997
(27.2) * Financial Data Schedule Restated for the year ended
December 31, 1996
- ------------------
* Filed herewith.
** Compensatory plan required to be filed pursuant to Item 601(b)(10)(iii)
of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
Date: 4/15/98 RELM, INC.
By: /s/ Richard K. Laird
------------------------------
Richard K. Laird
President & C.E.O.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and or the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/Donald F. U. Goebert Chairman 4/15/98
- -------------------------
Donald F. U. Goebert
/s/Richard K. Laird President and Chief 4/15/98
- ------------------------- Executive Officer
Richard K. Laird
/s/William P. Kelly Vice President - Finance 4/15/98
- ------------------------- Secretary
William P. Kelly
/s/Buck Scott Director 4/15/98
- -------------------------
Buck Scott
/s/James C. Gale Director 4/15/98
- -------------------------
James C. Gale
/s/Robert L. MacDonald Director 4/15/98
- -------------------------
Robert L. MacDonald
/s/Ralph R. Whitney, Jr. Director 4/15/98
- -------------------------
Ralph R. Whitney, Jr.
SIGNATURES TITLE DATE
---------- ----- ----
/s/Joel A. Schleicher Director 4/15/98
- --------------------------
Joel A. Schleicher
/s/George N. Benjamin, III Director 4/15/98
- --------------------------
George N. Benjamin, III
Exhibit Index
(2) Articles of Merger merging Adage, Inc. with and unto RELM Wireless
Corporation effective January 30, 1998.
(3)(i) Articles of Incorporation of RELM Wireless corporation filed October 24,
1997.
(3)(ii) By-Laws of RELM Wireless Corporation.
(10)(e) Adage, Inc. 1997 Stock Option Plan
(21) Subsidiaries of the Registrant
(27.1) Financial Data Schedule for the year ended December 31, 1997
(27.2) Financial Data Schedule Restated for the year ended
December 31, 1996