As filed with the Securities and Exchange Commission on October 20, 2003
Registration No. 333-75512
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
RELM WIRELESS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Nevada 3600 59-3486297
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number)Identification No.)
---------------
David P. Storey
President and Chief Executive Officer
Relm Wireless Corporation
7100 Technology Drive 7100 Technology Drive
West Melbourne, Florida 32904 West Melbourne, Florida 32904
(321) 984-1414 (321) 984-1414
(Address, Including Zip (Name, Address, Including Zip Code,
Code, and Telephone Number, and Telephone Number, Including
Including Area Code, of Area Code, of Agent for Service)
Registrant's Principal
Executive Offices)
---------------
Copies of communications to:
Andrew E. Balog, Esq.
Greenberg Traurig, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Telephone No.: (305) 579-0500
Facsimile No.: (305) 579-0717
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
---------------
CALCULATION OF REGISTRATION FEE
================================================ ============== =================== ==================== ================
Amount to Proposed Maximum Proposed Maximum Amount of
Title of Each Class be Aggregate Price Aggregate Offering Registration
of Securities to be Registered Registered Per Unit Price Fee
------------------------------------------------ -------------- ------------------- -------------------- ----------------
Common Stock, par value $0.60 per share (1). 3,191,250(1) (1) (1) (1)
------------------------------------------------ -------------- ------------------- -------------------- ----------------
Common Stock, par value $0.60 per share (2). 555,000(2) (2) (2) (2)
------------------------------------------------ -------------- ------------------- -------------------- ----------------
---------------------------
(1) Issuable upon the exercise of warrants (together with such indeterminate
number of shares as may be issuable pursuant to anti-dilution provisions
contained therein) that were issued by the Registrant in connection with
its 2002 public rights offering and registered along with the above
underlying Common Stock on the Registration Statement to which this
Post-Effective Amendment relates and for which a registration fee was
previously paid.
(2) Includes 277,500 shares issuable upon the exercise of an option that was
issued by the Registrant to the standby underwriter of its 2002 public
rights offering to purchase 277,500 units, each unit consisting of a
warrant to purchase one share of Common Stock and one share of Common Stock
(together with such indeterminable number of shares as may be issuable
pursuant to anti-dilution provisions contained therein), as well as 277,500
shares of Common Stock issuable upon exercise of the warrants comprising
the units underlying the standby underwriter's option. The standby
underwriter's option along with the underlying units and related Common
Stock were registered on the Registration Statement to which this
Post-Effective Amendment relates and for which a registration fee was
previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
================================================================================
The information in this prospectus is not complete and may be changed. The
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is declared effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION - Dated October 20, 2003
--------------------------------------------------------------------------------
Prospectus
[RELM WIRELESS CORPORATION LOGO]
3,191,250 Shares of
Common Stock Underlying
Common Stock Purchase Warrants
And
555,000 Shares of Common Stock Underlying a
Standby Underwriter's Option
--------------------------------------------------------------------------------
o This prospectus relates to the initial issuance and sale of up to
3,191,250 shares of our common stock upon the exercise of the warrants
that we issued in connection with our public rights offering completed
on March 22, 2002 (including the warrants issued upon exercise of our
standby underwriter's overallotment option effective on May 17, 2002).
Each unit warrant entitles the holder to purchase one share of our
common stock at a price of $1.05 per share, subject to adjustments,
commencing on February 12, 2003 through February 11, 2006. Warrants not
exercised by February 11, 2006 will automatically expire.
o This prospectus also covers the resale by the standby underwriter of
our 2002 public rights offering for its own account of up to 555,000
shares of our common stock that are issuable to the standby underwriter
upon exercise of an option we granted to it in connection with our 2002
public rights offering to purchase units, each unit consisting of one
share of our common stock and one warrant (having the same terms as the
warrants we issued in our public rights offering) as well as the shares
of our common stock issuable upon exercise of these warrants. We agreed
to register the shares issuable upon exercise of the option and upon
exercise of the warrants comprising the units underlying the option.
The standby underwriter or its pledgees, donees, transferees or other
successors-in-interest may offer these shares of our common stock
covered by this prospectus from time to time through public or private
transactions at prevailing market prices or at privately negotiated
price and may make sales directly to purchasers or to or through
agents, broker-dealers or other underwriters.
o Our common stock and the warrants are currently quoted on the
over-the-counter ("OTC") Bulletin Board under the symbols "RELM" and
"RELMW," respectively. On October 1, 2003, the last reported sales
prices for our common stock and warrants on the OTC Bulletin Board were
$1.61 per share and $0.55 per warrant, respectively.
o See "Risk Factors" on page 9 of this prospectus for a discussion of
risks that you should consider before exercising the warrants and
purchasing the underlying shares of our common stock.
----------------------
Per Share Total
--------- -----
Public Offering Price of Shares Underlying
Warrants............................... $1.05 $ 3,350,812
Underwriting Commission(1)............. $0.052 $ 165,945
Proceeds to Relm Wireless Corporation
(before expenses)...................... $0.998 $ 3,184,867
----------------------
------------
(1) Consists of maximum amount which Noble International Investments, Inc., the
standby underwriter of our public rights offering, could be paid in the
form of a fee equal to five percent (5%) of the exercise price of the
warrants for its solicitation of the exercise of the warrants, excluding
the warrants held by them to purchase 277,500 shares of our common stock
for which warrants upon exercise we would receive an additional $291,375.
See "Plan of Distribution - Warrant Solicitation Fees."
Although the shares of our common stock underlying the warrants will
not knowingly be sold to purchasers in states or jurisdictions in which they are
not registered or otherwise qualified for sale, purchasers may buy our common
stock or warrants in the aftermarket or may move to states or jurisdictions in
which our common stock or warrants are not so registered or qualified. In such
event, we may be unable to issue our common stock to those persons desiring to
exercise their warrants unless and until the common stock or warrants are
registered or qualified for sale in the state or jurisdiction in which such
purchasers reside, or an exemption to such registration or qualification exists
in such state or jurisdiction. If we are unable to register or qualify the
common stock and warrants in a particular state or jurisdiction and no exemption
to such registration or qualification is available in such state or
jurisdiction, a holder may have difficulty selling, exchanging or exercising
such warrants in order to realize any economic benefit from the purchase of our
common stock without conducting such sale in a state or jurisdiction in which
our securities are registered or qualified.
Neither the SEC nor any state securities commission has determined
whether this prospectus is truthful or complete nor have they made, nor will
they make, any determination as to whether anyone should buy these securities.
Any representation to the contrary is a criminal offense.
This date of this prospectus is __________, 2003.
TABLE OF CONTENTS
Page
Disclosure Regarding Forward-Looking Statements...................................................................1
Prospectus Summary................................................................................................2
Risk Factors......................................................................................................8
Use of Proceeds..................................................................................................15
Price Range Of Common Stock and Warrants.........................................................................16
Dividend Policy..................................................................................................16
Capitalization...................................................................................................17
Selected Historical Consolidated Financial and Operating Data....................................................18
Selected Quarterly Financial Data................................................................................19
Management's Discussion and Analysis of Financial Condition and Results of Operations............................20
Business.........................................................................................................39
Management.......................................................................................................52
Principal Shareholders...........................................................................................57
Certain Transactions.............................................................................................60
Description of the Unit Warrants.................................................................................60
Description of Capital Stock.....................................................................................64
Selling Shareholder..............................................................................................69
Certain U.S. Federal Tax Considerations..........................................................................70
Plan of Distribution.............................................................................................76
Where You Can Find More Information..............................................................................79
Legal Matters....................................................................................................80
Experts..........................................................................................................80
Index to Consolidated Financial Statements......................................................................F-1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We believe that it is important to communicate our future expectations
to our security holders and to the public. This prospectus, therefore, contains
statements about future events and expectations which are "forward-looking
statements" within the meaning of Sections 27A of the Securities Act of 1933 and
21E of the Securities Exchange Act of 1934, including the statements about our
plans, objectives, expectations and prospects under the headings "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." You can expect to identify these statements by forward-looking
words such as "may," "might," "could," "would," "anticipate," "believe," "plan,"
"estimate," "project," "expect," "intend," "seek" and other similar expressions.
Any statement contained in this prospectus that is not a statement of historical
fact may be deemed to be a forward-looking statement. Although we believe that
the plans, objectives, expectations and prospects reflected in or suggested by
our forward-looking statements are reasonable, those statements involve risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements, and we
can give no assurance that our plans, objectives, expectations and prospects
will be achieved.
Important factors that might cause our actual results to differ
materially from the results contemplated by the forward-looking statements are
contained in the "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections of this prospectus as
well as elsewhere in this prospectus, and include, among others, the following:
o changes in customer preferences;
o our inventory and debt levels;
o quality of management, business abilities and judgment of our
personnel;
o the availability, terms and deployment of capital;
o competition in the land mobile radio industry;
o limitations in available radio spectrum for use of land mobile
radios;
o changes or advances in technology; and
o general economic and business conditions.
We assume no obligation to publicly update or revise any
forward-looking statements made in this prospectus, whether as a result of new
information, future events, changes in assumptions or otherwise, after the date
of this prospectus.
PROSPECTUS SUMMARY
This summary highlights selected information and does not contain all
the information that is important to your investment decision. You should read
the entire prospectus, including "Risk Factors" and our financial statements and
related notes, before deciding to exercise the warrants and invest in our common
stock. As used in this prospectus, the terms "Company," "we," "us," "our," or
"Relm Wireless" mean collectively Realm Wireless Corporation and all of its
consolidated subsidiaries.
Summary of the Offering
Common stock offered................................. 3,191,250 shares of our common stock which are issuable
upon the exercise of the 3,191,250 warrants that we
issued in connection with our public rights offering
completed on March 22, 2002 (including the warrants
issued upon exercise of our standby underwriter's
overallotment option effective on May 17, 2002).
Because the warrants were issued together with common
stock as part of detachable units in our public rights
offering, we refer to the warrants in this prospectus
as the "unit warrants." Each unit warrant entitles the
holder to purchase one share of our common stock at an
exercise price of $1.05 per share (as adjusted from
$1.08 per share to give effect to our August 2003
private sale of 500,000 shares of our common stock at
$0.60 per share), and is exercisable at any time on or
after February 12, 2003 until February 11, 2006.
555,000 shares of our common stock which are issuable
upon the exercise of the option we issued to the
standby underwriter of our 2002 public rights
offering to purchase 277,500 units, each unit
consisting of one share of our common stock and one
warrant (having the same terms as the units warrants
we issued in our public rights offering), including
the shares of our common stock issuable upon exercise
of the warrants comprising the units underlying the
standby underwriter's option. The standby
underwriter's option is exercisable any time after
February 12, 2003 through February 11, 2007 at an
exercise price of $0.60 per unit and the warrants
comprising a part thereof are currently exercisable
at $1.05 per share and are otherwise identical in all
respects to the unit warrants. In this prospectus, we
refer to the warrants comprising the units underlying
the standby underwriter's option as the "standby
underwriter's warrants."
Common stock outstanding prior to this offering...... 9,065,088 shares (1)
Common stock outstanding immediately following this
offering.......................................... 12,811,338 shares(1)
2
Use of proceeds...................................... Assuming that all of the unit warrants are exercised,
we expect to receive net proceeds from the sale of the
underlying shares of our common stock offered hereby,
after deduction of a five percent (5%) fee which we may
have to pay to Noble International Investments, Inc.,
the standby underwriter in the public rights offering,
for solicitation of the exercise of the unit warrants,
and the expenses of this offering, of $75,000. We
intend to use the net proceeds from this offering for
working capital purposes, which will include the
further expansion of our digital LMR product line. We
will not receive any proceeds from the resale of shares
of our common stock issuable to Noble International
Investments, Inc., the standby underwriter of our 2002
public rights offering, as a result of the exercise of
its option to purchase units comprised of common stock
and the standby underwriter's warrants or the exercise
of the standby underwriter's warrants. However, we may
receive up to $291,375 of proceeds for the exercise of
the standby underwriter's warrants, which proceeds we
intend to also use for working capital purposes.
OTC Bulletin Board symbols:
Common stock......................................... RELM
Warrants............................................. RELMW
(1) Unless we state otherwise, the information in this prospectus concerning the
number of shares of our common stock outstanding, currently and after this
offering, is based on the number of shares of common stock outstanding as of
October 1, 2003 and does not include 7,596,155 shares of our common stock
related to stock options and other warrants and convertible debt.
3
WHO WE ARE
OVERVIEW
Relm Wireless designs, manufactures and markets wireless communications
products, principally two-way land mobile radios, or "LMRs," and related
components. We offer products with three distinct brand names: BK RADIO, RELM,
and UNIDEN. These products are sold to:
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.
From 1996 through 2000 we significantly restructured the Company. The
objective was to focus the Company on our core business of LMR wireless
communications. The restructuring, largely completed in 1999, consisted of
selling or otherwise discontinuing businesses and product lines that were
outside our focus or that were under-performing. We also significantly reduced
the size and costs of our operations. Consequently, in more recent years, we
have been able to aggressively pursue initiatives in the LMR business designed
to improve our competitive position and ultimately fuel future growth and
profitability.
The restructuring program was the key factor behind our profitable year
in 2001, and allowed us to withstand a difficult year in 2002. Diminished sales
to our two largest customers and the deteriorating overall economic conditions
were the principal reasons for a 29% decrease in revenues from 2001 to 2002. We
also incurred several significant non-recurring charges, the largest of which
was the write off of a note receivable from our former paper-manufacturing
subsidiary that was sold in 1997. This charge is unrelated to our present
operations.
During 2002 we continued to expand our utilization of high-quality,
low-cost contract manufacturers. These efforts began to yield margin
improvements in 2002, a trend that has continued thus far in 2003.
We made significant progress on new product development during 2002.
Most importantly, we expanded and accelerated our digital product development
using additional capital that was raised in our first quarter 2002 public rights
offering. The first model, a digital portable radio that will be added to our BK
Radio line, has been completed and approved by the Federal Communications
Commission or "FCC." It is in the process of being added to the contract for the
Department of Interior or "DOI." Of all federal government agencies, the DOI is
the most aggressive in implementing plans to purchase digital communications
technology. Late in 2002 we also introduced a new family of products for
business and industrial users, and completed the development and testing of our
ESAS System. We believe that these new products, and others that will be
completed shortly, serve as a solid foundation on which to grow the business
profitably.
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 our products and us is also available through the Internet at
"www.Relm.com." The information provided on our website is not incorporated into
this prospectus.
4
Relm Wireless Corporation is the surviving corporation in the January
30, 1998 reincorporation merger of Adage, Inc. into Relm Wireless Corporation,
its wholly owned subsidiary.
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 our common stock and the trading symbol
for the shares was changed from "ADGE" to "RELM."
RECENT DEVELOPMENTS
On August 29, 2003, we replaced our existing revolving line of credit
with Fleet Capital Corporation, under which we had been in default since
December 31, 2002, by entering into an agreement with a new lender, Silicon
Valley Bank. The agreement provides for a revolving line of credit of up to $2.5
million for one year. The line is secured by substantially all of our assets,
consisting principally of our trade receivables and inventory. Concurrently with
the refinancing transaction, three funds affiliated with our directors purchased
an aggregate of 500,000 shares of our common stock at $0.60 per share (which
resulted in reducing the exercise price of each warrant to $1.05 from $1.08).
The proceeds of the transaction were used to pay off our existing credit
facility with Fleet Capital Corporation and provide working capital to be used
in executing our business plans, including the expansion of our digital product
line.
In July 2003, we were awarded contract participation to supply to the
DOI digital LMR equipment that is compliant with the Association of
Public-Safety Communications Officials, or "APCO," Project 25 specifications.
The contract, originally established in November 2002, is a fixed-price,
indefinite-delivery and indefinite-quantity contract that is open to all federal
agencies. It includes one base year with options for four additional years.
Under the contract, U.S. government agencies may purchase up to $1 billion of
APCO Project 25 LMR equipment. The contract has no minimum purchase
requirements, and purchases may fluctuate from period to period. APCO Project 25
specifies standard features and signaling for narrow-band digital voice and data
in both conventional and trunking modes of operation. The standard has been
adopted by the U.S. federal government, which has targeted a conversion to APCO
Project 25 LMR equipment by year-end 2005. Government and public-safety LMR
users nationwide are increasingly adopting this standard.
On April 29, 2003, we were notified by Nasdaq Listing Qualifications
that we had not regained compliance with the minimum $1.00 closing bid price per
share requirement as set forth in marketplace rule 4310(c)(4). We were not
eligible for an additional 90 calendar day compliance period because we did not
meet the initial inclusion requirements of the Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(2)(A). Accordingly, our securities were delisted from
the Nasdaq SmallCap Market at the opening of business on May 8, 2003. Our common
stock and the unit warrants became immediately eligible for quotation on the OTC
Bulletin Board effective with the open of business on May 8, 2003. The OTC
Bulletin Board symbols assigned to our common stock and the warrants is "RELM"
and "RELMW", respectively.
In March 2003, our new VHF digital portable radio, the DPH, was
approved by the FCC for use in the United States. Subsequently, the DPH was
added to our contract with the U. S. General Services Administration, and
included on a contract with the U.S. Department of Interior. The BK
Radio-branded DPH is compliant with the APCO Project 25 standard.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
In the table below, we provide you with selected financial data as of
and for the six months ended June 30, 2003 and 2002, which are derived from and
should be read in conjunction with our unaudited condensed consolidated
financial statements included elsewhere herein, which have been prepared on the
same basis as our audited consolidated financial statements, and, in our
opinion, include all adjustments, consisting only of normal recurring
adjustments, that are considered necessary for a fair presentation of the
financial position and results of operations for those periods. The results of
operations for the six months ended June 30, 2003 are not necessarily indicative
of the results for the full year. We also provide you with selected financial
data for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, and
balance sheet data as of June 30, 2003, which are derived from and should be
read in conjunction with our unaudited condensed consolidated financial
statements included elsewhere herein, and as of December 31, 2002, 2001, 2000,
1999 and 1998, which are derived from and should read in conjunction with our
audited consolidated financial statements included elsewhere herein. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
Statement of Operations Data (in thousands, except per share data)
Six Months Ended June 30, Year Ended December 31,
------------------------- ---------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
(Unaudited)
Sales.................... $8,827 $9,683 $15,978 $22,809 $21,054 $22,404 $29,530
Income (Loss) From
Continuing Operations.. (70) (876) (3,631) 122 (1,162) (2,294) (4,907)
Loss From Discontinued
Operations............. -- -- -- -- (266) -- (725)
Extraordinary Gain....... -- -- -- -- -- -- 227
Net Income (Loss)........ $(254) $(1,013) $(3,631) $122 $(1,428) $(2,294) $(5,405)
----- ------- ------- ---- ------- ------- -------
Income (loss) Per
Share-Basic and
Diluted:
Income (Loss) Per Share
From Continuing
Operations............. $(0.03) $(0.14) $(0.47) $0.02 $(0.22) $(0.45) $(0.97)
Income (Loss) Per Share
From Discontinued
Operations............. -- -- -- -- (0.05) -- (0.15)
Income Per Share From
Extraordinary Item..... -- -- -- -- -- -- 0.05
Net Income (Loss) Per
Share.................. $(0.03) $(0.14) $(0.47) $0.02 $(0.27) $(0.45) $(1.07)
====== ====== ====== ===== ====== ====== ======
o 2002 results include an approximately $900 note receivable valuation
allowance related to the purchase of the assets of the Company's former
paper-manufacturing subsidiary in the first quarter, a collection
allowance of approximately $175 for a note receivable from the
purchaser of the assets of our former specialty-manufacturing
subsidiary established in the fourth quarter, the write-off of a
technology agreement with a book value of approximately $210 taken in
the fourth quarter, the write-off of an investment banking services
agreement with a book value of approximately $119 taken in the fourth
quarter, and approximately $185 in costs related to the restructuring
of our sales and marketing organization taken in the fourth quarter.
o 2000 results include an approximately $984 net gain on the sale of our
manufacturing facility and the sale of certain manufacturing and test
equipment.
o 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.
6
Balance Sheet Data (in thousands)
As of December 31,
As of June 30, --------------------------------------------------------
2003 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ----
(Unaudited)
Working Capital............ $5,400 $5,734 $9,262 $7,679 $5,676 $6,573
Total Assets............... 12,862 12,856 17,623 18,422 22,853 26,827
Long-Term Debt............. 3,150 3,150 6,998 6,353 9,072 8,755
Total Shareholders Equity.. 4,629 4,872 6,482 6,360 6,377 8,671
7
RISK FACTORS
You should carefully consider the following risk factors in addition to the
other information contained in this prospectus before exercising the warrants
and purchasing the underlying shares of common stock. The cautionary statements
set forth below and elsewhere in this prospectus should be read in conjunction
with accompanying forward-looking statements included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere herein.
OUR INDEPENDENT AUDITORS, IN THEIR REPORT REGARDING OUR FINANCIAL STATEMENTS AS
OF DECEMBER 31, 2002, HAVE INDICATED THAT THERE IS SUBSTANTIAL DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN
Our independent auditors reported in their audit report dated March 28,
2003 that substantial doubt exists about our ability to continue as a going
concern because we suffered a substantial net loss from operations for the year
ended December 31, 2002 and because we were then in default under the terms of
our credit agreement with Fleet Capital Corporation due to our violation of
certain financial covenants. We incurred a net loss of approximately $3.6
million during the year ended December 31, 2002. Although on August 29, 2003 we
entered into an agreement with a new lender named Silicon Valley Bank providing
for a revolving line of credit of up to $2.5 million for one year replacing the
credit agreement with Fleet Capital, if we default under the new agreement, are
unable to borrow sufficient amounts under the new agreement, or are unable to
refinance it or find alternate lenders, or raise additional funds from new
sources, we may be required to significantly curtail or even cease our
operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST
We have a history of substantial losses. We incurred a loss totaling
$3.6 million for the year ended December 31, 2002 and $254,000 for the six
months ended June 30, 2003. We had an accumulated deficit of approximately $21.8
million as of December 31, 2002 and approximately $22.1 million as of June 30,
2003. While we have taken steps to improve operations, we cannot assure that we
will achieve or sustain profitable operations in the future.
WE HAVE A VARIED OPERATING HISTORY ON WHICH INVESTORS CAN EVALUATE OUR FUTURE
PROSPECTS
The size and structure of our Company changed significantly from 1997
to 2000. During that time we shifted our focus to the LMR business by selling or
discontinuing our non-LMR businesses as well as LMR products that were
performing poorly. Accordingly, operating results prior to 2001 may not be
useful in projecting our future results.
In light of the nature of our LMR products, 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:
o Availability of products;
o Our dependence upon orders placed by the United States federal
government and its agencies;
o The timing and amount of orders we receive from our customers,
which may be tied to seasonal demand;
8
o Cancellations or delays of customer product orders, or the
loss of a significant customer;
o Reductions in consumer demand for consumer products generally
or for our products in particular;
o A reduction in the average selling price for our products as a
result of competitive factors;
o The timing and amount of research and development
expenditures;
o General business conditions in our markets;
o Any new product introductions, or delays in product
introductions, by us or our competitors; and
o Increased costs charged by our suppliers or changes in the
delivery of products to us.
As a result of these and other factors, we believe that
period-to-period comparisons for years prior to 2001, may not be a good
indicator of our future performance of our historical results of operations.
WE RELY ON OUR LINE OF CREDIT TO FINANCE OPERATIONS
Our past and present loan agreements contain numerous financial and
operating covenants. We defaulted on some of these covenants as of December 31,
2002 under our prior loan agreement with Fleet Capital Corporation. Although in
August 2003 we entered into a new loan agreement with a new lender named Silicon
Valley Bank to replace our agreement with Fleet Capital Corporation, there can
be no assurance that we will not default in the future or that such defaults
will be cured or waived. The covenants in our current loan agreement place
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.
Our failure to comply with the ratios and tests contained in our
current loan agreement could result in acceleration of the indebtedness. To
secure our obligations under our current loan agreement, we have granted to
Silicon Valley Bank, our current lender, a first priority pledge of, and
security interest in, substantially all of our assets. If the maturity of our
indebtedness was accelerated, we might not have sufficient assets to repay such
indebtedness in full.
Our current loan agreement only has a one year term. When our current
loan agreement expires, we will need to renew the agreement, refinance our loan,
or raise additional funds from new sources. If we are unable to borrow
sufficient amounts under our current loan agreement or are unable to refinance
it, or find alternate lenders, or raise additional funds from new sources, we
may be required to significantly curtail or even cease our operations.
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 are, and will continue to
be, significant.
9
We believe, based upon our current plans and assumptions relating to
our operations, that our existing line of credit, reserves and expected cash
receipts together will provide the funds necessary to satisfy our cash
requirements for the next twelve months.
OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND LIMIT OUR
ABILITY TO FINANCE FULL OPERATIONS AND PLANNED GROWTH BECAUSE OF DEBT SERVICE
OBLIGATIONS
Our total liabilities and debt were approximately $8.0 million and
shareholders' equity was approximately $4.9 million at December 31, 2002. At
June 30, 2003, our total liabilities and debt were approximately $8.2 million
and shareholders' equity was approximately $4.6 million. 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.
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 may not continue to 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.
10
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 currently is estimated to have in excess of 70% of the market for LMR
products. This company 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;
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. The development of our first APCO 25 compliant model
is complete and available for sale. 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
11
delivery schedules, quality assurance, production yield and costs. We currently
have a single source for the manufacture of our Uniden products. If any of our
manufacturers terminate 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 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
alternate 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, 2002, approximately 39% of our
LMR sales were to agencies and departments of the federal government. For the
six months ended June 30, 2003, sales to the U.S. government represented
approximately $3.70 million, or 41.9%, of our total revenues, compared to $3.95
million, or 40.8%, for the same period in 2002. These sales were primarily to
the United States Forest Service. There can be no assurance that we will be able
to maintain our 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.
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, Harold Cook and Chris Ramsden, our Vice Presidents and
Theresa Zagaruyka and James Spence, our engineering directors. 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 qualified personnel could cause our business, financial condition,
and results of operations to suffer.
12
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 shareholder 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 FCC.
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.
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.
13
WE CARRY SUBSTANTIAL QUANTITIES OF INVENTORY
We carry a significant amount of inventory to service customer
requirements in a timely manner. 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 marks "WILSON,"
"UTILICOM," "CITICOM," "MINI-COM," "REGENCY ELECTRONICS" and "FORCE
COMMUNICATIONS." In addition, we have worldwide 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. 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;
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 wartime economy
in the United States. While we cannot predict what impact a prolonged war on
terrorism and the war in Iraq 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.
14
WE MAY BE SUBJECT TO COSTLY LITIGATION RESULTING IN AN ADVERSE AFFECT ON OUR
FINANCIAL CONDITION
We are currently involved in seven lawsuits as a defendant or
plaintiff. While there is no way to predict the success or failure of any
litigation, we are vigorously 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. Three 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
Our articles of incorporation could discourage or prevent potential
acquisitions of our company that Shareholders 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.
EXERCISE OF THE UNIT WARRANTS AS WELL AS OUTSTANDING STOCK OPTIONS, WARRANTS AND
CONVERTIBLE NOTES MAY CAUSE DILUTION TO EXISTING SHAREHOLDERS AND LIMIT OUR
ABILITY TO RAISE CAPITAL
Existing shareholders (including purchasers who become shareholders
upon exercise of unit warrants) will suffer immediate dilution in the value of
their shares of common stock upon exercise of the unit warrants. If additional
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 applicable exercise price per share, then
existing shareholders (including purchasers who become shareholders upon
exercise of unit warrants) would suffer further dilution in the value of their
shares of common stock. The exercise of the unit warrants as well as options and
other 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.
USE OF PROCEEDS
Assuming that all of the unit warrants are exercised, we expect to
receive net proceeds from the sale of the underlying shares of our common stock
offered hereby, after deduction of a five percent (5%) fee which we may have to
pay to Noble International Investments, Inc., the standby underwriter in the
public rights offering, for solicitation of the exercise of the unit warrants,
and the expenses of this offering, of $75,000. We intend to use the net proceeds
from this offering for working capital purposes, which will include the further
expansion of our digital LMR product line. We will not receive any proceeds from
15
the resale of shares of our common stock issuable to Noble International
Investments, Inc., the standby underwriter of our 2002 public rights offering,
as a result of the exercise of its option to purchase units comprised of common
stock and the standby underwriter's warrants or the exercise of the standby
underwriter's warrants. However, we may receive up to $291,375 of proceeds for
the exercise of the standby underwriter's warrants, which proceeds we intend to
also use for working capital purposes.
PRICE RANGE OF COMMON STOCK AND WARRANTS
From July 5, 2001 until May 8, 2003, our common stock and unit warrants
were traded on the NASDAQ SmallCap Market under the symbol "RELM" and "RELM,"
respectively. 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 and unit warrants for the
periods indicated, as reported by the NASDAQ SmallCap Market and, with respect
to dates after May 8, 2003, as quoted on the OTC Bulletin Board. These
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission and may not necessarily represent actual transactions.
Common Stock Warrants(1)
------------ -----------
2001 Quarter Ended High Low 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 -- --
2002 Quarter Ended High Low High Low
------------------ ---- --- ---- ---
March 31, 2002 $1.25 $0.83 $0.29 $0.29
June 30, 2002 1.01 0.80 0.45 0.04
September 30, 2002 0.82 0.41 0.19 0.09
December 31, 2002 0.60 0.39 0.20 0.10
2003 Quarter Ended High Low High Low
------------------ ---- --- ---- ---
March 31, 2003 $0.60 $0.39 0.12 0.12
June 30, 2003 0.75 0.21 0.15 0.10
September 30, 2003 1.60 0.47 0.60 0.11
----------------------
(1) The warrants were issued in the first quarter of 2002.
On October 1, 2003, there were 1,211 holders of record of our common
stock and 68 holders of record of our unit warrants, respectively, and the last
quoted price of our common stock and warrants were $1.61 per share and $0.55 per
warrant, respectively. Our common stock and unit warrants were delisted from the
Nasdaq SmallCap Market at the opening of business of May 8, 2003 and since then
have been quoted on the OTC Bulletin Board under the symbols "RELM" and "RELMW,"
respectively.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Our future decisions concerning the payment
16
of dividends on the common stock will depend upon our results of operations,
financial condition and capital expenditure plans, as well as such other factors
as the board of directors, in its sole discretion, may consider relevant. In
addition, our existing indebtedness restricts, and we anticipate our future
indebtedness may restrict, our ability to pay dividends.
CAPITALIZATION
The following table shows our capitalization as of June 30, 2003:
o on an actual basis; and
o on an as adjusted basis to reflect (i) the issuance and sale
of 3,191,250 shares of our common stock upon exercise of the
unit warrants at an exercise price of $1.05 per share, after
deduction of a five percent (5%) fee which may be paid to
Noble Investments International, Inc., our standby underwriter
in the public rights offering, for solicitation of the
exercise of the warrants, and estimated offering expenses of
$75,000, and (ii) the issuance and sale of 500,000 shares of
common stock at $0.60 per share to three funds affiliated with
certain of our directors, including our use of the related net
sale proceeds to fund future working capital needs and the
immediate repayment of all outstanding amounts due under our
revolving line of credit with Fleet Capital Corporation, which
was replaced by the new secured revolving line of credit with
Silicon Valley Bank.
This table should be read in conjunction with "Selected Historical
Consolidated Financial and Operating Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our unaudited
condensed consolidated financial statements and related notes included elsewhere
in this prospectus.
As of June 30, 2003
---------------------------------
Actual As Adjusted
------------- ---------------
(In thousands)
(Unaudited)
Cash and cash equivalents.................................................... $ 854 $ 4,263
Convertible subordinated notes............................................... $ 3,150 $ 3,150
Revolving line of credit..................................................... $ 2,902 $ 2,902
Shareholders' equity:
Preferred stock; $1.00 par value; 1,000,000 shares authorized; none
outstanding............................................................ - -
Common stock; $0.60 par value; 20,000,000 shares authorized; 8,565,088
issued and outstanding at June 30, 2003 and 12,256,338 shares, as
adjusted............................................................... 5,138 7,353
Additional paid-in capital................................................ 21,553 22,913
Accumulated deficit....................................................... (22,062) (22,062)
---------- -----------
Total shareholders' equity............................................. 4,629 8,204
---------- -----------
Total capitalization................................................. $ 11,535 $ 18,519
========== ===========
17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
In the table below, we provide you with selected historical
consolidated financial and operating data as of and for the three and six months
ended June 30, 2003 and 2002, which are derived from and should be read in
conjunction with our unaudited condensed consolidated financial statements
included elsewhere herein, which have been prepared on the same basis as our
audited consolidated financial statements, and, in our opinion, include all
adjustments, consisting only of normal recurring adjustments, that are
considered necessary for a fair presentation of the financial position and
results of operations for those periods. The results of operations for the six
months ended June 30, 2003 are not necessarily indicative of the results for the
full year. We also provide you with selected financial data for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998, and balance sheet data as of June
30, 2003 and 2002, which are derived from and should be read in conjunction with
our unaudited condensed consolidated financial statements included elsewhere
herein, and as of December 31, 2002, 2001, 2000, 1999 and 1998, which are
derived from and should read in conjunction with our audited consolidated
financial statements included elsewhere herein. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
Statement of Operations Data (in thousands, except per share data)
Six Months Ended Three Months Ended
June 30, June 30,
(unaudited) (unaudited) Year Ended December 31,
------------------ ------------------- --------------------------------------------------------
2003 2002 2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Sales ................. $ 8,827 $ 9,683 $ 5,231 $ 4,950 $ 15,978 $ 22,809 $ 21,054 $ 22,404 $ 29,530
Income (Loss) from
Continuing
Operations Before
Discontinued
Operations and
Extraordinary Item . (70) (876) 219 78 (3,631) 122 $ (1,162) $ (2,294) $ (4,907)
Loss From Discontinued
Operations ......... -- -- -- -- -- -- (266) -- (725)
Extraordinary Item .... -- -- -- -- -- -- -- -- 227
Net Income (Loss) ..... $ (254) $ (1,013) $ 122 -- ($ 3,631) $ 122 $ (1,428) $ (2,294) ($ 5,405)
-------- -------- -------- --------- -------- -------- -------- -------- --------
Income (Loss) Per Share
From Continuing
Operations ......... $ (0.03) $ (0.14) $ 0.01 $ 0.00 $ (0.47) $ 0.02 $ (0.22) $ (0.45) $ (0.97)
Loss Per Share From
Discontinued
Operations ......... -- -- -- -- -- -- (0.05) -- (0.15)
Gain Per Share From
Extraordinary Item . -- -- -- -- -- -- -- -- 0.05
Net Income (Loss) Per
Share (Basic and
Diluted) ........... $ (0.03) $ (0.14) $ 0.01 $ 0.00 $ (0.47) $ 0.02 $ (0.27) $ (0.45) (1.07)
======== ======== ======== ========= ======== ======== ======== ======== ========
--------------------
o 2002 results include an approximately $900 note receivable
valuation allowance related to the purchase of the assets of
the Company's former paper-manufacturing subsidiary in the
first quarter, a collection allowance of approximately $175
for a note receivable from the purchaser of the assets of our
former specialty-manufacturing subsidiary established in the
fourth quarter, the write-off of a technology agreement with a
book value of approximately $210 taken in the fourth quarter,
the write-off of an investment banking services agreement with
a book value of approximately $119 taken in the fourth
quarter, and approximately $185 in costs related to the
restructuring of our sales and marketing organization taken in
the fourth quarter.
18
o 2000 results include an approximately $984 net gain on the
sale of our manufacturing facility and the sale of certain
manufacturing and test equipment.
o 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.
Balance Sheet-Data (in thousands)
June 30,
(unaudited) December 31,
------------------ ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---- ---- ---- ---- ---- ---- ----
Working Capital ............ $ 5,400 $10,348 $ 5,734 $ 9,262 $ 7,679 $ 5,676 $ 6,573
Total Assets ............... 12,862 16,202 12,856 17,623 18,422 22,853 26,827
Long-Term Debt (Less Current
Portion) ................ 3,150 3,150 3,150 6,998 6,353 9,072 8,755
Total Stockholders' Equity . 4,629 7,494 4,872 6,482 6,360 6,377 8,671
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth a summary of our unaudited financial
quarterly results of operations for each quarter in the two year period ended
December 31, 2002 and the six month period ended June 30, 2003. The information
for the six month period ended June 30, 2003 is derived from our unaudited
condensed consolidated financial statements included elsewhere in this
prospectus. This information is prepared on the same basis as our audited
financial statements contained elsewhere in this prospectus, and, in our
opinion, includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the quarterly information
presented. Please read this information in conjunction with our financial
statements and the related notes included elsewhere in this prospectus.
Historical results for any quarter are not necessarily indicative of the results
that may be expected for any future period.
(in thousands, except per share data) Quarters Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
2002 2002 2002 2002
---- ---- ---- ----
FISCAL 2002
Sales ............................. $ 4,733 $ 4,950 $ 3,979 $ 2,316
Gross profit ...................... 1,355 1,538 1,157 166
Net income (loss) ................. (1,016) 3 (395) (2,224)
Earnings (loss) per share-basic ... (0.18) 0.00 (0.05) (0.26)
Earning (loss) per share-diluted .. (0.18) 0.00 (0.05) (0.26)
19
Quarters Ended
----------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---- ---- ---- ----
FISCAL 2001
Sales ............................. $ 4,720 $ 6,188 $ 6,223 $ 5,678
Gross profit ...................... 1,249 1,740 1,930 1,700
Net income (loss) ................. (287) 145 213 51
Earnings (loss) per share-basic ... (0.05) 0.03 0.04 0.01
Earnings (loss) per share-diluted . (0.05) 0.03 0.04 0.01
Quarters Ended
----------------------
March 31, June 30,
2003 2003
---- ----
FISCAL 2003
Sales ............................. $ 3,596 $ 5,231
Gross Profit (loss) ............... 1,077 1,765
Net income (loss) ................. (377) 122
Earnings (loss) per share-- basic . (0.04) 0.01
Earnings (loss) per share-- diluted (0.04) 0.01
In the fourth quarter of 2002 we recorded adjustments that increased
our net loss by approximately $984 to reflect (i) the adjustment of inventories
for slower moving items ($283), (ii) the provision for an uncollectible note
receivable from the purchaser of our former specialty-manufacturing subsidiary
($175), (iii) the write-off of the remaining book value of a technology
agreement ($211), (iv) the write-off of the remaining book value of an
investment banking agreement ($120), and (v) severance and other costs
pertaining the reorganization of our sales and marketing efforts ($195).
Additionally, sales for the fourth quarter declined by $3.4 million (59.2%)
compared to the same period in the prior year. Consequently, we were unable to
absorb manufacturing overhead or cover other fixed costs ($1,240).
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and related notes included elsewhere
in this prospectus. The discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
the results contemplated in these forward-looking statements as a result of
factors, including, but not limited to, those under "Risk Factors."
RESULTS OF OPERATIONS
ANALYSIS OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002
The following table shows each item from the unaudited condensed
consolidated statements of operations for the three and six months ended June
30, 2003 and 2002 expressed as a percentage of sales:
Percentage of Sales Percentage of Sales
-------------------------- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30 June 30 June 30
2003 2002 2003 2002
---------- ---------- -------- ---------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 66.3 68.9 67.8 70.1
---------- ---------- -------- ---------
Gross margin 33.7% 31.1% 32.2 29.9%
Selling, general and administrative expenses (29.5) (29.5) (33.0) (29.6)
Loss on Notes Receivable -- -- -- (9.3)
Interest expense (2.3) (2.2) (2.5) (2.3)
Other income 0.4 0.7 0.4 0.9
---------- ---------- -------- ---------
Net income (loss) 2.3% 0.1% (2.9)% (10.4)%
========== ========== ======== =========
NET SALES
Net sales for the three months ended June 30, 2003 increased
approximately $0.3 million (5.7%) to $5.2 million from $4.9 million for the same
period last year.
This increase is attributed primarily to sales of our digital APCO
Project 25-compliant products. Our initial digital portable radio, the DPH, was
approved for sale by the FCC late in March 2003. Shortly thereafter, it was
added to our contract with the GSA. More recently, in July 2003, the DPH was
awarded a place on the DOI digital communications contract. Accordingly, it can
now be purchased by DOI agencies as well as other federal government agencies
nationwide. During the quarter, Uniden products were sold to a barter concern
for approximately $204,000. For this sale we received credits with the barter
concern, which will be utilized to procure goods and services in the normal
course of business in the future. We have executed various transactions with
this concern since establishing a relationship in 1996.
21
Net sales for the six months ended June 30, 2003 decreased
approximately $0.9 million (8.8%) to $8.8 million from $9.7 million for the same
period last year, primarily due to revenue declines during the first quarter
2003. First quarter revenues from BK Radio-branded analog products, sold
principally to the government and public safety market segments, decreased
approximately $1.0 million compared to the same period last year due to lighter
demand from our primary customers in federal and state agencies. This decrease
was partially offset by new product revenues driven by our newly introduced
digital portable radio, and the RP Series analog portable radios. The RP-Series
is a full-featured, yet low-cost product line designed to compete effectively in
the highly competitive business and industrial market segment.
COST OF SALES AND GROSS MARGIN
Cost of sales as a percentage of net sales for the three months ended
June 30, 2003 was 66.3% compared to 68.9% for the same period last year. For the
six months ended June 30, 2003, cost of sales as a percentage of net sales was
67.8% compared to 70.1% for the same period last year.
The improvement in cost of sales and gross margins reflects lower
product costs driven by the implementation of strategic manufacturing
relationships, and higher margins realized from sales of our new APCO Project 25
compliant digital portable radio. It also reflects reductions in staffing and
other manufacturing support costs at our operations in West Melbourne, Florida.
These actions began impacting product costs in 2002. We anticipate continued
improvements in cost of sales and gross margins.
We continuously evaluate new manufacturing alternatives to further
reduce our product costs. We anticipate that the current relationships, or
others that are comparable, will be available to us in the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses consist of
marketing, sales, commissions, engineering, development, management information
systems, accounting and headquarters expenses. For the three months ended June
30, 2003, SG&A expenses totaled approximately $1.5 million (29.5% of sales)
compared to $1.5 million (29.5% of sales) for the same period last year. For the
six months ended June 30, 2003, SG&A expenses totaled approximately $2.9 million
(33.0% of sales) compared to $2.9 million (29.6% of sales) for the same period
last year. Marketing and selling expenses for the three and six months ended
June 30, 2003 increased approximately $85,000 (15.3%) and $87,000 (8.0%),
respectively. This increase was the result of initiatives to drive revenue
growth, particularly from new products. These increases were partially offset by
decreases in engineering and development expenses as our ESAS systems
development was largely completed.
LOSS ON NOTES RECEIVABLE
In April 2002, we learned that the purchaser of the assets of the
Company's former paper-manufacturing subsidiary had ceased operations.
Accordingly, the Company wrote-off the entire principal amount ($900,000) of the
two promissory notes in the first quarter of last year.
OPERATING INCOME (LOSS)
Operating income for the three months ended June 30, 2003 was
approximately $219,000 compared to approximately $78,000 for the same period
last year. The operating loss for the six months ended June 30, 2003 was
22
approximately $70,000 compared to approximately $876,000 for the same period
last year. The prior year included a non-recurring write-off of the entire
principal amount ($900,000) of two promissory notes.
INTEREST EXPENSE
For the three months ended June 30, 2003 interest expense totaled
$119,000 (2.3% of sales) compared to $111,000 (2.2% of sales) for the same
period last year. For the six months ended June 30, 2003 interest expense
totaled $222,000 (2.5% of sales) compared to $221,000 (2.3% of sales) for the
same period last year. In March 2003, our then senior lender increased the
annual interest rate on our revolving line of credit by 2%, in accordance with
the provisions of the loan agreement. Additionally, borrowings from the
revolving line of credit increased compared to the same period last year.
INCOME TAXES
No income tax provision was provided for the three or six months ended
June 30, 2003 or 2002. We have net operating loss carryforward benefits totaling
approximately $35 million at June 30, 2003. We have evaluated our tax position
in accordance with the requirements of SFAS No. 109, Accounting for Income
Taxes, and do not believe that we have met the more-likely-than-not criteria for
recognizing a deferred tax asset. As a result, we have provided valuation
allowances against our net deferred tax assets.
RECENT EVENTS
U. S. DEPARTMENT OF INTERIOR (DOI) CONTRACT
In July 2003, we were awarded contract participation to supply to the
U. S. Department of Interior (DOI) digital LMR equipment that is compliant with
APCO (Association of Public-Safety Communications Officials) Project 25
specifications. The contract, originally established in November 2002, is a
fixed-price, indefinite-delivery and indefinite-quantity contract that is open
to all federal agencies. It includes one base year with options for four
additional years. Under the contract, U.S. government agencies may purchase up
to $1 billion of APCO Project 25 LMR equipment. The contract has no minimum
purchase requirements, and purchases may fluctuate from period to period.
APCO Project 25 specifies standard features and signaling for
narrow-band digital voice and data in both conventional and trunking modes of
operation. The standard has been adopted by the U.S. federal government, which
has targeted a conversion to APCO Project 25 LMR equipment by year-end 2005.
Government and public-safety LMR users nationwide are increasingly adopting this
standard. A cornerstone of APCO Project 25 is to provide effective
interoperability among users of compliant equipment, regardless of the equipment
manufacturer. Through this open architecture, APCO Project 25 provides an
environment where users will have a wider selection of LMR suppliers, including
Relm.
REVOLVING CREDIT FACILITY
On August 29, 2003, we entered into an agreement with a new lender. The
agreement provides for a revolving line of credit of up to $2.5 million for one
year. The line is secured by substantially all of our assets, consisting
principally of our trade receivables and inventory. Concurrently with the
23
refinancing transaction, three funds affiliated with our directors purchased an
aggregate of 500,000 shares of our common stock at $0.60 per share. The proceeds
of the transaction were used to pay off our existing revolving credit facility
with Fleet Capital Corporation and provide working capital to be used in
executing our business plans, including the expansion of our digital product
line. We had been in default of certain financial covenants under the terms of
our credit agreement with Fleet Capital Corporation and Fleet had in July 2003
demanded payment in full of all indebtedness thereunder on or before October 2,
2003.
SIGNIFICANT CUSTOMERS
Sales to the United States government represented approximately $2.24
million (42.8%) of our total revenues for the three months ended June 30, 2003,
compared to $2.47 million (50%) for the same period last year. For the six
months ended June 30, 2003, sales to the United States government represented
approximately $3.70 million (41. 9%) of our total revenues, compared to $3.95
million (40.8%) for the same period last year. These sales were primarily to the
United States Forest Service (USFS).
INFLATION AND CHANGING PRICES
Inflation and changing prices for the three and six months ended June
30, 2003 have contributed to increases in wages, facilities, and raw material
costs. These inflationary effects were more than offset by increased prices to
customers and reduced manufacturing costs associated with our initiatives to
utilized low-cost contract manufacturers.
RESULTS OF OPERATIONS
ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2002 AND 2001
GENERAL
Diminished sales to our two largest customers and the deteriorating
overall economic conditions were instrumental in a reduction of revenues by
approximately 29% in 2002 compared to 2001. Further details regarding the
decrease in revenues are reported under "Net Sales" below.
Gross margins for 2002 were approximately 26.4% compared to 29.2% in
2001. Due to the lower volumes, we did not fully absorb our manufacturing
overhead costs, which adversely impacted gross margins. However, during the year
we continued to expand our utilization of high-quality, low-cost contract
manufacturers. Also, responding to lower production volumes, during the fourth
quarter we reduced manufacturing support staffing and expenses. These efforts
began to yield product cost reductions and improved margins in 2002, a trend
that we expect to continue at an increasing rate in 2003. Further details
regarding gross margins are reported under "Cost of Sales and Gross Margins"
below.
We made significant progress on new product development during 2002.
Spending on product engineering and development in 2002 increased compared to
2001. This was made possible by the capital derived from the successful
completion of our public rights offering in the first quarter of 2002. The
offering provided us with approximately $2.0 million of additional working
capital. The additional engineering and development expenditures were related
primarily to the development of our digital products and ESAS systems. We
24
believe that this investment has yielded new products that will drive revenue
growth starting in 2003. The first digital product is complete and has been
approved by the U. S. Department of Interior (DOI) for immediate use. The DOI is
the most aggressive of all federal government agencies in implementing plans to
purchase digital communications technology. The first four ESAS system
installations are complete and set the stage for additional systems sales in the
near-term. Late in the year we also introduced a new family of products, the RP
Series, for business and industrial users. We believe that all these new
products, and others that will be completed shortly, serve as a solid foundation
on which to grow the business profitably. Our financial results for the year,
and the fourth quarter in particular, include several significant charges
unrelated to our current operations. These charges totaled approximately $1.6
million of which $0.7 million was incurred in the fourth quarter of 2002.
We established allowances totaling approximately $1.1 million for two
notes receivable from the purchasers of our former paper manufacturing and
specialty-manufacturing subsidiaries. The businesses and events associated with
these charges are legacies from before 1997. They are not at all related to land
mobile radio (LMR) operations, which have been our focus for the past several
years. Although the write-off and allowance impacted earnings, we anticipate no
impact on the execution of our core LMR business plan objectives. In addition to
the notes, we wrote-off the remaining book value (approximately $331,000) of
certain technology and investment banking agreements. Lastly, we incurred
severance and other expenses (approximately $195,000) associated with the
restructuring of our sales and marketing organization. Each of these charges is
discussed in greater detail under "Recent Events" below.
The following table shows items from our audited consolidated statement
of operations for the years ended December 31, 2002, 2001 and 2000 expressed as
a percent of sales:
Percent of Net Sales
For Year Ended December 31
----------------------------------------
2002 2001 2000
------ ------ ------
Sales..................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................. 73.6 70.8 74.4
----- ----- -----
Gross Margin.............................................. 26.4 29.2 25.6
Selling, General, and Administrative Expenses............. (40.5) (26.0) (33.0)
Loss on notes receivable.................................. (6.7) -- --
Interest Expense.......................................... (2.9) (2.5) (4.4)
Gain on Sale of Facility and Equipment.................... -- -- 4.7
Other Income.............................................. 1.0 -- 1.6
----- ----- -----
Pretax Income (loss) from Continuing Operations........... (22.7) 0.7 (5.5)
Income Tax Expense........................................ -- -- --
----- ----- -----
Income (loss) from Continuing Operations.................. (22.7)% 0.7% (5.5%)
===== ===== =====
NET SALES
Total sales for the year ended December 31, 2002 decreased $6.8 million
(30.0%) to $15.9 million from $22.8 million for the year 2001.
Revenues for BK Radio products, sold primarily to the government and
public safety segment of the LMR market, decreased $5.1 million (29.0%) compared
25
to the prior year. This decrease was attributed primarily to a decrease in
revenues derived from the U. S. Forest Service (USFS) and the Communications
Electronics Command of the U. S. Army (CECOM).
We did not ship any products to CECOM during 2002. During the prior
fiscal year, revenues from product shipments to CECOM totaled approximately $2.4
million. The contract under which those shipments were made expired in October
2001. CECOM solicited bids for a new contract in March 2002 and we submitted
proposals. Numerous delays have been encountered by CECOM, and the contract has
not yet been awarded. CECOM has indicated in recent communications that the
solicitation will be canceled and a contract will not be awarded. Accordingly,
we are currently pursuing avenues for providing our products to CECOM under
other existing contracts. Our shipments to CECOM during the years 1999 through
2001 averaged approximately $2.3 million annually.
During 2002, budget constraints and contract delays combined to reduce
shipments to the USFS by $3.4 million compared to the prior year. The USFS is
our largest customer representing revenues of approximately $3.5 million and
$6.9 million for the years ended December 31, 2002 and 2001, respectively. Due
to an extraordinarily active forest fire season, USFS experienced a decrease in
the funding available for new two-way communications equipment. Additionally,
the USFS contract expired in September 2002, and a new contract was not awarded
until December 2002. Revenues from the USFS also decreased because our mobile
radio was not included on the contract for most of 2002. We had been awarded the
mobile portion of the contract in prior years. The mobile radio has again been
awarded to us on the new contract that was issued in December 2002. We were also
awarded the portions of the contact for portable radios, base stations, and
repeaters. We anticipate that the margins that will be realized under this
contract will be consistent with or better than those realized under the
previous contract. The contract does not specify definite delivery dates or
quantities.
For the year ended December 31, 2002, sales in the business and
industrial market segment, served by Relm-branded and Uniden-branded products,
decreased approximately $1.7 million (50.3%) when compared to the same period of
the prior year. Customer demand in this market segment continued to be weak,
reflecting the lack of a sustained economic recovery. Also, due to engineering
delays, our new family of portable radios, the RP Series, was ready for sale
later in the year than originally anticipated. The RP series is designed as a
quality, full-featured, low-cost line to compete effectively in the business and
industrial market. We anticipate that the margins that will be realized from
these products will be consistent with or better than those realized from the
previous contract.
In response to declining revenues, we recently hired a new executive
sales management team and restructured our sales and marketing organization.
This team brings to Relm a history of sales and marketing success with another
large LMR manufacturer and with other wireless industries as well. We also
re-deployed other resources within the company to achieve a strong focus on
critical new product introductions. These organizational changes combined with
new products that have recently been completed and introduced (e.g., the digital
portable radio, RP Series portable radios, and ESAS systems), we believe
position us for revenue growth in 2003.
26
COST OF SALES AND GROSS MARGINS
Cost of sales as a percentage of sales for the year ended December 31,
2002 was 73.6% compared to 70.8% for the same period last year. Due to the lower
volumes, we did not fully absorb our manufacturing overhead costs, which
adversely impacted cost of sales and gross margins. Responding to lower
production volumes, starting in the fourth quarter we reduced manufacturing
support staffing and expenses. Also related to lower volumes, during the year we
increased reserves for slow moving inventory by approximately $283,000.
Excluding the impact of under-absorption, we continued to decrease
direct product costs (i.e., material and labor). Direct product costs for the
year ended December 31, 2002 were 55.3% compared to 58.2% for the same period
last year. We achieved this improvement by continuing to expand our utilization
of high-quality, low-cost contract manufacturers. We presently have agreements
with six contract manufacturers, five of which are offshore. By the end of 2002
all of our products were partially or entirely manufactured by these contract
manufacturers. These arrangements, combined with our deductions in manufacturing
infrastructure expenses, began to impact margins in 2002. With a full year of
manufacturing under these arrangements in 2003, we expect that trend to continue
at an increasing rate for all of our product lines.
We continuously evaluate new 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, 2002, SG&A expenses totaled $6.5 million or 40.5% of sales compared
with $5.9 million or 26.0% for the prior year.
This increase of $550,000 is attributable to the following: (1) the
expansion of our product development initiatives ($321,000) for APCO Project
25-compliant digital products and ESAS systems and (2) charges unrelated to our
current LMR operations, all of which pertained to old business lines of the
company. These charges pertained to a) writing-off the unamortized cost
($211,000) of a digital technology license that we will no longer utilize, b)
writing-off the unamortized cost ($120,000) of an investment banking agreement,
and c) severance and other expenses ($195,000) associated with restructuring our
sales and marketing organization.
The aforementioned increases were partially offset by decreases in
marketing and selling ($94,000) and general and administrative expenses
($203,000). Marketing and selling expenses decreased as a result of lower
selling commission expenses, which was driven by lower revenues. General and
administrative expenses were reduced as certain information systems functions
($121,000) were outsourced and several pending legal matters ($82,000) were
resolved.
Bringing products to market that will comply with the APCO 25 standard,
and achieving a significant share of the market for these products will continue
to require substantial investment to complete research and development and to
27
achieve market penetration. We estimate that these costs will total
approximately $393,000 in 2003, and will be funded from existing cash reserves
and working capital from operations.
LOSS ON NOTES RECEIVABLE
In April 2002, we learned that the purchaser of the assets of the
Company's former paper-manufacturing subsidiary, had ceased operations. The
purchaser owed the Company $900,000 plus accrued interest under the terms of two
secured promissory notes and had defaulted on its obligations to make principal
and interest payments. With guidance from counsel, we evaluated alternatives and
took all prudent actions to maximize the possibility of recovery. However, after
a comprehensive assessment, we believed that the value of the purchaser's assets
and the assets of the guarantor were insufficient to provide any recovery of the
amounts due under the notes. Accordingly, the Company wrote-off the entire
principal amount ($900,000) of the two promissory notes in the first quarter
2002.
During 2002, the purchaser of our former specialty-manufacturing
subsidiary ceased making payments in accordance with a note receivable. The
initial amount of the note was approximately $355,000. Presently, the amount due
under the note is approximately $175,000 plus accrued interest. This note is
derived from the 1997 agreement for the sale of our specialty manufacturing
operation. Since its inception, the terms of the obligation have been
restructured several times to accommodate the purchaser. The last payment was
received in March 2002. Attempts during the second and third quarters 2002 to
contact the purchaser and collect the past-due installment payments have been
unsuccessful. In February 2003, we started legal proceedings to recover the
remaining amount due under the note plus accrued interest. With guidance from
counsel, we believe that we will prevail in these proceedings. However, we have
been unable to ascertain the financial position of the purchaser or their
ability to pay the debt. Accordingly we established a collection allowance in
the fourth quarter 2002 for the entire principal amount of the note.
The businesses and events associated with the purchasers of the assets
of our former subsidiaries are legacies from before 1997. They are not at all
related to land mobile radio (LMR) operations, which have been our focus for the
past several years. We have excluded these obligations from our cash flow
projections and operating plans since 2000. Although the write-off and allowance
impacted 2002 earnings, we anticipate no future impact on the execution of our
core LMR business plan objectives, including our digital product development,
which in February 2003 yielded the introduction of our initial APCO Project 25
compliant digital radio.
INTEREST EXPENSE
For the year ended December 31, 2002, interest expense totaled
approximately $456,000 compared to $579,000 for 2001. We incur interest expense
on our revolving line of credit and on the subordinated convertible notes. The
interest rate on our revolving line of credit is variable and fluctuated with
the prime lending rate. The interest rate on the convertible notes is 8% per
annum. The effective interest rate on our revolving line of credit was lower
during 2002 as a result of the reductions in the prime lending rate. Also,
primarily as a result of improved accounts receivable collections, the principal
balance on the revolver as of December 31, 2002 decreased by $780,000 compared
to the balance at the same time in 2001.
28
INCOME TAXES
Income taxes represented effective tax rates of 0% for the years ended
December 31, 2002 and 2001. 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, as of
December 31, 2002 and 2001, we have federal and state net operating loss
carryforwards of approximately $35.0 million and $29.3 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 approximately $14.4 and $12.2 million against our net
deferred tax assets at December 31, 2002 and 2001, respectively.
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.
INFLATION AND CHANGING PRICES
Inflation and changing prices for the years ended December 31, 2002 and
2001 have contributed to increases in wages, facilities and raw material costs.
These inflationary effects were partially offset by increased prices to
customers and reduced manufacturing costs associated with our initiatives to
utilize low-cost contract manufacturers.
ANALYSIS OF THE YEARS ENDED DECEMBER 31, 2001 AND 2000
NET 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 in 2001 increased $2.6 million (12.8%) to $22.8 million from $20.2
million for the prior 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.
29
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.
COST OF SALES
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 in the prior 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 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 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.
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 was the result of our restructuring and cost reduction
actions. Selling and marketing staff and expenses, particularly 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 reflected
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
30
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.
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.
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.
These inflationary effects were partially offset by increased prices to
customers and reduced manufacturing costs associated with our initiatives to
utilize low-cost contract manufacturers.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2003, net cash used in operating
activities totaled $1.7 million compared to net cash provided by operating
activities of $1.1 million for the same period last year. The increase in cash
used in operations is attributed primarily to a $0.8 million reduction in the
net loss as compared to the same period last year. Accounts receivable increased
as revenues increased during the three months ended June 30, 2003 compared to
the preceding quarter. Cash was generated from the reduction of inventories
($1.3 million) during the six months ended June 30, 2003, compared to an
31
inventory reduction of $0.9 million for the same period last year. Cash totaling
approximately $0.7 million was used to pay trade payables during the six months
ended June 30, 2003, compared to $1.1 million used to reduce trade payables
during the same period last year. Additionally, in the first quarter of the
prior year, operations included a $900,000 valuation reserve for a note
receivable pertaining to its former subsidiary, Fort Orange Paper Company, which
was a non-cash item.
Net cash provided by operating activities for the year ended December
31, 2002 increased by $1,242,000 to $1,534,000 compared to net cash provided by
operating activities of $292,000 for the prior year. The increase is
attributable primarily to collection of trade receivables ($2,832,000),
decreases in inventory ($1,099,000), partially offset by losses on notes
receivable ($1,075,000) pertaining to former subsidiaries and by the payment of
trade payables ($1,043,000). Additionally, depreciation and amortization
decreased for the year ended December 31, 2002 by $269,000 to $787,000 compared
to $1,056,000 for the previous year.
The decreases in trade receivable and inventory were the result of
lower sales volumes and shipments from existing inventory during 2002.
Depreciation decreased due to as certain assets reached the end of their
depreciation cycle and capital expenditures remained low ($157,000). Net cash
used in investing activities for the year ended December 31, 2002 was $ 271,000,
an increase of $199,000, as compared to $72,000 net cash used during the prior
year, substantially all of this change related to capital expenditures for
property and equipment totaling $157,000 and the purchase of DVSI technology for
$125,000. These expenditures were primarily for engineering test equipment
required for the development of our new digital products. No significant capital
expenditures are planned for 2003. Capital expenditures are expected to increase
in 2004 when we commence production of our new generation of digital radios. 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 existing cash balances, operating cash flow, and our revolving
line of credit.
Capital expenditures increased by $10,000. Limited capital expenditures
are planned for 2003. 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 existing cash balances, operating cash flow
and our revolving line of credit.
Net cash provided by financing activities totaled $0.9 million for the
six months ended June 30, 2003, compared to $0.8 million for the same period
last year. Cash provided by financing activities was primarily the result of
additional borrowings from our revolving line of credit to fund operating
requirements. In the same period last year, we raised approximately $2.0 million
from the issuance of common stock and reduced our revolving line of credit by
approximately $1.3 million.
Net cash provided by (used in) financing activities increased $126,000
to $33,000 for the year ended December 31, 2002 compared to ($93,000) used in
previous year. On March 22, 2002, the Company closed a public rights offering,
which resulted in net cash to us of $2,021,000. The purpose of the offering was
to provide working capital, which will, among other things, be utilized to
continue the development of our APCO Project 25-compliant digital product line.
32
The securities offered were "units" priced at $.90 per unit. A unit was
comprised of one share of Relm common stock and one warrant to purchase one
share of Relm common stock, exercisable at $1.08 per share at any time on or
after February 12, 2003 and until February 11, 2006.
The offering resulted in the sale of 2,775,000 shares of common stock
and unit warrants to purchase 2,775,000 shares of common stock. The offering
generated $1.8 million in net proceeds. The unit warrants are currently quoted
on the OTC Bulletin Board under the symbol RELMW.
On May 17, 2002, the underwriter exercised its option to purchase
416,250 additional units at a purchase price of $0.90 per unit to cover
over-allotments. The Company received approximately $326,000 in net proceeds
from the purchase of these additional units.
On August 29, 2003, we replaced our revolving credit facility with
Fleet Capital, which we had been in default under since December 31, 2002, by
entering into an agreement with a new lender, Silicon Valley Bank. The agreement
provides for a revolving line of credit of up to $2.5 million for one year. The
line is secured by substantially all of our assets, consisting principally of
our trade receivables and inventory. Concurrently with the refinancing
transaction, three funds affiliated with our directors purchased an aggregate of
500,000 shares of our common stock at $0.60 per share. The proceeds of the
transaction were used to pay off our credit facility with Fleet Capital and
provide working capital to be used in executing our business plans, including
the expansion of our digital product line.
In their audit report on our consolidated financial statements for the
year ended December 31, 2002, our independent auditors have included an
explanatory paragraph which states "there is substantial doubt about the
Company's ability to continue as a going concern". This paragraph is included
because we suffered a substantial net loss from operations and were in violation
of certain financial covenants under our old revolving line of credit agreement,
which, as described above, was replaced by a new secured revolving line of
credit in August, 2003.
We believe existing cash funds combined with funds generated from
operations as well as funds derived from our recent private equity financing and
available under our new secured credit facility are sufficient to meet our
current working capital requirements for the next twelve months. If sales
volumes increase substantially, additional sources of working capital may be
required to fulfill the demand.
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's future contractual
obligations for the next five years and in the aggregate as of June 30, 2003:
(IN THOUSANDS)
Payments due by period ending June 30:
---------------------------------------------------------
Total 2003 2004 2005 2006 2007
----- ---- ---- ---- ---- ----
Future minimum lease commitments. $ 1,009 $ 410 $ 410 $ 189 $ -- $ --
Convertible subordinate notes.... $ 3,150 $ -- $ 3,150 $ -- $ -- $ --
Revolving credit facility........ $ 2,902 $ 2,902 $ -- $ -- $ -- $ --
Standby letters of credit........ $ 21 $ 21 $ -- $ -- $ -- $ --
33
At June 30, 2003, the Company has approximately $100,000 in unused line
of credit, which was replaced by the new $2.5 million secured revolving line of
credit in August, 2003.
In March 2000, we leased a 54,000 square feet facility in West
Melbourne, Florida. The lease has a term of five years. Rental, maintenance and
tax payments were approximately $375,000 and $377,856 in 2001 and 2002,
respectively. In May 2002, we rented 3,800 square feet of office space in
Lawrence, Kansas, to accommodate the expansion of our digital engineering team.
This lease has a term of two years. Rental, maintenance and tax payments for
2002 were $20,052. We anticipate that current leases will be renewed at the time
of their expiration dates.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement 145 amends Statement of Financial Accounting Standards No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's goal
of requiring similar accounting treatment for transactions that have similar
economic effects. Statement 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The Company has adopted the
provisions of Statement 145 for fiscal 2002, which did not result in a material
impact to the its financial position.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," ("Statement 146"). Statement 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between Statement 146 and Issue 94-3 relates to Statement
146's requirements for recognition of a liability for a cost associated with an
exit or disposal activity. Statement 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
A fundamental conclusion reached by the FASB in this Statement is that an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. Therefore, this Statement eliminates the
definition and requirements for recognition of exit costs in Issue 94-3. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
Statement 146 did not have a material impact on the Company's consolidated
financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34.
This Interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees
34
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
31, 2002. The adoption of FIN 45 did not have a material impact on the
Company's financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock- based employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, this Statement amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those effects
in the interim financial information. The amendments to SFAS No. 123 that
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation are effective for financial statements for fiscal years ending
after December 15, 2002. The amendment to SFAS No. 123 relating to disclosure
and the amendment to Opinion 28 is effective for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. Early application is encouraged. The adoption of SFAS No. 148 did not have
a material impact on the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately to
variable interest entities ("VIE's") created after January 31, 2003, and to
VIE's in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to VIE's
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. FIN 46 applies to public enterprises as of the beginning of
the applicable interim or annual period. The adoption of FIN 46 is not expected
to have a material impact on the Company's consolidated financial position,
liquidity, or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
35
for Derivative Instruments and Hedging Activities." It is effective for
contracts entered into or modified after June 30, 2003, except as stated within
the statement, and should be applied prospectively. The Company is currently
assessing the impact of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measurers in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with SFAS No. 150,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. The Company is currently assessing the impact of SFAS No. 150.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's financial reporting release, FR-60, Cautionary
Advice Regarding Disclosure About Critical Accounting Policies, we have selected
our more subjective accounting estimation processes for purposes of explaining
the methodology used in calculating the estimate in addition to the inherent
uncertainties pertaining to the estimate and the possible effects on the
Company's financial conditions. The two accounting estimation processes
discussed below are the allowance for collection on trade receivables and
reserves for excess or obsolete inventory. These estimation processes affect
current assets and are therefore critical in assessing the financial and
operating status of the Company. These estimates involve certain assumption that
if incorrect could create an adverse impact on the Company's operations and
financial position.
The allowance for collection losses was $69,000 on gross trade
receivables of $834,000 as of December 31, 2002. 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, 2002. Because the
amount that we will actually collect on the receivables outstanding as of
December 31, 2002 cannot be known with certainty as of this document's effective
date, we rely on prior experience. Our historical collection losses have
typically been infrequent with write-offs of trade receivables being less than
1% of sales. We maintain a general allowance of approximately 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 turn
out to have such an inability. Currently, our allowance on trade receivables is
8.25% of gross receivables. The increase in percentage is strictly related to
the decrease of account receivable balance, is not the result of any particular
doubtful account and is appropriate in view of the current economic downturn. We
believe that revenues and the receivable balance will increase during 2003, and
accordingly, we may experience an increase in this allowance balance. 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 slow-moving, excess, or obsolete inventory was $2.6
million at December 31, 2002 as compared to $2.3 million in 2001. The reserve
for excess or obsolete inventory is used to state our inventories at the lower
of cost or market. Because the amount of inventory that we will actually recoup
through sales of our inventory as of December 31, 2002 can not be known with
certainty as of this document's effective date, we rely on past sales
experience, future sales forecasts, and our strategic business plans. Generally,
in analyzing our inventory levels, we classify inventory as having been used or
unused during the past year. For raw material inventory with no usage in the
past year, we reserve 85% of its cost which takes into account a 15% scrap value
while for finished goods inventory with no usage in the past year we reserve 80%
of its costs. For inventory with usage in the past year, we review the average
36
annual usage over the past three years, project that amount over the next seven
years, and then reserve 25% of the excess amount (in which the excess amount
equals inventory on hand less a seven year projected usage amount). We believe
that 25% represents the value of excess inventory we would not be able to
recover due to our new product introductions and other technological
advancements over the next seven years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to the risk of fluctuating interest rates in the
ordinary course of business for borrowings under our new secured revolving line
of credit. The lender under our new secured revolving line of credit presently
charges interest at 2.00% per annum over the prime rate, provided that the
interest rate in effect on any day shall not be less than 6.25% per annum. Prior
to obtaining this new secured revolving line of credit, the lender under our old
revolving line of credit was charging 1.25% over the prime rate. As a result of
continuing defaults under the old credit agreement, the lender had indicated its
intent to increase the interest rate to 3.25% over the prime rate. However, no
interest rate increase was effectuated before we replaced the old revolving line
of credit with our new secured revolving line of credit.
The Company's primary exposure to market risk is to changes in interest
rates. The Company has both fixed and variable rate debt. The Company had $6.1
million of debt outstanding as of June 30, 2003 of which $3.1 million, or 50.8%,
has been borrowed at a fixed rate of 8.0% with maturity through December 2004.
The Company also had $2.9 million of variable rate debt as of June 30, 2003. As
these debt instruments mature, the Company typically refinances such debt at
their existing market interest rates which may be more or less than interest
rates on the maturing debt. Changes in interest rates have different impacts on
the fixed and variable rate portions of the Company's debt portfolio. A change
in interest rates impacts the fair value of the Company's fixed rate debt,
but has no impact on interest incurred or cash flows on the Company's fixed rate
debt. Interest rate changes on variable debt impacts the interest incurred and
cash flows but does not impact the net market value of the debt instrument.
Based on the variable rate debt of the Company as of June 30, 2003, it is
estimated that a 100 basis point increase in interest rates on the Company's old
revolving line of credit would have resulted in an additional $29,000 in
interest incurred per year on its old line of credit and a 100 basis point
decline would have lowered interest incurred by $29,000 per year.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On December 2, 2002, we dismissed our independent accountant, Ernst &
Young LLP ("EY"). On December 12, 2002, we engaged BDO Seidman, LLP ("BDO") as
our independent accountant to audit our financial statements for the year ending
December 31, 2002. Prior to the engagement of BDO, the Company did not consult
or was not consulted by BDO regarding auditing or accounting matters. EY audited
our consolidated balance sheet and those of our subsidiaries as of December 31,
1997 through and including December 31, 2001, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years then ended. EY's reports on the financial statements they audited did not
contain an adverse opinion, disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles.
37
The decision to dismiss EY and engage BDO was unanimously recommended
by our audit committee and unanimously approved by our board of directors.
During the two most recent fiscal years and the subsequent interim
period through December 2, 2002, there were no disagreements between us and EY
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of EY, would have caused EY to make reference in connection
with their opinion to the subject matter of the disagreement.
38
BUSINESS
General
Relm Wireless designs, manufactures and markets wireless communications
products, principally two-way land mobile radios, or "LMRs," and related
components. We offer products with three distinct brand names: BK Radio, Relm,
and Uniden. These products are sold to:
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.
From 1996 through 2000 we significantly restructured the Company. The
objective was to focus the Company on our core business of LMR wireless
communications. The restructuring, largely completed in 1999, consisted of
selling or otherwise discontinuing businesses and product lines that were
outside our focus or that were under-performing. We also significantly reduced
the size and costs of our operations. Consequently, in more recent years, we
have been able to aggressively pursue initiatives in the LMR business designed
to improve our competitive position and ultimately fuel future growth and
profitability.
The restructuring program was the key factor behind our profitable year
in 2001, and allowed us to withstand a difficult year in 2002. Diminished sales
to our two largest customers and the deteriorating overall economic conditions
were the principal reasons for a 29% decrease in revenues from 2001 to 2002. We
also incurred several significant non-recurring charges, the largest of which
was the write off of a note receivable from our former paper-manufacturing
subsidiary that was sold in 1997. This charge is unrelated to our present
operations.
During 2002 we continued to expand our utilization of high-quality,
low-cost contract manufacturers. These efforts began to yield margin
improvements in 2002, a trend that we expect to continue at an increasing rate
in 2003.
We made significant progress on new product development during 2002.
Most importantly, we expanded and accelerated our digital product development
using additional capital that was raised our first quarter 2002 public rights
offering. The first model, a digital portable radio that will be added to our BK
Radio line, has been completed and approved by the Federal Communications
Commission. It is in the process of being added to the contract for the
Department of Interior. Of all federal government agencies, the DOI is the most
aggressive in implementing plans to purchase digital communications technology.
Late in 2002 we also introduced a new family of products for business and
industrial users, and completed the development and testing of our ESAS System.
We believe that these new products, and others that will be completed shortly,
serve as a solid foundation on which to grow the business profitably.
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 our products and us is also available through the Internet at
"www.Relm.com." The information provided on our website is not incorporated into
this prospectus.
39
HISTORY - REINCORPORATION OF ADAGE, INC. INTO RELM WIRELESS CORPORATION
Relm Wireless Corporation is the surviving corporation in the January
30, 1998 reincorporation merger of Adage, Inc. into Relm Wireless Corporation,
its wholly owned subsidiary.
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
On August 29, 2003, we entered into an agreement with a new lender. The
agreement provides for a revolving line of credit of up to $2.5 million for one
year. The line is secured by substantially all of our assets, consisting
principally of our trade receivables and inventory. Concurrently with the
refinancing transaction, three funds affiliated with our directors purchased an
aggregate of 500,000 shares of our common stock at $0.60 per share. The proceeds
of the transaction were used to pay off our existing credit facility with Fleet
Capital Corporation and provide working capital to be used in executing our
business plans, including the expansion of our digital product line. We had been
in default of certain financial covenants under the terms of our credit
agreement with Fleet Capital Corporation and Fleet had in July 2003 demanded
payment in full of our indebtedness on or before October 2, 2003.
In July 2003, we were awarded contract participation to supply to the
U. S. Department of Interior digital LMR equipment that is compliant with the
Association of Public-Safety Communications Officials, or "APCO," Project 25
specifications. The contract, originally established in November 2002, is a
fixed-price, indefinite-delivery and indefinite-quantity contract that is open
to all federal agencies. It includes one base year with options for four
additional years. Under the contract, U.S. government agencies may purchase up
to $1 billion of APCO Project 25 LMR equipment. The contract has no minimum
purchase requirements, and purchases may fluctuate from period to period.
APCO Project 25 specifies standard features and signaling for
narrow-band digital voice and data in both conventional and trunking modes of
operation. The standard has been adopted by the U.S. federal government, which
has targeted a conversion to APCO Project 25 LMR equipment by year-end 2005.
Government and public-safety LMR users nationwide are increasingly adopting this
standard. A cornerstone of APCO Project 25 is to provide effective
interoperability among users of compliant equipment, regardless of the equipment
manufacturer. Through this open architecture, APCO Project 25 provides an
environment where users will have a wider selection of LMR suppliers, including
Relm.
On April 29, 2003, we were notified by Nasdaq Listing Qualifications
that we had not regained compliance with the minimum $1.00 closing bid price per
share requirement as set forth in marketplace rule 4310(c)(4). We were not
eligible for an additional 90 calendar day compliance period because we did not
meet the initial inclusion requirements of the Nasdaq SmallCap Market under
40
Marketplace Rule 4310(c)(2)(A). Accordingly, our securities were delisted from
the Nasdaq SmallCap Market at the opening of business on May 8, 2003. Our
securities became immediately eligible for quotation on the OTC Bulletin Board
effective with the open of business on May 8, 2003. The OTC Bulletin Board
symbol assigned to our common stock is "RELM."
In March 2003, our new VHF digital portable radio, the DPH, was
approved by the Federal Communications Commission for use in the United States.
The DPH has been added to our contract with the U. S. General Services
Administration, and is presently being evaluated by the U. S. Department of
Interior for inclusion on its contract. The BK Radio-branded DPH is compliant
with the APCO Project 25 standard.
On March 22, 2002, we closed a public rights offering. The purpose of
the offering was to provide working capital, which among other things, we
believe will speed the development of our new APCO Project 25-compliant digital
products and capabilities. The securities offered were "units" priced at $.90
per unit. Each unit was comprised of one share of our common stock and one
warrant to purchase one share of our common stock, exercisable at $1.08 per
share at any time on or after February 12, 2003 and until February 11, 2006. The
unit warrant exercise price was adjusted to $1.05 per share to give effect to
our private sale of 500,000 shares of our common stock at $0.60 per share in
August 2003. Units were offered initially to our 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.
Noble International Investments, Inc. was engaged as the standby
underwriter for the rights 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. In accordance
with the terms of the offering, the units were separated on the closing date.
The offering resulted in the sale of 2,775,000 shares of common stock and
warrants to purchase 2,775,000 shares of common stock. The offering generated
$1.8 million in net proceeds. The warrants are currently quoted on the OTC
Bulletin Board with the symbol "RELMW."
On May 17, 2002, Noble exercised its option to purchase 416,250
additional units at a purchase price of $0.90 per unit to cover over-allotments.
We received approximately $0.3 million in net proceeds from the purchase of
these additional units.
In 2002, we began to introduce a new series of portable radios to be
sold under our Relm brand. This family of portable analogue radios will, upon
completion, be comprised of four models. One model was introduced in the first
half of the year. Two additional models were introduced late in the fourth
quarter. The final model will be available in 2003. This radio family offers a
combination of features and affordability that are designed to compete
effectively in business and industrial markets worldwide. We have contracted for
the manufacture of these radios under a previously announced agreement with an
international electronic technology and manufacturing concern. Under the
agreement, we have exclusive distribution rights for these products in North,
Central, and South America. The agreement expires on September 11, 2006 and may
be expanded to include additional products.
41
LOSS ON NOTES RECEIVABLE
In April 2002, we learned that the purchaser of the assets of the
Company's former paper-manufacturing subsidiary, had ceased operations. The
purchaser owed the Company $900,000 plus accrued interest under the terms of two
secured promissory notes and had defaulted on its obligations to make principal
and interest payments. With guidance from counsel, we evaluated alternatives and
took all prudent actions to maximize the possibility of recovery. However, after
a comprehensive assessment, we believed that the value of the purchaser's assets
and the assets of the guarantor were insufficient to provide any recovery of the
amounts due under the notes. Accordingly, the Company wrote-off the entire
principal amount ($900,000) of the two promissory notes during the first quarter
2002.
During 2002, the purchaser of the assets of our former specialty
manufacturing subsidiary, ceased making payments in accordance with a note
receivable. The initial amount of the note was approximately $355,000.
Presently, the amount due under the note is approximately $175,000 plus accrued
interest. This note is derived from the 1997 agreement for the sale of our
specialty manufacturing operation. Since its inception, the terms of the
obligation have been restructured several times to accommodate the purchaser.
The last payment was received in March 2002. Attempts during the second and
third quarters 2002 to contact the purchaser and collect the past-due
installment payments have been unsuccessful. In February 2003, we started legal
proceedings to recover the remaining amount due under the note plus accrued
interest. With guidance from counsel, we believe that we will prevail in these
proceedings. However, we have been unable to ascertain the financial position of
the purchaser or their ability to pay the debt. Accordingly, we established a
collection allowance in the fourth quarter 2002 for the entire principal amount
of the note.
The businesses and events associated with both of the former
subsidiaries are legacies from before 1997. They are not at all related to land
mobile radio (LMR) operations, which have been our focus for the past several
years. We have excluded these obligations from our cash flow projections and
operating plans since 2000. Although the write-off and allowance impacted 2002
earnings, we anticipate no future impact on the execution of our core LMR
business plan objectives, including our digital product development, which in
February 2003 yielded the introduction of our initial APCO Project 25 compliant
digital radio.
INVESTMENT BANKING SERVICES AGREEMENT
On May 12, 2000, we engaged Janney Montgomery Scott (JMS) to provide
certain investment banking services. In connection with the engagement, we
granted warrants to JMS, valued at $226,000, to purchase 166,153 shares of our
common stock at an aggregate purchase price of one hundred dollars. The warrants
had a five-year term and an exercise price of $3.25 per share. The value of the
warrants along with $13,083 of associated warrant costs was being amortized on a
straight-line basis over the estimated life of the contract. Accumulated
amortization at December 31, 2002 and 2001 was $120,000 and $76,000
respectively. In the fourth quarter we were notified that JMS had closed its New
York office, and the firm no longer employs the principals who handled our
account. Therefore, we do not anticipate receiving further services under this
agreement. Accordingly, we elected to write-off the remaining value of the
warrants totaling approximately $120,000 during the fourth quarter of 2002.
42
TECHNOLOGY LICENSING AGREEMENT
In March 1998, we entered into an agreement with Racal Communications,
Inc. (presently known as "Thales") which, among other things, licensed us to use
Thales' digital APCO project 25-compliant technology under specified terms and
conditions. The cost of the technology license was $300,000 and was being
amortized over a period of eight years. We have since developed our own APCO
project 25-compliant digital technology, which was completed in the fourth
quarter 2002. Consequently, we do not anticipate utilizing the technology
provided for by our agreement with Racal. Accordingly, we elected to write-off
the remaining value of the technology agreement totaling $211,000 during the
fourth quarter of 2002.
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:
2002 2001 2000
---- ---- ----
(in Millions)
LMR-Gov't & Pub. Safety $ 12.5 $ 18.0 $ 14.7
LMR-Bus./Indus./Comm 3.4 4.8 6.4
------- ------- -------
Total $ 15.9 $ 22.8 $ 21.1
======= ======= =======
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 form of dispatch communications in the
U.S. with current users estimated to exceed 16.3 million. 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.
43
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. A privately commissioned study estimates
the addressable market for APCO Project 25 compliant products will total
approximately $38 billion over the next five years. Roughly half of that
estimate pertains to infrastructure equipment, which is defined as towers,
antennas, controllers, and combiners.
By some estimates, the LMR industry is as large as $5.7 billion in
annual sales. One manufacturer dominates the market, holding an estimated market
share in excess of 70% ($4 billion). The remaining market share is spread among
many small companies, including Relm.
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. The first product from that initiative was
completed at the end of 2002. It was awarded a place on the Department of
Interior contract in July 2003. Additional products are planned for 2003 through
2005.
We sell our products under the "BK RADIO," "UNIDEN," and "RELM" brand
names. Generally, "BK RADIO"-branded products serve the government and public
safety markets, while "RELM" and "UNIDEN"-branded products serve commercial,
business, and industrial market segments.
In September 1993, we purchased the assets of Bendix/King Mobile
Communications Division of Allied Signal. These products, sold under the "BK
RADIO" (formerly "BENDIX KING") brand name, consist of higher-specification
land-mobile radios whose primary market focus is professional radio users in the
44
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. Our APCO Project 25-compliant products will be marketed under the
"BK RADIO" brand.
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, such company is manufacturing for Relm, four models
of VHF and UHF portable two-way radio transceivers. The agreement is for a term
of five years and may be expanded to include additional products. Three models
were introduced during 2002. The final model will be introduced in 2003. These
products are marketed under the "RELM" brand.
In 2002, we completed the enhancements of our ESAS system products, and
four systems were installed. ESAS systems offer a comparatively inexpensive
multi-site trunking alternative for two-way communications. There are many areas
of the country, predominantly rural, that lack coverage from other
communications service providers. Enterprises of all types in these areas
continue to have a need for reliable and affordable two-way communications.
Also, in areas that presently have other means of communication, some users are
finding that the cost for their service is higher than anticipated, sometimes
significantly so. ESAS systems are an attractive solution in both of these
circumstances.
In March 2000, we purchased certain private radio communications
product lines from Uniden America Corporation. These products, primarily serving
the commercial, business and industrial segment of the LMR market, broaden and
modernize our offerings there. They are currently sold under the "UNIDEN" brand
name.
DESCRIPTION OF MARKETS
GOVERNMENT AND PUBLIC SAFETY MARKET
This market includes the military, fire, rescue, law enforcement,
emergency medical personnel, as well as various agencies of federal, state, and
local government. Our sales in this market are made either directly to the
end-users, or through two-way communications dealers. Sales to this market
represented approximately 78% of total sales during 2002 and 79% of total sales
for 2001. For the six months ended June 30, 2003, sales to this market
represented approximately 73% of our total revenues compared to 76% for the same
period in 2002.
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 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.
Historically, our products and systems for the government and public
safety market used primarily analog technology. We are, however, executing a
comprehensive plan to engineer, manufacture, and market digital products that
are compliant with the specifications of the APCO Project 25. The first product
45
from that initiative was completed at the end of 2002. It was included on the
Department of Interior contract in July 2003. Additional products are planned
through 2005.
BUSINESS, INDUSTRIAL AND COMMERCIAL MARKET
This market includes businesses and enterprises 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 22% of total sales during 2002 and 21% of total sales for 2001.
For the six months ended June 30, 2003, sales to this market represented
approximately 27% of total sales compared to 24% for the same period in 2002.
We offer products to this market under the "RELM" and "UNIDEN" brand
names. The products include mobile radios, portable radios, base stations, and
repeaters. The acquisition of the private radio communications product lines
from Uniden America Corporation broadened and modernized our product offering in
these segments of the LMR market. These products, which include ESAS systems as
well as additional portable and mobile radios, are presently being sold under
the Uniden brand name.
Under an OEM manufacturing agreement, we have expanded the Relm product
lines with four new models of VHF and UHF portable radios. These radios
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 engineering and development activities are conducted in West
Melbourne, Florida and Lawrence, Kansas. The team in Lawrence is responsible for
the execution of our APCO Project 25 development plan, which was launched in
2001. During the year, as a result of funding from our public rights offering,
we were able to expand and accelerate this program. As of December 31, 2002, 7
employees were dedicated to this program. They have completed the first product,
an APCO-compliant digital VHF portable radio, which was introduced in March
2003. Additional products are planned for 2003 through 2005. Our team based in
West Melbourne, Florida, totaling 6 employees, is responsible for developing
design specifications based on customer requirements and supervising quality
assurance activities. Both teams actively assist in the implementation of
product designs, with primary responsibility for applied engineering, production
engineering and the specification compliance of contract manufacturers.
For 2002, 2001, and 2000, Relm's research, development and engineering
expenditures were approximately $1.9 million, $1.4 million, and $1.2 million,
respectively. The use of strategic technology partners has enabled us to contain
and, in some instances, even reduce R&D expenditures while concentrating on key
initiatives, such as the APCO Project 25 digital program. In this connection,
costs incurred to date aggregated approximately $0.6 million and we estimate
additional costs of $ 1.2 million over the remaining life of the project.
Products from these research, development and engineering projects will be
completed and introduced at various times through 2005.
46
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. It is difficult to precisely assess their
importance. 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.
Consistent with that strategy, we have successfully implemented several outside
contract manufacturing arrangements. These arrangements have been instrumental
in decreasing our product costs significantly, allowing us to improve our
competitive position and gross margins.
Most recently, in 2002 we started receiving LMR subassemblies
manufactured for us under an agreement with a large and well-established
electronics manufacturer. The contract manufacturer purchases raw materials
directly from approved sources and manufactures completed subassemblies to our
specifications. The agreement has a five-year term and may be renewed upon the
agreement of both parties.
We are also currently receiving and selling our recently announced Relm
RP-series products that are manufactured under an OEM manufacturing agreement
with another electronic design and manufacturing concern. Under the agreement,
the company is manufacturing for Relm four models of VHF and UHF portable
two-way radio transceivers. These new products will provide a low-cost yet
feature-rich and reliable two-way communication alternative for customers in
these commercial, business, and industrial markets. Three models have been
completed, while the final model will be introduced in the second quarter 2003.
The agreement is for a term of five years and its scope may be expanded to
include additional products.
We continue to utilize the initial two contract manufacturing
relationships that were established in 2000, after restructuring our
manufacturing strategy and operations. One agreement is with a domestic contract
manufacturer for the manufacture of analog two-way subassemblies. The agreement
has a five-year term and is automatically renewed for one-year terms unless
either party gives notice of termination. In connection with the acquisition of
the Uniden LMR product line, we entered into another manufacturing contract with
Uniden America Corporation under which Uniden continues 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.
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
47
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, 2002, 2001, and 2000, 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 strive to
maintain strong relations with all our suppliers.
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 39%,
44% and 44% of our total sales for the years ended December 31, 2002 and 2001,
and 2000, respectively, and approximately 42% of our total sales for the six
months ended June 30, 2003. 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 22%, 34%, and
35% of total sales for the years ended December 31, 2002, 2001, and 2000,
respectively, and approximately 24% of our total sales for the six months ended
June 30, 2003. For the year ended December 31, 2002 we had no sales to CECOM
because our contract expired in 2001. However, sales to CECOM for the years
ended December 31, 2001 and 2000 represented approximately 10%, and 9% of total
sales, 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 was for a period of one year with options for three
additional years, and did not specify a minimum purchase. In December 2002, we
were awarded a new contract with similar terms. It continues to include the
portable radios and repeaters that were on the previous contract. Additionally,
it includes our GMH mobile radio that was not on the previous contract. The new
contract is for one year with two additional option years.
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 solicited bids for a
new contract in March 2002, and we submitted proposals. The evaluation of
48
proposals for this solicitation is in process but has been subjected to delays.
Consequently, the contract has not yet been awarded. CECOM has indicated in
recent communications that the solicitation will be canceled and a contract will
not be awarded. We are currently pursuing avenues for providing our products to
CECOM under other existing contracts.
BACKLOG
Our order backlog was approximately $1.7 million and $1.6 million as of
December 31, 2002 and 2001, respectively, and approximately $2.7 million as of
June 30, 2003.
COMPETITION
The worldwide land mobile radio markets are estimated to be $5.7
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 maintain our competitive advantage 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.
EMPLOYEES
We presently have 67 full-time employees, most of whom are located at
our West Melbourne, Florida facility. 34 of these employees are engaged in
direct manufacturing or manufacturing support, 13 in engineering, 12 in sales &
marketing, and 8 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.
INFORMATION RELATING TO DOMESTIC AND EXPORT SALES
The following table summarizes our sales of wireless communications
equipment by location of our customers:
2002 2001 2000
---- ---- ----
United States $ 14.9 $ 21.8 $ 20.4
Europe -- -- .7
Other International 1.0 1.0 --
------- ------- -------
Total $ 15.9 $ 22.8 $ 21.1
======= ======= =======
AVAILABILITY OF REPORTS AND OTHER INFORMATION
Our website is www.Relm.com. We file annual, quarterly and current
reports, proxy statements and other information with the SEC. These filings are
available to the public over the Internet at the SEC's website at www.sec.gov.
You may also read and copy any document we file at the SEC's public reference
room located at 450 Fifth Street, NW, Washington, D.C. 20549. You may obtain
more information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
49
PROPERTIES
OWNED
We do not currently own any real estate. 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
The majority of our operations are conducted in approximately 54,000
square feet of leased industrial space at 7100 Technology Drive in West
Melbourne, Florida. The original lease term is five years. Rental, maintenance
and tax payments were approximately $375,000 and $377,856 in 2001 and 2002,
respectively. In May 2002, we rented 3,800 square feet of office space in
Lawrence, Kansas, to accommodate the expansion of our digital engineering team.
This lease has a term of two years. Rental, maintenance and tax payments for
2002 were $20,052.
LEGAL PROCEEDINGS
In 1993, a civil action was brought against us by a plaintiff to
recover losses sustained on the note of a former affiliate totaling $1.7 million
plus interest at 12% per annum. The plaintiff alleged violations of federal
security and other laws by us in collateral arrangements with the former
affiliate. In February 1994, the liquidator of the former affiliate filed a
complaint claiming that intentional and negligent conduct by us and others
caused the former affiliate to suffer millions of dollars of losses leading to
its ultimate failure. In response, we filed motions for summary judgment to
dismiss these complaints. On September 12, 2002, the Court granted in
significant part the motions for summary judgment filed by us and one of our
directors. As the result, the lone remaining claim seeks damages against us for
non-payment of the note. We contend that this note was canceled and released for
fair consideration in 1993 and that there is no basis in law or fact for the
liquidator's claim. The Company is defending this matter vigorously.
In June 1997, substantially all of the assets of RELM
speciality-manufacturing were sold. The asset purchase agreement contains
indemnification provisions, which could result in liability for both parties.
Presently, two indemnification claims are pending against the Company. Insurance
coverage exists for these matters. Counsel for the Company's insurer is
vigorously defending both claims. Counsel believes the Company has meritorious
defenses and the likelihood of an unfavorable outcome in each of these actions
is remote.
On November 19, 2001, a products liability lawsuit was filed in the
353rd Judicial District Court of Travis County, Texas. On August 26, 2002, a
products liability lawsuit was filed in the Probate Court of Galveston County,
Texas. Relm Wireless Corporation, Relm Communications, Incorporated, and the
purchaser of the assets of our former specialty-manufacturing subsidiary are
named defendants in these lawsuits. The agreement under which the assets of the
former subsidiary were sold contains indemnification provisions, which could
result in liability for both parties. Counsel for the Company's insurer is
vigorously defending both claims. Counsel believes the Company has meritorious
defenses and the likelihood of an unfavorable outcome in each of these actions
is remote.
50
During 2002, the purchaser of the assets of our former
specialty-manufacturing subsidiary ceased making payments in accordance with a
note receivable. The initial amount of the note was approximately $355,000.
Presently, the amount due under the note is approximately $175,000 plus accrued
interest. This note is derived from the 1997 agreement for the sale of the
assets of our specialty-manufacturing subsidiary. Since its inception, the terms
of the obligation have been restructured several times to accommodate the
purchaser. The last payment was received in March 2002. Attempts to contact the
purchaser and collect the past-due installment payments have been unsuccessful.
In February 2003, we started legal proceedings to recover the remaining amount
due under the note plus accrued interest. With guidance from counsel, we believe
that we will prevail in these proceedings. However, we have been unable to
ascertain the financial position of the purchaser or their ability to pay the
debt. Accordingly we established a collection allowance in the fourth quarter
2002 for the entire principal amount of the note.
In April 2002, we learned that the purchaser of the assets of our
former paper-manufacturing subsidiary had ceased operations. The purchaser owes
us $900,000 plus accrued interest under the terms of two secured promissory
notes, and has defaulted on its obligations to make principal and interest
payments. The Chief Executive Officer of the purchaser personally guaranteed the
debt. Our security interest is subordinated to the security interest granted to
the purchaser's senior lender.
In connection with the sale of the subsidiary in 1997, we took back a
secured promissory note from the purchaser in the initial aggregate principal
amount of $2.4 million. In December 2000, the terms of the original promissory
note were modified and we received a principal payment of $700,000 plus accrued
interest of approximately $166,000. After this payment, the remaining principal
amount due on the original note was $900,000. Also, as part of the modification
agreement, the original note was replaced by two secured promissory notes, one
in the principal amount of $600,000 and the other in the principal amount of
$300,000. The $600,000 note was payable in ten annual installments starting on
April 2, 2002. The $300,000 note was payable in five annual installments
starting on January 1, 2003. Interest on both notes accrued at 2.75% over the
prime rate and was payable, in the case of the $600,000 note, in annual
installments, and, in the case of the $300,000 note, in semi-annual
installments. The $600,000 note was subject to a standby creditor's agreement
under which principal and interest payments on the note were contingent upon the
purchaser achieving a certain debt service coverage ratio and the absence of any
uncured defaults on other loans or agreements of the purchaser. As security for
both notes, the purchaser has granted to us a lien and security interest in
certain collateral. Our security interest, however, is subordinated to the
security interest granted to the purchaser's senior lender. In addition, the
Company was subject to a standstill agreement with the senior lender. A
principal of the purchaser guaranteed the prompt and complete payment of both
notes when due. Both notes were subject to forbearance fee payment agreements
with both the purchaser and the guarantor under which additional amounts may be
payable to us if there is a merger, sale or change of control of the purchaser
and if the notes are not paid in full by certain dates.
In December 2002, the purchaser's senior lender notified us that they
had sold the purchaser's assets for $200,000. This amount was not sufficient to
provide any recovery of amounts owed to us under the notes. In February 2003,
with the assistance of counsel, we initiated legal proceedings against the
guarantor. We have not been able to ascertain the financial position of the
guarantor or evaluate his ability to pay the debt. Accordingly, we have
maintained the valuation reserve for the entire principal amount ($900,000) of
the two promissory notes that was established in the first quarter 2002.
51
MANAGEMENT
Executive Officers, Directors and Other Key Employees
The following table presents information with respect to our executive
officers, directors and other key employees.
EXECUTIVE OFFICERS AND DIRECTORS:
Name Age Position
---- --- --------
George N. Benjamin, III 65 Chairman of the Board
David P. Storey 50 President, Chief Executive Officer, and Director
William P. Kelly 47 Executive Vice President - Chief Financial Officer
Ralph R. Whitney, Jr. (1) 68 Director
James C. Gale (1)(2) 53 Director
Randolph K. Piechocki (1)(2) 50 Director
Donald F.U. Goebert (2) 66 Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
OTHER KEY EMPLOYEES
Name Age Position
---- --- --------
Harold B. Cook 57 Vice President of Operations
Christopher Ramsden 48 Vice President of Federal Sales and Marketing
Theresa Zagaruyka 48 Engineering Director
James W. Spence 48 Engineering Director
The business experience of our executive officers and directors as well
as our other key employees is set forth below:
George N. Benjamin, III has been a director since January 1996 and was
appointed Chairman of the Board in May 2003. From August 1999 to October 2001,
he has been the President and CEO of Keystone Networks, Inc. an optical network
developer since November, 1999, and was the President and CEO of BICC Cables
Corp., N.A., a manufacturer of electrical wires and cable, from August 1998
through June 1999. He has been the Consultant and Partner in Trig Systems, LLC,
a management and consulting company, since July 1987. He has been a director of
Stonebridge Financial Corp. since January 2001.
David P. Storey has been our President and Chief Executive Officer
since July 2000, after serving as our Chief Operating Officer from June 1998 to
July 2000. From November 1994 to June 1998, he was Senior Vice President of
Manufacturing of ANTEC Corp., a communications electronics company.
William P. Kelly has been our Executive Vice President - Chief
Financial Officer since July 1997, and Secretary since June 2000. From October
1995 to June 1997, he was Vice President and Chief Financial Officer of our
subsidiary, Relm Communications, Inc. From January 1993 to October 1995, he was
the Financial Director of Harris Corp. Semiconductor Sector.
52
Ralph R. Whitney Jr. has been a director since January 1992. From
January 1971 to January 2002, Mr. Whitney was the President and Chief Executive
Officer of Hammond Kennedy Whitney & Co., Inc., an investment banking company.
From January 2001 to June 2002, Mr. Whitney served as a director of IFR Systems,
Inc., a manufacturer of test equipment for the military. Since 1971, he was a
director of Baldwin Technology Co., Inc., a manufacturer of printing press
equipment, First Technology, PLC, a manufacturer and supplier of electronic
optical sensors, Reinhold Industries, Inc., a manufacturer of composite
components in the aerospace, defense and commercial lighting industries, and
DURA Automotive Systems, Inc., a manufacturer of automobile windows, seat and
door assemblies.
James C. Gale has been a director since October 1993. Since September
1998, Mr. Gale has been a Managing Director of Sanders Morris Harris, an
investment banking company. From 1991 to 1998, Mr. Gale was a Managing Director
of Gruntal & Co., L.L.C., an investment banking and management company. Mr. Gale
is a director of Amarin Corporation plc., a specialty pharmaceutical company.
Randolph K. Piechocki has been a director since October 2002. He has
served as President of Palco Telecom Service, Inc., a provider of reverse
logistic and warranty fulfillment services, from August 1999 to the present. He
has held senior level management and advisory positions at TxPort, a
manufacturer of carrier class WAN access devices, from October 1997 to August
1999; at Voice Control Systems from July 1997 to October 1997; at American
Mobile Satellite, a wireless service provider, from April 1996 to September
1996.
Donald F. U. Goebert was our Chairman of the Board (and a director of
our predecessor) from March 1968 until May 2003 and has since been a director.
He was the President of our predecessor from March 1968 to October 1988, and our
President and Chief Executive Officer from April 1993 to December 1997. He has
been President of Chester County Fund, Inc., a commercial real estate company,
since 1968. Mr. Goebert is a director of Investors Insurance Group, Inc., a
commercial insurance company.
Our other key employees and their biographies are as follows:
Harold B. Cook has been our Vice President of Operations since July
2000. Mr. Cook joined us in April 1997 as Director of Manufacturing. Prior to
joining us, Mr. Cook held the position of Director of Manufacturing Operations
at Computer Products Incorporated, Fujitsu America Inc., and Ampro Corporation.
Mr. Cook also held operations management positions at Storage Technology
Corporation and Harris Corporation.
Christopher Ramsden has been our Vice President of Federal Sales and
Marketing since January 2003. Prior to joining us, Mr. Ramsden served as the
Director of Sales & Marketing for Kenwood Communications from February 2000 to
January 2002. He also served in various senior-level sales and marketing
positions with Bell South from August 1990 to February 2000. Mr. Ramsden has
also held sales and marketing positions at Motorola and U.S. West.
Theresa Zagaruyka has been one of our Directors of Engineering since
April, 1999. Prior to joining us, she was Business Manager of Dolphin
Technology, L.C., a consulting firm specializing in telecommunications
applications. From January, 1988 to February, 1994 she was involved in the
development of the software platform for Bendix/King radio products. Ms.
Zagaruyka holds a Bachelor of Science degree in Electrical Engineering from the
University of Kansas.
53
James W. Spence has been one of our Directors of Engineering since
April, 1999. Previously he was Engineering Manager with Dolphin Technology,
L.C., performing system, embedded software, DSP, and hardware design to create
trunked and secure mode radio products. From August, 1983 to October, 1994 he
held various positions with Bendix/King, lastly as Software and Digital
Engineering Group Leader. He was an original designer of the BK Radio product
line, beginning with the LPH portable radio. In the years prior to Bendix/King,
he held various engineering design positions with IBM. Mr. Spence holds
Bachelor's and Master's degrees in Electrical Engineering from the University of
Kansas.
BOARD OF DIRECTORS
The board of directors is currently fixed at six members. Each director
holds his office until the next annual meeting of stockholders unless he resigns
or is removed or disqualified. Officers are elected by the board of directors
and any number of offices may be held by the same person.
MEETINGS OF THE BOARD OF DIRECTORS
The board of directors held four meetings during fiscal year 2002, and
each of the directors attended at least seventy-five percent (75%) of the
aggregate number of meetings of the board of directors and committees (if any)
on which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has an audit committee and a compensation
committee. The board of directors does not have a committee whose functions
include nominating directors and does not have an executive committee. The
following chart describes the function and current membership of each committee
and the number of times it met in 2002.
AUDIT COMMITTEE - 7 MEETINGS
Function Members
-------- -------
o Recommends independent auditors Ralph R. Whitney Jr. (Chair)
o Reviews internal financial information Randolph K. Piechocki
o Reviews report of audit and management letter James C. Gale
o Participates in the determination of the adequacy of the internal
accounting control
o Reviews the results of audits with the independent auditors
o Oversees quarterly and yearly reporting
o Responsible for policies, procedures and other matters relating to
business integrity, ethics and conflicts of interests
o Reviews and approves a charter for the audit committee
Our board of directors adopted a charter for the Audit Committee on June 5,
2000.
54
COMPENSATION COMMITTEE - 3 MEETINGS
Function Members
-------- -------
o Reviews and approves compensation and benefit programs James C. Gale (Chair)
o Establishes and approves compensation of officers and management Donald F.U. Goebert
employees
o Adapts and administers stock option plans Randolph K. Piechocki
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, the Compensation Committee of our board of directors was
composed of independent, outside directors, Messrs. Benjamin (Chairman), Gale,
and Piechocki. As noted above, our compensation program for our executives is
administered by the board of directors with the advice and counsel of the
Compensation Committee. As a result, during 2002, Mr. Storey provided input to
the deliberations by the Compensation Committee and the board concerning
executive compensation. Mr. Storey did not vote as a member of the board in any
board action which affected his own compensation.
Neither of the Compensation Committee members is or has been an officer
or employee of us or any of our subsidiaries. In addition, neither Benjamin,
Gale, nor Piechocki has, or has had, any relationship with us which is required
to be disclosed in this proxy statement. No Relm executive officer currently
serves on the compensation committee or any similar committee of another public
company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
Our articles of incorporation and bylaws limit the liability of
directors to the maximum extent permitted by Nevada law. The limitation on our
directors' liability may not apply to liabilities arising under the federal
securities laws. Our articles of incorporation and bylaws provide that we shall
indemnify our directors and executive officers and may indemnify our other
officers and employees and agents and other agents to the fullest extent
permitted by law. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors and executive officers
pursuant to our certificate of incorporation and bylaws, we have been informed
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
At present, there is no pending litigation or proceeding involving any
of our directors, officers, employees or agents where indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that might result in a claim for such indemnification.
CODE OF ETHICS
We have adopted a written code of ethics that applies to our senior
financial officers and persons performing similar functions. The code is filed
as Exhibit 14 to our annual report on Form 10-K for the year ended December 31,
2002 filed with the SEC. We intend to disclose any amendments to or waivers from
the code on our website located at www.relm.com. Upon written request to our
corporate secretary by U.S. mail, we will provide, at no charge, a copy of the
code to any person requesting a copy.
55
EXECUTIVE COMPENSATION
The following table sets forth the annual and long term compensation
during each of the last three years paid by us to Messrs. Storey and Kelly, who
served as our President and Chief Executive Officer and Executive Vice President
- Finance, Chief Financial Officer, and Secretary, respectively, during 2002
(each a "Named Officer"). No other executive officer was paid salary and bonus
compensation by us which exceeded $100,000 during 2002.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
------------------------------------------ -----------------------------
Other Securities
Annual Underlying All Other
Name and Principal Salary Bonus Compensation Compensation Compensation
Position Year ($) ($) ($) Options(#) ($)(1)
-------- ---- --- --- --- ---------- ------
David P. Storey 2002 225,014 -- -- -- 5,875
President and 2001 203,486 -- -- 245,000 7,105
Chief Executive Officer 2000 192,385 20,833 -- 55,000 3,000
William P. Kelly 2002 135,013 -- -- -- 4,731
Executive Vice 2001 129,187 -- -- 177,500 4,390
President - Finance, 2000 122,844 20,833 -- 50,000 3,000
Chief Financial Officer
and Secretary
(1) The amounts shown in the column titled "All Other Compensation" for the
year 2000 include employer contributions to our 401(k) plan, and for the
year 2001 and 2002 include both employer contributions to our 401(k) plan
and disability insurance premiums paid by the Company for the benefit of
the Named Officers.
The Named Officers did not receive any other annual compensation not
categorized as salary or bonus except for perquisites and other personal
benefits which in the aggregate did not exceed the lesser of $50,000 or 10% of
the total annual salary and bonus reported for such named officer.
OPTION GRANTS IN LAST FISCAL YEAR
During the last completed fiscal year, there have been no grants of
stock options to the Named Officers.
We do not currently have (and have not previously had) any plan
pursuant to which any stock appreciation rights may be granted.
56
STOCK OPTION EXERCISES AND HOLDINGS
The following table sets forth information relating to stock options
exercised during 2002 by each of the Named Officers and the number and value of
stock options held on December 31, 2002 by each of them.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 2002
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Value Underlying Unexercised In-the-Money Options at
Acquired on Realized Options at Dec. 31, 2002 (#) Dec. 31, 2002 ($)(1)
Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------ --- ----------- ------------- ----------- -------------
David P. Storey -- -- 472,500 72,500 -- --
William P. Kelly -- -- 235,000 67,500 -- --
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002 about
our common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans, including the 1996
Stock Option Plan for Non-Employee Directors and the 1997 Stock Option Plan.
(a) (b) (c)
Number of securities
remaining available
for future issuance
Number of securities under equity
to be issued upon Weighted average compensation plan
exercise of exercise price of (excluding securities
outstanding options, outstanding options, reflected in column
Plan Category warrants, and rights warrants and rights (a)
------------- -------------------- ------------------- --------------------
Equity compensation plans approved by
security holders...................... 1,418,500 $1.76 281,500
Equity compensation plans not approved
by security holders................... -- 0 --
-------------------- ------------------- --------------------
Total.................................... 1,418,500 $1.76 281,500
==================== =================== ====================
COMPENSATION OF DIRECTORS
During 2002, we paid to each of our non-employee directors meeting fees
of $1,000 for attendance at each board meeting and $500 for attendance at each
meeting of any committee of the board of directors which was not held in
conjunction with a meeting of the board. In addition, our directors receive a
yearly retainer fee of $8,000. During 2002, we paid $50,000 to Mr. Goebert for
his services as Chairman of the Board. Pursuant to the terms of the 1996
Non-Employee Director Stock Option Plan, each non-employee director also
receives stock options for service as a director. Also, pursuant to the terms of
the Plan, a grant of a stock option for the purchase of 5,000 shares is made to
each non-employee director on the date of each annual meeting of shareholders at
which that person is elected or re-elected as a director (or if the annual
meeting has not been held by June 30 of that year the grant is made as of June
30th of that year to each of the persons qualifying and who has been a
non-employee director for at least three months).
Options are granted at an exercise price equal to the fair market value
of our common stock on the date of grant, become fully exercisable eleven months
after the date of grant, or earlier upon a change of control as defined in the
Plan, and expire five years from the date of grant or earlier in the event
service as a director ceases. On June 28, 2002, a grant of stock options for the
purchase of 5,000 shares was made to each of our non-employee directors at an
exercise price of $0.80 per share and on October 8, 2002, a grant of stock
options for the purchase of 5,000 shares was made to our newly elected director
Randolph K. Piechocki at an exercise price of $.61 per share.
EMPLOYMENT AGREEMENTS
We had Post-Termination Benefits Agreements with David P. Storey and
William P. Kelly, our key executives. The agreements provided an incentive for
the executives to remain in our employ should a merger, sale, change in control
or other transaction occur by providing severance compensation if the executives
are terminated within six months following such a change of control or other
transaction. The post-termination agreements also subjected the executives to
general confidentiality and non-disparagement provisions as well as
non-competition and non-solicitation provisions for one year following
termination. The post-termination agreements terminated on October 1, 2002.
57
PRINCIPAL SHAREHOLDERS
The table below sets forth information regarding the beneficial
ownership of our common stock as of October 1, 2003, by the following
individuals or groups:
o each person or entity who is known by us to own beneficially
more than 5.0% of our common stock;
o each of our named executive officers;
o each of our directors; and
o all of our directors and named executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of our common stock that are subject to
warrants or stock options that are presently exercisable or exercisable within
60 days of October 1, 2003 are deemed to be outstanding and beneficially owned
by the person holding the warrants or stock options for the purpose of computing
the percentage of ownership of that person, but are not treated as outstanding
for the purpose of computing the percentage of any other person. Except as
indicated below, the persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them. As
of October 1, 2003, we had outstanding 9,065,088 shares of our common stock.
Number of Shares Beneficially Percentage
Name and Address of Beneficial Owner(1) Owned Ownership
--------------------------------------- ----------------------------- ---------
Austin W. Marxe and David Greenhouse 871,795 (2) 8.8%
Corporate Opportunities Fund, Corporate Opportunities
Fund Institutional, L.P. 2,714,053 (3)(4) 26.7%
Corporate Opportunities Fund, L.P. 425,915 (5) 4.6%
Corporate Opportunities Fund (Institutional), L.P. 2,288,138 (6) 22.9%
SMM Corporate Management, LLC 2,714,053 (7)(4) 26.7%
Sanders Morris Harris Inc. 2,739,053 (8)(4) 26.9%
Donald F.U. Goebert 1,749,631 (9)(10)(11) 19.3%
Ralph R. Whitney, Jr. 50,469 (12) *
James C. Gale 2,759,053 (12)(13) 27.0%
George N. Benjamin, III 51,578 (12) *
Randolph K. Piechocki 5,000 (12) *
David P. Storey 595,000 (12) 6.1%
William P. Kelly 292,500 (12) 3.1%
Bruce Galloway 631,736 (14) 7.0%
Noble International Investments, Inc. 555,000 (15) 5.8%
All named executive officers and directors 5,503,231 (9)(10)(11)(12) 49.5%
as a group (7 persons)
*Less than 1%
------------------
(1) The address of each executive officer and each director is c/o Relm
Wireless Corporation, 7100 Technology Drive, West Melbourne, Florida 32904.
(2) As disclosed in the Schedule 13G filed by Austin W. Marxe ("Marxe") and
David M. Greenhouse ("Greenhouse"), dated February 27, 2003, Marxe and
Greenhouse are members of MG Advisers L.L.C., the general partner of and
investment adviser to Special Situations Private Equity Fund, L.P.
("SSPE.") Marxe and Greenhouse have shared voting and dispositive power
over 1,700,000 convertible subordinate promissory notes. These shares are
issuable upon conversion of an 8% convertible subordinated promissory note
due December 31, 2004 with a principal amount of $1,700,000, convertible
into 871,795 common shares, at an exercise price of $1.95, all of which are
owned by Special Situations Private Equity Fund, L.P.
58
(3) As disclosed in the Schedule 13D filed by Corporate Opportunities Fund,
L.P. ("COF"), Corporate Opportunities Fund (Institutional), L.P. ("COFI")
collectively, (the "Funds"), Corporate Opportunities Fund, L.P., Corporate
Opportunities Fund (Institutional), L.P., SMM Corporate Management, LLC,
General Partner of the Funds, Sanders Morris Harris Inc. ("SMH"), the
controlling member of the General Partner, and James C. Gale ("JCG"), the
Chief Investment Officer, a Manager, and Member of the General Partner,
dated September 8, 2003, are deemed to have sole power to vote or direct
the vote and to dispose or to direct the disposition of the shares, as
follows: the Funds: 2,714,053; COF: 425,915; COFI: 2,288,138; SMM:
2,714,053; SMH: 2,739,053; and JCG: 2,759,053. The shares of common stock
and warrants were separated on March 21, 2002. The address of the Funds,
SMM, and Gale is 126 East 56th Street, 24th Floor, New York, NY 10022; and
of SMH is 600 Travis, Suite 3100, Houston, TX 77002.
(4) Includes currently exercisable warrants to purchase 1,111,110 shares of
common stock.
(5) Includes currently exercisable warrants to purchase 173,888 shares of
common stock.
(6) Includes currently exercisable warrants to purchase 937,222 shares of
common stock.
(7) Includes shares beneficially owned by COF and COFI.
(8) Includes shares beneficially owned by SMM.
(9) Includes 60,000 shares owned by a partnership controlled by Mr. Goebert and
424,276 shares owned by Chester County Fund, Inc. of which Mr. Goebert is
President. The address for Mr. Goebert is 400 Willowbrook Lane, West
Chester, PA 19382
(10) Includes 23,366 shares held in a custodial account for our Employee Stock
Purchase Program, of which Mr. Goebert is a custodian, and 789 shares held
in a Trust under our 401(k) plan, of which Mr. Goebert is a Trustee.
(11) Includes 809,154 shares held jointly with his wife, and 3,887 shares held
in the name of his wife.
(12) Share ownership of the following persons includes immediately exercisable
options or warrants (exercisable as of October 1, 2003) as follows: for Mr.
Whitney - 20,000 shares; for Mr. Gale - 1,131,110 shares; for Mr. Benjamin
- 20,000 shares; for Mr. Piechocki - 5,000; for Mr. Storey - 595,000
shares; and for Mr. Kelly - 292,500 shares.
(13) Mr. Gale and his wife jointly own 20,000 shares of our common stock.
Additionally, Mr. Gale is managing director of SMH, an investment banking
company. Sanders Morris Harris Corporate Management LLC ("SMH LLC"), an
affiliate of SMH, manages two funds which purchased our common stock in the
rights offering which closed in March 2002 as follows: (i) 173,888 shares
are owned by COF; and (ii) 937,222 shares are owned by COFI. Mr. Gale is
Chief Investment Officer of SMH LLC. All shares are owned directly by the
funds. In the rights offering, COF LP acquired warrants to purchase 173,888
shares which became exercisable on February 12, 2003, and COFI acquired
warrants to purchase 937,222 shares which became exercisable on February
12, 2003.
(14) As disclosed in the Schedule 13D filed by Mr. Galloway. Mr. Galloway's
address is 1325 Avenue of the Americas, 26th Floor, New York, New York
10019.
(15) Includes 555,000 shares of our common stock that are issuable to Noble
International Investments, Inc. upon exercise of an option we granted to it
in connection with our 2002 public rights offering to purchase units, each
unit consisting of one share of our common stock and one warrant (having
the same terms as the unit warrants we issued in our public rights
offering) as well as the shares of our common stock issuable upon exercise
of these warrants. Mr. Nico Pronk, as President of Noble International
Investments, Inc., will be deemed to have investment control over the
shares issuable upon exercise of the option and the warrants. Noble
International Investments, Inc.'s address is 6501 Congress Avenue, Suite
100, Boca Raton, Florida 33487.
59
CERTAIN TRANSACTIONS
In a private sale completed August 2003, we issued 500,000 shares of
our common stock to three funds affiliated with our directors for a purchase
price of $0.60 per share. The proceeds from the sale were used to payoff our
then existing credit facility with Fleet Capital Corporation and provide working
capital to be used in executing our business plans, including the expansion of
our digital product line.
DESCRIPTION OF THE UNIT WARRANTS
We issued the unit warrants pursuant to a warrant agreement with
American Stock Transfer and Trust Company as warrant agent. The following
description is a summary of the material provisions of the warrant agreement
governing the unit warrants. This summary is not complete and is qualified in
its entirety by reference to the warrant agreements which is filed as an exhibit
to the registration statement of which this prospectus is a part.
Both the unit warrant certificates and the warrant agreement are
governed by the laws of the State of Florida.
THE UNIT WARRANTS
GENERAL
Each unit warrant, when exercised, will entitle the holder to receive
one fully paid and nonassessable share of our common stock (the "unit warrant
shares"), at an exercise price of $1.05 per share (as adjusted from $1.08 per
share to give effect to our August 2003 private sale of 500,000 shares of our
common stock at $0.60 per share), subject to adjustment (the "unit warrant
exercise price"). The unit warrant exercise price and the number of unit warrant
shares issuable upon the exercise of a unit warrant are both subject to
adjustment in the cases referred to below.
The unit warrants became exercisable on February 12, 2003. Unless
exercised, the unit warrants will automatically expire on 5:00 p.m., New York
City time, on February 11, 2006 (the "unit warrant expiration date"). We may
extend the expiration date by providing notice thereof to the registered
holders.
The unit warrants may be exercised by surrendering the warrant
certificates evidencing the unit warrants to be exercised with the accompanying
subscription form that is properly completed and executed, together with payment
of the unit warrant exercise price to the warrant agent. The unit warrant
exercise price may be paid in cash in United States dollars by wire transfer or
by certified or official bank check to the order of Relm Wireless Corporation.
Upon surrender of the warrant certificate and payment of the unit
warrant exercise price, we will deliver or cause to be delivered, to or upon the
written order of such holder, stock certificates representing the number of
whole unit warrant shares to which the holder is entitled. If less than all of
the unit warrants evidenced by a warrant certificate are to be exercised, a new
warrant certificate will be issued for the remaining number of unit warrants.
Holders of unit warrants will be able to exercise their unit warrants only if a
registration statement relating to the unit warrant shares underlying the unit
60
warrants is then in effect, or the exercise of such unit warrants is exempt from
the registration requirements of the Securities Act, and such securities are
qualified for sale or exempt from qualification under securities laws of the
states in which the various holders of unit warrants or other persons to whom it
is proposed that unit warrant shares be issued on exercise of the unit warrants
reside.
No fractional unit warrant shares will be issued upon exercise of the
unit warrants. We will pay to the holders of the unit warrant at the time of
exercise an amount in cash equal to such fraction multiplied by the current
market value of such fractional share determined as follows:
(a) If our common stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ Stock Market or the OTC Bulletin Board, the current
value shall be the last reported sale price of our common stock on such exchange
on the last business day prior to the date of exercise of the unit warrant or if
no such sale is made on such day, the average closing bid and asked prices for
such day on such exchange; or
(b) If our common stock is not listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ Stock Market or the OTC Bulletin Board, the current
value shall be the mean of the last reported bid and asked prices reported by
the National Quotation Bureau, Inc. on the last business day prior to the date
of the exercise of the unit warrant; or
(c) If our on common stock is not so listed on a national
securities exchange or admitted to unlisted trading privileges on such exchange
or listed for trading on the NASDAQ Stock Market or the OTC Bulletin Board and
bid and asked prices are not so reported by the National Quotation Bureau, Inc.,
the current value shall be an amount determined in such reasonable manner as may
be prescribed by our board of directors.
In the event of a taxable distribution to holders of our common stock
that results in an adjustment to the number of warrant shares or other
consideration for which a warrant may be exercised, the holders of the warrants
may, in certain circumstances, be deemed to have received a distribution subject
to United States federal income tax as a dividend. See "Certain U.S. Federal Tax
Considerations--Tax Treatment of Registered Warrants."
Certificates for unit warrants will be issued in fully registered form
only. A service charge may be imposed by the warrant agent for registration of
transfer or exchange of warrant certificates. We may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of unit warrants.
In the event a bankruptcy or reorganization is commenced by or against
us, a bankruptcy court may hold that unexercised unit warrants are executory
contracts that may be subject to rejection by us with approval of the bankruptcy
court. As a result, the holders of the unit warrants may, even if sufficient
funds are available, receive no consideration or a lesser amount of
consideration than they would be entitled to receive if they had exercised their
unit warrants prior to the commencement of any such bankruptcy or
reorganization.
NO RIGHTS AS SHAREHOLDERS
The holders of unexercised unit warrants will have no right to vote on
matters submitted to our Shareholders and will have no right to receive
dividends. The holders of the unit warrants will not be entitled to share in our
assets in the event of our liquidation, dissolution or winding up.
61
ADJUSTMENTS
The number of unit warrant shares issuable upon exercise of the unit
warrants and the unit warrant exercise price will be subject to adjustment in
the following circumstances as specified in the warrant agreement:
(1) In case of any reclassification, capital reorganization, or other
change of outstanding shares of common stock, or in case of any consolidation or
merger with or into another corporation (other than a consolidation or merger in
which we are the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of common stock), or in case of any sale or conveyance to another corporation of
our property as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction);
(2) If we, at any time while the unit warrants are outstanding, (i) pay
a stock dividend (except scheduled dividends paid on preferred stock that
contain a stated dividend rate) or otherwise make a distribution or
distributions on shares of our common stock or on any other class of capital
stock payable in shares of common stock, (ii) subdivide outstanding shares of
our common stock into a larger number of shares, or (iii) combine outstanding
shares of our common stock into a smaller number of shares;
(3) If we, at any time while the unit warrants are outstanding,
distribute to all holders of our common stock (and not to holders of unit
warrants) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security; or
(4) Except in the case of our issuing rights to subscribe for shares of
our common stock distributed to all the holders of our common stock and the
exercise of such rights or the exercise of any stock, warrants or options or
stock appreciation rights that may hereafter be exercised under any employee
benefit plan of ours now existing, if we or any subsidiary thereof, as
applicable with respect to "Common Stock Equivalents" (as defined below), at any
time while unexpired unit warrants issued hereunder are outstanding, issue (i)
shares of our common stock at a price per share (an "Issuance Price") that is
less than the lower of eighty-five (85%) percent of the closing bid price of our
common stock on the date of such issuance or the exercise price (the "Trigger
Price") or (ii) rights, warrants, options or other securities or debt that are
convertible into or exchangeable for shares of our common stock ("Common Stock
Equivalents"), entitling any person to acquire shares of our common stock at an
Issuance Price that is less than the Trigger Price (if the holder of the Common
Stock Equivalent so issued shall at any time, whether by operation of purchase
price adjustments, reset provisions, floating conversion, exercise or exchange
prices, receives shares of common stock at a conversion or exercise price less
than the Trigger Price, such issuance shall be deemed to have occurred for less
than the Trigger Price).
Adjustments shall be made at the time of warrant exercise.
REDEMPTION
Subject to the provisions of the warrant agreement, beginning on the
initial exercise date the unit warrants may be redeemed at our option on not
less than 30 days' prior written notice for a redemption price of $0.10 per
warrant if for any twenty (20) consecutive days during such period the last
reported sales price of our common stock for each trading day during such period
is at least 150% of the exercise price of the unit warrants. In the event we
exercise our right to redeem the unit warrants, the unit warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption in such notice. If any unit warrant called for
redemption is not exercised by such date, it will cease to be exercisable and
the registered holder will be entitled only to the redemption price.
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RESERVATION OF SHARES
We have authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of our common stock as will be
issuable upon the exercise of all outstanding unit warrants. Such shares of
common stock, when issued and paid for in accordance with the warrant agreement,
will be duly and validly issued, fully paid and nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
created by or through us.
AMENDMENT
From time to time, we and the warrant agent, without the consent of the
holders of the unit warrants, may amend or supplement the warrant agreement for
several purposes, including curing defects or inconsistencies or making any
change that does not adversely affect the legal rights of any holder. Any
amendment or supplement to the warrant agreement that adversely affects the
legal rights of the holders of the unit warrants will require the written
consent of the holders of a majority of the then outstanding unit warrants,
excluding unit warrants held by us or any of our affiliates. The consent of each
holder of the unit warrants affected will be required for any amendment pursuant
to which the unit warrant exercise price would be increased or the number of
unit warrant shares issuable upon exercise of unit warrants would be decreased,
other than pursuant to adjustments provided in the warrant agreement, or the
exercise period with respect to the unit warrants would be shortened.
REGISTRATION OF THE UNIT WARRANT SHARES
We filed and caused to become effective a registration statement
covering the unit warrant shares and agreed to use our best efforts to keep the
registration statement current while any of the unit warrants are outstanding.
WARRANT AGENT
American Stock Transfer & Trust Company is the warrant agent with
respect to the unit warrants.
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DESCRIPTION OF CAPITAL STOCK
The following summarizes all of the material terms and provisions of
the our capital stock. It does not purport to be complete, however, and is
qualified in its entirety by the actual terms and provisions contained in our
articles of incorporation and bylaws, both of which are included as exhibits to
the registration statement of which this prospectus forms a part, and by
applicable Nevada law.
AUTHORIZED CAPITAL STOCK
Our authorized capital stock consists of:
o 20,000,000 shares of common stock, par value $0.60 per share,
of which 9,065,088 shares are outstanding; and
o 1,000,000 shares of preferred stock, par value $1.00 per
share, of which no shares are outstanding.
STOCK RESERVED FOR ISSUANCE
We have reserved 1,398,500 shares of common stock for issuance upon
exercise of outstanding stock options and 6,197,655 shares for issuance upon
exercise of outstanding warrants and convertible notes. We have not reserved any
shares of preferred stock for issuance.
COMMON STOCK
The holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of our shareholders and do not
have any cumulative rights. Subject to the rights of the holders of any series
of preferred stock, holders of common stock are entitled to receive ratably such
dividends as may be declared by the board of directors out of funds legally
available therefor. We have never paid dividends in the past and do not intend
to do so in the future. Holders of shares of common stock have no preemptive,
conversion, redemption, subscription or similar rights. There are no sinking
fund provisions applicable to our common stock. If we liquidate, dissolve or
wind up, the holders of shares of common stock are entitled to share ratably in
the assets which are legally available for distribution, if any, remaining after
the payment or provision for the payment of all debts and other liabilities and
the payment and setting aside for payment of any preferential amount due to the
holders of shares of any series of preferred stock.
PREFERRED STOCK
Under our articles of incorporation, the board of directors is
authorized, subject to certain limitations prescribed by law, without further
shareholder approval, from time to time to issue up to an aggregate of 1,000,000
shares of preferred stock. The preferred stock may be issued in one or more
series. Each series may have different rights, preferences and designations and
qualifications, limitations and restrictions that may be established by our
board of directors without approval from the shareholders. These rights,
designations and preferences may include:
o number of shares to be issued;
o dividend rights;
o dividend rates;
o right to convert the preferred shares into a different type of
security;
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o voting rights attributable to the preferred shares;
o liquidation preferences; and
o terms of redemption.
If our board of directors decides to issue any preferred stock, it may
discourage or make more difficult a merger, tender offer, business combination
or proxy contest, assumption of control by a holder of a large block of our
securities or the removal of incumbent management, even if these events were
favorable to the interests of shareholders. The board of directors, without
shareholder approval, may issue preferred stock with voting and conversion
rights and dividend and liquidation preferences which may adversely affect the
holders of common stock.
STANDBY UNDERWRITER'S OPTION
We have outstanding an option to purchase 277,500 units, each unit
consisting of one share of our common stock and one warrant (having the same
terms as the unit warrants issued in our 2002 public rights offering), which we
issued to Noble International Investments, Inc., the standby underwriter in our
2002 public rights offering. The standby underwriter's option is exercisable at
any time between February 12, 2003 through February 11, 2007 and the current
exercise price is $0.60 per unit. The standby underwriter's option is governed
by the underwriter's warrant to purchase units issued March 22, 2002, which,
among other terms, provides for cashless exercises of the option, demand and
piggy-back registration rights and customary anti-dilution adjustments for stock
issuances as well as stock dividends and other events affecting our common
stock. The standby underwriter's option is not redeemable.
WARRANTS
In addition to the unit warrants, we have previously issued warrants to
purchase shares of our common stock. We have warrants outstanding for the
purchase of 806,642 shares of our common stock with an exercise price of $1.88.
The warrants became exercisable on September 16, 2000. The warrants have a five
year term and expire thereafter. The warrants were issued pursuant to two
separate warrant agreements in May 2000. The warrants contain provisions that
prevent the possible dilution of the warrant holders through automatic
adjustments in the number of shares purchasable upon exercise of the warrants in
the event of certain actions affecting our capital stock.
CONVERTIBLE NOTES
We have outstanding $3.15 million of our convertible subordinated
notes. The notes earn interest at 8% per annum, are convertible at $1.88 per
share, and are due on December 31, 2004. Registration rights were granted to the
note holders, and effective June 16, 2000, the common shares underlying the
notes were registered. The notes contain provisions that prevent the possible
dilution of the note holders through an automatic adjustment in the conversion
price in the event of certain actions affecting our capital stock.
SHARES ELIGIBLE FOR FUTURE SALE BY EQUITY HOLDERS
We have 9,065,088 shares outstanding, of which 8,565,088 shares are
freely tradable without restriction under the Securities Act.
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In general, under Rule 144 as currently in effect, if a period of at
least one year has elapsed since the later of the date the "restricted shares"
(as that phrase is defined in Rule 144) were acquired from us and the date they
were acquired from an affiliate, then the holder of the restricted shares
(including an affiliate) is entitled to sell a number of shares within any
three-month period that does not exceed the greater of 1% of the then
outstanding shares of our common stock or the average weekly reported volume of
trading of our common stock on the NASDAQ SmallCap Market during the four
calendar weeks preceding the sale. The holder may only sell shares through
unsolicited brokers' transactions or directly to market makers. Sales under Rule
144 are also subject to certain requirements pertaining to the manner of sales,
notices of sales and the availability of current public information concerning
us.
Under Rule 144(k), if a period of at least two years has elapsed
between the later of the date restricted shares were acquired from us and the
date they were acquired from an affiliate, as applicable, a holder of the
restricted shares who is not an affiliate at the time of the sale and has not
been an affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions above.
As of the date of this prospectus, options, warrants and convertible
securities to purchase or receive an aggregate of 7,596,155 shares of common
stock are issued and outstanding. We have not filed a registration statement on
Form S-8 or any other registration statement which would cover the common stock
that may be issued pursuant to the exercise of stock options granted under our
stock option plans. As such, the shares issuable upon the exercise of the
options will be restricted securities and subject to Rule 144, as described
above.
We can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of our
common stock in the public market, or the perception that such sales may occur,
could adversely affect prevailing market prices.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF NEVADA LAW AND OUR ARTICLES OF
INCORPORATION AND BYLAWS
We are incorporated under the laws of the State of Nevada and are
therefore subject to various provisions of the Nevada corporation laws which may
have the effect of delaying or deterring a change in our control or management.
NEVADA LAW
Nevada's "Combination with Interested Stockholders Statute," Nevada
Revised Statutes 78.411- 78.444, which applies to Nevada corporations like us
having at least 200 stockholders, prohibits an "interested stockholder" from
entering into a "combination" with the corporation, unless specific conditions
are met. A "combination" includes:
o any merger with an "interested stockholder," or any other
corporation which is or after the merger would be, an
affiliate or associate of the interested stockholder;
o any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of
transactions, to an "interested stockholder," having:
o an aggregate market value equal to 5% or more of the
aggregate market value of the corporation's assets,
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o an aggregate market value equal to 5% or more of the
aggregate market value of all outstanding shares of
the corporation, or
o representing 10% or more of the earning power or net
income of the corporation;
o any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an
aggregate market value equal to 5% or more of the aggregate
market value of all the outstanding shares of the corporation;
o the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested
stockholder"; and
o transactions which would have the effect of increasing the
proportionate share of outstanding shares of the corporation
owned by the "interested stockholder", or the receipt of
benefits, except proportionately as a stockholder, of any
loans, advances or other financial benefits by an "interested
stockholder."
An "interested stockholder" is a person who
o directly or indirectly owns 10% or more of the voting power of
the outstanding voting shares of the corporation; or
o is an affiliate or associate of the corporation which at any
time within three years before the date in question was the
beneficial owner, directly or indirectly, of 10% or more of
the voting power of the then outstanding shares of the
corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the articles of incorporation are met and either:
o the board of directors of the corporation approves, prior to
such person becoming an "interested stockholder," the
combination or the purchase of shares by the "interested
stockholder";
o the combination is approved by the affirmative vote of holders
of a majority of voting power not beneficially owned by the
"interested stockholder" at a meeting called no earlier than
three years after the date the "interested stockholder" became
such; or
o the aggregate amount of cash and the market value of
consideration other than cash to be received by holders of
common shares and holders of any other class or series of
shares meets the minimum requirements set forth in Sections
78.411 through 78.443, inclusive, and prior to the
consummation of the combination, except in limited
circumstances, the "interested stockholder" will not have
become the beneficial owner of additional voting shares of the
corporation. Nevada's "Control Share Acquisition Statute,"
Nevada Revised Statute Sections 78.378-78.379, prohibits an
acquiror, under some circumstances, from voting shares of a
target corporation's stock after crossing threshold ownership
percentages, unless the acquiror obtains the approval of the
target corporation's stockholders. The Control Share
Acquisition Statute only applies to Nevada corporations with
at least 200 stockholders, including at least 100 record
stockholders who are Nevada residents, and which do business
directly or indirectly in Nevada. While we do not currently
exceed these thresholds, we may well do so in the near future.
In addition, although we do not presently "do business" in
Nevada within the meaning of the Control Share Acquisition
Statute, we may do so in the future. Therefore, it is likely
that the Control Share Acquisition Statute will apply to us in
the future. The statute specifies three thresholds: at least
one-fifth but less than one-third, at least one-third but less
than a majority, and a majority or more, of all the
outstanding voting power. Once an acquiror crosses one of the
above thresholds, shares which it acquired in the transaction
taking it over the threshold or within ninety days become
"Control Shares" which are deprived of the right to vote until
a majority of the disinterested stockholders restore that
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right. A special stockholders' meeting may be called at the
request of the acquiror to consider the voting rights of the
acquiror's shares no more than 50 days, unless the acquiror
agrees to a later date, after the delivery by the acquiror to
the corporation of an information statement which sets forth
the range of voting power that the acquiror has acquired or
proposes to acquire and other information concerning the
acquiror and the proposed control share acquisition. If no
such request for a stockholders' meeting is made,
consideration of the voting rights of the acquiror's shares
must be taken at the next special or annual stockholders'
meeting. If the stockholders fail to restore voting rights to
the acquiror or if the acquiror fails to timely deliver an
information statement to the corporation, then the corporation
may, if so provided in its articles of incorporation or
bylaws, call some of the acquiror's shares for redemption. Our
articles of incorporation and bylaws do not currently permit
us to call an acquiror's shares for redemption under these
circumstances. The Control Share Acquisition Statute also
provides that the stockholders who do not vote in favor of
restoring voting rights to the Control Shares may demand
payment for the "fair value" of their shares. This amount is
generally equal to the highest price paid in the transaction
subjecting the stockholder to the statute.
ARTICLES OF INCORPORATION
Our articles of incorporation authorize the issuance of one million
shares of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time by our board of directors.
Accordingly, the board of directors is empowered, without stockholder approval,
to issue shares of preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the value, voting power or
other rights of the holders of our common stock. In addition, issuance of the
preferred stock could be utilized, 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. None of these shares of preferred stock
are outstanding as of the date of this prospectus. Although our board of
directors has no present intention to issue any shares of preferred stock, there
can be no assurance that it will not do so in the future.
BYLAWS
Provisions of our bylaws which are summarized below may affect
potential changes our control.
The bylaws provide the number of directors on our board of directors
shall be established by the board of directors, but shall be no less than one.
Between shareholder meetings, the board of directors may appoint new directors
to fill vacancies or newly created directorships.
Our bylaws further provide that shareholder action may be taken at a
meeting of shareholders. Under Nevada law, action may be effected by a consent
in writing if such consent is signed by the holders of the majority of
outstanding shares, unless Nevada law requires a greater percentage.
These provisions of our bylaws could discourage potential acquisition
proposals and could delay or prevent a change in our control or management.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of our board of directors and in the policies
formulated by our board of directors and to discourage certain types of
transactions that may involve an actual or threatened change in our control.
These provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage tactics
that may be used in proxy fights. However, such provisions could have the effect
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of discouraging others from making tender offers for our shares or proxy fights
and, as a consequence, they also may inhibit fluctuations in the market price of
our shares that could result from actual or rumored takeover attempts. Such
provisions also may have the effect of preventing changes in our management.
We are not aware of any proposed takeover attempt or any proposed
attempt to acquire a large block of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
LISTING
Our common stock and the warrants were previously listed on the Nasdaq
Small Cap Market under the symbols "RELM" and "RELMW," respectively, but were
delisted effective May 8, 2003 and are currently quoted on the over-the-counter
Bulletin Board under the same symbols.
SELLING SHAREHOLDER
This prospectus also covers the resale of the shares of our common
stock issuable upon the exercise of the standby underwriter's option to purchase
277,500 units, each unit consisting of one share of our common stock and a
warrant to purchase one share of our common stock, issued to Noble International
Investments, Inc., the standby underwriter of our public rights offering. The
standby underwriter's option is currently exercisable at an exercise price of
$0.60 per unit, while the standby underwriter's warrants comprising the units
underlying the option are exercisable at $1.05 per share. Noble has provided
investment banking services to us in the past and may do so in the future. The
following table provides information regarding the total ownership of our common
stock by Noble as of the date of this prospectus and as adjusted to reflect the
sale of the shares issuable upon the exercise of the option held by Noble and
exercise of the standby underwriter's warrants comprising the units underlying
the option. Our registration of these shares does not necessarily mean that
Noble will sell any or all of such shares.
As of October 1, 2003, there were 9,065,088 shares of our common stock
outstanding. Beneficial ownership has been determined in accordance with the
rules of the SEC (except that the shares issuable upon exercise of the warrants,
whether or not the warrants are exercisable presently or within 60 days of
October 1, 2003, are treated as beneficially owned and reported as such), and
includes voting or investment power with respect to the shares. Unless otherwise
indicated in the table below, to our knowledge, Noble has sole voting and
investment power with respect to its shares of common stock.
Number of
Ownership Prior Shares Ownership After
to the Offering Offered(1) the Offering
------------------------ ---------- -------------------------
Name Shares Percentage Shares Percentage
---- ------ ---------- ------ ----------
Noble International 555,000 5.8% 555,000 0 0
Investments, Inc. (2)
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------------------------
(1) The actual number of shares of common stock offered hereby and included in
the registration statement of which this prospectus forms a part includes,
pursuant to Rule 416 under the Securities Act, such additional number of
shares of common stock as may be issuable in connection with the shares
registered for sale hereby resulting from stock splits, stock dividends,
recapitalizations or similar transactions.
(2) Includes 555,000 shares of our common stock that are issuable to Noble
International Investments, Inc. upon exercise of an option we granted to it
in connection with our 2002 public rights offering to purchase units, each
unit consisting of one share of our common stock and one warrant (having
the same terms as the unit warrants we issued in our public rights
offering) as well as the shares of our common stock issuable upon exercise
of these warrants. Mr. Nico Pronk, as President of Noble International
Investments, Inc., will be deemed to have investment control over the
shares issuable upon exercise of the option and the warrants. Noble
International Investments, Inc.'s address is 6501 Congress Avenue, Suite
100, Boca Raton, Florida 33487.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
This general discussion of certain U.S. federal income and estate tax
considerations with respect to the acquisition, ownership and disposition of a
unit warrant, and of a share of our common stock acquired upon exercise of a
unit warrant, applies to you if you hold the unit warrant and any common stock
acquired on exercise of the unit warrant as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended.
This discussion is based upon the Internal Revenue Code, Treasury
regulations, Internal Revenue Service rulings and pronouncements and judicial
decisions now in effect, each of which is subject to change at any time by
legislative, administrative, or judicial action, possibly with retroactive
effect. The discussion does not discuss every aspect of U.S. federal income and
estate taxation that may be relevant to a particular taxpayer in light of its
personal circumstances or to persons who are otherwise subject to special tax
treatment. For example, special rules not discussed here may apply to you if you
are:
o a bank or a broker-dealer
o an insurance company;
o a pension or other employee benefit plan;
o a tax exempt organization or entity;
o a U.S. expatriate;
o a trader in securities that elects mark-to-market accounting
treatment;
o a person holding unit warrants or common stock as a part of a
hedging or conversion transaction or a straddle;
o a hybrid entity or an owner of interests therein; or
o a holder whose functional currency is not the U.S. dollar.
In addition, this discussion does not address the effect of any
applicable foreign, state, local or other tax laws. We have not sought and will
not seek any rulings from the Internal Revenue Service concerning the tax
consequences of the acquisition, ownership or disposition of a unit warrant or a
share of our common stock acquired on exercise of a unit warrant and,
accordingly, we cannot assure you that the Internal Revenue Service will not
successfully challenge the tax consequences described below. WE URGE YOU TO
CONSULT YOUR TAX ADVISER WITH RESPECT TO THE U.S. FEDERAL INCOME AND ESTATE TAX
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CONSIDERATIONS RELEVANT TO HOLDING AND DISPOSING OF A UNIT WARRANT OR A SHARE OF
OUR COMMON STOCK AS WELL AS ANY TAX CONSIDERATIONS APPLICABLE UNDER THE LAWS OF
ANY FOREIGN, STATE, LOCAL OR OTHER TAXING JURISDICTION.
U.S. HOLDERS
If you are a "U.S. Holder," as defined below, this section applies to
you. Otherwise, the section "Non-U.S. Holders" applies to you. You are a U.S.
Holder if you are the beneficial owner of a unit warrant or share of our common
stock acquired on exercise of a unit warrant and you are:
o a citizen or individual resident of the United States;
o a corporation, including an entity treated as a corporation
for U.S. federal income tax purposes, created or organized in
the United States or under the laws of the United States or of
any state thereof or the District of Columbia;
o an estate whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
o a trust, if (1) a court within the United States is able to
exercise primary supervision over the administration of the
trust, and one or more United States persons have the
authority to control all substantial decisions of the trust,
or (2) the trust was in existence on August 20, 1996 and
properly elected to continue to be treated as a United States
person.
TAX TREATMENT OF UNIT WARRANTS. A U.S. Holder will not have a taxable
event on exercise of a unit, except with respect to cash, if any, received in
lieu of a fractional share. A U.S. Holder will have a tax basis in the share of
our common stock received upon exercise of a unit warrant equal to the U.S.
Holder's tax basis in the unit warrant surrendered, plus the amount of cash paid
for the exercise price, adjusted for any fractional share for which cash is
received. In the case of a U.S. Holder that purchased a unit warrant as part of
a unit consisting of a share of our common stock and a unit warrant, the U.S.
Holder's tax basis in the unit warrant will equal that portion of the purchase
price of the unit that was allocated to the unit warrant based upon the relative
fair market values of the share of our common stock and the unit warrant
comprising the unit. In the case of a U.S. Holder that purchased a unit warrant
separately, the U.S. Holder's tax basis in the unit warrant will be the purchase
price therefor. A U.S. Holder generally will have a holding period in a share of
our common stock acquired upon exercise of a unit warrant that commences on the
date of exercise of the unit warrant.
A U.S. Holder will recognize gain or loss upon a sale, redemption,
lapse or other taxable disposition of a unit warrant in an amount equal to the
difference between the sum of the amount of cash and the fair market value of
any property received for the unit warrant and the U.S. Holder's tax basis in
the unit warrant. The gain or loss upon a sale, redemption, lapse or other
taxable disposition of a unit warrant will be capital gain or loss if the common
stock to which the unit warrant relates would be a capital asset in the hands of
the warrant holder and will be long-term capital gain or loss if the holding
period for the unit warrant exceeds one year.
An adjustment to the exercise price of the unit warrants, or the
failure to make an adjustment, may result in certain circumstances in a
constructive distribution to the holders of the unit warrants that could be
taxable as a dividend under Section 305 of the Code. In that event, a holder's
tax basis in the unit warrants would increase by the amount of the dividend.
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TAX TREATMENT OF COMMON STOCK ACQUIRED ON EXERCISE OF A UNIT WARRANT.
Cash distributed on our common stock will be treated as a dividend to the extent
of our current and accumulated earnings and profits attributable to the
distribution as determined under U.S. federal income tax principles. If the
amount of a distribution exceeds our current and accumulated earnings and
profits attributable to the distribution, the distribution next will be treated
as a nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the common stock, on a share-by-share basis, but not below
zero. If the distribution exceeds both our current and accumulated earnings and
profits attributable to the distribution and your adjusted tax basis in our
common stock, the excess will be treated as capital gain and will be either
long-term or short-term capital gain depending on whether your holding period
for that common stock is or is not more than one year.
Corporate U.S. Holders of our common stock generally should be eligible
for the 70% dividends-received deduction with respect to the portion of any
distribution on our common stock taxable as a dividend. However, corporate
investors should consider certain provisions that may limit the availability of
a dividends-received deduction, including but not limited to the holding period
rules of section 246(c) of the Internal Revenue Code, the rules of section 246A
that reduce the dividends-received deduction on dividends on certain
debt-financed stock, and the rules in section 1059 of the Internal Revenue Code
that reduce the basis of stock (and may require recognition of taxable gain) in
respect of certain extraordinary dividends, as well as the effect of the
dividends-received deduction on the determination of alternative minimum tax
liability.
If you sell or dispose of our common stock in a taxable transaction,
you will recognize capital gain or loss equal to the difference between the sum
of the cash and the fair market value of any property received and your tax
basis in the common stock. A U.S. Holder's tax basis in shares of our common
stock acquired upon exercise of a unit warrant will be determined in the manner
set forth in "--U.S. Holders --Tax Treatment of Unit Warrants" above. The gain
or loss will be long-term capital gain or loss if your holding period for your
stock exceeds one year. For corporate taxpayers, long-term capital gains are
taxed at the same rate as ordinary income. For individual taxpayers, net capital
gain -- the excess of a taxpayer's net long-term capital gain over short-term
capital loss -- is subject to a maximum tax rate of 15%. The deductibility of
capital losses is restricted, and capital losses generally may be used only to
reduce capital gains to the extent thereof.
INFORMATION REPORTING; BACKUP WITHHOLDING. We are required to furnish
to record holders of our common stock, other than corporations and other exempt
holders, and to the Internal Revenue Service, information with respect to
dividends paid on our common stock.
Certain U.S. Holders may be subject to backup withholding at the rate
of 28% with respect to dividends paid on our common stock or with respect to
proceeds received from a disposition of a unit warrant or a share of our common
stock. Generally, backup withholding applies only if:
o the payee fails to furnish a correct taxpayer identification
number to the payer in the manner required or fails to
demonstrate that it otherwise qualifies for an exemption;
72
o the Internal Revenue Service notifies the payer that the
taxpayer identification number furnished by the payee is
incorrect;
o the payee has failed to report properly the receipt of a
"reportable payment" on one or more occasions, and the
Internal Revenue Service has notified the payer that
withholding is required; or
o the payee fails (in certain circumstances) to provide a
certified statement, signed under penalties of perjury, that
the taxpayer identification number furnished is the correct
number and that the holder is not subject to backup
withholding.
Backup withholding is not an additional tax but, rather, is a method of
tax collection. A U.S. Holder will be entitled to a refund or a credit against
its actual tax liability for any amount withheld under the backup withholding
rules, provided the required information is furnished to the Internal Revenue
Service.
NON-U.S. HOLDERS
The following discussion is limited to U.S. federal income and estate
tax consequences relevant to a Non-U.S. Holder. As used herein, a "Non-U.S.
Holder" is a beneficial owner of a unit warrant or share of our common stock
acquired on exercise of a unit warrant that, for U.S. federal income tax
purposes, is
o a nonresident alien individual;
o a corporation (or an entity treated as a corporation) created
or organized in or under the law of a country (or a political
subdivision thereof) other than the United States; or
o a foreign estate or trust, which generally is an estate or
trust that is not a U.S. Holder.
This discussion does not address tax consequences relevant to an
expatriate or former long-term resident of the United States or to a person who
holds a unit warrant or share of our common stock through a partnership. A
person who holds a unit warrant or share of our common stock through a hybrid
entity (that is, an entity that is fiscally transparent for U.S. federal income
tax purposes but not for foreign tax purposes) may not be entitled to the
benefits of a tax treaty. For example, a person who is a partner in a foreign
partnership or beneficiary of a foreign trust or estate and who is subject to
U.S. federal income tax because of his own status, for example, as a U.S.
resident or a foreign person engaged in trade or business in the United States,
may be subject to U.S. federal income tax even though the foreign partnership,
trust or estate is not itself subject to U.S. federal income tax. For purposes
of the following discussion, "U.S. trade or business income" of a Non-U.S.
Holder generally means a dividend on our common stock or gain on a sale,
exchange or retirement of a unit warrant or share of our common stock if the
dividend or gain is (i) effectively connected with trade or business conducted
by the Non-U.S. Holder within the United States or (ii) in most cases of a
resident of a country with which the United States has an income tax treaty,
attributable to a permanent establishment (or fixed base) of the Non-U.S. Holder
in the United States.
73
TAX TREATMENT OF UNIT WARRANTS. The exercise of a unit warrant will
not, be a taxable disposition of the unit warrant for the exercising Non-U.S.
Holder, except with respect to cash, if any, received in lieu of a fractional
share. In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax upon a taxable disposition of a unit warrant, except as described in
"Certain U.S. Federal Tax Consequences --Non-U.S. Holders --Taxable Disposition
of a Unit Warrant or Share of Common Stock" below.
An adjustment to the exercise price of the unit warrants, or the
failure to make an adjustment, in certain circumstances may result in a
constructive distribution to the holders of the unit warrants that could be
taxable as a dividend under Section 305 of the Code. In that event, a holder's
tax basis in the unit warrant would increase by the amount of the dividend.
DIVIDENDS ON COMMON STOCK. If a unit warrant has been exercised, a
Non-U.S. Holder of our common stock generally will be subject to withholding of
U.S. federal income tax on dividends at a 30% rate or a lower rate that an
applicable income tax treaty may specify. Non-U.S. Holders should consult their
tax advisers on their entitlement to benefits under a relevant income tax
treaty. A Non-U.S. Holder of our common stock that claims the benefit of an
income tax treaty rate generally is required to satisfy applicable certification
and other requirements. A Non-U.S. Holder of our common stock that is eligible
for a reduced rate of U.S. withholding tax under an income tax treaty may obtain
a refund or credit of any excess amounts withheld by filing an appropriate claim
for a refund with the IRS.
Dividends that are U.S. trade or business income are generally subject
to U.S. federal income tax on a net income basis at graduated rates in the same
manner that a U.S. taxpayer is subject to tax and will be exempt from the
withholding tax described above. In the case of a Non-U.S. Holder that is a
corporation, U.S. trade or business income under certain circumstances also will
be subject to an additional branch profits tax at a 30% rate (or, if applicable,
a lower treaty rate). To claim an exemption from withholding because a dividend
is U.S. trade or business income, a Non-U.S. Holder must satisfy applicable
certification and other requirements.
TAXABLE DISPOSITION OF A UNIT WARRANT OR SHARE OF COMMON STOCK. Subject
to the discussion below of backup withholding, you generally will not be subject
to U.S. federal income tax on any gain recognized upon a sale, redemption, lapse
or other taxable disposition of a unit warrant or upon a sale, exchange or other
taxable disposition of our common stock. However, you will be subject to U.S.
federal income tax on the gain if:
o the gain is U.S. trade or business income (in which case, if
you are a foreign corporation (or a foreign entity treated as
a corporation), you may also be subject to the branch profits
tax at a 30% rate (or, if applicable, a lower treaty rate));
o you are a non-resident alien individual, you are present in
the United States for 183 or more days in the taxable year of
disposition and either (a) you have a "tax home" in the United
States for U.S. federal income tax purposes or (b) the gain is
attributable to an office or other fixed place of business you
maintain in the United States; or
o we are a "United States real property holding corporation"
within the meaning of section 897(c) of the Internal Revenue
Code, or we have been a United States real property holding
corporation at any time during the shorter of the five year
74
period ending on the date of your sale or other disposition
and the period you have held the unit warrant or common stock
that is sold or otherwise disposed of. We believe that we
currently are not a United States real property holding
corporation, and we do not anticipate becoming one. No
assurance, however, can be provided that we will not become a
United States real property holding corporation in the future.
A Non-U.S. Holder's tax basis in a unit warrant and in a share of our common
stock acquired upon exercise of a unit warrant will be determined in the same
manner set forth in "Certain U.S. Federal Tax Consequences -- U.S. Holders --
Tax Treatment of Unit Warrants" above.
FEDERAL ESTATE TAX. In the case of an individual who is not a citizen
of the United States and who is not domiciled in the United States at the time
of death,
o a unit warrant that is owned, or treated as owned, at the time
of death may be subject to U.S. federal estate tax, except as
an applicable estate tax treaty provides to the contrary; and
o a share of our common stock will be subject to U.S. federal
estate tax, except as an applicable estate tax treaty provides
to the contrary.
In the case of an individual who is not a citizen of the United States
but who is domiciled in the United States at the time of death, a unit warrant
and a share of our common stock will be subject to U.S. federal estate tax,
regardless of whether the individual is not a resident of the United States,
except as an applicable estate tax treaty provides to the contrary.
INFORMATION REPORTING; BACKUP WITHHOLDING. Under specific
circumstances, the IRS requires information reporting and backup withholding at
a rate of 28% on dividends paid to a Non-U.S. Holder of our common stock that is
required to certify its Non-U.S. Holder status but fails to do so. The proceeds
of a disposition of a unit warrant or a share of our common stock by a Non-U.S.
Holder to or through a foreign office of a broker will not be subject to backup
withholding. However, information reporting will apply in the case of a "U.S.
related broker" unless the broker has documentary evidence in its files of the
Non-U.S. Holder's foreign status and has no actual knowledge to the contrary or
unless the Non-U.S. Holder otherwise establishes an exemption. A broker is a
"U.S. related broker" if the broker is a United States person, a controlled
foreign corporation for U.S. federal income tax purposes, a foreign person 50%
or more of whose income from all sources for a designated period is from
activities that are effectively connected with the conduct of trade or business
within the United States or a foreign partnership that, at any time during its
taxable year, is owned 50% or more (by income or capital interest) by United
States persons or is engaged in the conduct of trade or business in the United
States.
Any amounts withheld under the backup withholding rules from a payment
to a Non-U.S. Holder will be allowed as a refund or as a credit against the
Non-U.S. Holder's U.S. federal income tax liability, provided the requisite
procedures are followed.
75
PLAN OF DISTRIBUTION
GENERAL
The shares of common stock underlying the unit warrants offered hereby
are issuable upon the exercise of unit warrants that were issued by us in
connection with a public rights offering, which we completed on March 22, 2002.
We engaged Noble International Investments, Inc. as a standby underwriter for
this rights offering.
We offered units comprised of one share of our common stock and one
warrant to purchase one share of our common stock, exercisable at $1.05 (as
adjusted from $1.08 per share to give effect to our August, 2003 private sale of
500,000 shares of our common stock at $0.60 per share), at any time on or after
February 12, 2003 until February 11, 2006.
In the offering, we sold 2,775,000 units consisting of 2,775,000 shares
of our common stock and warrants to purchase 2,775,000 shares of our common
stock at a purchase price of $0.90 per unit. On May 17, 2002, Noble exercised
its option to purchase 416,250 additional units (416,250 shares of our common
stock and warrants to purchase 416,250 shares of our common stock) at a purchase
price of $0.90 per unit to cover over-allotments.
All of the shares of common stock underlying the unit warrants sold
pursuant to this prospectus shall be sold by us, except that Noble may be assist
us in soliciting the exercise of the unit warrants as described below under
"--Warrant Solicitation Fees."
RESALE OF SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE STANDBY
UNDERWRITER'S OPTION AND STANDBY UNDERWRITER'S WARRANTS COMPRISING A PART
THEREOF
In connection with our 2002 public rights offering, we also issued to
Noble International Investments, Inc., the standby underwriter, an option to
purchase 277,500 units, each unit consisting of one share of our common stock
and one standby underwriter's warrant (having the same terms as the unit
warrants issued in our 2002 public rights offering). Noble's option is currently
exercisable at $0.60 per unit.
We are registering the shares of our common stock issuable to Noble
upon exercise of the standby underwriter's option and the underlying standby
underwriter's warrants on behalf of Noble for resale. As used in this
prospectus, the term "Noble" includes the pledgees, donees, transferees or other
successors-in-interest selling shares received after the date of this prospectus
from Noble as a gift, pledge, partnership distribution or other non-sale related
transfer.
Sales of shares of common stock by Noble may involve any of the
following:
o block transactions in which the broker or dealer so engaged
will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction,
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus,
o ordinary brokerage transactions and transactions in which a
broker solicits purchasers, or
o privately negotiated transactions.
In connection with the distribution of the shares of common stock or
otherwise, Noble may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
76
the common stock in the course of hedging the position they assume with Noble.
Noble may also sell the common stock short and redeliver the shares to close out
such short positions.
Noble may also enter into option transactions (including call or put
option transactions) or other transactions with broker-dealers which require
delivery to such broker-dealer of shares offered hereby, which shares such
broker-dealer may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction, if necessary). Noble may also pledge shares to a
broker-dealer and, upon a default, such broker-dealer may effect sales of the
pledged shares pursuant to this prospectus (as supplemented or amended to
reflect such transaction, if necessary). Noble may also sell the common stock
through one or more underwriters on a firm commitment or best-efforts basis
(with a supplement or amendment to this prospectus, if necessary).
Agents, broker-dealers or underwriters may receive compensation in the
form of discounts, concessions or commissions from Noble and/or the purchasers
of shares for whom they act as agent or to whom they sell as principals, or both
(which compensation as to a particular broker-dealer may be in excess of
customary commissions). Noble and any agents, broker-dealers or underwriters
that act in connection with the sale of shares might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any discount or commission received by them and any profit on the resale of
shares sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. Because Noble
might be deemed to be an underwriter, Noble will be subject to the prospectus
delivery requirements of the Securities Act.
All costs, expenses and fees in connection with the registration of the
shares will be borne by us. Brokerage commissions and similar selling expenses,
if any, attributable to the sale of the shares will be borne by Noble.
We have advised Noble that it will be subject to applicable provisions
of the Securities Exchange Act of 1934 and the associated rules and regulations
under the Exchange Act, including the anti-manipulative provisions of Regulation
M, which provisions may limit the timing of purchases and sales of shares of our
common stock by it.
In addition, any shares that qualify for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather than pursuant to this
prospectus.
Upon us being notified by Noble that any material arrangement has been
entered into with a broker-dealer for the sale of shares through a block trade,
special offering, exchange distribution or secondary distribution or a purchase
by a broker or dealer, a supplement to this prospectus will be filed, if
required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) Noble
and the name of the participating broker-dealer(s), (ii) the number of shares
involved, (iii) the price at which such shares were sold, (iv) the commissions
paid or discounts or concessions allowed to such broker-dealer(s), where
applicable, (v) that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus
and (vi) other facts material to the transaction. In addition, upon us being
notified by Noble that a donee, pledgee, transferee or other
successor-in-interest intends to sell more than 500 shares, a supplement to this
prospectus will be filed.
77
EXERCISE OF THE UNIT WARRANTS
The warrants may be exercised upon surrender of the warrant certificate
on or prior February 11, 2006, the expiration date of the unit warrants, at the
offices of the warrant agent, with the form of "Election to Purchase" on the
reverse side of the warrant certificate completed and executed, as indicated,
accompanied by payment of the full exercise price (by certified check payable to
the warrant agent) for the number of unit warrants being exercised. See
"Description of the Unit Warrants." American Stock Transfer & Trust Company is
the transfer agent and registrar for the our common stock and the warrant agent
for the warrants. However, our ability to sell the shares of our common stock
underlying the unit warrants is subject to the continued effectiveness of the
registration statement of which this prospectus is a part as well as the
qualification of these shares of common stock for sale in the states and other
jurisdictions where holders of the unit warrants reside. There can be no
assurance that we will, at all times during the term of the unit warrants, be
able to maintain such registration statement or qualification in effect, and in
the event we are unable to do so, the unit warrants may not be exercisable by
certain holders and may ultimately become worthless. If we are unable to qualify
the shares of common stock underlying the unit warrants for sale in particular
states or jurisdictions, holders of the unit warrants in those states or
jurisdictions may have to sell the unit warrants unexercised (market conditions
permitting) or allow the unit warrants to expire.
WARRANT SOLICITATION FEES
We have agreed for a period of three years, commencing on February 12,
2003, to pay to Noble a warrant solicitation fee of 5% of the exercise price for
each unit warrant exercised during the three year period, subject to Noble's
compliance with the rules of the NASD.
To the extent Noble engages in market making activities or solicited
brokerage activities with regard to our shares of common stock, Noble will be
prohibited under Regulation M of the Securities Exchange Act of 1934 before the
solicitation or before the exercise of any warrant based upon a prior
solicitation. As a result, Noble may be unable to continue to provide a market
for our common stock during certain periods while the unit warrants are
exercisable.
78
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the periodic reporting and other informational
requirements of the Securities Exchange Act. We will file annual, quarterly and
special reports and other information with the SEC. In addition, we have agreed
under the warrant agreement that, whether or not we are required to do so by the
rules and regulations of the SEC, for so long as any of the warrants remain
outstanding, we will furnish to the holders of any of the warrants and file with
the SEC, unless the SEC will not accept such a filing, (i) all quarterly and
annual financial information that would be required to be contained in a filing
with the SEC on Forms 10-Q and 10-K if we were required to file such forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by our certified independent public accountants and (ii) all
reports that would be required to be filed with the SEC on Form 8-K if we were
required to file such reports.
We have filed a registration statement on Form S-1 with the SEC to
register under the Securities Act the shares of our common stock issuable upon
exercise of the warrants. This prospectus constitutes a part of that
registration statement. As allowed by the SEC's rules, this prospectus does not
contain all the information set forth in the registration statement, certain
parts of which have been omitted in accordance with the rules and regulations of
the SEC. Please refer to the registration statement and related exhibits and
schedules filed therewith for further information with respect to us and the
registered notes offered hereby. Statements contained herein concerning the
provisions of any document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
registration statement or otherwise filed by us with the SEC and each such
statement is qualified in its entirety by such reference.
You may read and copy any document we file at the SEC's public
reference rooms located in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the web site maintained by the SEC
at: http://www.sec.gov. Our reports are also available on our Internet Website
at www.Relm.com as soon as practicable after we file such material with the SEC.
The information contained on our website is not incorporated by reference in
this prospectus. This information is available without charge upon written or
oral request to:
Relm Wireless Corporation
7100 Technology Drive
West Melbourne, Florida 32904
(321) 984-1414
Attention: Investor Relations
You should rely only on the information provided in this prospectus or
any prospectus supplement. We have not authorized anyone else to provide you
with different information. We may not make an offer of the shares of our common
stock issuable upon exercise of the unit warrants in any state where the offer
is not permitted. The delivery of this prospectus does not, under any
circumstances, mean that there has not been a change in our affairs since the
date of this prospectus. It also does not mean that the information in this
prospectus is correct after this date.
79
LEGAL MATTERS
The validity of the shares of our common stock issuable upon the
exercise of the unit warrants issued hereby will be passed upon by Greenberg
Traurig, P.A., Miami, Florida.
EXPERTS
The consolidated financial statements, as of December 31, 2002 and for
the year then ended included, in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report, which
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern, appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
The consolidated balance sheet of Relm Wireless Corporation as of
December 31, 2001 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 2001, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
On December 2, 2002, we dismissed Ernst & Young LLP as our independent
accountant and on December 12, 2002 we engaged BDO Seidman LLP as our
independent accountant to audit our financial statements for the year ending
December 31, 2002. The decision to dismiss Ernst & Young LLP and engage BDO
Seidman LLP was unanimously recommended by our Audit Committee and unanimously
approved by our Board of Directors.
80
RELM WIRELESS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002......... F-2
Condensed Consolidated Statements of Operations for the three and six months ended June F-3
30, 2003 and 2002.....................................................................
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2003 F-4
and 2002..............................................................................
Notes to Condensed Consolidated Financial Statements ................................... F-5
Report of Independent Certified Public Accountants BDO Seidman LLP...................... F-16
Report of Independent Certified Public Accountants Ernst & Young LLP.................... F-17
Consolidated Balance Sheets as of December 31, 2002 and 2001............................ F-18 - F-19
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000.................................................................................. F-20
Consolidated Statements Changes in Stockholders' Equity for the years ended December
31, 2002, 2001 and 2000............................................................... F-21
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000.................................................................................. F-22
Notes to Consolidated Financial Statements.............................................. F-23
F-1
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30 December 31
2003 2002
------------- -------------
(UNAUDITED) (See note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 854 $ 1,631
Trade accounts receivable (net of allowance for doubtful accounts
of $68 as of June 30, 2003 and $69 as of December 31, 2002) 2,926 765
Inventories, net 6,605 7,862
Notes receivable 24 21
Prepaid expenses and other current assets 74 289
------------- -------------
Total current assets 10,483 10,568
Property, plant and equipment, net 1,611 1,792
Notes receivable, less current portion 37 41
Debt issuance costs, net 256 341
Other assets 475 114
------------- -------------
Total assets $ 12,862 $ 12,856
============= =============
See notes to condensed consolidated financial statements.
F-2
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
June 30 December 31
2003 2002
------------- -------------
(Unaudited) (See note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 2,902 $ 1,970
Accounts payable 1,465 2,127
Accrued compensation and related taxes 422 466
Accrued warranty expense 100 103
Accrued expenses and other current liabilities 194 168
------------- -------------
Total current liabilities 5,083 4,834
Subordinated convertible notes 3,150 3,150
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares
none issued or outstanding. -- --
Common stock; $ 60 par value; 20,000,000 authorized shares
8,565,088 issued and outstanding at June 30, 2003;
8,540,088 issued and outstanding at December 31, 2002 5,138 5,123
Additional paid-in capital 21,553 21,557
Accumulated deficit (22,062) (21,808)
------------- -------------
Total stockholders' equity 4,629 4,872
------------- -------------
Total liabilities and stockholders' equity $ 12,862 $ 12,856
============= =============
See notes to condensed consolidated financial statements.
F-3
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
June 30 June 30 June 30 June 30
2003 2002 2003 2002
------------- ------------ ------------ ------------
(See Note 1) (See Note 1) (See Note 1) (See Note 1)
Sales $ 5,231 $ 4,950 $ 8,827 $ 9,683
Expenses
Cost of products 3,466 3,412 5,985 6,789
1,546 1,460 2,912 2,870
Selling, general & administrative
Loss on notes receivables -- -- -- 900
------------- ------------ ------------ ------------
5,012 4,872 8,897 10,559
------------- ------------ ------------ ------------
Operating income (loss) 219 78 (70) (876)
Other income (expense):
Interest expense (119) (111) (222) (221)
Other income 22 36 38 84
------------- ------------ ------------ ------------
Net income (loss) $ 122 $ 3 $ (254) $ (1,013)
============= ============ ============ ============
Earnings (loss) per share-basic $ 0.01 $ 0.00 $ (0.03) $ (0.14)
============= ============ ============ ============
Earnings (loss) per share-diluted $ 0.01 $ 0.00 $ (0.03) $ (0.14)
============= ============ ============ ============
See notes to condensed consolidated financial statements.
F-4
RELM WIRELESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
June 30, June 30,
2003 2002
-------------- --------------
(See Note 1) (See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (254) $ (1,013)
Adjustments to reconcile net loss to net cash provided by
(used in ) operating activities:
Loss on Notes Receivable -- 900
Allowance for doubtful accounts (1) (10)
Inventories reserve -- (43)
Depreciation and amortization 332 491
Change in current assets and liabilities:
Accounts receivable (2,161) 985
Inventories 1,257 929
Accounts payable (662) (1,076)
Other current assets (150) (23)
Other current liabilities (21) (83)
-------------- --------------
Net cash provided by (used in) operating activities (1,660) 1,057
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (60) (50)
-------------- --------------
Net cash used in investing activities (60) (50)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations -- (10)
Net increase (decrease) in revolving credit lines 932 (1,265)
Net proceeds from issuance of common stock 11 2,025
-------------- --------------
Net cash provided by financing activities 943 750
Increase (decrease) in cash and cash equivalents (777) 1,757
Cash and cash equivalents, beginning of period 1,631 335
-------------- --------------
Cash and cash equivalents, end of period $ 854 $ 2,092
============== ==============
SUPPLEMENTAL DISCLOSURE
Interest paid $ 222 $ 221
============== ==============
See notes to condensed consolidated financial statements.
F-5
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of June 30, 2003, the condensed
consolidated statements of operations for the three and six months ended June
30, 2003 and 2002 and the condensed consolidated statements of cash flows for
the six months ended June 30, 2003 and 2002 have been prepared by RELM Wireless
Corporation (the Company), and are unaudited. In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary for a fair
presentation have been made. The condensed consolidated balance sheet at
December 31, 2002 has been derived from the audited consolidated financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's December 31, 2002 Annual Report to Stockholders. The results of
operations for the three and six month periods ended June 30, 2003 are not
necessarily indicative of the operating results for a full year.
2. SIGNIFICANT EVENTS AND TRANSACTIONS
In July 2003, the Company was awarded contract participation to supply to the U.
S. Department of Interior (DOI) digital LMR equipment that is compliant with
APCO (Association of Public-Safety Communications Officials) Project 25
specifications. The contract, originally established in November 2002, is a
fixed-price, indefinite-delivery and indefinite-quantity contract that is open
to all federal agencies. It includes one base year with options for four
additional years. Under the contract, U.S. government agencies may purchase up
to $1 billion of APCO Project 25 LMR equipment. The contract has no minimum
purchase requirements, and purchases may fluctuate from period to period.
APCO Project 25 specifies standard features and signaling for narrow-band
digital voice and data in both conventional and trunking modes of operation. The
standard has been adopted by the U.S. federal government, which has targeted a
conversion to APCO Project 25 LMR equipment by year-end 2005. Government and
public-safety LMR users nationwide are increasingly adopting this standard. A
cornerstone of APCO Project 25 is to provide effective interoperability among
users of compliant equipment, regardless of the equipment manufacturer. Through
this open architecture, APCO Project 25 provides an environment where users will
have a wider selection of LMR suppliers, including RELM.
F-6
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA
2. SIGNIFICANT EVENTS AND TRANSACTIONS-CONTINUED
As of December 31, 2002 the Company was in violation of certain financial
covenants in its revolving line of credit agreement. Accordingly, all amounts
due under the agreement are classified as a current liability as of June 30,
2003. The Company has been negotiating with the lender the terms and conditions
of a proposed forbearance agreement. The Company and the lender, however, have
been unable to reach a definitive agreement. On July 3, 2003, the Company
received a notice from the lender demanding payment in full of all indebtedness
to the lender under the loan agreement on or before October 2, 2003. The letter
also asserts that events of default continue to exist under the loan agreement.
The lender contends that it may, at its sole discretion, make further advances
or extensions of credit under the loan agreement, but is not obligated to do so.
If lender decides to make further advances or extensions of credit, the
borrowing base and the maximum amount of the line shall continue with the terms
previously established. The lender has reserved the right to exercise all rights
and remedies available to it under the loan agreement if we fail to make full
payment of all indebtedness by October 2, 2003.
The Company has received financing proposals from several lenders. The proposals
are being evaluated and due diligence procedures are being performed. The
Company anticipates that our present lender will continue to make advances as
described in their letter. If the lender declines to advance additional funds,
the Company believes that its cash on hand will be sufficient to finance our
operations until an agreement is reached with an alternative financing source.
If, however, the Company is unsuccessful in securing financing from an
alternative source in a timely manner, its operations could be adversely
affected.
3. ALLOWANCE ON TRADE RECEIVABLES
The allowance for collection losses on trade receivables was $68 on gross trade
receivables of $2,994 at June 30, 2003. This allowance is used to state trade
receivables at a net realizable value or the amount that the Company estimates
will be collected on the Company's gross receivables as of June 30, 2003.
Because the amount that the Company will actually collect on the receivables
outstanding as of June 30, 2003 cannot be known with certainty as of the
effective date of this filing, the Company relies on prior experience. The
Company's historical collection losses have been typically infrequent with
write-offs of trade receivables being less than 1% of sales. The Company's
F-7
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
3. ALLOWANCE ON TRADE RECEIVABLES-CONTINUED
policy is to 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 turn
out to have such an inability. Currently the Company's allowance on trade
receivables is 2.3% of gross trade receivables. The Company also maintains a
specific allowance for customer accounts that the Company knows may not be
collectible due to reasons such as bankruptcy and other customer liquidity
issues. The Company analyzes the trade receivable portfolio based on the age of
each customer's invoice. In this way, the Company can identify those accounts
that are more likely than not to have collection problems. The Company then
reserves a portion or all of the customer's balance.
4. INVENTORIES
The components of inventory, net of reserves totaling $2,607 and $2,617 at June
30, 2003 and December 31, 2002, respectively, consist of the following:
June 30 December 31
2003 2002
------- -----------
Finished goods $3,658 $ 4,948
Work in process 750 507
Raw materials 2,197 2,407
------ ----------
$6,605 $ 7,862
====== ==========
The reserve for excess or obsolete inventory is used to state our inventories at
the lower of cost or market. Because the amount that we will actually recover
through sales of our inventory as of June 30, 2003 can not be known with
certainty, we rely on past sales experience, future sales forecasts, and our
strategic business plans. As of June 30, 2003, a portion of our inventory is in
excess of optimal levels based upon historical sales volumes. Certain new
product development has been completed and marketing programs implemented that
have reduced this inventory during the three and six months ended June 30, 2003,
and will continue to reduce it over the near term. No estimate can be made of a
loss that is reasonably possible should the programs not be successful.
F-8
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
5. BARTER CREDITS
The Company has entered into various barter transactions, exchanging inventory
for barter credits that are redeemable for goods and services in the future,
including but not limited to promotion, advertising, printing, and travel, among
others.
The credits are recorded at fair value of the inventory exchanged in accordance
with APB 29 "Accounting for Non-Monetary Transactions" and EITF 93-11
"Accounting for Barter Transactions". The credits totaled approximately $361,000
and $157,000 as of June 30, 2003 and December 31, 2002, respectively, and have
no expiration date. Such amounts are included in prepaid expenses and other
current assets in the accompanying condensed consolidated balance sheets. The
Company evaluates the recoverability of these credits on a quarterly basis and
expects to utilize all available credits.
6. STOCKHOLDERS' EQUITY
The consolidated changes in stockholders' equity for the six months ended June
30, 2003 are as follows:
Common Stock Additional
-------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
--------- ------- -------- ----------- -------
Balance at December 31, 2002 8,540,088 $ 5,123 $ 21,557 $ (21,808) $ 4,872
Common stock issued 25,000 15 (4) -- 11
Net loss -- -- -- (254) (254)
--------- ------- -------- ----------- ------
BALANCE AT JUNE 30, 2003 8,565,088 $ 5,138 $ 21,553 $ (22,062) $ 4,629
========= ======= ======== =========== =======
F-9
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA
7. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30 June 30 June 30 June 30
2003 2002 2003 2002
----------- ----------- ----------- ----------
Numerator:
Net income (loss) (numerator for basic and
diluted earnings per share) $ 122 $ 3 $ (254) $ (1,013)
----------- ----------- ----------- ----------
Denominator:
Denominator for basic and diluted earnings per share 8,565,088 8,327,012 8,558,560 6,989,066
weighted average common shares outstanding
Effect of dilutive securities:
Options -- 18,023 -- --
Denominator for diluted earnings per share -
adjusted weighted average shares 8,565,088 8,345,035 8,558,560 6,989,066
=========== =========== =========== ==========
Basic and diluted earnings (loss) per share $ 0.01 $ 0.00 $ (0.03) $ (0.14)
=========== =========== =========== ==========
A total of 7,225,968 shares related to options, warrants, and convertible debt
are not included in the computation of loss per share for the three and six
months ended June 30, 2003 because to do so would be anti-dilutive.
8. STOCK BASED COMPENSATION
The Company has elected to continue to account for its stock-based compensation
plans under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock
Issued to Employees" and related interpretations. No compensation cost is
reflected in the Company's net income related to the stock option plans for the
periods presented, as all options had an exercise price greater than or equal to
the market value of the underlying common stock on the date of grant. Had the
expense for the stock-based compensation been determined using the fair value
based method defined in Financial Accounting Standard (FAS) 123, "Accounting for
Stock-Based Compensation & Financial Accounting Standard (FAS) 148, the
Company's net loss and net loss per share would have been reduced to the pro
forma amounts indicated below:
F-10
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA
8. STOCK BASED COMPENSATION-CONTINUED
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
------ ----- ------ --------
Net income (loss) as reported $ 122 $ 3 $ (254) $ (1,013)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (26) (28) (53) (58)
Pro forma net income (loss) $ 96 $ (25) $ (307) $ (1,071)
====== ===== ====== ========
Basic and diluted income (loss) per share:
As reported $ 0.01 $0.00 $ (.03) $ (.14)
====== ===== ====== ========
Pro forma $ 0.01 $0.00 $ (.04) $ (.15)
====== ===== ====== ========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2002 and 2003, respectively: risk-free interest
rates of 3.53% and 4.76%; dividend yields of 0%; volatility factors of the
expected market price of our Common Stock of 44.0% and 96.7%; and a
weighted-average expected life of the option of four years.
These pro forma results may not be indicative of the future results for the full
fiscal year due to potential grants vesting and other factors.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
("Statement 146"). Statement 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee
F-11
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" ("Issue 94-3"). The principal difference
between Statement 146 and Issue 94-3 relates to Statement 146's requirements for
recognition of a liability for a cost associated with an exit or disposal
activity. Statement 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. A fundamental
conclusion reached by the FASB in this Statement is that an entity's commitment
to a plan, by itself, does not create an obligation that meets the definition of
a liability. Therefore, this Statement eliminates the definition and
requirements for recognition of exit costs in Issue 94-3. This Statement also
establishes that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. Statement 146 did not
have a material impact on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-
based employee compensation. It also amends the disclosure provisions of SFAS
No. 123 to require prominent disclosure about the effects on reported net income
of an entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in the interim
financial information. The amendments to SFAS No. 123 that provide alternative
F-12
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
9. RECENTLY ISSUED ACCOUNTING STANDARDS - CONTINUED
methods of transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation are effective
for financial statements for fiscal years ending after December 15, 2002. The
amendment to SFAS No. 123 relating to disclosure and the amendment to Opinion 28
is effective for financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. Early application is
encouraged. The adoption of SFAS No. 148 did not have a material impact on the
consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities ("VIE's") created after January 31, 2003, and to VIE's in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to VIE's in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period. The adoption of FIN 46 is not expected to have a
material impact on the Company's consolidated financial position, liquidity, or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." It is effective for
contracts entered into or modified after June 30, 2003, except as stated within
the statement, and should be applied prospectively. The Company is currently
assessing the impact of SFAS No. 149.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measurers in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with SFAS No. 150,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. SFAS No. 150 shall be effective for financial
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003. The Company is currently assessing the impact of SFAS No. 150.
F-13
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
10. CONTINGENT LIABILITIES
From time to time, the Company may become liable with respect to pending and
threatened litigation, tax, environmental and other matters.
LEGAL PROCEEDINGS
In 1993, a civil action was brought against the Company by a plaintiff to
recover losses sustained on the note of a former affiliate totaling $1,700 plus
interest at 12% per annum. The plaintiff alleged violations of federal security
and other laws by the Company in collateral arrangements with the former
affiliate. In February 1994, the liquidator of the former affiliate filed a
complaint claiming that intentional and negligent conduct by the Company and
others caused the former affiliate to suffer millions of dollars of losses
leading to its ultimate failure. In response, the Company filed motions for
summary judgment to dismiss these complaints. On September 12, 2002, the Court
granted in significant part the motions for summary judgment filed by the
Company and one of the Company's directors. As the result, the lone remaining
claim seeks damages against the Company for non-payment of the note. The Company
contends that this note was canceled and released for fair consideration in 1993
and that there is no basis in law or fact for the liquidator's claim. The
Company is defending this matter vigorously.
In June 1997, substantially all of the assets of a RELM specialty-manufacturing
subsidiary were sold. The asset purchase agreement contains indemnification
provisions, which could result in liability for both parties. Presently, two
indemnification claims are pending against the Company. Insurance coverage
exists for these matters. Counsel for the Company's insurer is vigorously
defending both claims. Counsel believes the Company has meritorious defenses and
the likelihood of an unfavorable outcome in each of these actions is remote.
On November 19, 2001, a products liability lawsuit was filed in the 353rd
Judicial District Court of Travis County, Texas. On August 26, 2002, a products
liability lawsuit was filed in the Probate Court of Galveston County, Texas.
RELM Wireless Corporation, RELM Communications, Incorporated, and the purchaser
F-14
RELM WIRELESS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA AND PER SHARE DATA)
LEGAL PROCEEDINGS-CONTINUED
of the assets of Company's former specialty-manufacturing subsidiary are named
defendants in these lawsuits. The agreement under which the assets of the former
subsidiary were sold contains indemnification provisions, which could result in
liability for both parties. Counsel for the Company's insurer is vigorously
defending both claims. Counsel believes the Company has meritorious defenses and
the likelihood of an unfavorable outcome in each of these actions is remote.
11. NASDAQ COMMUNICATION
On April 29, 2003 the Company was notified by Nasdaq Listing Qualifications that
it had not regained compliance with the minimum $1.00 closing bid price per
share requirement as set forth in marketplace rule 4310(c)(4). The Company was
not eligible for an additional 90 calendar day compliance period because it did
not meet the initial inclusion requirements of the Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(2)(A). Accordingly, the Company's securities were
delisted from the Nasdaq SmallCap Market at the opening of business on May 8,
2003. The Company's securities became immediately eligible for quotation on the
OTC Bulletin Board effective with the open of business on May 8, 2003. The OTC
Bulletin Board symbol assigned to the Company is "RELM".
F-15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheet of RELM Wireless
Corporation as of December 31, 2002, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RELM Wireless
Corporation at December 31, 2002, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered a substantial net
loss from operations and was in default of its loan agreement. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ BDO Seidman LLP
Miami, Florida
March 28, 2003
F-16
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheet of RELM Wireless
Corporation as of December 31, 2001, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two 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 the consolidated results of its operations
and its cash flows for each of the two 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 13, paragraph 4,as to which date is
March 22, 2002
F-17
RELM WIRELESS CORPORATION
Consolidated Balance Sheets
(In Thousands, except share data)
December 31
2002 2001
-------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,631 $ 335
Trade accounts receivable (net of allowance for doubtful
accounts of $69 in 2002 and $1,540 in 2001) 765 3,597
Inventories, net 7,862 8,961
Notes receivable 21 60
Prepaid expenses and other current 289 452
-------------------
Total current assets 10,568 13,405
Property, plant and equipment, net 1,792 2,156
Notes receivable, less current portion 41 911
Debt issuance costs, net 341 512
Other assets 114 639
-------------------
Total assets $12,856 $17,623
===================
See notes to consolidated financial statements.
F-18
RELM WIRELESS CORPORATION
Consolidated Balance Sheets
(In Thousands, except share data)
December 31
2002 2001
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 1,970 $ 100
Accounts payable 2,127 3,171
Accrued compensation and related taxes 466 532
Accrued warranty expense 103 79
Accrued expenses and other current liabilities 168 261
----------------------
Total current liabilities 4,834 4,143
Long-term debt 3,150 6,998
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares -- --
none issued or outstanding
Common stock; $.60 par value; 20,000,000 authorized shares:
8,540,088 and 5,346,174 issued and outstanding shares at
December 31, 2002 and 2001, respectively 5,123 3,207
Additional paid-in capital 21,557 21,452
Deficit (21,808) (18,177)
----------------------
Total stockholders' equity 4,872 6,482
----------------------
Total liabilities and stockholders' equity $ 12,856 $ 17,623
======================
See notes to consolidated financial statements.
F-19
RELM WIRELESS CORPORATION
Consolidated Statements of Operations
(In Thousands, Except Share Data)
Year ended December 31
2002 2001 2000
------------------------------------
Sales $ 15,978 $ 22,809 $ 21,054
Expenses
Cost of products 11,760 16,190 15,674
Selling, general & administrative 6,476 5,926 6,930
Loss on notes receivable 1,075 -- --
------------------------------------
19,311 22,116 22,604
------------------------------------
Operating income (loss) (3,333) 693 (1,550)
Other income (expense):
Interest expense (456) (579) (933)
Gain on sale of facility and equipment -- -- 984
Other income 158 8 337
------------------------------------
Total other income (expense) (298) (571) 388
------------------------------------
Income (loss) from continuing operations before discontinued
operations (3,631) 122 (1,162)
Discontinued operations:
Loss from discontinued operations net of taxes -- -- (266)
------------------------------------
Net income (loss) $ (3,631) $ 122 $ (1,428)
======== ======== ========
Income (loss) per share-basic and diluted:
Continuing operations $ (0.47) $ 0.02 $ (0.22)
Discontinued operations -- -- (0.05)
------------------------------------
Net income (loss) $ (0.47) $ 0.02 $ (0.27)
====================================
See notes to consolidated financial statements.
F-20
RELM WIRELESS CORPORATION
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, 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
Public rights offering 3,191,250 1,915 106 -- 2,021
Other 2,664 1 (1) -- --
Net loss -- -- -- (3,631) (3,631)
-------------------------------------------------------------------
Balance at December 31, 2002 8,540,088 $ 5,123 $ 21,557 $ (21,808) $ 4,872
===================================================================
See notes to consolidated financial statements.
F-21
RELM WIRELESS CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
2002 2001 2000
---------------------------------
Cash flows from operating activities
Net income (loss) $(3,631) $ 122 $(1,428)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Loss on notes receivable 1,075 -- --
Allowance for doubtful accounts (1,471) (15) (117)
Inventories reserve 283 341 44
Write down of investment banking agreement 120 (8) (4)
Write down of technology agreement 211 -- --
Depreciation and amortization 787 1,056 1,429
Gain on disposal of property and equipment, and other assets -- -- (984)
Change in operating assets and liabilities:
Accounts receivable 4,303 130 (1,629)
Inventories 816 (362) 3,344
Accounts payable (1,043) (431) (818)
Other current assets 209 (146) (25)
Other current liabilities (125) (395) (243)
---------------------------------
Cash provided by (used in) operating activities 1,534 292 (431)
Cash flows from investing activities
Purchases of property and equipment (157) (87) (251)
Payment for technology agreement (125) -- --
Collections on notes receivable 9 13 710
Proceeds from disposals of facility and equipment 2 2 5,944
Cash paid for Uniden product line -- -- (2,016)
---------------------------------
Cash provided by (used in) investing activities (271) (72) 4,387
Cash flows from financing activities
Repayment of debt and capital lease obligations (10) (748) (5,494)
Proceeds from debt -- -- 3,250
Net increase (decrease) in revolving credit lines (1,978) 655 (1,229)
Private Placement Costs -- -- (276)
Rights offering 2,021 -- --
---------------------------------
Cash provided by (used in) financing activities 33 (93) (3,749)
---------------------------------
Increase in cash 1,296 127 207
Cash and cash equivalents, beginning of year 335 208 1
---------------------------------
Cash and cash equivalents, end of year $ 1,631 $ 335 $ 208
=================================
Supplemental disclosure
Interest paid $ 476 $ 579 $ 933
=================================
Common stock issued for services rendered $ -- $ -- $ 676
=================================
See notes to consolidated financial statements
F-22
RELM WIRELESS CORPORATION
Notes to Consolidated Financial Statements
December 31, 2002
(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, which are sold to the government and
business and industrial markets. The Company has only one reportable business
segment.
PRINCIPLES OF CONSOLIDATION
The accounts of the Company and its subsidiary have been included in the
accompanying consolidated financial statements. All significant intercompany
balances and transactions have been eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost (determined by the average cost
method) or market. 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
Management reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets which
considers the discounted future net cash flows. During 2002, the Company
recorded the following asset impairments.
F-23
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
IMPAIRMENT OF LONG-LIVED ASSETS-CONTINUED
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 had a five-year term and an exercise price of $3.25 per
share. The value of the warrants was being amortized on a straight-line basis
over the estimated life of the contract. Accumulated amortization at December
31, 2002 and 2001 was $120 and $76 respectively. In the fourth quarter the
Company was notified that JMS had closed its New York office, and the firm no
longer employs the principals who handled the Company's account. Therefore, the
Company does not anticipate receiving further services under this agreement.
Accordingly, the Company elected to write-off the remaining value of the
warrants totaling approximately $120 during the fourth quarter of 2002.
In March 1998, the Company entered into an agreement with Racal Communications,
Inc. (presently known as "Thales") which, among other things, licensed the
Company to use Thales' digital APCO project 25-compliant technology under
specified terms and conditions. The cost of the technology license was $300 and
was being amortized over a period of eight years. The Company has since
developed its own APCO project 25-compliant digital technology, which was
completed in the fourth quarter 2002. Consequently, the Company does not
anticipate utilizing the technology provided for by its agreement with Racal.
Accordingly, the Company elected to write-off the remaining value of the
technology agreement totaling $211 during the fourth quarter of 2002.
F-24
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts based on specifically
identified amounts that the Company believes to be uncollectible. The Company
also records additional allowance based on certain percentages of the Company's
aged receivables, which are determined based on historical experience and the
Company's assessment of the general financial conditions affecting the Company's
customer base. If the Company's actual collections experience changes, revisions
to the Company's allowance may be required. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance. In
addition, with respect to notes receivable, the Company stops accruing interest
when collection of a note becomes doubtful. Based on the information available,
management believes the allowance for doubtful accounts as of December 31, 2002
is adequate.
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 received.
INCOME TAXES
Income taxes are calculated using the liability method specified by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
CONCENTRATION OF CREDIT RISK
The Company is in the business of designing, manufacturing, and marketing of
wireless communications equipment consisting primarily of land mobile radios,
base station components and subsystems. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral. At December 31, 2002 and 2001, accounts receivable from governmental
customers were approximately $125 and $2,800, respectively. Receivables
generally are due within 30 days. Credit losses relating to customers in the
land mobile radios, base station components and subsystems industry consistently
have been within management's expectations and are comparable to losses for the
portfolio as a whole.
F-25
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
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 short-term and long-term debt
approximates market, as the interest rates on these financial instruments
approximate current rates available to the Company.
ADVERTISING COSTS
The cost for advertising is expensed as incurred. The total advertising expense
for 2002, 2001, and 2000 was $202, $188, and $161, respectively.
ENGINEERING, RESEARCH AND DEVELOPMENT COSTS
Included in selling, general and administrative expenses for 2002, 2001, and
2000 are research and development costs of $1,865, $1,359, and $1,175,
respectively.
STOCK BASED COMPENSATION
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:
F-26
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
STOCK BASED COMPENSATION-CONTINUED
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------
Net income (loss) as reported $(3,631) $ 122 $(1,428)
--------------------------------------------------------------------------------------------------
Add: Stock-based employee compensation - - -
expense included in reported net income,
net of related tax effects
--------------------------------------------------------------------------------------------------
Deduct: Total stock-based employee (676) (620) (483)
compensation expense determined under fair
value based method for all awards, net of
related tax effects
------------------------------------------
Pro-forma net loss $(4,307) $ (498) $(1,911)
==========================================
EARNINGS PER SHARE:
--------------------------------------------------------------------------------------------------
Basic--as reported $ (0.47) $ 0.02 $ (0.27)
==========================================
Basic--pro forma (0.55) (0.09) (0.36)
==========================================
Diluted--as reported (0.47) 0.02 (0.27)
==========================================
Diluted--pro forma $ (0.55) $(0.09) $ (0.36)
==========================================
--------------------------------------------------------------------------------------------------
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 (LOSS)
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 SFAS No. 130. Total
comprehensive income (loss) is equal to net income (loss) reported in the
financial statements.
F-27
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
PRODUCT WARRANTY
The Company offers two-year warranties to its customers depending on the
specific product and terms of the customer purchase agreement. The Company's
typical warranties require it to repair and replace defective products during
the warranty period at no cost to the customer. At the time the product revenue
is recognized, the Company records a liability for estimated costs under its
warranties. The costs are estimated based on historical experience. The Company
periodically assesses the adequacy of its recorded liability for product
warranties and adjusts the amount as necessary.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
Statement 145 amends Statement of Financial Accounting Standards No. 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with the FASB's goal
of requiring similar accounting treatment for transactions that have similar
economic effects. Statement 145 also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in some
instances, they may change accounting practice. The Company has adopted the
provisions of Statement 145 for fiscal 2002, which did not result in a material
impact to the its financial position.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities,"
("Statement 146"). Statement 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The principal
difference between Statement 146 and Issue 94-3 relates to Statement 146's
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. Statement 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. Under Issue 94-3, a liability for an exit cost as generally defined in
Issue 94-3 was recognized at the date of an entity's commitment to an exit plan.
A fundamental conclusion reached by the FASB in this Statement is that an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. Therefore, this Statement eliminates the
definition and requirements for recognition of exit costs in Issue 94-3. This
Statement also establishes that fair value is the objective for initial
measurement of the liability. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31, 2002. The
Company is assessing whether the adoption of Statement 146 will have a material
impact on its consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of
F-28
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
RECENT ACCOUNTING PRONOUNCEMENTS-CONTINUED
------------------------------------------
accounting for stock-based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, this Statement amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those effects
in the interim financial information. The amendments to SFAS No. 123 that
provide alternative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation are effective for financial statements for fiscal years ending
after December 15, 2002. The amendment to SFAS No. 123 relating to disclosure
and the amendment to Opinion 28 is effective for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. Early application is encouraged. Management currently believes that the
adoption of SFAS No. 148 will not have a material impact on the financial
statements. Management does not intend to adopt fair value accounting under SFAS
123.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's consolidated financial
statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 applies immediately to variable interest
entities ("VIE's") created after January 31, 2003, and to VIE's in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to VIE's in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 applies to public enterprises as of the beginning of the applicable
interim or annual period.
The adoption of FIN 46 is not expected to have a material impact on the
Company's consolidated financial position, liquidity, or results of operations.
F-29
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. GOING CONCERN UNCERTAINTIES AND MANAGEMENT'S PLANS OF RESOLUTION
The Company's consolidated financial statements are presented on the going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss of
approximately $3.6 million during the year ended December 31, 2002. Also, as
discussed in Note 8, the Company was in default of its line of credit agreement.
Accordingly, under the terms of the agreement, the lender may demand immediate
payment of all amounts owed. The lender has not made such a demand. Should the
lender demand immediate payment, the Company does not have sufficient resources
to satisfy this obligation and continue with its normal ongoing business
activities. The lender has verbally agreed to enter into a forbearance agreement
with the Company. The Company believes that this agreement will have a term of
90 days and will increase the interest rate charged by 2%. Also, the lender will
charge a one-time fee of $20 for the forbearance agreement. The agreement
may be reviewed for renewal at the end of its term. As a result of these
circumstances, the line of credit has been classified as a current liability in
the accompanying consolidated balance sheet at December 31, 2002.
The default could have a material adverse impact on the Company's ability to
meet working capital requirements. The Company is seeking a replacement line of
credit to adequately fund its working capital demands. The ability of the
Company to continue as a going concern is predicated upon certain factors,
including its ability to find alternate lenders and refinance its revolving line
of credit, and to successfully implement its business plans. While pursuing
alternative financing, Company must continue to operate on cash flow generated
from operations and its existing line of credit. The continued support and
forbearance of its present lender will be required, although this is not
assured. The Company plans to improve its working capital position by reducing
operating costs and selling inventory, and marketing new products.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern.
F-30
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
3. INVENTORIES
Inventory, which is presented net of allowance for obsolete and slow moving
inventory, consisted of the following:
DECEMBER 31
2002 2001
------------------------------------
Finished goods $4,948 $5,724
Work in process 507 799
Raw materials 2,407 2,438
------------------------------------
$7,862 $8,961
====================================
The allowance for obsolete and slow moving inventory is as follows:
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------------------
Balance, beginning of year $2,319 $1,978 $1,934
Charged to cost of sales 283 341 44
------------------------------------------------------
$2,602 $2,319 $1,978
======================================================
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. At December 31, 2002, a
portion ($900) of inventory that pertains to the Uniden product line is in
excess of optimal levels based on the recent sales volumes. Certain new product
development has been completed and marketing programs have been implemented that
will reduce this inventory over the near term. Management believes no loss will
be incurred on the disposition of this inventory. No estimate can be made of a
range of amounts of loss that are reasonably possible should that program not be
successful.
F-31
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is composed of the following:
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------------------
Balance, beginning of year $ 1,540 $ 1,555 $1,672
Provision for doubtful accounts (26) - 58
Uncollectible accounts written off (1,445) (15) (175)
------------------------------------------------------
$ 69 $ 1,540 $1,555
======================================================
5. DEBT ISSUANCE COSTS
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, 2002 and 2001 was $476 and $306, 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
its common stock at an aggregate purchase price of one hundred dollars. The
warrants had a five-year term and an exercise price of $3.25 per share. The
value of the warrants was being amortized on a straight-line basis over the
estimated life of the contract. Accumulated amortization at December 31, 2002
and 2001 was $120 and $76 respectively. In the fourth quarter the Company was
notified that JMS had closed its New York office, and the firm no longer employs
the principals who handled the Company's account. Therefore, the Company does
not anticipate receiving further services under this agreement. Accordingly, the
Company elected to write-off the remaining value of the warrants totaling
approximately $120 during the fourth quarter of 2002.
F-32
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment as of December 31, 2002 and 2001 includes the
following:
2002 2001
------------------------------------
Leasehold improvements $ 98 $ 98
Machinery and equipment 8,702 7,498
Less accumulated depreciation (7,008) (5,440)
------------------------------------
Net property, plant and equipment $ 1,792 $ 2,156
====================================
Depreciation expense for 2002, 2001, and 2000 was $519, $761, and $1,221,
respectively. During 2002 the Company exercised bargain purchase options
pursuant to certain capital lease agreements. The net book value of the
equipment to which these leases pertained was zero as of December 31, 2002.
Accordingly the original cost of the equipment ($2,202) and its accumulated
depreciation ($2,202) were reclassified from equipment under capital leases to
Property, Plant and Equipment.
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.
7. NOTES RECEIVABLE
In April 2002, we became aware that, the purchaser of the Company's former
paper-manufacturing subsidiary, had ceased operations. The purchaser owed the
Company $900 plus accrued interest under the terms of two secured promissory
notes and had defaulted on its obligations to make principal and interest
payments. With guidance from counsel, management evaluated alternatives and took
all prudent actions to maximize the possibility of recovery. However, after a
comprehensive assessment, we believed that the value of purchaser's assets and
the assets of the guarantor were insufficient to provide any recovery of the
amounts due under the notes. Accordingly, the Company wrote-off the amount owed
in the first quarter 2002.
F-33
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
7. NOTES RECEIVABLE-CONTINUED
During 2002, the purchaser of the Company's former specialty manufacturing
subsidiary, ceased making payments in accordance with a note receivable. The
original amount of the note was approximately $355. As of December 31, 2002 the
amount due under the note is approximately $175 plus accrued interest. This note
resulted from a 1997 agreement for the sale of the assets of our former
specialty-manufacturing subsidiary. Since its inception, the terms of the
obligation have been restructured several times to accommodate the purchaser.
The last payment was received in March 2002. Attempts during the second and
third quarters 2002 to contact the purchaser and collect the past-due
installment payments have been unsuccessful. In February 2003, the Company
started legal proceedings to recover the remaining amount due under the note
plus accrued interest. With guidance from counsel, management believes that the
Company will prevail in these proceedings. However, we have been unable to
ascertain the financial position of the purchaser or their ability to pay the
debt. Accordingly, we established a collection allowance in the fourth quarter
2002 for the entire principal amount of the note.
8. DEBT
Long term debt consists of the following:
DECEMBER 31
2002 2001
------------------------------------
Line of credit $ 1,970 $3,948
Convertible subordinated note, matures 2004, interest only payment at
8% per annum through December 31, 2004, at which time principal is
due. 3,150 3,150
------------------------------------
Total debt 5,120 7,098
Less current portion (1,970) (100)
------------------------------------
Long-term debt $ 3,150 $6,998
====================================
Maturities of long-term debt for years succeeding December 31, 2002 are as
follows:
2003 $ 1,970
2004 3,150
-------------------
$ 5,120
===================
F-34
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
8. DEBT-CONTINUED
The Company's amended revolving credit agreement provided for a maximum line of
credit of $7,000 reduced by outstanding letters of credit and other factors.
Outstanding letters of credit were $21 and $127 at December 31, 2002 and
December 31, 2001, 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, 2002. Interest on the unpaid
principal balance accrues at the prime rate plus 1.25% (4.25% and 5.00 % at
December 31, 2002 and 2001, respectively). There is an annual fee of .25% on the
line. The line of credit is collaterized by substantially all of the Company's
non-real estate assets. At December 31, 2002 and 2001, the Company had
approximately $223 and $1,341 of availability on the revolving credit facility,
respectively. The credit agreement requires, among other things, compliance with
financial covenants and capital expenditure limitations. As of December 31, 2002
the Company was in violation of certain financial covenants in the line of
credit agreement. Based upon discussions with the lender, the Company
anticipates entering into a forbearance agreement. Although no definitive
agreement has yet been executed, the Company believes that this agreement will
have a term of 90 days and will increase the current interest rate by 2%. Also,
the lender will likely charge a one-time fee of $20 for the forbearance
agreement. The agreement will be reviewed for renewal at the end of its term.
The Company is currently in discussions with other lenders to replace this
revolving facility. Accordingly, the Company has reclassified the line of
credit, totaling $1,970 as of December 31, 2002, as a current liability
As of December 31, 2002 and 2001, the Company had convertible subordinated notes
totaling $3,150. The notes owe interest only at 8% per annum, payable quarterly,
and are due on December 31, 2004. The notes are convertible at $1.95 per share.
9. LEASES
The Company leases its facility in West Melbourne, Florida under a long-term
operating lease, which expires on June 30, 2005. In May 2002, the Company leased
a 3.8 thousand square feet of office space in Lawrence, Kansas, to accommodate
the expansion of its digital engineering team. This lease expires on April 30,
2004. At December 31, 2002, the future minimum lease payments for operating
leases are as follows: $410 in 2003 through 2004, and $189 in 2005.
Total rental expense for 2002, 2001, and 2000 were $398, $375, and $274,
respectively.
F-35
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
9. LEASES-CONTINUED
As of December 31, 2002 and 2001, property, plant, and equipment includes
equipment purchased under a capital lease as follows:
2002 2001
------------------------------------
Cost $ 2,202 $ 2,202
Accumulated depreciation (2,202) (2,195)
------------------------------------
$ - $ 7
====================================
10. INCOME TAXES
A reconciliation of the statutory United States income tax rate to the effective
income tax rate follows:
2002 2001 2000
------------------------------------------------------
Statutory U.S. income tax rate (34.00)% 34.00% (34.00)%
States taxes, net of federal benefit (3.63)% 4.35% (3.63)%
Permanent differences 0.21% 6.77% 0.93%
Change in valuation allowance 62.19% (15.09)% 35.78%
Other (24.77)% (30.03)% 0.92%
------------------------------------------------------
Effective income tax rate 0.00% 0.00% 0.00%
======================================================
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
F-36
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
10. INCOME TAXES-CONTINUED
The components of the deferred income tax assets (liabilities) are as follows:
DECEMBER 31
2002 2001
------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 13,174 $ 10,816
Tax credits 129 129
Section 263A costs 195 277
Asset reserves:
Bad debts 96 580
Inventory reserve 979 924
Accrued expenses:
Compensation 103 219
Other 24 80
------------------------------------
Total deferred tax assets 14,700 13,025
Deferred tax liabilities:
Depreciation (286) (606)
Expense reserve - (72)
Unrealized capital gain - (128)
------------------------------------
Total deferred tax liabilities (286) (806)
------------------------------------
Subtotal 14,414 12,219
Valuation allowance (14,414) (12,219)
------------------------------------
Net deferred tax assets (liabilities) $ - $ -
====================================
For tax purposes, the Company, at December 31, 2002, has federal and state net
operating loss carryforwards of approximately $35,003. These net operating loss
carryforwards begin to expire, for federal and state purposes, in 2010. During
2002 and 2001, the Company utilized $0 and $95, 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
F-37
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
10. INCOME TAXES-CONTINUED
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 consolidated
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
$14,414 against its net deferred tax assets at December 31, 2002.
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.
11. INCOME (LOSS) PER SHARE
The following table sets the computation of basic and diluted loss per share
from continuing operations:
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------------------
Numerator:
Net income (loss) from continuing operations
(numerator for basic and diluted earnings (loss)
per share) $ (3,631) $ 122 $ (1,162)
Denominator:
Denominator for basic earnings per share-weighted
average shares 7,787,230 5,346,174 5,346,174
Denominator for diluted earnings per share-weighted
average shares 7,787,230 5,383,452 5,346,174
Basic and diluted income (loss) per share $ (0.47) $ 0.02 $ (0.22)
======================================================
A total of 7,295,968 and 2,395,050 shares related to options and warrants and
convertible debt are not included in the computation of loss per share for 2002
and 2000, respectively, because to do so would have been anti-dilutive for those
periods.
F-38
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
12. 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.
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
SHARES OPTION WEIGHTED AVERAGE
UNDER OPTION PRICE PER SHARE EXERCISE PRICE
------------------------------------------------------
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
Options granted 90,000 0.61-1.10 0.94
Options expired or terminated (80,000) 1.00-4.06 2.36
------------------------------------------------------
Balance at December 31, 2002 1,418,500 $0.61-$3.06 $1.76
======================================================
Exercisable at December 31, 2002 997,750 $0.61-$3.06 $1.83
======================================================
At December 31, 2002, 281,500 unissued options were available under the two
plans.
The weighted average contractual life of stock options outstanding as of
December 31, 2002, 2001, and 2000 was 7.3, 8 and 8 years, respectively.
Generally, employee options have a 10-year life and vest over a 4-year period
from grant date. Director options have a five-year life and vest in eleven
months from the grant date.
At December 31, 2002, 1,418,500 shares of common stock were reserved for
issuance under outstanding options and 281,500 shares of common stock were
reserved for the granting of additional options. In addition, 4,244,368 shares
of common stock were reserved for issuance under warrants and 1,633,100 shares
of common stock were reserved for issuance under convertible debt instruments.
F-39
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
12. STOCK OPTION AND OTHER STOCK OPTION PLANS-CONTINUED
The weighted average fair value of options granted during the years ended
December 31, 2002, 2001 and 2000 was $0.62, $0.74 and $1.50 respectively, using
the Black-Scholes option- pricing method. The following weighted-average
assumptions were utilized:
YEAR ENDED DECEMBER 31
2002 2001 2000
------------------------------------------------------
Black Scholes Pricing Assumptions:
Expected volatility 49.6% 96.7% 129.8%
Risk free interest rate 3.0% 4.3% 6.1%
Expected dividends None None None
Expected life in years 4 4 4
13. 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.
On March 22, 2002, the Company closed a public rights offering. The purpose of
the offering was to provide working capital, which among other things, will be
utilized to speed the development of the Company's new APCO Project 25-compliant
digital products and capabilities. The securities offered were "units"priced at
$.90 per unit. A unit was comprised of one share of RELM common stock and one
warrant to purchase one share of RELM common stock, exercisable at $1.08 per
share at any time on or after February 12, 2003 and until February 11, 2006.
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.
Noble was engaged 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
F-40
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
13. EQUITY-CONTINUED
Commission (SEC) on February 11, 2002. The offering resulted in the sale of
2,775,000 shares of common stock and warrants to purchase 2,775,000 shares of
common stock. The offering generated $1,695 in net proceeds.
On May 17, 2002, Noble exercised its option to purchase 416,250 additional units
at a purchase price of $0.90 per unit to cover over-allotments. The Company
received approximately $326 in net proceeds from the purchase of these
additional units.
The Company had no shares of its $1.00 par value preferred stock issued as of
December 31, 2002 and 2001.
14. 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:
2002 2001 2000
------------------------------------------------------
U.S. Government 39% 44% 44%
Foreign markets 6% 4% 3%
Sales to the United States Government represented approximately 39%, 44% and 44%
of our total sales for the years ended December 31, 2002 and 2001, and 2000,
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 22%, 34%, and 35% of total
sales for the years ended December 31, 2002, 2001, and 2000, respectively. For
the year ended December 31, 2002 we had no sales to CECOM because our contract
expired in 2001. However, sales to CECOM for the years ended December 31, 2001
and 2000 represented approximately 10%, and 9% of total sales, respectively.
In 1998, the Company was awarded portions of the USFS contract. This contract
expired in September 2001. Earlier in 2001, bids for a new contract were
solicited, and the Company was awarded the contract for portable radios and base
stations. The contract was for a period of one year with options for three
additional years, and did not specify a minimum purchase. In December 2002, the
Company was awarded a new contract with similar terms. It continues to include
the portable radios and repeaters that were on the previous contract.
Additionally, it includes the Company's GMH mobile radio that was not on the
previous contract. The new contract is for one year with two additional option
years.
In 1996, the Company was 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 solicited bids for a
new contract in March 2002, and the Company submitted proposals.
F-41
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
14. SIGNIFICANT CUSTOMERS-CONTINUED
The evaluation of proposals for this solicitation is in process but has been
subjected to delays. Consequently, the contract has not yet been awarded. CECOM
has indicated in recent communications that the solicitation will be canceled
and a contract will not be awarded. We are currently pursuing avenues for
providing our products to CECOM under other existing contracts.
15. 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 $78, $69, and $80 for 2002, 2001, and 2000, respectively.
16. 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, $0 and $266 in 2002, 2001 and
2000, respectively.
17. COMMITMENTS AND CONTINGENCIES
ROYALTY COMMITMENT
In 2002, the Company has entered into a technology license related to its
development of digital products. Under this agreement, the Company is obligated
to pay a royalty for each product sold that utilizes the technology covered by
this agreement. No royalties were paid in 2002. The agreement has an indefinite
term, and can be terminated by either party under certain conditions.
LIABILITY FOR PRODUCT WARRANTIES
Changes in the Company's liability for product warranties during the year ended
December 31, 2002 are as follows:
F-42
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
LIABILITY FOR PRODUCT WARRANTIES-CONTINUED
Balance at Warranties Warranties Balance at
Beginning Issued Settled End
of year of year
---------------------------------------------------------------
2002 $ 79 103 (79) $103
LEGAL PROCEEDINGS
In 1993, a civil action was brought against the Company to recover losses
sustained on the note of a former affiliate. The plaintiff alleged violations of
federal security and other laws by the Company in collateral arrangements with
the former affiliate. In February 1994, the liquidator of the former affiliate
filed a complaint claiming that intentional and negligent conduct by the Company
and others caused the former affiliate to suffer millions of dollars of losses
leading to its ultimate failure. In response, the Company filed motions for
summary judgment to dismiss these complaints. On September 12, 2002, the Court
granted in significant part the motions for summary judgment filed by the
Company and one of its directors. As the result, the lone remaining claimant
seeks damages against the Company for non-payment of a $1.7 million note plus
interest at 12% per annum. The Company's contends that this note was canceled
and released for fair consideration in 1993 and that there is no basis in law or
fact for the Liquidator's claim. The Company is defending this matter
vigorously.
In June 1997, substantially all of the assets of a RELM specialty-manufacturing
subsidiary were sold. The asset purchase agreement contains indemnification
provisions, which could result in liability for both parties. Presently, two
indemnification claims are pending against the Company. Insurance coverage
exists for these matters. Counsel for the Company's insurer is vigorously
defending both claims. Counsel believes the Company has meritorious defenses and
the likelihood of an unfavorable outcome in each of these actions is remote.
On November 19, 2001 a products liability lawsuit was filed in the 353rd
Judicial District Court of Travis County, Texas. On August 26, 2002, a products
liability lawsuit was filed in the Probate Court of Galveston County, Texas,
naming RELM, RELM Communications, Incorporated, and the purchaser of the assets
of the Company's former specialty-manufacturing subsidiary. The asset purchase
agreement contains indemnification provisions, which could result in liability
for both parties. Counsel for the Company's insurer is vigorously defending both
claims. Counsel believes the Company has meritorious defenses and the likelihood
of an unfavorable outcome in each of these actions is remote.
F-43
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
LEGAL PROCEEDINGS-CONTINUED
In addition, the Company is involved in various claims and legal actions arising
in the ordinary course of its business. It is the opinion of management that the
ultimate disposition of these matters would not have a material effect upon the
Company's consolidated financial position or results of operations.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is summarized below:
QUARTERS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2002 2002 2002 2002
------------------------------------------------------------
FISCAL 2002
Sales $4,733 $4,950 $3,979 $2,316
Gross profit 1,355 1,538 1,157 166
Net income (loss) (1,016) 3 (395) (2,224)
Earnings (loss) per share-basic (0.18) 0.00 (0.05) (0.26)
Earning (loss) per share-diluted (0.18) 0.00 (0.05) (0.26)
QUARTERS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
2001 2001 2001 2001
------------------------------------------------------------
FISCAL 2001
Sales $4,720 $6,188 $6,223 $5,678
Gross profit 1,249 1,740 1,930 1,700
Net income (loss) (287) 145 213 51
Earnings (loss) per share-basic (0.05) 0.03 0.04 0.01
Earnings (loss) per share-diluted (0.05) 0.03 0.04 0.01
In the fourth quarter 2002 the Company recorded adjustments that increased its
net loss by approximately $984 to reflect, (i) the adjustment of inventories for
slower moving items ($283), (ii) the provision for an uncollectible note
receivable from the purchaser of the Company's former specialty-manufacturing
subsidiary ($175), (iii) the write-off of the remaining book value of a
technology agreement ($211), (iv) the write-off of the remaining book value of
an investment banking agreement ($120), and (v) severance and other costs
pertaining the reorganization of the Company's sales and marketing efforts
($195).
F-44
RELM Wireless Corporation
Notes to Consolidated Financial Statements (continued)
December 31, 2002
(In Thousands, Except Share Data and Percentages)
18. QUARTERLY FINANCIAL DATA (UNAUDITED)-CONTINUED
Additionally, sales for the fourth quarter declined by $3.4 million (59.2%)
compared to the same period in the prior year. Consequently, the Company was
unable to absorb manufacturing overhead or cover other fixed costs ($1,240).
F-45
================================================================================
[RELM WIRELESS CORPORATION LOGO]
3,191,250 Shares Of
Common Stock
Underlying Common Stock Purchase Warrants
And
555,000 Shares of Common Stock Underlying a Standby Underwriter's Option
======================================
PROSPECTUS
======================================
____________, 2003
================================================================================
We have not authorized any dealer, sales representative or any other
person to give any information or to make any representations not contained in
this prospectus or the accompanying letter of transmittal. This prospectus and
the accompanying letter of transmittal do not offer to sell or buy any
securities in any jurisdiction where it is unlawful.
================================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs expected
to be incurred in connection with the issuance and distribution of the
securities to be registered. All of the amounts shown are estimated except for
the Securities and Exchange Commission registration fee, which was previously
paid.
Securities and Exchange Commission registration fee........... $ 900.00
Printing expenses............................................. 15,000.00
Legal fees and expenses....................................... 40,000.00
Accounting fees and expenses.................................. 15,000.00
Miscellaneous expenses........................................ 5,000.00
Total......................................................... $75,900.00
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our officers and directors are indemnified as provided under the Nevada
Revised Statutes and our articles of incorporation and bylaws.
Unless specifically limited by a corporation's articles of
incorporation, the Nevada Revised Statutes automatically provides directors with
immunity from monetary liabilities. Our articles of incorporation do not limit
the automatic immunity provided by the Nevada Revised Statutes. Excepted from
this immunity are: (i) a willful failure to deal fairly with the corporation or
its shareholders in connection with a matter in which the director has a
material conflict of interest; (ii) a violation of criminal law unless the
director had reasonable cause to believe that his or her conduct was lawful or
no reasonable cause to believe that his or her conduct was unlawful; (iii) a
transaction from which the director derived an improper personal profit; and
(iv) willful misconduct.
Our articles of incorporation provide that we will indemnify, to the
fullest extent permitted by Nevada law, all persons whom we have the power to
indemnify under Nevada law, and that such indemnification shall not be the
exclusive indemnification available to such persons.
Our bylaws provide that we will indemnify each of our directors and
officers if he or she acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, our best interest and, with respect to any criminal
proceedings, had no reasonable cause to believe his or her conduct was unlawful.
In addition, we will indemnify our directors and officers in any action by or in
the right of the corporation if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, our best interest;
provided, that no indemnification shall be made in respect of a claim as to
which the person has been adjudged to be liable to us unless and only to the
II-1
extent that a court of competent jurisdiction determines that, despite the
adjudication of liability but in view of the circumstances of the case, the
person is fairly and reasonably entitled to indemnity for the expenses that such
court deems proper.
Our bylaws provide that no indemnification shall be provided by us to
any person, unless it is determined that indemnification is proper because the
person has met the applicable standard of conduct. Such determination shall be
made:
- a majority vote of a quorum of the Board of Directors
consisting of directors who are not parties to the action or
proceeding, or
- if such quorum is not obtainable, or if obtainable and a
majority vote of a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or
- by the shareholders, or
- in such other manner, if any, as shall be permitted under
Nevada law.
Our bylaws provide that expenses incurred in defending any action or
proceeding to which indemnification may be available may be advanced by us upon
receipt of any undertaking by or on behalf of the person claiming
indemnification to repay these amounts if it should be determined ultimately
that he is not entitled to be indemnified by us.
In addition, our articles of incorporation eliminate the personal
liability of our directors to the fullest extent permitted by Nevada law, as the
same may be amended and supplemented.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted for our directors, officers and controlling persons, we
have been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy and is, therefore, unenforceable.
We intend to enter into indemnity agreements with each of our directors and
executive officers to give them additional contractual assurances regarding the
scope of the indemnification described above and to provide additional
procedural protections. In addition, we have obtained directors' and officers'
insurance providing indemnification for our directors, officers and certain
employees for certain liabilities. We believe that these indemnification
provisions and agreements are necessary to attract and retain qualified
directors and officers. The limitation of liability and indemnification
provisions in our articles of incorporation and bylaws may discourage
shareholders from bringing a lawsuit against directors for breach of their
fiduciary duty. They may also reduce the likelihood of derivative litigation
against directors and officers, even though such an action, if successful, might
otherwise benefit our shareholders and us. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers under these
indemnification provisions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In a private sale completed August 2003, we issued 500,000 shares of
our common stock to three funds affiliated with our directors for a purchase
price of $0.60 per share. The proceeds from the sale were used to help pay off
our then existing credit facility with Fleet Capital Corporation and provide
working capital to be used in executing our business plans, including the
expansion of our digital product line.
II-2
The foregoing transaction did not involve a public offering. All sales
were made in reliance on Section 4(2) of the Securities Act and/or Regulation D
promulgated under the Securities Act. These sales were made without general
solicitation or advertising. The recipients in such transaction represented
their intention to acquire the securities for investment only and not with a
view to sell or for sale in connection with any distribution thereof. All
recipients had adequate access, through their relationship with us, to
information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description
------ -------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation (2)
3.2 Certificate of Amendment to Articles of Incorporation (9)
3.3 Bylaws (2)
4.1 8% Convertible Subordinate Promissory Note(5)
4.2 Warrant Agreement between Relm Wireless Corporation and Janney Montgomery Scott LLC dated May 12,
2000 (11)
4.3 Warrant Certificate No. W-100 issued to Janney Montgomery Scott LLC dated May 12, 2000 (11)
4.4 Warrant Agreement between Relm Wireless Corporation and Simmonds Capital Limited day
May 12, 2000 (11)
4.5 Warrant Certificate No. W-100 issued to Simmonds Capital Limited dated May 12, 2000 (11)
4.6 Warrant Agreement between Relm Wireless Corporation and American
Stock Transfer and Trust Company, dated February ___, 2002 (***)
4.7 Form of Warrant Certificate ***
5.1 Opinion of Greenberg Traurig, P.A.**
10.1 1996 Stock Option Plan for Non-Employee Directors (1)
10.2 1997 Stock Option Plan (2)
10.3 1997 Stock Option Plan, as amended (3)
10.4 Loan and Security Agreement (4)
10.5 Workers Compensation Close Out Agreement dated December 21, 1998 (4)
10.6 Amendment to Security and Loan Agreement(5)
10.7 2nd Amendment to Security and Loan Agreement(5)
10.8 3rd Amendment to Security and Loan Agreement(5)
10.9 Simmonds Agreement(5)
10.10 Contract for Sale of West Melbourne Fl. Real Estate(6)
10.11 Sub Lease Agreement(5)
10.12 Uniden Asset Purchase Agreement(6)
10.13 OEM Uniden Manufacturing Agreement(6)
10.14 Uniden ESAS Technology Agreement(6)
10.15 Manufacturing Agreement(9)
10.16 Transaction Agreement for Real Estate Sale and Contract Manufacturing(6)
10.17 Modification Agreement(7)
10.18 4th Amendment to Security and Loan Agreement(8)
10.19 Post-Termination Benefits Agreement between the Company and David P. Storey dated October 1, 2000(8)
10.20 Post-Termination Benefits Agreement between the Company and William P. Kelly dated October 1, 2000(8)
10.21 Credit Agreement between Silicon Valley Bank and Relm Wireless Corporation dated August 29, 2003 (13)
14.1 Code of Ethics (12)
16.1 Letter to the Commission regarding change in certifying accountants(10)
21.1 Subsidiaries of Registrant(10)
23.1 Consent of Ernst & Young LLP**
23.2 Consent of BDO Seidman LLP**
23.3 Consent of Greenberg Traurig, P.A. (contained in legal opinion filed as Exhibit 5.1)**
24.1 Power of Attorney (included on signature page)**
II-3
------------------
(1) Incorporated by reference from the Adage, Inc. (predecessor to Relm
Wireless Corporation) report on form 10-K for the year ended December
31, 1996.
(2) Incorporated by reference from the Company's report on form 10-K for
the year ended December 31, 1997.
(3) Incorporated by reference from the Company's report on form 10-K for
the year ended December 31, 1998.
(4) Incorporated by reference from the Company's report on form 10-Q for
the quarter ended March 31, 1999 filed May 12, 1999.
(5) Incorporated by reference from the Company's report on form 10-K for
the year ended December 31, 1999.
(6) Incorporated by reference from the Company's report on form 10-K/A-1
for the year ended December 31, 1999, filed April 12, 2000.
(7) Incorporated by reference from the Company's report on form 8-K dated
December 22, 2000.
(8) Incorporated by reference from the Company's report on form 10-K for
the year ended December 31, 2000.
(9) Incorporated by reference from the Company's report on form 10-Q for
the quarter ended September 30, 2001 dated November 1, 2001.
(10) Incorporated by reference from the Company's report on form 8-K dated
December 6, 2002, filed on December 6, 2002.
(11) Incorporated by reference from the Company's Form S-1, June 7, 2000
(File No. 333-38718).
(12) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
(13) Incorporated by reference from the Company's Report on Form 8-K filed
on September 3, 2003.
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
(b) Financial Statement Schedules:
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement.
II-4
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described under Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Relm
Wireless Corporation has duly caused this Post-Effective Amendment No. 1 to this
Registration Statement to be signed on its behalf by the undersigned, hereunto
duly authorized, in the City of West Melbourne, State of Florida, on October 17,
2003.
RELM WIRELESS CORPORATION
By: /s/ David P. Storey
---------------------------------------
David P. Storey
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints David P. Storey and William P.
Kelly, and each of them, his true and lawful attorney(s)-in-fact, each acting
alone, with full powers of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all further
amendments, including any post-effective amendments, to this Registration
Statement, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George N. Benjamin, III Chairman of the Board October 17, 2003
-----------------------------------------------
George N. Benjamin, III
/s/ David P. Storey President and Chief Executive Officer October 17, 2003
----------------------------------------------- (Principal Executive Officer) and
David P. Storey Director
/s/ William P. Kelly Executive Vice President - Finance October 17, 2003
----------------------------------------------- and Chief Financial Officer (Principal
William P. Kelly Financial and Accounting Officer)
/s/ Ralph Whitney, Jr. Director October 17, 2003
-----------------------------------------------
Ralph Whitney, Jr.
/s/ James C. Gale Director October 17, 2003
-----------------------------------------------
James C. Gale
/s/ Donald F.U. Goebert Director October 17, 2003
-----------------------------------------------
Donald F.U. Goebert
/s/ Randolph K. Piechocki Director October 17, 2003
-----------------------------------------------
Randolph K. Piechocki
II-6
INDEX TO EXHIBITS
Exhibit
Number Description
------ ---------------------------------------------------------------
5.1 Opinion of Greenberg Traurig, P.A.
23.1 Consent of Ernst & Young LLP
23.2 Consent of BDO Seidman, LLP
23.3 Consent of Greenberg Traurig, P.A. (contained in Exhibit 5.1)