-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N9Hj0oMpGn+hKK/CH4Vde20i7jY+OPeN0z3vjBo3w5XLu2faylyt+YNoD1ihpRvI kBWcuedMx3/T0j0USDOO6A== 0000950115-99-000457.txt : 19990402 0000950115-99-000457.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950115-99-000457 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELM WIRELESS CORP CENTRAL INDEX KEY: 0000002186 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 042225121 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07336 FILM NUMBER: 99580303 BUSINESS ADDRESS: STREET 1: 7505 TECHNOLOGY DRIVE CITY: WEST MELBOURNE STATE: FL ZIP: 32904 BUSINESS PHONE: 2154303900 MAIL ADDRESS: STREET 1: 750 TECHNOLOGY DRIVE CITY: WEST MELBOURNE STATE: FL ZIP: 32904 FORMER COMPANY: FORMER CONFORMED NAME: ADAGE INC DATE OF NAME CHANGE: 19920703 10-K405 1 ANNUAL REPORT ============================================================================== 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 ---------- ---------- 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. ============================================================================== 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 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 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:
$In Millions ------------ 1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
(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 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 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 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 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 $7.5 billion with annual growth of approximately 10%. RELM competes with many domestic and foreign companies in these markets. One competitor holds an estimated market share of approximately 70%. The Company competes in these markets by capitalizing on its strengths, including quality, speed, and customer responsiveness. The Company believes that it is competitive with regard to these factors. Employees - --------- The company employed 231 people as of December 31, 1998. 7 ITEM 1. BUSINESS -- Continued - ----------------------------- Information Relating to Domestic and Export Sales - ------------------------------------------------- The following table summarizes the Company's sales of wireless communications equipment by location of its customers:
($ In Millions) 1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
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 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 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 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 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 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:
For Withheld --- -------- 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
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 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.
1997 Quarter Ended High Low ------------------ ---- --- 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
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 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:
(In Thousands Except Share Data) 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- 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
All earnings (loss) per share amounts are computed and presented for all periods in accordance with SFAS No. 128, earnings per share. 15 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 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:
Percent of Net Sales Year Ended December 31, 1998 1997 1996 ----- ----- ----- 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%) ===== ===== =====
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 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 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 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 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 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 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 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 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 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 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 ITEM 8. FINANCIAL STATEMENTS - ---------------------------- The financial statements required by this item are contained in pages F-1 through F-29 of this report. 28 CONSOLIDATED FINANCIAL STATEMENTS RELM WIRELESS CORPORATION Years ended December 31, 1998, 1997 and 1996 with Reports of Independent Auditors F-1 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 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 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 RELM WIRELESS CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands)
December 31 1998 1997 ------------------------- 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 =========================
See accompanying notes. F-5 RELM WIRELESS CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands)
December 31 1998 1997 ------------------------- 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 =========================
See accompanying notes. F-6 RELM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Share Data)
Year ended December 31 1998 1997 1996 ------------------------------------ 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) ====================================
See accompanying notes. F-7 RELM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Thousands, Except Share Data)
Unrealized Gains (Losses) on Common Stock Additional Available ----------------------- Paid In Accumulated For Sale Shares Amount Capital Deficit Securities Total ------------------------------------------------------------------------------ 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 ==============================================================================
See accompanying notes. F-8 RELM WIRELESS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Year ended December 31 1998 1997 1996 ------------------------------------- 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
See accompanying notes. F-9 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 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 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 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:
December 31 1998 1997 ------------------------- Finished goods $ 4,641 $ 5,120 Work in process 1,945 2,245 Raw materials 3,980 4,139 ========================= $10,566 $11,504 =========================
F-13 3. Allowance for Doubtful Accounts The allowance for doubtful accounts is composed of the following:
Year ended December 31 1998 1997 1996 --------------------------------- 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 ================================
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:
Year ended December 31 1998 1997 1996 -------------------------- 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) ==========================
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 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:
Year ended December 31 1998 1997 1996 ------------------------------------- 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 =====================================
The summarized results of operations of the real estate business are as follows:
Year ended December 31 1998 1997 1996 ------------------------------------- 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) =====================================
F-15 6. Debt The debt consisted of the following:
December 31 1998 1997 ------------------------- 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 =========================
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 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:
1999 $ 762 2000 388 2001 387 2002 3,782 2003 288 Thereafter 2,468 ============= $8,075 =============
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 7. Leases (continued) Property, plant and equipment includes equipment purchased under capital leases at December 31 as follows:
1998 1997 ------------------------- Cost $3,672 $3,672 Accumulated depreciation (1,671) (1,098) ------------------------- $2,001 $2,574 =========================
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:
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 =============
F-18 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:
1998 1997 1996 ------------------------------------- Loss from continuing $ -- $3,870 $(266) operations Loss from discontinued -- -- (434) operations Loss on disposal of discontinued segment -- -- -- Extraordinary gain -- -- -- ===================================== $ -- $3,870 $(700) =====================================
F-19 8. Income Taxes (continued) The components of consolidated income taxes (benefit) for the years ended December 31 are as follows:
1998 1997 1996 ------------------------------------- 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)% =====================================
F-20 8. Income Taxes (continued) The deferred tax effect of temporary differences between financial and tax reporting at December 31 is as follows:
1998 1997 ------------------------- 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 $ -- $ -- =========================
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 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 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:
1998 1997 1996 ------------------------------------- U.S. government 24% 32% 21% Foreign markets 9 10 13
F-23 13. Earnings (Loss) Per Share The following table sets the computation of basic and diluted earnings (loss) per share from continuing operations:
Year ended December 31 1998 1997 1996 ------------------------------------- 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) =====================================
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 14. Stock Option and Other Stock Plans (continued) The following is a summary of all stock option plans:
Weighted Shares Option Average Under Price Per Exercise Option Share Price ------------------------------------- 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 =====================================
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 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 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:
Through Year ended June December 31, 1997 1996 --------------------------- 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 ===========================
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:
Through Year ended May December 31, 1997 1996 --------------------------- 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) ===========================
F-27 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 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 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH - ----------------------------------------- ACCOUNTANTS ON ACCOUNTING AND FINANCIAL --------------------------------------- DISCLOSURE ---------- None 29 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 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 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 EX-10.E 2 STOCK OPTION PLAN 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 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 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 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 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 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 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 (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 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 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 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 EX-27 3 FDS
5 1000 dollar 12-mos 12-mos Dec-31-1998 Dec-31-1997 Jan-01-1998 Jan-01-1997 Dec-31-1998 Dec-31-1997 1 1 464 213 749 881 3,498 5,379 1,565 133 10,566 11,504 15,974 20,498 8,829 8,805 5,323 4,598 26,827 31,665 9,401 10,191 0 0 0 0 0 0 3,027 3,021 5,644 11,013 26,827 31,665 29,530 45,376 29,530 45,376 22,864 39,003 33,696 52,974 (56) (426) 0 0 797 932 (4,907) (8,104) 0 3,870 (4,907) (11,974) (725) (2,836) 0 0 0 0 (5,405) (14,810) (1.07) (2.92) (1.07) (2.92)
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