BK Technologies Corp — Interim / Quarterly Report 1999

Aug 10, 1999

================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED June 30, 1999 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 or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7505 Technology Drive West Melbourne, Florida ---------------------------------------- (Address of principal executive offices) 32904 ---------- (Zip Code) Registrant's telephone number, including area code: (407) 984-1414 -------------- 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 --- --- Common Stock, $.60 Par Value -- 5,046,156 shares outstanding as of July 2, 1999 ================================================================================ PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS RELM WIRELESS CORPORATION Condensed Consolidated Balance Sheets (In thousands) June 30, December 31, 1999 1998 ----------- ------------ (Unaudited) (See Note 1 ASSETS Current Assets: Cash and cash equivalents ..................... $ 87 $ 464 Accounts receivable, net ...................... 4,853 3,498 Inventories ................................... 10,762 10,566 Investment securities - trading ............... 1 749 Notes receivable .............................. 400 400 Real estate investments held for sale ......... -- 58 Prepaid expenses and other current ............ 255 239 ------- ------- Total Current Assets ............................ 16,358 15,974 Property, Plant and Equipment, net .............. 8,520 8,829 Notes Receivable ................................ 1,295 1,695 Other Assets .................................... 485 329 ------- ------- Total Assets .................................... $26,658 $26,827 ======= ======= See notes to condensed consolidated financial statements. 1 ITEM 1 - FINANCIAL STATEMENTS - Continued RELM WIRELESS CORPORATION Condensed Consolidated Balance Sheets (In thousands except share data)

See notes to condensed consolidated financial statements. 2 ITEM 1 - FINANCIAL STATEMENTS - Continued RELM WIRELESS CORPORATION Condensed Consolidated Statements of Operations (Unaudited) (In thousands except share data)

See notes to condensed consolidated financial statements. 3 ITEM 1 - FINANCIAL STATEMENTS - Continued RELM WIRELESS CORPORATION Condensed Consolidated Statements of Cash Flow (Unaudited) (In thousands)

See notes to condensed consolidated financial statements. 4 ITEM 1 - FINANCIAL STATEMENTS - Continued Notes to Condensed Consolidated Financial Statements (Unaudited) (In thousands except share data) 1. Condensed Consolidated Financial Statements The condensed consolidated balance sheet as of June 30, 1999, the condensed consolidated statements of operations for the three months and six months ended June 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 1998 have been prepared by RELM Wireless Corporation (the Company), without audit. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation have been made. The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 1998 Annual Report to Shareholders. The results of operations for the three and six month period ended June 30, 1999 are not necessarily indicative of the operating results for a full year. The Company maintains its records on a calendar year basis. The Company's first, second, and third quarters normally end on the Friday closest to the last day of the last month of such quarter, which was July 2, 1999 for the second quarter of fiscal 1999. However, for convenience, the financial statements are dated as of June 30, 1999. The quarter began on April 3, 1999. 2. Inventories The components of inventory consist of the following: June 30, December 31, 1999 1998 -------- ------------ Finixhed Goods ................... $ 4,146 $ 4,641 Work in Process................... 2,218 1,945 Raw Materials..................... 4,398 3,980 ------- ------- $10,762 $10,566 ======= ======= 5 ITEM 1 - FINANCIAL STATEMENTS - Continued 3. Stockholders' Equity The consolidated changes in stockholders' equity for the six months ended June 30, 1999 are as follows:

1. Earnings Per Share The following table sets forth the computation of basic and diluted earning (loss) per share:

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. 6 ITEM 1 - FINANCIAL STATEMENTS - Continued 5. Comprehensive Income Total comprehensive income for the three months and six months ended June 30, 1999 was $77 and $132, respectively, compared to losses of $650 and $851, respectively, for the same periods in the previous year. 6. Real Estate Assets Held for Sale The summarized results of operations of the real estate business for the six months ended June 30, 1999 are as follows:

All of the remaining property held for sale was sold during the second quarter. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS Results of Operations As an aid to understanding the Company's operating results, the following table shows each item from the consolidated statement of operations expressed as a percentage of net sales:

Net Sales Net sales for the three months ended June 30, 1999 increased approximately $58,000 compared to the same period for the prior year. Revenues for the Company's core Land Mobile Radio Products (LMR) increased $1,155,000 (16.4%) for the same period. This increase is the result of product shipments to the U.S. Army. Conversely, Non-LMR product revenues decreased $1,097,000 (15.4%) as the Company discontinued business and products that were inadequately profitable or that did not fit its focus in LMR products. Also during the quarter, the Company completed its exit from the commercial real estate business by selling its remaining holdings for approximately $110,000. Net sales for the six months ended June 30, 1999 decreased $1,192,000 (8.1%) compared to the same period for the prior year. This decrease is the result of discontinuing businesses and products that were inadequately profitable or that did not fit the Company's focus in LMR products. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS - Continued Gross Margin Gross margin as a percentage of net sales increased 6.3% to 29.0% for the three months ended June 30, 1999 compared to the same period for the prior year. This increase was the result of the Company's restructuring, which significantly reduced manufacturing support expenses, and eliminated poorly performing products and busineses. Improved product mix, volumes, and pricing also contributed to the margin increase. Gross margin as a percentage of net sales increased 7.9% to 29.5% for the six months ended June 30, 1999 compared to the same period for the prior year. During the six months, in addition to the aforementioned factors, commercial real estate sales totaling approximately $908,000 improved the overall gross margin percentage. The book value of the real estate had been significantly reduced in prior periods as the Company increased valuation allowances to reflect current market projections. The Company completed its exit from this business in the second quarter. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses consist of marketing, sales, commissions, engineering, research and development, management information systems, accounting, and headquarters expenses. For the three months ended June 30, 1999, SG&A expenses totaled $1,876,000 or 26.3% of sales compared to $2,239,000 or 31.7% of sales for the same period in 1998. For the six months ended June 30, 1999 SG&A expenses totaled $3,647,000 or 26.8% of sales compared to $3,933,000 or 26.6% of sales for the same period in 1998. These decreases reflect lower research and development expenses in the current year related to new product initiatives that were largely completed during 1998. Interest Expense For the three months ended June 30, 1999 interest expense totaled $279,000 or 3.9% compared with $202,000 or 2.8% for the same period in 1998. This increase is primarily due to increased debt levels on the Company's revolving line of credit and the financing arrangement associated with the Company's workers' compensation liabilities. Under this arrangement, the insurance carrier assume all of the remaining workers' compensation liabilities. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS - Continued Income Taxes No income tax provision was provided for the three or six months ended June 30, 1999 as the Company has net operating loss carryforward benefits totaling approximately $9.4 million at June 30, 1999. The Company has evaluated its tax position versus the requirements of SFAS No. 109, Accounting for Income Taxes, and does not believe that it has met the more-likely-than-not criteria for recognizing a deferred tax asset and has provided valuation allowances against net deferred tax assets. Inflation and Changing Prices Inflation and changing prices for the quarters and six months ended June 30, 1999 and 1998 have contributed to increases in wages, facilities, and raw material costs. Effects of these inflationary effects were partially offset by increased prices to customers. The Company believes that it will be able to pass on most of its future inflationary increases to its customers. The Company is also subject to changing foreign currency exchange rates in its purchase of some raw materials. The Company employs several methods to protect against increases in cost due to currency fluctuations. It is not always possible to pass on these effects. Competitors in the LMR markets are subject to similar fluctuations. 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, which is year 2000 compliant, was implemented by the Company in July 1999. Costs associated with the upgrade were approximately $20,000 and have been recognized in operating expenses. It is the Company's policy to utilize the most current releases of software. The aforementioned upgrade would have been performed regardless of the year 2000 issue. No other information technology projects are impacted by the upgrade. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued Year 2000 Discussion - Continued Third Party Relationships The Company has material relationships with certain suppliers and customers. Generally, suppliers provide components that are necessary to manufacture a finished product. The Company's products are sold primarily to dealers and distributors who resell to 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. The questionnaire program began in the third 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 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. Liquidity and Capital Resources As of June 30, 1999, the Company had working capital of $9,487,000 compared with $6,573,000 as of December 31, 1998. The increase is primarily related to a $1,870,000 decrease in accrued expenses and a $1,355,000 increase in accounts receivable. The Company entered into a new agreement for a revolving line of credit on February 26, 1999. This agreement provides a $7 million line of credit for a term of three years. The terms and conditions are comparable to the previous agreement. The line of credit is secured by substantially all of the Company's non-real estate assets. As of June 30, 1999, the outstanding balance on the line was approximately $5.6 million. Capital expenditures for the three months and six months ended June 30, 1999 were approximately $156,000 and $402,000 respectively, compared with $104,000 and $518,000 respectively, for the same periods in 1998. These expenditures are related to tooling for the manufacture of new products. 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 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Continued Forward-Looking Statements - Continued and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; changes in customer preferences; competition; changes in technology; the integration of any acquisitions; changes in business strategy; the indebtedness of the Company; quality of management, business abilities and judgment of the Company's personnel; the availability, terms and deployment of capital; and various other factors referenced in this Report. The words "believe", "estimate", "expect", "intend", "anticipate", "will", "may", and similar expressions and variations thereof identify certain of such forward-looking statements. The forward-looking statements are made as of the date of this Report, and the Company assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK 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 June 30, 1999 the amount outstanding on the mortgage was approximately $3.8 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. 12 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K a) The following documents are filed as part of this report: 3. exhibits: The exhibits listed below are filed as a part of, or incorporated by reference int this report: Number Exhibit ------ ------- 27 Financial Data Schedule b) Reports on Form 8-K The Registrant was not required to file reports on Form 8K during the quarter ended June 30, 1999. Pursuant to the requirements of securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. RELM WIRELESS CORPORATION ------------------------------ William P. Kelly Chief Financial Officer and Vice President - Finance August 5, 1999