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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 March 31, 2004
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 9,840,639 shares of common stock, $0.60 par value, of the
registrant outstanding at April 12, 2004.
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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)
March 31 December 31
2004 2003
------- -------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 1,921 $ 1,293
Trade accounts receivable (net of allowance for doubtful
accounts of $95 in 2004 and $61 in 2003) 2,721 2,880
Inventories, net 5,129 5,698
Prepaid expenses and other current 320 374
------- -------
Total current assets 10,091 10,245
Property, plant and equipment, net 1,402 1,468
Debt issuance costs, net 128 171
Other assets 333 345
------- -------
Total assets $11,954 $12,229
======= =======
See notes to condensed consolidated financial statements.
1
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data) (Unaudited)
March 31 December 31
2004 2003
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 2,950 $ 3,150
Accounts payable 1,126 891
Accrued compensation and related taxes 524 547
Accrued warranty expense 82 82
Accrued other expenses and other current liabilities 269 302
-------- --------
Total current liabilities 4,951 4,972
Long-term debt -- 1,272
Commitments and Contingencies
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:
9,828,474 and 9,073,085 issued and outstanding shares at
March 31, 2004 and December 31, 2003, respectively 5,896 5,443
Additional paid-in capital 21,707 21,482
Deficit (20,600) (20,940)
-------- --------
Total stockholders' equity 7,003 5,985
-------- --------
Total liabilities and stockholders' equity $ 11,954 $ 12,229
======== ========
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
March 31,
2004 2003
------- -------
(see note 1) (see note 1)
Sales $ 4,970 $ 3,596
Expenses
Cost of products 2,871 2,519
Selling, general & administrative 1,690 1,366
------- -------
4,561 3,885
------- -------
Operating income (loss) 409 (289)
Other income (expense):
Interest expense (78) (103)
Other income 9 15
------- -------
Net income (loss) $ 340 $ (377)
======= =======
Earnings (loss) per share-basic $ 0.04 $ (0.04)
======= =======
Earnings (loss) per share-diluted $ 0.03 $ (0.04)
======= =======
See notes to condensed consolidated financial statements.
3
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Three Months Ended
March 31,
2004 2003
------- -------
Cash flows from operating activities
Net income (loss) $ 340 $ (377)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Allowance for doubtful accounts 34 (1)
Depreciation and amortization 160 167
Change in operating assets and liabilities:
Accounts receivable 125 (480)
Inventories 569 388
Accounts payable 235 (497)
Prepaid expenses and other current 50 --
Other assets 12 (11)
Accrued compensation and related taxes (23) 49
Accrued other expenses and other current liabilities (33) (26)
------- -------
Cash provided by (used in) operating activities 1,469 (788)
Cash flows from investing activities
Purchases of property and equipment (51) (6)
Collections on notes receivable 4 --
------- -------
Cash used in investing activities (47) (6)
Cash flows from financing activities
Proceeds from issuance of common stock 478 11
Net borrowings (payments) in revolving credit lines (1,272) 300
------- -------
Cash provided by (used in) financing activities (794) 311
------- -------
Increase (decrease) in cash 628 (483)
Cash and cash equivalents, beginning of period 1,293 1,631
------- -------
Cash and cash equivalents, end of period $ 1,921 $ 1,148
======= =======
Supplemental disclosure
Interest paid $ 78 $ 103
======= =======
Non-cash transaction
Convertible debt exchanged for common stock $ 200 --
======= =======
See notes to condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of March 31, 2004, the condensed
consolidated statements of operations for the three months ended March 31, 2004
and 2003 and the condensed consolidated statements of cash flows for the three
months ended March 31, 2004 and 2003 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, 2003 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 Annual Report on Form 10-K for the year ended December 31, 2003.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the operating results for a full year.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
As of April 12, 2004, 467,448 shares of common stock had been issued during 2004
due to the exercise of common stock purchase warrants, generating approximately
$466,000 in net proceeds. There were 2,982,859 stock purchase warrants
outstanding as of April 12, 2004. The exercise of all these warrants would
generate approximately $2.9 million in net proceeds. The exercise price of the
common stock purchase warrants was reduced to a share price of $1.05 from $1.08
as a result of the issuance in 2003 of common stock related to our new credit
facility and anti-dilution provisions contained in the warrants. Additionally,
we may redeem the common stock purchase warrants at $0.10 each when the market
price of our common stock exceeds 150% of the exercise price ($1.575) for 20
consecutive trading days. The price of our common stock currently meets this
criterion and we can redeem the warrants, if we elect to do so.
On March 5, 2004, 169,057 shares of common stock and 169,057 of the Company's
public stock purchase warrants were issued to Noble International Investments,
Incorporated (Noble) as a result of the cashless exercise of 187,500
underwriter's warrants for "units." A unit is comprised of one share of common
stock and one warrant to purchase one share of common stock, exercisable at
$1.05 per share any time until February 11, 2006. Noble received the warrants
for serving as the standby underwriter for the Company's public rights offering
in March 2002.
During the three months ended March 31, 2004, certain of the Company's
subordinated convertible notes were converted into 106,384 shares of common
stock. As a result of the conversions, the total amount due under the notes was
5
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
reduced by approximately $0.2 million. The remaining outstanding notes total
approximately $2.9 million and are convertible into approximately 1.6 million
shares of common stock. The notes mature on December 31, 2004. Upon maturity the
notes must be repaid or converted into shares of common stock. The decision
regarding repayment or conversion is at the option of the note holder unless the
market price of our common stock exceeds $6.50 per share for 30 consecutive
trading days, at which time the Company could convert the notes into shares of
common stock or repay them.
In February 2004, the Company's credit facility was increased by $1 million, to
$3.5 million, and the maturity date was extended to January 1, 2005. The
facility was originally established on August 29, 2003 and provided 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 trade
receivables and inventory. The credit agreement contains certain covenants with
which the Company must comply. As of March 31, 2004, the Company was in
compliance with all such covenants and the outstanding balance of the credit
facility was $0.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $95 on gross trade
receivables of $2,816 at March 31, 2004. 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, 2004.
Because the amount that the Company will actually collect on the receivables
outstanding as of March 31, 2004 cannot be known with certainty, the Company
relies on prior experience. The Company's historical collection losses have
typically been infrequent with write-offs of trade receivables being less than
1% of sales. The Company maintains a general allowance of approximately 1% to 5%
of the gross trade receivables 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 3.4% of gross trade receivables. The Company may also
maintain 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
may reserve a portion or all of the customer's balance. As of March 31, 2004,
there was a specific allowance of approximately $36.
6
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
4. INVENTORIES
The components of inventory, net of reserves totaling $2,802 at March 31, 2004
and December 31, 2003, respectively, consist of the following:
March 31 December 31
2004 2003
------ ------
Finished goods $2,881 $3,052
Work in process 576 743
Raw materials 1,672 1,903
------ ------
$5,129 $5,698
====== ======
The reserve for slow-moving, excess, or obsolete inventory 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 March 31, 2004 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 analyzing inventory, the
Company classifies it as having been used or unused during the past year. For
raw material inventory with no usage in the past year, the Company reserves 85%
of its cost which takes into account a 15% scrap value while for finished goods
inventory with no usage in the past year the Company reserves 80% of its cost.
For inventory with usage in the past year, the Company reviews the average
annual usage over the past three years, projects that amount over the next five
years, and then reserves 25% of the excess amount (in which the excess amount
equals inventory on hand less a five year projected usage amount). 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 five years. As of March 31, 2004, 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, 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. CONVERTIBLE SUBORDINATED NOTES
The Company privately placed convertible subordinated notes on March 16, 2000.
During the three months ended March 31, 2004, certain of the notes were
converted into 106,384 shares of common stock. As a result of the conversions,
the total amount due under the notes was reduced by $200. The remaining
7
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
outstanding notes total $2,950 and are convertible into approximately 1.6
million shares of common stock. The notes mature on December 31, 2004. Upon
maturity the notes must be repaid or converted into shares of common stock. The
decision regarding repayment or conversion is at the option of the note holder
unless the market price of our common stock exceeds $6.50 per share for 30
consecutive trading days, at which time the Company could convert the notes into
common stock or repay them. 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 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
March 31, 2004.
6. INCOME TAXES
No tax provision has been recorded during the three months ended March 31, 2004
because the Company anticipates applying federal and state net operating loss
carryforwards against year-to-date taxable income.
The Company has federal and state net operating loss carryforward benefits of
approximately $33,506 and $17,524, respectively, at March 31, 2004. These net
operating loss carryforwards begin to expire in 2010.
In accordance with SFAS Statement No. 109, Accounting for Income Taxes,
valuation allowances are provided against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The Company has evaluated its deferred
tax assets and does not believe that it has met the criteria for realizing their
value; therefore, it has established a valuation allowance for the entire amount
of its deferred tax assets, approximately $13 million, at March 31, 2004. The
federal and state net operating loss carryforwards could be subject to
limitation if, within any three year period prior to the expiration of the
applicable carryforward period, there is a greater than 50% change in ownership
of RELM.
7. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the three months ended
March 31, 2004 are as follows:
8
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
7. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the three months ended
March 31, 2004 are as follows:
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- --------- --------- --------- ---------
Balance at December 31, 2003 9,073,085 $ 5,443 $ 21,482 $ (20,940) $ 5,985
Common stock option exercise 12,500 8 4 -- 12
Common stock warrant exercise 636,505 381 85 -- 466
Note conversion 106,384 64 136 -- 200
Net income -- -- -- 340 340
--------- --------- --------- --------- ---------
Balance at March 31, 2004 9,828,474 $ 5,896 $ 21,707 $ (20,600) $ 7,003
========= ========= ========= ========= =========
9
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
8. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended
March 31,
2004 2003
----------- -----------
Numerator:
Net income (loss) (numerator for basic and $ 340 $ (377)
diluted earnings (loss) per share)
Denominator:
Denominator for basic and diluted earnings per share
weighted average shares 9,301,226 8,552,033
Effect of dilutive securities:
Options 528,285 --
Warrants 1,755,197 --
Convertible notes 530,135 --
----------- -----------
Denominator for diluted earnings per share- 12,114,843 8,552,033
adjusted weighted average shares
=========== ===========
Basic earnings (loss) per share $ 0.04 $ (0.04)
=========== ===========
=========== ===========
Diluted earnings (loss) per share $ 0.03 $ (0.04)
=========== ===========
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
Stock-Based Compensation & Financial Accounting Standard (FAS) 148 "Accounting
for Stock Based Corporation, Transition and Disclosure, an amendment of FASB
Statement No. 123."
10
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
The Company's net earnings (loss) and net earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
Three Months Ended
March 31,
2004 2003
-------- -------
Net income (loss) as reported $ 340 $(377)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (22) (109)
Pro forma net income (loss) $ 318 $ (486)
======== =======
Basic earnings (loss) per share:
As reported $ 0.04 $(0.04)
======== =======
Pro forma $ 0.03 $(0.06)
======== =======
Diluted earnings (loss) per share:
As reported $ 0.03 $(0.04)
======== =======
Pro forma $ 0.03 $(0.06)
======== =======
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.
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 2003 and 2004, respectively: risk-free interest
rates of 4.76% and 2.88%; dividend yields of 0%; volatility factors of the
expected market price of the common stock of 96.7% and 108.8%; and a
weighted-average expected life of the option of four years.
10. CONTINGENT LIABILITIES
From time to time, the Company may become liable with respect to pending and
threatened litigation, tax, environmental and other matters.
11
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
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. The lone remaining claim sought
damages against us for non-payment of the note. We contended that this note was
canceled and released for fair consideration in 1993 and that there was no basis
in law or fact for the liquidator's claim. On March 1, 2004, we reached a
settlement agreement. Under the terms of the settlement, we will pay to the
plaintiff cash totaling $120,000 and issue 6,452 shares of restricted common
stock valued at the closing price on March 1, 2004. Consequently, we recognized
a one-time charge of $140,000 in the fourth quarter 2003. The settlement is
subject to the execution by both parties of a written agreement and release.
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, one
indemnification claim is pending against us. 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. We
have insurance coverage for these matters. The initial case was settled in
February 2004 by the insurance companies involved, including ours. We did not
incur any costs or liabilities related to the settlement. Counsel for our
insurer is continuing to vigorously defend the remaining claim. Counsel believes
we have meritorious defenses and the likelihood of an unfavorable outcome is
remote.
The Company is involved in various claims and legal actions arising in the
ordinary course of its business. For a description of other pending legal
proceedings, reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 2003. It is the opinion of management that the
ultimate disposition of these matters would not have a material effect upon the
Company's consolidated financial position or results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations to our
security holders and to the public. This report, therefore, contains statements
about future events and expectations which are "forward-looking statements"
within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the
Securities Exchange Act of 1934, including the statements about our plans,
objectives, expectations and prospects under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." You
can expect to identify these statements by forward-looking words such as "may,"
"might," "could," "would," "anticipate," "believe," "plan," "estimate,"
"project," "expect," "intend," "seek" and other similar expressions. Any
statement contained in this report that is not a statement of historical fact
may be deemed to be a forward-looking statement. Although we believe that the
plans, objectives, expectations and prospects reflected in or suggested by our
forward-looking statements are reasonable, those statements involve risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements, and we
can give no assurance that our plans, objectives, expectations and prospects
will be achieved.
Important factors that might cause our actual results to differ materially from
the results contemplated by the forward-looking statements are contained in the
"Risk Factors" section of and elsewhere in our Annual Report on Form 10-K for
the year ended December 31, 2003 and in our future filings with the Securities
and Exchange Commission, and include, among others, the following:
|X| substantial losses incurred by us prior to 2003;
|X| changes in customer preferences;
|X| our inventory and debt levels;
|X| heavy reliance on sales to the U.S. Government;
|X| federal, state and local government budget deficits and
spending limitations;
|X| quality of management, business abilities and judgment of our
personnel;
|X| the availability, terms and deployment of capital;
|X| competition in the land mobile radio industry;
|X| reliance on overseas manufacturers;
|X| limitations in available radio spectrum for use of land mobile
radios;
|X| changes or advances in technology; and
|X| general economic and business conditions.
We assume no obligation to publicly update or revise any forward-looking
statements made in this report, whether as a result of new information, future
events, changes in assumptions or otherwise, after the date of this report.
13
EXECUTIVE SUMMARY
Our operating results for the three months ended March 31, 2004 improved
significantly compared to the same period last year, with sales increasing by
approximately 38% and gross margin percentage improving by approximately 41%.
Net income for the period was $340,000 ($0.03 per diluted share) compared to a
net loss of $377,000 ($0.04 per diluted share) for the same period last year.
Sales growth during the first quarter compared to the same period last year was
primarily the result of orders for new products, including our digital Project
25-compliant portable radio used by government and public-safety agencies, and
analog radios targeting commercial and industrial applications. The growth is
being realized from a steady increase in customer orders, rather than from a few
large orders. The improved volume of customer orders has been broad-based, with
much of it coming from new customers and customers that are returning after
several years. More new product additions are planned for later this year and
next year.
Gross margins improved as we continued to expand our use of contract
manufacturers, successfully reducing manufacturing support costs while improving
manufacturing efficiencies and inventory management. Also, our new products
incorporate recent, more cost-effective product designs.
Selling, general and administrative ("SG&A") expenses increased as a result of
sales increases, and additional expenses were incurred for sales and marketing
initiatives designed to drive sales growth, particularly from new digital and
commercial products. We also increased product development staff and expenses to
speed the completion and introduction of new products, including additional
Project-25 digital products.
During the quarter, additional cash totaling approximately $466,000 was
generated from the exercise of our public stock purchase warrants. We issued
467,448 shares of common stock associated with the warrant exercises. Also,
certain of our subordinated convertible notes were converted into common stock
during the quarter, reducing the amount due on the notes by $200,000 to $2.9
million.
In February 2004, our primary lender increased our revolving line of credit by
$1 million and extended the maturity date to January 1, 2005.
14
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
2004 2003
-------- -------
Sales 100.0% 100.0%
Cost of sales 57.8 70.0
Gross margin 42.2 30.0
Selling, general and
administrative expenses (34.0) (38.0)
Interest expense (1.6) (2.9)
Other income 0.2 0.4
----- ------
Net income (loss) 6.8% (10.5%)
===== ======
NET SALES
Net sales for the three months ended March 31, 2004 increased approximately $1.4
million (38.2%) to approximately $5.0 million from approximately $3.6 million
for the same period last year.
This increase is attributed primarily to sales of new products, including BK
Radio-brand digital products that are compliant with the APCO Project 25
standard and sold principally to agencies of federal, state and local
governments, as well as sales of RELM-brand products sold to business and
commercial concerns. These products were introduced at various times during
2003. Increases in new product sales were partially offset by decreased sales of
analog products as customers migrated to newer, more feature-rich products, in
some cases with digital technology.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of sales for the three months ended March 31, 2004
decreased to 57.8% from 70.0% for the same period last year. We have continued
to expand our use of contract manufacturers. All of our products are now largely
manufactured using such resources. Our contract manufacturing relationships have
helped improve our production efficiencies and reduce material and labor costs.
They have also enabled us to reduce internal manufacturing support expenses.
Increased sales volumes have enabled us to more fully utilize and absorb the
reduced base of manufacturing support expenses. As volumes increase, we believe
additional efficiencies and cost reductions can be realized.
We continuously evaluate manufacturing alternatives to improve quality and
reduce our product costs. We anticipate that the current contract manufacturing
relationships or comparable alternatives will be available to us in the future.
15
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 March 31, 2004,
SG&A expenses totaled approximately $1.7 million (34.0% of sales) compared to
approximately $1.4 million (38.0% 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. Sales commission expenses increased by
approximately $57,000 (27.4%) as a result of revenue increases. We also incurred
approximately $131,000 of additional expenses, a 40.7% increase compared to the
same period last year, for sales and marketing initiatives designed to drive
revenue growth, particularly from new digital and commercial products. A
collection allowance of approximately $36,000 related to a specific customer
receivable was established during the quarter. General and administrative
expenses increased approximately $67,000 (15.3%) related primarily to certain
outside professional services.
Product development staff and expenses increased by approximately $31,000 (9.0%)
in order to speed the completion and introduction of new products, including
additional APCO Project-25 digital products. Bringing such products to market
and achieving a significant share of the market will continue to require
substantial investment to complete development and to achieve market
penetration. Our internal development efforts are focused entirely on our
digital product development program. This project is planned to yield
approximately 17 products through 2005. We anticipate that these products will
be the main source of revenue growth in the future.
OPERATING INCOME (LOSS)
Operating income for the three months ended March 31, 2004 was approximately
$409,000 compared to an operating loss of approximately ($289,000) for the same
period last year.
INTEREST EXPENSE
For the three months ended March 31, 2004, interest expense decreased by
approximately $25,000 (24.3%) to $78,000 from $103,000 in 2003. We incur
interest expense on our revolving line of credit and our subordinated
convertible notes. The interest rate on our revolving line of credit is variable
and will fluctuate with the prime lending rate. The interest rate on the
convertible notes is 8% per annum. The effective interest rate on our current
revolving line of credit, which was established in August 2003, was lower
compared to the effective interest rate on the previous credit facility that was
in place during the same period last year. Also, primarily as a result of
improved operations, the outstanding principal balance on the revolving line of
credit was lower during the three months ended March 31, 2004 compared to the
same period last year.
INCOME TAXES
No income tax provision was provided for the three months ended March 31, 2004.
We have federal and state net operating loss carryforward benefits of
approximately $33,506 and $17,524, respectively, at March 31, 2004. These net
operating loss carryforwards begin to expire in 2010.
16
In accordance with SFAS Statement No. 109, Accounting for Income Taxes,
valuation allowances are provided against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. We have evaluated the realizability of
the deferred tax assets on our balance sheet and do not believe that we have met
the more likely than not criteria; therefore we have established a valuation
allowance against our net deferred tax assets at March 31, 2004. The federal and
state net operating loss carryforwards could be subject to limitation if, within
any three year period prior to the expiration of the applicable carryforward
period, there is a greater than 50% change in ownership of RELM.
SIGNIFICANT CUSTOMERS
Sales to the United States government represented approximately $2.3 million
(46.4%) of our total revenues for the three months ended March 31, 2004,
compared to approximately $1.5 million (40.7%) for the same period last year.
These sales were primarily to the United States Forest Service (USFS) and the
Unites States Department of the Interior.
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three months ended March 31, 2004 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 utilize low-cost contract
manufacturers.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2004, net cash provided by operating
activities totaled approximately $1.5 million compared to net cash used in
operating activities of approximately $0.8 million for the same period last
year. The increase in cash provided by operations is primarily attributable to
net income for the quarter of approximately $340,000 compared to a net loss of
approximately, ($377,000), for the same period last year. Changes in components
of working capital, particularly inventory, accounts payable and accounts
receivable, also contributed to cash provided by operations.
Inventory decreased by approximately $569,000 as a result of improved revenues
from items in existing inventory compared to an inventory reduction of
approximately $388,000 during the same period last year. Accounts payable
increased approximately $235,000, compared to a reduction of approximately
$497,000 for the same period last year, as we were increasingly successful in
obtaining favorable payment terms from certain suppliers. Collections of amounts
due from customers during the quarter resulted in a decrease in accounts
receivable of approximately $125,000, compared to an increase of approximately
$480,000 for the same period last year. Depreciation and amortization totaled
approximately $160,000 for the quarter, compared to approximately $167,000 for
the same period last year.
17
Cash used in investing activities was primarily to fund the acquisition of
equipment pertaining to our development and manufacture of new digital products.
Capital expenditures for the three months ended March 31, 2004 were
approximately $51,000 compared to approximately $6,000 for the same period last
year. No major capital expenditures are planned for the remainder of 2004. We
anticipate that future capital expenditures will be funded through existing cash
balances, operating cash flow and our revolving line of credit.
Net cash totaling approximately $794,000 was used in financing activities for
the three months ended March 31, 2004, compared to approximately $311,000
provided by financing activities during the same period last year. During the
quarter, we paid down our revolving line of credit by approximately $1.3
million. During the same period last year, we borrowed approximately $300,000
from our revolving line of credit. For the three months ended March 31, 2004, we
received approximately $478,000 in cash proceeds primarily from the exercise of
stock purchase warrants.
In August, 2003, we established a revolving line of credit with a new lender.
The credit 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. Concurrent 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 previous revolving credit
facility and to provide working capital for use in executing our business plans,
including the expansion of our digital product line. The credit agreement
contains certain covenants with which we must comply. As of March 31, 2004, we
were in compliance with all such covenants. In February 2004, our lender
increased the credit facility by $1 million and the maturity date was extended
to January 1, 2005. We have approximately $2.7 million in available unused
credit on the facility as of March 31, 2004.
As of April 12, 2004, 467,448 shares of common stock had been issued during 2004
due to the exercise of common stock purchase warrants, generating approximately
$466,000 in net proceeds. There were 2,982,859 stock purchase warrants
outstanding as of April 12, 2004. The exercise of all these warrants would
generate approximately $2.9 million in net proceeds. The exercise price of the
common stock purchase warrants was reduced to a share price of $1.05 from $1.08
as a result of the issuance in 2003 of common stock related to our new credit
facility and anti-dilution provisions contained in the warrants. Additionally,
we may redeem the common stock purchase warrants at $0.10 each when the market
price of our common stock exceeds 150% of the exercise price ($1.575) for 20
consecutive trading days. The price of our common stock currently meets this
criterion and we can redeem the warrants, if we elect to do so.
During the three months ended March 31, 2004, certain of our subordinated
convertible notes were converted into 106,384 shares of common stock. As a
result of the conversions, the total amount due under the notes was reduced by
approximately $0.2 million. The remaining outstanding notes total approximately
$2.9 million and are convertible into approximately 1.6 million shares of common
stock. The notes mature on December 31, 2004. Upon maturity the notes must be
repaid or converted into shares of common stock. The decision regarding
repayment or conversion is at the option of the note holder unless the market
price of our common stock exceeds $6.50 per share for 30 consecutive trading
days, at which time we could convert the notes into shares of common stock or
repay them. Although we cannot be certain if the notes will be converted or
repaid, we believe that there is a reasonable prospect that the notes may be
converted. If the notes must be repaid, we believe that we will be able to do so
by using cash generated from operations, the exercise of warrants, and our
credit facility, as well as existing cash funds.
18
Our cash balance at March 31, 2004 was approximately $1.9 million. We believe
these funds combined with cash generated from operations and amounts available
from our credit facility are sufficient to meet our current working capital
requirements for the next twelve months. If sales volume 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 March 31, 2004:
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD ENDING MARCH 31:
- -------------------------------------------------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008
- -------------------------------------------------------------------------------------------------------------------
Future minimum lease commitments $ 435 $ 326 $ 213 $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Convertible subordinate notes $ 2,950 $2,950 $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Revolving credit facility $ -- $ - $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Standby letters of credit $ 48 $ 48 $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Purchase orders $ 2,543 $2,543 $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
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 for
disclosure our revenue recognition process and our more subjective accounting
estimation processes. These processes affect our reported revenues and current
assets and are therefore critical in assessing the financial and operation
status of the Company. The processes for determining the allowance for
collection of trade receivables and the reserves for excess or obsolete
inventory involve certain assumptions that if incorrect could create an adverse
impact on the Company's operations and financial position.
Revenue
- -------
Revenues are recognized when the earnings process is complete and collection is
reasonably assured. The earnings process is generally complete when the product
is shipped, or received by the customer, depending upon whether the title to the
goods, as well as the risks and benefits of ownership are transferred to the
customer at point of shipment or point of delivery. We periodically review our
revenue recognition procedures to assure that such procedures are in accordance
with accounting principles generally accepted in the United States.
19
Allowance For Collection Losses
- -------------------------------
The allowance for collection losses was approximately $95,000 on gross trade
receivables of approximately $2.8 million as of March 31, 2004. This allowance
is used to state trade receivables at a net realizable value or the amount that
we estimate will be collected on our gross receivables as of March 31, 2004.
Because the amount that we will actually collect on the receivables outstanding
as of March 31, 2004 cannot be known with certainty, we rely on prior
experience. Our historical collection losses have typically been infrequent with
write-offs of trade receivables being less than 1% of sales. We maintain a
general allowance of approximately 1% to 5% of the gross trade receivables
balance in order to allow for future collection losses that arise from customer
accounts that do not indicate the inability to pay but turn out to have such an
inability. Currently, our allowance on trade receivables is 3.4% of gross
receivables. We may also maintain a specific allowance for customer accounts
that we anticipate may not be collectible for various reasons such as bankruptcy
and other liquidity issues. We analyze the trade receivable portfolio based on
the age of each customer's invoice. In this way, we can identify those accounts
that are more likely than not to have collection problems. Based on this
analysis, we may reserve a portion or all of a particular customer's balance. As
of March 31, 2004, there was a specific allowance of approximately $36,000. We
believe that revenues and total receivables will increase during 2004, and
accordingly, we may experience an increase in this allowance balance.
Inventory Reserve
- -----------------
The reserve for slow-moving, excess, or obsolete inventory was $2.8 million at
March 31, 2004 and December 31, 2003. The reserve for excess or obsolete
inventory 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 of
our inventory as of March 31, 2004 cannot be known with certainty, we rely on
past sales experience, future sales forecasts, and our strategic business plans.
Generally, in analyzing our inventory levels, we classify inventory as having
been used or unused during the past year. For raw material inventory with no
usage in the past year, we reserve 85% of its cost which takes into account a
15% scrap value while for finished goods inventory with no usage in the past
year we reserve 80% of its costs. For inventory with usage in the past year, we
review the average annual usage over the past three years, project that amount
over the next five years, and then reserve 25% of the excess amount (in which
the excess amount equals inventory on hand less a five year projected usage
amount). We believe that 25% represents the value of excess inventory we would
not be able to recover due to our new product introductions and other
technological advancements over the next five years. As of March 31, 2004, 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, 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.
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 credit facility. The lender
presently charges interest at 2.00% over the prime rate.
Our primary exposure to market risk is to changes in interest rates. We have
both fixed and variable rate debt. We have approximately $3.0 million of debt
outstanding as of March 31, 2004. All of this amount has been borrowed at a
fixed rate of 8.0% with a maturity of December 2004. We have no variable rate
debt under our revolving line of credit as of March 31, 2004. As debt
instruments mature, we refinance such debt at the 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 our debt portfolio. A change in interest rates impacts the net
market value of our fixed rate debt, but has no impact on interest incurred or
cash flows on our fixed rate debt. 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.
20
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 March 31,
2004. Based on this evaluation, they have concluded that, as of March 31, 2004,
our disclosure controls and procedures are reasonably designed and effective 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, at the
date of our Chief Executive Officer's and Chief Financial Officer's last
evaluation of our internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
21
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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
During the three months ended March 31, 2004, we issued 106,384 shares of our
common stock as a result of the cashless conversion of approximately $0.2
million aggregate principal amount of our outstanding subordinated convertible
notes. We issued these shares in reliance on Section 4(2) of the Securities Act
of 1933, as amended.
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 March 31,
2004.
The registrant filed a report dated February 24, 2004 on Form 8-K
on February 27, 2004, reporting an Item 5 Event and an Item 12
Event (which Item 12 was furnished).
The registrant filed a report dated March 10, 2004 on Form 8-K on
March 12, 2004, reporting an Item 5 Event.
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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: April 27, 2004
By: /s/William P. Kelly
-------------------------------------
William P. Kelly
Executive Vice President and
Chief Financial Officer
(Principal financial and accounting
officer and duly authorized officer)
EXHIBIT INDEX
-------------
EXHIBIT DESCRIPTION
NUMBER -----------
- ------
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).