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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, 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 12,865,671 shares of common stock, $0.60 par value, of the
registrant outstanding at October 15, 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)
SEPTEMBER 30 December 31
2004 2003
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,232 $ 1,293
Trade accounts receivable (net of allowance for doubtful
accounts of $92 in 2004 and $61 in 2003) 3,354 2,880
Inventories, net 4,930 5,698
Prepaid expenses and other current assets 250 374
------- -------
Total current assets 13,766 10,245
Property, plant and equipment, net 1,324 1,468
Debt issuance costs, net 43 171
Other assets 294 345
------- -------
Total assets $15,427 $12,229
======= =======
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
2004 2003
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 2,950 $ 3,150
Accounts payable 738 891
Accrued compensation and related taxes 513 547
Accrued warranty expense 104 82
Accrued other expenses and other current liabilities 323 302
-------- --------
Total current liabilities 4,628 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:
12,865,496 and 9,073,085 issued and outstanding shares at
September 30, 2004 and December 31, 2003, respectively 7,719 5,443
Additional paid-in capital 22,778 21,482
Accumulated Deficit (19,698) (20,940)
-------- --------
Total stockholders' equity 10,799 5,985
-------- --------
Total liabilities and stockholders' equity $ 15,427 $ 12,229
======== ========
See notes to condensed consolidated financial statements.
2
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -------------------------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
(SEE NOTE 1) (see note 1) (SEE NOTE 1) (see note 1)
Sales $ 5,186 $ 5,000 $ 15,104 $ 13,827
Expenses
Cost of products 2,758 3,009 8,242 8,994
Selling, general & administrative 1,847 1,593 5,412 4,505
------- -------- -------- --------
4,605 4,602 13,654 13,499
------- -------- -------- --------
Operating income 581 398 1,450 328
Other income (expense):
Interest expense (77) (115) (222) (338)
Other income (2) 8 14 46
------- -------- -------- --------
Net income $ 502 $ 291 $ 1,242 $ 36
======= ======== ======== ========
Earnings per share-basic $ 0.04 $ 0.03 $ 0.11 $ 0.00
======= ======== ======== ========
Earnings per share-diluted $ 0.04 $ 0.03 $ 0.11 $ 0.00
======= ======== ======== ========
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
2004 2003
------------ ------------
(SEE NOTE 1) (see note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,242 $ 36
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Allowance for doubtful accounts 32 (12)
Inventories reserve 64 150
Depreciation and amortization 494 501
Change in current assets and liabilities:
Accounts receivable (506) (1,977)
Inventories 704 1,315
Accounts payable (153) (650)
Prepaid expense and other current 124 (67)
Other assets 51 (297)
Accrued compensation and related taxes (34) 28
Accrued warranty expense 22 (2)
Accrued other expenses and other current liabilities 21 193
------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,061 (782)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (222) (101)
------- -------
CASH USED IN INVESTING ACTIVITIES (222) (101)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) in revolving credit lines (1,272) (212)
Proceeds from issuance of common stock 3,372 311
------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 2,100 99
Increase (decrease) in cash and cash equivalents 3,939 (784)
Cash and cash equivalents, beginning of period 1,293 1,631
------- -------
Cash and cash equivalents, end of period $ 5,232 $ 847
======= =======
SUPPLEMENTAL DISCLOSURE
Interest paid $ 222 $ 338
======= =======
NON-CASH FINANCING ACTIVITY
Conversion of notes to stockholders' equity $ 200 $ --
======= =======
See notes to condensed consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of September 30, 2004, the condensed
consolidated statements of income for the three and nine months ended September
30, 2004 and 2003 and the condensed consolidated statements of cash flows for
the nine months ended September 30, 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 and nine months ended September 30, 2004
are not necessarily indicative of the operating results for a full year.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
During the three months ended September 30, 2004, the Company's operations in
Florida were impacted by three hurricanes. There was no significant damage to
the Company's Florida facility or its contents. Because of storm-related power
outages and staff absences, however, manufacturing operations were impaired for
all or part of nine business days, which reduced the amount of product shipments
for the period. The amount by which shipments were reduced cannot be quantified
with any degree of certainty. It is anticipated that orders not shipped due to
disruption from the hurricanes will be shipped during the fourth quarter 2004.
Backup means of communication were operational shortly after each hurricane.
Accordingly, the Company does not believe there was a significant impact on the
receipt of customer orders.
In October 2004, our revolving line of credit was extended until January 2007.
Also, certain terms and conditions of the credit agreement were modified, which
will reduce related costs and ease reporting requirements. The original
agreement of August 2003 provided a $2.5 million revolving line of credit for
one year, secured by substantially all of the Company's assets, principally
trade receivables and inventory. Earlier in 2004, the facility's term was
extended to January 2005 from August 2004 and its credit limit was increased
from $2.5 million to $3.5 million.
5
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was approximately $92
on gross trade receivables of $3,446 at September 30, 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
September 30, 2004. Because the amount that the Company will actually collect on
the receivables outstanding as of September 30, 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 an inability to pay but turn out to have such an inability.
Currently, the Company's allowance on trade receivables is approximately 3% 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 a
particular customer's balance.
4. INVENTORIES
The components of inventory, net of reserves totaling $2,866 at September 30,
2004 and $2,802 at December 31, 2003, respectively, consist of the following:
SEPTEMBER 30 December
2004 2003
------ ------
Finished goods $2,241 $3,052
Work in process 549 743
Raw materials 2,140 1,903
------ ------
$4,930 $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 September 30, 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%
6
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
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.
5. CONVERTIBLE SUBORDINATED NOTES
The Company privately placed convertible subordinated notes on March 16, 2000.
During the nine months ended September 30, 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
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 noteholder
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 noteholders
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 is the effective conversion price as of September 30,
2004.
6. INCOME TAXES
No tax provision has been recorded during the three and nine months ended
September 30, 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 $32,264 and $16,282, respectively, at September 30, 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
7
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
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 $13,000, at September 30, 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 the Company.
7. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the nine months ended
September 30, 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 3,673,527 2,204 1,156 -- 3,360
Note conversion 106,384 64 136 -- 200
Net income -- -- -- 1,242 1,242
---------- ------ ------- -------- -------
Balance at September 30, 2004 12,865,496 $7,719 $22,778 $(19,698) $10,799
========== ====== ======= ======== =======
8
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Net income (numerator for basic and
diluted earnings per share) $ 502 $ 291 $ 1,242 $ 36
----------- ---------- ----------- ----------
Denominator:
Denominator for basic earnings per share
weighted average shares 12,864,715 8,703,977 11,114,553 8,607,032
Effect of dilutive securities:
Options 449,150 51,145 510,513 51,145
Warrants 48,399 136,437 144,421 136,437
Denominator:
Denominator for diluted earnings per share
weighted average shares 13,362,264 8,891,559 11,769,487 8,794,614
Basic earnings per share $ 0.04 $ 0.03 $ 0.11 $ 0.00
=========== ========== =========== ==========
Diluted earnings per share $ 0.04 $ 0.03 $ 0.11 $ 0.00
=========== ========== =========== ==========
A total of 1,569,148 shares related to convertible debt are not included in the
computation of earnings per share for the three and nine months ended September
30, 2004, respectively; and a total of 7,269,424 shares related to options,
warrants and convertible debt are not included in the computation of earnings
per share for the three and nine months ended September, 2003, respectively,
because the exercise prices of these securities exceeded the average market
price for the Company's common stock for the periods.
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
9
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
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," the Company's net earnings and net earnings per share would
have been reduced to the pro forma amounts indicated below:
September 30, September 30,
--------------------- ------------------------
2004 2003 2004 2003
----- ----- ------- ------
Net income as reported $ 502 $ 291 $ 1,242 $ 36
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (34) (20) (89) (93)
Pro forma net income (loss) $ 468 $ 271 $ 1,153 $ (57)
===== ===== ======= ======
Basic and diluted income (loss) per share:
As reported $0.04 $0.03 $ 0.11 $ 0.00
===== ===== ======= ======
Pro forma $0.04 $0.03 $ 0.11 $(0.01)
===== ===== ======= ======
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 4.625% and 2.75%; dividend yields of 0%; volatility factors of the
expected market price of the common stock of 99.3% and 108.8%; and a
weighted-average expected life of the option of four years.
10
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
10. COMMITMENTS AND CONTINGENCIES
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. The lone remaining claim sought
damages against the Company for non-payment of the note. The Company 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,
the Company and plaintiff reached a settlement agreement. Under the terms of the
settlement, the Company 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, the Company recognized a one-time charge of
$140,000 in the fourth quarter 2003. A written settlement agreement and release
was executed by both parties on August 24, 2004. In accordance with the
agreement, on August 24, 2004 the Company paid $60,000 in cash, and on October
20, 2004 issued the shares. The remaining cash payment will be made in December
2004.
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 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 our former
specialty-manufacturing subsidiary are named defendants in these lawsuits. The
Company has insurance coverage for these matters. The initial case was settled
in February 2004 by the insurance companies involved, including the Company. The
Company did not incur any costs or liabilities related to the settlement.
Counsel for the Company's insurer is continuing to vigorously defend the
remaining claim. Counsel believes the Company has meritorious defenses and the
likelihood of an unfavorable outcome is remote.
11
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
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.
OTHER
As of September 30, 2004, the Company has commitments for purchase orders of
approximately $1,781.
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 subsequent filings with the
Securities and Exchange Commission, and include, among others, the following:
[ ] substantial losses incurred by us prior to 2003;
[ ] changes in customer preferences;
[ ] our inventory and debt levels;
[ ] heavy reliance on sales to the U.S. Government;
[ ] federal, state and local government budget deficits and
spending limitations;
[ ] quality of management, business abilities and judgment of our
personnel;
[ ] the availability, terms and deployment of capital;
[ ] competition in the land mobile radio industry;
[ ] reliance on overseas manufacturers;
[ ] limitations in available radio spectrum for use of land mobile
radios;
[ ] changes or advances in technology; and
[ ] general economic and business conditions.
13
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.
EXECUTIVE SUMMARY
Our operating results for the three and nine months ended September 30, 2004
improved significantly compared to the same periods last year. Sales for the
three months ended September 30, 2004 increased approximately $186,000 (3.7%)
compared to the same period last year, while year-to-date sales for the nine
months ended September 30, 2004 increased approximately $1.3 million (9.2%)
compared to the same period last year. Our gross margin percentage for the three
and nine months ended September 30, 2004 was 46.8% and 45.4%, respectively.
Compared to the same periods for the prior year, this margin performance
represents a 21.9% improvement for the three months ended September 30, 2004 and
a 42.0% improvement for the nine months ended September 30, 2004. Net income for
the three months ended September 30, 2004 was $502,000, or $0.04 per diluted
share, compared to net income of $291,000, or $0.03 per diluted share for the
same period last year. For the nine months ended September 30, 2004, net income
totaled approximately $1.2 million, or $0.11 per diluted share, compared to net
income of $36,000, or $0.00 per diluted share for the same period last year.
Sales of our new digital Project 25-compliant portable radio used by government
and public-safety agencies and our RP-Series analog radios targeted for
commercial and industrial applications, increased during the third quarter and
for the year-to-date compared to the same periods last year and compared to the
first two quarters this year. The growth continues to be realized from an
overall increase in customer order volume, rather than from a few large orders.
The sources of orders have been broad-based, with many coming from new customers
and customers returning after several years. More new products, including
additional P25 compliant digital products, are planned for later this year and
next year. Sales of conventional analog products declined for the third quarter
and year-to-date as government and public safety users migrated to newer
products, particularly those featuring digital technology.
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 we continued
to expand product development and sales and marketing initiatives. With the
additional investment in these areas, we expect to drive sales growth by
expediting the introduction of new products, including additional Project-25
digital products.
For the year-to-date, additional cash totaling approximately $3.4 million was
generated from the exercise of our public stock purchase warrants. We issued
3,669,039 shares of common stock associated with the warrant exercises. Among
other things, the additional cash resources will be used to fund new product
development and sales and marketing initiatives. Also, certain of our
subordinated convertible notes were converted into common stock during the first
quarter of 2004, reducing the amount due on the notes by $200,000 to $2.95
million. Our cash balances as of September 30, 2004 totaled approximately $5.2
million.
14
In October 2004, our revolving line of credit was extended until January 2007.
Also, certain terms and conditions were modified that will reduce costs and
reporting requirements associated with the facility. Earlier in 2004, the
facility's term was extended to January 2005 from August 2004 and its credit
limit was increased from $2.5 million to $3.5 million.
RESULTS OF OPERATIONS
The following table shows each item from the condensed consolidated statements
of income expressed as a percentage of sales:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.2 60.2 54.6 65.0
----- ----- ----- -----
Gross margin 46.8% 39.8% 45.4% 35.0%
Selling, general and
administrative expenses (35.6) (31.9) (35.8) (32.6)
Interest expense (1.4) (2.3) (1.5) (2.4)
Other income 0.0 0.2 0.1 0.3
----- ----- ----- -----
Net income 9.8% 5.8% 8.2% 0.3%
===== ===== ===== =====
NET SALES
Net sales for the three months ended September 30, 2004 increased approximately
$0.2 million (3.7%) to approximately $5.2 million from $5.0 million for the same
period last year.
Net sales for the nine months ended September 30, 2004 increased approximately
$1.3 million (9.2%) to approximately $15.1 million from approximately $13.8
million for the same period last year.
Sales from new product introductions for both of our market segments (government
and public safety, and business and industrial) increased approximately $1.0
million (58.8%) and $4.4 million (154.3%) for the three and nine months ended
September 30, 2004, respectively, compared to the same periods last year. This
includes sales of our 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. Sales of conventional analog products decreased approximately $0.8 million
(23.0%) and $3.1 million (28.6%) for the three and nine months ended September
30, 2004, respectively, compared to the same periods last year, as users
migrated to newer, more feature-rich products, in some cases with Project
25-compliant digital technology. More new products are planned for introduction
this year and in 2005, including additional P25 compliant digital products. We
15
believe these planned new products combined with the new products that have
already been introduced will result in the growth of total sales.
During the three months ended September 30, 2004, the Company's operations in
Florida were impacted by three hurricanes. There was no significant damage to
the Company's Florida facility or its contents. Because of storm-related power
outages and staff absences, however, manufacturing operations were impaired for
all or part of nine business days, which reduced the amount of product shipments
for the period. The amount by which shipments were reduced cannot be quantified
with any degree of certainty. It is anticipated that orders not shipped due to
disruption from the hurricanes will be shipped during the fourth quarter 2004.
Backup means of communication were operational shortly after each hurricane.
Accordingly, the Company does not believe there was a significant impact on the
receipt of customer orders.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of sales for the three months ended September 30,
2004 decreased to 53.2% from 60.2% for the same period last year. Cost of sales
as a percentage of sales for the nine months ended September 30, 2004 decreased
to 54.6% from 65.0% for the same period last year.
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. Generally, increased sales
volumes have enabled us to more fully utilize and absorb the reduced base of
manufacturing support expenses. Unabsorbed overhead increased in the three
months ended September 2004, however, due to the impact on operations of the
three hurricanes (as described above under " -Net Sales"). 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.
The mix of products in our total sales has also contributed to improved margins.
Sales of higher-specification products to government and public-safety customers
have comprised a greater portion of our total sales for the nine months ended
September 30, 2004 compared to the same period last year.
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,
2004, SG&A expenses totaled approximately $1.8 million (35.6% of sales) compared
to approximately $1.6 million (31.9% of sales) for the same period last year.
For the nine months ended September 30, 2004, SG&A expenses totaled
approximately $5.4 million (35.8% of sales) compared to approximately $4.5
million (32.6% of sales) for the same period last year.
The overall increase in SG&A expenses is attributed primarily to increases in
product development and selling and marketing initiatives combined with certain
headquarters expenses.
16
Product development staff and expenses increased by approximately $174,000
(50.9%) and $315,000 (30.4%), respectively, for the three and nine months ended
September 30, 2004 compared to the same periods last year. This increase is
intended to expedite 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. Our internal development efforts are focused on our
digital product program. This program is planned to yield additional products
through 2006. We anticipate that these products will be a primary source of
sales growth in the future.
Marketing and sales expenses increased by approximately $123,000 (19.0%) and
$446,000 (24.6%), respectively, for the three and nine months ended September
30, 2004 compared to the same periods last year. We expanded our sales staff and
incurred additional marketing and promotion expenses for initiatives designed to
drive sales growth, particularly from government and public safety opportunities
for APCO Project 25 digital products. Sales commissions as a percent of sales
have decreased during the year as a greater portion of our sales were made
through direct channels or at reduced commission rates, partially offsetting the
additional staff and expenses.
General and administrative expenses decreased by approximately ($43,000) (7.1%)
for the three months ended September 30, 2004, and increased approximately
$146,000 (8.8%) for the nine months ended September 30, 2004 compared to the
same periods last year. The decrease during the quarter was primarily due to an
overall reduction in headquarters expenses. The increase in year-to-date
expenses was largely the result of certain professional fees, including legal
fees related to the settlement of a civil action that was originated in 1993
(see footnote 10 to our condensed consolidated financial statements included
elsewhere in this report). Also, during the first quarter of 2004, a collection
allowance of approximately $36,000 related to a specific customer receivable was
established.
OPERATING INCOME
Operating income for the three months ended September 30, 2004 was approximately
$581,000 compared to $398,000 for the same period last year. Operating income
for the nine months ended September 30, 2004 was approximately $1.5 million
compared to approximately $328,000 for the same period last year.
INTEREST EXPENSE
For the three months ended September 30, 2004, interest expense decreased by
approximately $38,000 (33.0%) to $77,000 from $115,000 for the same period last
year. For the nine months ended September 30, 2004, interest expense decreased
by approximately $116,000 (34.3%) to $222,000 from $338,000 for the same period
last year. 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. Primarily as a result of cash
generated from improved operations and warrant exercises, the outstanding
principal balance on the revolving line of credit was lower during the three and
nine months ended September 30, 2004 compared to the balance on the previous
credit facility that was in place during all of part of the same periods last
year.
17
INCOME TAXES
No income tax provision was provided for the three or nine months ended
September 30, 2004. We have federal and state net operating loss carryforward
benefits of approximately $32,264,000 and $16,282,000, respectively, at
September 30, 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. We have evaluated our deferred tax
assets and do not believe that we have met the criteria for realizing their
value; therefore we have established a valuation allowance for the entire amount
of our deferred tax assets, approximately $13 million, at September 30, 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 $2.70 million
(52.2%) of our total sales for the three months ended September 30, 2004,
compared to approximately $2.47 million (49.5%) for the same period last year.
For the nine months ended September 30, 2004, sales to the United States
government represented approximately $6.83 million (45.2%) of our total sales,
compared to approximately $6.2 million (44.7%) for the same period last year.
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three and nine months ended September 30,
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 nine months ended September 30, 2004, net cash provided by operating
activities totaled approximately $2.1 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 period of approximately $1.2 million compared to net income
of approximately $36,000 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 $768,000 as a result of improved sales from
items in existing inventory compared to an inventory reduction of approximately
$1.5 million during the same period last year. Accounts payable decreased
approximately $153,000, compared to a reduction of approximately $650,000 for
the same period last year. Sales growth during the first nine months of this
year compared to the same period last year and extended terms offered to certain
customers increased accounts receivable by approximately $474,000, compared to
an increase of approximately $2.0 million for the same period last year.
18
Depreciation and amortization totaled approximately $494,000 for the nine months
ended September 30, 2004, compared to $501,000 for the same period last year.
Cash used in investing activities was primarily to fund the acquisition of
equipment pertaining to our development of new digital products and computer
equipment for additional staff. Capital expenditures for the nine months ended
September 30, 2004 were approximately $222,000 compared to approximately
$101,000 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 $2.1 million was provided by financing
activities for the nine months ended September 30, 2004, compared to
approximately $99,000 provided by those activities during the same period last
year. During the period, we repaid the entire balance, approximately $1.3
million, on our revolving line of credit, compared to repayments totaling
$212,000 during the same period last year. During the nine months ended
September 30, 2004, we received approximately $3.4 million in net proceeds from
the exercise of our outstanding public warrants prior to the completion of our
redemption of the warrants in June 2004.
In October 2004, our revolving line of credit was extended until January 2007.
Also, certain terms and conditions of the credit agreement were modified, which
will reduce related costs and ease reporting requirements. The original
agreement of August 2003 provided a $2.5 million revolving line of credit for
one year, secured by substantially all of the Company's assets, principally
trade receivables and inventory. Earlier in this year, the facility's term was
extended to January 2005 from August 2004 and its credit limit was increased
from $2.5 million to $3.5 million. Under the formula for calculating the
available credit on our facility, approximately $2.9 million was available as of
September 30, 2004. The credit agreement contains covenants with which we must
comply. As of September 30, 2004, we were in compliance with all such covenants.
During the nine months ended September 30, 2004, certain of our convertible
subordinated 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
$0.2 million. The remaining outstanding notes total $2.95 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. We cannot be
certain if the notes will be converted or repaid. If the notes must be repaid,
we believe that we will be able to do so by using existing cash funds, cash
generated from operations and borrowings under our credit facility.
Our cash balance at September 30, 2004 was approximately $5.2 million. We
believe these funds combined with cash generated from operations and borrowing
availability under our credit facility are sufficient to meet our current
working capital requirements for the next twelve months.
19
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, 2004:
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD AS OF SEPTEMBER 30:
- ------------------------------------------------------------------------------------------------------------------
TOTAL 2004 2005 2006 2007 2008
- ------------------------------------------------------------------------------------------------------------------
Future minimum lease commitments $ 313 $ 107 $ 196 $ 10 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
Convertible subordinated notes $ 2,950 $ 2,950 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
Revolving credit facility $ -- $ -- $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
Standby letters of credit $ 44 $ 44 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
Purchase orders $ 1,781 $ 1,781 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------
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 sales recognition process and our more subjective accounting
estimation processes. These processes affect our reported sales 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.
Sales
- -----
Sales 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
sales recognition procedures to assure that such procedures are in accordance
with accounting principles generally accepted in the United States.
Allowance For Collection Losses
- -------------------------------
The allowance for collection losses was approximately $92,000 on gross trade
receivables of approximately $3.4 million as of September 30, 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
September 30, 2004. Because the amount that we will actually collect on the
receivables outstanding as of September 30, 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 an inability to pay but turn
out to have such an inability. Currently, our allowance on trade receivables is
approximately 3% 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
20
particular customer's balance. As of September 30, 2004, there was a specific
allowance of approximately $36,000. We believe that sales 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 $2.9 million at
September 30, 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 September 30, 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 cost. 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.
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 1.00% 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 $2.95 million of debt outstanding as
of September 30, 2004. This entire 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 September 30, 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.
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 September
30, 2004. Based on this evaluation, they have concluded that, as of September
30, 2004, our disclosure controls and procedures are 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.
21
CHANGES IN INTERNAL CONTROLS
There were no 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.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 10 to the Company's condensed consolidated financial
statements included elsewhere in this report for the information required by
this Item.
22
ITEM 6. 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).
23
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: October 28, 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)
24
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).