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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
7100 Technology Drive
West Melbourne, Florida 32904
(Address of principal executive offices and 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|
There were 9,065,088 shares of common stock, $0.60 par value, of the
registrant outstanding at September 30, 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) (Unaudited)
SEPTEMBER 30 December 31
2003 2002
------------ -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 847 $ 1,631
Trade accounts receivable (net of allowance for doubtful accounts of
$57 as of September 30, 2003 and $69 as of December 31, 2002) 2,754 765
Inventories, net 6,397 7,862
Notes receivable 21 21
Prepaid expenses and other current assets 357 289
-------- --------
Total current assets 10,376 10,568
Property, plant and equipment, net 1,529 1,792
Notes receivable, less current portion 36 41
Debt issuance costs, net 213 341
Other assets 407 114
-------- --------
Total assets $ 12,561 $ 12,856
======== ========
See notes to condensed consolidated financial statements.
1
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
SEPTEMBER 30 December 31
2003 2002
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 1,759 $ 1,970
Accounts payable 1,476 2,127
Accrued compensation and related taxes 495 466
Accrued warranty expense 100 103
Accrued expenses and other current liabilities 362 168
-------- --------
Total current liabilities 4,192 4,834
Subordinated convertible notes 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:
9,065,088 issued and outstanding at September 30, 2003; 8,540,088 5,438 5,123
issued and outstanding at December 31, 2002
Additional paid-in capital 21,553 21,557
Accumulated deficit (21,772) (21,808)
-------- --------
Total stockholders' equity 5,219 4,872
-------- --------
Total liabilities and stockholders' equity $ 12,561 $ 12,856
======== ========
See notes to condensed consolidated financial statements.
2
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 5,000 $ 3,979 $ 13,827 $ 13,662
Expenses
Cost of products 3,009 2,821 8,994 9,610
Selling, general & administrative 1,593 1,489 4,505 4,359
Loss on notes receivables -- -- -- 900
-------- -------- -------- --------
4,602 4,310 13,499 14,869
-------- -------- -------- --------
Operating income (loss) 398 (331) 328 (1,207)
Other income (expense):
Interest expense (115) (115) (338) (336)
Other income 8 51 46 135
-------- -------- -------- --------
Net income (loss) $ 291 $ (395) $ 36 $ (1,408)
======== ======== ======== ========
Earnings (loss) per share-basic $ 0.03 $ (0.05) $ 0.00 $ (0.19)
======== ======== ======== ========
Earnings (loss) per share-diluted $ 0.03 $ (0.05) $ 0.00 $ (0.19)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30 September 30
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $ 36 $(1,408)
Adjustments to reconcile net loss to net cash provided by (used in )
operating activities:
Loss on Notes Receivable -- 900
Allowance for doubtful accounts (12) (14)
Inventories reserve 150 (43)
Depreciation and amortization 501 575
Change in current assets and liabilities:
Accounts receivable (1,977) 2,120
Inventories 1,315 1,037
Accounts payable (650) (1,313)
Other current assets (364) 202
Other current liabilities 219 (72)
------- -------
Net cash provided by (used in) operating activities (782) 1,984
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (101) (153)
------- -------
Net cash used in investing activities (101) (153)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations -- (10)
Net decrease in revolving credit lines (212) (1,859)
Net proceeds from issuance of common stock 311 2,021
------- -------
Net cash provided by financing activities 99 152
Increase (decrease) in cash and cash equivalents (784) 1,983
Cash and cash equivalents, beginning of period 1,631 335
------- -------
Cash and cash equivalents, end of period $ 847 $ 2,318
======= =======
SUPPLEMENTAL DISCLOSURE
Interest paid $ 338 $ 336
======= =======
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, 2003, the condensed
consolidated statements of operations for the three and nine months ended
September 30, 2003 and 2002 and the condensed consolidated statements of cash
flows for the nine months ended September 30, 2003 and 2002 have been prepared
by RELM Wireless Corporation (the Company), and are unaudited. 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 audited consolidated financial statements and notes thereto included in
the Company's December 31, 2002 Annual Report on Form 10-K. The results of
operations for the three and nine month periods ended September 30, 2003 are not
necessarily indicative of the operating results for a full year.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
In July 2003, the Company was awarded contract participation to supply to the
U.S. Department of Interior (DOI) digital LMR equipment that is compliant with
APCO (Association of Public-Safety Communications Officials) Project 25
specifications. The contract, originally established in November 2002, is a
fixed-price, indefinite-delivery and indefinite-quantity contract that is open
to all federal agencies. It includes one base year with options for four
additional years. Under the contract, U.S. government agencies may purchase up
to $1 billion of APCO Project 25 LMR equipment. The contract has no minimum
purchase requirements, and purchases may fluctuate from period to period. During
the three months ended September 30, 2003, the Company received approximately
$3.0 million in orders as a result of this contract.
On August 29, 2003, the Company replaced its existing revolving line of credit
with Fleet Capital Corporation, under which it had been in default since
December 31, 2002, by entering into an agreement with a new lender, Silicon
Valley Bank. The agreement provides for a revolving line of credit of up to $2.5
million for one year. The line is secured by substantially all of the Company's
assets, consisting principally of its trade receivables and inventory.
Concurrently with the refinancing transaction, three funds affiliated with the
Company's directors purchased an aggregate of 500,000 shares of the Company's
common stock at $0.60 per share. The proceeds of the transaction were used to
pay off the Company's existing credit facility with Fleet Capital Corporation
and provide working capital to be used in executing the Company's business
plans, including the expansion of its digital product line.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $57 on gross trade
receivables of $2,811 at September 30, 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 September
30, 2003. Because the amount that the Company will actually collect on the
receivables outstanding as of September 30, 2003 cannot be known with certainty,
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 1% 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 2.0% 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.
As of September 30, 2003, there was no specific allowance.
4. INVENTORIES
The components of inventory, net of reserves totaling $2,752 and $2,617 at
September 30, 2003 and December 31, 2002, respectively, consist of the
following:
SEPTEMBER 30 December 31
2003 2002
---- ----
Finished goods $3,357 $4,948
Work in process 856 507
Raw materials 2,184 2,407
------ ------
$6,397 $7,862
====== ======
The reserve for slow-moving, excess, or obsolete inventory was approximately
$2.8 million as of September 30, 2003 compared to approximately $2.6 million as
of December 31, 2002. This reserve is used to state the Company's inventories at
the lower of cost or market. Because the amount of inventory that the Company
will actually recoup through sales of its inventory as of September 30, 2003
cannot be known with certainty, the Company relies on past sales experience,
future sales forecasts, and its strategic business plans to determine the amount
of the reserve. Generally, in evaluating inventory, the Company analyzes its
historical activity and classifies it as having been active or inactive. For raw
material inventory with no activity, the Company reserves 85% of its cost which
takes into account a 15% scrap value while for finished goods inventory with no
activity the Company reserves 80% of its cost. For inventory with activity, the
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
Company reviews the average annual activity 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 consumption). The Company believes that 25% represents the value of
excess inventory it would not be able to recover due to new product
introductions and other technological advancements over the next seven years. As
of September 30, 2003, a portion of the Company's 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 and nine months ended September 30,
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. BARTER CREDITS
The Company has entered into various barter transactions, exchanging inventory
for barter credits that are redeemable for goods and services in the future,
including but not limited to promotion, advertising, printing, and travel, among
others.
The credits are recorded at fair value of the inventory exchanged in accordance
with APB 29 "Accounting for Non-Monetary Transactions" and EITF 93-11
"Accounting for Barter Transactions." The credits totaled approximately $291 and
$157 as of September 30, 2003 and December 31, 2002, respectively, and have no
expiration date. Such amounts are included in prepaid expenses and other current
assets in the accompanying condensed consolidated balance sheets. The Company
evaluates the recoverability of these credits on a quarterly basis and expects
to utilize all available credits.
6. CONVERTIBLE SUBORDINATED NOTES
The Company privately placed convertible subordinated notes on March 16, 2000.
The amount due under the notes totals $3,150. The notes require interest only
payments at 8% per annum through December 31, 2004, at which time the principal
amount becomes due. At the time of issuance, the notes were convertible into
shares of RELM common stock at $3.25 per share. The notes contain provisions
that protect the purchasers of the notes against dilution should the Company
issue shares of common stock at a price less than the notes' conversion price
then in effect. These provisions provide for an adjustment in the notes'
conversion price and the number of shares into which the notes may be converted.
On two occasions, March 22, 2002 and August 29, 2003 the Company issued shares
of stock at a price below the notes' conversion price then in effect.
Accordingly, the conversion price of the notes has been adjusted to $1.88, which
was the effective conversion price as of September 30, 2003.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
7. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the nine months ended
September 30, 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 525,000 315 (4) -- 311
Net income -- -- -- 36 36
--------- --------- --------- --------- ---------
BALANCE AT SEPTEMBER 30, 2003 9,065,088 $ 5,438 $ 21,553 $ (21,772) $ 5,219
========= ========= ========= ========= =========
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income (loss) (numerator for basic and
diluted earnings per share) $ 291 $ (395) $ 36 $ (1,408)
----------- ----------- ----------- -----------
Denominator:
Denominator for basic and diluted earnings per 8,703,977 8,537,424 8,607,032 7,501,389
share weighted average common shares
outstanding
Effect of dilutive securities:
Options 51,145 -- 51,145 --
Warrants 136,437 -- 136,437 --
----------- ----------- ----------- -----------
Denominator for diluted earnings per share - 8,891,559 8,537,424 8,794,614 7,501,389
adjusted weighted average shares
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.03 $ (0.05) $ 0.00 $ (0.19)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.03 $ (0.05) $ 0.00 $ (0.19)
=========== =========== =========== ===========
9. 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
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) as reported $ 291 $ (395) $ 36 $(1,408)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (20) (26) (93) (84)
Pro forma net income (loss) $ 271 $ (421) $ (57) $(1,492)
======= ======= ======= =======
Basic and diluted income (loss) per share:
As reported $ 0.03 $ (0.05) $ 0.00 $ (0.19)
======= ======= ======= =======
Pro forma $ 0.03 $ (0.05) $ (0.01) $ (0.20)
======= ======= ======= =======
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.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
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
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
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.
Statement 146 did not have a material impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 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. The adoption of FIN 45 did not have a material impact 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 No. 148 did not have a material impact on the
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"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 created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. On October 9, 2003 the
FASB issued FASB Staff Position No. FIN 46-6, "Effective Date of FASB
Interpretation No. 46, Consolidation of Variable Interest Entities," which
defers the implementation date for public entities that hold an interest in a
variable interest entity or potential variable interest entity from the first
fiscal year or interim period beginning after June 15, 2003 to the end of the
first interim or annual period ending after December 15, 2003. This deferral
applies only if 1) the variable interest entity was created before February 1,
2003 and 2) the public entity has not issued financial statements reporting that
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
variable interest entity in accordance with FIN 46, other than disclosures
required by paragraph 26 of FIN 46. 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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." It is effective for
contracts entered into or modified after September 30, 2003, except as stated
within the statement, and should be applied prospectively. The Company is
currently assessing the impact of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measurers in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with SFAS No. 150,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatorily redeemable noncontrolling (minority) interests
which on October 29, 2003, the FASB decided to defer indefinitely. SFAS No. 150
did not have a material impact on the Company's consolidated financial
statements.
11. 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.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA AND PER SHARE DATA)
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. 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. 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.
12
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 PERCENTAGE OF SALES
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.2 70.9 65.0 70.3
----- ----- ----- -----
Gross margin 39.8% 29.1% 35.0 29.7%
Selling, general and administrative
expenses
(31.9) (37.4) (32.6) (31.9)
Loss on Notes Receivable -- -- -- (6.6)
Interest expense (2.3) (2.9) (2.4) (2.5)
Other income 0.2 1.3 0.3 1.0
----- ----- ----- -----
Net income (loss) 5.8% (9.9)% 0.3% (10.3)%
===== ===== ===== =====
NET SALES
Net sales for the three months ended September 30, 2003 increased approximately
$1.0 million (25.7%) to $5.0 million from $4.0 million for the same period last
year.
This increase is attributed primarily to sales of our digital APCO Project
25-compliant products. Our digital portable radio, the DPH, was approved by the
Federal Communications Commission (FCC) late in March 2003. Shortly thereafter,
it was added to our contract with the GSA. More recently, in July 2003, the DPH
was awarded a place on the Department of Interior (DOI) digital communications
contract. Accordingly, it can now be purchased by DOI agencies as well as other
federal government agencies nationwide from DOI agencies.
Net sales for the nine months ended September 30, 2003 increased approximately
$0.2 million (1.2%) to $13.8 million from $13.6 million for the same period last
year.
This increase is attributed primarily to the introduction of our digital
portable radio, the DPH, and its inclusion on the DOI contract. Also, revenue
increases from our new RP-series portable radios, introduced earlier this year,
largely offset a decline in revenues from Uniden-branded products. The RP is a
full featured, low-cost product line designed to compete effectively in the
commercial and industrial market segment.
13
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of net sales for the three months ended September
30, 2003 was 60.2% compared to 70.9% for the same period last year. For the nine
months ended September 30, 2003, cost of sales as a percentage of net sales was
65.0% compared to 70.3% for the same period last year.
The improvement in cost of sales and gross margins reflects lower product costs
driven by the implementation of strategic manufacturing relationships, and
higher margins realized from sales of our new APCO Project 25 compliant digital
portable radio. It also reflects reductions in staffing and other manufacturing
support costs at our operations in West Melbourne, Florida. These actions began
impacting product costs in 2002. We anticipate continued improvements in cost of
sales and gross margins in future quarters as our strategic manufacturing
relationships expand and digital product revenues grow.
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, development, management information systems,
accounting and headquarters expenses. For the three months ended September 30,
2003, SG&A expenses totaled approximately $1.6 million (31.9% of sales) compared
to approximately $1.5 million (37.4% of sales) for the same period last year.
For the nine months ended September 30, 2003, SG&A expenses totaled
approximately $4.5 million (32.6% of sales) compared to approximately $4.4
million (31.9% of sales) for the same period last year.
The overall increase in SG&A expenses is attributed primarily to increases in
selling and marketing expenses. Marketing and selling expenses for the three and
nine months ended September 30, 2003 increased approximately $0.1 million
(23.9%) and $0.2 million (24.7%), respectively. These increases were primarily
the result of the redeployment of internal staff for initiatives designed to
drive revenue growth, particularly from new products, such as our digital
product, RP-series portable radios, and ESAS systems. These increases were
partially offset by decreases in engineering and development expenses as our
ESAS systems development was largely completed.
OPERATING INCOME (LOSS)
Operating income for the three months ended September 30, 2003 was approximately
$398,000 compared to an operating loss of approximately ($331,000) for the same
period last year. The operating income for the nine months ended September 30,
2003 was approximately $328,000 compared to an operating loss of approximately
($1,207,000) for the same period last year. The prior year period included a
non-recurring write-off of the entire principal amount ($900,000) of two
promissory notes.
14
INTEREST EXPENSE
For the three months ended September 30, 2003, interest expense totaled $115,000
(2.3% of sales) compared to $115,000 (2.9% of sales) for the same period last
year. For the nine months ended September 30, 2003, interest expense totaled
$338,000 (2.3% of sales) compared to $336,000 (2.5% of sales) for the same
period last year. In March 2003, Fleet Capital, our former senior lender,
increased the annual interest rate on our revolving line of credit by 200 basis
points, in accordance with the provisions of the loan agreement. This increase
was largely offset, however, by reduced borrowings. The annual interest rate
under our new revolving line of credit that was closed on August 29, 2003, was
200 basis points per annum over the current prime lending rate at September 30,
2003, which is 100 basis points lower than the last rate charged by our former
lender.
INCOME TAXES
No income tax provision was provided for the three or nine months ended
September 30, 2003 or 2002. We have net operating loss carryforward benefits
totaling approximately $35 million at September 30, 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.
RECENT EVENTS
U. S. DEPARTMENT OF INTERIOR (DOI) CONTRACT
In July 2003, we were awarded contract participation to supply to the U. S.
Department of Interior (DOI) digital LMR equipment that is compliant with APCO
(Association of Public-Safety Communications Officials) Project 25
specifications.
The contract, originally established in November 2002, is a fixed-price,
indefinite-delivery and indefinite-quantity contract that is open to all federal
agencies. It includes one base year with options for four additional years.
Under the contract, U.S. government agencies may purchase up to $1 billion of
APCO Project 25 LMR equipment. The contract has no minimum purchase
requirements, and purchases may fluctuate from period to period. During the
three months ended September 30, 2003 we received orders totaling approximately
$3.0 million from DOI agencies.
REVOLVING CREDIT FACILITY
On August 29, 2003, we entered into an agreement with a new lender. The
agreement provides for a revolving line of credit of up to $2.5 million for one
year. The line is secured by substantially all of our assets, consisting
principally of our trade receivables and inventory. Concurrently with the
refinancing transaction, three funds affiliated with our directors purchased an
aggregate of 500,000 shares of our common stock at $0.60 per share. The proceeds
of the transaction were used to pay off our existing revolving credit facility
with Fleet Capital Corporation and provide working capital to be used in
executing our business plans, including the expansion of our digital product
line. We had been in default of certain financial covenants under the terms of
15
our credit agreement with Fleet Capital Corporation and Fleet had in July 2003
demanded payment in full of all indebtedness thereunder on or before October 2,
2003.
SIGNIFICANT CUSTOMERS
Sales to the United States government represented approximately $2.47 million
(49.48%) of our total revenues for the three months ended September 30, 2003,
compared to approximately $1.70 million (42.8%) for the same period last year.
For the nine months ended September 30, 2003, sales to the United States
government represented approximately $6.17 million (44.7%) of our total
revenues, compared to approximately $5.79 million (42.4%) for the same period
last year. These sales were primarily to the United States Forest Service
(USFS).
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three and nine months ended September 30,
2003 have contributed to increases in certain costs. These inflationary effects
were more than offset by increases in sales of higher priced products and
reduced manufacturing costs associated with our initiatives to utilized low-cost
contract manufacturers.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2003, net cash used in operating
activities totaled approximately $0.8 million compared to net cash provided by
operating activities of approximately $2.0 million for the same period last
year. For the nine months ended September 30, 2003, we realized a net profit of
approximately $36,000 compared to a net loss of approximately $1.4 million for
the same period last year. The increase in cash used in operations is attributed
primarily to an increase in accounts receivable resulting from increased
revenues during the three months ended September 30, 2003 compared to the same
period for the preceding year. Cash was generated from the reduction of
inventories ( approximately $1.3 million) during the nine months ended September
30, 2003, compared to an inventory reduction of approximately $1.0 million for
the same period last year. Also, cash totaling approximately $0.7 million was
used to pay trade payables during the nine months ended September 30, 2003,
compared to approximately $1.3 million used to reduce trade payables during the
same period last year. Additionally, in the prior year, operations included a
$0.9 million valuation reserve for a note receivable pertaining to its former
subsidiary, Fort Orange Paper Company, which was a non-cash item.
Capital expenditures for the nine months ended September 30, 2003 decreased by
approximately $52,000 compared to the same period last year. Limited capital
expenditures are planned for the remainder of 2003. We anticipate that future
capital expenditures will be funded through existing cash balances, operating
cash flow and our revolving line of credit.
Net cash provided by financing activities totaled approximately $0.1 million for
the nine months ended September 30, 2003, compared to approximately $0.2 million
for the same period last year. Cash provided by financing activities was
primarily the result of the sale of 500,000 shares of common stock for $0.3
million, which was partially offset by payments to reduce our revolving line of
credit. In the same period last year, we raised approximately $2.0 million from
the issuance of common stock and reduced our revolving line of credit by
approximately $1.9 million.
16
On August 29, 2003, we replaced our existing revolving line of credit with Fleet
Capital Corporation, under which we had been in default since December 31, 2002,
by entering into an agreement with a new lender, Silicon Valley Bank. The
agreement provides for a revolving line of credit of up to $2.5 million for one
year. The line is secured by substantially all of our assets, consisting
principally of our trade receivables and inventory. Concurrently with the
refinancing transaction, three funds affiliated with our directors purchased an
aggregate of 500,000 shares of our common stock at $0.60 per share. The proceeds
of the transaction were used to pay off our existing credit facility with Fleet
Capital Corporation and provide working capital to be used in executing our
business plans, including the expansion of our digital product line.
LIQUIDITY STATEMENT
In their audit report on our consolidated financial statements for the year
ended December 31, 2002, our independent auditors included an explanatory
paragraph which states "there is substantial doubt about the Company's ability
to continue as a going concern". This paragraph was included because we suffered
a substantial net loss from operations and were in violation of certain
financial covenants under our old revolving line of credit agreement, which, as
described above, was replaced by a new secured revolving line of credit in
August, 2003.
We believe existing cash funds combined with funds generated from operations as
well as funds derived from our recent private equity financing and available
under our new secured credit facility 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.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's future contractual
obligations for the next five years and in the aggregate as of September 30,
2003:
(IN THOUSANDS)
- ---------------------------------------- ------------ -------------------------------------------------------------
PAYMENTS DUE BY PERIOD ENDING SEPTEMBER 30:
- ---------------------------------------- ------------ -------------------------------------------------------------
TOTAL 2003 2004 2005 2006 2007
- ---------------------------------------- ------------ ---------- ------------ ------------- ------------ ----------
Future minimum lease commitments $ 702 $ 103 $ 410 $ 189 $ -- $ --
- ---------------------------------------- ------------ ---------- ------------ ------------- ------------ ----------
Convertible subordinate notes $ 3,150 $ -- $ 3,150 $ -- $ -- $ --
- ---------------------------------------- ------------ ---------- ------------ ------------- ------------ ----------
Revolving credit facility $ 1,759 $ 1,759 $ -- $ -- $ -- $ --
- ---------------------------------------- ------------ ---------- ------------ ------------- ------------ ----------
Standby letters of credit $ 21 $ 21 $ -- $ -- $ -- $ --
- ---------------------------------------- ------------ ---------- ------------ ------------- ------------ ----------
At September 30, 2003, the Company had approximately $500,000 of
borrowing availability under its new $2.5 million secured revolving line of
credit.
17
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 assumptions
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 $57 on gross trade
receivables of $2,811 at September 30, 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 September
30, 2003. Because the amount that the Company will actually collect on the
receivables outstanding as of September 30, 2003 cannot be known with certainty,
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 1% 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 2.0% 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.
As of September 30, 2003, there were no specific allowances.
The reserve for slow-moving, excess, or obsolete inventory was $2.8 million as
of September 30, 2003 compared to $2.6 million as of December 31, 2002. This
reserve is used to state our inventories at the lower of cost or market. Because
the amount of inventory that we will actually recoup through sales 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 to
determine the amount of the reserve. Generally, in evaluating our inventory, we
analyze its historical activity and classify it as having been active or
inactive. For raw material inventory with no activity, we reserve 85% of its
cost which takes into account a 15% scrap value while for finished goods
inventory with no activity we reserve 80% of its cost. For inventory with
activity, we review the average annual activity 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 consumption). We believe that 25% represents the value of excess
inventory we would not be able to recover due to new product introductions and
other technological advancements over the next seven years. As of September 30,
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
18
and nine months ended September 30, 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.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the safe-harbor created by such sections.
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 or advances in technology;
changes in business strategy; the debt and inventory levels of the Company;
quality of management, business abilities and judgment of the Company's
personnel; limitations in available radio spectrum for use of land mobile
radios; 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 for the fiscal
year ended December 31, 2002, as filed with the Securities and Exchange
Commission. 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.
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 a rate equal to 200 basis points over the prime
rate, provided that the interest in effect on any day shall not be less than
6.25% per annum.
The Company has both fixed and variable rate debt. The Company has $4.9 million
of debt outstanding as of September 30, 2003, of which $3.1 million, or 63.3%,
has been borrowed under subordinated convertible notes at a fixed rate of 8.0%
with maturity on December 31, 2004. The Company also has approximately $1.8
million of variable rate debt as of September 30, 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 may impact the fair value of the Company's fixed rate debt, but has no
impact on its interest expense incurred or cash flows. Interest rate changes on
variable debt impacts the interest expense 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 September 30, 2003, it is estimated that a 100 basis
point increase in interest rates on the Company's revolving line of credit would
result in approximately $18,000 in additional interest expense per year on its
line of credit. A 100 basis point decline would lower interest expense incurred
by approximately $18,000 per year.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, they have concluded that, as of the end of the period covered by
this report, our disclosure controls and procedures are reasonably designed to
alert them on a timely basis to material information relating to us required to
be included in our reports filed or submitted under the Securities Exchange Act.
CHANGES IN INTERNAL CONTROLS
There were no significant changes to our internal controls or, to our knowledge,
in other factors that could significantly affect our internal controls,
subsequent to the date of our Chief Executive Officer's and Chief Financial
Officer's latest evaluation of our internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to Note 11 to the Company's condensed consolidated financial
statements included elsewhere in this report for the information required by
this Item.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification Pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Item 601(b)(32) of Regulation S-K).
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Item 601(b)(32) of Regulation S-K).
(b) Reports on Form 8-K during the fiscal quarter ended September 30, 2003.
The registrant filed a report dated July 3, 2003 on Form 8-K on
July 16, 2003, reporting an Item 5 Event.
The registrant filed a report dated September 3, 2003 on Form 8-K
on September 5, 2003, reporting an Item 5 Event.
20
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
thereunto duly authorized.
RELM WIRELESS CORPORATION
(The "Registrant")
Date: November 5, 2003
By: /s/William P. Kelly
----------------------------
William P. Kelly
Executive Vice President and
Chief Financial Officer
(Principal financial and
accounting officer and duly
authorized officer)
21
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
31.1 Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation
S-K).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation
S-K).