UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
T QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
£ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File number: 000-7336
RELM WIRELESS CORPORATION
(Exact name of Small Business Issuer as Specified in Its Charter)
| Nevada |
| 59-4486297 |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
7100 Technology Drive
West Melbourne, Florida 32904
(Address of principal executive offices)
(321) 984-1414
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes T No £
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12B- of the exchange act).
Yes £ No T
8,565,088 shares outstanding as of July 31, 2003
PART I- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands except share data)
June 30 2003 | December 31 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
2
ITEM 1 - FINANCIAL STATEMENTS – Continued
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands except share data)
See notes to condensed consolidated financial statements
3
ITEM 1 - FINANCIAL STATEMENTS – continued
RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands except per share data)
June 30 2003 |
| June 30 2002 |
| June 30 2003 |
| June 30 2002 | |||||||||
| |||||||||||||||
(see note 1) | (see note 1) | (see note 1) | (see note 1) | ||||||||||||
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| ||||||||||||
Sales | $ | 5,231 | $ | 4,950 | $ | 8,827 |
| $ | 9,683 |
| |||||
Expenses | |||||||||||||||
Cost of products | 3,466 | 3,412 | 5,985 | 6,789 | |||||||||||
Selling, general & administrative | 1,546 | 1,460 | 2,912 | 2,870 | |||||||||||
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
4
ITEM 1 - FINANCIAL STATEMENTS – continued
RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| June 30, 2003 | June 30, 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
5
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
6
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands except share data and per share data
2. Significant Events and Transactions-continued
architecture, APCO Project 25 provides an environment where users will have a
wider selection of LMR suppliers, including RELM.
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
7
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands except share data and per share data)
3. Allowance On Trade Receivables-continued
sales. The Company’s 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 2003 |
| December 31 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.
8
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:
Additional Paid-In Capital | ||||||||||||||||
Common Stock | Accumulated Deficit | |||||||||||||||
Shares | Amount | 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 | ||||||
9
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 2003 |
| June 30 2002 | June 30 2003 |
| June 30 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 weighted average common shares outstanding | 8,565,088 | 8,327,012 | 8,558,560 | ||||||||||