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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2002
-------------
OR
[x] 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 000-7336
RELM WIRELESS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 59-3486297
------------------------------- ----------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 TECHNOLOGY DRIVE
WEST MELBOURNE, FLORIDA
-----------------------
(Address of principal executive offices)
32904
-----
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (321) 984-1414
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
------ ------
[ 8,537,424] shares outstanding as of August 9, 2002
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PART I- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30 December 31
2002 2001
--------- -----------
(UNAUDITED) (See note 1)
ASSETS
- -------
Current assets:
Cash and cash equivalents $ 2,092 $ 335
Trade accounts receivable (net of allowance for doubtful accounts
of $100 as of June 30, 2002 and $1,540 as of December 31, 2001) 2,622 3,597
Inventories, net 8,075 8,961
Notes receivable 59 60
Prepaid expenses and other current assets 475 452
------- -------
Total current assets 13,323 13,405
Property, plant and equipment, net 1,954 2,156
Notes receivable, less current portion 11 911
Debt issuance costs, net 427 512
Other assets 487 639
------- -------
Total assets $16,202 $17,623
======= =======
See notes to condensed consolidated financial statements.
2
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30 December 31
2002 2001
-------- --------
(UNAUDITED) (See note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------
Current Liabilities:
Current maturities of long-term liabilities $ 100 $ 110
Accounts payable 2,096 3,171
Accrued compensation and related taxes 475 532
Accrued warranty expense 47 79
Accrued expenses and other current liabilities 257 251
-------- --------
Total current liabilities 2,975 4,143
Long-term liabilities:
Loan, notes and mortgages 2,583 3,848
Convertible subordinated notes 3,150 3,150
-------- --------
5,733 6,998
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares
at June 30, 2002 and December 31, 2001; none issued -- --
Common stock; $.60 par value; 20,000,000 authorized shares:
8,537,424 issued and outstanding shares at June 30,
2002; 5,346,174 issued and outstanding at December 31, 2001 5,122 3,207
Additional paid-in capital 21,562 21,452
Accumulated deficit (19,190) (18,177)
-------- --------
Total stockholders' equity 7,494 6,482
-------- --------
Total liabilities and stockholders' equity 16,202 $ 17,623
======== ========
See notes to condensed consolidated financial statements.
3
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30 June 30 JUNE 30 June 30
2002 2001 2002 2001
-------- -------- -------- --------
(SEE NOTE 1) (see note 1) (SEE NOTE 1) (see note 1)
Sales $ 4,950 $ 6,188 $ 9,683 $ 10,908
Expenses
Cost of products 3,412 4,448 6,789 7,919
Selling, general & administrative 1,460 1,462 2,870 2,850
Loss on notes receivables -- -- 900 --
-------- -------- -------- --------
4,872 5,910 10,559 10,769
-------- -------- -------- --------
Operating income (loss) 78 278 (876) 139
Other income (expense):
Interest expense (111) (145) (221) (303)
Other income 36 12 84 22
-------- -------- -------- --------
Net income (loss) $ 3 $ 145 $ (1,013) $ (142)
======== ======== ======== ========
Earnings (loss) per share-basic $ 0.00 $ 0.03 $ (0.14) $ (0.03)
======== ======== ======== ========
Earnings (loss) per share-diluted $ 0.00 $ 0.03 $ (0.14) $ (0.03)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
---------------------
JUNE 30 June 30
2002 2001
------- -------
(SEE NOTE 1) (see note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,013) $ (142)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Loss on Notes Receivable 900 --
Depreciation and amortization 491 535
Change in current assets and liabilities:
Accounts receivable 975 (414)
Inventories 886 (166)
Accounts payable (1,076) (442)
Other current assets and liabilities (106) 212
------- -------
Cash provided by (used in) operating activities 1,057 (417)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (50) (53)
Other -- (31)
------- -------
Cash used in investing activities (50) (84)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (10) (641)
Net change in revolving credit lines (1,265) 1,177
Net proceeds from issuance of common stock 2,025 --
------- -------
Cash provided by financing activities 750 536
Increase in cash 1,757 35
Cash and cash equivalents, beginning of period 335 208
------- -------
Cash and cash equivalents, end of period $ 2,092 $ 243
======= =======
Supplemental disclosure
Interest paid $ 221 $ 303
======= =======
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 2002, the condensed
consolidated statements of operations for the three and six months ended
June 30, 2002 and 2001 and the condensed consolidated statements of cash
flows for the six months ended June 30, 2002 and 2001 have been prepared by
RELM Wireless Corporation (the Company), without audit. In the opinion of
management, all adjustments (which include normal recurring adjustments)
necessary for a fair presentation have been made. The balance sheet at
December 31, 2001 has been derived from the audited financial statements at
that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's December
31, 2001 Annual Report to Stockholders. The results of operations for the
three and six month periods ended June 30, 2002 are not necessarily
indicative of the operating results for a full year.
The Company maintains its records on a calendar year basis. The Company's
first, second, and third quarters normally end on the Friday closest to the
last day of the last month of such quarter, which was June 28, 2002 for the
second quarter of fiscal 2002. The quarter began on March 30, 2002.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
PUBLIC RIGHTS OFFERING
On March 22, 2002, the Company closed a public rights offering. The purpose
of the offering was to provide working capital, which among other things,
the Company believes will speed the development of the Company's new APCO
Project 25-compliant digital products and capabilities. The securities
offered were "units". A unit was comprised of one share of RELM common
stock and one warrant to purchase one share of RELM common stock,
exercisable at $1.01 per share at any time on or after February 12, 2003
and until February 11, 2006. Units were offered initially to RELM's equity
holders in the form of a rights offering. The "right" allowed investors in
the offering to purchase units at a 10% discount to the market price of a
share of common stock.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
2. SIGNIFICANT EVENTS AND TRANSACTIONS - CONTINUED
PUBLIC RIGHTS OFFERING-CONTINUED
Noble International Investments, Inc. (Noble) was engaged as the standby
underwriter for this offering. The units were offered to the public
pursuant to a registration statement that was declared effective by the
Securities and Exchange Commission (SEC) on February 11, 2002. In
accordance with the terms of the offering, the units were separated on the
closing date. The offering resulted in the sale of 2,775,000 shares of
common stock and warrants to purchase 2,775,000 shares of common stock .
The offering generated $1,800 in net proceeds. The warrants are currently
quoted on the OTC Bulletin Board with the symbol RELMW. The Company's
common stock is listed on the NASDAQ Small Cap Market under the Company's
current symbol, RELM
On May 17, 2002, Noble exercised its option to purchase 416,250 additional
units at a purchase price of $0.90 per unit to cover over-allotments. The
Company received approximately $326 in net proceeds from the purchase of
these additional units.
INTRODUCTION OF NEW PORTABLE TWO-WAY RADIO
In January 2002, the Company introduced the first model of its new RP
series of portable radios. The second model, serving a different frequency
band, was introduced in June 2002. Both models have been type-accepted by
the Federal Communications Commission (FCC). The next model in the RP
Series, offering expanded channels and functions, is undergoing internal
FCC compliance testing and is expected to be available for sale in the
third quarter 2002.
These radios are manufactured for the Company under a previously announced
agreement with an electronic technology and manufacturing concern. Under
the agreement, they will manufacture for the Company, four models of VHF
and UHF portable two-way radio transceivers, and the Company will have
exclusive distribution rights for these products in North, Central, and
South America. The agreement expires on September 11, 2006 and may be
expanded to include additional products.
LOSS ON NOTES RECEIVABLE
During the first quarter of 2002, the Company established a $900 valuation
reserve. This amount is equal to the total principal amount due to the
Company from Fort Orange Paper Company, Inc. (Fort Orange), the purchaser
of its former paper-
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
2. SIGNIFICANT EVENTS AND TRANSACTIONS - CONTINUED
LOSS ON NOTES RECEIVABLE - CONTINUED
manufacturing subsidiary. In April, the Company learned that Fort Orange
had ceased operations. Fort Orange owes the Company $900 plus accrued
interest under the terms of two secured promissory notes and has defaulted
on its obligations to make principal and interest payments. The Company's
security interest is subordinated to the security interest granted to the
purchaser's senior lender.
In connection with the sale of the subsidiary in 1997, the Company took
back a secured promissory note from the purchaser in the initial aggregate
principal amount of $2,400. In December 2000, the terms of the original
promissory note were modified and the Company received a principal payment
of $700 plus accrued interest of approximately $166. After this payment,
the remaining principal amount due on the original note was $900. Also, as
part of the modification agreement, the original note was replaced by two
secured promissory notes, one in the principal amount of $600 and the other
in the principal amount of $300. The $600 note is payable in ten annual
installments starting on April 2, 2002. The $300 note is payable in five
annual installments starting on January 1, 2003. Interest on both notes is
accrued at 2.75% over the prime rate and is payable, in the case of the
$600 note, in annual installments, and, in the case of the $300 note, in
semi-annual installments. The $600 note is subject to a standby creditor's
agreement under which principal and interest payments on the note are
contingent upon the purchaser achieving a certain debt service coverage
ratio and the absence of any uncured defaults on other loans or agreements
of the purchaser. As security for both notes, the purchaser has granted to
the Company a lien and security interest in certain collateral. The
Company's security interest, however, is subordinated to the security
interest granted to the purchaser's senior lender. In addition, the Company
is subject to a standstill agreement with the senior lender. A principal of
the purchaser has guaranteed the prompt and complete payment of both notes
when due. Both notes are subject to forbearance fee payment agreements with
both the purchaser and the guarantor under which additional amounts may be
payable to the Company if there is a merger, sale or change of control of
the purchaser and if the notes are not paid in full by certain dates.
It is the Company's understanding that Fort Orange is actively seeking to
sell its assets. A party interested in purchasing the Fort Orange assets
has contacted the Company to discuss a settlement of the note receivable.
No definitive agreement has been reached.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
2. SIGNIFICANT EVENTS AND TRANSACTIONS - CONTINUED
LOSS ON NOTES RECEIVABLE - CONTINUED
The Company believes that the value of Fort Orange's business and its
assets is uncertain due to the cessation of operations, and the current
business conditions in this industry. Therefore, the amount, if any, that
the Company may recover in the event of a sale, or otherwise, cannot yet be
determined. As a result of these circumstances, the Company established a
valuation reserve for the entire principal amount ($900) of the two
promissory notes in the first quarter 2002.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $0.1 million
on gross trade receivables of $2.6 million at June 30, 2002. This allowance
is used to state trade receivables at a net realizable value or the amount
that we estimate will be collected on our gross receivables as of June 30,
2002. Because the amount that we will actually collect on the receivables
outstanding as of June 30, 2002 cannot be known with certainty as of this
document's effective date, we rely on prior experience. Our historical
collection losses have been typically infrequent with write-offs of trade
receivables being less than 1% of sales. Our policy is to maintain a
general allowance of approximately 2 to 5% of a gross trade receivable
balance in order to allow for future collection losses that arise from
customer accounts that do not indicate the inability to pay but turn out to
have such an inability. Currently our allowance on trade receivables is
3.82% of gross trade receivables. We also maintain a specific allowance for
customer accounts that we know may not be collectible due to various
reasons such as bankruptcy and other customer liquidity issues. We analyze
our trade receivable portfolio based on the age of each customer's invoice.
In this way, we can identify those accounts that are more likely than not
to have collection problems. We then reserve a portion or all of the
customer's balance.
4. INVENTORIES
The components of inventory, net of reserves totaling $2,323 and $2,319 at
June 30, 2002 and December 31, 2001, respectively, consist of the
following:
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
4. INVENTORIES - CONTINUED
JUNE 30 December 31
2002 2001
------ ------
Finished goods $5,169 $5,724
Work in process 718 799
Raw materials 2,188 2,438
------ ------
$8,075 $8,961
====== ======
The reserve for excess or obsolete inventory was $2.3 million at June 30,
2002. The reserve for excess or obsolete inventory is used to state our
inventories at the lower of cost or market. Because the amount of
inventoriable costs that we will actually recoup through sales of our
inventory as of June 30, 2002 can not be known with certainty as of this
document's effective date, we rely on past sales experience and future
sales forecasts. In analyzing our inventory levels, we classify inventory
as either no usage in the past year or usage in the past year. For
inventory with no usage in the past year, we reserve 85% of the cost of
this inventory, which takes into account a 15% scrap value. For inventory
with usage in the past year, we review the average annual usage over the
past three years, project that amount over the next seven years, and then
reserve 25% of the excess amount (in which the excess amount equals
inventory on hand less a seven year projected usage amount). We believe
that 25% represents the value of excess inventory we would not be able to
recover due to our new product introductions and other technological
advancements.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
5. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the six months ended
June 30, 2002 are as follows:
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------------------------------------------------------------------
Balance at December 31, 2001 5,346,174 $ 3,207 $ 21,452 $ (18,177) $ 6,482
Public rights offfering 3,191,250 1,915 110 -- 2,025
Net loss -- -- -- (1,013) (1,013)
----------------------------------------------------------------------
BALANCE AT JUNE 30, 2002 8,537,424 $ 5,122 $ 21,562 $ (19,190) $ 7,494
======================================================================
6. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -------------------------
JUNE 30 June 30 JUNE 30 June 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator:
Net income (loss) (numerator for basic earnings per share) $ 3 $ 145 $ (1,013) $ (142)
Effect of dilutive securities:
8% convertible notes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) (numerator for dilutive earnings per share) 3 145 (1,013) (142)
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per share-weighted
average shares 8,327,012 5,346,174 6,989,066 5,346,174
Effect of dilutive securities:
8% convertible notes -- -- -- --
Options 18,023 18,000 -- --
----------- ----------- ----------- -----------
Denominator for diluted earnings per share -
adjusted weighted average shares 8,345,035 5,364,174 6,989,066 5,346,174
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.00 $ 0.03 $ (0.14) $ (0.03)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.00 $ 0.03 $ (0.14) $ (0.03)
=========== =========== =========== ===========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
6. EARNINGS (LOSS) PER SHARE - CONTINUED
A total of 2,893,884 and 2,328,384 shares related to options, warrants, and
convertible debt are not included in the computation of loss per share for
the six months ended June 30, 2002 and 2001, respectively, because to do so
would be anti-dilutive.
7. OMPREHENSIVE LOSS
The total comprehensive income (loss) for the three and six months ended
June 30, 2002 was $3 and ($1,013), respectively, compared to $145 and
($142) for the same periods in the previous year.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued Statements of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets. Under the new rules, goodwill and indefinite lived
intangible assets are no longer amortized but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
amortization provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, the Company applied the
new accounting rules beginning January 1, 2002. The adoption of SFAS No.
141 and No. 142 did not have a material impact on our Condensed
Consolidated Financial Statements.
9. 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 is the policy of the Company to retain a 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 are recorded based upon the Company's
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. CONTINGENT LIABILITIES - CONTINUED
GENERAL INSURANCE - CONTINUED
estimates of the aggregate liability for claims incurred. Such estimates
utilize certain actuarial assumptions followed in the insurance industry
and are included in accrued expenses. The amounts accrued are included in
accrued compensation and related taxes in the balance sheets.
LEGAL PROCEEDINGS
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. A pre-trial schedule set in October 2001 set
aggressive time frames for the completion of discovery, the filing of
dispositive motions and the filing of pre-trial statements. The Company is
vigorously defending this matter.
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. The Company is vigorously defending this matter.
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.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. CONTINGENT LIABILITIES - CONTINUED
LEGAL PROCEEDINGS - CONTINUED
On February 12, 1999, the Company initiated collection and legal
proceedings in Sao Paulo, Brazil, against its Brazilian dealer, Chatral,
for failure to pay for product shipments totaling $1,400 which has been
fully reserved in a prior year. In April 2001, the Brazilian court ordered
the Company to post security with the court totaling approximately $300 in
the form of cash or a bond in order for the case to proceed. The Company
has elected not to post security. Consequently, the case has been
involuntarily dismissed. There has been no ruling on the merits of the
case, and we have preserved our rights to pursue this matter in the future.
On December 8, 1999, Chatral filed a counter claim against the Company
alleging damages totaling $8,000 as a result of the Company's
discontinuation of shipments to Chatral. While an unfavorable outcome could
have a material adverse effect on the financial position of the Company,
management, with the advice of counsel, believes the Company has
meritorious defenses and the likelihood of an unfavorable outcome is
remote.
Heath & Company filed a suit against RELM Wireless Corporation and RELM
Communications, Inc. in the United States District Court for the District
of Massachusetts in early 2001 year for breach of contract,
misrepresentation and unfair trade practices. Pursuant to a Memorandum and
Order dated April 24, 2001, most of Heath's claims were dismissed. The
court ruled as a matter of law that a fact finder must determine whether
RELM Communications withheld information it knew to be essential to the
Plaintiff and whether it did so in a bad faith attempt to withdraw from a
brokerage agreement. On March 21, 2002, the parties settled the matter for
payment to Heath of $33.
On December 20, 2000, a products liability lawsuit was filed in Los Angeles
Superior Court in Los Angeles, California. Although the Company was not
named in the suit, one of the Defendants, C.P. Allstar Corporation had
purchased all or substantially all of the assets of a RELM affiliate. As
part of the asset sale, the asset purchase agreement contained
indemnification provisions, which could result in liability for the
Company. On October 23, 2001, C.P. Allstar Corporation served us with a
claim for
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. CONTINGENT LIABILITIES - CONTINUED
LEGAL PROCEEDINGS - CONTINUED
indemnification under a provision of the asset purchase agreement. In June
2002, the Company was released from this matter by C.P. Allstar.
On November 19, 2001, a products liability lawsuit was filed in the 353rd
Judicial District Court of Travis County, Texas, against RELM Wireless
Corporation and RELM Communications, Inc. C.P. Allstar Corporation is also
a named defendant in this lawsuit. C.P. Allstar Corporation had purchased
all or substantially all of the assets of a RELM affiliate. As part of the
asset sale, the asset purchase agreement contained indemnification
provisions, which could result in liability for us. The claim is being
vigorously defended by the Company's insurer.
10. NASDAQ COMMUNICATION
On May 1, 2002 the Company was notified by Nasdaq Listing Qualifications
that for the last 30 consecutive trading days the Company's stock has
closed below the minimum $1.00 per share requirement for continued listing
under Marketplace Rule 4310(c)(4). In accordance with Marketplace Rule
4310(c)(8)(d) the Company has 180 days, until October 28, 2002, to regain
compliance. If at any time before October 28, 2002 the bid price of the
Company's common stock closes at $1.00 per share or more for a minimum of
10 consecutive trading days, the Nasdaq Staff will provide written
notification that the Company complies with the rule. Otherwise the Staff
will provide written notification that the Company's securities will be
delisted. At that time, the Company may appeal the staff's determination to
a Listing Qualifications Panel.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
---------------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
RESULTS OF OPERATIONS
---------------------
As an aid to understanding our operating results, the following table shows
each item from the condensed consolidated statement of operations expressed
as a percentage of sales:
PERCENTAGE OF SALES PERCENTAGE OF SALES
------------------ ------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 June 30 JUNE 30 June 30
2002 2001 2002 2001
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.9 71.9 70.1 72.6
----- ----- ----- -----
Gross margin 31.1% 28.1% 29.9% 27.4%
Selling, general and
administrative expenses (295) (23.6) (29.6) (26.1)
Loss on Notes Receivable -- -- (9.3) --
Interest expense (2.2) (2.3) (2.3) (2.8)
Other income 0.7 0.2 0.9 0.2
----- ----- ----- -----
Net income (loss) 0.1% 2.4% (10.4)% (1.3)%
===== ===== ===== =====
NET SALES
Net sales for the three months and six months ended June 30, 2002 decreased
by approximately $1.2 million (20.0%) and $1.2 million (11.2%),
respectively, compared to the same period for the prior year. These
decreases are attributed primarily to the absence of BK Radio product sales
to the Communications Electronics Command of the U. S. Army (CECOM). During
the year ended December 31, 2001, revenues from product shipments to CECOM
totaled approximately $1.2 million. The contract under which those
shipments were made expired in October 2001. CECOM solicited bids for a new
contract in March 2002 and we submitted proposals. The evaluation of
proposals for this solicitation is in process, but has been subjected to
delays. Consequently, the contract has not yet been awarded. Based upon
discussions with CECOM, we anticipate that the contract will be awarded
prior to September 30, 2002.
Overall, for the three months and six months ended June 30, 2002, revenues
from BK Radio-branded products serving the government and public safety
market segment decreased approximately $0.7 million (or 16.2%). This is
because the decrease in revenues from CECOM was partially offset by
increases in sales to various federal and
16
NET SALES - CONTINUED
state forest fire-fighting agencies and increased sales of our S-Series
family of repeaters and base stations. For the quarter ended June 30, 2002,
sales of Uniden-branded and RELM-branded products in the business and
industrial market segment decreased approximately $0.6 million (41.6%) when
compared to the same period of the prior year. Customer demand in this
market segment continued to be weak, reflecting the lack of a sustained
economic recovery. However, we did realize modest revenue increases in our
RELM products compared to the same period last year as we continued the
introduction of our new family of portable radios, the RP Series. The RP
series is designed as a quality, full-featured, low-cost line to compete
effectively in the business and industrial market. Also, we have received
customer orders totaling approximately $1.0 million for Uniden ESAS
(Enhanced Sub-Audible Signaling) systems, one of which is for the expansion
of one of the initial systems installed earlier this year.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of net sales for the three months ended June
30, 2002 was 68.9% compared to 71.9% for the same period in the prior year.
For the six months ended June 30, 2002, cost of sales as a percentage of
net sales was 70.1% compared to 72.6% for the same period in the prior
year. The overall improvement in cost of sales and gross margins is a
reflection of various and continuing initiatives to reduce direct product
costs and manufacturing infrastructure costs. These initiatives, started in
2000, have included facility and staff reductions, and leveraging strategic
external manufacturing relationships, some of which are offshore.
Additional initiatives designed to further reduce product costs are
underway. We believe that, combined with new product revenues, these
efforts will continue to yield improved cost of sales and gross margin
performance. We anticipate that the current relationships or comparable
alternatives will be available to the company in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses consist of marketing,
sales, commissions, engineering, research and development, management
information systems, accounting, and headquarters expenses. For the three
months ended June 30, 2002, SG&A expenses totaled approximately $1,460,000
(29.5% of sales) compared to $1,462,000 (23.6% of sales) for the same
period last year. For the six months ended June 30, 2002, SG&A expenses
totaled approximately $2,870,000 (29.6% of sales) compared to $2,850,000
(26.1% of sales) for the same period last year.
Research and development expenses increased as a result of the continuing
development of our new APCO Project 25-compliant products and new ESAS
system features and capabilities. We anticipate that the initial models of
digital products will be introduced for sale in the fourth quarter 2002.
Selling and marketing expenses
17
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - CONTINUED
increased as a result of efforts to drive additional revenues particularly
in the business and industrial segment of the market. These increases were
largely offset by reductions in general and administrative expenses.
Certain information systems functions were outsourced and legal expenses
were reduced as several pending legal matters were resolved.
INTEREST EXPENSE
For the three months ended June 30, 2002 interest expense totaled $111,000
(2.2% of sales) compared to $145,000 (2.3% of sales) for the same period
during the prior year. Interest expense for the six months ended June 30,
2002 totaled $221,000 ( 2.3% of sales) compared to $303,000 (2.8% of sales)
for the same period during the prior year. We have generated working
capital through expense reductions, a fast collection cycle, and reduced
inventory, enabling us to reduce the amount outstanding on our revolving
line of credit. Additionally, we satisfied capital lease obligations
associated with certain computer equipment.
LOSS ON NOTES RECEIVABLE
The loss on notes receivable is discussed under the section titled
"Recent Events" .
INCOME TAXES
No income tax provision was provided for the three or six months ended June
30, 2002 or 2001. We have net operating loss carryforward benefits totaling
approximately $29 million at June 30, 2002. We have evaluated our tax
position in accordance with the requirements of SFAS No. 109, Accounting
for Income Taxes, and do not believe that we have met the
more-likely-than-not criteria for recognizing a deferred tax asset. As a
result, we have provided valuation allowances against our net deferred tax
assets.
RECENT EVENTS
PUBLIC RIGHTS OFFERING
On March 22, 2002, we closed a public rights offering. The purpose of the
offering was to provide working capital, which among other things, will
speed the development of our new APCO Project 25-compliant digital products
and capabilities. The securities offered were "units". A unit was comprised
of one share of RELM common stock and one warrant to purchase one share of
RELM common stock for $1.01 per share. The warrants may be exercised at any
time on or after February 12, 2003 and the warrants expire on February 11,
2006. Units were offered initially to RELM's equity holders in the form of
a rights offering. The "right" allowed investors in the
18
PUBLIC RIGHTS OFFERING - CONTINUED
offering to purchase units at a 10% discount to the market price of a share
of common stock. We believe that a rights offering provided several
advantages over a traditional public offering. It allowed us to offer the
units to our current equity holders who already have some knowledge of our
business, and it provided them with the opportunity to maintain their
fully-diluted pro-rata ownership in the company. Additionally, the warrant
component gave investors the opportunity to buy our shares in the future at
a fixed price. Noble International Investments, Inc. (Noble) was engaged as
the standby underwriter for this offering. The units were offered to the
public pursuant to a registration statement that was declared effective by
the Securities and Exchange Commission (SEC) on February 11, 2002. In
accordance with the terms of the offering, the units were separated on the
closing date. The offering resulted in the sale of 2,775,000 shares of
common stock and warrants to purchase 2,775,000 shares of common stock. The
offering generated $1.8 million in net proceeds. The warrants are currently
quoted on the OTC Bulletin Board with the symbol RELMW. The Company's
common stock is listed on the NASDAQ Small Cap Market under our current
symbol, RELM.
On May 17, 2002, Noble exercised its option to purchase 416,250 additional
units at a purchase price of $0.90 per unit to cover over-allotments. We
received approximately $326,000 in net proceeds from the purchase of these
additional units.
LOSS ON NOTES RECEIVABLE
During the first quarter of 2002, we established a $900,000 valuation
reserve. The reserve equals the total principal amount due to us from Fort
Orange Paper Company, Inc. (Fort Orange), the purchaser of our former
paper-manufacturing subsidiary. In April, we learned that Fort Orange had
ceased operations. Fort Orange owes us $900,000 plus accrued interest under
the terms of two secured promissory notes and has defaulted on its
obligations to make principal and interest payments. Our security interest
is subordinated to the security interest granted to the purchaser's senior
lender. In connection with the sale of the subsidiary in 1997, we took back
a secured promissory note from the purchaser in the initial aggregate
principal amount of $2,400,000. In December 2000, the terms of the original
promissory note were modified and we received a principal payment of
$700,000 plus accrued interest of approximately $166,000. After this
payment, the remaining principal amount due on the original note was
$900,000. Also, as part of the modification agreement, the original note
was replaced by two secured promissory notes, one in the principal amount
of $600,000 and the other in the principal amount of $300,000. The $600,000
note is payable in ten annual installments starting on April 2, 2002. The
$300,000 note is payable in five annual installments starting on January 1,
2003. Interest on both notes is accrued at 2.75% over the prime rate and is
payable, in the case of the $600,000 note, in annual installments, and, in
the case of the $300,000 note, in semi-annual installments. The $600,000
note is subject to a standby creditor's
19
LOSS ON NOTES RECEIVABLE - CONTINUED
agreement under which principal and interest payments on the note are
contingent upon the purchaser achieving a certain debt service coverage
ratio and the absence of any uncured defaults on other loans or agreements
of the purchaser. As security for both notes, the purchaser has granted to
us a lien and security interest in certain collateral. Our security
interest, however, is subordinated to the security interest granted to the
purchaser's senior lender. In addition, we are subject to a standstill
agreement with the senior lender. A principal of the purchaser has
guaranteed the prompt and complete payment of both notes when due. Both
notes are subject to forbearance fee payment agreements with both the
purchaser and the guarantor under which additional amounts may be payable
to us if there is a merger, sale or change of control of the purchaser and
if the notes are not paid in full by certain dates.
It is our understanding that Fort Orange is actively seeking to sell its
assets. A party interested in purchasing the Fort Orange assets has
contacted us to discuss a settlement of the note receivable. No definitive
agreement has been reached.
We believe that the value of the business and its assets is uncertain due
to the cessation of operations, and the current business conditions in this
industry. Therefore, the amount, if any, that we may recover in the event
of a sale, or otherwise, cannot yet be precisely determined. As a result of
these circumstances, we established a valuation reserve for the entire
principal amount ($900,000) of the two promissory notes in the first
quarter 2002. With the assistance of counsel we are taking all prudent
steps to maximize the possibility for recovery.
The Fort Orange business and the associated promissory notes are legacies
from before 1997, and not at all related to land mobile radio (LMR)
operations, which have been our focus for the past several years. We have
excluded the subject promissory notes from our cash flow projections and
operating plans since 2000. Although the valuation reserve impacted
earnings, we anticipate no impact on the execution of our core LMR business
plan objectives, including the completion and introduction of our digital
products, which are proceeding on-schedule.
SIGNIFICANT CUSTOMERS
---------------------
Sales to the United States government represented approximately 53.07% and
42.18% of our total revenues for the three and six months ended June 30,
2002, respectively, compared to 56.80% and 50.4% for the prior year. These
sales were primarily to the United States Forest Service (USFS). The
decline in the percentage of total revenues attributable to sales to the
United States government is primarily due to the expiration of our CECOM
contract described below.
In 2001, the USFS solicited bids for a new contract and we were awarded the
contract for portable radios, base stations, and repeaters. The contract is
for a period of one year
20
SIGNIFICANT CUSTOMERS - CONTINUED
---------------------------------
with options for three additional years, and does not specify a minimum
purchase. We were not awarded the contract for mobile radios. However,
these units are available on the Company's General Service Administration
(GSA) schedule.
In 1996, we were awarded a contract to provide land mobile radios to CECOM.
This contract was for a term of five years with no specified minimum
purchase requirement. The contract expired in 2001. CECOM solicited bids
for a new contract in March 2002 and we submitted proposals. The evaluation
of proposals for this solicitation is in process, but has been subjected to
delays. Consequently, the contract has not yet been awarded. Based upon
discussions with CECOM, we anticipate that the contract will be awarded
prior to September 30, 2002.
INFLATION AND CHANGING PRICES
-----------------------------
Inflation and changing prices for the three and six months ended June 30,
2002 and 2001 have contributed to increases in wages, facilities, and raw
material costs. Effects of these inflationary effects were partially offset
by increased prices to customers. We believe that we will be able to pass
on most of our future inflationary increases to our customers.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of June 30, 2002, we had working capital of $10.3 million, including
$2.1 million of cash and cash equivalents, compared with $9.3 million as of
December 31, 2001. This increase was primarily the result of the recently
closed public rights offering. Reductions in operating expenses and
inventory also contributed to the increase.
We have a $7 million revolving line of credit. As of June 30, 2002, the
formula under the terms of the agreement supported a borrowing base
totaling approximately $4.0 million, of which approximately $1.3 million
was available.
Capital expenditures for property and equipment for the six months ended
June 30, 2002 were approximately $50,000 compared to $53,000 for the same
period in 2001. Capital expenditures for the remainder of the year are
anticipated to increase as we intensify the development of our APCO Project
25-compliant digital products.
On March 22, 2002, we closed a public rights offering. The purpose of the
offering was to provide working capital which, among other things, will be
used to fund the development of our new APCO Project 25-compliant digital
products and capabilities.
21
FORWARD-LOOKING STATEMENTS
--------------------------
This report contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act Of 1995 and is subject to
the safe-harbor created by such act. These forward-looking statements
concern the Company's operations, economic performance and financial
condition and are based largely on the Company's beliefs and expectations.
These 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 and risks include, among others,
the following: the factors described in the Company's filings with the
Securities and Exchange Commission; general economic and business
conditions; changes in customer preferences; competition; changes in
technology; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; and the availability, terms and deployment of capital. Certain
of these factors and risks, as well as other risks and uncertainties are
stated in more detail in the Company's Annual Report on Form 10-K. These
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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
------ -------------------------------------------------------
The Company utilizes a variable-rate line of credit. The Company does not
expect changes in interest rates to have a material effect on income or
cash flows in fiscal year 2002, although there can be no assurance that
interest rates will not significantly change.
CRITICAL ACCOUNTING POLICIES
----------------------------
In response to the SEC's financial reporting release, FR-60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies, we have
selected our more subjective accounting estimation processes for purposes
of explaining the methodology used in calculating the estimate in addition
to the inherent uncertainties pertaining to the estimate and the possible
effects on the Company's financial conditions. The two accounting
estimation processes discussed below are the allowance for collection on
trade receivables and reserves for excess or obsolete inventory. These
estimation processes affect current assets and are therefore critical in
assessing the financial and operating status of the Company. These
estimates involve certain assumption that if incorrect could create an
adverse impact on the Company's operations and financial position.
The allowance for collection losses on trade receivables was $0.1 million
on gross trade receivables of $2.6 million at June 30, 2002. This allowance
is used to state trade receivables at a net realizable value or the amount
that we estimate will be collected on our gross receivables as of June 30,
2002. Because the amount that we will actually collect on the receivables
outstanding as of June 30, 2002 cannot be known with certainty as of this
document's effective date, we rely on prior experience. Our historical
collection losses have been typically infrequent with write-offs of trade
receivables being less than 1% of sales. Our policy is to maintain a
general allowance of approximately 2 to 5% of a gross trade receivable
balance in order to allow for future collection losses that arise from
customer accounts that do not indicate the inability to pay but turn out to
have such an inability. Currently our allowance on trade receivables is
3.82% of gross trade receivables. We also maintain a specific allowance for
customer accounts that we know may not be collectible due to various
reasons such as bankruptcy and other customer liquidity issues. We analyze
our trade receivable portfolio based on the age of each customer's invoice.
In this way, we can identify those accounts that are more likely than not
to have collection problems. We then reserve a portion or all of the
customer's balance.
The reserve for excess or obsolete inventory was $2.3 million at June 30,
2002. The reserve for excess or obsolete inventory is used to state our
inventories at the lower of cost or market. Because the amount of
inventoriable costs that we will actually recoup through sales of our
inventory as of June 30, 2002 can not be known with certainty as
23
CRITICAL ACCOUNTING POLICIES - CONTINUED
----------------------------------------
of this document's effective date, we rely on past sales experience and
future sales forecasts. In analyzing our inventory levels, we classify
inventory as either no usage in the past year or usage in the past year.
For inventory with no usage in the past year, we reserve 85% of the cost of
this inventory, which takes into account a 15% scrap value. For inventory
with usage in the past year, we review the average annual usage over the
past three years, project that amount over the next seven years, and then
reserve 25% of the excess amount (in which the excess amount equals
inventory on hand less a seven year projected usage amount). We believe
that 25% represents the value of excess inventory we would not be able to
recover due to our new product introductions and other technological
advancements.
PART II- OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
On May 17, 2002, Noble exercised its option to purchase 416,250 additional
units at the purchase price of $0.90 per unit to cover over-allotments in
connection with our public rights offering which closed on March 22, 2002.
We received approximately $326,000 in net proceeds from the purchase of
these additional units.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
None
ITEM 5. OTHER INFORMATION
-----------------
On May 1, 2002 we were notified by Nasdaq Listing Qualifications that for
the last 30 consecutive trading days our stock has closed below the minimum
$1.00 per share requirement for continued listing under Marketplace Rule
4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(d) we have 180
days, until October 28, 2002, to
24
PART II- OTHER INFORMATION - CONTINUED
--------------------------------------
ITEM 5. OTHER INFORMATION - CONTINUED
-----------------------------
regain compliance. If at any time before October 28, 2002 the bid price of
our common stock closes at $1.00 per share or more for a minimum of 10
consecutive trading days, the Nasdaq Staff will provide written
notification that the Company complies with the rule. Otherwise the Staff
will provide written notification that our securities will be delisted. At
that time, we may appeal the staff's determination to a Listing
Qualifications Panel.
ITEM 6. EXHIBITS AND REPORTS FORM 8-K
-----------------------------
(a) The following documents are filed as part of this report:
Exhibit 99.1 Certification Pursuant to 18 U.S.C Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K during the fiscal quarter ended June 30, 2002.
May 9, 2002 - Press release announcing disclosing a $900,000
valuation reserve in the first quarter of 2002.
25
SIGNATURES
----------
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized.
RELM WIRELESS CORPORATION
(The "Registrant")
Date: August 9, 2002
By: /s/W. P. Kelly
-----------------------------------
William P. Kelly
Executive Vice President - Finance
and Chief Financial Officer
(Principal financial and accounting
officer and duly authorized officer)
26