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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-7336
RELM WIRELESS CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 04-2225121
--------------------------- --------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7505 TECHNOLOGY DRIVE
WEST MELBOURNE, FLORIDA 32904
(Address of principal offices) (Zip Code)
------------------------------ ----------
Registrant's telephone number, including area code: (407)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]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on February 26, 1999, based on the closing
price at which such stock was sold on the NASDAQ National Market on such date,
was $5,694,622.
As of February 26, 1999, 5,046,156 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 1999 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, 1998.
==============================================================================
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ------- ---------
General
RELM Wireless Corporation (together with its subsidiaries, "RELM" or the
"Company") designs and manufactures wireless communication products sold to the
land mobile radio ("LMR") markets, which consist of public safety, government,
and business and industrial ("B&I") users.
The Company also owns the capital stock of an entity, Redgo Properties Inc.
("Redgo"), that is involved in the purchase and sale of commercial real estate.
During 1995, RELM decided to discontinue and exit the commercial real estate
segment. Since then the Company has made every effort to liquidate all of its
Redgo holdings. Most of the remaining real estate assets were sold in 1998,
leaving one material holding. The Company is continuing its efforts to sell
this property.
During 1998 the Company achieved important objectives that it believes are key
to the Company's current and future success. Most importantly, the Company
initiated and completed very aggressive product development programs that have
yielded three new product families, one of which was introduced in 1998. The
Company expects that the other new product families will be introduced in 1999.
At the same time, restructuring plans were executed to focus the Company in the
LMR business by selling or discontinuing non-LMR products as well as products
that were inadequately profitable. These actions included consolidating all
operations to the Company's West Melbourne, Florida facility and reducing
payroll and operating expenses by over 30%.
Since the arrival of Richard K. Laird as President and CEO in December 1997, a
new executive management team has been recruited, including David P. Storey as
Executive Vice President and Chief Operating Officer ("COO"), in June 1998, and
Robert P. Jacobson as Senior Vice President of Sales and Marketing in August
1998. These executives each bring to RELM significant experience in electronics
manufacturing and sales.
1
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
General -- Continued
The principal executive offices of RELM are located at 7505 Technology Drive,
West Melbourne, Florida 32904 and the telephone number is (407) 984-1414. More
information about the Company and its products are also available through the
Internet at RELM.com. The information provided on the Company's website is not
incorporated into this report. As of December 31, 1998 RELM employed 231 people
located primarily at the West Melbourne, Florida facility. RELM also has
facilities located in Virginia and Nebraska.
Reincorporation of Adage, Inc. into RELM Wireless Corporation
RELM Wireless Corporation is the resulting corporation from the January 30, 1998
reincorporation merger (the "Reincorporation") of Adage, Inc., a Pennsylvania
corporation ("Adage"), into RELM, its wholly owned subsidiary. The
Reincorporation was approved by the shareholders of Adage at its annual meeting
held on December 8, 1997. In connection with the geographical transition of the
business activities of Adage out of Pennsylvania to its new headquarters in
Florida and the refocusing of Adage's resources and management on the
manufacturing and sale of wireless communications equipment its Board of
Directors recommended approval of the Reincorporation to change its State of
Incorporation and to change its corporate name to a name closely identified with
the name of its principal subsidiary, RELM Communications, Inc. and the wireless
communications products which it markets under the RELM identity.
Also as a result of the Reincorporation, each share of Adage common stock
outstanding immediately prior to the Reincorporation was converted, effective as
of January 30, 1998, into one share of RELM common stock and the trading symbol
for the shares was changed from "ADGE" to "RELM". Until RELM gives notice to its
shareholders to exchange their Adage share certificates for RELM share
certificates, the outstanding Adage share certificates shall continue to
represent the RELM shares into which they have been converted.
2
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
Recent Developments
On February 12, 1999 the Company filed criminal and civil suits in Sao Paulo,
Brazil against its Brazilian dealer, RELM Chatral Telecomunicacoes Ltda.
("Chatral") for failure to pay for product shipments totaling $1.4 million.
Chatral has been the Company's distributor in Brazil since 1991, and was its
largest international customer.
The Company believes that sufficient new revenue opportunities exist both
domestically and internationally to meet or exceed revenue objectives for 1999
and beyond.
Please refer to item 3 of this report for additional discussion of this matter.
Sales Information about Product Lines
As an aid to understanding the Company's major product lines and their sales,
the following table summarizes sales information by major product lines and
industry segments:
<TABLE>
<CAPTION>
$In Millions
------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
LMR - Gov't & Pub. Safety $ 12.3 $ 22.4 $ 22.9
LMR - Bus./Indus., & Comm. 10.9 11.8 16.0
Digita Data Communications(1) 1.6 3.1 4.1
Access Controls (1) 1.3 2.3 3.9
Electronic Components 1.7 1.8 2.4
Inter-Segment Elimination -- -- (3.9)
------- ------- -------
Total Wireless Comm. Equipment 27.8 41.4 45.4
Commercial Real Estate 1.7 4.0 2.2
------- ------- -------
Total Company $ 29.5 $ 45.4 $ 47.6
======= ======= =======
</TABLE>
(1) - Consistent with its strategy to focus on higher margin LMR products, the
Company has exited or is exiting the Digital Data Communications and Access
Controls businesses as described below.
3
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
Sales Information about Industry Segments -- Continued
Audited financial statements and detailed supplementary financial information
are found in items 6, 7, and 8.
Principal Business and Products of Subsidiaries
- -----------------------------------------------
Wireless Communications Equipment - RELM Communications, Inc.
RELM Communications, Inc. is a Florida corporation located in West Melbourne,
Florida. On January 24, 1992, RELM Wireless Corporation acquired all of the
outstanding stock of RELM Communications, Inc. in exchange for 1,946,183 shares
of RELM Wireless Corporation common stock. In September 1993, RELM purchased the
assets and business of Bendix/King Mobile Communications Division of Allied
Signal. This product line (Bendix King) consists of higher-specification
land-mobile radios whose primary market focus is professional radio users in the
government and public safety sectors. The Bendix King products, with more
extensive features and capabilities, provide a strong complement to the original
line of RELM radios.
RELM operates exclusively in the wireless communications industry, serving the
LMR markets by designing, manufacturing, and marketing wireless communications
equipment consisting of land mobile radios and base station components and
subsystems. These products are sold under the RELM and Bendix King brand names.
Description of Products & Markets
- ---------------------------------
Government and Public Safety
Users in this market include the military, law enforcement, emergency medical
personnel, and various agencies of federal, state, and local government. Most
products and systems in this market utilize conventional analog technology. Some
users, however, operate digital LMR equipment and systems that are compliant
with the new specifications established by the Association of Public
Communication Officials ("APCO").
4
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
Description of Products & Markets -- Continued
- ----------------------------------------------
The Company offers products to this market under the Bendix King brand name.
These products include mobile radios for mounting in vehicles, portable
(hand-held) radios, base stations, and repeaters that enable two-way radios to
operate over a wider area. The Company also manufactures and sells base station
components and subsystems which are installed at radio transmitter sites to
improve performance by reducing or eliminating signal interference and to enable
the use of one antenna for both transmission and reception. Most sales are made
directly to the end-users.
Business & Industrial / Commercial
Users in this market are businesses and enterprises of all sizes that require
fast, push-to-talk communication among a defined body of users. Examples of
these users include hotels, construction companies, schools, taxicabs, and
airlines. The Company serves this market with both RELM and Bendix King brand
products, including mobile radios, portable radios, base stations, and
repeaters. These products are sold to original equipment manufacturers, and
dealers who resell the products to end-users.
Electronic Components
RELM markets electronic components, primarily microprocessors and clock
oscillators, to electronic component distributors and original equipment
manufacturers through its RXD subsidiary. The components are used in various
electronic products including computers, electronic scales, organs, keyboards,
and toys.
Research and Development
- ------------------------
The Company completed the design of three new product families in 1998. One, the
Bendix King Gold Series, was successfully introduced in the fourth quarter of
1998. The Company expects that the others, including the APCO-compliant Link
Series, will be introduced in 1999.
RELM employed 10 people as of December 31, 1998 who devote all or a portion of
their time to research and development. As part of its restructuring, the
Company closed its R&D center in Indianapolis, Indiana in 1998 and reestablished
engineering operations at its Florida facility. This consolidation included a
reduction of 20 employees (67.0%) from the prior
5
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
Research and Development -- Continued
- -------------------------------------
year. Expenses for sustaining engineering as well as research and development
totaled $2.8 million, $5.5 million, and $3.1 million for the years ended
December 31, 1998, 1997, and 1996 respectively.
The Company met its aggressive schedule for major R&D initiatives in 1998 by
utilizing third-party alliances to speed the process. With the completion of
these initiatives, the Company anticipates that R&D spending will be
significantly reduced in 1999.
Patents
- -------
RELM holds patents and patent licenses covering various land-mobile radio
products that are currently marketed. These patents have various expiration
dates out to the year 2001. It is difficult to precisely assess the importance
of the patents and licenses; however, the Company believes that they enhance its
competitive position.
Raw Materials
- -------------
RELM purchases component parts and raw materials for assembly into finished
products from both domestic and foreign suppliers. The primary foreign suppliers
are located in the Pacific-Rim. Under the guidance of the Company's new COO, the
Company has secured more favorable pricing and terms from many of these
suppliers.
Certain components are only available from a single source. The amount of these
components is not material relative to total component and raw material
purchases. During the years ended December 31, 1998, 1997 and 1996 the Company's
operations have not been impaired due to delays from single source suppliers.
However, the absence of a single source component may delay the manufacture of
finished products. The Company manages the risk of such delays by securing
second sources and redesigning products in response to component shortages or
obsolescence.
Seasonal Impact
- ---------------
Demand for the RELM's Bendix King LMR products is typically strongest in the
summer season. This is a reflection of the increased forest fire activity during
that time.
6
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
Significant Customers
- ---------------------
In 1996, the Company was awarded a contract to provide land mobile radios to the
United States Army. This contract is for a term of five years and totals in
excess of $40 million in revenue. Shipments commenced in 1997 and totaled $10.4
million, representing 22.9% of total sales for that year. Shipments were
suspended in 1998 because the customer had inventory that was sufficient to meet
its requirements throughout the year. The customer's stock has since been
depleted to the point of reorder. The Company anticipates that a new order
totaling approximately $1.0 million will be placed in the second quarter of
1999.
Backlog
- -------
The Company's order backlog was approximately $1.5 million and $4.5 million as
of December 31, 1998 and 1997 respectively. This included only the current
portion of the U.S. Army contract.
Competition
- -----------
The worldwide land mobile radio markets are estimated to be $7.5 billion with
annual growth of approximately 10%. RELM competes with many domestic and foreign
companies in these markets. One competitor holds an estimated market share of
approximately 70%. The Company competes in these markets by capitalizing on its
strengths, including quality, speed, and customer responsiveness. The Company
believes that it is competitive with regard to these factors.
Employees
- ---------
The company employed 231 people as of December 31, 1998.
7
<PAGE>
ITEM 1. BUSINESS -- Continued
- -----------------------------
Information Relating to Domestic and Export Sales
- -------------------------------------------------
The following table summarizes the Company's sales of wireless communications
equipment by location of its customers:
<TABLE>
<CAPTION>
($ In Millions)
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
United States $ 24.9 $ 36.9 $ 39.1
South America 2.1 2.1 1.8
Europe .6 1.7 4.1
Other International .2 .7 .4
------- ------- -------
Total $ 27.8 $ 41.4 $ 45.4
======= ======= =======
</TABLE>
DISCONTINUED PRODUCTS AND PRODUCT LINES
- ---------------------------------------
Digital Data Communications Equipment
RELM has manufactured load management systems for sale to electric utility
companies, dealers, and jobbers. A load management system enables its user to
limit usage of electricity during peak demand periods. Using radio transmitters,
a signal is sent by the utility company to individual receivers that are wired
to appliances such as air conditioners and water heaters. The power to the
appliances is momentarily turned-off which reduces power demand and shifts
consumption to non-peak hours. This product line was sold to the Company's
former product line manager in August 1998 for $125,000, which represents
approximately the fair market value of its net assets.
Radio Controls for the Garage Door and Gate Operator Industry
RELM has manufactured small, low-powered receivers, transmitters, and control
circuit boards designed by Allister Access Controls, a former subsidiary of RELM
("Allister"). These products control the operation of automatic garage door and
gate operators and are manufactured under the Allister and Pulsar brand names.
Allister sells garage door and gate operators to distributors and dealers who
re-sell and install them for the end-user. Allister was sold by the Company in
1997. These products do not currently meet the Company's margin requirements and
negotiations with
8
<PAGE>
ITEM 1. BUSINESS -- Continued
- ------- ---------------------
DISCONTINUED PRODUCTS AND PRODUCT LINES -- Continued
Allister for increased pricing have been unsuccessful. Accordingly, Allister has
begun purchasing these components from an alternate source. After the remaining
inventory is manufactured and sold, the Company anticipates that this product
line will be discontinued.
Redgo Properties, Inc.
Redgo Properties, Inc. ("Redgo") is a Pennsylvania corporation engaged in
developing and managing real estate. In 1995, the Company decided to discontinue
this segment. Since then, the Company has made every effort to liquidate all of
its Redgo holdings. Consequently, in 1997 this segment was reclassified as a
continuing operation. Most of the remaining real estate assets were sold in
1998, leaving one material holding. The Company is continuing its efforts to
sell this property.
9
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
Owned
The Company owns a 130,000 square foot office and industrial building on 20
acres located in West Melbourne, Florida, which includes a 30,000 square foot
addition for engineering and headquarters functions. This building is utilized
for the manufacture of wireless communications equipment. The facility was
expanded to allow the consolidation of all operations at this location.
Leased
The Company leases a 37,600 square foot facility located in Indianapolis,
Indiana used primarily for engineering. This office was closed and engineering
operations were consolidated at the Florida facility in April 1998. Efforts to
sublease the facility have been unsuccessful. The Company will terminate the
lease at the end of 1999. A reserve was established in 1997 for the present
value of the lease commitment.
The Company also leases a 5,000 square foot facility located in Norfolk,
Nebraska that is used for the operations of RXD, Inc. (marketer of electronic
components), a wholly owned subsidiary of RELM. Lease payments are $1,000 per
month.
The Company leases a 792 square foot facility located in Vienna, Virginia that
is used for the Company's government sales office. Lease payments are $1,848 per
month.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
On February 14, 1996, the Insurance Commissioner of the Commonwealth of
Pennsylvania (the "Insurance Commissioner"), in her capacity as statutory
liquidator for Corporate Life Insurance Company ("Corporate Life"), filed a
complaint against multiple defendants in the Commonwealth Court of Pennsylvania,
including RELM and Mr. Donald Goebert (in his capacity as an officer and
Director of RELM). The specific claims alleged against RELM and Mr. Goebert in
the complaint are for a preferential transfer, conspiracy and common law fraud
arising from a 1987 transaction between RELM and Corporate Investment Company
("CIC"), the parent company of Corporate Life, pursuant to which RELM and CIC
exchanged promissory notes in the amount of $1,700,000 (the "Note Transaction").
In connection with the Note Transaction, CIC pledged to RELM as security for its
note payment obligation its shares of stock of Corporate Life. CIC subsequently
defaulted on its note. In 1991, at the demand of the Insurance Commissioner, CIC
sold Corporate Life to American Homestead, Inc. ("AHI") and, in connection with
such sale, RELM assigned its note receivable from CIC along with the collateral
to AHI. As consideration for this assignment, AHI agreed to assume RELM's
obligations under its note to CIC in the amount of $1,700,000. Accordingly,
although the complaint alleges a claim for a preferential transfer, RELM
received no payment of funds from CIC. The conspiracy claims are non-specific
but pertain to the sale of Corporate Life to AHI in 1991. Mr. Goebert was an
officer and director of CIC.
In one of two related actions, in 1994 the Trustee and statutory liquidator of
CIC, in connection with the current bankruptcy proceedings of CIC, brought an
adversarial proceeding in the United States District Court for the Eastern
District of Pennsylvania against RELM, Mr. Goebert and other individuals and
entities that were involved in the sale of Corporate Life to AHI. This
adversarial proceeding alleges the same claims as in the action brought by the
Insurance Commissioner in connection with the Note Transaction and the sale of
Corporate Life. In the other related action, in 1993 two individual creditors of
CIC filed a complaint against, among others, RELM and Mr. Goebert in the United
States District Court for the Southern District of New York. The specific claims
alleged against RELM and Mr. Goebert in the complaint are for fraud, fraudulent
conveyance, securities fraud and RICO in connection with the Note Transaction,
the sale of Corporate Life and other investments made by CIC in an effort to
raise capital for Corporate
11
<PAGE>
Life. Each of the above-related matters is in civil suspense. RELM believes that
an adjudication of the action brought by the Insurance Commissioner will in
effect resolve both of the related matters on the legal principles of collateral
estoppel and/or issue preclusion. RELM believes that there will be no material
adverse effect on the financial position of the Company as a result of these
actions.
There are approximately 5 pending claims against the Company for personal injury
and or property damages alleged to have resulted from the malfunction of a
garage door or gate operator. The Company maintains product liability insurance
with coverage of $2,000,000, subject to deductibles ranging from $75,000 to
$500,000. During the times that such claims were made, the Company maintained
umbrella coverage extending its insurance coverage for various periods by
$3,000,000 to $10,000,000. Additionally, the Company has established reserves
totaling $148,000 for the estimated uninsured liability associated with these
claims.
On February 12, 1999 the Company initiated criminal and civil proceedings in Sao
Paulo, Brazil against its Brazilian dealer, Chatral, for failure to pay for
product shipments totaling $1.4 million. Exhaustive negotiations have been
conducted by the Company's executive management team, resulting in multiple
proposals to satisfy the debt. One proposal was accepted by Chatral's
principals, including a signed debt confession and promissory notes. As economic
conditions in Brazil deteriorated in the next several days, additional disputes
arose and Chatral defaulted on the terms of these documents. Subsequent attempts
to negotiate were unsuccessful. The Company is vigorously pursuing all avenues
to collect the outstanding balance. Currently, the amount of recovery, if any,
is uncertain. Accordingly, the Company has established a $1.4 million allowance
for doubtful accounts as of December 31, 1998.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
- ------- ----------------------------------
SECURITY HOLDERS
----------------
While no matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 1998, the 1998
Annual Meeting of Shareholders of RELM was held on August 21, 1998. Of the
5,046,416 shares of common stock outstanding and entitled to vote at the
meeting, 4,454,651 shares were represented in person or by proxy.
Election of Directors
On the proposal to elect Donald F. U. Goebert, Richard K. Laird, Buck Scott,
Robert L. MacDonald, Ralph R. Whitney, Jr., James C. Gale, and George M.
Benjamin III as directors until the 1999 Annual Meeting of Shareholders and
until their successors are duly elected and qualified, the nominees for
Director received the number of votes as set forth below:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Donald F. U. Goebert 4,104,429 350,222
Buck Scott 4,104,448 350,203
Robert L. MacDonal 4,094,712 359,939
Ralph R. Whitney, 4,104,639 350,012
James C. Gale 4,104,639 350,012
Richard K. Laird 4,104,614 350,037
George N. Benjamin 4,094,773 359,878
</TABLE>
1997 Stock Option Plan
On the proposal to approve the Company's 1997 Stock Option Plan, 2,101,371
shares were voted for the proposal, 730,637 shares were voted against the
proposal, and 22,421 shares abstained from the vote.
On the basis of the above vote, all of the Director nominees were elected to
serve until the next annual meeting of shareholders and until their successors
are duly elected and qualified and the 1997 Stock Option Plan was approved.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT COMMON
- ------- --------------------------------
EQUITY AND RELATED STOCKHOLDERS MATTERS
---------------------------------------
The Company's stock is traded on the NASDAQ National Market System. Formerly,
the symbol was "ADGE". The symbol changed to "RELM" effective on January 30,
1998. The following table sets forth for the periods indicated the high and low
closing sale prices of the common stock as furnished by NASDAQ.
<TABLE>
<CAPTION>
1997 Quarter Ended High Low
------------------ ---- ---
<S> <C> <C>
March 31, 1997 3.875 3.250
June 30, 1997 4.688 3.500
September 30, 1997 5.563 4.063
December 31, 1997 7.563 4.188
1998 Quarter Ended High Low
------------------ ---- ---
March 31, 1998 7.500 5.750
June 30, 1998 5.750 3.063
September 30, 1998 4.500 1.000
December 31, 1998 2.875 1.125
</TABLE>
On February 26, 1999, the closing sale price as reported by NASDAQ was $1.69. On
that date, there were 3,073 holders of record.
No cash dividends were paid with respect to the Company's common stock during
the past five years. The Company intends to retain its earnings to fund growth
and, therefore, does not intend to pay dividends in the foreseeable future.
Additionally, the Company's revolving credit agreement restricts the Company's
ability to make dividend payments.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
The following table summarizes selected financial data of the Company 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:
<TABLE>
<CAPTION>
(In Thousands Except Share Data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net Sales & Revenues $ 29,530 $ 45,376 $ 47,646 $ 45,266 $ 47,010
Loss From
Continuing Operations (4,907) (11,974) (1,347) (533) (759)
Income (Loss) From
Discontinued Operations (725) (2,836) (2,679) 1,645 (299)
Extraordinary Gain 227 -- -- -- --
Net Income (Loss) (5,405) (14,810) (4,026) 1,112 (1,058)
Diluted Loss Per Share
From Continuing Operations (.97) (2.36) (0.26) (0.10) (0.15)
Diluted Earnings (Loss) Per Share
From Discontinued Operations (0.15) (0.56) (0.52) 0.32 (0.06)
Diluted Earnings Per Share From 0.05 -- -- -- --
Extraordinary Item
Diluted Earnings (Loss) Per Share (1.07) (2.92) (0.78) 0.22 (0.21)
BALANCE SHEET
Working Capital 6,573 10,307 27,008 29,904 32,538
Total Assets 26,827 31,665 54,028 64,916 87,494
Long-Term Debt 8,755 7,440 15,554 14,906 24,621
Total Shareholders $ 8,671 $ 14,034 $ 29,214 $ 32,620 $ 31,236
</TABLE>
All earnings (loss) per share amounts are computed and presented for all periods
in accordance with SFAS No. 128, earnings per share.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS
----------
RESULTS OF OPERATIONS
- ---------------------
General
The Company was significantly restructured and transformed during 1998. Key
objectives and initiatives were successfully implemented that have focused the
Company in the LMR markets. Furthermore, a concentrated R&D effort has yielded
three new product families, one of which was already introduced to the market in
the fourth quarter of 1998. The Company expects that the others will be
introduced in 1999, including digital products that are compliant with the
APCO25 standard.
In order to meet the objective of focusing on the LMR markets, the Company sold
or discontinued all non-LMR businesses and products during the year. At the same
time, in response to the reduced revenue base, the Company's payroll and
operating expenses were significantly reduced. The Company expects that this
will allow the Company to increase gross margins and achieve profitability with
lower revenues.
R&D spending, although reduced from the prior year, was maintained at higher
than normal levels due to the aggressive product development schedule. The
Company was able to compress the schedule by utilizing alliances with outside
companies. As a result of completing these development efforts, these alliances
will be discontinued and the Company anticipates that R&D spending in 1999 will
be significantly lower.
Most of the remaining commercial real estate held by the Company's wholly owned
subsidiary, Redgo Properties, Inc., was sold during 1998. The carrying value of
the remaining property is $58,000 net of a valuation allowance of $2 million.
During 1998 the Company increased the valuation allowance by $961,000.
The Company, as of December 31, 1998, has established an additional allowance
for doubtful accounts of $1.4 million covering all amounts due to the company
from its Brazilian dealer Chatral. The Company has conducted business with this
dealer for approximately ten years. There have been no uncollected receivable
amounts from this dealer in prior years. Extensive negotiations to secure
payment have been conducted by the executive team. These negotiations, however,
have been unsuccessful. Accordingly, the Company initiated both criminal and
civil proceedings against Chatral in
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
General -- Continued
February 1999. A debt confession and promissory notes that were signed by
Chatral principals document the claim. The Company is continuing to vigorously
pursue all possible actions to collect the outstanding balance and/or recover
finished goods inventory. Currently, the amount of recovery, if any, is
uncertain.
Results Of Operations
As an aid to understanding the Company's operating results, the following table
shows items from the consolidated statement of operations expressed as a percent
of sales:
<TABLE>
<CAPTION>
Percent of Net Sales Year Ended December 31,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of Sales 77.4 86.0 71.9
----- ----- -----
Gross Margin 22.6 14.0 28.1
Selling, General, and
Administrative Expenses (33.4) (26.7) (26.3)
Restructuring Charge -- (4.1) --
Impairment Loss (3.3) -- (2.7)
Interest Expense (2.7) (2.0) (1.4)
Other Income (Expense) .2 .9 (1.1)
----- ----- -----
Pretax Income (Loss)
from Continuing Operations (16.6) (17.9) (3.4)
Income Tax (Expense) Benefit -- (8.5) .6
----- ----- -----
Income (Loss)
from Continuing Operations (16.6%) (26.4%) (2.8%)
===== ===== =====
</TABLE>
Fiscal Year 1998 Compared With Fiscal Year 1997
- -----------------------------------------------
Net Sales
Net Sales for the year ended December 31, 1998 decreased $15.8 million or 34.9%
from the prior year. Of the total decrease, $11.0 million is attributed to LMR
products, $2.2 million to commercial real estate, $1.5 million to
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Fiscal Year 1998 Compared With Fiscal Year 1997 - Continued
- -----------------------------------------------------------
Net Sales - Continued
digital data communications, $1.0 million to access controls, and $0.1 million
to electronic components.
The decreases are reflective of the Company's strategy to exit non-LMR
businesses and to discontinue products and lines that were inadequately
profitable. Specifically, the Company sold its digital data communications
business and exited from the access controls and consumer electronics
businesses. LMR sales were impacted by the lack of shipments to the U.S. Army.
Throughout the year the U. S. Army had inventory quantities that were sufficient
to meet its users' requirements. Its inventory was depleted to reorder points
late in the year. The Company anticipates the receipt of a new order totaling
approximately $1 million in the second quarter of 1999. Additional orders from
this customer are expected later in 1999.
In the fourth quarter of 1998, the Company introduced its new Bendix King "Gold
Series" radio. This radio has been favorably reviewed by its customers, which
are primarily public safety and government entities such as the U. S. Forestry
Service. The Company expects that additional new products, including those that
are digital and APCO25 compliant, will be introduced in 1999.
The Company enhanced its sales and marketing organization significantly with the
addition of Bob Jacobson as Senior Vice President of Sales & Marketing. Mr.
Jacobson's extensive background in the federal government arena, particularly
with the Department of Defense, complements the Company's product thrust. Under
his guidance, the Company's sales and marketing approach and team have been both
updated and energized.
During the prior year, as the Company continued its strategy to exit the
commercial real estate business, most of its remaining real estate holdings were
sold. Several additional holdings were sold in 1998, although substantially less
than in 1997. The selling price of the real estate was
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Fiscal Year 1998 Compared With Fiscal Year 1997 - Continued
- -----------------------------------------------------------
Net Sales - Continued
approximately the same as its book value. The Company is continuing its
efforts to sell the remaining real estate.
Cost of Sales
Cost of Sales as a percent of net sales for the year ended December 31, 1998
decreased to 77.4% from 86.0% in the prior year. This decrease was primarily the
result of the Company's focus on higher margin LMR products and discontinuing
other less profitable products and product lines. Additionally, under the
direction of David Storey, Executive Vice President and COO, the Company has
negotiated more favorable pricing and terms from major suppliers, particularly
those in the Pacific Rim. Additionally, Mr. Storey has spearheaded the
implementation of a comprehensive, Company-wide quality program that has
resulted in first-pass yield improvements and cost reductions.
In responding to the lower manufacturing volumes, employment and manufacturing
support expenses were significantly reduced during the year. The number of
employees decreased by 80, while $1.5 million of expenses was trimmed. The
Company believes that its fixed manufacturing overhead structure is adequate to
support significantly higher manufacturing volumes. As these volumes increase as
expected in 1999 and beyond, the Company anticipates that the absorption of
overhead, and consequently margins, will continue to improve.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) include commissions,
marketing, sales, sustaining engineering, product development, management
information, accounting, and headquarters. For the year ended December 31, 1998,
SG&A expenses totaled $9.9 million or 33.4% of net sales compared with $12.1
million or 26.7% for the prior year. As a result of the Company's restructuring,
37 employees and $3.8 million in expenses were eliminated from the SG&A cost
structure. R&D spending, however, was
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------- ------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Selling, General and Administrative Expenses - Continued
approximately $1.5 million higher than normal levels in order to complete
critical product development projects. These projects have been completed.
Consequently, the Company expects that R&D spending in 1999 will be
significantly lower.
Also impacting SG&A expenses is a $1.4 million allowance for doubtful accounts
for the amounts that are owed to the Company from Chatral, its Brazilian dealer.
See item 3 of this report for additional discussion of this matter.
Interest Expense
Interest expense decreased $135,000 for the year ended December 31, 1998 to
approximately $797,000 from approximately $932,000 during the prior year. As
expected, cash flows from the previous sales of discontinued operations resulted
in overall lower debt levels during the year.
Income Taxes
Income taxes represented effective tax rates of 0% and 47.8% for the years ended
December 31, 1998 and 1997 respectively. These rates are made up primarily of a
34% effective federal tax rate, the respective state tax rates where the Company
does business, and changes in valuation allowances related to deferred tax
assets. Because the Company believes that it has not met the
more-likely-than-not criteria of SFAS No. 109, no tax benefit provision has been
recognized for 1998. The Company has established valuation allowances against
net deferred tax assets.
Discontinued Operations
The Company recognized a loss of $725,000 for worker's compensation and product
liability claims related to the sale of its former recycled paper manufacturing
and specialty manufacturing subsidiaries. As part of the sales of these
subsidiaries in 1997, the Company commissioned various insurance professionals
to estimate the related liabilities and established reserves accordingly during
the prior year.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Fiscal Year 1998 Compared With Fiscal Year 1997 - Continued
Discontinued Operations - Continued
In 1998, the Company, with the guidance of risk management consultants, analyzed
all remaining liabilities and negotiated a contract under which the insurance
carrier assumes all of the remaining workers compensation liabilities. In
connection with the analysis and contract, the Company recognized an additional
$725,000 of expenses.
Fiscal Year 1997 Compared With Fiscal Year 1996
Net Sales
Net Sales for the year ended December 31, 1997 decreased $2.3 million or 4.8%
from the prior year. The total decrease is comprised of a $4.1 million decrease
in the wireless communications equipment business and a $1.8 million increase in
the commercial real estate business.
The 1997 decrease in wireless communications equipment reflects lower customer
demand in the company's land mobile radio and demand side management businesses.
Land mobile radio sales were adversely impacted by reduced U. S. Forestry
Service purchases. Reportedly, this was the result of a less-active fire season.
Also, sales of traditional analog radios slowed due to uncertainty in the public
safety markets as they contemplate migrating to digital technology. Demand Side
Management sales declined for the third consecutive year as the electric utility
industry approaches deregulation. Deregulation of utilities may reduce the need
for managing peak demand. The company's near-term strategy is to focus on the
LMR business. Toward that end, products and product lines that do not fit this
strategy or are not adequately profitable, have been or will be discontinued.
Conversely, the Company anticipates introducing new products to replace the
existing analog product line in the second quarter of 1999. Furthermore, the
company's development of APCO 25 compliant digital products will yield
additional new products 1999.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Fiscal Year 1997 Compared With Fiscal Year 1996 - Continued
- -----------------------------------------------------------
Cost of Sales
Cost of Sales as a percent of net sales for the year ended December 31, 1997
increased to 86.0% from 71.9% in the prior year. This increase was primarily the
result of charges related to discontinuing inadequately profitable products and
lines. The detail of these charges is reported in the 1997 Form 10-K and Annual
Report. Other contributing factors were declining volumes in the fourth quarter
and the reclassification of the company's commercial real estate business as a
continuing operation.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) consist of commissions,
marketing, sales, sustaining engineering, product development, management
information, accounting, and headquarters. For the year ended December 31, 1997,
SG&A expenses totaled $12.1 million or 26.7% of net sales compared with $12.5
million or 26.3% for the prior year. The increase in SG&A costs was primarily
the result of charges associated with closing the Indiana engineering center and
reestablishing operations in Florida. Additionally, the company incurred product
development costs associated with the company's engineering initiative for
replacing its aging analog radio product offerings. Also, headquarters expenses
increased due to the re-incorporation from Pennsylvania to Nevada and executive
search and recruiting costs.
Interest Expense
Interest expense increased $254,000 for the year ended December 31, 1997 to
$932,000 from $678,000 during the prior year. This increase was the result of
debt for the expansion of the Florida facility and to replace obsolete surface
mount manufacturing equipment. Cash flow from continuing operations and from the
sale of discontinued operations enabled the company to reduce its debt level
during the second half of the year.
Income Taxes
Income taxes represented effective tax rates of 47.8% and 15.4% for the years
ended December 31, 1997 and 1996 respectively. These
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Fiscal Year 1997 Compared With Fiscal Year 1996 - Continued
Income Taxes - Continued
rates are made up primarily of a 34% effective federal tax rate, the respective
state tax rates where the company does business, and changes in valuation
allowances related to deferred tax assets. The company evaluated the deferred
tax assets on its balance sheet and does not believe that it has met the
more-likely-than-not criteria of SFAS No. 109, Accounting for Income Taxes, for
realizing the net deferred tax assets. Therefore, the company has established
valuation allowances against net deferred tax assets as of December 31, 1997.
Inflation and Changing Prices
Inflation and changing prices for the years ended December 31, 1998, 1997, and
1996 have contributed to increases in wages, facilites, 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 costs due to
currency fluctuations. It is not always possible to pass on these effects to its
customers. Competitors in the LMR markets are subject to similar fluctuations.
Pension Plans
RELM sponsors a participant contributory retirement plan, (401(k)), that is
available to employees. The Company's contribution to this plan is a percentage
of employees' contributions and totaled approximately $137,000, $248,000, and
$245,000 for 1998, 1997, and 1996 respectively.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
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 year 2000 related exposures.
Internal Company Systems
The Company implemented a new enterprise-wide information system in 1997. The
current release of this software is year 2000 compliant. The Company has not yet
implemented the current release. This implementation is scheduled for the second
quarter of 1999. Costs associated with the upgrade are estimated to be
approximately $20,000 and will be recognized when they are incurred. It is the
Company's policy to utilize the most current releases of software. The
aforementioned upgrade would be performed regardless of the year 2000 issue. No
other information technology projects are impacted by the upgrade.
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 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 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 in
the first quarter of 1999. As a contingency plan and as is its normal practice,
the Company in most cases has or will have secondary sources for
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Year 2000 Discussion - Continued
- --------------------------------
Third Party Relationships--Continued
purchases. Other than the U. S. 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.
Dividends
- ---------
No cash dividends were paid with respect to the Company's common stock during
the past five years. The Company intends to retain its earnings to fund growth
and, therefore, does not intend to pay dividends in the foreseeable future.
Liquidity and Capital Resources
- -------------------------------
On December 31, 1998, the Company had working capital totaling $6.6 million, a
decrease of $3.7 million from December 31, 1997. A significant portion of this
decrease was the result of establishing an allowance for doubtful accounts to
cover the amounts due to the Company from its Brazilian dealer. Also impacting
working capital were the aforementioned charges related to discontinued
operations as well as expenditures for product development.
The Company has a $7 million revolving line of credit. As of December 31, 1998
available credit on this line was approximately $3.2 million. This facility,
which was scheduled to expire at the end of February 1999, was replaced with a
new revolving line of credit on February 26, 1999. This agreement will provide a
$7 million line of credit for a term of three years. The terms are comparable to
the previous agreement. The line of credit is secured by substantially all of
the Company's non-real estate assets.
Capital expenditures for the year ended December 31, 1998, were $1.4 million.
These expenditures were primarily for engineering test
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS -- Continued
-----------------------
Liquidity and Capital Resources - Continued
equipment to support new product development and for manufacturing equipment.
Capital expenditures for 1999 are expected to be approximately $1.2 million.
These expenditures will support the manufacturing of the Company's two new
product families and will upgrade old, obsolete equipment. The current credit
line agreement contains capital expenditure restrictions. The Company believes
that the restrictions will not impact the execution of its capital investment
plans. The Company anticipates that capital expenditures will be funded through
operating cash flow and financing sources.
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 acquisitons; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The words "believe", "estimate", "expect",
"intend", "anticipate" and similar expressions an 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.
26
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
- -------------------------------------------------
ABOUT MARKET RISKS
------------------
The Company is subject to the risk of fluctuating interest rates in the ordinary
course of business for borrowings under a mortgage of its primary operating
facility. The Company has entered into an interest rate swap to reduce its
exposure to such fluctuations. Under this arrangement, the Company converted its
variable LIBOR-rate mortgage into a mortgage with a fixed rate of 8.85%. As of
December 31, 1998 the amount outstanding on the mortgage was approximately $3.7
million. The Company does not expect changes in the fair market value of this
swap to have a significant effect on its operations, cash flow, or financial
position.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
- ----------------------------
The financial statements required by this item are contained in pages F-1
through F-29 of this report.
28
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
RELM WIRELESS CORPORATION
Years ended December 31, 1998, 1997 and 1996
with Reports of Independent Auditors
F-1
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
CONTENTS
Rep1rt of Independent Certified Public Accountants--Ernst & Young LLP.........1
Report of Independent Certified Public Accountants--MacDade Abbott LLP........2
Consolidated Financial Statements
Consolidated Balance Sheets...................................................3
Consolidated Statements of Operations.........................................5
Consolidated Statements of Stockholders' Equity...............................6
Consolidated Statements of Cash Flows.........................................7
Notes to Consolidated Financial Statements....................................8
F-2
<PAGE>
ERNST & YOUNG LLP
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated balance sheets of RELM Wireless
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RELM Wireless
Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
Orlando, Florida
March 9, 1999
F-3
<PAGE>
MACDADE ABBOTT LLP
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
RELM Wireless Corporation
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of RELM Wireless Corporation (formerly
Adage, Inc.) and subsidiaries for the year ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
RELM Wireless Corporation and subsidiaries for the year ended December 31, 1996,
in conformity with generally accepted accounting principles.
Paoli, Pennsylvania
March 7, 1997
F-4
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 464 $ 213
Accounts receivable (net of allowance for
doubtful accounts of $ 1,565 in 1998 and $133 3,498 5,379
in 1997
Inventories 10,566 11,504
Investment securities--trading 749 881
Notes receivable 400 400
Prepaid expenses and other current assets 239 288
Real estate investments held for sale 58 1,833
-------------------------
15,974 20,498
Property, plant and equipment:
Land 233 233
Buildings and improvements 4,183 4,150
Machinery and equipment 9,736 9,020
Accumulated depreciation (5,323) (4,598)
-------------------------
8,829 8,805
Notes receivable, less current portion 1,695 2,200
Other assets 329 162
-------------------------
Total assets $26,827 $31,665
=========================
</TABLE>
See accompanying notes.
F-5
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term liabilities $ 1,355 $ 1,584
Accounts payable 4,617 1,935
Accrued compensation and related taxes 2,547 3,017
Accrued expenses and other current liabilities 704 756
Accrued restructuring liability 178 1,872
Accrued research costs -- 1,027
-------------------------
Total current liabilities 9,401 10,191
Long-term liabilities, less amounts classified
as current liabilities:
Loans, notes and mortgages 7,313 5,405
Capital lease obligations 1,442 2,035
-------------------------
8,755 7,440
Commitments and contingencies
Stockholders' equity:
Common stock; $.60 par value; 10,000,000
authorized shares: issued and outstanding shares
5,046,416 at December 31, 1998 and 5,035,779 at 3,027 3,021
December 31, 1997
Additional paid-in capital 20,221 20,185
Accumulated deficit (14,577) (9,172)
-------------------------
Total stockholders' equity 8,671 14,034
-------------------------
Total liabilities and stockholders' equity $26,827 $31,665
=========================
</TABLE>
See accompanying notes.
F-6
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Sales $29,530 $45,376 $47,646
Expenses:
Cost of products 22,864 39,003 34,252
Selling, general and administrative 9,871 12,099 12,537
Impairment loss 961 -- 1,300
Restructuring charge -- 1,872 --
------------------------------------
Total expenses 33,696 52,974 48,089
------------------------------------
Operating loss (4,166) (7,598) (443)
Other income (expense):
Interest expense (797) (932) (678)
Net gains (losses) on investments (132) 158 (643)
Other income 188 268 151
------------------------------------
Total other income (expense) (741) (506) (1,170)
------------------------------------
Loss from continuing operations before (4,907) (8,104) (1,613)
income taxes
Income tax expense (benefit) -- 3,870 (266)
------------------------------------
Loss from continuing operations (4,907) (11,974) (1,347)
Discontinued operations:
Loss from discontinued operations net of (725) (266) (847)
income tax
Loss on disposal of discontinued segments
net of income tax -- (2,570) (1,832)
------------------------------------
Loss on discontinued operations (725) (2,836) (2,679)
------------------------------------
Loss before extraordinary item (5,632) (14,810) (4,026)
Extraordinary gain on debt forgiveness 227 -- --
------------------------------------
Net loss $(5,405) $ (14,810) $ (4,026)
====================================
Earnings (loss) per share--basic and diluted:
Continuing operations $ (.97) $ (2.36) $ (.26)
Discontinued operations (.15) (.56) (.52)
Extraordinary gain .05 -- --
------------------------------------
Net loss $ (1.07) $ (2.92) $ (.78)
====================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Unrealized
Gains
(Losses) on
Common Stock Additional Available
----------------------- Paid In Accumulated For Sale
Shares Amount Capital Deficit Securities Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 5,121,535 $ 3,073 $ 20,477 $ 9,664 $(594) $32,620
Sale of common stock 7,615 3 23 -- -- 26
Available for sale
securities reclassified -- -- -- -- 594 594
as trading
Net loss -- -- -- (4,026) -- (4,026)
------------------------------------------------------------------------------
Balances at December 31, 1996 5,129,150 3,076 20,500 5,638 -- 29,214
Purchase of common stock (93,371) (55) (315) -- -- (370)
Net loss -- -- -- (14,810) -- (14,810)
------------------------------------------------------------------------------
Balances at December 31, 1997 5,035,779 3,021 20,185 (9,172) -- 14,034
Sale of common stock 10,637 6 36 -- -- 42
Net loss -- -- -- (5,405) -- (5,405)
------------------------------------------------------------------------------
Balances at December 31, 1998 5,046,416 $ 3,027 $ 20,221 $ (14,577) $-- $ 8,671
==============================================================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
RELM WIRELESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (5,405) $(14,810) $ (4,026)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,344 1,796 2,762
Net (gain) loss on investment securities 132 (158) 643
Valuation allowance on real estate 961 -- 1,300
Loss on disposal of discontinued segments -- 2,570 1,832
Gain on disposal of property and equipment, and
other assets -- -- (354)
Deferred income taxes -- 3,870 (700)
Other -- 39 39
Changes in current assets and liabilities:
Accounts receivable 1,881 3,327 (2,002)
Inventories 938 3,508 2,323
Accounts payable 2,682 (2,049) (1,463)
Other current assets and liabilities (3,361) 1,898 183
Real estate investments held for sale 814 2,677 1,076
Discontinued segments--noncash charges and
working capital charges -- 545 (572)
-------------------------------------
Cash provided by (used in) operating activities (14) 3,213 1,041
Cash flows from investing activities
Purchases of property and equipment (1,368) (2,694) (1,352)
Collections on notes receivable 600 -- --
Loans and advances (95) -- --
Net cash from sale of subsidiaries -- 7,643 --
Proceeds from disposals of property and equipment -- -- 700
Sales of real estate -- -- 100
Investing activities of discontinued segments -- -- (182)
-------------------------------------
Cash provided by (used in) investing activities (863) 4,949 (734)
Cash flows from financing activities
Repayment of debt and capital lease obligations (1,184) (2,248) (3,079)
Proceeds from debt -- 4,802 --
Net increase (decrease) in revolving credit lines 2,270 (11,071) 3,195
Proceeds from issuance of common stock 42 -- 26
Retirement of stock -- (31) --
Deferred financing charges -- -- (100)
Financing activities of discontinued segments -- -- (87)
-------------------------------------
Cash provided by (used in) financing activities 1,128 (8,548) (45)
-------------------------------------
Increase (decrease) in cash 251 (386) 262
Cash and cash equivalents, beginning of year 213 599 337
Cash and cash equivalents, end of year $ 464 $ 213 $ 599
Supplemental disclosure
Interest paid $ 797 $ 1,266 $ 1,352
Income taxes paid 29 12 4
Capital lease additions -- 1,755 355
</TABLE>
See accompanying notes.
F-9
<PAGE>
RELM WIRELESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(In Thousands, Except Share Data)
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 of land mobile radios, utility load
management systems, and base station components and subsystems. In 1995, the
Company formed a plan to discontinue its real estate development and management
business (see Note 5).
Principles of Consolidation
The accounts of the Company and its subsidiaries have been included in the
consolidated financial statements. All significant intercompany balances and
transactions have been eliminated.
Inventory
Inventories are stated at the lower of cost or market, determined by the average
cost method.
Investment Securities
Investments that are purchased and held principally for the purpose of selling
them in the near term are classified as "trading securities" and carried at fair
value, with unrealized gains and losses included in earnings. Realized gains and
losses are computed by the specific identification method on a trade-date basis.
The classification of investment securities is determined by management at the
date of purchase. When the Company subsequently changes its purpose for holding
the security, it is transferred among classifications at the fair value at the
date reclassified.
Property and Equipment
Property 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.
F-10
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Depreciation is generally computed on the straight-line method using lives of 3
to 20 years on machinery and equipment and 5 to 30 years on buildings and
improvements. The Company revised the estimated useful life of some of its
equipment from 5 to 8 years as of January 1, 1996. This decreased the Company's
1996 operating loss by $117, net loss by $73 and loss per share by $.02.
Depreciation expense on property, plant, and equipment for 1998, 1997 and 1996
was $1,344, $1,220 and $1,066 respectively.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of assets may
be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow value is required.
Cash Equivalents
Cash and cash equivalents includes time deposits, certificates of deposit and
highly liquid marketable securities with original maturities of less than three
months.
Revenue Recognition
Revenues and expenses are recognized as goods are shipped. Real estate revenues
are recognized upon closing of a sale.
Income Taxes
The Company files a consolidated federal income tax return with its subsidiaries
in which it owns 80% or more of the outstanding capital stock. The Company
follows the liability method of accounting for income taxes.
F-11
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of cash, accounts receivables and investments. The
Company places its cash and investments in accounts with major financial
institutions. Concentrations of credit risk with respect to accounts receivable
are generally diversified due to the large number of customers comprising the
Company's customer base. Accordingly, the Company believes that its accounts
receivable credit risk exposure is limited.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's management believes the carry amounts of cash, notes receivable,
investments and short-term and long-term debt approximates their fair values.
The Company has entered into an interest rate swap to reduce exposure to
interest rate fluctuations. The interest differentials from the swap is recorded
as interest expense as incurred.
Advertising Costs
The cost for advertising is expensed as incurred. The total advertising expense
for 1998, 1997 and 1996 was $241, $456 and $319, respectively.
Research and Development Costs
Included in selling, general and administrative expenses for 1998, 1997 and 1996
are research and development costs of $2,277, $5,466 and $3,065, respectively.
F-12
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Stock Based Compensation
The Company follows APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plans.
Earnings (Loss) Per Share
Earnings (loss) per share amounts are computed and presented for all periods in
accordance with SFAS No. 128, Earnings per Share.
Comprehensive Income
Pursuant to SFAS No. 130, Reporting Comprehensive Income, the Company is
required to report comprehensive income and its components in its financial
statements. The Company does not have any significant components of
comprehensive income to be reported under SFAS No. 130. Total comprehensive
income (loss) is equal to the net income (loss) reported in the financial
statements.
Business Segments
The Company follows SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in reporting segment information and information
about products and services, geographic areas, and major customers. The
Company has only one reportable business segment.
2. Inventory
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Finished goods $ 4,641 $ 5,120
Work in process 1,945 2,245
Raw materials 3,980 4,139
=========================
$10,566 $11,504
=========================
</TABLE>
F-13
<PAGE>
3. Allowance for Doubtful Accounts
The allowance for doubtful accounts is composed of the following:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 133 $ 165 $ 381
Provision for doubtful accounts 1,514 140 194
Uncollectible accounts written off (82) (147) (200)
Recoveries -- -- 1
Discontinued operations -- (25) (211)
--------------------------------
Balance, end of period $ 1,565 $ 133 $ 165
================================
</TABLE>
4. Investment Securities
Investment securities, which consist of marketable equity securities, had a
market value of $749 and $881 and a cost basis of $550 at December 31, 1998 and
1997, respectively. Realized gains and changes in unrealized gains or losses
included in investment income were as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
--------------------------
<S> <C> <C> <C>
Realized gains on investment securities $ -- $ -- $ 39
Reduction in cost of available for sale
investment transferred to trading -- -- (855)
Unrealized gains (loss) on trading
investment securities (132) 158 173
==========================
$(132) $ 158 $(643)
==========================
</TABLE>
During 1996, investment securities classified as available for sale, had a
market decline which was considered other than temporary and management
reclassified this investment as current trading. The market decline was
recognized as a reduction in cost and reported with net (gains) losses on
investments in the consolidated statement of operations.
F-14
<PAGE>
5. Real Estate Assets Held for Sale
The Company continues its vigorous efforts to dispose of the real estate assets
and has classified such assets as real estate held for sale in the accompanying
balance sheets. The real estate assets include subdivided units of commercial
land, completed residential properties, and commercial properties, and are
presented net of valuation allowances of $1,966 and $1,005 at December 31, 1998
and 1997. The Company has increased its valuation allowance to reflect the
current value of the real estate assets based on market sale projections. The
real estate valuation allowances are composed of the following:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Balances, beginning of period $1,005 $2,920 $1,620
Provision for impairment losses 961 -- 1,300
Reduction due to sales -- (1,915) --
=====================================
Balance, end of period $1,966 $1,005 $2,920
=====================================
</TABLE>
The summarized results of operations of the real estate business are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Sales $1,805 $3,937 $ 2,130
Cost of sales (851) (4,006) (1,911)
Impairment loss (961) -- (1,300)
Selling, general and
administrative expenses (100) (522) (269)
-------------------------------------
Operating loss $ (107) $ (591) $(1,350)
=====================================
</TABLE>
F-15
<PAGE>
6. Debt
The debt consisted of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------
<S> <C> <C>
Line of credit. $ 3,770 $ 1,500
Note payable to bank secured by real estate
bearing interest at 8.85% with monthly payments
of $24 plus interest due through August 2012. 3,905 4,193
Notes payable to a third party 400 443
Notes payable to banks secured by real estate -- 162
-------------------------
Total debt 8,075 6,298
Amounts classified as current liabilities (762) (893)
=========================
Long-term debt $ 7,313 $ 5,405
=========================
</TABLE>
On February 26, 1999 the Company refinanced its revolving credit. The new credit
agreement provides for a maximum line of credit of $7,000 reduced by outstanding
letters of credit. Included in the $7,000 line is a $500 term loan with monthly
principal payments of $8 commencing on April 1, 1999. These future payments have
been reflected in the debt maturity table. Interest on the unpaid principal
balance accrues at the prime rate (7.75% at December 31, 1998) plus 1.25%. There
is an annual fee of .25% on the line. The credit agreement requires, among other
things, maintenance of financial ratios and limits certain expenditures. The
line of credit is secured by substantially all of the Company's non-real estate
assets and expires on February 26, 2002. On the closing date there was
approximately $2,408 of unutilized borrowing capacity.
The $3,905 note agreement contains a cash flow and a net worth requirement. The
Company was in violation of these covenants at December 31, 1998. The bank has
provided a waiver of the cash flow covenant for 1998 and a waiver of the
tangible net worth requirement through January 1, 2000.
The Company has entered into an interest rate swap related to its $3,905 note to
reduce exposure to interest rate fluctuations. Under this arrangement, the
Company converted the variable LIBOR-rate debt into 8.85% fixed-rate debt. As of
December 31, 1998 the notional amount of the swap agreement was $3,929. The
agreement expires in August 2012.
F-16
<PAGE>
6. Debt (continued)
On November 17, 1998, an agreement was reached with the third party debtor
whereby principal and interest of $227 was forgiven and a new agreement for $500
was signed. The agreement requires interest free monthly payments of $50. The
gain on debt forgiveness is classified as an extraordinary item in the statement
of operations.
As of December 31, 1998 and 1997, the Company had approximately $3,230 and
$8,500 of unused lines of credit available.
The Company capitalized $38 of interest in 1997.
Maturities of long-term debt for years succeeding December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 762
2000 388
2001 387
2002 3,782
2003 288
Thereafter 2,468
=============
$8,075
=============
</TABLE>
7. Leases
The Company occupied certain properties under long-term operating leases which
expire at various dates. Certain of these operating leases were assumed by the
buyers of the Company's paper and specialty manufacturing businesses which were
sold in 1997. The Company recorded charges of $345 in 1997 and $110 in 1996
related to the abandonment of certain leases and the write-off of leasehold
improvements. Total rental expenses for all operating leases for 1998, 1997 and
1996 was $220, $397 and $614, respectively.
F-17
<PAGE>
7. Leases (continued)
Property, plant and equipment includes equipment purchased under capital leases
at December 31 as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Cost $3,672 $3,672
Accumulated depreciation (1,671) (1,098)
-------------------------
$2,001 $2,574
=========================
</TABLE>
Amortization of equipment under capital leases is included in depreciation
expense.
During 1997, the Company revised the estimated useful life of one of its leased
assets from eight to five years (the life of the lease) and recorded an
additional charge of $317 related to this change. This revision increased the
1997 net loss by $317 and loss per share by $.06.
At December 31, 1998, the future minimum payments for the capital leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 756
2000 756
2001 593
2002 249
-------------
Total minimum lease payments 2,354
Less amounts representing interest (320)
-------------
Present value of net minimum lease payments 2,034
Less current maturities (592)
=============
Long-term obligations under capital-leases $1,442
=============
</TABLE>
F-18
<PAGE>
8. Income Taxes
The provision for income taxes from continuing operations consists of the
following:
1998 1997 1996
-------------------------------------
Current:
Federal $ -- $ -- $ --
State -- -- --
-------------------------------------
-- -- --
Deferred:
Federal -- 3,309 (670)
State -- 561 (30)
-------------------------------------
-- 3,870 (700)
-------------------------------------
$ -- $3,870 $(700)
=====================================
The provision for income taxes is provided in the statement of consolidated
operations as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Loss from continuing $ -- $3,870 $(266)
operations
Loss from discontinued -- -- (434)
operations
Loss on disposal of
discontinued segment -- -- --
Extraordinary gain -- -- --
=====================================
$ -- $3,870 $(700)
=====================================
</TABLE>
F-19
<PAGE>
8. Income Taxes (continued)
The components of consolidated income taxes (benefit) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Federal income taxes
(benefit) at statutory rates (34.0)% (34.0)% (34.0)%
State income taxes (benefit)
net of federal income tax (3.6) (3.5) (3.6)
benefit
Change in valuation allowance 37.6 86.0 18.1
Limited use capital losses -- -- 1.9
Permanent differences and -- (0.7) 2.2
other
=====================================
Effective income tax rate --% 47.8% (15.4)%
=====================================
</TABLE>
F-20
<PAGE>
8. Income Taxes (continued)
The deferred tax effect of temporary differences between financial and tax
reporting at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryovers $9,401 $ 6,972
Tax credits 49 129
Unrealized capital losses:
Disposal of segment -- 670
Investment losses -- --
Asset reserves:
Bad debts 589 50
Inventory reserve 940 1,073
Inventory capitalization 128 128
Real estate sales 740 378
Accrued expenses:
Compensated absences 100 171
Health insurance claims 707 752
Restructuring accrual 67 704
All other 105 --
Valuation allowances (12,024) (10,177)
-------------------------
802 850
Deferred tax liabilities:
Depreciation (727) (726)
Unrealized capital gain (75) (124)
-------------------------
Net deferred tax assets $ -- $ --
=========================
</TABLE>
In accordance with SFAS Statement No. 109, Accounting for Income Taxes,
valuation allowances are provided against deferred tax assets if, based on the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The Company has evaluated the
realizability of the deferred tax assets on its balance sheet and does not
believe it has met the more likely than not criteria; therefore, the Company has
established a valuation allowance in the amount of $12,024 against its net
deferred tax assets.
F-21
<PAGE>
8. Income Taxes (continued)
Part of the federal loss carryforward is attributed to the prior operation of
the wireless electronic subsidiary. This loss carryforward is limited to a tax
benefit of approximately $320 per year. If unused, the federal and state tax
loss carryforward benefit (at current rates) expires in the following years:
2004--$1,177; 2005--$1,436; 2006--$363; 2009--$5; 2010--$81; 2011--$459;
2012--$2,667; 2018--$3,213.
9. Pension Plans
The Company sponsors a participant contributory retirement (401k) plan which is
available to all employees. The Company's contributions to the plan is either a
percentage of the participants salary (50% of the participants' contributions up
to a maximum of 6%) or a discretionary amount. Total contributions made by the
Company were $137, $248 and $245 for 1998, 1997 and 1996, respectively.
The Company participated in a multi-employer pension plan through June 16, 1997,
the date of sale of its paper manufacturing business. The plan provides defined
benefits for those employees covered by two collective bargaining agreements.
Contributions for employees are based on hours worked at rates set in the
bargaining agreements. If the Company curtailed employment or withdrew from the
multi-employer plans, a withdraw liability may be incurred. The buyer of the
paper manufacturing business agreed to assume such withdrawal liability, if any.
The Company agreed to be secondarily liable if the buyer withdraws from the plan
through June 16, 2002. The amount of such liability, if any, cannot presently be
determined. Total amounts charged to pension expense and contributed to the
multi-employer plan were $70 and $145 for 1997 and 1996 respectively.
10. Related Party Transactions
The specialty-manufacturing subsidiary leased its manufacturing and office
facility from a corporation controlled by an officer of the Company. This
subsidiary was sold on June 4, 1997. Rental payments under this lease were
approximately $88 for the period January 1, 1997 through the sale date.
Rental payments were $230 for 1996.
During 1996, the Company's commercial real estate subsidiary managed rental
properties that were owned by other entities that were controlled by an officer
of the Company. For this service, the Company received fees related to a
percentage of gross rents plus a percentage of new leases
F-22
<PAGE>
10. Related Party Transactions (continued)
signed. Property management fees received by the Company during 1996 from
related parties totaled $133. See Note 5.
During 1997, the Company's commercial real estate subsidiary sold real estate to
an entity that was controlled by the Company's principal shareholder for $1,733.
As part of the sale, unsecured notes receivable were established totaling $200.
These notes plus interest at 7% were paid in 1998. During 1998, the Company's
commercial real estate subsidiary sold real estate to an entity that was
controlled by the Company's principal shareholder for $1,056 cash.
11. Restructuring
In 1997, the Company recorded a $1,872 charge related to restructuring. The
restructuring consisted of consolidating operations and reducing operating
expenses. In consolidating operations, the Company accrued $446 related to the
closing of a research and development facility in Indiana and $1,426 relating to
the termination of both factory and support employees in Indiana and Florida. In
1998, the Company reduced the liability by $1,694 for lease and severance
payments. The remaining liability of $178 relates to the remaining lease
payments on the Indiana facility.
12. Significant Customers
Sales to the United States government and to foreign markets as a percentage of
the Company's total sales were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
U.S. government 24% 32% 21%
Foreign markets 9 10 13
</TABLE>
F-23
<PAGE>
13. Earnings (Loss) Per Share
The following table sets the computation of basic and diluted earnings (loss)
per share from continuing operations:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Numerator:
Net income (numerator for basic and
diluted earnings per share) $ (4,907) $ (11,974) $ (1,347)
-------------------------------------
Denominator:
Denominator for basic and diluted
earnings per share-weighted average shares 5,045,459 $5,076,438 $5,116,304
shares
=====================================
Basic earnings (loss) per share $ (.97) $ (2.36) $ (.26)
=====================================
Diluted earnings (loss) per share $ (.97) $ (2.36) $ (.26)
=====================================
</TABLE>
Shares related to options are not included in the computation of earnings (loss)
per share because to do so would have been anti-dilutive for the periods
presented.
14. Stock Option and Other Stock Plans
The Company has two plans whereby eligible officers, directors and employees can
be granted options for future purchases of Company common stock at the market
price on the grant date. The options, if not exercised within a five year
period, expire. Other conditions and terms apply to stock option plans.
F-24
<PAGE>
14. Stock Option and Other Stock Plans (continued)
The following is a summary of all stock option plans:
<TABLE>
<CAPTION>
Weighted
Shares Option Average
Under Price Per Exercise
Option Share Price
-------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1995 261,203 $3.61-$7.87 $5.06
Options granted 33,191 4.00-4.06 4.01
Options exercised (7,640) 3.61 3.61
Options expired or terminated (9,096) 5.62-7.87 6.49
-----------
Balance at December 31, 1996 277,658 3.61-6.88 4.90
Options granted 130,000 4.06-6.25 5.74
Options expired or terminated (114,135) 3.61-6.88 4.97
-----------
Balance at December 31, 1997 293,523 4.00-6.88 5.28
Options granted 190,000 3.06-3.50 3.20
Options exercised (10,637) 4.00 4.00
Options expired or terminated (44,907) 3.06-6.88 5.94
-------------------------------------
Balance at December 31, 1998 427,979 $3.06-$6.88 $4.46
=====================================
Exercisable at December 31, 1998 161,833 $3.06-$6.88 $4.88
=====================================
</TABLE>
The weighted average contractual life of stock options outstanding was 2.7 and
2.4 years at December 31, 1998 and 1997, respectively.
At December 31, 1998, 192,968 of unissued options were available under the two
plans.
Pro forma information regarding net income or loss is required by SFAS No. 123,
Accounting for Stock-Based Compensation, and has been determined as if the
Company had accounted for its employee stock options under the fair value method
of that Statement. The fair values for these options were estimated at the date
of grant using the Black-Scholes option-pricing model minimum value method with
the following weighted-average assumptions for 1998 and 1997: expected
volatility of .59% (1998) and 44% (1997); risk-free interest rate of 6%;
dividend yield of 0%; and a weighted-average expected life of the options of 3.5
years.
F-25
<PAGE>
14. Stock Option and Other Stock Plans (continued)
For purposes of pro forma disclosures, the estimated fair value is amortized to
expense over the options' vesting period. The Company's pro forma net loss for
1998 and 1997 was $5,520 and $14,835, respectively, or $1.09 and $2.92 loss per
share. The proforma net loss reflects only options granted after December 31,
1994. Therefore, the full impact of calculating compensation cost for stock
options under SFAS Statement No. 123 is not reflected in the proforma net loss
amounts because compensation cost is reflected over the vesting periods and
compensation cost for options granted prior to January 1, 1995 is not
considered. The weighted average fair value of options granted during 1998 and
1997 was $1.63 and $2.41, respectively. The option price equaled the market
price on the date of grant for all options granted in 1998 and 1997.
Adoption of SFAS No. 123 had no material effect on pro forma net income or
loss or earnings (loss) per share for 1996.
15. Discontinued Operations
Paper Manufacturing
On June 16, 1997, the Company sold the assets and certain liabilities of its
paper manufacturing business, Fort Orange Paper Co., Inc. (Fort Orange), to the
former president of Fort Orange. The purchase price totaled $8,619 and consisted
of cash of $6,219 and a note for $2,400. A loss of $2,084 was recorded on the
transaction in 1997 and an additional loss of $725 was recorded in 1998. The
note, which totaled $2,000 and $2,400 at December 31, 1998 and 1997,
respectively, is receivable over five years in annual payments of $400 for the
first four years and $800 in the final year and is secured by the assets of Fort
Orange. Interest at 11.5% is receivable quarterly.
F-26
<PAGE>
15. Discontinued Operations (continued)
The operations of Fort Orange were reclassified to discontinued operation for
all periods presented. Summarized results of Fort Orange's discontinued
operations were as follows:
<TABLE>
<CAPTION>
Through Year ended
June December 31,
1997 1996
---------------------------
<S> <C> <C>
Net revenues $10,335 $23,134
Operating profit (loss) (415) 232
Income (loss) before income taxes (335) 459
Income tax benefits -- (156)
---------------------------
Net income (loss) from discontinued
operations $ (335) $ 303
===========================
</TABLE>
Specialty Manufacturing
In December 1996, the Company agreed in principal to sell its specialty
manufacturing business, Allister Manufacturing Company, Inc. (Allister), to an
officer and director of the Company. The sale, which was conditional upon the
buyer obtaining the necessary financing, was finalized on June 4, 1997 for a
total purchase price of approximately $1,946 including cash of $1,592 and the
assignment of approximately 83,000 shares of common stock of the Company. The
book value of the net assets sold were $2,432 at the date of sale. A loss on the
sale of $1,832 (pre-tax and after tax) was recorded in 1996 and an additional
loss on sale of $486 was recorded in 1997.
The operations of Allister were reclassified to discontinued operations for all
periods presented. Summarized results of Allister's discontinued operations were
as follows:
<TABLE>
<CAPTION>
Through Year ended
May December 31,
1997 1996
---------------------------
<S> <C> <C>
Net revenues $4,332 $11,212
Operating profit (loss) 69 (715)
Income (loss) before income taxes 69 (1,738)
Income tax benefits - (590)
---------------------------
Net income (loss) from discontinued
operations $ 69 $(1,148)
===========================
</TABLE>
F-27
<PAGE>
16. Contingent Liabilities
From time to time, the Company may become liable with respect to pending and
threatened litigation, tax, environmental and other matters.
General Insurance
Under the Company's insurance programs, coverage is obtained for catastrophic
exposures as well as those risks required to be insured by law or contract. It
is the policy of the Company to retain a significant portion of certain expected
losses related primarily to workers' compensation, physical loss to property,
business interruption resulting from such loss and comprehensive general,
product, and vehicle liability. Provisions for losses expected under these
programs are recorded based upon the Company's estimates of the aggregate
liability for claims incurred. Such estimates utilize certain actuarial
assumptions followed in the insurance industry and are included in accrued
expenses. The amounts accrued are included in accrued compensation and related
taxes in the balance sheets.
Former Affiliate
In 1993, a civil action was brought against the Company by a plaintiff to
recover losses sustained on notes of a former affiliate. The plaintiff alleges
violations of federal security and other laws by the Company in collateral
arrangements with the former affiliate. In response, the Company filed a motion
to dismiss the complaint in the fall of 1993, which the court has yet to rule.
In February 1994, the plaintiff executed and circulated for signature, a
stipulation of voluntary dismissal. After the stipulation was executed the
plaintiff refused to file the stipulation with the court. Subsequently the
Company and others named in the complaint filed a motion to enforce their
agreement with the plaintiff. The court has also yet to rule on that motion.
In a second related action, an adversarial action in connection with the
bankruptcy proceedings of the former affiliate has been filed. In response to
that complaint the Company filed a motion to dismiss for failure to state a
cause of action. Although the motion for dismissal was filed during 1995, the
bankruptcy court has not yet ruled on the motion. The range of potential loss,
if any, as a result of these actions cannot be presently determined.
In February 1996, the liquidator of the former affiliate filed a complaint
claiming intentional and negligent conduct by the Company and others named in
the complaint caused the former affiliate to suffer millions of dollars of
losses leading to its ultimate failure. The complaint does not
F-28
<PAGE>
16. Contingent Liabilities (continued)
specify damages but an unfavorable outcome could have a material adverse impact
on the Company's financial position. The range of potential loss, if any, cannot
be presently determined.
Management, with the advice of counsel, believes the Company has meritorious
defenses and the likelihood of an unfavorable outcome in each of these actions
is remote.
F-29
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
- -----------------------------------------
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
---------------------------------------
DISCLOSURE
----------
None
29
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
- -------- ---------------------------------------
REGISTRANT.
-----------
Information required by this item is incorporated by reference to the definitive
proxy statement to be filed by the Company for the Annual Meeting of the
Shareholders to be held on June 14, 1999.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Information required by this item is incorporated by reference to the definitive
proxy statement to be filed by the Company for the Annual Meeting of the
Shareholders to be held on June 14, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information required by this item is incorporated by reference to the definitive
proxy statement to be filed by the Company for the Annual Meeting of the
Shareholders to be held on June 14, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information required by this item is incorporated by reference to the definitive
proxy statement to be filed by the Company for the Annual Meeting of the
Shareholders to be held on June 14, 1999.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. Financial Statements: See index to the Consolidated Financial Statements on
page F-1 hereof.
2. Financial Statement Schedules: All schedules have been omitted because th
ey
are inapplicable or not material, or the information called for thereby is
included in the Consolidated Financial Statements and notes thereto.
3. Exhibits: The exhibits listed below are filed as a part of, or incorporated
by reference into this report:
Number Exhibit
------ -------
3(i) Articles of Incorporation *
3(ii) By-Laws *
10(e) 1997 Stock Option Plan **
27 Financial Data Schedule
- ----------
* Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
** Compensatory plan required to be filed pursuant to Item 601(b)(10)(iii) of
Regulation S-K.
(b) No reports on Form 8-K have been filed during the period ended December 31,
1998 by the Company.
31
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
Date: March 31, 19RELM, INC.
By: /s/ Richard K. Laird
-----------------------
Richard K. Laird
President & C.E.O.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and or the dates indicated.
SIGNATURES TITLE DATE
/s/ Donald F. U. Goebert Chairman March 31, 1999
- ------------------------
Donald F. U. Goebert
/s/ Richard K. Laird President, Chief March 31, 1999
- ------------------- Executive Officer and
Richard K. Laird Director
/s/ William P. Kelly Vice President -- Finance March 31, 1999
- -------------------- Secretary
William P. Kelly
/s/ Buck Scott Director March 31, 1999
- --------------------
Buck Scott
/s/ James C. Gale Director March 31, 1999
- --------------------
James C. Gale
/s/ Robert L. MacDonald Director March 31, 1999
- --------------------
Robert L. MacDonald
/s/ Ralph R. Whitney, Jr. Director March 31, 1999
- --------------------
Ralph R. Whitney, Jr.
/s/ George N. Benjamin, III Director March 31, 1999
- --------------------
George N. Benjamin, III
32
EXHIBIT 10(E)
RELM WIRELESS CORPORATION
1997 STOCK OPTION PLAN
----------------------
(As amended June 23, 1998)
ARTICLE I
GENERAL
-------
1.01 Purpose. The purposes of this Stock Option Plan are to:
(a) closely associate the economic interests of the Employees of the
Company with the economic interests of the shareholders of the Company;
(b) promote the success of the Company's business;
(c) maintain competitive compensation levels for the Employees of the
Company; and
(d) provide an incentive to the Employees of the Company to continue in the
employment or service of the Company.
1.02 Construction. The Plan (and the Options granted hereunder), as it
applies to Options granted to Employees of the Company, is intended to qualify
as a tax qualified, incentive stock option plan, and to be described under Code
Section 422 and Regulations issued thereunder. To the extent the Plan (and the
Options granted hereunder) applies to Employees to whom the Committee intends to
grant nonqualified stock options, the Plan is intended to be a nonqualified,
stock option plan under Code Section 83 and Regulations issued thereunder. The
Plan, and the Options granted hereunder, shall be interpreted and construed to
achieve the intended purpose.
1.03 Effective Date. The Plan is effective as of October 13, 1997.
ARTICLE II
DEFINITIONS
-----------
As used in the Plan, capitalized words in the Plan shall be defined as
follows:
2.01 "Beneficiary" means the person designated in the last will and
testament of the Optionee as the beneficiary of the Optionee with respect to the
Option. In the absence of such designation, the beneficiary of the Optionee
shall be determined under the laws of descent and distribution of the state of
domicile of the Optionee at the time of the Optionee's death.
1
<PAGE>
2.02 "Board" means the Board of Directors of the Company.
2.03 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
2.04 "Committee" means the committee of individuals appointed by the Board
in accordance with Section 3.01 below to administer the Plan. Such Committee
shall consist of two or more Non-Employee Directors.
2.05 "Common Stock" means the voting common stock of the Company.
2.06 "Company" means RELM Wireless Corporation, a Nevada corporation, its
parents (if any), and any present or future subsidiaries.
2.07 "Employee" means a common law employee of the Company, or any
subsidiary of the Company, including, but not limited to common law employees
who are also officers or directors of the Company.
2.08 "Grant Date" means the date an Option is granted to an Employee and
shall mean the date selected by the Committee as of which the Committee allots a
specific number of Shares to an Optionee pursuant to the Plan.
2.09 "Non-Employee Director" means a member of the Board who is a
"non-employee director" as defined in Rule 16b-3 implementing the Securities
Exchange Act of 1934.
2.10 "Option" means the stock option granted pursuant to the Plan, which if
granted to an Employee may be designated as being intended to qualify as a tax
qualified, incentive stock option within the meaning of Code Section 422 or may
be designated as being intended to be treated as a nonqualified, stock option
within the scope of Code Section 83.
2.11 "Option Agreement" means the written agreement between the Company and
the Optionee evidencing the grant of the Option by the Company to the Optionee.
2.12 "Optionee" means an Employee who has been granted an Option pursuant
to the Plan, and who has executed an Option Agreement.
2.13 "Plan" means this 1997 Stock Option Plan.
2.14 "Share" means one share of Common Stock, as adjusted for
recapitalization transactions in accordance with Section 7.01 below.
2.15 "Regulations" means Treasury Regulations promulgated in accordance
with the Code.
2
<PAGE>
ARTICLE III
ADMINISTRATION
--------------
3.01 The Committee. The Plan shall be administered by the Committee. The
Committee may select one of its members as its chairperson, and shall hold
meetings at such time and places as it may determine. Acts by a majority of the
Committee, or acts reduced to or approved in writing by a majority of the
members of the Committee, shall be the valid acts of the Committee.
3.02 Authority of Committee. The Committee shall have the authority, in its
sole discretion, but subject to the terms of the Plan, to:
(a) grant Options to Employees in accordance with the terms of the Plan in
such amount and on such terms as the Committee shall determine;
(b) impose such limitations, restrictions and conditions upon any such
award as the Committee shall deem appropriate, provided such limitation,
restriction and/or condition, in the case of a grant of an Option to an Employee
that is intended to be a tax qualified stock option, is consistent with Code
Section 422, the Regulations thereunder, and this Plan; and
(c) in its discretion, interpret the Plan, adopt, amend and rescind rules
and regulations relating to the Plan, and make all other determinations, and
take all other actions necessary or appropriate for the implementation and
administration of the Plan.
3.03 Decisions Final. All actions, decisions, interpretations and
determinations of the Committee on all matters relating to the administration
and operation of the Plan shall be within the Committee's sole discretion and
shall be final and conclusive. No members of the Committee shall be liable for
any action taken or decision made in good faith relating to the Plan or any
award thereunder.
3.04 Indemnification of Committee. The Company indemnifies and holds
harmless the members of the Committee in their capacity as Committee members
against all liability and expenses (including reasonable attorney, paralegal,
and professional fees and court costs) arising from any threatened, pending or
completed action, suit, proceeding (including administrative proceedings or
investigations) or appeal, incurred by reason of the fact that such individual
is or was a member of the Committee, provided that such individual (i) acted, or
failed to act, in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, the best interests of the Company as well as the
Employees and Optionees, or (ii) with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
3
<PAGE>
ARTICLE IV
ELIGIBILITY AND SCOPE
---------------------
4.01 Eligibility for Participation. Optionees under the Plan shall be
selected by the Committee from amongst the Employees. An Optionee must be
employed by the Company at the time the Option is granted. In making this
selection and in determining the form and amount of awards, the Committee shall
consider any factors deemed relevant, including the Employee's functions,
responsibilities, value of services to the Company, and past and potential
contributions to the Company's profitability and growth.
4.02 Aggregate Limitations on Awards. Subject to the recapitalization
provisions of Section 7.01 below, the maximum number of Shares of Common Stock
which may be issued under the Plan shall be 1,500,000. The Shares of Common
Stock may be authorized but unissued Shares, or may be treasury stock of the
Company. If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
to an Option shall again become available for a future grant under the Plan,
unless the Plan previously shall have been terminated.
ARTICLE V
GRANT OF OPTIONS
----------------
5.01 Grant of Options. The Committee may, from time to time and subject to
the provisions of the Plan and such rules and regulations as are prescribed by
the Committee, grant to any Employee one or more Options to purchase a stated
number of Shares of Common Stock for (i) cash, (ii) the exchange for Shares of
Common Stock previously acquired by the Employee, (iii) in the discretion of the
Committee, by delivery of the Optionee's personal recourse promissory note
bearing interest payable not less than annually at no less than 100% of the
lowest applicable federal rate as specified by the Internal Revenue Code and
Internal Revenue Service, or (iv) in the discretion of the Committee, by some
combination of the foregoing.
5.02 Option Agreements. The grant of an Option shall be evidenced by a
written Option Agreement, executed by the Company and the Optionee, stating the
number of Shares of Common Stock subject to the Option evidenced thereby, and in
such form as the Committee may from time to time determine. Such Option
Agreement shall state on its face whether the Option is intended to be a tax
qualified, incentive stock option under Code Section 422 or a nonqualified,
stock option subject to Code Section 83.
4
<PAGE>
5.03 Option Price.
A. With respect to an Option granted to an Employee that is intended to be
a tax qualified, incentive stock Option under Code Section 422, the price per
Share of Common Stock deliverable upon the exercise of the Option shall not be
less than one hundred percent (100%) of the fair market value of a Share of
Common Stock on the Grant Date. Notwithstanding the foregoing, in the event an
Employee to whom the Option is to be granted owns Shares of Common Stock, as of
the Grant Date, that comprise more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company, or its parent or
subsidiaries, if any, the foregoing price per Share of Common Stock shall not be
less than one hundred ten percent (110%) of the fair market value of a Share of
Common Stock on the Grant Date.
B. The price per Share specified in the agreement relating to each
nonqualified, stock Option subject to Code Section 83 granted under the Plan
shall in no event be less than the lesser of (i) the book value per Share of
Common Stock as of the end of the fiscal year of the Company immediately
preceding the date of such grant, or (ii) fifty percent (50%) of the fair market
value per Share of Common Stock on the date of such grant.
5.04 Determination of Fair Market Value. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded, "fair
market value" shall be determined as of the last business day for which the
prices or quotes discussed in this sentence are available prior to the date such
Option is granted and shall mean (i) the average (on that date) of the high and
low prices of the Common Stock on the principal national securities exchange on
which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the NASDAQ National Market List, if the Common
Stock is not then traded on a national securities exchange; or (iii) the closing
bid price (or average of bid prices) last quoted (on that date) by an
established quotation service for over-the-counter securities, if the Common
Stock is not reported on the NASDAQ National Market List. However, if the Common
Stock is not publicly traded at the time an Option is granted under the Plan,
"fair market value" shall be deemed to be the fair market value of the Common
Stock as determined by the Committee after taking into consideration all factors
which it deems appropriate including, without limitation, recent sale and offer
prices of the Common Stock in private transactions negotiated at arm's length.
Notwithstanding the foregoing, the fair market value of the Common Stock shall
be determined without regard to any restrictions other than a restriction which,
by its terms, will never lapse.
5.05 Maximum Amount of Grant. With respect to an Option granted to an
Employee that is intended to be a tax qualified, incentive stock Option under
Code Section 422, the aggregate, fair market value of the Shares of Common Stock
that may be subject to an Option (and to any other incentive stock options
granted by the Company or its parent or subsidiaries, if any) and that shall be
exercisable for the first time by the Optionee in a calendar year shall not
exceed $100,000.00. For purposes of this Section, the fair market value of the
Common Stock shall be determined as of the Grant Date. Such $100,000.00 limit
shall not apply to nonqualified, stock options granted to Employees.
5
<PAGE>
5.06 Term of Plan. Unless the Plan is terminated earlier by the Board, no
award of an Option shall be made under the Plan after the date which is ten (10)
years after the earlier of the date the Plan was adopted by the Board or the
date the Plan was approved by the shareholders of the Company. Provided,
however, that the Plan and all Options granted under the Plan prior to the
termination of the Plan shall remain in effect until such Options have been
exercised, satisfied or terminated in accordance with the Plan and the terms of
such Options.
5.07 Term of Options. Except as provided in Article VI below, the term of
each Option shall be no more than ten (10) years from the date of the grant.
Notwithstanding the foregoing, in the event the Employee to whom an Option
intended to be a tax qualified, incentive stock option under Code Section 422 is
to be granted owns Shares of Common Stock, as of the Grant Date, that comprise
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or its parent or subsidiaries, if any, the term of each
Option to such Employee shall be no more than five (5) years from the date of
the grant.
5.08 Other Terms. In addition to the foregoing terms and conditions, the
Committee may impose such additional terms, conditions and restrictions,
including a vesting schedule, as are not otherwise inconsistent with this Plan.
ARTICLE VI
EXERCISE OF OPTION
------------------
6.01 Procedure for Exercise.
A. Any Option granted hereunder shall be exercisable at such times and
under such terms and conditions as are determined by the Committee at the time
of the grant and as are consistent with the terms of the Plan. An Option shall
be deemed to be exercised when written notice of such exercise, along with full
payment (be it in cash, promissory note or by the transfer of other Shares, in
accordance with Section 5.01 above) for the Shares, has been delivered to the
Secretary of the Company in accordance with the terms of the Option. Until the
issuance of the stock certificate by the Company or its transfer agent, the
Optionee shall have no right to vote the Shares nor to receive dividends, and
shall not have any other rights as a stockholder of the Company with respect to
the Shares of Common Stock subject to the Option. The Company or its transfer
agent shall issue, or cause to be issued, such Common Stock certificate promptly
upon exercise of the Option.
B. The exercise of an Option in any manner shall result in a decrease in
the number of Shares available for grant under the terms of the Plan and under
the terms of the Option.
6
<PAGE>
6.02 Termination of Employment. In the case of an Option granted to an
Employee that is intended to be a tax qualified, incentive stock option under
Code Section 422 (not including such an Option converted to a nonqualified stock
option within the scope of Code Section 83 under Paragraph 7.07 hereunder), in
the event the employment of the Optionee terminates, whether voluntarily or
involuntarily, such Employee may exercise his or her Options to the extent
exercisable at the time of such termination of employment. Such exercise shall
occur within the earlier of the remaining term of the option or sixty (60) days
from such termination of employment (or such shorter period as is specified by
the Committee in the Option Agreement). To the extent that the Optionee was not
entitled to exercise the Option at the effective date of the Optionee's
termination of employment or service to the Company, or the Optionee fails to
exercise the Option within the time specified, the Option shall terminate.
6.03 Disability of Optionee. In the case of an Option granted to an
Employee that is intended to be a tax qualified, incentive stock option under
Code Section 422, in the event the employment of the Optionee terminates due to
the disability of the Optionee, such Optionee may exercise his or her Options to
the extent exercisable at the time of such termination of employment. Such
exercise shall occur within the earlier of the remaining term of the option or
one hundred eighty (180) days after the effective date of the Optionee's
termination of employment. For purposes of this Section 6.03, "disability" shall
be as defined in Code Section 22(e)(3) and the Regulations thereunder.
6.04 Death of Optionee.
A. In the event of the death of an Employee to whom an Option that is
intended to be a tax qualified, incentive stock option under Code Section 422
has been granted, any Option exercisable on the date of the Optionee's death may
be exercised by the Beneficiary, provided that such exercise occurs within the
earlier of the remaining term of the Option or one hundred eighty (180) days
from the date of the Optionee's death. In the event the Optionee's employment
had terminated prior to death, but the Option was still exercisable pursuant to
Sections 6.01, 6.02 or 6.03 above, the Beneficiary shall be permitted to
exercise the Option during the time periods specified in this Section 6.04.
B. In the case of the death, an Option granted to an Employee that is
intended to be a nonqualified stock option under Code Section 83 may be
exercised, to the extent exercisable at death, at any time during the remaining
term of the Option.
6.05 Options Non-Transferable. Any Option granted hereunder may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of, in any
manner other than by the Optionee's last will or by the laws of descent and
distribution, and may be exercised during the Optionee's lifetime, only by the
Optionee.
6.06 Manner of Payment. Upon the exercise of an Option, the Optionee shall
pay to the Company, at the Committee's discretion:
7
<PAGE>
(a) the cost of the Shares of Common Stock in cash;
(b) in exchange for Shares of Common Stock previously acquired by the
Optionee that at the time of such exercise have a fair market value equal to the
exercise price;
(c) by delivery of a personal recourse note bearing interest payable not
less than annually at no less than 100% of the lowest applicable federal rate as
specified by the Internal Revenue Code and Internal Revenue Service; or
(d) any combination thereof.
6.07 Restrictions on Certain Shares. The Shares of Common Stock issued to
an Optionee pursuant to this Plan shall be subject to any and all federal and
state securities laws, rules and regulations generally applicable to the Common
Stock of the Company, including without limitation, any restrictions on the sale
or other transfer of the Shares of Common Stock. Any certificate representing
such Shares shall contain a restrictive legend evidencing the existence of any
such restrictions.
ARTICLE VII
MISCELLANEOUS
-------------
7.01 Recapitalizations.
A. Subject to any required action by the stockholders of the Company, the
number of Shares of Common Stock covered by each outstanding Option, and the
number of Shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination, or reclassification of the Common Stock, or any
other increase or decrease in the number of issued Shares of Common Stock
effected without receipt of consideration by the Company. Provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Any adjustment made
pursuant to this Section shall be made by the Committee, whose determination in
that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares of Common Stock subject to an Option.
B. Except as declared by the Board, in the event of the dissolution or
liquidation of the Company, the Options granted under the Plan immediately shall
terminate.
8
<PAGE>
C. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, the Option shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless such successor corporation does not agree to
assume the Option or to substitute an equivalent option, in which case the
Optionee shall retain the right to exercise the Option (which right shall no
longer be subject to restrictions, including vesting provisions) as to all of
the Shares of Common Stock subject to the Option through the date of the sale of
the assets or the merger of the Company. Thereafter, the Option shall terminate.
In the event any of the Options are not fully vested at the time of such sale or
merger, such Options shall become fully vested and exercisable at that time.
D. In the event of a recapitalization or reorganization of the Company
(other than a transaction described in subparagraph C above) pursuant to which
securities of the Company or of another corporation are issued with respect to
the outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price upon such exercise the
securities he would have received if he had exercised his Option prior to such
recapitalization or reorganization.
E. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class or securities convertible into shares of stock of
any class shall affect, and no adjustment by reason thereof shall be made with
respect to the number or price of shares subject to Options. No adjustments
shall be made for dividends paid in cash or in property other than securities of
the Company.
F. No fractional shares shall be issued under the Plan and the Optionee
shall receive from the Company cash in lieu of such fractional shares.
7.02 Withholding Taxes. Whenever the Company is required to issue or
transfer Shares of Common Stock under the Plan, the Company shall have the right
to require the Optionee to remit to the Company any amount sufficient to satisfy
any required federal, state and/or local withholding taxes prior to the delivery
of any certificate or certificates for such Shares. Alternatively, the Company
may issue or transfer such Shares of Common Stock, net of the number of Shares
of Common Stock sufficient to satisfy the withholding requirements. For
withholding tax purposes, the Shares of Common Stock shall be valued on the date
the withholding obligation is incurred.
7.03 Right to Terminate Employment. Nothing in the Plan or Option, or in
any agreement entered into pursuant to the Plan shall confer upon any Employee
the right to continue in the employ of the Company or effect any right which the
Company may have to terminate the employment of such Employee regardless of the
effect of such termination of employment on the rights of the Employee under the
Plan or any Option.
7.04 Non-Uniform Determinations. The Committee's determinations under the
Plan (including without limitation determinations of the Employees to receive
awards, the form, amount and timing of such awards, the terms and
9
<PAGE>
provisions of such awards and the agreements evidencing same) need not be
uniform and may be made by the Committee selectively among Employees who
receive, or who are eligible to receive, awards under the Plan, whether or not
such persons are similarly situated.
7.05 Leaves of Absence. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those attributable
to illness, military obligations or governmental service) provided that the
period of such leave does not exceed 90 days or, if longer, any period during
which such Optionee's right to reemployment is guaranteed by statute. A bona
fide leave of absence with the written approval of the Committee shall not be
considered an interruption of employment under the Plan, provided that such
written approval contractually obligates the Company to continue the employment
of the Optionee after the approved period of absence. Options under the Plan
shall not be affected by any change of employment within or among the Company,
so long as the Optionee continues to be an employee of the Company.
Notwithstanding the foregoing, the Committee shall be entitled to make such
rules, regulations and determinations as it deems appropriate under the Plan in
respect of any leave of absence taken by an Optionee.
7.06 Amendment of Plan.
A. The Board may, without further action by the shareholders of the
Company, and without receiving any further consideration from the Optionees,
amend this Plan or condition or modify awards under this Plan in respect to
changes in securities, taxation or other laws or rules, regulations, or
regulatory interpretations thereof applicable to this Plan, or to comply with
stock exchange rules or requirements.
B. The Committee may at any time, and from time to time, terminate, modify
or amend the Plan (including modifying the mix of Shares to be issued pursuant
to Code Sections 422 and 83) in any respect, except that without shareholder
approval, the Committee may not (i) increase the aggregate, maximum number of
Shares of Common Stock which may be issued under the Plan (other than increases
pursuant to Section 7.01), (ii) extend the period during which any award may be
granted or exercised, or (iii) extend the term of the Plan. Except as required
or permitted by the preceding paragraph, the termination, modification or
amendment of the Plan shall not affect an Optionee's rights under an award
previously granted to such Optionee.
7.07 Conversion of Qualified Options Into Non-Qualified Options. The
Committee, at the written request of any Optionee may, in its discretion, take
such actions as may be necessary to convert such Optionee's tax qualified,
incentive stock option within the meaning of Code Section 422 (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into nonqualified, stock options within the scope of
Code Section 83 at any time prior to the expiration of such Qualified Options,
regardless of whether the Optionee is an Employee of the Company at the time of
such conversion. Such actions may include, but not be limited to, extending the
exercise period or reducing the exercise price of the appropriate installments
of such Options. At the time of such conversion, the Committee (with the consent
of the Optionee) may impose such conditions on the exercise of the resulting
10
<PAGE>
nonqualified options as the Committee, in its discretion, may determine,
provided that such conditions shall not be inconsistent with this Plan. Nothing
in the Plan shall be deemed to give any Optionee the right to have such
Optionee's tax qualified, incentive stock option converted into a nonqualified
option, and no such conversion shall occur until and unless the Committee takes
appropriate action.
7.08 Application of Funds. The proceeds received by the Company from the
sale of Shares pursuant to Options granted and purchases authorized under the
Plan shall be used for general corporate purposes.
7.09 Notice to Company of Disqualifying Disposition. Each Employee who
receives a tax qualified, incentive stock option within the meaning of Code
Section 422 must agree to notify the Company in writing immediately after the
Employee makes a "disqualifying disposition" of any Shares of Common Stock
acquired pursuant to the exercise of a tax qualified, incentive stock option. A
disqualifying disposition is any disposition (including any sale) of such Shares
of Common Stock before the later of (a) two (2) years after the date the
Employee was granted the tax qualified, incentive stock option or (b) one (1)
year after the date the Employee acquired Shares of Common Stock by exercising
the tax qualified, incentive stock option. If the Employee has died before such
Shares of Common Stock are sold, these holding period requirements do not apply
and no disqualifying disposition can occur thereafter.
7.10 Governing Law; Construction. The validity and construction of the Plan
and any instrument evidencing Common Stock rights shall be governed by the laws
of the State of Nevada. In construing this Plan, the singular shall include the
plural and the masculine gender shall include the feminine and neuter, unless
the context otherwise requires.
7.11 Shareholder Approval. In the event this Plan is not adopted by the
shareholders of the Company by October 13, 1998, the Plan shall remain in
effect, but all options granted hereunder, or to be granted hereunder, shall be
nonqualified stock options under Code Section 83 and Regulations issued
thereunder.
Originally adopted by the Board of Directors as of October 13, 1997 and amended
by the Board of Directors as of June 23, 1998.
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> dollar
<S> <C> <C>
<PERIOD-TYPE> 12-mos 12-mos
<FISCAL-YEAR-END> Dec-31-1998 Dec-31-1997
<PERIOD-START> Jan-01-1998 Jan-01-1997
<PERIOD-END> Dec-31-1998 Dec-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 464 213
<SECURITIES> 749 881
<RECEIVABLES> 3,498 5,379
<ALLOWANCES> 1,565 133
<INVENTORY> 10,566 11,504
<CURRENT-ASSETS> 15,974 20,498
<PP&E> 8,829 8,805
<DEPRECIATION> 5,323 4,598
<TOTAL-ASSETS> 26,827 31,665
<CURRENT-LIABILITIES> 9,401 10,191
<BONDS> 0 0
0 0
0 0
<COMMON> 3,027 3,021
<OTHER-SE> 5,644 11,013
<TOTAL-LIABILITY-AND-EQUITY> 26,827 31,665
<SALES> 29,530 45,376
<TOTAL-REVENUES> 29,530 45,376
<CGS> 22,864 39,003
<TOTAL-COSTS> 33,696 52,974
<OTHER-EXPENSES> (56) (426)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 797 932
<INCOME-PRETAX> (4,907) (8,104)
<INCOME-TAX> 0 3,870
<INCOME-CONTINUING> (4,907) (11,974)
<DISCONTINUED> (725) (2,836)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,405) (14,810)
<EPS-PRIMARY> (1.07) (2.92)
<EPS-DILUTED> (1.07) (2.92)
</TABLE>
