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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: MARCH 31, 2003
--------------
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
-----
(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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
8,565,088 shares outstanding as of May 9, 2003
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PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
March 31 December 31
2003 2002
-----------------------
(Unaudited) (See note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 1,148 $ 1,631
Trade accounts receivable (net of allowance for doubtful accounts
of $68 as of March 31, 2003 and $69 as of December 31, 2002) 1,246 765
Inventories, net 7,474 7,862
Notes receivable 24 21
Prepaid expenses and other current assets 301 289
------- -------
Total current assets 10,193 10,568
Property, plant and equipment, net 1,677 1,792
Notes receivable, less current portion 37 41
Debt issuance costs, net 299 341
Other assets 110 114
------- -------
Total assets $12,316 $12,856
======= =======
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)
March 31 December 31
2003 2002
--------------------------
(Unaudited) (See note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term liabilities $ 2,270 $ 1,970
Accounts payable 1,630 2,127
Accrued compensation and related taxes 515 466
Accrued warranty expense 103 103
Accrued expenses and other current liabilities 142 168
-------- --------
Total current liabilities 4,660 4,834
Long-term debt 3,150 3,150
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares
none issued or outstanding -- --
Common stock; $.60 par value; 20,000,000 authorized shares:
8,565,088 issued and outstanding at March 31, 2003;
8,540,088 issued and outstanding at December 31, 2002 5,138 5,123
Additional paid-in capital 21,553 21,557
Accumulated deficit (22,185) (21,808)
-------- --------
Total stockholders' equity 4,506 4,872
-------- --------
Total liabilities and stockholders' equity $ 12,316 $ 12,856
======== ========
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
-------------------------
March 31 March 31
2003 2002
------------ ------------
(see note 1) (see note 1)
Sales $ 3,596 $ 4,733
Expenses
Cost of products 2,519 3,377
Selling, general & administrative 1,366 1,410
Loss on notes receivable -- 900
------- -------
3,885 5,687
------- -------
Operating loss (289) (954)
Other income (expense):
Interest expense (103) (110)
Other income 15 48
------- -------
Net loss $ (377) $(1,016)
======= =======
Loss per share-basic and diluted (0.04) (0.18)
======= =======
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)
THREE MONTHS ENDED
-------------------------
March 31 March 31
2003 2002
------------ ------------
(see note 1) (see note 1)
Cash flows from operating activities
Net loss $ (377) $(1,016)
Adjustments to reconcile net loss to net cash provided by
(used in ) operating activities:
Loss on Notes Receivable -- 900
Allowance for doubtful accounts (1) --
Inventories reserve -- (32)
Depreciation and amortization 167 215
Change in current assets and liabilities:
Accounts receivable (480) 1,479
Inventories 388 952
Accounts payable (497) (1,134)
Other current assets 12 77
Other current liabilities -- (10)
------- -------
Net cash provided by (used in) operating activities (788) 1,431
Cash flows from investing activities
Purchases of property and equipment (6) (24)
------- -------
Net cash used in investing activities (6) (24)
Cash flows from financing activities
Repayment of debt and capital lease obligations -- (8)
Net increase (decrease) in revolving credit lines 300 (1,701)
Net proceeds from issuance of common stock 11 1,776
------- -------
Net cash provided by financing activities 311 67
Increase (decrease) in cash and cash equivalents (483) 1,474
Cash and cash equivalents, beginning of period 1,631 335
------- -------
Cash and cash equivalents, end of period $ 1,148 $ 1,809
======= =======
Supplemental disclosure
Interest paid $ 103 $ 110
======= =======
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 March 31, 2003, the
condensed consolidated statements of operations for the three months ended
March 31, 2003 and 2002 and the condensed consolidated statements of cash
flows for the three months ended March 31, 2003 and 2002 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 condensed
consolidated balance sheet at December 31, 2002 has been derived from the
audited consolidated financial statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. It
is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's December 31, 2002 Annual Report to Stockholders.
The results of operations for the three month period ended March 31, 2003
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 quarter normally ends on the Friday closest to the last day of the
last month of such quarter, which was March 28, 2003 for the first quarter
of fiscal 2003. The quarter began on January 1, 2003.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
In March 2003, the Company's new VHF digital portable radio, the DPH, was
approved by the Federal Communications Commission (FCC) for use in the
United States. The DPH has been added to our contract with the U. S.
General Services Administration (GSA), and is presently being evaluated by
the U. S. Department of Interior for inclusion on its contract. The BK
Radio-branded DPH is compliant with the Project 25 standard established by
the Association of Public Safety Communication Officials (APCO). Project
25, which establishes a standard for digital LMR devices to meet FCC
requirements for more efficient use of radio spectrum, is being
increasingly adopted by government and public safety, land mobile radio
(LMR) users nationwide.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
2. SIGNIFICANT EVENTS AND TRANSACTIONS-CONTINUED
As of December 31, 2002 the Company was in violation of certain financial
covenants in its revolving line of credit agreement. Accordingly, all
amounts due under the agreement are classified as a current liability as of
March 31, 2003. The lender has indicated its intention to continue lending
to the Company under new terms and conditions, which will be included in a
forbearance agreement. Although a definitive agreement has not yet been
executed, the Company believes the agreement will have a term of 90 days
and will increase the current interest rate by 2%. Also, the lender will
likely charge a one-time fee of $20 for the forbearance agreement. The
agreement will be reviewed for renewal at the end of its term. The Company
is currently in discussions with other lenders to replace this revolving
credit facility.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $68 on gross
trade receivables of $1,314 at March 31, 2003. 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 March 31, 2003. Because the amount that the Company will actually
collect on the receivables outstanding as of March 31, 2003 cannot be known
with certainty as of the effective date of this filing, 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 5.18%
of gross trade receivables. The Company also maintains a specific allowance
for customer accounts that the Company knows may not be collectible due to
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.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
4. INVENTORIES
The components of inventory, net of reserves totaling $2,602 at March 31,
2003 and December 31, 2002, respectively, consist of the following:
March 31 December 31
2003 2002
---- ----
Finished goods $4,632 $4,948
Work in process 556 507
Raw materials 2,286 2,407
------ ------
$7,474 $7,862
====== ======
The reserve for excess or obsolete inventory is used to state our
inventories at the lower of cost or market. Because the amount that we will
actually recover through sales of our inventory as of March 31, 2003 can
not be known with certainty, we rely on past sales experience, future sales
forecasts, and our strategic business plans. As of March 31, 2003, a
portion of our inventory is in excess of optimal levels based upon
historical sales volumes. Certain new product development has been
completed and marketing programs implemented that have reduced this
inventory during the three months ended March 31, 2003, and will continue
to reduce it over the near term. No estimate can be made of a loss that is
reasonably possible should the programs not be successful.
5. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the three months ended
March 31, 2003 are as follows:
Common Stock Additional
------------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------
Balance at December 31, 2002 8,540,088 $ 5,123 $21,557 $ (21,808) $4,872
Common stock issued 25,000 15 (4) -- 11
Net loss -- -- -- (377) (377)
-----------------------------------------------------------------------------
Balance at March 31, 2003 8,565,088 $ 5,138 $21,553 $ (22,185) $4,506
=============================================================================
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
6. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
THREE MONTHS ENDED
-------------------------------------------
March 31 March 31
2003 2002
------------------ -------------------
Numerator:
Net loss (numerator for basic and diluted earnings per share) $ (377) $ (1,016)
Denominator:
Denominator for basic and diluted earnings per share
weighted average common shares outstanding 8,552,033 5,651,119
=========== ===========
Basic and diluted earnings (loss) per share $ (0.04) $ (0.18)
=========== ===========
9
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 7,225,968 shares related to options, warrants, and convertible
debt are not included in the computation of loss per share for the three
ended March 31, 2003 because to do so would be anti-dilutive.
7. STOCK BASED COMPENSATION
The Company has elected to continue to account for its stock-based
compensation plans under Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations. No
compensation cost is reflected in the Company's net income related to the
stock option plans for the periods presented, as all options had an
exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. Had the expense for the stock-based
compensation been determined using the fair value based method defined in
Financial Accounting Standard (FAS) 123, "Accounting for Stock-Based
Compensation,& Financial Accounting Standard (FAS) 148, the Company's net
loss and net loss per share would have been reduced to the pro forma
amounts indicated below:
Three months ended
March 31,
-------------------------------------
2003 2002
--------------- -----------------
(in thousands)
Net loss as reported $ (377) $ (1,016)
Deduct: Total stock-based employee compensation
expense determined unfair value based method
for all awards, net of related tax effects (109) (112)
-------------- ---------------
Pro forma net loss $ (486) $ (1,128)
============== ===============
Basid and diluted loss per share:
As reported $ (.04) $ (.18)
============== ===============
Pro forma $ (.06) $ (.20)
============== ===============
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA
7. STOCK BASED COMPENSATION-CONTINUED
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002 and 2003, respectively: risk-free
interest rates of 3.53% and 4.76%; dividend yields of 0%; volatility
factors of the expected market price of our Common Stock of 44.0% and
96.7%; and a weighted-average expected life of the option of four years.
These pro forma results may not be indicative of the future results for the
full fiscal year due to potential grants vesting and other factors.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
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 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
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
8. RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED
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. Statement 146 did
not have a material impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements
No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees
issued or modified after December 31, 2002 and are not expected to have a
material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity
that voluntarily changes to the fair value based method of accounting for
stock- based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions
with respect to stock-based employee compensation. Finally, this Statement
amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in the interim financial information. The
amendments to SFAS No. 123 that provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation are effective for
financial statements for fiscal years ending after December 15, 2002. The
amendment to SFAS No. 123 relating to disclosure and the amendment to
Opinion 28 is effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
Early application is encouraged. The adoption of SFAS 148 did not have a
material impact on the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
8. RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED
"Consolidation of Variable Interest Entities." FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities ("VIE's") created after
January 31, 2003, and to VIE's in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to VIE's in which an enterprise holds a
variable interest that it acquired before February 1, 2003. FIN 46 applies
to public enterprises as of the beginning of the applicable interim or
annual period. The adoption of FIN 46 is not expected to have a material
impact on the Company's consolidated financial position, liquidity, or
results of operations.
9. CONTINGENT LIABILITIES
From time to time, the Company may become liable with respect to pending
and threatened litigation, tax, environmental and other matters.
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 totaling $1,700
plus interest at 12% per annum 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 the Company's directors.
As the result, the lone remaining claim seeks damages against the Company
for non-payment of the note. The Company 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 is defending
this matter vigorously.
In June 1997, substantially all of the assets of a RELM
specialty-manufacturing subsidiary were sold. The asset purchase agreement
contains indemnification
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
LEGAL PROCEEDINGS-CONTINUED
provisions, which could result in liability for both parties. Presently,
two indemnification claims are pending against the Company. Insurance
coverage exists for these matters. 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.
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 the purchaser of the assets of Company's former
specialty-manufacturing subsidiary are named defendants in these lawsuits.
The agreement under which the assets of the former subsidiary were sold
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.
10. NASDAQ COMMUNICATION
On April 29, 2003 the Company was notified by Nasdaq Listing Qualifications
that it has not regained compliance with the minimum $1.00 closing bid
price per share requirement as set forth in marketplace rule 4310(c)(4).
The Company is not eligible for an additional 90 calendar day compliance
period because it does not meet the initial inclusion requirements of the
Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(A). Accordingly,
the Company's securities were delisted from the Nasdaq SmallCap Market at
the opening of business on May 8, 2003. The Company's securities became
immediately eligible for quotation on the OTC Bulletin Board effective with
the open of business on May 8, 2003. The OTC Bulletin Board symbol assigned
to the Company is "RELM".
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
RESULTS OF OPERATIONS
The following table shows each item from the condensed consolidated
statements of operations expressed as a percentage of sales:
Percentage of Sales
---------------------------------------
THREE MONTHS ENDED
March 31 March 31
2003 2002
------------- ---------------
Sales 100.0% 100.0%
Cost of sales 70.0 71.4
Gross Margin 30.0 28.6
Selling, general and
administrative expenses (38.0) (29.8)
Loss on Notes Receivable -- (19.0)
Interest expense (2.9) (2.3)
Other income 0.4 1.0
------------ --------------
Net loss (10.5)% (21.5)%
============ ==============
NET SALES
Total sales for the three months ended March 31, 2003 decreased
approximately $1.1 million (24.0%) to $3.6 million from $4.7 million for
the same period of the prior year.
Revenues for the three months ended March 31, 2003 for BK Radio-branded
products, sold primarily to the government and public safety segment of the
land mobile radio market decreased approximately $1.0 million (29.0%)
compared to the same period last year primarily due to lighter demand from
our principal customers in federal and state government agencies. However,
revenues from these customers for the three months ended March 31, 2003
increased by approximately $0.8 million (51.2%) compared to the immediately
preceding three-month period ended December 31, 2002. This increase was
mainly the result of higher sales orders from the U. S. Forest Service.
Our first BK Radio-brand APCO Project 25 compliant digital portable radio,
the DPH, was approved for sale by the Federal Communications Commission
late in March 2003. The DPH offers important performance advantages
compared to
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
NET SALES-CONTINUED
competitor's products, including a significantly lower price. The DPH has
been added to our contract with the U. S. General Services Administration,
and is presently being evaluated by the U. S. Department of Interior for
inclusion on its contract. The product is being actively marketed to
additional federal and state government agencies as well.
Revenues for the three month period ended March 31, 2003 for the business
and industrial market segment, served primarily by RELM and Uniden-brand
products, decreased approximately $0.1 million (11.3%) compared to the same
period last year. In this segment, increasing demand for our recently
introduced RP-Series portable radios and our repeater products helped
offset a decline in sales of our other portable and mobile radio products.
The RP-Series is a full-featured, yet low-cost product line designed to
compete effectively in the highly competitive business and industrial
market. Although economic conditions remain weak in this segment compared
to the same period last year, revenues for our RP-Series improved by
approximately $0.5 million (64.1%) compared to the immediately preceding
three-month period ended December 31, 2002.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of net sales for the three months ended March
31, 2003 was 70.0% compared to 71.4% for the same period in the prior year.
The improvement in cost of sales and gross margins reflects lower product
costs driven by the implementation of strategic manufacturing
relationships, some of which are off shore. It also reflects reductions in
staffing and other manufacturing support costs at our operations in West
Melbourne, Florida. Combined, these actions began impacting product costs
in 2002. In 2003, having the benefit of a full year of manufacturing under
our present structure, combined with new product revenues, we expect
continued improvements in cost of sales and gross margins.
We continuously evaluate new manufacturing alternatives to further reduce
our product costs. We anticipate that the current relationships, or others
that are comparable, will be available to us 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 March 31, 2003, SG&A expenses totaled approximately $1,366,314
(38.0% of sales)
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-CONTINUED
compared to $1,410,000 (29.8% of sales) for the same period last year.
We reduced staffing and expenses associated with certain headquarters
functions and other administrative support functions, while maintaining our
investment in the development of new products.
LOSS ON NOTES RECEIVABLE
In April 2002, we learned that the purchaser of the assets of the Company's
former paper-manufacturing subsidiary, had ceased operations. Accordingly,
the Company wrote-off the entire principal amount ($900,000) of the two
promissory notes in the first quarter of fiscal year 2002.
OPERATING LOSS
The operating loss for the three months ended March 31, 2003 was
approximately $289,000 compared to an operating loss of approximately
$954,000 for the same period during the prior year, which included a
non-recurring write-off of the entire principal amount ($900,000) of two
promissory notes. Excluding this write-off, the operating loss during the
prior year was approximately $54,000.
INTEREST EXPENSE
For the three months ended March 31, 2003 interest expense totaled $103,000
(2.9% of sales) compared to $110,000 (2.3% of sales) for the same period
during the prior year. This decrease is largely due to a lower rate of
interest on our revolving line of credit compared to that of the same
period last year. Additionally, during 2002 we satisfied the remaining
capital lease obligations associated with certain computer equipment.
INCOME TAXES
No income tax provision was provided for the three months ended March 31,
2003 or 2002. We have net operating loss carryforward benefits totaling
approximately $35 million at March 31, 2003. 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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
RECENT EVENTS
COMPLETION AND INTRODUCTION OF APCO PROJECT 25-COMPLIANT DIGITAL PRODUCT
In March 2003, the Company's new VHF digital portable radio, the DPH, was
approved by the Federal Communications Commission (FCC) for use in the
United States. The DPH has been added to our contract with the U. S.
General Services Administration (GSA), and is presently being evaluated by
the U. S. Department of Interior for inclusion on its contract. The BK
Radio-branded DPH is compliant with the Project 25 standard established by
the Association of Public Safety Communication Officials (APCO). Project
25, which establishes a standard for digital LMR devices to meet FCC
requirements for more efficient use of radio spectrum, is being
increasingly adopted by government and public safety, land mobile radio
(LMR) users nationwide.
SIGNIFICANT CUSTOMERS
Sales to the United States government represented approximately $1.5
million (40.7%) of our total revenues for the three months ended March 31,
2003 compared to $1.5 million (31.1%) for the same period last year. These
sales were primarily to the United States Forest Service (USFS).
In December 2002, we were awarded a new contract with terms similar to our
previous contract with the United States Forest Service. The new contract
continues to include the portable radios and repeaters that were on the
previous contract. Additionally, it includes our GMH mobile radio that was
not on the previous contract. The new contract is for one year with two
additional option years.
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three months ended March 31, 2003
have contributed to increases in wages, facilities, and raw material costs.
These inflationary effects were partially offset by increased prices to
customers and reduced manufacturing costs associated with our initiatives
to utilized low-cost contract manufacturers.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended March
31, 2003 decreased by $2,219,000 to ($788) compared to net cash provided by
operating activities of $1,431,000 for the prior year. The decrease in cash
provided from operations is attributable primarily to growth in trade
receivables ($480,000) compared to a reduction in trade receivables
($1,479,000) for the prior year. Accounts receivable increased as revenues
grew during the three months ended March 31, 2003 compared to the preceding
quarter. Also, cash generated from the reduction of inventories ($388,000)
was used to pay trade payables ($497,000). Additionally, in the first
quarter of the prior year, operations included a $900,000 valuation reserve
for a note receivable pertaining its former subsidiary, Fort Orange Paper
Company, which was a non-cash item.
Capital expenditures decreased by $18,000. Limited capital expenditures are
planned for 2003. The current revolving line of credit contains
restrictions on our capital expenditures. We believe that these
restrictions will not impact the execution of our capital investment plans.
We anticipate that capital expenditures will be funded through existing
cash balances, operating cash flow and our revolving line of credit.
Net cash provided by financing activities increased $244,000 to $311,000
for the three months ended March 31, 2003, compared to $67,000 provided in
the comparative period for the previous year. The increase was the result
of additional borrowings from our revolving line of credit to fund
operating requirements.
We have a $3 million revolving line of credit with Fleet Business Credit.
As of March 31, 2003, the amount outstanding on the line was approximately
$2.3 million. The formula under the terms of the agreement supports a
borrowing base of approximately $2.4 million, of which approximately $0.1
million was available at March 31, 2003. As of December 31, 2002 we were in
violation of certain financial covenants in the line of credit agreement.
Accordingly, we have classified all amounts due under this agreement as
current liabilities. The interest rate has been increased by 2%. The lender
has indicated its intention to continue lending to us under new terms and
conditions, which will be included in a forbearance agreement. This
forbearance agreement is currently being negotiated. Although a definitive
agreement has not been executed, we believe it will have a term of 90 days.
Also, the lender will likely charge a one-time fee of $20,000 for the
forbearance agreement. The agreement will be reviewed for renewal at the
end of its term. We are currently seeking new financing arrangements.
In their report on our consolidated financial statements for the year ended
December
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES-CONTINUED
31, 2002, our independent auditors have included an explanatory paragraph
that states "there is substantial doubt about the Company's ability to
continue as a going concern". This paragraph was included primarily because
we were in violation of certain financial covenants in our revolving line
of credit agreement, and because we suffered a substantial net loss from
operations. The violation of financial covenants is an event of default
under our agreement with the lender. Although the lender may demand
immediate payment of all amounts owed as a result of the default, such a
demand has not been made. If the lender were to demand payment, we
presently would not have sufficient resources to satisfy this obligation
and continue with our normal ongoing business activities.
We believe existing cash funds combined with funds generated from
operations and our credit facility, assuming a satisfactory forbearance
agreement, are sufficient to meet our current working capital requirements
for the next twelve months. If sales volumes increase substantially,
additional sources of working capital may be required to fulfill the
demand.
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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
We are subject to the risk of fluctuating interest rates in the ordinary
course of business for borrowings under our revolving line of credit. The
lender presently charges interest at the 1.25% over the prime rate. As a
result of defaults under the credit agreement, the lender has indicated
their intent to increase the interest rate to 3.25% over the prime rate. No
definitive agreement regarding the increase has yet been executed.
The Company's primary exposure to market risk relates to changes in
interest rates. The Company has both fixed and variable rate debt. The
Company has $5.4 million of debt outstanding as of March 31, 2003, of which
$3.1 million, or 57.4%, has been borrowed under subordinated convertible
notes at a fixed rate of 8.0% with maturity on December 31, 2004. The
Company also has $2.3 million of variable rate debt as of March 31, 2003.
As these debt instruments mature, the Company typically refinances such
debt at existing market interest rates which may be more or less than
interest rates on the maturing debt. Changes in interest rates have
different impacts on the fixed and variable rate portions of the Company's
debt portfolio. A change in interest rates impacts the net market value of
the Company's fixed rate debt, but has no impact on its interest incurred
or cash flows. Interest rate changes on variable debt impacts the interest
incurred and cash flows but does not impact the net market value of the
debt instrument. Based on the variable rate debt of the Company as of March
31, 2003, it is estimated that a 100 basis point increase in interest rates
on the Company's revolving line of credit would result in an additional
$23,000 in interest incurred per year on its line of credit. A 100 basis
point decline would lower interest incurred by $23,000 per year.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as such term is defined under Rule 13a-14( c )
promulgated under the Securities Exchange Act of 1934, as amended, within
the 90 day period prior to the filing date of this report. Based on this
evaluation, the chief executive officer and the chief financial officer
concluded that our disclosure controls and procedures were effective as of
this date. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls
subsequent to the date of their last evaluation.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In 1993, a civil action was brought against us by a plaintiff to recover
losses sustained on the note of a former affiliate totaling $1,700,000 plus
interest at 12% per annum. The plaintiff alleged violations of federal
security and other laws by us 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 us and others
caused the former affiliate to suffer millions of dollars of losses leading
to its ultimate failure. In response, we 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 us and one of
our directors. As the result, the lone remaining claim seeks damages
against us for non-payment of the note. We contend 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 is defending
this matter vigorously.
In June 1997, substantially all of the assets of a RELM
specialty-manufacturing subsidiary were sold. The asset purchase agreement
contains indemnification provisions, which could result in liability for
both parties. Presently, two indemnification claims are pending against the
Company. Insurance coverage exists for these matters. 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.
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 the purchaser of the assets of our former specialty-manufacturing
subsidiary are named defendants in these lawsuits. The agreement under
which the assets of the former subsidiary were sold 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------
None
22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
As of December 31, 2002 the Company was in violation of certain financial
covenants in its revolving line of credit agreement. Accordingly, all
amounts due under the agreement are classified as a current liability at
March 31, 2003. The lender has indicated its intention to continue lending
to the Company under new terms and conditions, which will be included in a
forbearance agreement. Although a definitive agreement has not yet been
executed, the Company believes the agreement will have a term of 90 days
and will increase the current interest rate by 2%. Also, the lender will
likely charge a one-time fee of $20,000 for the forbearance agreement. The
agreement will be reviewed for renewal at the end of its term. The Company
is currently in discussions with other lenders to replace this revolving
credit facility.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
The annual meeting of our shareholders was held on May 6, 2003. Of the
8,565,088 shares of common stock outstanding and entitled to vote at the
meeting, 6,026,791 shares were represented in person or by proxy. In
addition, George N. Benjamin III succeeded Donald F. U. Goebert as chairman
of the board.
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 N.
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 6,021,805 4,986
David P. Storey 6,021,693 5,098
Ralph R. Whitney 6,021,805 4,986
James C. Gale 6,021,805 4,986
George N. Benjamin III 6,021,805 4,986
Randolph K. Piechocki 6,021,805 4,986
RATIFICATION OF THE APPOINTMENT OF BDO SEIDMAN, LLP AS INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
On the proposal to ratify the appointment of BDO Seidman, LLP as the
Company's independent auditors, 6,021,943 shares were voted for the
proposal, 2,863 shares were voted against the proposal, and 1,985 shares
abstained from the vote. The affirmative
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS-CONTINUED
-------------------------------------------------------------
vote of the holders of a majority of the total votes cast was required to
approve this proposal. Based on the vote, the proposal was approved by the
shareholders.
ITEM 5. OTHER INFORMATION
-----------------
On April 29, 2003 the Company was notified by Nasdaq Listing Qualifications
that it has not regained compliance with the minimum $1.00 closing bid
price per share requirement as set forth in marketplace rule 4310(c)(4).
The Company is not eligible for an additional 90 calendar day compliance
period because it does not meet the initial inclusion requirements of the
Nasdaq SmallCap Market under Marketplace Rule 4310(c)(2)(A). Accordingly,
the Company's securities were delisted from the Nasdaq SmallCap Market at
the opening of business on May 8, 2003. The Company's securities became
immediately eligible for quotation on the OTC Bulletin Board effective with
the open of business on May 8, 2003. The OTC Bulletin Board symbol assigned
to the Company is "RELM".
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 March 31, 2003.
None
24
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: May 15, 2003
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)
25
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.
May 15, 2003
/s/David P. Storey
-----------------------------------------
David P. Storey
President and Chief Executive Officer
26
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.
May 15, 2003
/s/ W. P. Kelly
---------------------------------------
William P. Kelly
Executive Vice President - Finance and
Chief Financial Officer
27
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
RELM WIRELESS CORPORATION
-----------------
FORM 10-Q QUARTERLY REPORT
FOR THE FISCAL QUARTER ENDED:
March 31, 2003
-----------------
EXHIBITS
-----------------
28
EXHIBIT INDEX
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.
29