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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: SEPTEMBER 30, 2002
------------------
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 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
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(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 November 4, 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)
SEPTEMBER 30 DECEMBER 31
2002 2001
------- -------
(UNAUDITED) (SEE NOTE 1)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,318 $ 335
Trade accounts receivable (net of allowance for doubtful accounts
of $95 as of September 30, 2002 and $1,540 as of December 31, 2001) 1,491 3,597
Inventories, net 7,967 8,961
Notes receivable 59 60
Prepaid expenses and other current assets 364 452
------- -------
Total current assets 12,199 13,405
Property, plant and equipment, net 1,927 2,156
Notes receivable, less current portion 10 911
Debt issuance costs, net 384 512
Other assets 462 639
------- -------
Total assets $14,982 $17,623
======= =======
See notes to condensed consolidated financial statements
1
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
SEPTEMBER 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 1,856 3,171
Accrued compensation and related taxes 458 532
Accrued warranty expense 33 79
Accrued expenses and other current liabilities 299 251
-------- --------
Total current liabilities 2,746 4,143
Long-term liabilities:
Loan, notes and mortgages 1,991 3,848
Convertible subordinated notes 3,150 3,150
-------- --------
5,141 6,998
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares
at September 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 September 30,
2002; 5,346,174 issued and outstanding at December 31, 2001 5,122 3,207
Additional paid-in capital 21,558 21,452
Accumulated deficit (19,585) (18,177)
-------- --------
Total stockholders' equity 7,095 6,482
-------- --------
Total liabilities and stockholders' equity $ 14,982 $ 17,623
======== ========
See notes to condensed consolidated financial statements.
2
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
- -----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
------- -------- -------- --------
(SEE NOTE 1) (SEE NOTE 1) (SEE NOTE 1) (SEE NOTE 1)
Sales $ 3,979 $ 6,223 $ 13,662 $ 17,131
Expenses
Cost of products 2,821 4,293 9,610 12,212
Selling, general & administrative 1,489 1,528 4,359 4,378
Loss on notes receivables - - 900 -
------- -------- -------- --------
4,310 5,821 14,869 16,590
------- -------- -------- --------
Operating income (loss) (331) 402 (1,207) 541
Other income (expense):
Interest expense (115) (149) (336) (452)
Other income (expense) 51 (40) 135 (18)
------- -------- -------- --------
Net Income (loss) $ (395) $ 213 $ (1,408) $ 71
======= ======== ======== ========
Earnings (loss) per share-basic $ (0.05) $ 0.04 $ (0.19) $ 0.01
======= ======== ======== ========
Earnings (loss) per share-diluted $ (0.05) $ 0.04 $ (0.19) $ 0.01
======= ======== ======== ========
See notes to condensed consolidated financial statements.
3
ITEM 1 - FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30 September 30
2002 2001
------- -----
(SEE NOTE 1) (SEE NOTE 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $(1,408) $ 71
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Loss on notes receivable 900 -
Depreciation and amortization 575 799
Change in current assets and liabilities:
Accounts receivable 2,106 90
Inventories 994 (402)
Accounts payable (1,313) (471)
Other current assets and liabilities 128 261
------- -----
Cash provided by operating activities 1,982 348
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (153) (64)
Other 2 53
------- -----
Cash used in investing activities (151) (11)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations (10) (727)
Net change in revolving credit lines (1,859) 398
Net proceeds from issuance of common stock 2,021 -
------- -----
Cash provided by (used in) financing activities 152 (329)
Increase in cash 1,983 8
Cash and cash equivalents, beginning of period 335 208
------- -----
Cash and cash equivalents, end of period $ 2,318 $ 216
======= =====
Supplemental disclosure
Interest paid $ 336 $ 452
======= =====
See notes to condensed consolidated financial statements.
4
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 September 30, 2002, the
condensed consolidated statements of operations for the three and nine
months ended September 30, 2002 and 2001 and the condensed consolidated
statements of cash flows for the nine months ended September 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 nine month periods ended September 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 September 27, 2002
for the third quarter of fiscal 2002. The quarter began on June 29, 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"priced at $.90 per unit. A unit was comprised of one
share of RELM common stock and one warrant to purchase one share of RELM
common stock, exercisable at $1.08 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.
5
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
fourth 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-
6
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.
The Company, with guidance from counsel, will evaluate alternatives and
take all prudent actions to maximize the possibility of recovery. However,
the Company believes that the value of Fort Orange's assets and the assets
of the guarantor are insufficient to provide any recovery of the amounts
due under the notes. Accordingly, the Company has maintained the valuation
reserve for the entire principal amount ($900)
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
of the two promissory notes that was established in the first quarter 2002.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $95 on gross
trade receivables of $1,586 at September 30, 2002. This allowance is used
to state trade receivables at a net realizable value or the amount that the
Company estimates will be collected on the Company's gross receivables as
of September 30, 2002. Because the amount that the Company will actually
collect on the receivables outstanding as of September 30, 2002 cannot be
known with certainty as of this document's effective date, the Company
relies on prior experience. The Company's historical collection losses have
been typically infrequent with write-offs of trade receivables being less
than 1% of sales. The Company's 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 the Company's allowance on trade receivables is 5.99%
of gross trade receivables. The Company also maintains a specific allowance
for customer accounts that the Company knows may not be collectible due to
various reasons such as bankruptcy and other customer liquidity issues. The
Company analyzes the trade receivable portfolio based on the age of each
customer's invoice. In this way, the Company can identify those accounts
that are more likely than not to have collection problems. The Company then
reserves 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
September 30, 2002 and December 31, 2001, respectively, consist of the
following:
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
4. INVENTORIES - CONTINUED
September 30 December 31
2002 2001
------ ------
Finished goods $5,260 $5,724
Work in process 454 799
Raw materials 2,253 2,438
------ ------
$7,967 $8,961
====== ======
The reserve for slow-moving, excess, or obsolete inventory was $2.3 million
at September 30, 2002. The reserve for excess or obsolete inventory is used
to state the Company's inventories at the lower of cost or market. Because
the amount of inventoriable costs that will actually be recouped through
sales of inventory as of September 30, 2002 can not be known with certainty
as of this document's effective date, the Company's relies on past sales
experience, future sales forecasts, and strategic business plans.
Generally, in analyzing inventory levels, the Company classifies inventory
as having been used or unused during the past year. For inventory with no
usage in the past year, the Company reserves 85% of its cost which takes
into account a 15% scrap value. For inventory with usage in the past year,
the Company reviews the average annual usage over the past three years,
projects that amount over the next seven years, and then reserves 25% of
the excess amount (in which the excess amount equals inventory on hand less
a seven year projected usage amount). The Company believes that 25%
represents the value of excess inventory that would not be able to be
recovered due to new product introductions and other technological
advancements.
9
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 nine months ended
September 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 1,915 106 -- 2,021
Net loss -- -- -- (1,408) (1,408)
--------- ------ ------- -------- -------
Balance at September 30, 2002 8,537,424 $5,122 $21,558 $(19,585) $ 7,095
========= ====== ======= ======== =======
6. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
6. EARNINGS (LOSS) PER SHARE - CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
September 30 September 30 September 30 September 30
2002 2001 2002 2001
----------- ---------- ----------- ----------
Numerator:
Net income (loss) (numerator for basic earnings per share) $ (395) $ 213 $ (1,408) $ 71
Effect of dilutive securities:
8% convertible notes -- -- -- --
----------- ---------- ----------- ----------
Net income (loss) (numerator for dilutive earnings per share) (395) 213 (1,408) 71
----------- ---------- ----------- ----------
Denominator:
Denominator for basic earnings per share-weighted
average shares 8,537,424 5,346,174 7,501,389 5,346,174
Effect of dilutive securities:
8% convertible notes -- -- -- --
Options -- 50,000 -- 30,000
----------- ---------- ----------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares 8,537,424 5,396,174 7,501,389 5,376,174
=========== ========== =========== ==========
Basic earnings (loss) per share $ (0.05) $ 0.04 $ (0.19) $ 0.01
=========== ========== =========== ==========
Diluted earnings (loss) per share $ (0.05) $ 0.04 $ (0.19) $ 0.01
=========== ========== =========== ==========
A total of 2,893,884 shares related to options, warrants, and convertible
debt are not included in the computation of loss per share for the three
and nine months ended September 30, 2002 because to do so would be
anti-dilutive.
7. COMPREHENSIVE LOSS
The total comprehensive income (loss) for the three and nine months ended
September 30, 2002 was ($395) and ($1,408), respectively, compared to $213
and $71 for the same periods in the previous year.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
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 the Company's Condensed
Consolidated Financial Statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Retirement Obligations" ("Statement 143").
Statement 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. The Company
will adopt the provisions of Statement 143 for fiscal 2003, which is not
expected to result in a material impact to the its financial position.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("Statement 144"). Statement 144 supersedes Statement of Financial
Accounting Standards No. 121, but retains its fundamental provisions for
the (a) recognition and measurement of impairment of long-lived assets to
be held and used, and (b) measurement of long-lived assets to be disposed
of by sale. Statement 144 also supersedes the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30 for segments of a
business to be disposed of, but retains the requirement to report
discontinued operations separately from continuing operations and extends
that reporting to a component of an entity that either has been disposed of
or is classified as held for sale. The Company has adopted the provisions
of Statement 144 for fiscal 2002, which did not result in a material impact
to the its financial position.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections" ("Statement 145"). Statement
145 updates, clarifies and simplifies existing accounting pronouncements.
Statement 145 rescinds Statement of Financial Accounting Standards No. 4
("Statement 4"), which required all gains and losses from extinguishment of
debt to be aggregated and, if material, classified as an extraordinary
item, net of related income tax effect. As a result, the criteria in
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
8. RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED
Accounting Principles Board Opinion No. 30 will now be used to classify
those gains and losses because Statement 4 has been rescinded. Statement
145 amends Statement of Financial Accounting Standards No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's
goal of requiring similar accounting treatment for transactions that have
similar economic effects. Statement 145 also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. The Company
has adopted the provisions of Statement 145 for fiscal 2002, which did not
result in a material impact to the its financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("Statement 146"). Statement 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" ("Issue 94-3"). The principal difference between Statement
146 and Issue 94-3 relates to Statement 146's requirements for recognition
of a liability for a cost associated with an exit or disposal activity.
Statement 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3
was recognized at the date of an entity's commitment to an exit plan. A
fundamental conclusion reached by the FASB in this Statement is that an
entity's commitment to a plan, by itself, does not create an obligation
that meets the definition of a liability. Therefore, this Statement
eliminates the definition and requirements for recognition of exit costs in
Issue 94-3. This Statement also establishes that fair value is the
objective for initial measurement of the liability. The provisions of this
Statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company is assessing whether the adoption of
Statement 146 will have a material impact on its 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.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
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
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 the note of a former affiliate. The plaintiff
alleged violations of federal security and other laws by the Company in
collateral arrangements with the former affiliate. In February 1994, the
liquidator of the former affiliate filed a complaint claiming that
intentional and negligent conduct by the Company and others caused the
former affiliate to suffer millions of dollars of losses leading to its
ultimate failure. In response, the Company filed motions for summary
judgment to dismiss these complaints.
On September 12, 2002, the Court granted in significant part the motions
for summary judgment filed by the Company and one of its directors. As the
result, the lone remaining claim seeks damages against the Company for
non-payment of the note. The Company's contends that this note was canceled
and released for fair consideration in 1993 and that there is no basis in
law or fact for the Liquidator's claim. The Company, with the advice of
counsel, believes that it has a meritorious defense and that the likelihood
of an unfavorable outcome is remote.
In 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 was involuntarily
dismissed. On December 8, 1999, Chatral filed a counter claim against the
Company
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. CONTINGENT LIABILITIES - CONTINUED
LEGAL PROCEEDINGS - CONTINUED
alleging damages totaling $8,000 as a result of the Company's
discontinuation of shipments to Chatral. The Company and Chatral have
agreed to a joint stipulation of dismissal under which all claims between
the parties have been released.
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 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. On August 26, 2002 a
products liability lawsuit was filed in the Probate Court of Galveston
County, Texas. RELM Wireless Corporation, RELM Communications,
Incorporated, and C.P. Allstar Corporation are named defendants in these
lawsuits. C.P. Allstar Corporation had purchased all or substantially all
of the assets of a RELM affiliate. The asset purchase agreement contains
indemnification provisions, which could result in liability for both
parties. Counsel for the Company's insurer is vigorously defending both
claims. Counsel believes the Company has meritorious defenses and the
likelihood of an unfavorable outcome in each of these actions is remote.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
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 had
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 had 180 days, until October 28, 2002, to regain
compliance. The Company did not regain compliance by the designated date.
On October 29, 2002 the Company was granted an additional 180 days, until
April 28, 2003, to regain compliance. If at any time before April 28, 2003
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.
16
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 NINE MONTHS ENDED
September 30 September 30 September 30 September 30
2002 2001 2002 2001
----- ----- ----- -----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.9 69.0 70.3 71.3
----- ----- ----- -----
Gross margin 29.1% 31.0 29.7 28.7
Selling, general and
administrative expenses (37.4) (24.6) (31.9) (25.6)
Loss on Notes Receivable -- -- (6.6) --
Interest expense (2.9) (2.4) (2.5) (2.6)
Other income (expense) 1.3 (0.6) 1.0 (0.1)
----- ----- ----- -----
Net income (loss) (9.9)% 3.4% (10.3)% 0.4%
===== ===== ===== =====
NET SALES
Net sales for the three months and nine months ended September 30, 2002
decreased by approximately $2.2 million (36.1%) and $3.5 million (20.2%),
respectively, compared to the same period for the prior year. These
decreases are primarily the result of the absence of sales to the
Communications Electronics Command of the U. S. Army in 2002, and a decline
in sales of our BK Radio-brand mobile radios resulting from the expiration
of our contract for mobile radios with the U.S. Forest Service in the third
quarter of 2001.
During the prior fiscal year, revenues from product shipments to CECOM
totaled approximately $2.4 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. Numerous delays have
been encountered by CECOM, and the contract has not yet been awarded. Based
upon discussions with CECOM, we believe that the contract will be awarded
before the end of the year. The contract, if it is awarded to us, qualifies
us as the exclusive supplier of certain products to CECOM. The contract
will not specify definite delivery dates or quantities.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
As disclosed in our third quarter 2001 Form 10-Q filing with the Securities
and Exchange Commission, we were not awarded the 2002 USFS contract for
mobile radios. Accordingly, sales of our BK Radio-brand mobile radios for
the nine months ended September 30, 2002 declined approximately $1.9M
compared to the same period for the prior year. The USFS is our largest
customer representing revenues of approximately $3.4M and $4.8M for the
nine months ended September 30, 2002 and 2001, respectively. Bids for
participation on a new contract were recently solicited by the USFS. The
USFS has notified us that we have been awarded participation for mobile
radios along with one other company. We have been awarded exclusive (i.e.
no other companies were named as suppliers) participation for portable
radios. We were also awarded participation for base stations and repeaters.
The USFS contract does not specify definite delivery dates or quantities.
For the quarter ended September 30, 2002, sales in the business and
industrial market segment, served by Uniden-branded and RELM-branded
products, decreased approximately $0.4 million (37.7%) 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.
Revenues for Uniden products declined while we realized modest revenue
increases in RELM products compared to the same period last year as a
result of the introduction of the first two models of our RP Series
portable radios. The RP series is designed as a quality, full-featured,
low-cost line to compete effectively in the business and industrial market.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of net sales for the three months ended
September 30, 2002 was 70.9% compared to 69.0% for the same period in the
prior year. For the nine months ended September 30, 2002, cost of sales as
a percentage of net sales was 70.3% compared to 71.3% for the same period
in the prior year. The increase in cost of sales as a percent of sales for
the three months ended September 30, 2002 compared to the same period for
the prior year was due to lower product volumes, which in turn resulted in
under-absorbed manufacturing overhead costs.
The improvement in cost of sales for the nine months ended September 30,
2002 compared to the same period for the prior year 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.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of marketing, sales,
commissions, engineering, research and development, management information
systems, accounting, and headquarters expenses. For the three months ended
September 30, 2002, SG&A expenses totaled approximately $1,489,000 (37.4%
of sales) compared to $1,528,000 (24.6% of sales) for the same period last
year. For the nine months ended September 30, 2002, SG&A expenses totaled
approximately $4,359,000 (31.9% of sales) compared to $4,378,000 (25.6% of
sales) for the same period last year.
While total SG&A spending remained largely unchanged, we reduced general
and administrative expenses while investing more in engineering and
research and development. 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. ESAS systems are currently being actively marketed and
sold. These additional expenses in engineering and R&D 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 September 30, 2002 interest expense totaled
$115,000 (2.9% of sales) compared to $149,000 (2.4% of sales) for the same
period during the prior year. Interest expense for the nine months ended
September 30, 2002 totaled $336,000 ( 2.5% of sales) compared to $452,000
(2.6% of sales) for the same period during the prior year. We have
generated working capital through expense reductions, a short 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 nine months ended
September 30, 2002 or 2001. We have net operating loss carryforward
benefits totaling
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
INCOME TAXES - CONTINUED
approximately $29 million at September 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 $1.08 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 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. 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 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.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
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 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.
The Company, with guidance from counsel, will evaluate alternatives and
take all prudent actions to maximize the possibility of recovery. However,
the Company believes that the value of Fort Orange's assets and the assets
of the guarantor are insufficient to provide any recovery of the amounts
due under the notes. Accordingly, the Company has maintained the valuation
reserve for the entire principal amount ($900,000) of the two promissory
notes that was established in the first quarter 2002.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
LOSS ON NOTES RECEIVABLE - CONTINUED
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 42.8% and
42.4% of our total revenues for the three and nine months ended September
30, 2002, respectively, compared to 57.5% and 52.6% 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 and reduced sales of mobile radio products because
they are not on the 2002 USFS contract.
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
before the end of the year.
We were not awarded a new contract for the sale of our BK Radio-brand
mobile radios to the USFS when our contract expired in the third quarter of
2001. Bids for participation on a new contract were recently solicited by
the USFS. The USFS has notified us that we have been awarded participation
for mobile radios along with one other company. We have been awarded
exclusive (i.e. no other companies were named as suppliers) participation
for portable radios. We were also awarded participation for base stations
and repeaters. The USFS contract does not specify definite delivery dates
or quantities.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
INFLATION AND CHANGING PRICES
-----------------------------
Inflation and changing prices for the three and nine months ended September
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 September 30, 2002, we had working capital of $9.5 million, including
$2.3 million of cash and cash equivalents, compared with $9.3 million as of
December 31, 2001. 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. The offering generated
approximately $2.1 million in cash. Also, trade payables were reduced.
Inventory reduction initiatives and reduced trade receivables resulting
from collection cycle improvements largely offset these working capital
increases.
We have a $7 million revolving line of credit. As of September 30, 2002,
the formula under the terms of the agreement supported a borrowing base
totaling approximately $3.0 million, of which approximately $1.2 million
was available. The line of credit renews annually on February 26th of each
year unless terminated in writing by either party. We have no reason to
believe that the line will be terminated by the lender prior to the renewal
date.
Capital expenditures for property and equipment for the nine months ended
September 30, 2002 were approximately $153,000 compared to $64,000 for the
same period in 2001. The additional capital investment was to support our
development of APCO Project 25-compliant digital products. Capital
expenditures for the remainder of the year are anticipated to decrease
because most of our initial capital needs for the aforementioned
development were met during the first three quarters.
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
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITIONS
------------------------
FORWARD-LOOKING STATEMENTS - CONTINUED
--------------------------------------
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.
24
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 $1.6 million at September 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 September 30, 2002. Because the amount that we will actually collect on
the receivables outstanding as of September 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. We
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 5.99% of gross 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 slow-moving, excess, or obsolete inventory was $2.3 million
at September 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 September 30, 2002
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
-------------------------------------------------------
CRITICAL ACCOUNTING POLICIES - CONTINUED
----------------------------------------
can not be known with certainty as of this document's effective date, we
rely on past sales experience, future sales forecasts, and our strategic
business plans. Generally, in analyzing our inventory levels, we classify
inventory as having been used or unused during the past year. For inventory
with no usage in the past year, we reserve 85% of its cost 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
-----------------
In 1993, a civil action was brought against the Company by a plaintiff to
recover losses sustained on the note of a former affiliate. The plaintiff
alleged violations of federal security and other laws by the Company in
collateral arrangements with the former affiliate. In February 1994, the
liquidator of the former affiliate filed a complaint claiming that
intentional and negligent conduct by the Company and others caused the
former affiliate to suffer millions of dollars of losses leading to its
ultimate failure. In response, the Company filed motions for summary
judgment to dismiss these complaints.
On September 12, 2002, the Court granted in significant part the motions
for summary judgment filed by the Company and one of its directors. As the
result, the lone remaining claim seeks damages against the Company for
non-payment of the note. The Company's contends that this note was canceled
and released for fair consideration in 1993 and that there is no basis in
law or fact for the Liquidator's claim. The Company, with the advice of
counsel, believes that it has a meritorious defense and that the likelihood
of an unfavorable outcome is remote.
In 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 $1,400,000 which has been
fully reserved in a prior year. In April
26
PART II- OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS - CONTINUED
-----------------------------
2001, the Brazilian court ordered the Company to post security with the
court totaling approximately $300,000 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 was involuntarily dismissed. On December
8, 1999, Chatral filed a counter claim against the Company alleging damages
totaling $8,000,000 as a result of the Company's discontinuation of
shipments to Chatral. The Company and Chatral have agreed to a joint
stipulation of dismissal under which all claims between the parties have
been released.
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 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. On August 26, 2002 a
products liability lawsuit was filed in the Probate Court of Galveston
County, Texas. RELM Wireless Corporation, RELM Communications,
Incorporated, and C.P. Allstar Corporation are named defendants in these
lawsuits. C.P. Allstar Corporation had purchased all or substantially all
of the assets of a RELM affiliate. The asset purchase agreement contains
indemnification provisions, which could result in liability for both
parties. Counsel for the Company's insurer is vigorously defending both
claims. Counsel believes the Company has meritorious defenses and the
likelihood of an unfavorable outcome in each of these actions is remote.
27
PART II- OTHER INFORMATION
---------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The annual meeting of our shareholders was held on July 9, 2002. Of the
8,121,174 shares of common stock outstanding and entitled to vote at the
meeting, 7,173,529 shares were represented in person or by proxy.
ELECTION OF DIRECTORS
On the proposal to elect Donald F. U. Goebert, David. P. Storey, Buck
Scott, Robert MacDonald, Ralph R. Whitney, James C. Gale, and George M.
Benjamin III as directors until the 2003 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 7,130,374 43,155
David P. Storey 7,130,924 42,605
Buck Scott 7,130,924 42,605
Robert MacDonald 7,099,346 74,183
Ralph R. Whitney 7,130,924 42,605
James C. Gale 7,130,924 42,605
George N. Benjamin III 7,130,924 42,605
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG, LLP AS INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
On the proposal to ratify the appointment of Ernst & Young, LLP as the
Company's independent auditors, 7,147,900 shares were voted for the
proposal, 10,594 shares were voted against the proposal, and 15,035 shares
abstained from the vote. The affirmative vote of the holders of a majority
of the total votes cast was required to
28
PART II- OTHER INFORMATION
--------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - CONTINUED
---------------------------------------------------------------
approve this proposal. Based on the vote, the proposal was approved by the
shareholders.
ITEM 5. OTHER INFORMATION
-----------------
On May 1, 2002 the Company was notified by Nasdaq Listing Qualifications
that for the last 30 consecutive trading days the Company's stock had
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 had 180 days, until October 28, 2002, to regain
compliance. The Company did not regain compliance by the designated date.
On October 29, 2002 the Company was granted an additional 180 days, until
April 28, 2003, to regain compliance. If at any time before April 28, 2003
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.
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 September 30, 2002.
None
29
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: November 6, 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)
30
CERTIFICATIONS
I, David P. Storey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RELM Wireless
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant' ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 6, 2002
/s/ David P. Storey
------------------------------------
David P. Storey
President and Chief Executive Officer
CERTIFICATIONS
I, William P. Kelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RELM Wireless
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant' ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 6, 2002
/s/ W. P. Kelly
--------------------------------------
William P. Kelly
Executive Vice President - Finance and
Chief Financial Officer