<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 4, 1996
Commission File Number 0-27414
REMEC, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3814301
(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA 92123
(Address of principal executive offices) (Zip Code)
(619) 560-1301
(Registrant's telephone number, including area code)
Indicate by check 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 month (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 number of shares outstanding of each of the issuer's classes of common
stock, at the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding as of: AUGUST 4, 1996
----------- ---------------------------------
<S> <C>
Common shares,
$.01(cent)par value 7,865,665
</TABLE>
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<TABLE>
<CAPTION>
Index Page No.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets............................. 3
Condensed Consolidated Statements of Income....................... 4
Condensed Consolidated Statements of Cash Flows................... 5
Condensed Consolidated Statement of Changes in
Shareholder's Equity.............................................. 6
Notes to Condensed Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10
PART II OTHER INFORMATION
Item 4. Submission of matters to a vote of securityholders..................... 20
Item 6. Exhibits and Reports on Form 8-K ...................................... 20
SIGNATURES ........................................................................... 21
</TABLE>
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Part I - Financial Information
Item 1 - Consolidated Financial Statements
REMEC, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
August 4, January 31,
----------- -----------
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,433,488 $ 433,529
Accounts receivable, net 10,181,941 4,289,751
Inventories, net 12,738,160 11,089,664
Prepaid expenses and other current assets 1,611,420 1,253,541
----------- -----------
Total current assets 27,965,009 17,066,485
Property, plant and equipment, net 10,341,404 8,578,441
Deferred offering costs -- 1,108,424
Intangible and other assets 4,924,144 1,230,360
----------- -----------
$43,230,557 $27,983,710
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,177,537 $ 2,946,742
Accrued expenses 4,210,196 5,053,035
----------- -----------
Total current liabilities 7,387,733 7,999,777
Bank revolving term loan and line-of-credit -- 1,900,000
Other long-term liabilities 1,293,777 1,350,628
Shareholders' equity 34,549,047 16,733,305
----------- -----------
$43,230,557 $27,983,710
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------------- ---------------------------------
August 4, 1996 July 30, 1995 August 4, 1996 July 30, 1995
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 18,367,018 $ 12,648,631 $ 34,771,300 $ 25,595,399
Cost of sales 14,022,967 10,326,820 26,751,890 20,340,692
------------ ------------ ------------ ------------
Gross profit 4,344,051 2,321,811 8,019,410 5,254,707
Operating expenses:
Selling, general and administrative 2,312,366 1,766,640 4,197,363 3,726,390
Research and development 798,144 87,915 1,523,656 255,268
------------ ------------ ------------ ------------
3,110,510 1,854,555 5,721,019 3,981,658
------------ ------------ ------------ ------------
Income from operations 1,233,541 467,256 2,298,391 1,273,049
Interest (income) expense (47,743) 36,318 (157,056) 79,856
------------ ------------ ------------ ------------
Income before provision for income taxes 1,281,284 430,938 2,455,447 1,193,193
Provision for income taxes 495,000 186,000 990,000 515,000
------------ ------------ ------------ ------------
Net income $ 786,284 $ 244,938 $ 1,465,447 $ 678,193
============ ============ ============ ============
Net income per share $ 0.10 $ 0.04 $ 0.19 $ 0.12
============ ============ ============ ============
Shares used in per share calculations 7,919,051 5,524,023 7,867,065 5,524,023
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended
-----------------------------------
August 4, 1996 July 30, 1995
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,465,447 $ 678,193
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,227,694 882,403
Changes in operating assets and liabilities:
Accounts receivable (4,764,425) (1,375,851)
Inventories (811,392) (1,686,988)
Prepaid expenses and other current assets (403,204) (84,559)
Accounts payable (367,614) (115,263)
Accrued expenses and other long-term
liabilities (1,151,385) 278,112
------------ ------------
Net cash used by operating activities (4,804,879) (1,423,953)
INVESTING ACTIVITIES
Additions to property, plant and equipment (3,082,477) (780,034)
Payment for acquisition, net of cash acquired (4,011,735) --
Other assets (133,988) --
------------ ------------
Net cash used by investing activities (7,228,200) (780,034)
FINANCING ACTIVITIES
Proceeds from bank revolving term loan, line-of-credit
and long-term debt -- 5,800,000
Repayments on bank revolving term loan, line-of-credit and
long-term debt (2,426,561) (3,800,000)
Proceeds from sale of common stock 16,351,175 --
Deferred offering costs 1,108,424 --
Cash dividends -- (54,800)
------------ ------------
Net cash provided by financing activities 15,033,038 1,945,200
Increase (decrease) in cash and cash equivalents 2,999,959 (258,787)
Cash and cash equivalents at beginning of period 433,529 368,346
------------ ------------
Cash and cash equivalents at end of period $ 3,433,488 $ 109,559
============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Convertible
preferred shares Common shares
----------------------------- -------------
Shares Amount Shares Amount
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Balance at January 31, 1996 718,607 $ 7,186 4,418,860 $ 44,189
Common stock issued in offering -- -- 2,264,893 22,649
Common stock issued under
stock purchase plan -- -- 94,228 942
Common stock issued upon
exercise of stock options -- -- 9,775 98
Conversion of preferred stock (718,607) (7,186) 1,077,909 10,779
Net income -- -- -- --
--------- ------------ --------- ------------
Balance at August 4, 1996 -- $ -- 7,865,665 $ 78,657
========= ============ ========= ============
</TABLE>
<TABLE>
<CAPTION>
Paid-in Retained
capital earnings Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 31, 1996 $ 7,526,903 $ 9,155,027 $ 16,733,305
Common stock issued in offering 15,628,152 -- 15,650,801
Common stock issued under
stock purchase plan 659,452 -- 660,394
Common stock issued upon
exercise of stock options 39,002 -- 39,100
Conversion of preferred stock (3,593) -- --
Net income -- 1,465,447 1,465,447
------------ ------------ ------------
Balance at August 4, 1996 $ 23,849,916 $ 10,620,474 $ 34,549,047
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Quarterly Financial Statements
The accompanying condensed consolidated financial statements and related
notes for the three and six month periods ended August 4, 1996 and July
30, 1995 are unaudited but include all adjustments (consisting of normal
recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of
operations of the Company for the interim periods. The results of
operations for the three and six month periods ended August 4, 1996 are
not necessarily indicative of the operating results to be expected for
the full fiscal year. The information included in this report should be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto and the other information set forth for the
year ended January 31, 1996 in the Company's Annual Report on Form 10-K.
Readers of this Quarterly Report on Form 10-Q are strongly encouraged to
review the Company's Annual Report on Form 10-K.
2. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
August 4, January 31,
-------------- --------------
1996 1996
---- ----
<S> <C> <C>
Raw materials $ 7,153,106 $ 7,356,389
Work in progress 8,175,084 7,838,947
-------------- --------------
15,328,190 15,195,336
Less unliquidated progress payments (2,590,030) (4,105,672)
-------------- --------------
$ 12,738,160 $ 11,089,664
============== ==============
</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$1,792,000 and $1,924,000 at August 4, 1996 and January 31, 1996,
respectively.
3. Net Income Per Share
Net income per share is computed based on the weighted average number of
common and common equivalent shares outstanding during each period using
the treasury stock method. Pursuant to the requirements of the Securities
and Exchange Commission, common and common equivalent shares issued
during the twelve-month period prior to the company's initial public
offering (see Note 4) have been included in the calculations as if they
were outstanding for all periods presented using the treasury stock
method. In addition, the calculation of the number of shares used in
computing net income per share also includes convertible preferred stock,
which converted into 1,077,909 common shares upon the closing of the
initial public offering, as if they were converted into common shares as
of the original dates of issuance.
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4. Initial Public Offering
In February, 1996, the Company completed an initial public offering (the
"IPO") of its common stock in which the Company sold a total of 2,264,893
shares of common stock at $8.00 per share. Concurrent with the closing of
the IPO, the 461,538 outstanding shares of Series A preferred stock and
257,069 outstanding shares of Series B preferred stock were converted
into 1,077,909 shares of common stock. The Company's proceeds from the
offering after deducting underwriting commissions of $1,268,340 and
expenses of $1,200,083 were $15,650,801. In connection with the Company's
IPO, certain shareholders also sold 1,185,107 shares as part of the
offering.
5. Acquisition
Effective April 30, 1996, the Company acquired all of the outstanding
common stock of RF Microsystems, Inc. ("RFM") and various VSAT (very
small aperture terminals) microwave design and manufacturing resources
from STM Wireless, Inc. ("STM") in exchange for cash consideration of
approximately $4,066,000. The acquisition has been accounted for as a
purchase, and accordingly, the total purchase price has been allocated to
the acquired assets and liabilities assumed at their estimated fair
values in accordance with the provisions of Accounting Principles Board
Opinion No. 16. The estimated excess of the purchase price over the net
assets acquired of $3,559,000 is being carried as intangible assets,
including purchased technology, and will be amortized over its estimated
life of 15 years.
In connection with the acquisition, the Company also received purchase
orders from STM totalling approximately $20 million for the design and
manufacture of commercial wireless C-Band VSAT equipment.
A summary of the RFM acquisition costs and a preliminary allocation of
the purchase price to the assets acquired and liabilities assumed is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Total acquisition cost:
Cash paid $ 3,933,000
Payment of acquisition related expenses 133,000
-----------
$ 4,066,000
===========
Allocated as follows:
Current assets $ 1,622,000
Machinery and equipment 320,000
Acquired intangibles 3,559,000
Liabilities assumed (1,435,000)
-----------
$ 4,066,000
===========
</TABLE>
Final purchase price adjustments, if any, will be determined at a later
date and may differ from the estimates presented above.
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6. Subsequent Event
On August 26, 1996, the Company acquired Magnum Microwave Corporation
("Magnum") in exchange for approximately 1,081,000 shares of the
Company's common stock. The transaction will be accounted for as a
pooling of interests; accordingly, commencing with the third quarter, all
of the Company's prior period financial statements will be restated as if
the transaction took place at the beginning of such periods.
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ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REMEC, Inc. (The "Company") commenced operations in 1983 and has
become a leader in the design and manufacture of microwave multi function
modules ("MFMs") for the defense industry. The Company's consolidated results of
operations include the operations of REMEC Microwave (Microwave), REMEC
Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey") and RF Microsystems
("RFM"), which was acquired on April 30, 1996, along with certain other VSAT
microwave design and manufacturing resources. On August 26, 1996, the Company
acquired Magnum Microwave Corporation in exchange for approximately 1,081,000
shares of REMEC common stock in a transaction that will be accounted for as a
pooling of interests.
The Company's microwave defense business is conducted at
Microwave, its commercial telecommunications business in conducted through
Wireless, its precision instrument business is conducted as Humphrey, and RFM
provides the Department of Defense with research and analysis, systems
engineering and test evaluation services.
Historically, substantially all of the Company's sales have been
to prime contractors to various agencies of the U.S. Department of Defense and
foreign defense contracts and governments. Beginning in 1995, the Company
entered the commercial wireless telecommunications market via the establishment
of Wireless. During 1996, the Company increased its capability in this market by
purchasing certain VSAT microwave design and manufacturing resources from STM
Wireless. Accordingly, the Company expects sales to the commercial
telecommunications market to represent an increasing percentage of revenues in
the future.
The Company's research and development efforts in the defense
industry are conducted in direct response to the unique requirements of a
customer's order and, accordingly, expenditures related to such efforts are
included in cost of sales and the related funding is included in net sales. As a
result, historical research and development expenses have been minimal. The
Company expects that, as its commercial business expands, research and
development expenses will increase in amount and as a percentage of sales.
The Company historically has experienced some fluctuations in
operating results attributable to various factors including the contractual
demands of major customers and defense spending budgetary constraints. In
addition, with the decline in available defense industry production programs,
the Company has placed more reliance on development contracts as a source of
defense revenues, resulting in an increased susceptibility to fluctuations due
to an increase in revenues from fixed price development contracts as a
percentage of total revenues. Development contracts carry reduced gross margins
and are typically for minimal hardware deliveries and sporadic non-hardware
revenue items which results in fluctuating revenues and gross margins.
Furthermore, a large portion of the Company's expenses are fixed and difficult
to reduce. If net sales do not meet the Company's expectations, the fixed nature
of the Company's expenses would exacerbate the effect on profitability of any
net sales shortfall.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total net
sales, certain consolidated statement of income data for the periods indicated.
Three months ended Six months ended
August 4, July 30, August 4, July 30,
1996 1995 1996 1995
--------- -------- --------- --------
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<TABLE>
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of goods sold 76 82 77 79
--- --- --- ---
Gross profit 24 18 23 21
Operating expenses:
Selling, general and administrative 13 14 12 15
Research and development 4 1 4 1
--- --- --- ---
Total operating expenses 17 15 16 16
--- --- --- ---
Income from operations 7 3 7 5
Interest (income) expense -- -- -- --
--- --- --- ---
Income before income taxes 7 3 7 5
Provision for income taxes 3 1 3 2
--- --- --- ---
Net income 4% 2% 4% 3%
=== === === ===
</TABLE>
Net Sales. Net sales were $18.4 million for the three months
ended August 4, 1996 and $34.8 million for the six month period ended August 4,
1996, representing increases of $5, 718,000 or 45% and $9,176,000 or 36%,
respectively, over the comparable prior year periods. The effects of a reduction
in defense Microwave sales were more than offset by increased sales at Humphrey
and Wireless. In addition, consolidated sales for the three and six month
periods ended August 4, 1996 include $1.4 million of sales by RFM, which was
acquired in April 1996. For the six month period ended August 4, 1996, Microwave
net sales decreased $3.5 million, Humphrey net sales increased $1.5 million, and
Wireless net sales increased $9.9 million versus the comparable prior year
period.
The decrease in Microwave sales is attributable to continued
reductions in available defense industry production programs as well as
continued pricing pressure on follow-on orders for programs for which the
Company participates. The Company believes that in the near term defense
procurement in the areas addressed by the Company is stabilizing; however, there
continues to be uncertainty in the amount of defense business that will be
available to the Company. In an effort to offset the potential of declining
defense revenues, the Company is focusing heavily upon the commercial wireless
telecommunications business. However, there can be no assurance that the Company
will be successful in the commercial wireless telecommunications market or that
the deployment of resources to that market will not have a material adverse
affect on the Company's defense business.
Results for the six month period ended July 30, 1995 include $2.4
million of non-recurring revenue, $0.9 million of gross profit and $0.3 million
of selling, general and administrative expenses associated with the settlement
of a termination claim for a large defense contract that was terminated in
December 1992. The increase in Humphrey revenues is primarily attributable to
increased shipments on production contracts for existing programs and customers.
Sales to commercial wireless customers were almost entirely attributable to the
production of microwave front-ends for P-COM and the production of commercial
C-Band VSAT equipment for STM.
Gross Profit. Gross profit was $4.3 million for the three months
ended August 4, 1996 and $8.0 million for the six month period ended August 4,
1996, representing increases of $2,022,000 or 87% and $2,765,000 or 53%,
respectively, over the comparable prior year periods. Gross margin was 24% for
the three months ended August 4, 1996 and 23% for the first six months of fiscal
1997 compared with 18% and 21%, respectively, for the corresponding prior year
periods. Gross margins for Microwave declined from 29% for the six months ended
July 30, 1995 to 17% for the six month period ended August 4, 1996. The
declining gross margins at Microwave were primarily the result of increasing
price competition, the reduced overhead absorption resulting from reduced
volume, continued reliance on development versus production business and the
positive impact on gross margins for the six month period ended July 30, 1995,
associated with the
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<PAGE> 12
termination claim settlement. Gross margins at Humphrey increased from 25% for
the six months ended July 30, 1995 to 30% for the six month period ended August
4, 1996. Humphrey gross margins for the six month period ended July 30, 1995
were adversely affected by losses on certain long-term contracts in place at the
time of the Company's acquisition of Humphrey. Humphrey gross margins for the
six month period ended August 4, 1996 reflect improved overhead absorption
attributable to increased volume. Gross margin for Wireless for the six month
period ended August 4, 1996 was 24% versus negative start up gross margins
during the comparable prior year period.
Selling, General and Administrative Expenses. Selling, general
and administrative ("S,G&A") expenses were $2.3 million for the three months
ended August 4, 1996 and $4.2 million for the six month period ended August 4,
1996, representing increases of $546,000 or 31% and $471,000 or 13%,
respectively, over the comparable prior year periods. These increases were
primarily attributable to S,G&A costs associated with the Wireless and RFM
operations, neither of which were significant contributors to prior year S,G&A
costs - Wireless was operating at start up levels during the second quarter of
fiscal 1996, while RFM was not included in prior year results at all as it was
not acquired until the second quarter of fiscal 1997. S,G&A expenses continue to
decline as a percentage of net sales as compared with the prior year, from 15%
for the six month period ended July 30, 1995 to 12% for the six month period
ended August 4, 1996. The Company expects to incur additional S,G&A expenses in
the future as it pursues the commercial wireless telecommunications market.
Research and Development Expenses. Research and development
expenses were $798,000 for the three months ended August 4, 1996 and $1,524,000
for the six month period ended August 4, 1996, as compared with $88,000 and
$255,000, respectively, for the comparable prior year periods. These increases
resulted primarily from expenses related to commercial wireless
telecommunications research and development expenses which totaled $1,089,000
during the first six months of the year.
Interest (Income)Expense. The Company's results of operations for
the three and six month periods ended July 30, 1995 included interest expense of
$36,000 and $80,000. By contrast, results of operations for the three and six
month periods ended August 4, 1996, included net interest income of $48,000 and
$157,000. The interest income during the current year reflects the increased
level of cash on hand as a result of the funds generated from the Company's
initial public offering which was consummated in February 1996. The interest
expense incurred during the prior year reflects interest on debt obligations
incurred in connection with the Humphrey acquisition.
Provision for Income Taxes. The Company's effective income tax
rate declined from 43% for the six month period ended July 30, 1995 to 40% for
the six month period ended August 4, 1996. The Company expects its future
effective tax rate to be approximately 40%.
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<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At August 4, 1996, the Company had $3.4 million of cash and cash
equivalents and $20.6 million of working capital. The company also has $15.0
million in available credit facilities consisting of a $9.0 million revolving
working capital line-of-credit and a $6.0 million revolving term loan. The
borrowing rates are prime and prime plus .5%, respectively. The revolving
working capital line-of-credit terminates June 1, 1997. The revolving period
under the term loan expires June 1, 1997, at which time any loan amount
outstanding converts to a term loan to be fully amortized and paid in full by
November 1, 2000. As of August 4, 1996, there were no borrowings outstanding
under the Company's credit facilities.
During the six month period ended August 4, 1996, the Company's
operations used net cash of approximately $4.8 million, primarily as a result of
the increase in accounts receivable resulting from the Company's increased level
of sales.
Investing activities utilized $7.2 million in cash during the six
month period ended August 4, 1996, primarily as a result of the acquisition of
RFM in exchange for cash consideration of $4.0 million and $3.1 million of
capital expenditures, the bulk of which were associated with the expansion of
the Company's commercial wireless telecommunications business. The above
expenditures were financed primarily by funds raised in the Company's initial
public offering. The Company's future capital expenditures will be substantially
higher than historical levels as a result of commercial wireless
telecommunications expansion requirements.
In February, 1996, the Company completed an initial public
offering ("IPO") of its common stock in which the Company sold a total of 2.3
million shares of common stock at $8.00 per share. The Company's proceeds from
the offering after deducting underwriting commissions and expenses was $15.7
million. The Company also realized proceeds of approximately $700,000 from
additional issuances of stock primarily attributable to the Company's Employee
Stock Purchase Plan. In addition to the funds invested in connection with the
acquisition of RFM, an additional $2.4 million of the IPO proceeds was utilized
to pay down certain bank obligations, including $526,000 of obligations assumed
in the acquisition of RFM.
The Company's future capital requirements will depend upon many
factors, including the nature and timing of orders by OEM customers, the
progress of the Company's research and development efforts, expansion of the
Company's marketing and sales efforts, and the status of competitive products.
The Company believes that available capital resources and the proceeds from its
initial public offering will be adequate to fund its operations for at least
twelve months. There can be no assurance, however, that the Company will not
require additional financing prior to such date. There can be no assurance that
any additional financing will be available to the Company on acceptable terms,
or at all. The inability to obtain such financing could have a material adverse
effect on the Company's business, financial condition and results of operations.
FUTURE OPERATING RESULTS
The statements in this Report on Form 10-Q that relate to future
plans, events or performance are forward-looking statements. REMEC's future
operations, financial performance, business and share price may be affected by a
number of factors, including the factors listed below, any of which could cause
actual results to vary materially from anticipated results. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. REMEC undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
Merger with Magnum. In August, 1996, the Company completed its
merger (the "Merger") with Magnum. The anticipated benefits of the Merger will
not be achieved unless the Company and Magnum are successfully combined in
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<PAGE> 14
an efficient and effective manner. The transition to a combined Company in which
Magnum is a wholly-owned subsidiary of the Company will require substantial
attention from management, which has limited experience in integrating companies
the size of REMEC and Magnum. The diversion of management attention and any
difficulties encountered in completing the merger or affecting the transition
process could have an adverse impact on the revenues and operating results of
the Company. There can be no assurance that the two companies will be
successfully integrated or that the consolidated operations of REMEC and Magnum
will be profitable.
Control by Management. The Company's executive officers
beneficially own a substantial portion of the outstanding shares of the Common
Stock of the Company and comprise four of the nine members of the Board of
Directors. As a result, such persons have the ability to exercise influence over
significant matters regarding the Company. Such a high level of influence may
have a significant effect in delaying, deferring or preventing a change in
control of the Company.
Potential Volatility of Stock Price. The market price of the
shares of Common Stock, like the stock prices of many technology companies, may
be subject to wide fluctuations in response to such factors as actual or
anticipated operating results, announcements of technological innovations, new
products or new contracts by the Company, its competitors or their customers,
government regulatory action, developments with respect to wireless
telecommunications, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the stocks of
technology companies and that have often been unrelated to the operating
performance of particular companies. The market price of REMEC Common Stock has
been volatile and may continue to be highly volatile.
Risks Associated With Entering Commercial Wireless
Telecommunications Market. Historically, the Company's business has been almost
exclusively focused on the defense market. The Company believes that its future
growth depends on its success in the commercial wireless telecommunications
market, a market in which it has only recently begun to compete. The Company
believes that while the technologies used in the defense and commercial
industries are very similar, the two industries differ significantly in terms of
the customer base, manufacturing requirements and lead times, the need to expend
substantial resources for research and development without the assurance of
reimbursement or recovery of those costs, and credit risks with customers. As a
result, the Company is subject to risks inherent in the operation of a new
business enterprise, including risks associated with attracting and servicing a
new customer base, manufacturing products in a cost effective and profitable
manner, managing the expansion of a business operation and attracting and
retaining qualified engineering, manufacturing and marketing personnel with
industry experience. For example, the Company believes that microwave engineers
with the skills necessary to develop products for the wireless
telecommunications market currently are in high demand and that the Company may
not be able to attract sufficient engineering expertise. There can be no
assurance that the Company will be successful in the commercial wireless
telecommunications market or that the deployment of resources to that market
will not have a material adverse effect on the Company's defense business.
Reliance on P-COM and STM; Customer Concentration and
Exclusivity. As of August 4, 1996, two customers, P-COM and STM, accounted for a
substantial portion of both total backlog and backlog scheduled for shipment in
the fiscal year ending January 31, 1997. P-COM, which produces point-to-point
millimeter wave radio systems for use in wireless telecommunications
applications, was founded in August 1991 and began commercial shipment of its
products in October 1993. P-COM experiences intense competition worldwide from a
number of leading telecommunications companies, most of which have substantially
greater installed bases, financial resources and other capabilities than P-COM,
and is subject to the risks inherent in the operation of a new business
enterprise. The sales agreement between the Company and P-COM provides that all
of the units will be delivered by June 1998. REMEC has agreed to sell the
products which are the subject of the agreement with P-COM exclusively to P-COM
and not to compete with P-COM in the sale of point-to-point radios under
conditions applicable to both parties. In April 1996, REMEC received orders from
STM for $20.0 million for the design and manufacture of C-Band VSAT equipment.
Aside from P-COM and STM, the Company derives significant revenues from a
limited group of customers, including TRW, Inc., Hughes Aircraft Company, Inc.
("Hughes Aircraft"), Westinghouse Electric Corporation ("Westinghouse"), Loral
Corporation, GEC Marconi Aerospace, Inc. ("GEC-
-14-
<PAGE> 15
Marconi"), Texas Instruments and Lockheed-Martin Corporation. The Company
anticipates that it will continue to sell products to a relatively small group
of customers. As a result, any cancellation, reduction or delay in orders by or
shipments to P-COM, STM, or any other significant customer, as a result of
manufacturing or supply difficulties or otherwise, or the inability of any
customer to finance its purchases of the Company's products would materially
adversely affect the Company's business, financial condition and results of
operations. The Company has granted P-COM exclusivity for certain products and
expects that in order to enter into other significant relationships in the
wireless telecommunications industry, customers will either expressly or
implicitly require exclusivity. In entering into such exclusive arrangements,
the Company will have to forego opportunities to supply products to competing
companies. If the Company enters into exclusive relationships with customers who
prove to be unsuccessful, the Company may be materially adversely affected and
the Company may be unable then to establish relationships with the industry
leaders. There can be no assurance that the Company will be able to locate, or
negotiate acceptable arrangements with, significant customers or that its
current or future arrangements with significant customers will continue or will
be successful.
Uncertainty of Emerging Markets in Wireless Telecommunications. A
number of the commercial markets for the Company's products in the wireless
telecommunications area have only recently begun to develop. Because these
markets are relatively new, it is difficult to predict the rate at which these
markets will grow, if at all. Existing or potential wireless telecommunications
market applications for the Company's products may fail to develop or may erode
for many different reasons, including insufficient growth to support expensive
infrastructure equipment, insufficient consumer demand for wireless products or
services because of pricing or otherwise, or real or perceived security risks
associated with wireless communications. If the markets for the Company's
products in commercial wireless telecommunications fail to grow, or grow more
slowly than anticipated, the Company's business, operating results and financial
condition could be materially adversely affected.
Dependence on Defense Market. A substantial portion of the
Company's sales has been to the defense market. As a result, the Company's sales
could be materially adversely impacted by a decrease in defense spending by the
United States government because of defense spending cuts, general budgetary
constraints or otherwise. The United States defense budget has recently been
reduced and may be further reduced. Fewer available defense industry production
programs, coupled with continued pricing pressure on follow-on orders for
programs on which the Company participates, caused sales of the Company's core
defense products - MFMs and components for microwave systems - to decline from
$35.3 million in the year ended January 31, 1994 to $26.9 million for the year
ended January 31, 1996. The Company expects to continue to derive a substantial
portion of its revenues from these business segments and to develop microwave
products for defense applications. Failure of the Company to replace sales
attributable to a significant defense program or contract at the end of that
program or contract, whether due to cancellation, spending cuts, budgetary
constraints or otherwise, could have a material adverse effect upon the
Company's business, operating results and financial condition in subsequent
periods. In addition, a large portion of the Company's expenses are fixed and
difficult to reduce, thus magnifying the material adverse effect of any revenue
shortfall. Also, defense contracts frequently contain provisions that are not
standard in private commercial transactions, such as provisions permitting the
cancellation of a contract if funding for a program is reduced or canceled. For
example, the government terminated a large defense program in December 1992 for
which the Company had been supplying in excess of $4 million of products on an
annual basis.
Risks of Cost Overruns and Product Non-performance. The Company's
customers establish demanding specifications for product performance,
reliability and cost. The Company's contract with P-COM to produce microwave
front ends for point-to-point radios and its contract with STM to produce C-Band
VSAT equipment, and a significant portion of the Company's defense contracts are
firm fixed-price ("FFP") contracts that provide for a predetermined fixed price
for stipulated products, regardless of the costs incurred. The Company has made
pricing commitments to P-COM and to other customers in anticipation of achieving
more cost effective product designs and introducing more widespread
manufacturing automation. A substantial portion of the P-COM backlog involves
the re-design by the Company of the entire point-to-point radio front end. The
Company faces the risk of experiencing cost overruns or order cancellation if it
fails to achieve forecasted product design and manufacturing efficiencies or if
products cost more to produce because of increased cost of materials, components
or labor or otherwise. Manufacture of the Company's products is an extremely
-15-
<PAGE> 16
complex process. The Company has in the past experienced cost overruns on FFP
contracts. There can be no assurance that cost overruns or problems with
performance or reliability of Company products will not occur in the future. Any
such cost overruns or performance problems may have a material adverse effect on
the Company's business, operating results and financial condition.
Fluctuations in Quarterly Results. The Company's quarterly
results have in the past been, and will continue to be, subject to significant
variations due to a number of factors, any one of which could substantially
affect the Company's results of operations for any particular fiscal quarter. In
particular, quarterly results of operations can vary due to the timing,
cancellation or rescheduling of customer orders and shipments, the pricing and
mix of products sold, new product introductions by the Company, the Company's
ability to obtain components and sub-assemblies from contract manufacturers and
suppliers, and variations in manufacturing efficiencies. In addition, with the
decline in available defense industry production programs, the Company has
placed more reliance on development contracts as a source of defense revenues,
resulting in an increased susceptibility to fluctuations due to an increase in
revenues from fixed price development contracts as a percentage of total
revenues. Development contracts carry reduced gross margins and are typically
for minimal hardware deliveries and sporadic non-hardware revenue items which
results in fluctuating sales and gross margins. Accordingly, the Company's
performance in any one fiscal quarter is not necessarily indicative of financial
trends or future performance.
Backlog. The Company's order backlog is subject to fluctuations
and is not necessarily indicative of future sales. There can be no assurance
that current order backlog will necessarily lead to sales in any future period.
The Company's order backlog as of August 4, 1996 was approximately $116.0
million, approximately 49% of which was attributable to commercial customers and
approximately 51% of which was attributable to defense customers. A substantial
amount of the Company's order backlog can be canceled at any time without
penalty, except, in some cases, the recovery of the Company's actual committed
costs and profit on work performed up to the date of cancellation. Cancellations
of pending purchase orders or termination or reductions of purchase orders in
progress from customers of the Company could have a material adverse effect on
the Company's business, operating results and financial condition.
Necessity of Implementing High Volume Manufacturing.
Historically, the volume of the Company's production requirements in the defense
market was not sufficient to justify the widespread implementation of automated
manufacturing processes. Fulfillment of substantial orders in the wireless
telecommunications industry will require a significant increase in the Company's
manufacturing capacity. For example, the Company plans to introduce more
automated manufacturing processes in order to fulfill its obligations to P-COM,
some of which are specialized processes that must be developed. There can be no
assurance that the Company will be able to implement the desired automated
manufacturing processes on a timely basis or at all or that, if implemented,
such manufacturing processes will be sufficient to fulfill the Company's current
and future production commitments in a cost effective manner or that the Company
will obtain a sufficient amount of high volume orders to absorb the capital
costs incurred.
Competition. The markets for the Company's products are extremely
competitive and are characterized by rapid technological change, new product
development, product obsolescence and evolving industry standards. In addition,
price competition is intense and significant price erosion generally occurs over
the life of a product. The Company faces some competition from component
manufacturers who have integration capabilities, but believes that its primary
competition is from the captive manufacturing operations of large wireless
telecommunications OEMs (including all of the major telecommunications equipment
providers) and defense prime contractors who are responsible for a substantial
majority of the present worldwide production of MFMs. The Company's future
success is dependent upon the extent to which these OEMs and defense prime
contractors elect to purchase from outside sources rather than manufacture their
own microwave MFMs and components. The Company's customers and large
manufacturers of microwave transmission equipment could also elect to enter into
the non-captive market for microwave products and compete directly with the
Company. Many of the Company's current and potential competitors have
substantially greater technical, financial, marketing, distribution and other
resources than the Company and have greater name recognition and market
acceptance of their products and technologies. No assurance can be given that
the Company's competitors will not develop new
-16-
<PAGE> 17
technologies or enhancements to existing products or introduce new products that
will offer superior price or performance features or that new products or
technologies will not render obsolete the products of the Company's customers.
For example, innovations such as a wireless telephone system utilizing
satellites instead of land-based base stations or a device that integrates
microwave functionality could significantly reduce the potential market for the
Company's products. The Company believes that to remain competitive in the
future it will need to invest significant financial resources in research and
development.
Declining Average Selling Prices. The Company's customers are
under continuous pressure to reduce prices and, therefore, the Company expects
to continue to experience downward pricing pressure on its products. The
Company's customers frequently negotiate supply arrangements well in advance of
delivery dates, requiring the Company to commit to price reductions before it is
determined that assumed cost reductions can be achieved. To offset declining
average sales prices, the Company believes that it must achieve manufacturing
cost reductions and obtain orders for higher volume products. If the Company is
unable to offset declining average selling prices, the Company's gross margins
will decline, and such decline will have material adverse effects on the
Company's business, financial condition and results of operations.
Environmental Regulations and Risks. The Company is subject to a
variety of local, state and federal governmental regulations relating to the
storage, discharge, handling, emission, generation, manufacture and disposal of
toxic or other hazardous substances used to manufacture the Company's products.
The failure to comply with current or future regulations could result in the
imposition of substantial fines on the Company, suspension of production,
alteration of its manufacturing processes or cessation of operations.
News reports have asserted that power levels associated with hand
held cellular telephones and infrastructure equipment may pose certain health
risks. If it were determined or perceived that electromagnetic waves carried
through wireless telecommunications equipment create a significant health risk,
the market for these products could be materially adversely affected, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, if wireless telecommunications
systems or other systems or devices that rely on or incorporate the Company's
products are determined or alleged to create a significant health risk, the
Company could be named as a defendant, and held liable, in product liability
lawsuits commenced by individuals alleging that the Company's products harmed
them, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Government Regulations. The Company's products are incorporated
into wireless telecommunications systems that are subject to regulation
domestically by the Federal Communications Commission ("FCC") and
internationally by other government agencies. Although the equipment operators
and not the Company are responsible for compliance with such regulations,
regulatory changes, including changes in the allocation of available frequency
spectrum, could materially adversely affect the Company's operations by
restricting development efforts by the Company's customers, obsoleting current
products or increasing the opportunity for additional competition. Changes in,
or the failure by the Company to manufacture products in compliance with,
applicable domestic and international regulations could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the increasing demand for wireless telecommunications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such
products, generally following extensive investigation of and deliberation over
competing technologies. The delays inherent in this governmental approval
process have in the past caused and may in the future cause the cancellation,
postponement or rescheduling of the installation of communications systems by
the Company's customers, which in turn may have a material adverse effect on the
sale of products by the Company to such customers.
Because of its participation in the defense industry, the Company
is subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. An adverse finding in any such audit could adversely affect the
Company's ability to complete for and obtain future defense business.
-17-
<PAGE> 18
Dependence on Suppliers and Contract Manufacturers. The Company
relies on contact manufacturers and suppliers, in some cases sole suppliers or
limited groups of suppliers, to provide it with services and materials necessary
for the manufacture of products. Certain ceramic low drift substrates (supplied
by NTK of Japan and Alpha Industries) and certain semiconductors (supplied by
Alpha Industries, MaCom MWT and others) used by the Company are sole source
items and would require significant effort, time or design changes to develop
alternate sources. The Company is also dependent on P-COM to supply it with
certain modules necessary for the production of microwave front ends for
point-to-point radios for P-COM. The Company's reliance on contract
manufacturers and on sole suppliers involves several risks, including a
potential inability to obtain critical materials or services and reduced control
over production costs, delivery schedules, reliability and quality of components
or assemblies. Any inability to obtain timely deliveries of acceptable quality,
or any other circumstance that would require the Company to seek alternative
contract manufacturers or suppliers, could delay the Company's ability to
deliver products to customers, which in turn would have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, in the event that costs for the Company's contract manufacturers or
suppliers increase, the Company may suffer losses due to an inability to recover
such cost increases under fixed price production commitments to its customers.
-18-
<PAGE> 19
Limitation on Protection of Proprietary Technology; Risk of Third
Party Claims. The Company does not presently hold any patents applicable to its
products. In order to protect its intellectual property rights, the Company
relies on a combination of trade secret, copyright and trademark laws and
employee and third-party nondisclosure agreements, as well as limiting access to
and distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its intellectual property rights will be
adequate to prevent misappropriation of the Company's technology or to preclude
competitors from independently developing such technology. Furthermore, there
can be no assurance that, in the future, third parties will not assert
infringement claims against the Company or with respect to its products for
which the Company has indemnified certain of its customers. Asserting the
Company's rights or defending against third party claims could involve
substantial costs and diversion of resources, thus materially and adversely
affecting the Company's business, financial condition and results of operations.
In the event a third party were successful in a claim that one of the Company's
products infringed its proprietary rights, the Company may have to pay
substantial royalties or damages, remove that product from the marketplace or
expend substantial amounts in order to modify the product so that it no longer
infringes such proprietary rights, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on Key Personnel. The Company is highly dependent on
the continued service of, and on its ability to attract and retain, qualified
engineering, management, manufacturing, quality assurance, marketing and support
personnel. The Company does not maintain key man life insurance on its key
personnel and such personnel do not have employment or non-competition
agreements with the Company. Competition for such personnel is intense, and
there can be no assurance that the Company will be successful in attracting or
retaining such personnel. For example, the Company believes that microwave
engineers with the skills necessary to develop products for the wireless
telecommunications market currently are in high demand and that the Company may
not be able to attract sufficient engineering expertise.
-19-
<PAGE> 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders
The Annual Meeting of Shareholders of the Company was held on May
29, 1996. The following items were voted upon by the shareholders
with all items being approved.
<TABLE>
<CAPTION>
Votes for Votes against Votes Broker
--------- or withheld abstained non-votes
----------- --------- ---------
<S> <C> <C> <C> <C>
(1) Election of the following persons, who were the
only nominees, as Directors to hold office until
the next Annual Meeting or until their successors
are elected and qualified:
Ronald E. Ragland 5,532,439 240
Denny E. Morgan 5,453,321 79,358
Errol Ekaireb 5,532,439 240
Gary Luick 5,530,719 1,960
Andre R. Horn 5,530,719 1,960
Jack A. Giles 5,530,719 1,960
Jeffrey M. Nash 5,530,719 1,960
Thomas A. Corcoran 5,530,719 1,960
William H. Gibbs 5,530,719 1,960
(2) Amendment of the Bylaws of the Company
to change the size of the Board of Directors
to a flexible number, with a minimum of seven
directors and a maximum of eleven directors,
with the exact number to be fixed by the
Board of Directors. 5,531,240 1,439
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
- Exhibit 11.1 - Computation of Net Income per Common Share
- Exhibit 27 - Financial Data Schedule
(b) The following report on Form 8-K/A was filed during the quarter ended
August 4, 1996.
Report on Form 8-K/A dated April 30, 1996, was filed with the
Securities and Exchange Commission on June 26, 1996, in connection
with the acquisition of RF Microsystems ("RFM") by the Registrant. The
Form 8-K/A included a proforma condensed combined balance sheet for
RFM and the Registrant as of January 31, 1996.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
REMEC, Inc.
(Registrant)
By: /s/ Ronald E. Ragland
-----------------------------------------
Ronald E. Ragland
Chairman and Chief Executive Officer
By: /s/ Thomas A. George
-----------------------------------------
Thomas A. George
Senior Vice President
Chief Financial Officer
Date: September 17, 1996
-21-
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number
11.1 Computation of Net Income per Common Share
27 Financial Data Schedule
-22-
<PAGE> 1
EXHIBIT 11.1
REMEC, Inc.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
--------------------------- ---------------------------
August 4, July 30, August 4, July 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income per common share:
Net income $ 786,284 $ 244,938 $1,465,447 $ 678,193
Weighted average shares outstanding:
Common stock 7,808,673 4,402,114 7,776,191 4,402,114
Effect of common stock equivalents 110,378 -- 90,874 --
Adjustments to reflect requirements of the -- 44,000 -- 44,000
Securities and Exchange Commission
(Effect of SAB 83)
Effect of assumed conversion of preferred shares
from date of issuance -- 1,077,909 -- 1,077,909
---------- ---------- ---------- ----------
7,919,051 5,524,023 7,867,065 5,524,023
Net income per common share ---------- ---------- ---------- ----------
$ 0.10 $ 0.04 $ 0.19 $ 0.12
========== ========== ========== ==========
</TABLE>
-23-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> AUG-04-1996
<CASH> 3,433,488
<SECURITIES> 0
<RECEIVABLES> 10,311,941
<ALLOWANCES> (130,000)
<INVENTORY> 12,738,160
<CURRENT-ASSETS> 27,965,009
<PP&E> 26,101,349
<DEPRECIATION> (15,759,945)
<TOTAL-ASSETS> 43,230,557
<CURRENT-LIABILITIES> 7,387,733
<BONDS> 0
0
0
<COMMON> 78,657
<OTHER-SE> 34,470,390
<TOTAL-LIABILITY-AND-EQUITY> 43,230,557
<SALES> 34,771,300
<TOTAL-REVENUES> 34,771,300
<CGS> 26,751,890
<TOTAL-COSTS> 26,751,890
<OTHER-EXPENSES> 5,721,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (157,056)
<INCOME-PRETAX> 2,455,447
<INCOME-TAX> 990,000
<INCOME-CONTINUING> 1,465,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,465,447
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
