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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, 2005
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 12,951,471 shares of common stock, $0.60 par value, of the
registrant outstanding at April 15, 2005.
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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
2005 2004
-------- -----------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,952 $ 3,140
Trade accounts receivable (net of allowance for doubtful
accounts of $81 in 2005 and $89 in 2004) 3,029 3,651
Inventories, net 4,944 4,735
Deferred tax assets, net 1,175 1,338
Prepaid expenses and other current assets 408 326
------- -------
Total current assets 13,508 13,190
Property, plant and equipment, net 1,296 1,291
Deferred tax assets, net 4,924 4,924
Other assets 280 288
------- -------
Total assets $20,008 $19,693
======= =======
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
2005 2004
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 150 $ 700
Accounts payable 1,066 520
Accrued compensation and related taxes 599 549
Accrued warranty expense 131 118
Accrued other expenses and other current liabilities 263 352
-------- --------
Total current liabilities 2,209 2,239
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:
12,951,471 and 12,872,618 issued and outstanding shares at
March 31, 2005 and December 31, 2004, respectively 7,770 7,723
Additional paid-in capital 22,760 22,794
Accumulated Deficit (12,731) (13,063)
-------- --------
Total stockholders' equity 17,799 17,454
-------- --------
Total liabilities and stockholders' equity $ 20,008 $ 19,693
======== ========
See notes to condensed consolidated financial statements.
2
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------------ ------------
(SEE NOTE 1) (see note 1)
Sales $ 5,540 $ 4,970
Expenses
Cost of products 3,100 2,871
Selling, general & administrative 1,950 1,690
-------- --------
5,050 4,561
-------- --------
Operating income 490 409
Other income (expense):
Interest expense (5) (78)
Other income (expense) 20 9
-------- --------
Total other income (expense) 15 (69)
-------- --------
Income before income tax 505 340
Income tax expense (173) --
-------- --------
Net income $ 332 $ 340
======== ========
Net income per share-basic: $ 0.03 $ 0.04
======== ========
Net income per share-diluted: $ 0.02 $ 0.03
======== ========
Weighted average shares outstanding-basic 12,885 9,301
======== ========
Weighted average shares outstanding-diluted 13,470 12,114
======== ========
See notes to condensed consolidated financial statements.
3
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data) (Unaudited)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 332 $ 340
Adjustments to reconcile net income to net cash
provided by operating activities:
Allowance for doubtful accounts (8) 34
Inventories reserve (1) --
Deferred tax expense 163 --
Depreciation and amortization 132 160
Change in operating assets and liabilities:
Accounts receivable 630 125
Inventories (208) 569
Accounts payable 546 235
Prepaid expenses and other current assets (82) 50
Other assets 8 12
Accrued compensation and related taxes 50 (23)
Accrued warranty expense 13 0
Accrued other expenses and other current liabilities (89) (33)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,486 1,469
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (137) (51)
Collections on notes receivable -- 4
------- -------
NET CASH USED IN INVESTING ACTIVITIES (137) (47)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 13 478
Repayment of debt (550) --
Net decrease in revolving credit lines -- (1,272)
------- -------
CASH USED IN FINANCING ACTIVITIES (537) (794)
Increase in cash 812 628
Cash and cash equivalents, beginning of period 3,140 1,293
------- -------
Cash and cash equivalents, end of period $ 3,952 $ 1,921
======= =======
SUPPLEMENTAL DISCLOSURE
Interest paid $ 5 $ 78
======= =======
Income tax paid $ 45 $ 13
======= =======
NON-CASH FINANCING ACTIVITY
Conversion of notes to stockholders' equity $ -- $ 200
Conversion of warrants to stockholders' equity $ 37 $ --
======= =======
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, 2005, the condensed
consolidated statements of income for the three months ended March 31, 2005 and
2004 and the condensed consolidated statements of cash flows for the three
months ended March 31, 2005 and 2004 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, 2004 has been derived from the Company's 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, 2004,
as filed with the Securities and Exchange Commission. The results of operations
for the three months ended March 31, 2005 are not necessarily indicative of the
operating results for a full year.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
In January 2005, the Company announced the award of a contract to one of its
dealers to provide BK Radio-brand portable two-way transceivers to the
California Department of Forestry (CDF) for deployment in forests throughout the
state. The contract is effective through June 30, 2007 and provides for
purchases up to approximately $5,400. It does not specify purchase dates or
quantities of equipment.
In January 2005, the Company introduced a new line of six mobile radios, the RM
Series. Engineered for a wide range of applications, the RELM RM Series mobiles
operate in one of three frequency bands (either 136-174 MHz VHF, 430-470 MHz UHF
or 470-512 MHz UHF) and with high-power (45 watts) and low-power (25 watts)
models. The new products are Federal Communications Commission (FCC) type
accepted as well as Industry Canada (IC) certified.
In March 2005, the cryptographic module for the Company's flagship BK Radio
digital portable radio, the DPHx, was officially validated to FIPS 140-2 by the
National Institute of Standards and Technology (NIST). The DPHx, which is fully
compliant with the APCO Project 25 (P25) technical standard for public safety
radio, is now available with tested and proven encryption capabilities. The
Company believes encryption will enable it to address a much broader and growing
array of market opportunities for P25 digital radios, particularly in homeland
security.
5
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
In April 2005, the Company introduced a new high-specification, enhanced and
expanded portable radio for field command and coordination functions, the BK
Radio GPH-CMD. Capable of field communications over 500 channels, with 25 groups
of 20 channels per group, the new BK Radio GPH-CMD radio is designed for
operation on the 136-174 MHz VHF frequency band. Meeting rigid MIL-STD 810 C/D/E
military specifications, the new BK Radio GPH-CMD has also received FCC Type
Acceptance as well as IC certification.
In April 2005, the Company introduced two new portable analog radios, The
RELM/BK RP3000 and RP3600 series. This marks the official debut of the new
RELM/BK product line of mid-range professional-grade radios. The Relm/BK RP 3000
is a palm-size yet rugged VHF (145-175 MHz) or UHF (440-470 MHz) portable radio
with 16 programmable channels and a built-in pager with siren and silent vibrate
alerts. The Relm/BK RP 3600, also palm-sized, contains 128 programmable channels
in 16 zones, plus the built-in pager, voice storage capability, programming by
keypad or PC and much more. Both models have received FCC Type Acceptance and IC
certification.
In April 2005, the Company announced that its Board of Directors is exploring
various strategic alternatives and has engaged Jefferies Quarterdeck, a division
of Jefferies and Company, Inc., as the Company's financial advisor. There is no
assurance that this process will result in any specific transaction.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was approximately $81
on gross trade receivables of $3,110 at March 31, 2005. 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, 2005. Because the amount that the Company will actually collect on the
receivables outstanding as of March 31, 2005 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. As of March 31, 2005, there was no specific allowance.
6
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
4. INVENTORIES
The components of inventory, net of reserves totaling $2,477 at March 31, 2005
and $2,478 at December 31, 2004, respectively, consist of the following:
MARCH 31 December 31
2005 2004
-------- -----------
Finished goods $1,929 $1,952
Work in process 1,129 851
Raw materials 1,886 1,932
------ ------
$4,944 $4,735
====== ======
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, 2005 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.
5. INCOME TAXES
A non-cash deferred tax expense of approximately $163 and a non-cash alternative
minimum tax expense of approximately $10 have been recorded for the three months
ended March 31, 2005.
As of March 31, 2005, the Company recognized a net deferred tax asset of
approximately $6,099 compared to $6,262 as of December 31, 2004. This asset is
primarily composed of net operating loss carry forwards (NOL's). These NOL's
total approximately $28,313 for federal purposes and $30,066 for state purposes,
with expirations starting in 2005 through 2024.
7
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
In order to fully realize the net deferred tax asset, the Company must generate
sufficient taxable income in future years prior to the expiration of our NOL's.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109) requires the Company to analyze all positive and negative
evidence to determine if, based on the weight of available evidence, the Company
is more likely than not to realize the benefit of the net deferred tax asset.
The recognition of the net deferred tax asset is based upon the Company's
conclusions regarding, among other considerations, estimates of future earnings
based on information currently available, current and anticipated customers,
contracts and product introductions, as well as recent operating results during
2005 and historical operating results in 2004, 2003 and 2002, and certain tax
planning strategies.
The Company has evaluated the available evidence and the likelihood of realizing
the benefit of its net deferred tax asset. The Company concluded that based on
the weight of available evidence it is more likely than not to realize a benefit
from its net deferred tax asset recorded at March 31, 2005. The amount of the
net deferred tax asset as of March 31, 2005 decreased by approximately $163
reflecting the tax effect of the Company's taxable income for the three months
ended March 31, 2005.
The Company cannot presently estimate what, if any, changes to the valuation of
its deferred tax asset may be deemed appropriate in the future. Future losses or
income may make it necessary to decrease or increase the net deferred tax asset
and recognize an income tax expense or benefit.
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.
6. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the three months ended
March 31, 2005 are as follows:
8
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
COMMON STOCK ADDITIONAL
------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2004 12,872,618 $ 7,723 $ 22,794 $ (13,063) $ 17,454
Common stock option exercise 17,500 10 3 -- 13
Common stock warrant exercise 61,353 37 (37) -- --
Net income -- -- -- 332 332
---------- ---------- ---------- ---------- ----------
Balance at March 31, 2005 12,951,471 $ 7,770 $ 22,760 $ (12,731) $ 17,799
========== ========== ========== ========== ==========
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED
MARCH 31,
2005 2004
----------- -----------
Numerator:
Net income (numerator for basic
and diluted earnings per share) $ 332 $ 340
Denominator:
Denominator for basic earnings per share
weighted average shares 12,884,803 9,301,226
Effect of dilutive securities:
Options 493,695 528,285
Warrants 91,825 1,755,197
Convertible notes -- 530,135
----------- -----------
Denominator for diluted earnings per share-
adjusted weighted average shares 13,470,323 12,114,843
----------- -----------
Basic income per share $ 0.03 $ 0.04
=========== ===========
Diluted income per share $ 0.02 $ 0.03
=========== ===========
9
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
A total of 488,000 shares related to options are not included in the computation
of earnings per share for the three months ended March 31, 2005, and a total of
614,000 shares related to options are not included in the computation of
earnings per share for the three months ended March 31, 2004 because the
exercise prices of these options exceeded the average market price for the
Company's common stock.
8. 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," the Company's net income and net income per share would have
been reduced to the pro forma amounts indicated below:
10
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------- -------
Net income as reported $ 332 $ 340
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (36) (22)
Pro forma net income $ 296 $ 318
======= =======
Basic income per share:
As reported $ 0.03 $ 0.04
======= =======
Pro forma $ 0.02 $ 0.03
======= =======
Diluted income per share:
As reported $ 0.02 $ 0.03
======= =======
Pro forma $ 0.02 $ 0.03
======= =======
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 2005 and 2004, respectively: risk-free interest
rates of 3.77% and 4.625%; dividend yields of 0%; volatility factors of the
expected market price of the common stock of 1.025% and 99.3%; and a
weighted-average expected life of the option of four years.
9. 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 June 1997, substantially all of the assets of a RELM specialty-manufacturing
subsidiary were sold. The asset purchase agreement contains indemnification
11
Notes to Condensed Consolidated Financial Statements (continued)
Unaudited
(in Thousands, Except Share Data and Percentages)
provisions, which could result in liability for both parties. Presently, one
indemnification claim is pending against the Company. 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 the Company's former specialty-manufacturing
subsidiary are named defendants in the lawsuit. The Company has insurance
coverage for this matter. Counsel named by the insurer is continuing to
vigorously defend this claim. Counsel believes the Company has 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 business. 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 March 31, 2005, the Company has commitments for purchase orders from
suppliers of approximately $3,978.
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, 2004 and in our subsequent filings with the
Securities and Exchange Commission, and include, among others, the following:
|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 and financial position for the three months ended March
31, 2005 improved compared to the same period last year. We also completed
development of and introduced new products that we believe will contribute to
our near-term and extended future growth.
For the three months ended March 31, 2005, sales increased approximately 11.5%
($0.6 million) compared to the same period last year while gross margins as a
percent of sales improved to 44.0% from 42.2% compared to the same period last
year. Pretax income increased approximately 48.5% ($0.2 million) to $0.5
million. For the quarter, we recognized a non-cash deferred tax expense of
approximately $0.2 million. For the same period last year we did not record any
income tax expense or benefit. Net income for the quarter totaled approximately
$0.3 million, or $0.03 per basic and $0.02 per fully diluted share, compared to
net income of approximately $0.3 million, or $0.04 per basic and $0.03 per fully
diluted share, for the same period last year.
Our balance sheet as of March 31, 2005 also improved compared to the period
ended December 31, 2004, including a 25.9% ($0.8 million) increase in cash and a
78.6% ($0.6 million) reduction in the current maturities of long term debt.
During the three months ended March 31, 2005, we completed eleven new two-way
radio products as well as encryption capability for our APCO Project 25 digital
portable radio. One of these new radio products, the GPH-CMD, resulted in the
award of a contract to the Company valued at up to $5.4 million to provide this
product to the California Department of Forestry (CDF). The contract, effective
through June 30, 2007, does not specify purchase dates or quantities of
equipment. Our new encryption module enables us to address a much broader and
growing array of market opportunities for P25 digital radios, particularly in
homeland security. The other new radio products significantly broaden our
product offerings, particularly in commercial, industrial and local municipality
applications.
In April 2005, we announced that our Board of Directors is exploring various
strategic alternatives and has engaged Jefferies Quarterdeck, a division of
Jefferies and Company, Inc., as our financial advisor. There is no assurance
that this process will result in any specific transaction.
RESULTS OF OPERATIONS
The following table shows each item from the condensed consolidated statements
of income expressed as a percentage of sales:
14
PERCENTAGE OF SALES
------------------
THREE MONTHS ENDED
MARCH 31,
2005 2004
----- -----
Sales 100.0% 100.0%
Cost of sales (56.0) (57.8)
----- -----
Gross margin 44.0 42.2
Selling, general and
administrative expenses (35.2) (34.0)
Interest expense (0.1) (1.6)
Other income 0.4 0.2
----- -----
Pretax income 9.1 6.8
Income tax expense (3.1) --
----- -----
Net income 6.0% 6.8%
===== =====
NET SALES
Net sales for the three months ended March 31, 2005 increased approximately $0.6
million (11.5%) to approximately $5.5 million from $4.9 million for the same
period last year. This increase was driven entirely by the introduction of new
products.
Sales of new products for the three months ended March 31, 2005 increased
approximately 24.7% ($0.6 million) compared to the same period last year. This
includes sales of our digital APCO Project 25 radios used by government and
public-safety agencies, our new GPH-CMD portable radio custom-designed for the
California Department of Forestry (CDF), which was specified in the contract
awarded by the CDF during the first quarter, and our expanding line of RP-Series
products targeted for commercial, industrial and municipal applications. Sales
of conventional analog products for the three months ended March 31, 2005
remained flat compared to the same period last year.
More new APCO Project 25 digital radios and related capabilities are planned for
later this year. The migration of existing and new users to these newer, more
feature-rich products, we believe will fuel growth in total sales. To capitalize
on the advantages of our new products and the accelerating migration to APCO
Project 25 digital products, we expanded our sales and marketing staff and
activities in the first quarter 2005. We expect to continue this focus during
the remainder of the year.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of sales for the three months ended March 31, 2005
decreased to 56.0% from 57.8% 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
effectively control internal manufacturing support expenses. Furthermore,
15
increased sales volumes have enabled us to more fully utilize and absorb our
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.
The mix of products in our total sales has also contributed to improved margins.
Sales of newer, higher-specification products that incorporate recent, more
cost-effective product designs, including APCO Project 25 digital products, and
sales of new analog products comprised a greater portion of our total sales in
the first quarter 2005 compared to the same period in 2004.
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, 2005, SG&A expenses totaled approximately
$2.0 million (35.2% of sales) compared to approximately $1.7 million (34.0% of
sales) for the same period in 2004.
The overall increase in SG&A expenses is attributed primarily to increases in
product development and selling and marketing initiatives.
Product development and engineering staff and expenses increased by
approximately $0.2 million (51.6%) for the three months ended March 31, 2005
compared to the same period last year. This increase is intended to expedite the
completion and introduction of new products, particularly additional APCO
Project 25 digital products. Bringing such products to market and achieving a
significant share of the market will continue to require substantial engineering
investment. Our internal development efforts are focused on our digital product
program. This program is planned to yield additional new products through 2006.
We anticipate that these products will be the primary source of future sales
growth.
Sales and marketing expenses increased by approximately $0.1 million (11.1%) for
the three months ended March 31, 2005 compared to the same period last year.
During the quarter, we added direct sales staff and incurred additional expenses
for sales and marketing initiatives designed to drive sales growth, particularly
from government and public safety opportunities for APCO Project 25 digital
products. Sales commissions as a percentage of sales decreased during the year
as a greater portion of our sales were made through direct channels or at
reduced rates, partially offsetting the additional staff and expenses.
General and administrative expenses for the three months ended March 31, 2005
decreased by approximately $13,000 (2.2%) compared to the same period last year
due to the elimination of certain debt related costs.
OPERATING INCOME
Operating income for the three months ended March 31, 2005 was approximately
$490,000 compared to $409,000 for the same period last year. The improvement is
16
attributable to sales growth and product mix as well as product and
manufacturing improvements which reduced product costs.
INTEREST EXPENSE
For the three months ended March 31, 2005, interest expense decreased by
approximately $73,000 (93.6%) to $5,000 from $78,000 for the same period last
year. This reduction is the result of the December 31, 2004 retirement of our
convertible subordinated notes. Also, primarily as a result of our improved cash
position, we had no outstanding principal balance under the revolving line of
credit during the first quarter 2005 compared to an outstanding principal
balance of approximately $1.3 million during the same period last year. The
interest rate on our revolving line of credit is variable and will fluctuate
with the prime lending rate.
The subordinated convertible notes matured on December 31, 2004. Notes totaling
$2.25 million were repaid and retired on that date. Notes totaling an additional
$550,000 were retired in January 2005. One note totaling $150,000 presently
remains outstanding. The right for this note to convert and to earn interest
expired on December 31, 2004.
INCOME TAXES
We recorded a non-cash deferred tax expense of approximately $163,000 and a
non-cash alternative minimum tax of approximately $10,000 for the three months
ended March 31, 2005. No income tax expense or benefit was recorded for the same
period last year.
As of March 31, 2005, we recognized a net deferred tax asset of approximately
$6.1 million. This asset is primarily composed of net operating loss carry
forwards (NOL's). These NOL's total $28.3 million for federal purposes and $30.1
million for state purposes, with expirations starting in 2005 through 2024.
In order to fully realize the net deferred tax asset, we must generate
sufficient taxable income in future years prior to the expiration of our NOL's.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109) requires us to analyze all positive and negative evidence
to determine if, based on the weight of available evidence, we are more likely
than not to realize the benefit of the net deferred tax asset. The recognition
of the net deferred tax asset is based upon our conclusions regarding, among
other considerations, estimates of future earnings based on information
currently available, current and anticipated customers, contracts and product
introductions, as well as recent operating results during 2005 and historical
operating results in 2004, 2003 and 2002, and certain tax planning strategies.
We have evaluated the available evidence and the likelihood of realizing the
benefit of our net deferred tax asset. We concluded that based on the weight of
available evidence we are more likely than not to realize a benefit from our net
deferred tax asset recorded at March 31, 2005. The amount of the net deferred
tax asset as of March 31, 2005 decreased by approximately $0.2 million during
the three months ended March 31, 2005 reflecting the tax effect of our taxable
income for the quarter.
We cannot presently estimate what, if any, changes to the valuation of our
deferred tax asset may be deemed appropriate in the future. Future losses or
income may make it necessary to decrease or increase our net deferred net tax
asset and recognize an income tax expense or benefit.
17
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 $1.9 million
(34.2%) of our total sales for the three months ended March 31, 2005, compared
to approximately $2.3 million (46.4%) for the same period last year.
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three months ended March 31, 2005 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 contract
manufacturers.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2005, net cash provided by operating
activities totaled approximately $1.5 million, largely unchanged from the same
period last year. The cash provided by operations is primarily attributable to
net income for the period of approximately $0.3 million compared to net income
of approximately $0.3 million for the same period last year. Changes in
components of working capital, particularly accounts receivable and accounts
payable, also contributed to cash provided by operations.
Sales growth and accelerated collections during the period contributed to a
decrease in accounts receivable totaling approximately $0.6 million compared to
a decrease of approximately $0.1 for the same period last year. Accounts payable
for the period increased approximately $0.5 million compared to an increase of
approximately $0.2 million for the same period last year as we generally
succeeded in obtaining more favorable terms from suppliers. Inventory net of
reserve increased by approximately $0.2 million during the period as a result of
the purchases of new product inventory. This compares to a decrease of $0.6
million for the same period last year driven by improved sales of items in
existing inventory. Net deferred tax assets decreased approximately $0.2 million
reflecting the impact of deferred tax expense for the period. No net deferred
tax asset was recognized for the same period last year. Depreciation and
amortization totaled approximately $132,000 for the three months ended March 31,
2005 compared to $160,000 for the same period last year as certain assets became
fully depreciated or amortized.
Cash used in investing activities was primarily to fund the acquisition of
equipment pertaining to our development of new digital products and computer
equipment. Capital expenditures for the period were approximately $137,000
compared to approximately $51,000 for the same period last year. 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 $0.5 million was used in financing activities
for the three months ended March 31, 2005 compared to approximately $0.8 million
used during the same period last year. We repaid $550,000 of our subordinated
convertible notes during the first quarter 2005. There were no note repayments
18
last year. During the same period last year we repaid the entire balance,
approximately $1.3 million, on our revolving line of credit. There have been no
amounts outstanding under the revolving line of credit since the first quarter
last year. Also, in the first quarter last year we received approximately $0.5
million in net proceeds from the exercise of public warrants and the conversion
of certain subordinated convertible notes.
We have a revolving line of credit for up to $3.5 million, which expires in
January 2007 and is secured by substantially all of the Company's assets,
principally trade receivables and inventory. In October 2004, certain terms and
conditions of the credit agreement were modified, which reduced related costs
and ease reporting requirements. Under the formula for calculating the available
credit on our facility, approximately $3.4 million was available as of March 31,
2005. The credit agreement contains customary financial and restrictive
covenants with which we must comply. As of March 31, 2005, we were in compliance
with all such covenants.
Our subordinated convertible notes matured on December 31, 2004. Notes totaling
$2.25 million were repaid and retired on that date, and as of December 31, 2004,
notes totaling $700,000 remained outstanding. Notes totaling $550,000 were
tendered, repaid and retired in January 2005. Currently, one note totaling
$150,000 remains outstanding. The rights for this note to convert to RELM common
stock and to earn interest have expired.
Our cash balance at March 31, 2005 was approximately $4.0 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. If sales volumes
increase substantially, additional sources of working capital may be required to
fulfill the demand.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's future contractual obligations for
the next five years and in the aggregate as of March 31, 2005:
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD AS OF MARCH 31:
- -------------------------------------------------------------------------------------------------------------------
TOTAL 2005 2006 2007 2008 2009
- -------------------------------------------------------------------------------------------------------------------
Future minimum lease commitments $ 2,309 $ 365 $ 486 $ 486 $ 486 $ 486
- -------------------------------------------------------------------------------------------------------------------
Convertible subordinated notes $ 150 $ 150 $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Revolving credit facility $ -- $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Standby letters of credit $ -- $ -- $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
Purchase orders $ 3,978 $ 3,978 $ -- $ -- $ -- $ --
- -------------------------------------------------------------------------------------------------------------------
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.
19
Income Taxes
- ------------
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply in the period in which the deferred tax asset or
liability is expected to be realized. The effect of changes in net deferred tax
assets and liabilities is recognized on the Company's balance sheet and
statement of operations in the period in which the change is recognized.
Valuation allowances are provided to the extent that impairment of tax assets
are more likely than not. In determining whether a tax asset is realizable, the
Company considers among other things, estimates of future earnings based on
information currently available, current and anticipated customers, contracts
and new product introductions, as well as recent operating results, and certain
tax planning strategies. If the Company fails to achieve the future results
anticipated in the calculation and valuation of net deferred tax assets, the
Company may be required to reduce its deferred tax assets in the future.
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 and Staff
Accounting Bulleting No. 104.
Allowance for Collection Losses
- -------------------------------
The allowance for collection losses was approximately $81,000 on gross trade
receivables of approximately $3.1 million as of March 31, 2005. 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, 2005.
Because the amount that we will actually collect on the receivables outstanding
as of March 31, 2005 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 particular customer's
balance. As of March 31, 2005, there was no specific allowance. We believe that
sales and total receivables will increase during 2005, and accordingly, we may
experience an increase in this allowance.
20
Inventory Reserve
- -----------------
The reserve for slow-moving, excess, or obsolete inventory was $2.5 million at
March 31, 2005. 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, 2005
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 may be 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. Presently,
we have neither fixed or variable rate debt. All but $150,000 of our
subordinated convertible notes have been repaid and no interest accrues on the
remaining note, in accordance with its terms and conditions. We have no variable
rate debt outstanding under our revolving line of credit as of March 31, 2005.
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 (who serves as our
principal financial and accounting 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, 2005. Based on this
evaluation, they have concluded that our disclosure controls and procedures were
effective as of March 31, 2005.
CHANGES IN INTERNAL CONTROLS
There was no change in our internal control over financial reporting identified
in connection with the evaluation required by paragraph (d) of Exchange Act
21
Rules 13a-15 or 15d-15 that occurred during the three months ended March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 9 to the Company's condensed consolidated financial
statements included elsewhere in this report for the information required by
this Item.
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).
22
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: May 4, 2005 By: /s/ William P. Kelly
---------------------------------------
William P. Kelly
Executive Vice President and
Chief Financial Officer
(Principal financial and accounting
officer and duly authorized officer)
23
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).