FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
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Commission file number 33-31797
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RELM WIRELESS CORPORATION
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(Exchange name of registrant as specified in its charter)
Nevada 04-2225121
- ------------------------------- -------------------------------------
(State or other jurisdiction of I.R.S. Employer Identification Number
Incorporation or organization)
7505 Technology Drive, West Melbourne, Florida 32904
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(Address of principal executive officers) (Zip Codes)
(407) 984-1414
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date of September 30, 1998.
5,043,604 shares of Common Stock, par value $.60 per share
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<PAGE>
PART I- FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands except share data)
September 30 December 31
1998 1997
(Unaudited) (Audited)
------------ --------
ASSET
Current
Cash and cash equivalents $ 147 $ 213
Accounts receivable, net 5,614 5,379
Inventory 11,109 11,504
Investment securities-trading 738 881
Notes receivable 400 400
Real estate investments held for sale 1,011 1,833
Prepaid expenses and other 234 288
------- -------
Total Current Assets 19,253 20,498
Property, Plant and Equipment, Net 9,083 8,805
Notes Receivable 1,800 2,200
Other Assets 65 162
------- -------
Total Assets $30,201 $31,665
======= =======
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
ITEM I - FINANCIAL STATEMENTS - Continued
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands except share data)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term liabilities: $ 1,191 $ 1,584
Accounts payable 3,222 1,935
Accrued expenses 2,897 3,773
Accrued restructuring liability 430 1,872
Accrued research costs 599 1,027
-------- --------
Total Current Liabilities 8,339 10,191
Long-term Liabilities
Loans, notes and mortgages 7,763 5,405
Capital lease obligations 1,483 2,035
-------- --------
Total Long-term Liabilities 9,246 7,440
Stockholders' equity:
Common $.60 par value: 10,000,000 authorized
shares: issued and outstanding shares
5,043,604 at September 30, 1998 and 5,035,779
at December 31, 1997 3,026 3,021
Additional paid-in capital 20,211 20,185
Retained earnings (deficit) (10,621) (9,172)
-------- --------
Total stockholders' equity 12,616 14,034
-------- --------
Total Liabilities and Stockholders' Equity $ 30,201 $ 31,665
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
ITEM I - FINANCIAL STATEMENTS - Continued
RELM WIRELESS CORPORATION
Consolidated Statements of Operations
(In thousands except share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited) Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 7,228 $ 11,436 $ 22,010 $ 35,544
Expenses:
Cost of sales 5,398 8,904 16,992 27,084
Selling, general & administrative 1,987 2634 5,920 8,461
-------- -------- -------- --------
7,385 11,538 22,912 35,545
-------- -------- -------- --------
Operating income (loss) (157) (102) (902) (1)
Other income (expense):
Interest expense (202) (119) (605) (751)
Net gains (losses) on investments (300) 320 (143) 306
Other income 63 -- 201 --
-------- -------- -------- --------
Income (loss) from continuing operations
before income taxes (596) 99 (1,449) (446)
Income tax expense (benefit) -- 31 -- (170)
-------- -------- -------- --------
Income (loss) from continuing operations (596) 68 (1,449) (276)
Discontinued operations:
Loss from discontinued operations net of
income taxes -- -- -- (266)
Loss on sale of discontinued operations
net of income taxes -- -- -- (2,570)
-------- -------- -------- --------
Net income (loss) $ (596) $ 68 $ (1,449) $ (3,112)
======== ======== ======== ========
Earnings (loss) per share - basic and diluted:
Continuing operations $ (0.12) $ 0.01 $ (0.29) $ (0.05)
Discontinued operations -- -- -- (0.05)
Loss on sale of discontinued operations -- -- -- (0.51)
-------- -------- -------- --------
Net income (loss) $ (0.12) $ 0.01 $ (0.29) $ (0.61)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
ITEM I - FINANCIAL STATEMENTS - Continued
RELM WIRELESS CORPORATION
Condensed Consolidated Statement of Cash Flow
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
-------- --------
(Unaudited) (Unaudited)
Cash (used) provided by operations $ (1,525) $ 1,753
Investing activities:
Property, plant and equipment purchases (1,257) (3,618)
Proceeds from sale of segments 872 7,693
Collections of note receivables 400 --
-------- --------
Cash provided by investing activities 15 4,075
Financing activities:
Proceeds from debt -- 4,300
Changes in lines of credit 2,016 (10,171)
Capital lease, Mortgage (603) (640)
Sale (purchase) of stock 31 (40)
-------- --------
Cash provided (used) by financing activities 1,444 (6,551)
-------- --------
Decrease in cash (66) (723)
Cash and cash equivalent at beginning of period 213 502
-------- --------
Cash and cash equivalent at end of period
(over draft) $ 147 $ (221)
======== ========
Supplemental disclosure
Interest paid 605 751
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands except share data)
1. Condensed Consolidated Financial Statements
The condensed consolidated balance sheet as of September 30, 1998, the condensed
consolidated statements of operations for the three months and nine months ended
September 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the nine months ended September 30, 1998 and 1997 have been prepared
by the Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position, results of operations and changes in cash flows at
September 30, 1998 and for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 1997 Annual
Report to Shareholders. The results of operations for the period ended September
30, 1998 are not necessarily indicative of the operating results for a full
year.
As of January 1, 1998, the Company adopted FASB Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components: however, the adoption of
this Statement had no impact on the Company's net loss or stockholders' equity
for 1998 or 1997.
2. Inventories:
September 30 December 31
1998 1997
------------ -----------
Inventories consisted of:
Raw Material $ 4,391 $ 4,139
Work in Process 2,111 2,245
Finished Goods 4,607 5,120
--------- ----------
$ 11,109 $ 11,504
========= ==========
5
<PAGE>
3. Stockholders' Equity
The consolidated changes in stockholders' equity for the nine months ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Common Stock Additional Retained Stockholders
--------------------- Paid in Earnings Equity
Shares Amount Capital (Deficit) Total
--------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 5,035,779 $ 3,021 $ 20,185 $ (9,172) $ 14,034
Exercise of stock options 7,825 5 26 -- 31
Net loss -- -- -- (1,449) (1,449)
--------- --------- --------- --------- ---------
Balance September 30, 1998 5,043,604 $ 3,026 $ 20,211 $ (10,621) $ 12,616
========= ========= ========= ========= =========
</TABLE>
4. Earnings (Loss) Per Share
In 1997, the FASB issued SFAS No. 128, Earnings per Share. This statement
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share are very similar to the
previously reported fully diluted earnings per share. All earnings (loss) per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements. The following table sets
the computation of basic and diluted earnings (loss) per share from continuing
operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30 September 30 September 30 September 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) (numerator
for basic and diluted
earnings (loss) per share) $ (596) $ 68 $ (1,449) $ (276)
----------- ----------- ----------- -----------
Denominator:
Denominator for basic earnings per share-
weighted average shares 5,043,604 5,059,185 5,042,749 5,088,628
Effect of dilutive securities:
Options -- 4,271 -- --
----------- ----------- ----------- -----------
Dilutive potential shares -- 4,271 -- --
----------- ----------- ----------- -----------
Denominator for diluted earnings (loss) per
share-adjusted weighted average shares 5,043,604 5,063,456 5,042,749 5,088,628
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.12) $ 0.01 $ (0.29) $ (0.05)
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.12) $ 0.01 $ (0.29) $ (0.05)
=========== =========== =========== ===========
</TABLE>
Shares related to options are not included in the computation of earnings (loss)
per share for certain periods because to do so would have been anti-dilutive for
the periods presented.
6
<PAGE>
5. Reclassifications
In accordance with Staff Accounting Bulletin No. 93, the Company's real estate
operations have been classified in continuing operations for all periods
presented as the real estate business has not been completely disposed of. The
real estate operations were previously reported in discontinued operations.
Management anticipates selling the remaining real estate assets and exiting the
business in 1998. The summarized results of operations of the real estate
business are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -------------------
September 30 September 30
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- -----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ -- $ 463 $ 740 $ 1,502
Cost of sales -- 453 747 1,476
Selling, general & administrative -- 105 93 370
------ ----- ------ -------
Operating Loss $ -- $ (95) $ (100) $ (344)
====== ===== ====== =======
</TABLE>
The statements of operations for the three and nine months ended September 30,
1997 have been restated to properly reflect discontinued operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS
Results of Operations
As an aid to understanding the Company's operating results, the following table
shows each item from the consolidated statements of operations expressed as a
percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------------- ----------------------------------------
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (74.7%) (77.9%) (77.2%) (76.2%)
Gross margin 25.3% 22.1% 22.8% 23.8
Selling, general and administrative
expenses (27.5%) (23.0%) (26.9%) (23.8%)
Interest expense (2.8%) (1.0%) (2.7%) (2.1%)
Other income (expense) (3.3%) 2.8% 0.3% 0.9%
----- ----- ----- -----
Income (loss) from continuing
operations before income tax benefit (8.3%) 0.9% (6.5%) (1.2%)
Income tax (benefit) 0.3% (0.5%)
----- ----- ----- -----
Net Income (loss) from continuing
operations (8.3%) 0.6% (6.5%) (0.7%)
Income (loss) from discontinued operations -- -- -- (0.8%)
Net Income (loss) on sale of discontinued
operations -- -- -- (7.2%)
----- ----- ----- -----
Net Income (loss) from continuing
operations (8.3%) 0.6% (6.5%) (8.7%)
===== ===== ===== =====
</TABLE>
Net Sales
Net sales for the three months and nine months ended September 30, 1998
decreased $4,208,000 (36.8%) and $13,534,000 (38.1%) respectively compared to
sales for the same periods in 1997. This decrease is primarily the result of
reduced radio requirements for the U.S. Army. The Company's five-year, $40
million contract with the Army remains intact. However, the Army's current
inventory on-hand is sufficient to satisfy their requirements through Quarter 1
of 1999. Shipments are expected to resume at that time. Also, as previously
announced, sales decreased as the Company discontinued products and businesses
that were inadequately profitable or did not fit the Company's strategic focus
in land mobile radios. Consistent with that strategy, the Demand Side Management
business was sold during the third quarter for its net book value of
approximately $125,000.
Compared to the previous quarter, sales of LMR products increased $542,000
(8.1%). Furthermore, significant improvement was realized later in the quarter,
as LMR sales in September increased $1,364,000 (69.4%) from August. This
increase reflects the introduction of the Company's new "BK GOLD" series radios.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS -- CONTINUED.
Net Sales Continued
Additional new products that will be introduced by the Company in 1999, combined
with an aggressive, highly focused marketing and sales strategy, will fuel sales
growth in 1999 and beyond.
Cost of Sales
Cost of sales as a percentage of net sales for the three months ended September
30, 1998 decreased 3.2% compared to the same period in 1997. Cost of sales
decreased 2.6% compared to the previous quarter of 1998. The three months ended
September 30, 1998 represents the Company's third consecutive quarter of
improvement in margin performance.
Earlier in the year, consistent with lower volumes and revenues, the Company
reduced staffing and manufacturing support costs in excess of 30%. These
reductions, in concert with manufacturing quality initiatives and material
procurement renegotiations, have yielded margin improvements. These initiatives
are currently in their infancy. As they continue through 1999, additional margin
gains will be realized.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses consist of marketing, sales,
commissions, sustaining engineering, product development, information systems,
accounting, and headquarters. SG&A expenses as a percentage of sales for the
three months and nine months ended September 30, 1998 increased 4.5% and 3.1%
respectively, compared to the same periods in 1997.
Expenses in all SG&A areas were reduced earlier in 1998 as a result of the
Company's restructuring program and continue to be evaluated for reductions. In
product development, however, the Company is continuing to invest aggressively
in three new product initiatives. The Company's new "BK GOLD" series products
were introduced during the third quarter. Design of the other new products will
be completed in 1998, which will allow R&D expenses to be reduced in excess of
$1,000,000 (39.4%) In 1999. The Company is also intensifying its sales and
marketing efforts to fuel immediate sales growth in 1999.
Interest Expense
Interest expense for the three months and nine months ended September 30, 1998
increased $83,000 and decreased $146,000 respectively compared to the same
periods in 1997. During the second half of 1997, debt levels were reduced using
cash flow from operations and from the sales of discontinued operations. There
was no significant change in interest expense between the first, second, and
third quarters of 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS -- CONTINUED.
Income Taxes
The Company has evaluated its tax position versus the requirements of SFAS No.
109, Accounting for Income Taxes and does not believe that it has met the
more-likely-than-not criteria for recognizing a deferred tax asset and has
provided valuation allowances against net deferred tax assets. Therefore, an
income tax benefit was not provided for the three months and nine months ended
September 30, 1998.
Liquidity and Capital Resources
As of September 30, 1998 the Company had working capital of $10,915,000 compared
with $10,307,000 as of December 31, 1997. As of September 30, 1998, the Company
has unutilized credit of $3.4 million under a revolving line of credit.
The decrease in cash of $66,000 during the nine months ended September 30, 1998
is the result of $1,257,000 in capital expenditures, combined with a debt
increase of $1,844,000. Capital expenditures for the comparable period in 1997
totaled $3,618,000. This was comprised of a $2,000,000 facility expansion and
the replacement of obsolete manufacturing Surface Mount equipment for
$1,400,000.
Discontinued Operations
There were no discontinued operations for the three months and nine months ended
September 30, 1998. For the nine months ended September 30, 1997, the Company
reported a loss from discontinued operations of $266,000. The discontinued
operations (specialty manufacturing and recycled paper manufacturing) were sold
during the second quarter of 1997 at a net loss of approximately $2.6 million.
Inflation and Changing Prices
Inflation and changing prices for the quarters September 30, 1998 and 1997 have
contributed to increases in wages, facilities, and raw material costs. These
inflationary effects were partially offset by increased prices to customers. The
Company believes that it will be able to pass on most of its future inflationary
increases to its customers. The Company is also subject to changing foreign
currency exchange rates in its purchase of some raw materials. The Company
employs several methods to protect against increases in cost due to currency
fluctuations. It is not always possible to pass on these effects. Competitors in
the land-mobile radio markets are subject to similar fluctuations.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS -- CONTINUED.
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the safe-harbor created by such sections.
Such forward-looking statements concern the Company's operations, economic
performance and financial condition. Such statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: General economic and business conditions; changes
in customer preferences; competition; changes in technology; the integration of
any acquisitions; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The 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.
Year 2000 Discussion
GENERAL
As the year 2000 approaches, an issue has emerged with many companies regarding
how existing application software programs and operating systems will
accommodate this date value. Accordingly, 1999 could be the maximum date value
that these systems will be able to process. Although the extent of the potential
impact of this problem is not precisely known, estimates indicate that it could
affect the global economy. The Company has addressed or is in the process of
addressing all year 2000 related exposures.
INTERNAL COMPANY SYSTEMS
The Company implemented a new enterprise-wide information system in 1997. The
current release of the software is year 2000 compliant. The Company has not yet
upgraded to the current release. This upgrade will be completed in March 1999.
Costs associated with upgrade are estimated to be approximately $20,000 and will
be recognized in the first quarter of 1999. It is the Company's policy to
utilize the most current releases of software. The aforementioned upgrade would
be performed regardless of the status of the year 2000 issue. No other
information technology projects are impacted by the upgrade.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS -- CONTINUED.
Year 2000 Discussion -- Continued
THIRD PARTY RELATIONSHIPS
The Company has material relationships with certain suppliers and customers.
Generally, suppliers provide components that are necessary to manufacture a
finished product. The Company's products are sold primarily to dealers and
distributors who resell to the end-users. If these suppliers and/or customers
were unable to conduct business as a result of year 2000 issues the potential
impact to the Company's business could be significant. The amount of the
potential impact cannot be estimated at this time.
The Company will determine the state of readiness of material third parties
through the use of questionnaires. These questionnaires will be distributed at
the end of 1998. As a contingency plan, and as is its normal practice, the
Company in most cases has or will have secondary sources for purchases. Other
than the US Government, no single customer represents a significant portion
(greater than 10%) of the Company's sales. The cost of administering the
questionnaire program is estimated to be less than $5,000.
ITEM 6. Exhibits and Reports of Form 8-K
a.) Reports on Form 8-K
The Registrant was not required to file reports on Form 8K during the quarter
ended September 30, 1998.
Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned there-
unto duly authorized.
RELM WIRELESS CORPORATION
___________________________
William P. Kelly
Chief Financial Officer and
Vice President - Finance
Date: November 4, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 147
<SECURITIES> 738
<RECEIVABLES> 5,744
<ALLOWANCES> (130)
<INVENTORY> 11,011
<CURRENT-ASSETS> 19,253
<PP&E> 14,010
<DEPRECIATION> (4,927)
<TOTAL-ASSETS> 30,201
<CURRENT-LIABILITIES> 8,339
<BONDS> 0
0
0
<COMMON> 3,026
<OTHER-SE> 10,621
<TOTAL-LIABILITY-AND-EQUITY> 30,201
<SALES> 7,228
<TOTAL-REVENUES> 7,228
<CGS> 5,398
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,987
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> (596)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (596)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
