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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the
fiscal year ended December 31, 2001
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 0-7336
RELM WIRELESS CORPORATION
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(Exact name of registrant as specified in its charter)
Nevada 59-3486297
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(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
7100 Technology Drive
West Melbourne, Florida 32904
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (321) 984-1414
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.60
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(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on January 31, 2002, based on the closing price
at which such stock was sold on the NASDAQ National Market on such date, was
$4,258,174.
As of January 31, 2002, 5,346,174 shares of the Registrant's Common Stock were
outstanding.
Documents Incorporated by Reference: Portions of the Registrant's Proxy
Statement for its 2001 Annual Shareholders' Meeting are incorporated by
reference in Part III of this report. The Registrant's Proxy Statement will be
filed within 120 days after December 31, 2001.
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Table of Contents
PART I
Item 1. Business................................................................1
Item 2. Properties.............................................................11
Item 3. Legal Proceedings......................................................11
Item 4. Submission of Matters to a Vote of Security Holders....................13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..15
Item 6. Selected Financial Data................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risks............26
Item 8. Financial Statements and Supplementary Data............................39
PART III
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosures..............................................40
Item 10. Directors and Executive Officers of the Registrant.....................40
Item 11. Executive Compensation.................................................40
Item 12. Security Ownership of Certain Beneficial Owners and Management.........40
Item 13. Certain Relationships and Related Transactions.........................40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......41
SIGNATURES .....................................................................43
Part I
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Item 1. Business
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General
RELM Wireless Corporation designs, manufactures and markets wireless
communications products, principally two-way land mobile radios (LMR) and
related components. We offer products with three distinct brand names, BK Radio,
RELM, and Uniden. These products are sold to two market segments.
1) The government and public safety market, which includes fire, rescue,
law enforcement, and emergency medical personnel, as well as the
military and various agencies of federal, state, and local governments.
2) The business and industrial market, which consists of enterprises
requiring fast, inexpensive communication among a discrete group of
users. Examples include hotels, construction companies, schools,
airports, and taxies.
Prior to 2000, we were engaged in many unrelated businesses. Starting in 1996,
we developed and executed a strategy to focus on wireless communications. From
that time through 1999, we sold or otherwise discontinued businesses and product
lines that were outside that focus or were under-performing. In 1999 we
completed our exit from these businesses and products, and today are focused
exclusively on LMR wireless communications.
As part of our strategic plan, operations were significantly restructured. These
restructuring actions significantly reduced our revenue base. Accordingly,
during the last two years we have aggressively pursued initiatives for growth in
LMR revenues. Toward that end, in 2000 we completed the acquisition of the
private radio communications product lines from Uniden America Corporation.
Additionally, we introduced our new "G-Series" mobile radios. In 2001 we entered
into an agreement for the manufacture of four new portable radios for business
and industrial users, the first of which was introduced in January 2002. Also,
all our sales and marketing efforts have been streamlined and consolidated.
In concert with our efforts to increase revenues, we have reduced operating
expenses and employment while improving quality and efficiency. We significantly
reduced manufacturing expenses primarily through facility, staff and spending
reductions, much of which was the result of manufacturing outsourcing
arrangements. Also, we sold our 144,000 square foot facility in West Melbourne,
Florida and leased reduced square footage nearby at a substantially lower cost.
We also reduced staffing and expenses in all selling, general, and
administrative functions. Consequently, we have been able to improve gross
profit margins and operating income.
Our principal executive offices are located at 7100 Technology Drive, West
Melbourne, Florida 32904 and the telephone number is (321) 984-1414. More
information about us and our products is also available through the Internet at
"RELM.com". The information provided on our website is not incorporated into
this report.
1
Item 1. Business-continued
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History - Reincorporation of Adage, Inc. into RELM Wireless Corporation
RELM Wireless Corporation is the surviving corporation in the January 30, 1998
reincorporation merger (the "Reincorporation") of Adage, Inc., a Pennsylvania
corporation ("Adage"), into RELM Wireless Corporation, its wholly owned
subsidiary. The Reincorporation was approved by the shareholders of Adage at its
annual meeting held on December 8, 1997.
As a result of the Reincorporation, each share of Adage common stock outstanding
immediately prior to the Reincorporation was converted, effective as of January
30, 1998, into one share of RELM common stock and the trading symbol for the
shares was changed from "ADGE" to "RELM".
Recent Developments
In September 2001 we entered into a contract with an electronic and
manufacturing concern for the manufacture of a new family of portable two-way
radios. Under the agreement, this company will manufacture for RELM, four models
of VHF and UHF portable two-way radio transceivers, and we will have exclusive
distribution rights for these products in North, Central, and South America. The
agreement is for a term of five years and may be expanded to include additional
products. The first product model was introduced in January 2002. The remaining
models are expected to be available in the second quarter of 2002.
In February 2002, we commenced a public rights offering. The purpose of the
offering is to provide working capital, which among other things, will further
the development of our new digital products and capabilities. The securities
being offered are "units". A unit is comprised of one share of RELM common stock
and one warrant to purchase one share of RELM common stock. Units were offered
initially to RELM's equity holders in the form of a rights offering. The "right"
allowed investors in the offering to purchase units at a 10% discount to the
market price of a share of common stock. We believe that a rights offering
provides several advantages over a traditional public offering. It allows us to
offer the units to our current equity holders who already have some knowledge of
our business, and it provides them with the opportunity to maintain their
fully-diluted pro-rata ownership in the company. Additionally, the warrant
component gives investors the opportunity to buy our shares in the future at a
fixed price. We have engaged Noble International Investments, Inc. as the
standby underwriter for this offering. The units were offered to the public
pursuant to a registration statement that was declared effective by the
Securities and Exchange Commission (SEC) on February 11, 2002. At the option of
the standby underwriter, the units could be separated upon ten (10) days notice
which was given ten (10) days prior to the closing of the offering. The offering
closed on March 22, 2002 and resulted in the sale of approximately 2.8 million
units, which were immediately separated and which generated approximately $2.5
million in gross proceeds. The underlying
2
Item 1. Business-continued
warrant is currently quoted on the OTC Bulletin Board with the symbol RELMW and
the underlying shares are listed on the NASDAQ Small Cap Market under RELM'S
current symbol for its common stock, RELM.
Sales Information
As an aid to understanding the impact of our decision to focus exclusively on
our LMR business, the following table summarizes sales information by major
product lines and industry:
2001 2000 1999
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(in Millions)
LMR-Gov't & Pub. Safety $ 18.0 $ 14.7 $ 13.5
LMR-Bus./Indus./Comm 4.8 6.4 7.0
Digital Data Communications(1) -- -- --
Access Controls (1) -- -- .1
Electronic Components(1) -- -- .9
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Total Wireless Comm. Equipment 22.8 21.1 21.5
Commercial Real Estate -- -- .9
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Total Company $ 22.8 $ 21.1 $ 22.4
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(1) - We have exited the Digital Data Communications, Access Controls and
Electronic Components businesses. See "Discontinued Products and Product Lines."
Audited financial statements and detailed supplementary financial information
are found in items 6, 7, and 8.
Industry Overview
LMR communications consist of hand-held (portable) and mobile (vehicle mounted)
two-way radios commonly used by the public safety sector (e.g. police, fire, and
emergency medical personnel), businesses (e.g. hotels, airports, farms, taxis,
and construction firms), and government agencies within the United States and
abroad. LMR systems are constructed to meet an organization's specific
communication needs. The cost of a system varies widely, starting at
approximately $60,000 for a basic configuration. Radio sets typically cost
between $250 and $800, depending upon features, and there are no recurring
airtime usage charges. Accordingly, LMR usage patterns are considerably
different from those for cellular and other wireless communications tools. LMR
usage is characterized by frequent calls of short duration. The majority of
users make 20 to 50 calls per day, with most calls lasting less than 30 seconds.
The average useful life is 8 years for a portable radio and 11 years for a
mobile.
LMR systems are the oldest form of wireless dispatch communications used in the
U.S., having been first deployed by the Detroit Police Department in 1921. LMR
is also the most widely used
3
Item 1. Business-continued
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form of dispatch communications in the U.S. with an estimated 16.3 million users
in 1998. Initially, LMR was used almost exclusively by law enforcement. At that
time all radio communications were transmitted in an analog format. Analog
transmissions typically consist of a voice or other signal modulated directly
onto a continuous radio carrier wave. Over time, advances in technology
decreased the cost of LMR products and increased its popularity and usage by
businesses and other agencies. To respond to the growing usage, additional
spectrum was allocated for LMR use.
In recent years LMR has been characterized by slow growth of approximately 2%
annually. This growth rate is a reflection of several factors:
o LMR is a mature industry, having been in existence for over 70 years.
o Some LMR users are in mature industry segments that are themselves
experiencing slow growth rates.
o Most significantly, growth has been hampered by the lack of available
radio spectrum, which has prevented existing users from expanding their
systems and hindered efforts of many potential new users from obtaining
licenses for new systems.
As a result of the lack of available spectrum, the FCC has mandated that new LMR
equipment utilize more spectrum-efficient technology. This will effectively
require LMR users to migrate to digital systems. Responding to the mandate, the
Association of Public Communications Officials (APCO), in concert with several
LMR manufacturers (including RELM), recommended an industry standard for digital
LMR devices that would meet the FCC requirements and provide solutions to
several problems experienced primarily by public safety users. The standard is
called Project 25. The primary objectives of APCO Project 25 are to i) allow
effective, efficient and reliable inter-operability among users, ii) obtain
maximum radio spectrum efficiency, and, iii) to ensure competition among LMR
providers through an open system architecture.
Although the FCC does not require public safety agencies or APCO to purchase
Project 25-compliant equipment or otherwise adopt the standard, we believe that
compliance with the standard is fast becoming the key factor for public safety
purchasers. Furthermore, we believe that the demand for Project 25-compliant
equipment will fuel significant LMR market growth as users upgrade systems to
comply with the FCC mandate. According to the Public Safety Wireless Networks
organization (PSWN), a federal government agency, over the next 10 years,
Federal, State and Local government agencies are forecasted to spend in excess
of $200 billion to upgrade their LMR systems.
By some estimates, the LMR industry is as large as $7 billion in annual sales.
Motorola dominates the market, holding an estimated market share in excess of
70% ($5 billion). Comnet/Ericsson is another major participant with an estimated
$1 billion in annual sales. The remaining market share is spread among many
small companies, including RELM.
4
Item 1. Business-continued
Description of Products
We design, manufacture, and market wireless communications equipment consisting
of land mobile radios and base station components and subsystems. The majority
of our products use analog technology. We are, however, executing a
comprehensive plan to engineer, manufacture, and market digital products that
are compliant with the specifications of the Association of Public Communication
Officials ("APCO") Project 25. We anticipate introducing digital products in the
fourth quarter of 2002.
We sell our products under the "BK RADIO," "UNIDEN," and "RELM" brand names.
In September 1993, we purchased the assets of Bendix/King Mobile Communications
Division of Allied Signal. These products are sold under the "BK Radio"
(formerly "Bendix King") brand name and consist of higher-specification
land-mobile radios whose primary market focus is professional radio users in the
government and public safety sectors. The BK Radio products have more extensive
features and capabilities than the products offered in the RELM and Uniden
product lines.
In March 2000, we purchased certain private radio communications product lines
from Uniden America Corporation. These products primarily serve the commercial,
business and industrial segment of the LMR market, and significantly broaden and
modernize our offerings there. These products are currently sold under the
"Uniden" brand name.
In September 2001 we entered into a contract with an elctronic and manufacturing
concern for the manufacture of a new family of portable two-way radios. Under
the agreement, this company will manufacture for RELM, four models of VHF and
UHF portable two-way radio transceivers, and we will have exclusive distribution
rights for these products in North, Central, and South America. The agreement is
for a term of five years and may be expanded to include additional products.
These products will be marketed under the RELM brand. The first model was
introduced in January 2002. The remaining models are expected to be available in
the second quarter of 2002.
Description of Markets
Government and Public Safety Market
The government and public safety market includes the fire, rescue, law
enforcement, emergency medical personnel, as well as various agencies of
federal, state, and local government. Most of our sales in this market are made
directly to the end-users. Sales to this market represented approximately 79% of
total sales during 2001 and 70% of total sales for 2000.
We offer products to this market under the BK Radio brand name. This product
line consists of higher-specification land mobile radios with more complex
features and capabilities tailored for professional radio users. The products
include mobile radios for mounting in vehicles, portable (hand-held) radios,
base stations, and repeaters that enable two-way radios to operate over a wider
area. We also manufacture and sell base station components and subsystems which
are
5
Item 1. Business-continued
--------------------------
installed at radio transmitter sites to improve performance by reducing or
eliminating signal interference and to enable the use of one antenna for both
transmission and reception.
Currently, our products and systems for the government and public safety market
use primarily analog technology. However, there is an increasing demand in this
market for digital LMR equipment and systems that are compliant with the Project
25 standard established by APCO. We are currently developing products that are
compliant with Project 25 specifications.
Business, Industrial and Commercial Market
The business, industrial and commercial market includes businesses of all sizes
that require fast, push-to-talk communication among a defined group of users
such as hotels, construction companies, schools, taxicab and limousine
companies, and airports. Most of our sales in this market are to dealers and
distributors who then resell the products to end-users. Our sales to this market
represented approximately 21% of total sales during 2001 and 30% of total sales
for 2000.
We offer products to this market under the RELM and Uniden brand names. The
products include mobile radios, portable radios, base stations, and repeaters.
In March 2000, we expanded our product offering with the acquisition of the
private radio communications product lines from Uniden America Corporation. This
product line supplements our product offerings in this segment with 8 new
portable radios and 6 new mobile radios. These products are recognized in the
business, industrial and commercial segments of the LMR market and have
broadened and modernized our offerings, including the addition of trunking
capability and ESAS systems. These products are presently being sold under the
Uniden brand name.
In September 2001, we entered into an OEM manufacturing agreement with an
electronic design and manufacturing concern in China. Under this agreement, RELM
will acquire four new models of VHF and UHF portable radios and will have
exclusive distribution rights in North, Central, and South America. These
radios, sold under the RELM brand, will supplement our current product lines by
providing lower-cost, yet feature rich and reliable two-way communications for
lower-end business and industrial users.
Engineering, Research and Development
Our product design and development activities are principally conducted in West
Melbourne, Florida, where core research and development activities, including
product conceptualization, technical writing, printed circuit board layouts,
software development and mechanical engineering are conducted. Our engineers and
other research and development employees also develop design specifications
based on customer requirements and supervise quality assurance activities. Our
research and development team actively assists in the implementation of product
designs, with primary responsibility for applied engineering, production
engineering and the supervision of contract manufacturers. Other activities
include ongoing engineering and quality assurance. As of December 31, 2001, we
employed 10 people who devote all or a substantial portion of their time to
research, development and engineering.
6
Item 1. Business (continued)
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For 1999, 2000, and 2001, RELM's research, development and engineering
expenditures were approximately $1.5 million, $1.2 million, and $1.4 million,
respectively. The use of strategic technology partners has enabled us to reduce
R&D expenditures while concentrating on key initiatives, particularly APCO
Project 25 compliant digital products.
In 2001 we launched our digital development initiative. Initially this project
will yield a VHF portable radio. Later, UHF and 800Mhz/700Mhz models will also
be included. The VHF model is planned to be available for sale in the fourth
quarter of 2002. We utilize a strategic alliance for the repeater portion of our
Project 25 development. Our partner has already successfully developed and
introduced Project 25-compliant repeaters.
Intellectual Property
We hold patents and patent licenses covering various land-mobile radio products
that are currently marketed. These patents have various expiration dates out to
the year 2004. While it is difficult to precisely assess their importance, we
believe that certain of the patents and licenses may enhance our competitive
position. We hold several trademarks related to the "RELM" name and our product
names. In addition to intellectual property laws, we also rely on trade secret
law and employee and third party non-disclosure agreements to protect our
intellectual property rights.
Manufacturing and Raw Materials
Our manufacturing strategy is to utilize the highest quality and most cost
effective resources available for every aspect of our manufacturing. In the
first quarter of 2000, we completed our initial agreement for utilizing outside
manufacturing services while concurrently reducing our operating overhead. This
was accomplished by selling our West Melbourne manufacturing facility and
entering into a contract with a contract manufacturer, for the manufacture of
certain LMR subassemblies. This agreement has a five-year term and is
automatically renewed for one-year terms unless either party gives notice of
termination. The contract manufacturer purchases the raw materials related to
the manufacture of these subassemblies directly from suppliers.
Also, in connection with the acquisition of the Uniden LMR product line, we
entered into a manufacturing contract with Uniden America Corporation under
which Uniden will continue to manufacture that product line. We are permitted to
use the Uniden brand name for the duration of the contract. The initial term of
the Uniden contract was for 18 months. Although the contract expired in
September 2001, both parties continue to operate under its original terms.
In September 2001, we entered into an OEM manufacturing agreement with an
electronic design and manufacturing concern in China for the manufacture of a
new family of portable two-way radios. Under the agreement, the company will
manufacture for RELM four models of VHF and UHF portable two-way radio
transceivers, and RELM will have exclusive distribution rights for these
products in North, Central, and South America. The agreement is for a term of
five years and its scope may be expanded to include additional products. The
initial model was introduced in January 2002, while the remaining models are
expected to be available in the
7
Item 1. Business (continued)
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second quarter 2002. The new portable two-way radios will provide a low-cost yet
feature-rich and reliable two-way communication alternative for customers in
these markets. The manufacturer is a private company which has specialized in
engineering and manufacturing quality radio frequency (RF) products since 1993.
They employ approximately 120 individuals, including 30 electronic and RF
engineers.
We plan to continue to outsource manufacturing where it furthers our business
objectives. This strategy allows us to focus on our core technological
competencies of research, product design and development, and to reduce the
substantial capital investment required to manufacture our products. We also
believe that our use of experienced, high-volume manufacturers will provide
greater manufacturing specialization and expertise, higher levels of flexibility
and responsiveness, and faster delivery of product. To ensure that products
manufactured by others meet our standards, our West Melbourne production and
engineering team works closely with its ISO9002-qualified contract manufacturers
in all key aspects of the production process. We establish product
specifications, select the components and the suppliers, and negotiate the
prices for most of these components. We retain all document control. We also
work with our contract manufacturers to improve process control and product
design, and to conduct periodic, on-site inspections.
We rely upon a limited number of both domestic and foreign suppliers for several
key products as well as components used in their products. Several are located
in the Pacific-Rim. We place purchase orders from time to time with these
suppliers and have no guaranteed supply arrangements. In addition, we obtain
certain components from a single source. The amount of these components is not
material relative to total component and raw material purchases. During the
years ended December 31, 2001, 2000, and 1999, our operations have not been
impaired due to delays from single source suppliers. However, the absence of a
single source component may delay the manufacture of finished products. We
manage the risk of such delays by securing second sources and redesigning
products in response to component shortages or obsolescence. We believe that our
supplier relationships are strong.
Seasonal Impact
Demand for our "BK Radio" LMR products is typically the greatest during the
summer season because of the increased forest fire activity during that time of
year.
Significant Customers
Sales to the United States Government represented approximately 44%, 44% and 26%
of our total sales for the years ended December 31, 2001 and 2000, and 1999,
respectively. These sales were primarily to the United States Forest Service
(USFS) and the Communications Electronics Command of the United States Army
(CECOM). Sales to the USFS represented approximately 34%, 35%, and 27% of total
sales for the years ended December 31, 2001, 2000, and 1999,
8
Item 1. Business (continued)
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respectively. Sales to CECOM represented approximately 10%, 9%, and 8% of total
sales for the years ended December 31, 2001, 2000, and 1999, respectively.
In 1998, we were awarded portions of the USFS contract. This contract expired in
September 2001. Earlier in 2001, bids for a new contract were solicited and we
were awarded the contract for portable radios and base stations. The contract is
for a period of one year with options for three additional years, and does not
specify a minimum purchase. We were not awarded the contract for mobile radios.
However, these units are available on the Company's General Service
Administration (GSA) schedule.
In 1996, we were awarded a contract to provide land mobile radios to CECOM. This
contract was for a term of five years with no specified minimum purchase
requirement. The contract expired in 2001. CECOM has not yet solicited bids for
a new contract. We have offered to continue providing products to CECOM under
the terms of the recently expired contract. Shipments to CECOM totaled $2.3
million for the year ended December 31, 2001.
Backlog
Our order backlog was approximately $1.6 million and $2.5 million as of December
31, 2001 and 2000, respectively.
Competition
The worldwide land mobile radio markets are estimated to be $7.5 billion with
annual growth of less than 5%. We compete with many domestic and foreign
companies in these markets. One competitor holds a share of the market estimated
to exceed 70%. We compete in these markets by capitalizing on our strengths,
which include quality, speed, and customer responsiveness. As we successfully
implement low-cost manufacturing relationships, we are increasingly able to
compete on price. We believe that we are competitive with regard to these
factors.
Employees
We presently have 81 full-time employees, most of whom are located at our West
Melbourne, Florida facility. 52 of these employees are engaged in direct
manufacturing or manufacturing support, 10 in engineering, 8 in sales, marketing
and order entry and 11 in general and administrative activities. Our employees
are not represented by any collective bargaining agreements, nor has there ever
been a labor-related work stoppage.
9
Item 1. Business (continued)
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Information Relating to Domestic and Export Sales
The following table summarizes our sales of wireless communications equipment by
location of our customers:
2001 2000 1999
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(in Millions)
United States $ 21.8 $ 20.4 $ 20.7
Europe -- .7 .7
Other International 1.0 -- .1
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Total $ 22.8 $ 21.1 $ 21.5
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Discontinued Products and Product Lines
Electronic Components
Until the third quarter of 1999, we marketed electronic components, primarily
crystals and clock oscillators, to electronic component distributors and
original equipment manufacturers through one of our subsidiaries. These
components were used in various electronic products including computers, scales,
keyboards, and toys. We sold this product line in September 1999 for
approximately $500,000, which was slightly more than its net book value.
Digital Data Communications Equipment
Until August 1998, we manufactured load management systems for sale to electric
utility companies, dealers, and jobbers. A load management system enables its
user to limit usage of electricity during peak demand periods. We sold this
product line to our former product line manager in August 1998 for $105,000,
which represented the approximate fair market value of its net assets.
Radio Controls for the Garage Door and Gate Operator Industry
Until 1997, we manufactured small, low-powered receivers, transmitters, and
control circuit boards designed by Allister Access Controls, one of our former
subsidiaries ("Allister"). These products control the operation of automatic
garage door and gate operators and were manufactured under the Allister and
Pulsar brand names. We sold Allister in 1997.
Redgo Properties, Inc.
Redgo Properties, Inc. was one of our wholly owned subsidiaries which was
engaged in developing and managing real estate. In 1995, we decided to
discontinue this segment and we sold our two remaining holdings in the first and
second quarters of 1999.
10
Item 2. Properties
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Owned
In March 2000, we sold our 144,000 square foot office and industrial building
located on 20 acres in West Melbourne, Florida for $5.6 million. The transaction
resulted in a gain of approximately $1.2 million.
Leased
In March 2000, we moved all of our operations to approximately 54,000 square
feet of comparable leased space at a nearby location in West Melbourne, Florida.
The lease has a term of five years. Rental, maintenance and tax payments were
approximately $274,000 and $375,000 in 2000 and 2001, respectively.
Item 3. Legal Proceedings
-------------------------
On February 14, 1996, the Insurance Commissioner of the Commonwealth of
Pennsylvania, in her capacity as statutory liquidator for Corporate Life
Insurance Company, filed a complaint against multiple defendants in the
Commonwealth Court of Pennsylvania, including us and Donald F.U. Goebert (in his
capacity as one of our officers and directors). The specific claims alleged
against us and Mr. Goebert are for a preferential transfer, conspiracy and
common law fraud arising from a 1987 transaction between us and Corporate
Investment Company, the parent Company of Corporate Life, pursuant to which we
and Corporate Life Insurance exchanged promissory notes in the amount of
$1,700,000. In connection with this transaction, Corporate Life Insurance
pledged to us, as security for its note payment obligation, its shares of stock
of Corporate Life. Corporate Life Insurance subsequently defaulted on its note.
In 1991, at the demand of the Insurance Commissioner, Corporate Life Insurance
sold Corporate Life to American Homestead, Inc. and, in connection with such
sale, we assigned our note receivable from Corporate Life Insurance along with
the collateral to American. As consideration for this assignment, American
agreed to assume our obligations under its note to Corporate Life Insurance in
the amount of $1,700,000. Accordingly, although the complaint alleges a claim
for a preferential transfer, we received no payment of funds from Corporate Life
Insurance. The conspiracy claims are non-specific but pertain to the sale of
Corporate Life to American in 1991. Mr. Goebert was an officer and a director of
Corporate Life Insurance. A pre-trial schedule set in October 2001 set
aggressive time frames for the completion of discovery, the filing of
dispositive motions and the filing of pre-trial statements. We will continue to
vigorously defend this matter.
In one of two related actions, in 1994, the Trustee and statutory liquidator of
Corporate Life Insurance, in connection with the current bankruptcy proceedings
of Corporate Life Insurance, brought an adversarial proceeding in the United
States District Court for the Eastern District of Pennsylvania against us, Mr.
Goebert and other individuals and entities that were involved in the sale of
Corporate Life to American.
11
Item 3. Legal Proceedings (continued)
-------------------------------------
This adversarial proceeding alleges the same claims as in the action brought by
the Insurance Commissioner in connection with the note transaction and the sale
of Corporate Life. In the other related action, in 1993, two individual
creditors of Corporate Life Insurance filed a complaint against, among others,
us and Mr. Goebert in the United States District Court for the Southern District
of New York. The specific claims alleged against us and Mr. Goebert in the
complaint are for fraud, fraudulent conveyance, securities fraud and Racketeer
Influenced and Corrupt organization act violations in connection with the Note
Transaction, the sale of Corporate Life and other investments made by Corporate
Life Insurance in an effort to raise capital for Corporate Life. Each of the
above-related matters is in civil suspense. This motion remains currently
pending. We believe that an adjudication of the action brought by the Insurance
Commissioner will in effect resolve both of the related matters on the legal
principles of collateral estoppel and/or issue preclusion. We believe that there
will be no material adverse effect on our financial position as a result of
these actions.
On February 12, 1999, we initiated criminal and civil proceedings in Sao Paulo,
Brazil against our Brazilian dealer, Chatral, for failure to pay for product
shipments totaling $1.4 million. Exhaustive negotiations were conducted by our
executive management team, resulting in multiple proposals to satisfy the debt.
One proposal was accepted by Chatral's principals, including a signed debt
confession and promissory notes. As economic conditions in Brazil deteriorated
in the next several days, additional disputes arose and Chatral defaulted on the
terms of these documents. Subsequent attempts to negotiate were unsuccessful. In
April 2001, the Brazilian court ordered us to post security with the court
totaling approximately $300,000 in the form of cash or a bond in order for the
case to proceed. We have elected not to post security. Consequently, the case
has been involuntarily dismissed. There has been no ruling on the merits of the
case, and we have preserved our rights to pursue this matter in the future.
On December 8, 1999, Chatral filed claim against us in the United States
District Court for the Southern District in Miami, Florida alleging damages
totaling $8 million as a result of our discontinuation of shipments to Chatral.
We have retained counsel to represent us in these actions. Although we believe
that we have defenses of merit, the outcome of this action is uncertain. An
unfavorable outcome could have a material adverse effect on our financial
condition.
Heath & Company filed suit against RELM Wireless Corporation and RELM
Communications, Inc. in the United States District Court for the District of
Massachusetts in early 2001 year for breach of contract, misrepresentation and
unfair trade practices. Pursuant to a Memorandum and Order dated April 24, 2001,
by Judge Douglas P. Woodlock, most of Heath's claims have been dismissed. The
judge ruled as a matter of law that a fact finder must determine whether RELM
Communications withheld information it knew to be essential to Heath and whether
it did so in a bad faith attempt to withdraw from a brokerage agreement. Our
belief is that the Plaintiff will not be able to meet the burdens outlined by
the court in its April 24, 2001 Memorandum and Order.
12
Item 3. Legal Proceedings (continued)
-------------------------------------
On December 20, 2000, a products liability lawsuit was filed in Los Angeles
Superior Court in Los Angeles, California. Although we were not named in the
suit, one of the Defendants, C.P. Allstar Corporation had purchased all or
substantially all of the assets of a RELM affiliate. As part of the asset sale,
the asset purchase agreement contained indemnification provisions, which could
result in liability for us. On October 23, 2001, C.P. Allstar Corporation served
us with a claim for indemnification under a provision of the asset purchase
agreement. We are vigorously defending the claim.
On November 19, 2001, a products liability lawsuit was filed in the 353rd
Judicial District Court of Travis County, Texas, against RELM Wireless
Corporation and RELM Communications, Inc. C.P. Allstar Corporation is also a
named defendant in this lawsuit. C.P. Allstar Corporation had purchased all or
substantially all of the assets of a RELM affiliate. As part of the asset sale,
the asset purchase agreement contained indemnification provisions, which could
result in liability for us. We are vigorously defending the claim.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The annual meeting of our shareholders was held on June 14, 2001. Of the
5,346,174 shares of common stock outstanding and entitled to vote at the
meeting, 4,974,196 shares were represented in person or by proxy.
Election of Directors
On the proposal to elect Donald F. U. Goebert, David. P. Storey, Buck Scott,
Robert MacDonald, Ralph R. Whitney, James C. Gale, and George M. Benjamin III as
directors until the 2002 Annual Meeting of Shareholders and until their
successors are duly elected and qualified, the nominees for Director received
the number of votes as set forth below:
For Withheld
---------------------------
Donald F. U. Goebert 4,631,855 342,341
David P. Storey 4,632,005 342,191
Buck Scott 4,632,121 342,075
Robert MacDonald 4,632,060 342,136
Ralph R. Whitney 4,632,121 342,075
James C. Gale 4,632,121 342,075
George N. Benjamin III 4,632,121 342,075
Amendment To The Articles Of Incorporation To Increase Authorized Common Stock
On the proposal to amend article five of the Company's articles of
incorporation, increasing the number of authorized shares of common stock from
10 million to 20 million, 4,831,347 shares were voted for the proposal, 130,302
shares were voted against the proposal, and 12,547 shares abstained from the
vote. The affirmative vote of the holders of a majority of our common stock
13
Item 4. Submission of Matters to a Vote of Security Holders (continued)
-----------------------------------------------------------------------
was required to approve this proposal. Based on this vote, the proposal was
approved by the shareholders.
Amendment To The Articles Of Incorporation To Increase Authorized Preferred
Stock
On the proposal to amend article five of the Company's articles of
incorporation, increasing the number of authorized shares of preferred stock
from twenty thousand (20,000) to 1 million (1,000,000), 2,765,298 shares were
voted for the proposal, 455,371 shares were voted against the proposal, 23,474
shares abstained from the vote, and there were 1,730,053 non-votes. The
affirmative vote of the holders of a majority of our common stock was required
to approve this proposal. Based on this vote, the proposal was approved by the
shareholders.
Ratification Of The Appointment Of Ernst & Young LLP As Independent Certified
Public Accountants
On the proposal to ratify the appointment of Ernst & Young LLP as the Company's
independent auditors, 4,954,300 shares were voted for the proposal, 12,730
shares were voted against the proposal, and 7,166 shares abstained from the
vote. The affirmative vote of the holders of a majority of the total votes cast
was required to approve this proposal. Based on the vote, the proposal was
approved by the shareholders.
14
Part II
Item 5. Market for the Registrant Common Equity and Related Stockholders Matters
--------------------------------------------------------------------------------
Effective as of July 5, 2001, our common stock began trading on the NASDAQ
SmallCap Market under the symbol "RELM,". Prior to trading on the NASDAQ
SmallCap Market our common stock traded on the NASDAQ National Market. The
following table sets forth the high and low closing sale price for our common
stock for the periods indicated, as reported by the NASDAQ SmallCap Market.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commission and may not necessarily represent actual transactions.
2000 Quarter Ended High Low
------------------------------------------------------------------
March 31, 2000 $ 8.125 $ 2.875
June 30, 2000 4.188 2.000
September 30, 2000 2.500 1.563
December 31, 2000 2.000 0.313
2001 Quarter Ended High Low
------------------------------------------------------------------
March 31, 2001 $ 1.56 $ 0.56
June 30, 2001 1.25 0.80
September 30, 2001 1.59 0.99
December 31, 2001 1.50 1.02
On January 31, 2002, there were 1,187 holders of record of our common stock.
We have never declared or paid cash dividends on our capital stock. We currently
intend to retain all available funds and any future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. In addition, our loan agreement with Summit
Business Capital prohibits us from paying dividends on our common stock. No cash
dividends were paid with respect to our common stock during the past five years.
Item 6. Selected Financial Data
-------------------------------
The following table summarizes selected financial data of RELM and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report:
15
Item 6. Selected Financial Data (continued)
Statement of Operations (In Thousands, except per share data)
Year ended December 31
2001 2000 1999 1998 1997
-------------------------------------------------------------------
Sales (2) $ 22,809 $ 21,054 $ 22,404 $ 29,530 $ 45,376
Income (Loss) From
Continuing Operations 122 (1,162) (2,294) (4,907) (11,974)
Loss From Discontinued
Operations -- (266) -- (725) (2,836)
Extraordinary Gain -- -- -- 227 --
Net Income (Loss) (1) $ 122 $ (1,428) $ (2,294) $ (5,405) $(14,810)
-------------------------------------------------------------------
Income (loss) Per Share-
Basic and Diluted:
Income (Loss) Per Share
From Continuing
Operations (1) $ 0.02 $ (0.22) $ (0.45) $ (0.97) $ (2.36)
Income (Loss) Per Share
From Discontinued
Operations -- (0.05) -- (0.15) (0.56)
Income Per Share From
Extraordinary Item -- -- -- 0.05 --
-------------------------------------------------------------------
Net Income (Loss) Per
Share (1)
$ 0.02 $ (0.27) $ (0.45) $ (1.07) $ (2.92)
===================================================================
(1) Includes a $984,000 net gain on the sale of our manufacturing facility in
the first quarter of 2000 and the sale of certain equipment in the fourth
quarter of 2000.
(2) Sales for the year ended December 31, 1998 decreased $15.8 million or 34.9%
from the prior year. Of the total decrease, $11.0 million is attributed to LMR
products, $2.2 million to commercial real estate, $1.5 million to digital data
communications, $1.0 million to access controls, and $0.1 million to electronic
components. The decreases reflect our strategy to exit non-LMR businesses and to
discontinue products and lines that were inadequately profitable. Specifically,
we sold our digital data communications business and exited from the access
controls, consumer electronics, and commercial real estate businesses. LMR sales
were impacted by the lack of shipments to the U.S. Army. Throughout the year the
U. S. Army had inventory quantities that were sufficient to meet its users'
requirements.
16
Item 6. Selected Financial Data (continued)
-------------------------------------------
Balance Sheet (In Thousands)
December 31
2001 2000 1999 1998 1997
----------------------------------------------------------
Working Capital $ 9,262 $ 7,679 $ 5,676 $ 6,573 $10,307
Total Assets 17,623 18,422 22,853 26,827 31,665
Long-Term Debt 6,998 6,353 9,072 8,755 7,440
Total Shareholders Equity 6,482 6,360 6,377 8,671 14,034
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
-------------------------------------------------------------------------------
Results of Operations
---------------------
General
During the period from 1996 through 1999, our operations were significantly
restructured to focus on wireless communications and the LMR markets. During
1999, we completed our exit from businesses and products that were outside our
focus in wireless communications when we sold all of our remaining commercial
real estate holdings as well as our electronic components product line.
Accordingly operating results for 2001 and 2000 reflect business activities
solely within the LMR industry.
The restructuring actions have reduced our revenue base. In response, we have
reduced our operating expenses and employment. We significantly reduced our
manufacturing infrastructure during the second half of 2000 primarily through
facility, staff and spending reductions, much of which was the result new
outsourcing arrangements. As a result, in 2001 we were able to significantly
improve gross profit margins and operating income on modest revenue growth.
Selling, general and administrative expenses in 2001 were reduced by
approximately $1.0 million (14.5%) compared to 2000. Interest expense in 2001
decreased by approximately $354,000 (37.9%) compared to 2000 as we reduced our
debt and benefited from lower interest rates on our revolving credit line.
During the last two years we have aggressively pursued initiatives for growth in
LMR revenues. Toward that end, in 2000 we completed the acquisition of the
private radio communications product lines from Uniden America Corporation.
Additionally, we introduced our new "G-Series" mobile radios. In 2001 we entered
into an agreement for the manufacture of four new portable radios
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
for business and industrial users, the first of which was introduced in January
2002. We also completed the development of multi-site dispatch capabilities for
our Uniden ESAS system products. All our sales and marketing efforts have been
streamlined and consolidated to reduce their cost and enhance their
effectiveness.
Engineering and R&D spending in 2001 increased from the previous year by
approximately $184,000 (15.7%) due primarily to the development of multi-site
dispatch capabilities for our Uniden ESAS system products. We are also executing
a comprehensive plan to develop, manufacture, and market digital products that
are compliant with the specifications of APCO Project 25.
Results Of Operations
As an aid to understanding our operating results, the following table shows
items from our consolidated statement of operations expressed as a percent of
sales:
Percent of Net Sales
for Year Ended December 31
2001 2000 1999
---------------------------------
Sales 100.0% 100.0% 100.0%
Cost of Sales 70.8 74.4 74.2
---------------------------------
Gross Margin 29.2 25.6 25.8
Selling, General, and Administrative
Expenses (26.0) (33.0) (33.5)
Interest Expense (2.5) (4.4) (4.8)
Gain on Sale of Facility and
Equipment -- 4.7 --
Other Income -- 1.6 2.3
---------------------------------
Pretax Income (loss) from
Continuing Operations 0.7 (5.5) (10.2)
Income Tax Expense -- -- --
---------------------------------
Income (loss) from Continuing
Operations 0.7% (5.5%) (10.2%)
=================================
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
Fiscal Year 2001 Compared With Fiscal Year 2000
-----------------------------------------------
Sales
Total sales for the year ended December 31, 2001 increased $1.8 million (8.3%)
to $22.8 million from $21.1 million for the year 2000. Sales from core LMR
products increased $2.6 million (12.8%) to $22.8 million from $20.2 million for
last year.
Revenues for BK Radio products, sold primarily to the government and public
safety segment of the LMR market, increased $2.6 million (17.8%) compared to the
prior year. This increase was largely driven by sales of our GMH mobile radios
that were introduced in the fourth quarter of 2000, and by strong demand from
the United States Forest Service and the Army as a result of significant forest
fires and recent world events.
Revenues for Uniden products, sold principally to the business and industrial
segment of the LMR market, increased approximately $2.0 million (117.5%)
compared to the prior year. This increase was the result of a complete year of
marketing and sales initiatives that yielded domestic and international growth,
and included ESAS systems sales. Also, the acquisition of the Uniden product
line was not completed until the end of the first quarter in 2000, and the
entire line of products was not available until the fourth quarter of 2000.
Revenues for RELM products, sold principally to the low-end business and
industrial segment of the LMR market, decreased approximately $1.9 million
(66.7%) compared to the prior year. During the year, aged product designs with
minimal profit potential were discontinued and plans for a new family of
portable radios were finalized. The initial model of this family was introduced
in January 2002. Additional models will be introduced in the second quarter of
2002.
Cost of Sales and Gross Margin
Cost of sales as a percentage of sales for the year ended December 31, 2001 was
70.8% compared to 74.4% for the same period last year. The overall improvement
in cost of sales and gross margins was the result of reductions in manufacturing
staff and expenses that were implemented starting in the fourth quarter 2000,
combined with increased manufacturing volumes, which allowed for more effective
use of manufacturing overhead resources.
We have also realized cost improvements by employing a strategy to outsource
certain manufacturing operations and products. In March 2000 we entered into a
contract manufacturing agreement for the manufacture of certain LMR
subassemblies for a period of five years. Also, in connection with our
acquisition in March 2000 of certain Uniden product lines, we entered into a
manufacturing contract with Uniden Corporation pursuant to which Uniden
Corporation manufactures our LMR products branded under the "Uniden" name.
Although the
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
contract expired in September 2001, both parties continue to operate in
accordance with its terms and conditions.
In September 2001, we entered into a contract with an electronic design and
manufacturing concern in China for the manufacture of a new family of portable
two-way radios. Under the agreement, this company will manufacture for RELM,
four models of VHF and UHF portable two-way radio transceivers, and we will have
exclusive distribution rights for these products in North, Central, and South
America. The agreement is for a term of five years and may be expanded to
include additional products. The initial model was introduced in January 2002,
while the remaining models are expected to be available in the second quarter
2002.
We are continuing to evaluate new external manufacturing alternatives to further
reduce our product costs. We anticipate that the current relationships or
comparable alternatives will be available to the company in the future.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) include commissions,
marketing, sales, sustaining engineering, product development, management
information, accounting, and headquarters. For the year ended December 31, 2001,
SG&A expenses totaled $5.9 million or 26.0% of sales compared with $6.9 million
or 33.0% for the prior year.
This decrease is the result of our restructuring and cost reduction actions.
Selling and marketing staff and expenses, particularly as those related to the
Uniden product line, were significantly reduced. Likewise, staff and expenses
pertaining to general and administrative functions such as finance, information
systems, human resources and headquarters were also reduced. Engineering
expenses increased by approximately $184,000 (15.7%). This reflects our
development of multi-site dispatch capability for our Uniden ESAS systems. These
systems were introduced in the second quarter of 2001.
Interest Expense
For the year ended December 31, 2001 interest expense totaled approximately
$579,000 compared to $933,000 for the same period last year. Revenue growth and
expense reductions throughout the year generated working capital and enabled us
to reduce the amount outstanding on our revolving line of credit. Also, the
effective interest rate on our revolving line of credit was lower during 2001 as
a result of the reductions in the prime lending rate. Other long-term debt was
satisfied at various times during 2000, including the mortgage on our facility,
which was sold, and capital leases associated with certain manufacturing and
computer equipment.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
Gain on sale of facility and equipment
On March 24, 2000, we completed the sale of our 144,000 square foot facility
located in West Melbourne, Florida for $5.6 million. The transaction resulted in
a gain of approximately $1.2 million and provided approximately $1.6 million in
cash after related expenses and the satisfaction of the mortgage on the
property. We now lease approximately 54,000 square feet of comparable space at a
nearby location.
Income Taxes
Income taxes represented effective tax rates of 0% for the years ended December
31, 2001 and 2000. These tax rates are made up of a 34% effective tax rate, the
respective state tax rates where we do business, and changes in valuation
allowances related to deferred tax assets. For tax purposes, at December 31,
2001 and 2000, we have federal and state net operating loss carryforwards of
approximately $29.3 million and $30.8 million, respectively. These net operating
loss carryforwards begin to expire, for federal and state purposes, 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 the realizability of
the deferred tax assets on our balance sheet and do not believe that we have met
the more likely than not criteria; therefore we have established a valuation
allowance in the amount of $12.2 million against our net deferred tax assets at
December 31, 2001 and 2000.
The net change in total valuation allowance for the period ended December 31,
2001 was $18,000 and relates to our expectations regarding utilization of our
net deferred tax assets, including available net operating loss and tax credit
carryforwards.
The federal and state net operating loss and tax credit 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.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
Fiscal Year 2000 Compared With Fiscal Year 1999
Sales
Sales for the year ended December 31, 2000 decreased $1.3 million or 6.0% from
the prior year. Substantially all of the decrease is attributed to businesses
and product lines that have been sold or discontinued, reflecting our strategy
to focus on wireless businesses and to exit or discontinue products and
businesses that do not fit this focus or that perform poorly.
Sales in 2000 to the government and public safety segment of the LMR market
increased $1.2 million (8.9%) compared to the previous year. This increase was
due primarily to sales of our BK Radio products to the U. S. Forest Service as a
result of significant forest fires.
Sales in 2000 to the commercial and industrial segment of the LMR industry
decreased $0.6 million (8.6%) compared to the previous year. This decrease was
due in large part to the transition of this business segment to the newly
acquired Uniden products. As a result of manufacturing delays, however, the full
line of these products was not available for sale until late in the fourth
quarter.
Cost of Sales
Cost of Sales as a percent of sales for the year ended December 31, 2000
increased to 74.4% from 74.2% in the prior year. We realized improved margins on
our BK Radio product revenues as a result of higher volumes and the outsourcing
of certain manufacturing processes. Margins on Uniden products, however, largely
offset these improvements. Because new Uniden products were not available for
sale until late in 2000, most of the Uniden revenues during the year were from
the sale of older, lower margin inventory products.
In sizing the business to anticipated shipment and manufacturing volumes,
employment and manufacturing support expenses were significantly reduced during
the year. We sold our Florida facility and leased reduced square footage at a
nearby location. Also, we outsourced a portion of our manufacturing activities
to a contract manufacturer. Related to this action, we sold surface mount
equipment and related capital lease was terminated
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) include commissions,
marketing, sales, sustaining engineering, product development, management
information, accounting, and headquarters. For the year ended December 31, 2000,
SG&A expenses totaled $6.9 million or 33.0% of sales compared with $7.5 million
or 33.5% for the prior year. As a result of our restructuring actions, 6
employees and approximately $1.3 million in annualized expenses were
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
eliminated from the SG&A cost structure. Engineering spending, was reduced
approximately $300,000 compared to the prior year as the GMH development was
completed and as we seek funding to complete our digital product development
plan. G&A spending was reduced by approximately $500,000 compared to the prior
year as a result of staff and expense reductions in the finance, human
resources, information systems, and headquarters functions.
Interest Expense
Interest expense decreased $146,000 for the year ended December 31, 2000 to
approximately $933,000 compared to approximately $1,079,000 for the prior year
primarily as a result of the satisfaction of the mortgage on our facility in
connection with its sale and as a result of using both working capital and a
portion of the proceeds from our private placement of convertible subordinated
notes to reduce the amounts outstanding on our revolving credit facility.
Income Taxes
Income taxes represented effective tax rates of 0% for the years ended December
31, 2000 and 1999. These tax rates are made up of a 34% effective tax rate, the
respective state tax rates where we do business, and changes in valuation
allowances related to deferred tax assets. For tax purposes, at December 31,
2000, we have federal and state net operating loss carryforwards of
approximately $30.8 million. These net operating loss carryforwards begin to
expire, for federal and state purposes, in 2004.
In accordance with SFAS Statement No. 109, Accounting for Income Taxes,
valuation allowances are provided against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. We have evaluated the realizability of
the deferred tax assets on our balance sheet and do not believe that we have met
the more likely than not criteria; therefore we have established a valuation
allowance in the amount of $12.2 million and $11.8 million against our net
deferred tax assets at December 31, 2000 and 1999, respectively.
The net change in total valuation allowance for the period ended December 31,
2000 was $476,000 and relates to our expectations regarding utilization of our
net deferred tax assets, including available net operating loss and tax credit
carryforwards.
The federal and state net operating loss and tax credit 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.
23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
Inflation and Changing Prices
-----------------------------
Inflation and changing prices for the years ended December 31, 2001 and 2000
have contributed to increases in wages, facilities, and raw material costs.
Effects of these inflationary effects were partially offset by increased prices
to customers. We believe that we will be able to pass on most of our future
inflationary increases to our customers.
Dividends
---------
No cash dividends have been paid with respect to our common stock during the
past five years. We intend to retain our earnings to fund growth and, therefore,
do not intend to pay dividends in the foreseeable future. In addition, our
revolving credit lines restricts our ability to pay dividends.
Liquidity and Capital Resources
-------------------------------
On December 31, 2001, we had working capital totaling $9.3 million, an increase
of $1.6 million from December 31, 2000. This increase was primarily the result
of revenue growth and expense reductions combined with improvements in our
collection cycle and inventory management, which enabled us to reduce accounts
payable and other current liabilities. Also, during 2000 we eliminated debt
associated with the sale of our facility and the outsourcing of certain
manufacturing operations.
We have a $7 million revolving line of credit with Fleet/Summit Commercial Corp
which expires in February 2003. As of December 31, 2001, we had borrowed $4.0
million under the revolving line of credit. As of December 31, 2001, the formula
under the terms of the agreement supported a borrowing base totaling
approximately $5.3 million, of which approximately $1.3 million was available.
Capital expenditures for the year ended December 31, 2001 were approximately
$87,000. These expenditures were primarily for tooling required to manufacture
new products and for manufacturing and test equipment. Future capital
expenditures are expected to increase when we commence execution of our digital
development plan. The current revolving line of credit contains restrictions on
our capital expenditures. We believe that these restrictions will not impact the
execution of our capital investment plans. We anticipate that capital
expenditures will be funded through operating cash flow and new sources of
financing.
In February 2002, we commenced a public rights offering. The purpose of the
offering is to provide working capital, which among other things, will further
the development of our new digital products and capabilities. The securities
being offered are "units". A unit is comprised of
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
-------------------------------------------------------------------------------
Liquidity and Capital Resources (continued)
-------------------------------------------
one share of RELM common stock and one warrant to purchase one share of RELM
common stock. Units were offered initially to RELM's equity holders in the form
of a rights offering. The "right" allowed investors in the offering to purchase
units at a 10% discount to the market price of a share of common stock. We
believe that a rights offering provides several advantages over a traditional
public offering. It allows us to offer the units to our current equity holders
who already have some knowledge of our business, and it provides them with the
opportunity to maintain their fully-diluted pro-rata ownership in the company.
Additionally, the warrant component gives investors the opportunity to buy our
shares in the future at a fixed price. We have engaged Noble International
Investments, Inc. as the standby underwriter for this offering. The Units were
offered to the public pursuant to a registration statement that was declared
effective by the Securities and Exchange Commission (SEC) on February 11, 2002.
The offering closed on March 22, 2002 and resulted in the sale of approximately
2.8 million units, which generated approximately $2.5 million in gross proceeds.
On March 16, 2000, we sold $3.25 million of convertible subordinated notes. The
proceeds from this offering were used to purchase the Uniden private radio
communications product lines to repay a portion of the revolving line of credit
and for working capital requirements. Management currently believes that
existing cash funds combined with funds generated from operations and our credit
facility will be sufficient to provide for our anticipated working capital
requirements and capital expenditures for the next twelve months.
The following table sets forth the Company's future contractual obligations and
off balance sheet arrangements as of December 31, 2001:
(In Thousands)
----------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006
----------------------------------------------------------------------------------------------
Future minimum lease commitments $ 389 $ 378 $ 378 $ 189 $ --
----------------------------------------------------------------------------------------------
Convertible subordinate notes $ -- $ -- $3,150 $ -- $ --
----------------------------------------------------------------------------------------------
Revolving credit facility $ 100 $3,848 $ -- $ -- $ --
----------------------------------------------------------------------------------------------
Standby letters of credit $ 127 $ -- $ -- $ -- $ --
----------------------------------------------------------------------------------------------
Net cash provided by operating activities for the year ended December 31, 2001
was $0.3 million. Net cash used in investing activities for the year ended
December 31, 2001 was $0.1 million, primarily from the purchase of property and
equipment. Net cash used in financing
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
--------------------------------------------------------------------------------
Liquidity and Capital Resources (continued)
activities for the year ended December 31, 2001 was $0.1 million, primarily from
the payment and borrowing of debt on our revolving credit facility . Our cash
and cash equivalents balance at December 31, 2001 was $0.3 million.
Recent Accounting Pronouncements
--------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued FAS 142,
Goodwill and Other Tangible Assets. Under the new rules, goodwill and indefinite
lived intangible assets are no longer amortized but reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. We will
apply the new accounting rules beginning January 1, 2002. We do not anticipate
that the adoption of this Statement will have a significant effect on our
results of operations or financial position.
Forward-Looking Statements
--------------------------
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the safe-harbor created by such sections.
Such forward-looking statements concern the Company's operations, economic
performance and financial condition. Such statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; changes
in customer preferences; competition; changes in technology; the integration of
any acquisitions; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The words "believe", "estimate", "expect",
"intend", "anticipate" and similar expressions and variations thereof identify
certain of such forward-looking statements. The forward-looking statements are
made as of the date of this Report, and the Company assumes no obligation to
update the forward-looking statements or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
--------------------------------------------------------------------
We were subject to the risk of fluctuating interest rates in the ordinary course
of business for borrowings under a mortgage of our primary operating facility.
We had entered into an interest rate swap to reduce our exposure to such
fluctuations. Under this arrangement, we converted our
26
Item 7A. Quantitative and Qualitative Disclosures About Market Risks-continued
------------------------------------------------------------------------------
variable LIBOR-rate mortgage into a mortgage with a fixed rate of 8.85%. As of
December 31, 1999, the amount outstanding on the mortgage was approximately $3.7
million. In March 2000, we sold our facility and satisfied our obligations under
the terms of the mortgage and the related interest swap contract.
Critical Accounting Policies
----------------------------
In response to the SEC's financial reporting release, FR-60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, we have selected our
more subjective accounting estimation processes for purposes of explaining the
methodology used in calculating the estimate in addition to the inherent
uncertainties pertaining to the estimate and the possible effects on the
Company's financial condition. The two accounting estimation processes discussed
below are the allowance for collection losses on trade receivables and reserves
for excess or obsolete inventory. These estimation processes affect current
assets and are therefore critical in assessing the financial and operating
status of the Company. These estimates involve certain assumption that if
incorrect could create an adverse impact on the Company's operations and
financial position.
The allowance for collection losses on trade receivables was $1.5 million on
gross trade receivables of $5.1 million at December 31, 2001. Of this amount,
$1.4 million relates to our Brazilian dealer, Chatral, as discussed in Legal
Proceedings. 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 December 31, 2001. As the amount that we will truly collect on
the receivables outstanding as of December 31, 2001 can not be known with exact
certainty as of this document's effective date, we rely on prior experience. Our
historical collection losses have been typically infrequent with write-offs of
trade receivables being less than 1% of sales. We maintain a general allowance
of approximately 2 to 5% of a gross trade receivable balance in order to allow
for future collection losses that arise from customer accounts that do not
indicate the inability to pay but will have such an inability. We also maintain
a specific allowance for customer accounts that we know may not be collectible
due to various reasons such as bankruptcy and other customer liquidity issues.
We analyze our 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. We then reserve a portion or all of the
customer's balance.
The reserve for excess or obsolete inventory was $2.3 million at December 31,
2001. The reserve for excess or obsolete inventory is used to state our
inventories at the lower cost or market as described in the footnotes to the
financial statements. As the amount of inventoriable costs that we will truly
recoup through sales on our inventory levels as of December 31, 2001 can not be
known with exact certainty as of this document's effective date, we rely on past
sales experience and future sales forecasts. In analyzing our inventory levels,
we classify inventory as either no usage in the past year or usage in the past
year. For inventory with no usage in the past year, we reserve 85% of the cost
of this inventory, which takes into account a 15% scrap value. 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 seven years, and then reserve 25%
of the excess amount
27
Item 7A. Quantitative and Qualitative Disclosures About Market Risks-continued
------------------------------------------------------------------------------
Critical Accounting Policies-continued
--------------------------------------
(in which the excess amount equals inventory on hand less a seven 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.
RISK FACTORS
------------
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST
We have a history of substantial and continuing losses. We have incurred
substantial losses, including losses of $1,428,000, $2,294,000, and $5,405,000
for the fiscal years ended December 31, 2000, 1999, and 1998, respectively. As
of December 31, 2001, we had an accumulated deficit of approximately
$18,177,000.
WE HAVE A LIMITED AND VARIED OPERATING HISTORY ON WHICH INVESTORS CAN EVALUATE
OUR FUTURE PROSPECTS
From 1997 to 2000, we shifted our focus to the LMR business by selling or
discontinuing our non-LMR product lines as well as LMR products that were
performing poorly. Because of our shift in emphasis to the LMR products, we have
a limited relevant operating history that investors may use to evaluate our
future prospects. Because of our limited relevant operating history, our
historical financial information is of limited value in projecting our future
results.
In light of the nature of our LMR products and our limited operating history,
our operating results are difficult to forecast, because they generally depend
on the volume and timing of the orders we receive. As a result, we may be unable
to adjust our expenses in a timely manner to compensate for an unexpected
revenue shortfall. A shortfall in revenues will significantly harm our business
and operating results. In addition, we are and will continue to be subject to
numerous risks, uncertainties, expenses, delays, and difficulties in our attempt
to concentrate our efforts on the LMR business due to a variety of factors,
including:
Availability of products;
Our dependence upon orders placed by the United States Federal Government and
its agencies;
The timing and amount of orders we receive from our customers, which may be tied
to seasonal demand;
Cancellations or delays of customer product orders, or the loss of a significant
customer;
28
RISK FACTORS-continued
----------------------
Reductions in consumer demand for our customers' products generally or for our
products in particular;
A reduction in the average selling price for our products as a result of
competitive factors;
The timing and amount of research and development expenditures;
General business conditions in our markets;
Any new product introductions, or delays in product introductions, by us or our
competitors;
Increased costs charged by our suppliers or changes in the delivery of products
to us; and
Increased competition or reductions in the prices that we are able to charge.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations may not be a good predictor
of our future performance.
WE RELY ON OUR LINE OF CREDIT WITH SUMMIT BUSINESS CAPITAL TO FINANCE OPERATIONS
Our loan agreement contains numerous financial and operating covenants. We have
defaulted on some of these obligations, which defaults have, in the past, been
waived. The loan agreement has been restructured, and while we are in compliance
with all of the restructured covenants, there can be no assurance that we will
not cause an event of default in the future or that such defaults will be
waived. These covenants place significant restrictions on our ability to incur
additional indebtedness, to pay dividends and other distributions, to repay
other obligations, to create liens or other encumbrances, to make investments,
to engage in transactions with affiliates, to sell or otherwise dispose of
assets and to merge or consolidate with other entities, and will otherwise
restrict our corporate activities.
Defaults under our Summit Business Capital loan covenants could cause
acceleration of our loan. Our failure to comply with any of the ratios and tests
contained in the Summit Business Capital loan agreement in the future could
result in acceleration of the maturity of the indebtedness under our Summit
Business Capital loan as well as the maturity of other outstanding debt. To
secure our obligations under the Summit Business Capital loan agreement, we have
granted a first priority pledge of, and security interest in, substantially all
of our assets to Summit Business Capital. If the maturity of our indebtedness
were accelerated, we might not have sufficient assets to repay such indebtedness
in full.
When our Summit Business Capital loan agreement expires in February 2003, we
will need to refinance our loan and/or raise additional funds from new sources.
If we are unable to borrow sufficient amounts under the Summit Business Capital
loan agreement or unable to refinance it, or find alternate lenders, we may be
required to significantly curtail or even cease our operations.
29
RISK FACTORS-continued
----------------------
We will continue to need significant capital to fund our operations and finance
our growth, and we may not be able to obtain it on terms acceptable to us or at
all. In addition, our capital requirements in connection with the development,
marketing and sale of our LMR products (as well as certain acquisition
activities) are, and will continue to be, significant.
We believe, based upon our current plans and assumptions relating to our
operations, that our existing line of credit, reserves and expected cash
receipts will provide the funds necessary to satisfy our cash requirements for
the foreseeable future.
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR
ABILITY TO FINANCE FULL OPERATIONS AND PLANNED GROWTH BECAUSE OF DEBT SERVICE
OBLIGATIONS
On December 31, 2001, our total liabilities and debt were approximately
$11,141,000 and shareholders' equity was approximately $6,482,000. Our leverage
could have important consequences to you. For example, it could:
o make it more difficult for us to satisfy our obligations with respect
to our indebtedness;
o increase our vulnerability to general adverse economic and industry
conditions;
o limit our ability to fund future working capital, capital expenditures,
acquisitions and other general corporate requirements;
o require us to dedicate a substantial portion of our cash flow from
operations to repaying indebtedness, thereby reducing the availability
of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes;
o limit our flexibility in planning for, or reacting to, changes in our
business and industry; and
o limit our ability to borrow additional funds.
Our ability to make principal and interest payments on our indebtedness will
depend on our ability to generate cash in the future through sales of our LMR
products. We cannot assure you that our available liquidity will be sufficient
to service our indebtedness. Without sufficient funds to service our
indebtedness, we would have serious liquidity constraints and would need to seek
additional financing from other sources, but we may not be able to do so on
commercially reasonable terms, or at all.
30
RISK FACTORS-continued
----------------------
OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY
Our business will suffer if we are unable to keep pace with rapid technological
changes and product development in our industry. The market for our LMR products
is characterized by ongoing technological development, evolving industry
standards and frequent product introductions. The LMR industry is experiencing a
transition from analog LMR products to digital LMR products. In addition, a new
standard for LMR equipment (the APCO 25 Standard) has been adopted and the
market demand for APCO 25 compliant products is growing.
WE DEPEND ON THE SUCCESS OF OUR LMR PRODUCT LINE
We currently depend on our LMR products and do not yet have multiple sources of
revenue. In 1997, we worked to shift our focus predominately to the development
and sale of the LMR product line. A decline in the price of or demand for LMR
products as a result of competition, technological change, the introduction of
new products by us or others, a failure to manage product transitions
successfully, or for other reasons, would cause our business, financial
condition and results of operations to suffer. In addition, our future success
will largely depend on the successful introduction and sale of new analog and
digital LMR products. We have not yet demonstrated that we will be able to
successfully develop these products on a timely basis and in a cost-effective
manner, or at all. Even if we successfully develop these products, we cannot
guarantee that they will achieve market acceptance.
WE ARE ENGAGED IN A HIGHLY COMPETITIVE INDUSTRY
We face intense competition from other LMR manufacturers, and the failure to
compete effectively could adversely affect our market share and results of
operations. We face intense competition from several companies currently
offering LMR product lines. The largest producer of LMR products in the world,
Motorola, currently is estimated to have in excess of 70% of the market for LMR
products. Motorola is also the world's largest producer of APCO 25 compliant
products. This producer, as well as other of our competitors, are significantly
larger and have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we have and they have established reputations for success in
developing and producing LMR products. These advantages may allow them:
o to respond more quickly to new or emerging technologies and changes in
customer requirements which may render our products obsolete or less
marketable;
o to engage in more extensive research and development;
o to undertake more far-reaching marketing campaigns;
o to be able to take advantage of acquisitions and other opportunities;
31
RISK FACTORS-continued
----------------------
o to adopt more aggressive pricing policies; and
o make more attractive offers to potential employees, strategic partners
and advertisers.
Many of our competitors have established extensive networks of retail locations
and multiple distribution channels, and so enjoy a competitive advantage over us
in these areas as well. We may not be able to compete successfully and
competitive pressures may materially and adversely affect our business, results
of operations and financial condition. See the discussion in "Business-
Competition in the Industry" for a more complete discussion of competitive
factors in our industry.
An increase in the demand for APCO 25 compliant products, would benefit
competitors who are better financed and have inventories that will meet such
demand. APCO 25 compliant products have already been brought to the market by
several of our competitors. We are presently selling an APCO 25 compliant
product pursuant to a licensing agreement with another company. We are also
currently developing our own digital products that comply with the APCO 25
standard. Bringing such products to market and achieving a significant share of
the market for these products will continue to require substantial expenditure
of funds to complete research and development and extensive marketing to achieve
market penetration. There can be no assurance that we will be successful in
developing and/or acquiring and marketing, on a timely basis, fully functional
product enhancements or new products that respond to these and other
technological advances by others, or that our new products will be accepted by
customers. An inability to successfully develop products could have a material
adverse effect on our business, results of operations and financial condition.
WE DEPEND ON A FEW MANUFACTURERS TO PRODUCE OUR PRODUCTS
We contract with manufacturers to produce our products and our dependence on a
limited number of contract manufacturers exposes us to certain risks, including
shortages of manufacturing capacity, reduced control over delivery schedules,
quality assurance, production yield and costs. Uniden America Corporation is
currently the sole manufacturer of the family of LMR products that we acquired
from Uniden. Since our contract with Uniden expired in September, if Uniden
decides to increase the price of its products or stop manufacturing for us, we
will have to find an alternate manufacturer for our LMR products bearing the
Uniden name. Despite our manufacturing agreements , if any manufacturer
terminates production or cannot meet our production requirements, we may have to
rely on other contract manufacturing sources or identify and qualify new
contract manufacturers. The lead time required to qualify a new manufacturer
could range from approximately two to six months. Despite efforts to do so, we
may not be able to identify or qualify new contract manufacturers in a timely
manner and these
32
RISK FACTORS-continued
----------------------
new manufacturers may not allocate sufficient capacity to us in order to meet
our requirements. Any significant delay in our ability to obtain adequate
quantities of our products from our current or alternative contract
manufacturers could cause our business, financial condition and results of
operations to suffer.
In addition, our dependence on limited and sole source suppliers of components
involves several risks, including a potential inability to obtain an adequate
supply of components, price increases, late deliveries and poor component
quality. Disruption or termination of the supply of these components could delay
shipments of our products. The lead time required for orders of some of our
components is as much as six months. In addition, the lead time required to
qualify new suppliers for our components is as much as six months. If we are
unable to accurately predict our component needs, or if our component supply is
disrupted, we may miss market opportunities by not being able to meet the demand
for our products. This may damage our relationships with current and prospective
customers.
WE DEPEND HEAVILY ON SALES TO THE UNITED STATES GOVERNMENT
We are subject to risks associated with our reliance on sales to the U.S.
Government. For the year ended December 31, 2001, approximately 44% of our LMR
sales were to agencies and departments of the federal government. There can be
no assurance that we will be able to maintain this government business. Our
ability to maintain our government business will depend on many factors outside
of our control, including competitive factors, changes in government personnel
making contract decisions, and political factors. The loss or non-renewal of
sales to the U.S. Government could have a material adverse effect upon us. While
we were awarded portions of the United States Forestry Services contract,
including the contract for portable radios, repeaters and base stations, we were
not awarded the contract for mobile radios.
RETENTION OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL IS CRITICAL TO OUR
BUSINESS
Our success is largely dependent on the personal efforts of David P. Storey, our
President and Chief Executive Officer, William Kelly, our Chief Financial
Officer, and Harold Cook and Thomas L. Morrow, our Senior Vice Presidents. We do
not have employment agreements with these individuals, and we cannot be sure
that we will retain their services. The loss of any of their services could have
a material adverse effect on our operations. In addition, we have not obtained
key-person life insurance on any of our executive officers or key employees.
Our success is also dependent upon our ability to hire and retain qualified
operations, development and other personnel. Competition for qualified personnel
in our industry is intense, and we are further hindered in our recruiting
efforts by the lack of a readily available pool of candidates in West Melbourne,
Florida, where we are headquartered. There can be no assurance that we will be
able to hire or retain necessary personnel. The inability to attract and retain
33
RISK FACTORS-continued
----------------------
qualified personnel could cause our business, financial condition, and results
of operations to suffer.
WE MAY NOT BE ABLE TO MANAGE OUR GROWTH
Acquisitions and other business transactions may disrupt or otherwise have a
negative impact on our business and results of operations. During the first
quarter of 2000, we purchased from Uniden America Corporation its LMR product
line. There can be no assurance that we will complete any additional asset
purchases or other business transactions or that any such transactions which are
completed will prove favorable to our business. We do not intend to seek
stockholder approval for any such transactions unless required by applicable law
or regulation. We hope to grow rapidly, and the failure to manage our growth
could adversely affect our business. Our business plan contemplates, among other
things, continued development of our LMR product lines through internal
development as well as acquisitions, and, as a result, significant growth in our
customer base. This growth and continued development, if it materializes, could
place a significant strain on our management, employees, operations and
financial capabilities. In the event of this expansion, we have to continue to
implement and improve our operating systems and to expand, train, and manage our
employee base. If we are unable to manage and integrate our expanding operations
effectively, our business, results of operations, and financial condition could
be materially and adversely affected.
WE ARE SUBJECT TO GOVERNMENT REGULATION
Failure to comply with government regulations applicable to our business could
result in penalties. Our LMR products are regulated by the Federal
Communications Commission. We believe that we are in substantial compliance with
all applicable federal regulations governing our operations and we believe that
we have obtained all licenses necessary for the operation of our business.
Failure to comply with these requirements and regulations or to respond to
changes in these requirements and regulations could result in penalties on us
such as fines, restrictions on operations or a temporary or permanent closure of
our facility. These penalties could harm our operating results and cause a
decline of our stock price. In addition, there can be no assurance that we will
not be materially adversely affected by existing or new regulatory requirements
or interpretations.
WE ENGAGE IN BUSINESS WITH MANUFACTURERS LOCATED IN CHINA
We are beginning to place a substantial amount of emphasis on manufacturing our
product in the People's Republic of China and, accordingly, we are subject to
special considerations and significant risks not typically associated with
companies operating in North or South America
and Western Europe. These include the risks associated with the political,
economic and legal environments, among others. Our results may be affected by,
among other things, changes in the political and social conditions in China and
changes in government policies with respect to laws and regulations,
anti-inflation measures, currency conversion and rates and method of taxation.
34
RISK FACTORS-continued
----------------------
The Chinese government has implemented economic reform policies in recent years,
and these reforms may be refined or changed by the government at any time. It is
possible that a change in the Chinese leadership could lead to changes in
economic policy. The laws and regulations applicable to our industry in China
remain subject to change and could have a material adverse effect on our
business.
WE CARRY SUBSTANTIAL QUANTITIES OF INVENTORY
We carry a significant amount of finished goods inventory. If we are unable sell
this inventory over a commercially reasonable time, we may be required to take
inventory markdowns in the future, which could reduce our net sales and gross
margins. In addition, it is critical to our success that we accurately predict
trends in consumer demand, including seasonal fluctuations, in the future and do
not overstock unpopular products or fail to sufficiently stock popular products.
Both scenarios could harm our operating results.
WE RELY ON A COMBINATION OF CONTRACT, COPYRIGHT, TRADEMARK AND TRADE SECRET LAWS
TO PROTECT OUR PROPRIETARY INFORMATION AND TECHNOLOGY
We have federal trademark registrations for the names "Wilson," "Utilicom,"
"Citicom," "Mini-com," "Regency Electronics" and "Force Communications". In
addition, we have world-wide nonexclusive licenses to use the federal trademarks
"Uniden" and "ESAS". The 18 United States patents that we owned have expired. As
part of our confidentiality procedures, we generally enter into nondisclosure
agreements with our employees, distributors and customers, and limit access to
and distribution of our proprietary information. Although we believe that
trademark protection should prevent another party from manufacturing and selling
competing products under one or more of our trademarks, there can be no
assurance that the steps we have taken to protect our trademarks will be
successful. The expiration of our patents issued to us may make us susceptible
to misappropriation or to an unauthorized third party copying our technology, or
otherwise obtaining and using our products, designs or other information. In
addition, patents may not be issued under future patent applications, and the
patents issued under such patent applications could be invalidated, circumvented
or challenged. It may also be particularly difficult to protect our products and
intellectual property under the laws of certain countries in which our products
are or may be manufactured or sold.
OUR FLUCTUATING QUARTERLY OPERATING RESULTS COULD CAUSE VOLATILITY IN OUR STOCK
PRICE
Our quarterly operating results may fluctuate significantly from quarter to
quarter and may be below the expectations of public market analysts and
investors, resulting in volatility for the market price for our common stock.
Other factors affecting the volatility of our stock price include:
o future announcements concerning us or our competitors;
35
RISK FACTORS-continued
----------------------
o the announcement or introduction of technological innovations or new
products by us or our competitors;
o changes in product pricing policies by us or our competitors;
o changes in earnings estimates of us or our competitors by securities
analysts;
o additions or departures of key personnel; and
o sales of our common stock.
RISK OF WAR AND TERRORISM
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to our business, employees, supplies, distributors and
resellers, and customers that could have an adverse effect on our operations and
financial results. The economic uncertainty stemming from the terrorist attacks
of September 11, 2001, may continue through the pending war-time economy in the
United States. While we cannot predict what impact a prolonged war on terrorism
will have on the United States economy, we plan to control expenses, continue to
invest in our business and make capital expenditures when they will increase
productivity, profitably, or revenue.
WE MAY BE SUBJECT TO COSTLY LITIGATION RESULTING IN AN ADVERSE AFFECT ON OUR
FINANCIAL CONDITION
We are currently involved in approximately four separate lawsuits, both as a
defendant and a plaintiff. While there is no way to predict the success or
failure of any litigation we are strenuously defending those actions in which we
are defendants. Although we believe our products and technology do not infringe
on any proprietary rights of others, as the number of competing products
available in the market increases and the functions of those products further
overlap, infringement claims may increase. Any such claims, with or without
merit, could result in costly litigation or might require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. Any
successful infringement claim could have a material adverse effect upon our
business, results of operations and financial condition. In addition, agreements
regarding the purchase or sale of certain assets and businesses require us to
indemnify the purchasers or buyers of such assets or businesses for any damages
they may suffer if third party claims give rise to losses. Two indemnification
claims are pending. We cannot guarantee that there will not be future claims.
Any such claims may require us to pay substantial damages, which could cause our
business, financial condition and results of operations to suffer.
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS AND NEVADA LAW MAY DISCOURAGE A
POTENTIAL TAKEOVER
36
RISK FACTORS-continued
----------------------
Our articles of incorporation could discourage or prevent potential acquisitions
of our company that stockholders may consider favorable. Our articles of
incorporation authorize the issuance of 1,000,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by our Board of Directors. Preferred stock could be
issued, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of our company which could be beneficial to our
shareholders.
OUTSTANDING STOCK OPTIONS, WARRANTS AND CONVERTIBLE NOTES MAY CAUSE DILUTION TO
EXISTING SHAREHOLDERS AND LIMIT OUR ABILITY TO RAISE CAPITAL
If outstanding warrants or options to purchase our common stock are exercised at
a time when we otherwise could obtain a price for the sale of shares of our
common stock which is higher than the option exercise price per share, then
existing shareholders would suffer dilution in the value of their shares of
common stock. The exercise of the options and warrants and/or the conversion of
outstanding notes, or the possibility of such exercise or conversion, may impede
our ability to seek financing in the future through the sale of additional
securities. The exercise of the warrants and options and/or the conversion of
the notes would cause substantial dilution to the existing stockholders.
RISKS ASSOCIATED WITH ELIGIBILITY FOR QUOTATION OF WARRANTS ON THE OVER THE
COUNTER BULLETIN BOARD.
In order for our warrants issued upon the separation of our units to be eligible
for quotation on the OTC Bulletin Board, we must be in continued compliance with
the standards prescribed by the OTC Bulletin Board. We must remain current on
all filings required by the Securities and Exchange Commission and any other
applicable regulatory authority. To remain eligible, we must also provide
reportings of key events to the OTC Bulletin Board. Any lapse in providing such
reportings, or filings to the applicable regulatory authority might result in
our warrants no longer being eligible for quotation. The OTC Bulletin Board is
not a listing service, but only provides quotation services for eligible
securities. The ability to trade our warrants is conditioned upon a market maker
being present to facilitate the trade and to create the market for the warrants.
If we are no longer in compliance with the requirements of the OTC Bulletin
Board, there would be no forum in which the price for the warrants would be
quoted. Without such a forum, the price of our warrants as well as the market
for their sale and exchange, could be materially adversely affected.
RISKS ASSOCIATED WITH LISTING ON THE NASDAQ SMALLCAP MARKET
In December of 2000, the NASDAQ National Market notified us that our common
stock failed to maintain a minimum market value of public float of $5,000,000
over the previous thirty (30) consecutive trading days, and would be delisted
upon failure to comply with its listing requirements. Our management, after
careful analysis of its alternatives, decided to transfer its listing to the
NASDAQ SmallCap Market, which was approved on July 19, 2001.
37
RISKS ASSOCIATED WITH LISTING ON THE NASDAQ SMALLCAP MARKET-
continued
Listing of our common stock on the NASDAQ SmallCap Market requires continued
compliance with listing standards. Our common stock trades on the NASDAQ
SmallCap Market, conditioned upon our meeting certain standards relating to
assets, stock price, stockholder base and market value, as well as certain non-
quantitative maintenance criteria established by the NASDAQ SmallCap Market.
These eligibility requirements are subject to change from time to time. While we
are currently in compliance with the applicable eligibility tests, if we
continue to sustain substantial operating losses and are unable to raise
sufficient new capital, our common stock could be delisted from trading on the
NASDAQ SmallCap Market. The effects of delisting from the NASDAQ SmallCap Market
would include, among other things, less coverage by investment bankers and
institutions, the limited release of the market price of the common stock and
limited news coverage of our company. These effects could materially adversely
affect the trading market, liquidity and prices for our common stock, as well as
our ability to issue additional securities or to secure additional financing.
38
Item 8. Financial Statements and Supplementary Data
---------------------------------------------------
39
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheets of RELM Wireless
Corporation as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RELM Wireless
Corporation at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Jacksonville, Florida
March 1, 2002,
except for Note 19, as to which the date is
March 22, 2002
F-1
RELM Wireless
Consolidated Balance Sheets
(In Thousands, except share data)
December 31
2001 2000
-----------------
Assets
Current assets:
Cash and cash equivalents $ 335 $ 208
Trade accounts receivable (net of allowance for doubtful
accounts of $1,540 in 2001 and $1,555 in 2000) 3,597 3,712
Inventories, net 8,961 8,940
Notes receivable 60 --
Prepaid expenses and other current assets 452 528
-----------------
Total current assets 13,405 13,388
Property, plant and equipment, net 2,156 2,833
Notes receivable, less current portion 911 984
Debt issuance costs, net 512 682
Other assets 639 535
-----------------
Total assets $17,623 $18,422
=================
See accompanying notes.
F-2
RELM Wireless
Consolidated Balance Sheets
(In Thousands, except share data)
December 31
2001 2000
-----------------------------
Liabilities and stockholders' equity Current liabilities:
Current maturities of long-term liabilities $ 110 $ 848
Accounts payable 3,171 3,604
Accrued compensation and related taxes 532 361
Accrued warranty expense 79 305
Accrued expenses and other current liabilities 251 591
-----------------------------
Total current liabilities 4,143 5,709
Long-term liabilities:
Loan, notes and mortgages 3,848 3,193
Convertible subordinated notes 3,150 3,150
Capital lease obligations -- 10
-----------------------------
6,998 6,353
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares at
December 31, 2001; 20,000 authorized shares at December 31,
2000; none issued -- --
Common stock; $.60 par value; 20,000,000 authorized shares:
5,346,174 issued and outstanding shares at December 31, 2001;
10,000,000 authorized shares: 5,346,174 issued and outstanding
shares at December 31, 2000 3,207 3,207
Additional paid-in capital 21,452 21,452
Accumulated deficit (18,177) (18,299)
-----------------------------
Total stockholders' equity 6,482 6,360
-----------------------------
Total liabilities and stockholders' equity $ 17,623 $ 18,422
=============================
See accompanying notes.
F-3
RELM Wireless
Consolidated Statements of Operations
(In Thousands, except per share data)
Year ended December 31
2001 2000 1999
--------------------------------
Sales $ 22,809 $ 21,054 $ 22,404
Expenses:
Cost of products 16,190 15,674 16,618
Selling, general and administrative 5,926 6,930 7,508
--------------------------------
22,116 22,604 24,126
--------------------------------
Operating income (loss) 693 (1,550) (1,722)
Other income (expense):
Interest expense (579) (933) (1,079)
Gain on sale of facility and equipment -- 984 --
Net gains on investments -- -- 49
Other income 8 337 458
--------------------------------
Total other income (expense) (571) 388 (572)
--------------------------------
Income (loss) from continuing operations before
discontinued operations 122 (1,162) (2,294)
Discontinued operations:
Loss from discontinued operations net of taxes -- (266) --
--------------------------------
Net income (loss) $ 122 $ (1,428) $ (2,294)
================================
Income (loss) per share-basic and diluted:
Continuing operations $ 0.02 $ (0.22) $ (0.45)
Discontinued operations -- (0.05) --
--------------------------------
Net income (loss) $ 0.02 $ (0.27) $ (0.45)
================================
See accompanying notes.
F-4
RELM Wireless
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
---------------------------------------------------------------------------
Balance at December 31, 1998 5,046,416 $ 3,027 $ 20,221 $ (14,577) $ 8,671
Sale of common stock 43,989 26 (26) -- --
Net loss -- -- -- (2,294) (2,294)
---------------------------------------------------------------------------
Balance at December 31, 1999 5,090,405 3,053 20,195 (16,871) 6,377
Common stock issued for services
rendered 200,000 120 531 -- 651
Common stock warrants issued -- -- 635 -- 635
Common stock issued for conversion
of debt 30,769 19 81 -- 100
Common stock issued for
services rendered 25,000 15 10 -- 25
Net loss -- -- -- (1,428) (1,428)
---------------------------------------------------------------------------
Balance at December 31, 2000 5,346,174 3,207 21,452 (18,299) 6,360
Net income -- -- -- 122 122
---------------------------------------------------------------------------
Balance at December 31, 2001 5,346,174 $ 3,207 $ 21,452 $ (18,177) $ 6,482
===========================================================================
See accompanying notes.
F-5
RELM Wireless
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
2001 2000 1999
---------------------------------------------
Cash flows from operating activities
Net income (loss) $ 122 $(1,428) $(2,294)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,056 1,429 1,497
Net gain on investment securities -- -- (49)
Gain on disposal of facility and equipment -- (984) (142)
Changes in current assets and liabilities:
Accounts receivable 115 (1,746) 1,346
Inventories (21) 3,388 100
Accounts payable (431) (818) (170)
Other current assets and liabilities (549) (268) (2,665)
Real estate investments held for sale -- -- 58
---------------------------------------------
Cash provided by (used in) operating activities 292 (427) (2,319)
Cash flows from investing activities
Purchases of property and equipment (87) (251) (681)
Collections on notes receivable 13 710 400
Net cash from sale of subsidiaries -- -- 525
Proceeds from disposals of facility and equipment 2 5,944 46
Proceeds from sale of investment securities -- -- 797
Cash paid for Uniden product line -- (2,016) --
---------------------------------------------
Cash provided by (used in) investing activities (72) 4,387 1,087
Cash flows from financing activities
Repayment of debt and capital lease obligations (748) (5,494) (1,973)
Proceeds from debt -- 3,250 1,880
Net increase (decrease) in revolving credit lines 655 (1,229) 862
Private placement costs -- (276) --
Janney investment service agreement -- (4) --
---------------------------------------------
Cash provided by (used in) financing activities (93) (3,753) 769
---------------------------------------------
Increase (decrease) in cash 127 207 (463)
Cash and cash equivalents, beginning of year 208 1 464
---------------------------------------------
Cash and cash equivalents, end of year $ 335 $ 208 $ 1
=============================================
Supplemental disclosure
Interest paid $ 579 $ 933 $ 1,079
=============================================
Common stock issued for services rendered $ -- $ 651 $ --
=============================================
Common stock issued for services rendered $ -- $ 25 $ --
=============================================
See accompanying notes
F-6
RELM Wireless
Notes to Consolidated Financial Statements
December 31, 2001
(In Thousands, Except Share Data and Percentages)
1. Summary of Significant Accounting Policies
Description of Business
The Company's primary business is the designing, manufacturing, and marketing of
wireless communications equipment consisting primarily of land mobile radios and
base station components and subsystems. The Company was also involved in
commercial real estate until 1999.
Principles of Consolidation
The accounts of the Company and its subsidiary have been included in the
consolidated financial statements. All significant intercompany balances and
transactions have been eliminated.
Inventory
Inventories are stated at the lower of cost or market, determined by the average
cost method. Shipping and handling costs are classified as a component of cost
of products in the consolidated statements of operations.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Expenditures for maintenance,
repairs and minor renewals are expensed as incurred. When properties are retired
or otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts and the resulting gain or loss is reflected
in operations for the period.
Depreciation is generally computed on the straight-line method using lives of 3
to 10 years on machinery and equipment and 5 to 30 years on buildings and
building improvements.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.
F-7
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
1. Summary of Significant Accounting Policies (continued)
Cash Equivalents
Cash and cash equivalents includes time deposits.
Revenue Recognition
Sales revenue is recognized as goods are shipped, except for sales to the U.S.
Government, which are recognized when the goods are delivered. Real estate
revenues are recognized upon closing of a sale.
Income Taxes
The Company files a federal income tax return and follows the liability method
of accounting for income taxes.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of cash and cash equivalents and accounts
receivables. The Company places its cash and cash equivalents in accounts with
major financial institutions. Concentrations of credit risk with respect to
accounts receivable are generally diversified due to the large number of
customers comprising the Company's customer base. Accordingly, the Company
believes that its accounts receivable credit risk exposure is limited.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments
The Company's management believes that carrying amounts of cash and cash
equivalents, accounts and notes receivable, accounts payable and other accrued
liabilities approximates fair value because of the short-term nature of these
financial instruments. The fair value of notes receivable and short-term and
long-term debt approximates market, as the interest rates on these financial
instruments approximates market rates.
Advertising Costs
The cost for advertising is expensed as incurred. The total advertising expense
for 2001, 2000, and 1999 was $188, $161, and $133, respectively.
Engineering, Research and Development Costs
Included in selling, general and administrative expenses for 2001, 2000, and
1999 are research and development costs of $1,359, $1,175, and $1,483,
respectively.
Stock Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plans.
Earnings (Loss) Per Share
Earnings (loss) per share amounts are computed and presented for all periods in
accordance with SFAS No. 128, Earnings per Share.
Comprehensive Income
Pursuant to SFAS No. 130, Reporting Comprehensive Income, the Company is
required to report comprehensive income (loss) and its components in its
financial statements. The Company does not have any significant components of
other comprehensive income (loss) to be reported under
F-9
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
1. Summary of Significant Accounting Policies (continued)
SFAS No. 130. Total comprehensive income (loss) is equal to net income (loss)
reported in the financial statements.
Business Segments
The Company follows SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in reporting segment information and information about
products and services, geographic areas, and major customers. The Company has
only one reportable business segment.
Impact of Recently Issued Accounting Standard
In June 2001, the Financial Accounting Standard Board (FASB) issued FAS 142,
Goodwill and Other Intangible Assets. Under the new rules, goodwill and
indefinite lived intangible assets are no longer amortized but reviewed annually
for impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
Company will apply the new accounting rules beginning January 1, 2002. The
Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
In June 2000, the FASB issued Statement No. 138, Accounting for Certain Hedging
Activities, which amended Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Statement 138 must be adopted concurrently
with the adoption of Statement 133. The Company adopted these new Statements
effective January 1, 2001. These Statements required the Company to recognize
all derivatives on the balance sheet at fair value. The adoption of these
Statements did not have a significant effect on its results of operations or
financial position.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which was required to be implemented no later than the fourth quarter of fiscal
years beginning after December 15, 1999, and provides guidance on the
recognition, presentation and disclosures of revenue and provides guidance for
disclosures related to revenue recognition policies. The Company adopted the
Bulletin in the fourth quarter of 2000. The implementation of this Bulletin did
not have a material impact on the Company's financial position or results of
operations.
F-10
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
1. Summary of Significant Accounting Policies (continued)
In April 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25. Among other issues, that interpretation clarifies the definition
of employees for purposes of applying Opinion 25, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award and the accounting for an exchange of stock compensation awards in a
business combination. The implementation of this Interpretation did not have a
material impact on the Company's financial position or results of operations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. Inventories
Inventory which is presented net of allowance for obsolete and slow moving
inventory consisted of the following:
December 31
2001 2000
-------------------------
Finished goods $5,724 $5,043
Work in process 799 796
Raw materials 2,438 3,101
-------------------------
$8,961 $8,940
=========================
The allowance for obsolete and slow moving inventory is as follows:
Year ended December 31
2001 2000 1999
---------------------------------
Balance, beginning of year $ 1,978 $ 1,934 $ 1,985
Charged to cost of sales 341 44 (12)
Disposal of inventory -- -- (39)
---------------------------------
$ 2,319 $ 1,978 $ 1,934
=================================
F-11
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
3. Allowance for Doubtful Accounts
The allowance for doubtful accounts is composed of the following:
Year ended December 31
2001 2000 1999
-------------------------------------------------
Balance, beginning of year $1,555 $1,672 $1,565
Provision for doubtful accounts -- 58 176
Uncollectible accounts written off (15) (175) (69)
-------------------------------------------------
$ 1,540 $1,555 $1,672
=================================================
4. Intangible Asset
On March 16, 2000, the Company completed the private placement of $3,250 of
convertible subordinated notes. The debt issuance costs included grants to
Simmonds Capital Limited of 50,000 shares of the Company's stock valued at $163
and warrants to purchase 300,000 shares of the Company's common stock valued at
$409. The warrants have a five-year term and an exercise price of $3.25 per
share. The debt issuance costs, which totaled $817 are being amortized on a
straight-line basis over the life of the notes (5 years). Accumulated
amortization at December 31, 2001 and 2000 was $306 and $135, respectively.
On May 12, 2000, the Company engaged Janney Montgomery Scott (JMS) to provide
certain investment banking services. In connection with the engagement, the
Company granted warrants to JMS, valued at $226, to purchase 166,153 shares of
the Company's common stock at an aggregate purchase price of one hundred
dollars. The warrants have a five-year term and an exercise price of $3.25 per
share. The value of the warrants is being amortized on a straight-line basis
over the estimated life of the contract. Accumulated amortization at December
31, 2001 and 2000 was $76 and $27, respectively.
F-12
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
5. Property, Plant and Equipment
Property, plant, and equipment as of December 31, 2001 and 2000 includes the
following:
2001 2000
------------------------
Building improvements $98 $98
Machinery and equipment 7,498 10,378
Less allowances for depreciation (5,440) (7,643)
------------------------
Net property, plant and equipment $2,156 $2,833
========================
Depreciation expense for 2001, 2000, and 1999 was $761, $1,221, and $1,497,
respectively.
On March 13, 2000, the Company acquired the private radio communications product
lines from Uniden Corporation for approximately $1.8 million. Under the terms of
the transaction, RELM acquired all of Uniden's current land mobile radio
inventory, certain non-exclusive intellectual property rights, and assumed
responsibility for service and technical support.
On March 24, 2000, the Company completed the sale of its 144 thousand square
foot facility located in West Melbourne, Florida for $5,600. The transaction
resulted in a net gain of $1,165 and provided approximately $1,600 in cash after
related expenses and after payoff of the note and satisfaction of the mortgage
on the property. Upon the sale of the building, the Company leased approximately
54 thousand square feet of comparable space at a nearby location.
On March 23, 2000, the Company entered into a contract manufacturing agreement
for the manufacture of certain land mobile radio assemblies. As a result of this
agreement, on October 20, 2000, the Company sold certain manufacturing equipment
and satisfied its obligations under an associated capital lease. This
transaction resulted in a loss of $330. The company also realized reductions in
monthly depreciation expense and monthly lease payments of approximately $15 and
$30, respectively.
6. Notes Receivable
In December 2000 the Company modified its loan agreement with the owner of its
former paper manufacturing subsidiary. This agreement modified the terms of the
original secured promissory note dated May 12, 1997 and cured the default on a
$400 principle payment under that note,
F-13
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
6. Notes Receivable (continued)
which was announced on July 3, 2000. Under the terms of the modification
agreement, on December 22, 2000 the former subsidiary made a principal payment
to RELM of $700 plus accrued interest of approximately $166. The original note
which, following this payment, had a remaining principal amount due of $900, has
been replaced by two secured promissory notes of $600 and $300. The $600 note is
payable in ten annual installments starting on April 2, 2002. The $300 note is
payable in five annual installments starting on January 1, 2003. Interest on
both notes is earned at 2.75% over the prime rate and is payable in annual
installments on the $600 note, and in semi-annual installments on the $300 note.
The Company records interest income when received. The $600 note is subject to a
standby creditor's agreement under which payments on the note are contingent
upon the former subsidiary achieving a certain debt service coverage ratio and
the absence of any uncured defaults on other loans or agreements.
7. Debt
On March 16, 2000, the Company completed the private placement of $3,250 of
convertible subordinated notes. The notes earn interest at 8% per annum, are
convertible at $3.25 per share, and are due on December 31, 2004. The
registration of the common stock shares underlying the convertible notes was
effective on June 16, 2000. Portions of the proceeds from this private placement
were used to acquire the Uniden land mobile radio products.
The debt issuance costs included grants to Simmonds Capital Limited of 50,000
shares at $3.25 per share of the Company's common stock valued at $163 and
warrants to purchase 300,000 shares of the Company's common stock valued at
$409. The warrants have a five-year term and an exercise price of $3.25 per
share. Additionally, the Company incurred approximately $817 in costs related to
the private placement. These costs are currently being amortized on a
straight-line basis over the life of the notes.
F-14
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
7. Debt (continued)
The debt consists of the following:
December 31
2001 2000
------------------------
Line of credit $3,948 $3,293
Note payable to finance company, secured by surety bond, with monthly
payments of $61 including interest at 6.04% through July 2001.
- 419
Convertible subordinate note, matures 2004, interest at 8% 3,150 3,150
------------------------
Total debt 7,098 6,862
Amounts classified as current liabilities (100) (519)
------------------------
Long-term debt $6,998 $6,343
========================
Maturities of long-term debt for years succeeding December 31, 2001 are as
follows:
2002 $ 100
2003 3,848
2004 3,150
2005 -
---------
$ 7,098
=========
On February 26, 1999, the Company refinanced its revolving credit facility. The
new credit agreement, which was amended for the fourth time on May 4, 2000,
provides for a maximum line of credit of $7,000 reduced by outstanding letters
of credit and other factors. The revolving credit facility expires in February
2003. Outstanding letters of credit were $127 and $1,444 at December 31, 2001
and December 31, 2000, respectively. Included in the $7,000 line is a $500 term
loan with monthly principal payments of $8 which commenced on April 1, 1999. The
term loan has a balance of $100 at December 31, 2001. Interest on the unpaid
principal balance accrues at the prime rate plus 1.25%. There is an annual fee
of .25% on the line. The credit agreement requires, among other things,
maintenance of financial ratios and limits certain expenditures. The line of
credit is secured by substantially all of the Company's
F-15
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
7. Debt (continued)
non-real estate assets and expires on February 26, 2003. At December 31, 2001
and 2000, the Company had approximately $1,341 and $1,100 of availability on the
revolving credit facility, respectively.
8. Leases
The Company leases its facility in West Melbourne Florida under a long-term
operating lease, which expires on June 30, 2005. At December 31, 2001, the
future minimum lease payments for operating leases are as follows: $378 in 2001
through 2004, and $189 in 2005. Total rental expenses for all operating leases
for 2001, 2000, and 1999 were $375, $274, and $280, respectively.
As of December 31, 2001 and 2000, property, plant, and equipment includes
equipment purchased under a capital lease as follows:
2001 2000
-------------------------
Cost $ 2,202 $ 2,202
Accumulated depreciation (2,195) (2,036)
-------------------------
$ 7 $ 166
=========================
During 2000, the Company sold certain manufacturing equipment that was purchased
under a capital lease, and satisfied its lease obligations.
Amortization of equipment under capital leases is included in depreciation
expense.
F-16
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
8. Leases (continued)
At December 31, 2001, the future minimum payments for the capital leases are as
follows
2002 $ 11
-----
Total minimum lease payments 11
Less amount representing interest (1)
-----
Present value of net minimum lease payment 10
Less current maturities (10)
-----
Long-term obligations under capital-leases $ --
=====
9. Income Taxes
There was no current or deferred provision for income taxes from continuing
operations for 2001, 2000 or 1999.
A reconciliation of the statutory United States income tax rate to the effective
income tax rate follows:
2001 2000 1999
-------------------------------------------
Statutory U.S. income tax rate 34.00% (34.00)% (34.00)%
States taxes, net of federal benefit 4.35% (3.63)% (3.63)%
Permanent differences 6.77% 0.93% 0.00%
Change in valuation allowance (15.09)% 35.78% 37.20%
Other (30.03)% 0.92% 0.43%
-----------------------------------------
Effective income tax rate 0.00% 0.00% 0.00%
=========================================
F-17
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
9. Income Taxes (continued)
The components of the deferred income tax assets (liabilities) are as follows:
December 31
2001 2000
------------------------
Deferred tax assets:
Operating loss carryforwards $ 10,816 $ 11,413
Tax credits 129 129
Section 263A costs 277 --
Asset reserves:
Bad debts 580 623
Inventory reserve 924 764
Accrued expenses:
Compensation 219 277
All other 80 1
------------------------
Total deferred tax assets 13,025 13,207
Deferred tax liabilities:
Depreciation (606) (661)
Inventory capitalization -- (40)
Product liability -- (14)
Expense reserve (72) (127)
Unrealized capital gain (128) (128)
------------------------
Total deferred tax liabilities (806) (970)
------------------------
Subtotal 12,219 12,237
Valuation allowance (12,219) (12,237)
------------------------
Net deferred tax assets (liabilities) $ -- $ --
========================
For tax purposes, the Company, at December 31, 2001, has federal and state net
operating loss carryforwards of approximately $29,250. These net operating loss
carryforwards begin to expire, for federal and state purposes, in 2010. During
2001 and 2000, the Company utilized $0.5
F-18
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
9. Income Taxes (continued)
million and $0, respectively, of its net operating loss carryforwards. In
accordance with SFAS Statement No. 109, Accounting for Income Taxes, valuation
allowances are provided against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company has evaluated the realizability of
the deferred tax assets on its balance sheet and does not believe it has met the
more likely than not criteria; therefore the Company has established a valuation
allowance in the amount of $12,219 against its net deferred tax assets at
December 31, 2001.
The net change in total valuation allowance for the period ended December 31,
2001 was $18 and relates to the Company's expectations regarding utilization of
its net deferred tax assets, including available net operating loss and tax
credit carryforwards.
The federal and state net operating loss and tax credit 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.
10. Income (Loss) Per Share
The following table sets the computation of basic and diluted loss per share
from continuing operations:
Year ended December 31
2001 2000 1999
------------------------------------------------------
Numerator:
Net income (loss) (numerator for basic and
diluted earnings (loss) per share) $ 122 $ (1,162) $ (2,294)
Denominator:
Denominator for basic earnings per share-
weighted average shares 5,346,174 5,346,174 5,090,405
Denominator for diluted earnings per share-
weighted average shares 5,383,452 5,346,174 5,090,405
Basic and diluted income (loss) per share $ 0.02 $ (0.22) $ (0.45)
======================================================
F-19
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
10. Income (Loss) Per Share-continued
A total of 2,395,050 and 751,666 shares related to options and warrants and
convertible debt are not included in the computation of loss per share for 2000
and 1999 because to do so would have been anti-dilutive for those periods.
11. Stock Option and Other Stock Option Plans
The Company has two plans whereby eligible officers, directors and employees can
be granted options for the future purchase of Company common stock at the market
price on the grant date. The options, if not exercised within five-year or
ten-year periods, expire. Other conditions and terms apply to stock option
plans.
The following table summarizes information about fixed stock options outstanding
at December 31, 2001:
Weighted
Option Average
Shares Price per Exercise
Under Option Share Price
---------------------------------------------
Balance at December 31, 1998 427,979 $3.06-$6.88 $4.46
Options granted 495,000 1.50- 4.25 3.08
Options expired or terminated (171,313) 3.50- 6.88 4.34
-----------------------------------------
Balance at December 31, 1999 751,666 1.50- 6.25 3.54
Options granted 581,000 0.406-2.85 1.78
Options expired or terminated (373,000) 1.50-6.25 3.89
-----------------------------------------
Balance at December 31, 2000 959,666 0.406-4.06 2.40
Options granted 527,500 0.99-1.10 1.06
Options expired or terminated (78,666) 2.56-4.00 2.88
-----------------------------------------
Balance at December 31, 2001 1,408,500 $0.406-$4.06 $1.84
=========================================
Exercisable at December 31, 2001 745,000 $0.406-$4.06 $1.92
=========================================
At December 31, 2001, 291,500 unissued options were available under the two
plans.
The weighted average contractual life of stock options outstanding as of
December 31, 2001 and 2000 was 8 years.
F-20
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
11. Stock Option and Other Stock Option Plans (continued)
The Company applies APB No. 25 in accounting for its plans and, accordingly, no
compensation cost was recognized to the extent that the exercise price of the
stock options equaled the fair value. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss and loss per share would be the pro-forma
amounts indicated below:
Year ended December 31
2001 2000 1999
-------------------------------------------
Net income (loss) as reported $122 $(1,428) $(2,294)
Pro-forma net income (loss) (498) (1,911) (2,545)
Pro-forma income (loss) per share:
Basic and diluted (0.09) (0.36) (0.50)
The weighted average fair value of options granted during the years ended
December 31, 2001, 2000 and 1999 was $ 0.74, $1.50 and $2.08 respectively, using
the Black-Scholes option- pricing method. The following weighted-average
assumptions were utilized:
Year ended December 31
2001 2000 1999
------------------------------------------
Black Scholes Pricing Assumptions:
Expected volatility 96.7% 129.8% 90.0%
Risk free interest rate 4.3% 6.1% 6.0%
Expected dividends None None None
Expected life in years 4 4 4
The pro-forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro-forma net loss amounts presented above because
compensation cost is reflected over the option vesting periods of up to four
years and compensation cost for options granted prior to December 31, 1996 is
not considered.
F-21
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
12. Equity
On March 13, 2000, the Company acquired the private radio communications product
lines from Uniden America Corporation. Under the terms of the transaction, RELM
acquired all of Uniden's land mobile radio inventory, certain non-exclusive
intellectual property rights, and assumed responsibility for service and
technical support. Included in the transaction costs is a finders and advisory
fee of 200,000 shares of RELM common stock paid to Simmonds Capital Limited.
On August 21, 2000, in accordance with the terms of the Company's 8% convertible
subordinated notes, a holder of two notes elected to convert his notes into
30,769 shares of RELM common stock.
During the fourth quarter 1999, the investment-banking firm Sanders Morris
Harris provided financial advisory services to the Company for a fee of $25,000.
During the fourth quarter 2000, the Company agreed to pay and SMH agreed to
accept 25,000 shares of RELM common stock, valued at the then current market
price, as payment for these fees.
The Company had no shares of its $1.00 par value preferred stock issued as of
December 31, 2001 and 2000.
13. Significant Customers
Sales to the United States government and to foreign markets as a percentage of
the Company's total sales were as follows for the year ended December 31:
2001 2000 1999
-----------------------------
U.S. Government 44% 45% 26%
Foreign markets 4% 3% 1%
14. Pension Plans
The Company sponsors a participant contributory retirement (401K) plan, which is
available to all employees. The Company's contribution to the plan is either a
percentage of the participants salary (50% of the participants contribution up
to a maximum of 6%) or a discretionary amount. Total contributions made by the
Company were $69, $80, and $109 for 2001, 2000, and 1999, respectively.
F-22
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
14. Pension Plans (continued)
Related to its former paper-manufacturing subsidiary, the Company participated
in a multi-employer pension plan through the date of sale of the subsidiary on
June 16, 1997. The plan provided defined benefits for those employees covered by
two collective bargaining agreements. Contributions for employees were based on
hours worked at rates set in the bargaining agreements. If the Company curtailed
employment or withdrew from the plans, a liability may be incurred. The buyer of
the former subsidiary assumed such liability, if any. The Company agreed to be
secondarily liable if the buyer withdraws from the plans prior to June 16, 2002.
15. Restructuring
In 1997, the Company recorded a $1,872 charge related to restructuring. The
restructuring consisted of consolidating operations and reducing operating
expenses. In consolidating operations, the Company accrued $446 related to the
closing of a research and development facility in Indiana and $1,426 relating to
the termination of both factory and support employees in Indiana and Florida. In
1998, the Company reduced the liability by $1,694 for lease and severance
payments. The remaining liability of $178 in 1998 related to the remaining lease
payments of the Indiana facility. During the 1999 the Company completed its
transactions related to the restructuring and reduced the liability to zero.
16. Real Estate Assets Held for Sale
The Company sold its remaining real estate held for sale during the first and
second quarters of 1999. The real estate assets included subdivided units of
commercial land, completed residential properties, and commercial properties,
and had a valuation allowance of $1,966 at December 31, 1998. The real estate
valuation allowance was composed of the following:
Year ended December 31
2001 2000 1999
-------------------------------------------
Balance, beginning of period -- $ -- $ 1,966
Reduction due to sales -- -- (1,966)
-------------------------------------------
Balance, end of period -- $ -- $ --
===========================================
F-23
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
16. Real Estate Assets Held for Sale-continued
The summarized results of operations of the real estate business are as follows:
Year ended December 31
2001 2000 1999
--------------------------------------------
Sales $ -- $ -- $908
Cost of sales -- -- (58)
Selling, general and administrative
expenses -- -- (60)
-------------------------------------------
Operating income $ -- $ -- $790
===========================================
17. Discontinued Operations
Specialty Manufacturing
The Company incurred costs associated with the settlement of certain product
liability claims related to its former specialty manufacturing subsidiary, which
was sold in June 1997. These costs totaled $0, $266 and $0 in 2001, 2000 and
1999, respectively.
RXD, Inc.
During the third quarter of 1999, the Company sold the assets associated with
its subsidiary, RXD, Inc. (RXD), for $525. The assets sold included accounts
receivable and inventory valued at $186 and $225, respectively. The gain
recorded from the sale is $84 and was included in other income in the statement
of operations. The Company's sales for 1999 included approximately $910 of sales
generated by RXD.
18. Contingent Liabilities
From time to time, the Company may become liable with respect to pending and
threatened litigation, tax, environmental and other matters.
F-24
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
18. Contingent Liabilities-continued
General Insurance
Under the Company's insurance programs, coverage is obtained for catastrophic
exposures as well as those risks required to be insured by law or contract. It
is the policy of the Company to retain a significant portion of certain expected
losses related primarily to workers' compensation, physical loss to property,
business interruption resulting from such loss and comprehensive general,
product, and vehicle liability. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry and are included in accrued
expenses. The amounts accrued are included in accrued compensation and related
taxes in the balance sheets.
Legal Proceedings
In 1993, a civil action was brought against the Company by a plaintiff to
recover losses sustained on notes of a former affiliate. The plaintiff alleges
violations of federal security and other laws by the Company in collateral
arrangements with the former affiliate. In response, the Company filed a motion
to dismiss the complaint in the fall of 1993, which the court has yet to rule.
In February 1994, the plaintiff executed and circulated for signature, a
stipulation of voluntary dismissal. After the stipulation was executed the
plaintiff refused to file the stipulation with the court. Subsequently the
Company and others named in the complaint filed a motion to enforce their
agreement with the plaintiff. The court has also yet to rule on that motion. A
pre-trial schedule set in October 2001 set aggressive time frames for the
completion of discovery, the filing of dispositive motions and the filing of
pre-trial statements. The Company intends to vigorously defend this matter
In a second related action, an adversarial action in connection with the
bankruptcy proceedings of the former affiliate has been filed. In response to
that complaint the Company filed motion to dismiss for failure to state a cause
of action. Although the motion for dismissal was filed during 1995, the
bankruptcy court has not yet ruled on the motion. The range of potential loss,
if any, as a result of these actions cannot be presently determined.
In February 1986, the liquidator of the former affiliate filed a complaint
claiming intentional and negligent conduct by the Company and others named in
the complaint caused the former affiliate to suffer millions of dollars of
losses leading to its ultimate failure. The complaint does not
F-25
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
18. Contingent Liabilities-continued
specify damages but an unfavorable outcome could have a material adverse impact
on the Company's financial position. The range of potential loss, if any, cannot
be presently determined. Management, with the advice of counsel, believes the
Company has meritorious defenses and the likelihood of an unfavorable outcome in
each of these actions is remote.
In February 1999, the Company initiated collection and legal proceedings against
its Brazilian dealer, Chatral, for failure to pay for 1998 product shipments
totaling $1,400 which has been fully reserved. In April 2001, the Brazilian
court ordered the Company to post security with the court totaling approximately
$300,000 in the form of cash or a bond in order for the case to proceed. The
Company has elected not to post security. Consequently, the case has been
involuntarily dismissed. There has been no ruling on the merits of the case, and
we have preserved our rights to pursue this matter in the future.
On December 8, 1999, Chatral filed a counter claim against the Company that
alleges damages totaling $8,000 as a result of the Company's discontinuation of
shipments to Chatral. Although the Company and its counsel believe the Company
has a meritorious defense, the outcome of this action is uncertain. An
unfavorable outcome could have a material adverse effect on the financial
position of the Company.
Heath & Company filed a suit against RELM Wireless Corporation and RELM
Communications, Inc. in the United States District Court for the District of
Massachusetts in early 2001 year for breach of contract, misrepresentation and
unfair trade practices. Pursuant to a Memorandum and Order dated April 24, 2001,
by Judge Douglas P. Woodlock, most of Heath's claims have been dismissed. The
judge ruled as a matter of law that a fact finder must determine whether RELM
Communications withheld information it knew to be essential to the Plaintiff and
whether it did so in a bad faith attempt to withdraw from a brokerage agreement.
The Company believes that the Plaintiff will not be able to meet the burdens
outlined by the court in its April 24, 2001 Memorandum and Order.
On December 20, 2000, a products liability lawsuit was filed in Los Angeles
Superior Court in Los Angeles, California. Although we were not named in the
suit, one of the Defendants, C.P. Allstar Corporation had purchased all or
substantially all of the assets of a RELM affiliate. As part of the asset sale,
the asset purchase agreement contained indemnification provisions, which could
result in liability for us. On October 23, 2001, C.P. Allstar Corporation served
us with a
F-26
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
18. Contingent Liabilities-continued
claim for indemnification under a provision of the asset purchase agreement. The
claim is being vigorously defended by the Company's insurer.
On November 19, 2001, a products liability lawsuit was filed in the 353rd
Judicial District Court of Travis County, Texas, against RELM Wireless
Corporation and RELM Communications, Inc. C.P. Allstar Corporation is also a
named defendant in this lawsuit. C.P. Allstar Corporation had purchased all or
substantially all of the assets of a RELM affiliate. As part of the asset sale,
the asset purchase agreement contained indemnification provisions, which could
result in liability for us. The claim is being vigorously defended by the
Company's insurer.
19. Subsequent Event
In February 2002, the Company commenced a public rights offering. The purpose of
the offering is to provide working capital, which among other things, will
further the development of the Company's new digital products and capabilities.
The securities offered are "units". A unit is comprised of one share of RELM
common stock and one warrant to purchase one share of RELM common stock. Units
were offered initially to RELM's equity holders in the form of a rights
offering. The "right" allowed investors in the offering to purchase units at 10%
discount to the market price of a share of common stock. The Units were offered
to the public pursuant to a registration statement that was declared effective
by the Securities and Exchange Commission (SEC) on February 11, 2002. The
offering closed on March 22, 2002 and resulted in the sale of approximately 2.8
million units, which generated approximately $2.5 million in gross proceeds.
F-27
RELM Wireless
Notes to Consolidated Financial Statements (continued)
December 31, 2001
(In Thousands, Except Share Data and Percentages)
20. Quarterly Financial Data (Unaudited)
Selected quarterly financial data is summarized below:
Quarters Ended
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
2001 2001 2001 2001 Year
--------------------------------------------------------------------------------
Fiscal 2001
Sales $4,720 $6,188 $6,223 $5,678 $22,809
Gross profit 1,249 1,740 1,930 1,700 6,619
Net income (loss) (287) 145 213 51 122
Income (loss) per share-basic (0.05) 0.03 0.04 0.01 0.02
Income (loss) per share-diluted (0.05) 0.03 0.04 0.01 0.02
Quarters Ended
--------------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Total
2000 2000 2000 2000 Year
--------------------------------------------------------------------------------
Fiscal 2000
Sales $4,596 $5,158 $5,958 $5,342 $21,054
Gross profit 987 1,478 1,675 1,240 5,380
Income (loss) from
continuing operations 391 (542) (330) (681) (1,162)
Income (loss) from
discontinued operations -- -- -- (266) (266)
Net income (loss) 391 (542) (330) (947) (1,428)
Income (loss) per share-
basic from continuing
operations 0.08 (0.10) (0.06) (0.13) (0.22)
Income (loss) per share-
diluted from continuing
operations 0.07 (0.10) (0.06) (0.13) (0.22)
Loss per share-basic and
diluted from discontinued
operations - - - (0.05) (0.05)
Income (loss) per share-basic 0.08 (0.10) (0.06) (0.18) (0.27)
Income (loss) per share-diluted 0.07 (0.10) (0.06) (0.18) (0.27)
F-28
Part III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
-----------------------------------------------------------------------
None.
Item 10. Directors and Executive Officers of the Registrant.
------------------------------------------------------------
Information required by this item is incorporated by reference to the definitive
proxy statement to be filed by RELM for its 2002 Annual Meeting of Shareholders
(the "2002 Proxy Statement").
Item 11. Executive Compensation
-------------------------------
Information required by this item is incorporated by reference to the 2002 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
-----------------------------------------------------------------------
Information required by this item is incorporated by reference to the 2002 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------
Information required by this item is incorporated by reference to the 2002 Proxy
Statement.
40
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Consolidated Financial Statements listed below:
Report of Independent Certified Public accountants
Consolidated Balance Sheets
- December 31, 2000 and 2001
Consolidated Statements of Operations
- Years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Shareholders' Equity - Years ended December
31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
2000 and 2001
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules: All schedules have been
omitted because they are inapplicable or not material, or the
information called for thereby is included in the Consolidated
Financial Statements and notes thereto.
3. Exhibits: The exhibits listed below are filed as a part of, or
incorporated by reference into this report:
Number Exhibit
------------ ----------------------------------------------------
3(i) Articles of Incorporation **
3(ii) By-Laws **
4(ii) 8% Convertible Subordinate Promissory Note****
10(a) 1996 Stock Option Plan for Non-Employee Directors *
10(b) 1997 Stock Option Plan **
10(c) Loan and Security Agreement ****
10(d) Workers Compensation Close Out Agreement *****
10(e) Amendment to Security and Loan Agreement****
10(f) 2nd Amendment to Security and Loan Agreement****
10(g) 3rd Amendment to Security and Loan Agreement****
10(h) Simmonds Agreement****
10(i) Contract for Sale of West Melbourne Fl. Real Estate****
10(j) Sub Lease Agreement****
10(k) Uniden Asset Purchase Agreement****
10(l) OEM Uniden Manufacturing Agreement****
41
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K (continued)
----------------------------------------------------------------------------
Number Exhibit
-------- ------------------------------------------------------
10(m) Uniden ESAS Technology Agreement****
10(n) Manufacturing Agreement****
10(o) Transaction Agreement for Real Estate Sale and Contract
Manufacturing****
10(p) Fort Orange Modification Agreement******
10(q) 4th Amendment to Security and Loan Agreement*******
Post-Termination Benefits Agreement between the Company
10(r) and David P. Storey dated October 1, 2000
Post-Termination Benefits Agreement between the Company
10(s) and William P. Kelly dated October 1, 2000
OEM Manufacturing Agreement*******
10(t) Certificate of Amendment to Articles of
Incorporation********
10(u) Subsidiary of Registrant
23 Consent
----------------------------------------------------------------------------
(b) Reports on Form 8-K. The items reported and the dates of reports on
Form 8-K filed by the registrant during the last quarter of the period
covered by this report were as follows:
1. Item 5, dated December 22, 2000.
* Incorporated by reference from the Adage, Inc. (predecessor to
RELM Wireless Corporation) report on form 10-K for the year
ended December 31, 1996.
** Incorporated by reference from the Company's report on form
10-K for the year ended December 31, 1997.
*** Incorporated by reference from the Company's report on form
10-K for the year ended December 31, 1998.
**** Incorporated by reference from the Company's report on form
10-K for the year ended December 31, 1999.
***** Incorporated by reference from the Company's report on form
10-Q quarter 1 dated May 5, 1999.
****** Incorporated by reference from the Company's report on form
8-K dated December 22, 2000.
******* Incorporated by reference from the Company's report on form
10-K for the year ended December 31, 2000.
******** Incorporated by reference from the Company's report on form
10-Q quarter 3 dated November 1, 2001.
42
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
Date: March 30, 2001 RELM WIRELESS CORPORATION
By: /s/David. P. Storey
--------------------
David P. Storey
President & C.E.O.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and or the dates indicated.
SIGNATURES TITLE DATE
/s/Donald F. U. Goebert Chairman March 30, 2002
-------------------------
Donald F. U. Goebert
/s/David P. Storey President, Chief March 30, 2002
------------------------- Executive Officer and
David P. Storey Director
/s/William P. Kelly Vice President - Finance March 30, 2002
------------------------- Chief Financial Officer
William P. Kelly Secretary
/s/Buck Scott Director March 30, 2002
-------------------------
Buck Scott
/s/James C. Gale Director March 30, 2002
-------------------------
James C. Gale
/s/Robert L. MacDonald Director March 30, 2002
-------------------------
Robert L. MacDonald
/s/Ralph R. Whitney, Jr. Director March 30, 2002
-------------------------
Ralph R. Whitney, Jr.
/s/George N. Benjamin, III Director March 30, 2002
--------------------------
George N. Benjamin, III
43