UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-07336
RELM WIRELESS CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 59-3486297
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
7100 Technology Drive
West Melbourne, Florida 32904
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (321) 984-1414
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.60
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant on March 1, 2005, based on the closing
price of such stock on the OTC Bulletin Board on such date, was $16,630,625.
As of March 1, 2005, 12,890,118 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy
statement for its 2005 annual shareholders' meeting are incorporated by
reference in Part III of this report. The registrant's proxy statement will be
filed within 120 days after December 31, 2004.
TABLE OF CONTENTS
PAGE
----
Part I 1
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II 9
Item 5. Market for Registrant's Common Equity, Related Stockholders
Matters and Issuer Purchases of Equity Securities 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risks 20
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 28
Part III 29
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
Part IV 30
Item 15. Exhibits and Financial Statement Schedules 30
SIGNATURES 33
i
PART I
ITEM 1. BUSINESS.
GENERAL
RELM Wireless Corporation, in business for over 57 years, designs, manufactures
and markets wireless communications products, principally two-way land mobile
radios (LMR) and related products. Our products are marketed using three
distinct brand names, BK Radio, RELM, and Uniden. These products are sold in two
primary markets:
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; and
2. The business and industrial market, which consists of enterprises requiring
fast, inexpensive communication among a discrete group of users. Examples
include corporate disaster recovery, hotels, construction companies,
schools, airports, and taxies.
Generally, BK Radio-branded products serve the government and public safety
market. RELM and Uniden-branded products serve the business and industrial
market.
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 the company and our products is also available through the
Internet at "http://www.relm.com." The information provided on our website is
not incorporated by reference into this report.
EVENTS OF 2004
DIGITAL ENCRYPTION
We completed development of digital encryption capabilities for our flagship DPH
digital portable radio. Also, operational and validation testing has been
successfully completed on the cryptographic module. The new encryption
capability meets Digital Encryption Standard (DES) and Advanced Encryption
Standard (AES) specifications, and our DPH meets or exceeds technical
specifications for compliance with the Association of Public Safety
Communication Officials (APCO) Project 25 standard for digital public safety
radio equipment, including encryption. Encryption enables secured two-way
communications and is important to many LMR users particularly those involved in
public safety, security and disaster recovery functions.
EXPANDED BAND VHF DIGITAL PORTABLE RADIO
We introduced a new APCO Project 25 digital radio, which features expanded
band-width capability. The frequency range for this product is 136-174 MHz,
compared to a range of 147-174 MHz for our DPH model. The additional band-width
includes a frequency band often assigned to and favored by high-specification
radio users in public safety and homeland security agencies, as well as military
units. The expanded band enables us to address markets and users that we could
not serve prior to this development, including certain public safety and
homeland security applications.
1
REVOLVING CREDIT FACILITY
In February 2004, our lender increased our revolving credit facility by $1
million to $3.5 million, and the maturity date was extended to January 1, 2005.
In October 2004, the maturity date of the facility was further extended until
January 1, 2007. Additionally, certain terms and conditions were modified that
have reduced related costs. The original agreement of August 2003 with Silicon
Valley Bank provided a $2.5 million revolving line of credit for one year,
secured by substantially all of the Company's assets, principally trade
receivables and inventory.
COMMON STOCK WARRANTS
We completed in June 2004 the redemption of all our outstanding public warrants
to purchase common stock. On April 30, 2004, the Company announced the
redemption of the public warrants. The public warrants, with an exercise price
of $1.05, were exercisable for one share of common stock until 5:00 p.m. (New
York time) on May 30, 2004. Prior to completion of the redemption, approximately
99.4 percent of the public warrants were exercised, generating net proceeds to
the Company of approximately $3.4 million and a 3,673,527 share increase in
outstanding shares of the Company's common stock. After that date, the warrants
were no longer exercisable, and holders had the right to receive only the
redemption price of $0.10 per warrant. The redemption concluded the Company's
2002 public rights offering.
CONVERTIBLE NOTES
The convertible notes matured on December 31, 2004. Notes totaling $2.25 million
were repaid and retired on that date. As of December 31, 2004, notes totaling
$700,000 remained outstanding. The rights for these notes to convert and to earn
interest expired on December 31, 2004. Notes totaling $550,000 were tendered,
repaid and retired in January 2005. One note totaling $150,000 remains
outstanding.
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., corporate disaster recovery,
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. The cost of radio
sets can range from under $200 for a basic analog portable, to over $3,000 for a
digital unit, depending upon features. Typically, 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.
2
In recent years LMR has been characterized by slow growth. This growth rate is a
reflection of several factors:
o LMR is a mature industry, having been in existence for over 70 years;
o some LMR users are in mature industry segments that are themselves
experiencing slow growth rates; and
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 Federal Communications
Commission (FCC) has mandated that new LMR equipment utilize technology that is
more spectrum-efficient. This effectively requires LMR users to migrate to
digital systems. Responding to the mandate, 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 Project 25 are to i) allow effective and
reliable communication among users of compliant equipment, regardless of its
manufacturer, ii) maximize radio spectrum efficiency, and iii) promote
competition among LMR providers through an open system architecture.
Although the FCC does not require public safety agencies or APCO to purchase
Project 25 equipment or otherwise adopt the standard, compliance with the
standard is increasingly becoming the key consideration for government and
public safety purchasers. Accordingly, we anticipate that the demand for APCO
Project 25 equipment will fuel significant LMR market growth as users upgrade
equipment to achieve interoperability and comply with the FCC mandate.
By some estimates, the LMR industry is as large as $5.7 billion in annual sales.
Presently, one manufacturer dominates the market. However, the open architecture
of the APCO Project 25 standard effectively eliminates the ability of one or
more major companies to lockout competitors. Formerly, because of proprietary
characteristics incorporated in many conventional analog LMR systems, a customer
was effectively precluded from purchasing additional LMR products from a company
other than the initial provider of the system. Additionally, the system
infrastructure technology was prohibitive for smaller communications companies
to develop. APCO Project 25 provides an environment under which users will have
a wider selection of LMR suppliers, including smaller companies such as RELM.
DESCRIPTION OF PRODUCTS
We design, manufacture, and market wireless communications equipment consisting
of two-way radios, repeaters, base stations, and related components and
subsystems. Two-way radios can be units that are hand-held (portable) or
installed in vehicles (mobile). Repeaters expand the range of two-way radios,
enabling them to operate over a wider area. Base station components and
subsystems 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.
We employ both analog and digital technologies in our products. Our digital
products are compliant with APCO Project 25 specifications.
3
We sell our products under the BK Radio, RELM and Uniden brand names. Generally,
BK Radio-branded products serve the government and public safety market, while
RELM and Uniden-branded products serve the business and industrial market.
BK Radio (formerly "Bendix King") branded products consist of
higher-specification land-mobile radios whose primary market focus is
professional radio users in the government and public safety sectors. The BK
Radio products have more extensive features and capabilities than the products
offered in the RELM and Uniden product lines. Our APCO Project 25 digital
products are marketed under the BK Radio brand.
RELM and Uniden branded products provide basic, inexpensive, yet feature rich
and reliable, two-way communications for business and industrial users, such as
hotels, construction companies, schools, taxicab and limousine companies, and
airports. Typically these users are not radio professionals, and require easy,
fast, inexpensive communication among a defined group of users.
DESCRIPTION OF MARKETS
GOVERNMENT AND PUBLIC SAFETY MARKET
The government and public safety market includes the military, fire, rescue, law
enforcement, emergency medical personnel, as well as various agencies of
federal, state, and local government. In most instances, BK Radio branded
products serve this market and are sold either directly to end-users, or through
two-way communications dealers. Government and public safety sales represented
approximately 76% of total sales for 2004, 82% of total sales for 2003 and 78%
of total sales for 2002.
Most government and public safety users currently use products that employ
analog technology. However, users in the United States and certain other
countries are migrating at an increasing rate to digital products that comply
with the APCO Project 25 standard. The evolution of the standard and compliant
digital products is explained in the INDUSTRY OVERVIEW section starting on page
2 of this report.
BUSINESS AND INDUSTRIAL 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.
We offer products to this market under the RELM and Uniden brand names. 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 24% of
total sales for 2004, 18% of total sales for 2003 and 22% of total sales for
2002.
ENGINEERING, RESEARCH AND DEVELOPMENT
Our engineering and development activities are conducted in two locations by a
team of 19 employees. Their primary development focus is the execution of our
plan to design APCO Project 25 digital products. Our first APCO Project 25
digital product, named the DPH, was introduced to the market in 2003. Also in
2003, the DPH was added to the contract to supply agencies of the U.S.
Department of Interior (DOI) with digital two-way communications equipment. In
2004, we completed development of digital encryption capabilities for the DPH.
The new encryption capabilities meet DES and AES specs, and the DPH meets or
exceeds technical specifications for compliance with the APCO Project 25
standard for digital public safety radio equipment, including encryption.
Encryption enables secured two-way communications and is important to many LMR
users particularly those involved in public safety, security and disaster
4
recovery functions. Also in 2004, we developed and introduced an additional APCO
Project 25 digital portable radio with an expanded frequency band of 136-174
MHz. The original DPH functions with a frequency range of 147-174 MHz. The
additional band-width includes frequency bands often assigned to and favored by
high-specification radio users in public safety and homeland security agencies,
as well as military units. This enables us to address markets and users that we
could not serve prior to this development, including certain public safety and
homeland security applications. We plan to develop a broad range of additional
APCO Project 25 digital products and capabilities during the next few years.
A segment of our engineering team is responsible for product specifications
based on customer requirements and supervising quality assurance activities.
They also have primary responsibility for applied engineering, production
engineering and the specification compliance of contract manufacturers.
For 2004, 2003 and 2002, our engineering and development expenditures were
approximately $1.9 million, $1.5 million and $1.9 million, respectively.
INTELLECTUAL PROPERTY
We presently have no United States patents in force. We hold several trademarks
related to the names "RELM" and "BK Radio" and certain product names. We also
rely on trade secret laws 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, some of which are with offshore
concerns, have been instrumental in decreasing our product costs significantly,
allowing us to improve our competitive position and gross margins.
Contract manufacturers produce various subassemblies and products on our behalf.
Generally, the contract manufacturers procure raw materials from RELM-approved
sources and complete manufacturing activities in accordance with our
specifications. An Original Equipment Manufacturer (OEM) manufacturing agreement
governs the business relationship with each contract manufacturer. These
agreements typically have a five-year term and may be renewed upon agreement by
both parties. The scope of the contracts may also be expanded to include new
products in the future.
We plan to continue to utilize contract manufacturing where it furthers our
business objectives. This strategy allows us to focus on our core technological
competencies of product design and development, and to reduce the substantial
capital investment required to manufacture our products. We also believe that
our use of experienced, high-volume manufacturers will provide greater
manufacturing specialization and expertise, higher levels of flexibility and
responsiveness, and faster delivery of product. To ensure that products
manufactured by others meet our standards, our West Melbourne production and
engineering team works closely with its ISO9002 industry-qualified contract
manufacturers in all key aspects of the production process. We establish product
specifications, select the components and, in some cases, the suppliers. 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 and components. We place purchase orders from time to time with
these suppliers and have no guaranteed supply arrangements. In addition, we
5
obtain certain components from a single source. The amount of these components
is not material relative to total component and raw material purchases. During
2004, 2003, and 2002, our operations have not been impaired due to delays from
single source suppliers. However, the absence of a single source component could
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. We anticipate that the current relationships, or others that are
comparable, will be available to us in the future.
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 46%, 50% and 39%
of our total sales for the years ended December 31, 2004, 2003 and 2002,
respectively. These sales were primarily to the United States Forest Service
(USFS) and the DOI.
Sales to the USFS represented approximately 23%, 27%, and 22% of total sales for
the years ended December 31, 2004, 2003 and 2002, respectively. Our new digital
portable radio, the DPH, was added to the DOI contract in July 2003. For the
years ended December 31, 2004 and 2003 sales to the DOI represented
approximately 22% and 12% of total sales, respectively.
BACKLOG
Our order backlog was approximately $2.7 million, $2.8 million, and $1.7 as of
December 31, 2004, 2003, and 2002, respectively.
COMPETITION
The worldwide land mobile radio markets are estimated by various industry market
studies to exceed $5 billion annually with annual growth of approximately 2%. We
compete with many domestic and foreign companies in these markets. One
competitor holds a share of the market estimated to exceed 70%. We compete in
these markets by capitalizing on our advantages and strengths, which include
price, quality, speed, and customer responsiveness.
EMPLOYEES
As of December 31, 2004, we had 76 full-time employees, most of whom are located
at our West Melbourne, Florida facility; 36 of these employees are engaged in
direct manufacturing or manufacturing support, 19 in engineering, 13 in sales
and 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. We believe our relations with our employees are
good.
6
INFORMATION RELATING TO DOMESTIC AND EXPORT SALES
The following table summarizes our sales of wireless communications equipment by
location of our customers:
2004 2003 2002
------- ------- -------
(in Millions)
United States $ 20.3 $ 18.5 $ 14.9
Other International 0.4 1.2 1.0
------- ------- -------
Total $ 20.7 $ 19.7 $ 15.9
======= ======= =======
ACCESS TO COMPANY INFORMATION
We electronically file with, or furnish to, the Securities and Exchange
Commission ("SEC"), reports and information, including our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
exhibits and amendments to these reports. The public may read and copy any of
the reports that are filed with the SEC at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically.
We make available, free of charge, by responding to requests addressed to our
investor relations department, our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and all exhibits and amendments to
these reports. These reports are available as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the SEC. In
addition, we make available, free of charge, by responding to requests addressed
to our investor relations department, our Code of Business Conduct and Ethics,
and our Corporate Governance Guidelines.
As discussed, Item 101(e) of Regulation S-K does not require this disclosure.
ITEM 2. PROPERTIES
OWNED
We do not currently own any real estate.
LEASED
We lease approximately 54,000 square feet of industrial space at 7100 Technology
Drive in West Melbourne, Florida. The original lease term is five years, which
expires on June 30, 2005, with a renewal option of five years. We exercised the
renewal option in February 2005. Rental, maintenance and tax expenses for this
facility were approximately $378,000, $384,000 and $395,000 in 2002, 2003 and
2004, respectively. We also lease 3,800 square feet of office space in Lawrence,
Kansas, to accommodate a segment of our engineering team. This lease has a term
of two years and expires on April 15, 2005. Rental, maintenance and tax expenses
for this facility were approximately $20,000, $33,000 and $32,000 for 2002,
7
2003, and 2004, respectively. In April 2005, our engineering team will relocate
to 8,111 square feet of leased office and laboratory space, which is in close
proximity to its present location. In January 2005, we executed a lease for this
space, which expires December 31, 2009.
ITEM 3. 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 securities 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. The lone
remaining claim sought damages against us for non-payment of the note. We
contended that this note was canceled and released for fair consideration in
1993 and that there was no basis in law or fact for the liquidator's claim. On
March 1, 2004, we reached a settlement agreement with the plaintiff. Under the
terms of the settlement, we paid to the plaintiff cash totaling $120,000 and
issued 6,452 shares of restricted common stock valued at $3.10 per share, the
closing price on March 1, 2004. A written settlement agreement and release was
executed by both parties on August 24, 2004. In accordance with the agreement,
on August 24, 2004, we paid $60,000 in cash, and on October 20, 2004, we issued
the shares. We made the remaining cash payment in November 2004.
Such settlement agreement was accrued in the accompanying 2003 balance sheet
under the caption "Accrued other expenses and other current liabilities."
In June 1997, substantially all of the assets of a RELM specialty-manufacturing
subsidiary were sold. The asset purchase agreement contains indemnification
provisions, which could result in liability for both parties. Presently, one
indemnification claim is pending against us. 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 the lawsuit. We have insurance coverage for this matter. Counsel
named by our insurer is continuing to vigorously defend this claim. Counsel
believes we have meritorious defenses and the likelihood of an unfavorable
outcome is remote.
We are involved in various claims and legal actions arising in the ordinary
course of our business. It is the opinion of management that the ultimate
disposition of these matters would not have a material effect upon our
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The following tables set forth the high and low closing sale price for our
common stock for the periods indicated, as reported by 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
2004 Quarter Ended High Low
------------------ ----- -----
March 31, 2004 $3.70 $1.46
June 30, 2004 3.29 1.85
September 30, 2004 2.78 1.49
December 31, 2004 2.52 1.71
2003 Quarter Ended High Low
------------------ ----- -----
March 31, 2003 $0.67 $0.37
June 30, 2003 0.77 0.15
September 30, 2003 1.60 0.47
December 31, 2003 1.80 1.40
On March 1, 2005, there were 1,216 holders of record of our common stock.
We have never declared or paid cash dividends on our common stock. We currently
intend to retain all available funds and any future earnings for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. In addition, our loan agreement with
Silicon Valley Bank prohibits us from paying dividends on our common stock.
EQUITY COMPENSATION PLAN INFORMATION
(c)
Number of securities
(a) (b) remaining available for
Number of securities to Weighted average future issuance under equity
be issued upon exercise exercise price of compensation plan (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants, and rights warrants and rights column (a)
- ----------------------------- ----------------------- -------------------- ----------------------------
Equity compensation plans
approved by security holders 1,565,500 $ 1.74 134,500
--------- -------- ---------
Equity compensation plans not
approved by security holders -- -- --
--------- -------- ---------
Total 1,565,500 $ 1.74 134,500
========= ======== =========
9
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected financial data of RELM, which are
derived from and should be read in conjunction with the Consolidated Financial
Statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
report:
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Sales $ 20,656 $ 19,728 15,978 $ 22,809 $ 21,054
Income (Loss) From Continuing
Operations 1,660 881 (3,631) 122 (1,162)
Loss From Discontinued Operations -- -- -- -- (266)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) $ 7,877 $ 868 $ (3,631) $ 122 $ (1,428)
========== ========== ========== ========== ==========
Income (loss) Per Share-Basic:
Income (loss) Per Share From
Continuing Operations $ 0.68 $ 0.10 $ (0.47) $ 0.02 $ (0.22)
Income (loss) Per Share From
Discontinued Operations -- -- -- -- (0.05)
---------- ---------- ---------- ---------- ----------
Net Income (loss) Per Share $ 0.68 $ 0.10 $ (0.47) $ 0.02 $ (0.27)
========== ========== ========== ========== ==========
Income (loss) Per Share-Diluted:
Income (loss) Per Share From
Continuing Operations $ 0.65 $ 0.09 $ (0.47) $ 0.02 $ (0.22)
Income (loss) Per Share From
Discontinued Operations -- -- -- -- (0.05)
---------- ---------- ---------- ---------- ----------
Net Income (loss) Per Share $ 0.65 $ 0.09 $ (0.47) $ 0.02 $ (0.27)
========== ========== ========== ========== ==========
o Results for 2004 include an approximately $6.3 million net deferred tax
asset on our balance sheet and a corresponding tax benefit on our statement
of operations. The deferred tax asset and tax benefit is more fully
explained under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Income Taxes" on page 14.
10
o Results for 2002 include, 1) a $900,000 note receivable valuation allowance
related to the purchase of the assets of the Company's former
paper-manufacturing subsidiary in the first quarter, 2) a collection
allowance of $175,333 for a note receivable from the purchaser of the
assets of our former specialty-manufacturing subsidiary, 3) the write-off
of a technology agreement with a book value of $210,981, 4) the write-off
of an investment banking services agreement with a book value of $119,851,
and 5) $185,270 in costs related to the restructuring of our sales and
marketing organization.
o Results for 2000 include a $984,000 net gain on the sale of our
manufacturing facility and the sale of certain manufacturing and test
equipment.
BALANCE SHEET (IN THOUSANDS)
DECEMBER 31
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
Working Capital $10,951 $ 5,273 $ 5,734 $ 9,262 $ 7,679
Total Assets 19,693 12,229 12,856 17,623 18,422
Long-Term Debt -0- 1,272 3,150 6,998 6,353
Total Stockholders' Equity 17,454 5,985 4,872 6,482 6,360
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
Our operating results for the year ended December 31, 2004 improved compared to
last year. Sales for 2004 increased by approximately $0.9 million (4.7%)
compared to 2003 while gross margins as a percent of sales in 2004 improved to
44.0% from 38.6% in 2003. Pretax income of approximately $1.7 million in 2004
was approximately 88.4% higher than in 2003. Net income increased $7.0 million
to approximately $7.9 million, or $0.68 per basic and $0.65 per fully dilute
share compared to last year's net income of approximately $0.9 million or $0.10
per basic and $0.09 per fully diluted share.
Our balance sheet as of December 31, 2004 also improved significantly compared
to the period ending December 31, 2003, including an approximately $1.8 million
(142.9%) increase in cash and the satisfaction of the majority of all long-term
debt on December 31, 2004.
Sales in 2004 of new products, including digital APCO Project 25 radios used by
government and public-safety agencies and our RP-Series analog radios targeted
for commercial and industrial applications, increased approximately $4.7 million
(83.7%) compared to the same period last year. The growth was derived from an
overall increase in customer order volume, rather than from a few large orders,
with many coming from new customers and customers returning after several years.
More new products, including additional APCO Project 25 digital products, are
planned for later this year and next year. Sales of conventional analog products
in 2004 declined $3.8 million (27.1%) compared to the same period last year as
customers, particularly government and public safety users, migrated to newer
products, particularly those featuring digital technology.
11
Gross margins improved as we continued to expand our use of contract
manufacturers, successfully reducing manufacturing support costs while improving
manufacturing efficiencies and inventory management. Also, our new products
incorporate recent, more cost-effective product designs.
Selling, general and administrative ("SG&A") expenses increased as we continued
to invest in new product development and sales and marketing initiatives. The
additional spending in these areas is intended to drive sales growth by
expediting the introduction of new products, including additional APCO Project
25 digital products, and intensifying our sales activities.
In the fourth quarter 2004, we evaluated the realizability of our net operating
loss carryforwards and other deferred tax assets in accordance with SFAS
Statement No. 109 and reduced the valuation allowance against deferred tax
assets. Consequently, we recognized a net deferred tax asset and a corresponding
deferred tax benefit totaling approximately $6.2 million for the fourth quarter
and year ended 2004. The deferred tax asset and income tax benefit are explained
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Income Taxes" starting on page 14.
In October 2004, our revolving line of credit was extended until January 2007.
Also, certain terms and conditions were modified that will reduce costs and
reporting requirements associated with the facility. Earlier in 2004, the
facility's term was extended to January 2005 from August 2004 and its credit
limit was increased from $2.5 million to $3.5 million.
RESULTS OF OPERATIONS
As an aid to understanding our operating results, the following table shows
items from our consolidated statement of operations expressed as a percent of
sales:
Percent of Net Sales
for Year Ended December 31
2004 2003 2002
----- ----- -----
Sales 100.0% 100.0% 100.0%
Cost of Products 56.0 61.4 73.6
----- ----- -----
Gross Margin 44.0 38.6 26.4
Selling, General, and Administrative (34.7) (32.2) (40.5)
Expenses
Loss on notes receivable -- -- (6.7)
Interest Expense (1.4) (2.2) (2.9)
Other Income 0.1 0.3 1.0
----- ----- -----
Pretax Income (loss) 8.0 4.5 (22.7)
Income Tax Benefit (Expense) 30.1 (0.1) --
----- ----- -----
Net Income (loss) 38.1% 4.4% (22.7%)
===== ===== =====
FISCAL YEAR 2004 COMPARED WITH FISCAL YEAR 2003
SALES
Net sales for the year ended December 31, 2004 increased approximately $0.9
million (4.7%) to approximately $20.7 million from $19.7 million for 2003.
12
Sales from new products for both of our market segments (government and public
safety, and business and industrial) increased approximately $4.7 million
(83.7%) for the year ended December 31, 2004 compared to the same period last
year. This includes sales of our BK Radio-brand digital products that are
compliant with the APCO Project 25 standard and sold principally to agencies of
federal, state and local governments, as well as sales of RELM-brand products
sold to business and commercial concerns. These products were introduced at
various times during 2003 and 2004. Sales of conventional analog products
decreased approximately $3.8 million (27.1%) for the year ended December 30,
2004 compared to the same period last year, as users migrated to newer, more
feature-rich products, in many cases with digital APCO Project 25 technology.
More new products are planned for introduction in 2005, including additional
APCO Project 25 digital products. We believe these planned new products combined
with the new products that have already been introduced will contribute to the
growth of total sales.
To capitalize on the advantages of our new products and the accelerating
migration to APCO Project 25 digital products, we expanded our sales and
marketing staff and activities in 2004. We expect to continue this focus in
2005, to aggressively pursue opportunities with both state and federal
government agencies.
COST OF SALES AND GROSS MARGINS
Cost of sales as a percentage of sales for the year ended December 31, 2004
decreased to 56.0% from 61.4% for 2003.
Contract manufacturing relationships have helped improve our production
efficiencies and reduce material and labor costs. They have also enabled us to
effectively control internal manufacturing support expenses. Furthermore,
increased sales volumes have enabled us to more fully utilize and absorb our
base of manufacturing support expenses. As volumes increase, we believe
additional efficiencies and cost reductions can be realized. We continuously
evaluate manufacturing alternatives to improve quality and reduce our product
costs. We anticipate that the current contract manufacturing relationships or
comparable alternatives will be available to us in the future.
The mix of products in our total sales has also contributed to improved margins.
Sales of higher-specification products to government and public-safety
customers, including APCO Project 25 digital products, and sales of new RELM
analog products comprised a greater portion of our total sales for 2004 compared
to 2003.
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 year ended December 31, 2004, SG&A
expenses totaled approximately $7.2 million (34.7% of sales) compared to
approximately $6.4 million (32.2% of sales) for 2003.
The overall increase in SG&A expenses is attributed primarily to increases in
product development and selling and marketing initiatives.
Product development and engineering staff and expenses increased by
approximately $0.4 million (27.4%) for the year ended December 31, 2004 compared
to 2003. This increase is intended to expedite the completion and introduction
of new products, including additional APCO Project 25 digital products. Bringing
such products to market and achieving a significant share of the market will
continue to require substantial investment. Our internal development efforts are
focused on our digital product program. This program is planned to yield
13
additional products through 2006. We anticipate that these products will be a
primary source of sales growth in the future.
Sales and marketing expenses increased by approximately $0.4 million (16.0%) for
the year ended December 31, 2004 compared to 2003. We incurred additional
marketing and promotion expenses for initiatives designed to drive sales growth,
particularly from government and public safety opportunities for APCO Project 25
digital products. Sales commissions as a percentage of sales decreased during
the year as a greater portion of our sales were made through direct channels or
at reduced rates, partially offsetting the additional staff and expenses.
General and administrative expenses for the year ended December 31, 2004
remained constant compared to 2003, totaling approximately $2.3 million (10.9%
of sales).
OPERATING INCOME
Operating income for the year ended December 31, 2004 increased approximately
$0.7 million (52.0%) to approximately $1.9 million compared to approximately
$1.3 million for 2003. The improvement is attributed to sales growth and product
mix as well as product and manufacturing improvements which reduced product
costs.
INTEREST EXPENSE
For the year ended December 31, 2004, interest expense decreased by
approximately $151,000 (34.2%) to $291,000 from $442,000 for 2003. We incurred
interest expense on our revolving line of credit and our subordinated
convertible notes. The interest rate on our revolving line of credit is variable
and will fluctuate with the prime lending rate. The interest rate on the mature
convertible notes was 8% per annum. Primarily as a result of cash generated from
improved operations and warrant exercises, the outstanding principal balance on
the revolving line of credit was lower during 2004 compared to the prior year.
The convertible notes matured on December 31, 2004. Notes totaling $2.25 million
were repaid and retired on that date. As of December 31, 2004, notes totaling
$700,000 remained outstanding. The rights for these notes to convert and to earn
interest expired on December 31, 2004. Notes totaling $550,000 were tendered,
repaid and retired in January 2005. One note totaling $150,000 presently remains
outstanding.
INCOME TAXES
The income tax benefit for the year ended December 31, 2004 was approximately
$6.2 million compared to income tax expense of $13,000 for 2003.
As of December 31, 2004, we recognized a deferred tax asset of approximately
$6.3 million, net of a valuation allowance of approximately $7.0 million. This
asset is primarily composed of net operating loss carry forwards (NOL's). These
NOL's total $29.2 million for federal purposes and $31.0 million for state
purposes, with expirations starting in 2005 through 2024.
In order to fully realize the net deferred tax asset, we will need to generate
sufficient taxable income in future years prior to the expiration of our NOL's.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (Statement 109) requires us to analyze all positive and negative evidence
to determine if, based on the weight of available evidence, we are more likely
14
than not to realize the benefit of the net deferred tax asset. The recognition
of the net deferred tax asset and corresponding tax benefit is based upon our
conclusions regarding, among other considerations, our estimates of future
earnings based on information currently available, our current and anticipated
customers, contracts and product introductions, as well as recent operating
results during 2004, 2003 and 2002, and certain tax planning strategies.
We have evaluated the available evidence and the likelihood of realizing the
benefit of our net deferred tax asset. From our evaluation we have concluded
that based on the weight of available evidence we are more likely than not to
realize the benefit of our net deferred tax assets recorded at December 31,
2004. Therefore, in the fourth quarter 2004, we reduced our valuation allowance
to approximately $7.0 million at December 31, 2004 from $13.2 million at
December 31, 2003, recognizing a net deferred tax asset on our balance sheet of
approximately $6.3 million and a corresponding deferred tax benefit on our
statement of operations of $6.2 million.
We cannot presently estimate what, if any, changes to the valuation of our
deferred tax asset may be deemed appropriate in the future. If we incur future
losses, it may be necessary to reduce some or the entire net deferred net tax
asset recognized as of December 31, 2004.
FISCAL YEAR 2003 COMPARED WITH FISCAL YEAR 2002
SALES
Total sales for the year ended December 31, 2003 increased $3.7 million (23.1%)
to approximately $19.7 million from approximately $16.0 million for the year
2002.
Sales for BK Radio products, targeted for the government and public safety
market of the LMR market, increased approximately $3.5 million (29.6%) compared
to the prior year. The increase in sales for the BK Radio product line, as well
as the increase in total sales, were driven principally by the introduction of a
new digital portable radio, the DPH. The DPH complies with the Project 25
Standard of APCO. This product received approval from the FCC in March 2003, and
in July 2003 was included on the U.S. Department of Interior contract for
digital LMR equipment. We are aggressively pursuing additional opportunities
with various federal and state government agencies for this product. Additional
APCO Project 25 digital products are planned for 2004 and 2005.
For the year ended December 31, 2003, sales in the business and industrial
market, served by RELM-branded and Uniden-branded products, increased
approximately $0.2 million (6.0%) when compared to the prior year. During 2003,
we introduced a new line of portable radios to address this market, the RELM RP
Series. The RP products are full-featured but low-cost, allowing us to compete
more effectively in the highly competitive business and industrial market. We
also expanded our channels to market for these products. Growth in revenues for
RELM-branded products was partially offset by declines in other products, due in
part to the migration of some customers to the new RP Series.
To capitalize on the advantages of our new products, we expanded our sales and
marketing efforts in 2003. We initially established regional direct sales
resources in other parts of the U.S, among other initiatives. These efforts are
under the direction of a sales and marketing management team that was put in
place in 2003. As sales increase we anticipate further expanding sales and
marketing initiatives.
15
COST OF SALES AND GROSS MARGINS
Cost of sales as a percentage of sales for the year ended December 31, 2003
decreased to 61.4% from 73.6% for the prior year. Continuing programs initiated
in 2000 further expanded our use of contract manufacturing resources. All of our
products are now produced using such resources. Our contract manufacturing
relationships have improved efficiencies and resulted in lower material and
labor costs for all our products. They have enabled us to also reduce our
internal manufacturing support expenses. Furthermore, increased sales volumes
have enabled us to more fully utilize and absorb the smaller base of
manufacturing support expenses. As volumes increase, we believe additional
efficiencies and cost reductions may be realized.
We continuously evaluate manufacturing alternatives to further reduce our
product costs. We anticipate that the current contract manufacturing
relationships or comparable alternatives will be available to the company in the
future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the year ended December 31, 2003, SG&A expenses decreased approximately
$126,000 (2.0%) to $6.4 million or 32.2% of sales from $6.5 million or 40.5% of
sales for the prior year.
This decrease is primarily the result of reduced administrative staffing and
expenses as well as the completion of certain engineering initiatives. Also,
several non-recurring expenses were recognized in the prior year, all of which
pertained to old business lines and were unrelated to our current LMR
operations. They included the following items: (1) writing-off the unamortized
cost ($211,000) of a technology license, 2) writing-off the unamortized cost
($120,000) of an investment banking agreement, and 3) severance and other
expenses ($195,000) associated with restructuring our sales and marketing
organization.
The aforementioned decreases enabled us to expand our digital development
program in 2003, with the objective of speeding the completion of additional
APCO Project 25 products to complement the DPH. Bringing such products to market
and achieving a significant share of the market will continue to require
substantial investment to complete research and development and to achieve
market penetration.
Our internal development efforts are focused entirely on our digital product
development program. During 2003, expenses related to this project totaled
approximately $0.8 million.
We also increased our investment in sales and marketing initiatives during 2003
to capitalize on the advantages of our new products. Regional direct sales
resources were placed in parts of the U.S., among other initiatives. As sales
increase we anticipate expanding sales and marketing initiatives. Generally
selling commission expenses vary in approximate proportion to sales. Increased
selling commission expenses in 2003 were driven by sales growth.
General and administrative expenses include a one-time charge of $140,000
related to the March 2004 settlement of a legal matter described in Item 3 of
this report.
INTEREST EXPENSE
For the year ended December 31, 2003, interest expense decreased by
approximately $14,000 (3.1%) to $442,000 from $456,000 in 2002. We incur
interest expense on our revolving line of credit and our subordinated
convertible notes. The interest rate on our revolving line of credit is variable
16
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 2003 as a result of the reductions in the prime lending
rate, and our new revolving line of credit. Also, primarily as a result of
improved operations, the outstanding principal balance on the revolver and our
new revolver was reduced during the second half of 2003.
INCOME TAXES
Income tax expense for the years ended December 31, 2003 and 2002 was
approximately $13,000 and $0, and represented effective tax rates of 1.3% and
0%. 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, 2003 and
2002, we have federal and state net operating loss carryforwards of
approximately $34.0 million and $35.0 million, respectively. These net operating
loss carryforwards begin to expire, for federal and state purposes, in 2004. In
accordance with Statement 109, 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 evaluated the realizability of the deferred tax assets on our
balance sheet and believe that we have not met the more likely than not
criteria; therefore we have established a valuation allowance in the amount of
approximately $13.2 and $14.4 million against our deferred tax assets at
December 31, 2003 and 2002, 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, 2004, 2003, and
2002 have contributed to increases in wages, facilities, and certain raw
material costs. These inflationary effects were more than offset by reduced
manufacturing costs associated our initiatives to utilize low-cost contract
manufacturers.
DIVIDENDS
No cash dividends have been paid with respect to our common stock during the
past five years. We intend to retain our earnings to fund growth and, therefore,
do not intend to pay dividends in the foreseeable future. In addition, our
revolving credit line restricts our ability to pay dividends.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2004, net cash provided by operating activities
totaled approximately $2.3 million compared to $0.3 million in 2003. The
increase in cash provided by operations is primarily attributable to net income
for the year of approximately $7.9 million compared to net income of
approximately $0.9 million for 2003. The increase in net income was largely
offset by the recognition in 2004 of a net deferred tax asset totaling $6.3
million. Last year, deferred tax assets were fully reserved and effectively not
recognized. Changes in components of working capital, particularly inventory,
also contributed to cash provided by operations.
Inventory net of reserve decreased in 2004 by approximately $1.0 million as a
result of improved sales from items in existing inventory compared to an
inventory reduction of approximately $2.2 million during the same period last
year. Accounts payable in 2004 decreased approximately $0.4 million compared to
a reduction of approximately $1.2 million for the same period last year. Sales
17
growth during 2004 and extended terms offered during the year to certain
customers increased accounts receivable by approximately $0.8 million, compared
to an increase of approximately $2.1 million for 2003. Depreciation and
amortization totaled approximately $0.7 million for 2004, which was
approximately the same as in 2003.
Cash used in investing activities was primarily to fund the acquisition of
equipment pertaining to our development of new digital products and computer
equipment. Capital expenditures for 2004 were approximately $0.3 million
compared to approximately $0.2 million last year. We anticipate that future
capital expenditures will be funded through existing cash balances, operating
cash flow and our revolving line of credit.
Net cash totaling approximately $0.1 million was used in financing activities
for 2004 compared to approximately $0.5 million last year. During 2004, we
repaid the entire balance, approximately $1.3 million, on our revolving line of
credit, compared to repayments totaling $0.7 million last year. We also repaid
$2.25 million of our subordinated convertible notes in 2004. There were no note
repayments last year. We received approximately $3.4 million in net proceeds
from the exercise of our outstanding public warrants prior to the completion of
our redemption of the warrants in June 2004.
In October 2004, our revolving line of credit was extended until January 2007.
Also, certain terms and conditions of the credit agreement were modified, which
will reduce related costs and ease reporting requirements. The original
agreement of August 2003 provided a $2.5 million revolving line of credit for
one year, secured by substantially all of the Company's assets, principally
trade receivables and inventory. Earlier in 2004, the facility's term was
extended to January 2005 from August 2004 and its credit limit was increased
from $2.5 million to $3.5 million. Under the formula for calculating the
available credit on our facility, approximately $3.4 million was available as of
December 31, 2004. The credit agreement contains covenants with which we must
comply. As of December 31, 2004, we were in compliance with all such covenants.
During the year ended December 31, 2004, certain of our convertible subordinated
notes were converted into 106,384 shares of common stock. As a result of the
conversions, the total amount due under the notes was reduced by $0.2 million.
The convertible subordinated notes matured on December 31, 2004. Notes totaling
$2.25 million were repaid and retired on that date. As of December 31, 2004,
notes totaling $700,000 remained outstanding. The rights for these notes to
convert to RELM common stock and to earn interest expired on December 31, 2004.
Notes totaling $550,000 were tendered, repaid and retired in January 2005.
Currently, one note totaling $150,000 remains outstanding.
Our cash balance at December 31, 2004 was approximately $3.1 million. We believe
these funds combined with cash generated from operations and borrowing
availability under our credit facility are sufficient to meet our current
working capital requirements for the next twelve months. If sales volumes
increase substantially, additional sources of working capital may be required to
fulfill the demand.
18
The following table sets forth the Company's future contractual obligations as
of December 31, 2004:
(IN THOUSANDS)
2005 2006 2007 2008 2009
----- ----- ----- ----- -----
Future minimum lease commitments 493 486 486 486 486
----- ----- ----- ----- -----
Convertible subordinated notes 700 0 0 0 0
----- ----- ----- ----- -----
Revolving credit facility 0 0 0 0 0
----- ----- ----- ----- -----
Purchase orders 3,737 0 0 0 0
----- ----- ----- ----- -----
We lease approximately 54,000 square feet of industrial space at 7100 Technology
Drive in West Melbourne, Florida. The original lease term is five years, which
expires on June 30, 2005, with a renewal option of 5 years. We exercised the
renewal option in February 2005. Rental, maintenance and tax expenses for this
facility were approximately $378,000, $384,000 and $395,000 in 2002, 2003 and
2004, respectively. We also lease 3,800 square feet of office space in Lawrence,
Kansas, to accommodate a segment of our engineering team. This lease has a term
of two years and expires on April 15, 2005. Rental, maintenance and tax expenses
for this facility were approximately $20,000, $33,000 and $32,000 in 2002, 2003,
and 2004, respectively. In April 2005, our engineering team will relocate to
8,111 square feet of leased office and laboratory space, which is in close
proximity to its present location. In January 2005, we executed a lease for this
space, which expires December 31, 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4" (Statement
151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). As currently
worded in ARB 43, Chapter 4, the term "so abnormal" was not defined and its
application could lead to unnecessary noncomparability of financial reporting.
This Statement eliminates that term and requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this Statement requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities. The adoption of Statement 151 will not have a
material impact on the Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 152, "Accounting For Real Estate Time-Sharing Transactions - an amendment of
FASB Statements No. 66 and 67" (Statement 152). This Statement amends FASB
Statement No. 66, "Accounting for Sales of Real Estate", to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This Statement also
amends FASB Statement No. 67, "Accounting for Costs and Initial Rental
Operations of Real Estate Projects," to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in SOP 04-2. This Statement is
effective for financial statements for fiscal years beginning after June 15,
2005. The adoption of Statement 152 will not have a material impact the
Company's consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29"
(Statement 153). This Statement amends Opinion 29 to eliminate the exception for
non-monetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of non-monetary assets that do not have
commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The adoption of FAS 153 will not have a material impact on the
Company's consolidated financial statements.
19
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123, "Share-Based Payment" (Statement 123). This
Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award (with limited exceptions). That cost will be recognized
over the period during which the employee is required to provide service in
exchange for the award requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. Employee share purchase plans will not result
in recognition of compensation cost if certain conditions are met; those
conditions are much the same as the related conditions in Statement 123. This
Statement is effective for public entities that do not file as a small business
issuers as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005. This Statement applies to all awards granted after
the required effective date and to awards modified, repurchased, or cancelled
after that date. The cumulative effect of initially applying this Statement, if
any, is recognized as of the required effective date and is not expected to have
a material impact of the Company's consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. Such forward-looking statements concern the Company's
operations, economic performance and financial condition. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; changes in customer preferences; competition; changes in technology;
the integration of any acquisitions; changes in business strategy; the
indebtedness of the Company; quality of management, business abilities and
judgment of the Company's personnel; the availability, terms and deployment of
capital; and various other factors referenced in this Report under "Risk
Factors" and elsewhere. The words "believe," "estimate," "expect," "intend,"
"anticipate" and similar expressions and variations thereof identify certain of
such forward-looking statements. The forward-looking statements are made as of
the date of this Report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are subject to the risk of fluctuating interest rates in the ordinary course
of business for borrowings under our revolving credit facility. The lender
presently charges interest at the 1.00% over the prime rate.
Our primary exposure to market risk is to changes in interest rates. We have no
variable rate debt under our revolving line of credit as of December 31, 2004.
As debt instruments mature, we refinance such debt at the existing market
interest rates, which may be more or less than interest rates on the maturing
debt. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In response to the SEC's financial reporting release, FR-60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, we have selected for
disclosure our revenue recognition process and our more subjective accounting
20
estimation processes. These processes affect our reported revenues and current
assets and are therefore critical in assessing the financial and operation
status of the Company. The processes for determining the allowance for
collection of trade receivables and the reserves for excess or obsolete
inventory involve certain assumptions that if incorrect could create an adverse
impact on the Company's operations and financial position.
REVENUE
Sales revenue are recognized when the earnings process is complete and
collection is reasonably assured. The earnings process is generally complete
when the product is shipped, or received by the customer, depending upon whether
the title to the goods, as well as the risks and benefits of ownership are
transferred to the customer at point of shipment or point of delivery. We
periodically review our revenue recognition procedures to assure that such
procedures are in accordance with accounting principles generally accepted in
the United States and Staff Accounting Bulletin No. 104.
ALLOWANCE FOR COLLECTION LOSSES
The allowance for collection losses was approximately $89,000 on gross trade
receivables of approximately $3.8 million as of December 31, 2004. This
allowance is used to state trade receivables at a net realizable value or the
amount that we estimate will be collected on our gross receivables as of
December 31, 2004. Because the amount that we will actually collect on the
receivables outstanding as of December 31, 2004 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 significantly less than 1% of sales. We maintain a
general allowance of approximately 1% to 5% of the gross trade receivables
balance in order to allow for future collection losses that arise from customer
accounts that do not indicate the inability to pay but turn out to have such an
inability. Currently, our allowance on trade receivables is 2.3% of gross
receivables. We believe that revenues and total receivables will increase during
2005, 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 may reserve a portion or
all of the customer's balance.
INVENTORY RESERVE
The reserve for slow-moving, excess, or obsolete inventory was $2.5 million at
December 31, 2004 as compared to $2.8 million in 2003. The reserve for excess or
obsolete inventory is used to state our inventories at the lower of cost or
market. Because the amount of inventory that we will actually recoup through
sales of our inventory as of December 31, 2004 cannot 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 annual usage over
the past three years, project that amount over five years, and then reserve 25%
of the excess amount (in which the excess amount equals inventory on hand less a
five year projected usage amount). We believe that 25% represents the value of
excess inventory we would not be able to recover due to new product
introductions and other technological advancements over the next five years.
21
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply in the period in which the deferred tax asset or
liability is expected to be realized. The effect of changes in net deferred tax
assets and liabilities is recognized on the Company's balance sheet and
statement of operations in the period in which the change is recognized.
Valuation allowances are provided to the extent that impairment of tax assets
are more likely than not. In determining whether a tax asset is realizable, the
Company considers among other things, estimates of future earnings based on
information currently available, current and anticipated customers, contracts
and new product introductions, as well as recent operating results during 2004,
2003 and 2002, and certain tax planning strategies. If the Company fails to
achieve the future results anticipated in the calculation and valuation of net
deferred tax assets, the Company may be required to reduce its deferred tax
assets in the future.
RISK FACTORS
OUR INDUSTRY IS CHARACTERIZED BY RAPIDLY CHANGING TECHNOLOGY
Our business could 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) is being increasingly adopted
and the market demand for APCO 25 products is growing.
WE DEPEND ON THE SUCCESS OF OUR LMR PRODUCT LINE
We currently depend on our LMR products as our sole source of sales. 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, could 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. Even if we successfully develop these products,
we cannot guarantee that they will achieve market acceptance.
WE ARE ENGAGED IN A HIGHLY COMPETITIVE INDUSTRY
We face intense competition from other LMR manufacturers, and the failure to
compete effectively could adversely affect our market share and results of
operations. We face intense competition from several companies currently
offering LMR products. 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 producer is also the world's largest producer of APCO 25 products. Some 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. Some also have
established reputations for success in developing and producing LMR products.
These advantages may allow them:
22
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.
An increase in the demand for APCO Project 25 products, could benefit
competitors who are better financed and have inventories that will meet such
demand. APCO 25 products have already been brought to the market by several of
our competitors. Our first APCO Project 25 portable radio was brought to market
in 2003. Bringing such products to market and achieving a significant market
penetration for these products will continue to require substantial expenditure
of funds. There can be no assurance that we will be successful in developing and
marketing, on a timely basis, fully functional product enhancements or new
products that respond to these and other technological advances, 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.
GOVERNMENT AGENCIES MAY INCUR BUDGET DEFICITS AND BUDGETS MAY BE LIMITED
Government budget deficits at the federal, state and local levels continue to be
a spending factor for certain government agencies. We expect continued
prioritization of limited funds for public safety applications. However, we have
no assurance that funding for areas where our products may be deployed will not
be reduced or even eliminated.
WE DEPEND ON A FEW MANUFACTURERS TO PRODUCE OUR PRODUCTS AND ON A FEW SUPPLIERS
OF COMPONENTS
We contract with manufacturers to produce our products and our dependence on a
limited number of contract manufacturers exposes us to certain risks, including
shortages of manufacturing capacity, reduced control over delivery schedules,
quality assurance, production yield and costs. 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
and cost effective 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
23
current or alternative contract manufacturers could cause our business,
financial condition and results of operations to suffer.
In addition, our dependence on limited and sole source suppliers of components
involves several risks, including a potential inability to obtain an adequate
supply of components, price increases, late deliveries and poor component
quality. Disruption or termination of the supply of these components could delay
shipments of our products. The lead-time required for orders of some of our
components is as much as six months. In addition, the lead-time required to
qualify new suppliers for our components is as much as six months. If we are
unable to accurately predict our component needs, or if our component supply is
disrupted, we may miss market opportunities by not being able to meet the demand
for our products. This may damage our relationships with current and prospective
customers.
WE DEPEND HEAVILY ON SALES TO THE UNITED STATES GOVERNMENT
We are subject to risks associated with our reliance on sales to the U.S.
Government. For the year ended December 31, 2004, approximately 46% of our LMR
sales were to agencies and departments of the federal government. These sales
were primarily to the USFS and DOI. There can be no assurance that we will be
able to maintain this government business. Our ability to maintain our
government business will depend on many factors outside of our control,
including competitive factors, changes in government personnel making contract
decisions, and political factors. The loss of sales to the U.S. Government would
have a material adverse effect on our business, financial condition and results
of operations.
RETENTION OF OUR EXECUTIVE OFFICERS AND KEY PERSONNEL IS CRITICAL TO OUR
BUSINESS
Our success is largely dependent on the personal efforts of our President and
Chief Executive Officer, our Chief Financial Officer, our Vice President of
Operations and our Engineering Vice Presidents. We do not have employment
agreements with these individuals, and we cannot be sure that we will retain
their services. The loss of any of their services could have a material adverse
effect on our operations. In addition, we have not obtained key-person life
insurance on any of our executive officers or key employees.
Our success is also dependent upon our ability to hire and retain qualified
operations, development and other personnel. Competition for qualified personnel
in our industry is intense. 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.
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. There can be no
assurance that we will complete any additional asset purchases or other business
transactions or that any such transactions which are completed will prove
favorable to our business. We do not intend to seek stockholder approval for any
such transactions unless required by applicable law or regulation. We hope to
grow rapidly, and the failure to manage our growth could adversely affect our
business. Our business plan contemplates, among other things, continued
development of our LMR product lines through internal development as well as
acquisitions, and, as a result, significant growth in our customer base. This
growth and continued development, if it materializes, could place a significant
strain on our management, employees, operations and financial capabilities. In
the event of this expansion, we have to continue to implement and improve our
operating systems and to expand, train, and manage our employee base. If we are
24
unable to manage and integrate our expanding operations effectively, our
business, results of operations, and financial condition could be adversely
affected.
WE ARE SUBJECT TO GOVERNMENT REGULATION
Failure to comply with government regulations applicable to our business could
result in penalties. Our LMR products are regulated by the Federal
Communications Commission. We believe that we are in substantial compliance with
all applicable federal regulations governing our operations and we believe that
we have obtained all licenses necessary for the operation of our business.
Failure to comply with these requirements and regulations or to respond to
changes in these requirements and regulations could result in penalties on us
such as fines, restrictions on operations or a temporary or permanent closure of
our facility. These penalties could harm our operating results and cause a
decline of our stock price. In addition, there can be no assurance that we will
not be adversely affected by existing or new regulatory requirements or
interpretations.
WE ENGAGE IN BUSINESS WITH MANUFACTURERS LOCATED IN OTHER COUNTRIES
We place a substantial amount of emphasis on manufacturing our product in other
countries and, accordingly, we are subject to special considerations and
significant risks not typically associated with companies operating in the
United States. 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 these countries,
and changes in government policies with respect to laws and regulations,
anti-inflation measures, currency conversion and rates and method of taxation.
The governments of these countries may implement economic reform policies at any
time. It is possible that changes in leadership could lead to changes in
economic policy. Additionally, the laws and regulations applicable to us may be
subject to change, which could have a material adverse effect on our business.
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 to 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, TRADEMARK AND TRADE SECRET LAWS TO PROTECT
OUR INTELLECTUAL PROPERTY RIGHTS
The United States patents that we owned have expired. We have no plans to renew
them. We hold several trademarks related to the "RELM" and BK Radio names. As
part of our confidentiality procedures, we generally enter into non-disclosure
agreements with our employees, distributors and customers, and limit access to
and distribution of our proprietary information. We also rely on trade secret
laws to protect our intellectual property rights. Although we believe that
trademark protection, trade secret laws and non-disclosure agreements should
prevent another party from manufacturing and selling competing products under
one or more of our trademarks or otherwise violating our intellectual property
rights, there can be no assurance that the steps we have taken to protect our
25
intellectual property rights will be successful. 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, suppliers, 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. While we cannot predict what impact a
prolonged war on terrorism will have on the United States economy, we plan to
control expenses, continue to invest in our business and make capital
expenditures when they will increase productivity, profitably, or revenue.
WE MAY BE SUBJECT TO COSTLY LITIGATION RESULTING IN AN ADVERSE AFFECT ON OUR
FINANCIAL CONDITION
We are currently involved in two 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. One indemnification claim is pending, for which we are insured.
We cannot guarantee that there will not be future claims. Any such claims could
require us to pay substantial damages, which could cause our business, financial
condition and results of operations to suffer.
26
CERTAIN PROVISIONS IN OUR CHARTER DOCUMENTS AND NEVADA LAW MAY DISCOURAGE A
POTENTIAL TAKEOVER
Certain provisions of our articles of incorporation and Nevada law could
discourage or prevent potential acquisitions of our company that stockholders
may consider favorable. Our articles of incorporation authorize the issuance of
1,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by our Board of
Directors. Preferred stock could be issued, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of our
company, which could be beneficial to our shareholders.
OUTSTANDING STOCK OPTIONS AND WARRANTS MAY CAUSE DILUTION TO EXISTING
SHAREHOLDERS AND LIMIT OUR ABILITY TO RAISE CAPITAL
If outstanding warrants and 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 such securities' exercise prices, then
existing shareholders would suffer dilution in the value of their shares of
common stock. The exercise of the options and warrants and/or the conversion of
outstanding notes, or the possibility of such exercise or conversion, may impede
our ability to seek financing in the future through the sale of additional
securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
RELM Wireless Corporation
Melbourne, Florida
We have audited the accompanying consolidated balance sheets of RELM Wireless
Corporation (the "Company") as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (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 consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RELM
Wireless Corporation as of December 31, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman LLP
-------------------
BDO Seidman LLP
Miami, Florida
February 25, 2005
See notes to consolidated financial statements.
F-1
RELM Wireless Corporation
Consolidated Balance Sheets
(in Thousands, except share data)
DECEMBER 31 December 31
2004 2003
------- -------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 3,140 $ 1,293
Trade accounts receivable (net of allowance for
doubtful accounts of $89 in 2004 and $61 in 2003) 3,651 2,880
Inventories, net 4,735 5,698
Deferred tax assets, net 1,338 --
Prepaid expenses and other current assets 326 374
------- -------
Total current assets 13,190 10,245
Property, plant and equipment, net 1,291 1,468
Debt issuance costs, net -- 171
Deferred tax assets, net 4,924 --
Other assets 288 345
------- -------
Total assets $19,693 $12,229
======= =======
See notes to consolidated financial statements.
F-2
RELM Wireless Corporation
Consolidated Balance Sheets (continued)
(in Thousands, except share data)
December 31 December 31
2004 2003
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 700 $ 3,150
Accounts payable 520 891
Accrued compensation and related taxes 549 547
Accrued warranty expense 118 82
Accrued other expenses and other current liabilities 352 302
-------- --------
Total current liabilities 2,239 4,972
Long-term debt -- 1,272
Commitments and Contingencies
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000
authorized shares none issued or outstanding -- --
Common stock; $.60 par value; 20,000,000 authorized shares:
12,872,618 and 9,073,085 issued and outstanding shares at
December 31, 2004 and 2003, respectively 7,723 5,443
Additional paid-in capital 22,794 21,482
Accumulated deficit (13,063) (20,940)
-------- --------
Total stockholders' equity 17,454 5,985
-------- --------
Total liabilities and stockholders' equity $ 19,693 $ 12,229
======== ========
See notes to consolidated financial statements.
F-3
RELM Wireless Corporation
Consolidated Statements of Operations
(in Thousands, except share data)
YEAR ENDED DECEMBER 31
2004 2003 2002
-------- -------- --------
Sales $ 20,656 $ 19,728 $ 15,978
Expenses
Cost of products 11,571 12,112 11,760
Selling, general & administrative 7,161 6,350 6,476
Loss on notes receivable -- -- 1,075
-------- -------- --------
18,732 18,462 19,311
-------- -------- --------
Operating income (loss) 1,924 1,266 (3,333)
Other income (expense):
Interest expense (291) (442) (456)
Other income (expense) 27 57 158
-------- -------- --------
Total other income (expense) (264) (385) (298)
-------- -------- --------
Income (loss) before income taxes 1,660 881 (3,631)
Income tax benefit (expense) 6,217 (13) --
-------- -------- --------
Net income (loss) $ 7,877 $ 868 $ (3,631)
======== ======== ========
Net income (loss) per share-basic: $ 0.68 $ 0.10 $ (0.47)
Net income (loss) per share-diluted: $ 0.65 $ 0.09 $ (0.47)
Weighted average shares outstanding-basic 11,536 9,002 7,787
======== ======== ========
Weighted average shares outstanding-diluted 12,151 9,173 7,787
======== ======== ========
See notes to consolidated financial statements.
F-4
RELM Wireless Corporation
Consolidated Statements of Changes in Stockholders' Equity
(in Thousands, except share data)
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
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
Common stock issued 500,000 300 -- -- 300
Common stock option exercise 32,500 20 (2) -- 18
Fees for registration of shares -- -- (73) -- (73)
Other 497 -- -- -- --
Net income -- -- -- 868 868
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2003 9,073,085 5,443 21,482 (20,940) 5,985
Common stock issued 6,542 4 16 -- 20
Common stock option exercise 12,500 8 4 -- 12
Common stock warrant exercise 3,673,527 2,204 1,156 -- 3,360
Note conversion 106,384 64 136 -- 200
Other 580 -- -- -- --
Net income -- -- -- 7,877 7,877
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2004 12,872,618 $ 7,723 $ 22,794 $ (13,063) $ 17,454
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-5
RELM Wireless Corporation
December 31, 2004
Consolidated Statements of Cash Flow
(in Thousands, Except Share Data and Percentages)
YEAR ENDED DECEMBER 31
2004 2003 2002
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 7,877 $ 868 $(3,631)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Loss on notes receivable -- -- 1,075
Allowance for doubtful accounts 28 (8) (1,471)
Inventories reserve (324) 200 283
Deferred tax benefit (6,262) -- --
Write down of investment banking agreement -- -- 120
Write down of technology agreement -- -- 211
Allowance for note receivable -- 35 --
Depreciation and amortization 678 675 787
Change in operating assets and liabilities:
Accounts receivable (799) (2,107) 4,303
Inventories 1,287 1,964 816
Accounts payable (371) (1,237) (1,043)
Prepaid expenses and other current assets 33 (63) (13)
Other assets 57 (243) 222
Accrued compensation and related taxes 2 81 (66)
Accrued warranty expense 36 (21) 24
Accrued other expenses and other current liabilities 73 134 (83)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,315 278 1,534
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (330) (170) (157)
Payment for technology agreement -- -- (125)
Collections on notes receivable 15 7 9
Proceeds from disposals of facility and equipment -- -- 2
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (315) (163) (271)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt and capital lease obligations -- -- (10)
Proceeds from issuance of common stocks 3,369 318 --
Repayment of debt (2,250) -- --
Net increase (decrease) in revolving credit lines (1,272) (698) (1,978)
Financing transaction costs -- (73) --
Rights offering -- -- 2,021
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (153) (453) 33
------- ------- -------
Increase (decrease) in cash 1,847 (338) 1,296
Cash and cash equivalents, beginning of year 1,293 1,631 335
------- ------- -------
Cash and cash equivalents, end of year $ 3,140 $ 1,293 $ 1,631
======= ======= =======
SUPPLEMENTAL DISCLOSURE
Interest paid $ 291 $ 442 $ 476
======= ======= =======
Income tax paid $ 13 -- --
======= ======= =======
NON-CASH FINANCING ACTIVITY
Conversion of notes to stockholders' equity $ 200 $ -- $ --
Common stock issued for settlement of legal matter $ 23 $ -- $ --
======= ======= =======
See notes to consolidated financial statements.
F-6
RELM Wireless Corporation
December 31, 2004
Notes to Consolidated Financial Statements
(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 two-way land mobile
radios and related products which are sold in two primary markets: (1) the
government and public safety market and (2) business and industrial market. 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:
On May 12, 2000, the Company engaged an investment banking firm. In connection
with the engagement, the Company granted warrants, valued at $226 to purchase
F-7
RELM Wireless Corporation
December 31, 2004
Notes to Consolidated Financial Statements (continued)
(in Thousands, Except Share Data and Percentages)
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 was $120. During the fourth quarter of 2002,
the Company was notified that the investment banking firm had closed its New
York office, and no longer employed the principals who handled the Company's
account. Therefore, the Company did 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 a technology agreement which, among
other things, licensed the Company to use the licensor's digital APCO Project 25
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 digital technology, which
was completed in the fourth qu