<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 MAY 5, 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:
CLASS OUTSTANDING AS OF: MAY 5, 1996
Common shares
$.01 cents par value 7,800,679
This report on Form 10-Q, including all exhibits, contains 24 pages.
The exhibit index is located on page 23.
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<TABLE>
<CAPTION>
Index Page No.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. 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 6. Exhibits and Reports on Form 8-K ............................... 21
SIGNATURES ................................................................... 22
</TABLE>
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Part I - Financial Information
Item 1 - Consolidated Financial Statements
REMEC, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
May 5, January 31,
--------------------------
1996 1996
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,207,292 $ 433,529
Accounts receivable, net 7,677,937 4,289,751
Inventories, net 12,323,354 11,089,664
Prepaid expenses and other current assets 1,464,200 1,253,541
----------- -----------
Total current assets 27,672,783 17,066,485
Property, plant and equipment, net 9,458,895 8,578,441
Deferred offering costs -- 1,108,424
Intangible and other assets 4,781,684 1,230,360
----------- -----------
$41,913,362 $27,983,710
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,537,236 $ 2,946,742
Accrued expenses 4,737,875 5,053,035
----------- -----------
Total current liabilities 7,275,111 7,999,777
Bank revolving term loan and line-of-credit -- 1,900,000
Other long-term liabilities 1,311,079 1,350,628
Shareholders' equity 33,327,172 16,733,305
----------- -----------
$41,913,362 $27,983,710
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------------
May 5, 1996 April 30, 1995
------------ --------------
<S> <C> <C>
Net sales $ 16,404,282 $12,946,768
Cost of sales 12,728,923 10,013,872
------------ -----------
Gross profit 3,675,359 2,932,896
Operating expenses:
Selling, general and administrative 1,884,997 1,959,750
Research and development 725,512 167,353
------------ -----------
2,610,509 2,127,103
------------ -----------
Income from operations 1,064,850 805,793
Interest (income) expense (109,314) 43,538
------------ -----------
Income before provision for income taxes 1,174,164 762,255
Provision for income taxes 495,000 329,000
------------ -----------
Net income $ 679,164 $ 433,255
============ ===========
Net income per share $ 0.09 $ 0.08
============ ===========
Shares used in per share calculations 7,827,471 5,524,023
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------------------
May 5, 1996 April 30, 1995
----------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 679,164 $ 433,255
Adjustments to reconcile net income to net cash used by operating
activities:
Depreciation and amortization 657,246 430,110
Changes in operating assets and liabilities:
Accounts receivable (2,195,221) (1,388,133)
Inventories (931,989) 458,728
Prepaid expenses and other current assets (203,653) 99,737
Accounts payable (1,007,915) (128,372)
Accrued expenses and other long-term
liabilities (670,547) (292,100)
------------ -----------
Net cash used by operating activities (3,672,915) (386,775)
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,179,567) (212,242)
Payment for acquisition, net of cash acquired (4,006,000) --
Other assets 35,679 --
------------ -----------
Net cash used by investing activities (5,149,888) (212,242)
FINANCING ACTIVITIES
Proceeds from bank revolving term loan, line-of-credit
and long-term debt -- 2,700,000
Repayments on bank revolving term loan, line-of-credit
and long-term debt (2,426,561) (2,400,000)
Proceeds from sale of common stock 15,914,703 --
Deferred offering costs 1,108,424 --
------------ -----------
Net cash provided by financing activities 14,596,566 300,000
Increase (decrease) in cash and cash equivalents 5,773,763 (299,017)
Cash and cash equivalents at beginning of period 433,529 368,346
------------ -----------
Cash and cash equivalents at end of period $ 6,207,292 $ 69,329
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Convertible
preferred shares Common shares
------------------- -------------- Paid-in Retained
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1996 718,607 $ 7,186 4,418,860 $ 44,189 $ 7,526,903 $9,155,027 $16,733,305
Common stock issued in
offering -- -- 2,264,893 22,649 15,628,152 -- 15,650,801
Common stock issued under
stock purchase plan -- -- 38,517 385 261,517 -- 261,902
Common stock issued upon
exercise of stock options -- -- 500 5 1,995 -- 2,000
Conversion of preferred
stock (718,607) (7,186) 1,077,909 10,779 (3,593) -- --
Net income -- -- -- -- -- 679,164 679,164
------- -------- ----------- ---------- ------------ ---------- -----------
Balance at May 5, 1996 -- $ -- 7,800,679 $ 78,007 $ 23,414,974 $9,834,191 $33,327,172
======= ======== =========== ========== ============ ========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements and
related notes for the three month periods ended May 5, 1996 and April
30, 1995 are unaudited but include all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of financial position and results of
operations of the Company for the interim periods. The results of
operations for the three month period ended May 5, 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
Inventories consist of the following:
<TABLE>
<CAPTION>
May 5, January 31,
-------------------------------
1996 1996
---- ----
<S> <C> <C>
Raw materials $ 8,152,113 $ 7,356,389
Work in progress 8,868,099 7,838,947
----------- -----------
17,020,212 15,195,336
Less unliquidated progress payments 4,696,858 4,105,672
----------- -----------
$12,323,354 $11,089,664
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</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$1,981,000 and $1,924,000 at May 5, 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 $1,200,003 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 certain other assets
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.
REMEC's balance sheet as of May 5, 1996 reflects the acquisition of
RFM.
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>
<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 May 11, 1996, the Company entered into a plan of
reorganization and merger agreement with Magnum Microwave Corporation
("Magnum"). Under the terms of the agreement, and subject to the
approval of the holders of a majority of the outstanding shares of
Magnum's common stock, the Company will acquire all of the outstanding
shares of Magnum common stock in exchange for approximately 1,081,000
shares of the Company's common stock. The merger is to be accounted for
as a pooling of interests; accordingly, all of the assets and
liabilities of Magnum will be carried forward at their historical cost
basis, and the operating results of Magnum will be combined with those
of the Company.
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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. 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 contractors and governments. In 1995,
the Company entered the commercial wireless telecommunications market with
orders aggregating approximately $ 47.3 million from P-COM to produce microwave
front ends of point-to-point radios. As of May 5, 1996, the Company had an order
backlog of $119.6 million, $61.7 million of which is commercial wireless
content.
All revenues and related costs of sales are recognized when products
are shipped or engineering services are performed. During the three months ended
May 5, 1996, sales to the Company's top ten customers accounted for
approximately 82% of total net sales; sales to the Company's top three customers
accounted for approximately 44% of total net sales; and sales to the top
customer (P-COM) accounted for 28% of total net sales. The Company recorded
revenues of approximately $4.5 million in sales to P-COM during the three month
period ended May 5, 1996, as compared to $5.4 million of sales to P-COM for all
of fiscal 1996. The Company expects sales to the commercial telecommunications
market to represent an increasing percentage of revenues in the near future
because of the P-COM and STM Wireless, Inc., order backlog (see discussion
below regarding acquisition of RF Microsystems, Inc.) and the Company's strategy
to increase its presence in the commercial wireless telecommunications market.
The Company's international sales as a percentage of net sales for the three
month period ended May 5, 1996 was 10%. The international sales percentages do
not include products sold to foreign end users by the Company's domestic OEM
customers.
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.
On April 30, 1996, the Company completed the acquisition for cash of
RFM, a wholly-owned subsidiary of STM Wireless, Inc. ("STM"), and various VSAT
(very small aperture terminals) microwave design and manufacturing resources for
a purchase price of approximately $4.0 million. In connection with the
acquisition, REMEC received purchase orders from STM totaling approximately $20
million for the design and manufacture of commercial wireless C-Band VSAT
equipment. RFM provides the Department of Defense with research and analysis,
systems engineering and test evaluation, primarily for satellite communication
systems.
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
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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.
The Company's microwave defense business is conducted as REMEC
Microwave ("Microwave"), its commercial wireless telecommunications business is
conducted through REMEC Wireless, Inc. ("Wireless") and the Company's precision
instrumentation business is conducted as Humphrey, Inc. ("Humphrey").
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.
<TABLE>
<CAPTION>
Three months ended
April 30, May 5,
--------- ------
1995 1996
---- ----
<S> <C> <C>
Net sales 100% 100%
Cost of goods sold 77 78
---- ----
Gross profit 23 22
Operating expenses:
Selling, general and administrative 16 11
Research and development 1 5
---- ----
Total operating expenses 17 16
---- ----
Income from operations 6 6
Interest (income) expense -- (1)
---- ----
Income before income taxes 6 7
Provision for income taxes 3 3
---- ----
Net income 3% 4%
---- ----
</TABLE>
THREE MONTHS ENDED MAY 5, 1996 VS. THREE MONTHS ENDED APRIL 30, 1995
Net Sales. Net sales increased 27% from $12.9 million for the three
months ended April 30, 1995 to $16.4 million for the three months ended May 5,
1996. The effects of a reduction in defense Microwave sales were offset by
increased Humphrey and commercial Wireless sales. Microwave sales decreased from
$8.3 million for the three months ended April 30, 1995 to $6.1 million for the
three month period ended May 5, 1996. During the same three month periods,
Humphrey net sales increased from $4.7 million in 1995 to $5.7 million in 1996,
while Wireless net sales were $4.6 million for the three month period ended May
5, 1996 versus no sales during the comparable 1995 period.
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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 three month period ended April 30, 1995 include $0.9
million of non-recurring revenue, $0.3 million of gross profit and $0.1 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.
Gross Profit. Gross profit increased 25% from $2.9 million for the
three month period ended April 30, 1995 to $3.7 million for the three month
period ended May 5, 1996. Gross profit as a percentage of sales declined from
23% for the three months ended April 30, 1995 to 22% for the three month period
ended May 5, 1996. The decline in overall gross margin reflects declining
margins at Microwave and the relatively low start-up margins being achieved at
Wireless, which more than offset the improved margins at Humphrey. Gross margins
for Microwave declined from 27% for the three months ended April 30, 1995 to 19%
for the three month period ended May 5, 1996. The declining gross margins at
Microwave were primarily the result of increasing price competition and the
reduced overhead absorption resulting from reduced volume. Gross margins at
Humphrey increased from 18% for the three months ended April 30, 1995 to 35% for
the three month period ended May 5, 1996. Humphrey gross profit for the three
month period ended April 30, 1995 was adversely affected by losses on certain
long-term contracts in place at the time of the Company's acquisition of
Humphrey. Humphrey gross profit for the three month period ended May 5, 1996
reflects improved overhead absorption attributable to increased volume. Gross
margin for Wireless for the three month period ended April 30, 1995 was 11%.
Wireless gross margins are being affected by start-up costs associated with the
P-COM contract.
Selling, General and Administrative Expenses. Selling, general and
administrative ("S,G&A") expenses declined 4% from $2.0 million during the three
month period ended April 30, 1995 to $1.9 million for the three month period
ended May 5, 1996. S,G&A during the first quarter of fiscal 1996 included
expenses of approximately $0.1 million associated with the settlement of the
termination claim described above. Excluding these non-recurring expenses S,G &
A costs remained essentially unchanged. However, these expenses declined as a
percentage of net sales from 16% for the three month period ended April 30, 1995
to 11% for the three month period ended May 5, 1996. The Company expects S,G&A
expenses to increase in the future as it pursues the commercial wireless
telecommunications market.
Research and Development Expenses. Research and development expenses
increased from $167,000 for the three month period ended April 30, 1995 to
$726,000 for the three month period ended May 5, 1996. This increase resulted
primarily from commercial wireless telecommunications research and development
expenses totaling $510,000 during the three month period ended May 5, 1996.
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Interest (Income)Expense. The Company's results of operations for the
three month period ended April 30, 1995 included interest expense of $44,000. By
contrast, results of operations for the three month period ended May 5, 1996
included net interest income of $109,000. The interest income for the three
months ended May 5, 1996 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 three
months ended April 30, 1995 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 three month period ended April 30, 1995 to 42% for the
three month period ended May 5, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At May 5, 1996, the Company had $6.2 million of cash and cash
equivalents and $20.4 million of working capital. The company 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 May
5, 1996, there were no borrowings outstanding under the Company's credit
facilities.
During the three month period ended May 5, 1996, the Company's
operations used net cash of approximately $3.7 million. During this time period,
accounts receivable increased by approximately $2.2 million as a result of the
increased level of sales, while accounts payable declined approximately $1.0
million do to the reduction of certain trade payables.
Investing activities utilized net cash of $5.1 million during the three
month period ended May 5, 1996, primarily as a result of the acquisition of RFM
in exchange for cash consideration of approximately $4.0 million and
approximately $1.2 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 approximately
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
approximately $15.7 million. In addition to the funds invested in connection
with the acquisition of RFM, an additional $2.4 million of the IPO proceeds were
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, the status of competitive products and
the nature and timing of any acquisitions by the Company. 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,
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<PAGE> 14
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. Actual results could
differ materially due to a variety of factors, including REMEC's success in
penetrating the commercial wireless market, risks associated with the
cancellation or reduction of orders by significant commercial or defense
customers, trends in the commercial wireless and defense markets, risks of cost
overruns and product nonperformance. REMEC's future operations, financial
performance, business and share price may be affected by a number of factors,
including the following, 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 May, 1996, the Company entered into a plan of
merger (the ("Merger") with Magnum. There can be no assurance that the
conditions to the consummation of the Merger will be satisfied and, accordingly,
that the Merger ultimately will be consummated. If consummated, the anticipated
benefits of the Merger will not be achieved unless the Company and Magnum are
successfully combined in a smooth and timely manner. That combination will
require the integration of the two companies. 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.
Control by Management. As of May 31, 1996, the Company's executive
officers beneficially own 23.8% 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, upon completion of the Merger, the market price of REMEC Common Stock may
continue to be highly volatile.
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<PAGE> 15
Additionally, the price of REMEC Common Stock following the Merger will
be sensitive to the earnings and cash flow of Magnum and REMEC. No assurances
can be given that the consolidated operations of Magnum and REMEC will be
profitable following the Merger.
Shares Eligible for Future Sale. Sales of substantial amounts of shares
in the public market or the prospect of such sales could adversely affect the
market price of the Common Stock. Of the 7,802,979 shares of Common Stock
outstanding as of May 31, 1996, 4,015,439 are subject to lock-up agreements
pursuant to which the holders of such shares have agreed not to sell or
otherwise dispose of such shares on or before July 30, 1996, without the prior
written consent of Needham & Company, Inc. After July 30, 1996, such shares may
be sold in the public market subject to limitation imposed by the Rules and
Regulations of the Securities and Exchange Commission. Additionally, the Company
has filed a registration statement under the Securities Act of 1933, as amended
(the "Securities Act"), covering the sale of 1,000,000 shares of Common Stock
reserved for issuance under the Company's Equity Incentive Plan and Employee
Stock Purchase Plan and including approximately 6,885 outstanding options that
will be assumed by REMEC in connection with the Merger.
As a result of the Merger, REMEC will issue approximately 1,081,161
additional shares of REMEC Common Stock. All such additional shares will,
subject to resale restrictions imposed by Rule 145, be freely tradeable shortly
following the Merger. Sales of REMEC Common Stock currently subject to lock-up,
issuable upon exercise of stock options or issuable in the Merger may cause
substantial fluctuations in the price of REMEC Common Stock over short time
periods.
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; Customer Concentration and Exclusivity. As of May 5,
1996, one customer, P-COM, 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 that P-COM, and is subject to the risks
inherent in the operation of a new business enterprise. The agreement 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
- 15 -
<PAGE> 16
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, the Company
derives significant revenues from a limited group of customers, including STM,
TRW, Inc., Hughes Aircraft Company, Inc. ("Hughes Aircraft"), Westinghouse
Electric Corporation ("Westinghouse"), Loral Corporation, GEC Marconi Aerospace,
Inc. ("GEC-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, 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. Sales for defense applications constituted
approximately 69% of net sales for the three months ended May 5, 1996 and
defense orders account for 66% of backlog scheduled to be shipped in the fiscal
year ending January 31, 1997. 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
- 16 -
<PAGE> 17
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
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 May 5, 1996 was approximately $119.6 million,
approximately 52% of which was attributable to commercial customers and
approximately 48% 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
- 17 -
<PAGE> 18
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 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.
New 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
- 18 -
<PAGE> 19
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.
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.
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
- 19 -
<PAGE> 20
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.
- 20 -
<PAGE> 21
PART II - OTHER INFORMATION
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 was filed during the quarter
ended May 5, 1996:
- Report on Form 8-K dated April 30, 1996, regarding
the purchase of all of the outstanding shares of
capital stock of RF Microsystems, Inc., and various
VSAT microwave design and manufacturing resources
from STM Wireless, Inc.
- 21 -
<PAGE> 22
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: June 14, 1996
- 22 -
<PAGE> 23
EXHIBIT INDEX
Exhibit
Number
- -------
11.1 Computation of Net Income per Common Share
27 Financial Data Schedule
- 23 -
<PAGE> 1
EXHIBIT 11.1
REMEC, Inc.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended
-------------------------------
May 5, 1996 April 30, 1995
----------- --------------
<S> <C> <C>
Net income per common share:
Net income $ 679,164 $ 433,255
Weighted average shares outstanding:
Common stock 7,759,021 4,402,115
Effect of common stock equivalents 68,450
Adjustments to reflect requirements of the
Securities and Exchange Commission
(Effect of SAB 83) 44,000
Effect of assumed conversion of preferred shares
from date of issuance 1,077,909
---------- ----------
7,827,471 5,524,023
---------- ----------
Net income per common share $ 0.09 $ 0.08
========== ==========
</TABLE>
- 24 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> MAY-5-1996
<CASH> 6,207,292
<SECURITIES> 0
<RECEIVABLES> 7,757,937
<ALLOWANCES> (80,000)
<INVENTORY> 12,323,354
<CURRENT-ASSETS> 27,672,783
<PP&E> 9,458,895
<DEPRECIATION> 657,246
<TOTAL-ASSETS> 41,913,362
<CURRENT-LIABILITIES> 7,275,111
<BONDS> 0
0
0
<COMMON> 78,007
<OTHER-SE> 33,249,165
<TOTAL-LIABILITY-AND-EQUITY> 41,913,362
<SALES> 16,404,282
<TOTAL-REVENUES> 16,404,282
<CGS> 12,728,923
<TOTAL-COSTS> 12,728,923
<OTHER-EXPENSES> 2,610,509
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (109,314)
<INCOME-PRETAX> 1,174,164
<INCOME-TAX> 495,000
<INCOME-CONTINUING> 679,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 679,164
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
