<PAGE>
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 OCTOBER 30, 1998
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Commission File Number 0-27414
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REMEC, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3814301
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(State of other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA 92123
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(Address of principal executive offices) (Zip Code)
(619) 560-1301
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(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
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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: OCTOBER 30, 1998
----------- -----------------------------------
<S> <C>
Common shares,
$.01(cent)par value 23,120,307
</TABLE>
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<TABLE>
<CAPTION>
Index Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets.....................................3
Condensed Consolidated Statements of Income...............................4
Condensed Consolidated Statement of Changes in
Shareholder's Equity.................................................5
Condensed Consolidated Statements of Cash Flows...........................6
Notes to Condensed Consolidated Financial Statements......................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................14
Item 6. Exhibits and Reports on Form 8-K...............................................14
SIGNATURES................................................................................15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
October 30, January 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $80,702,480 $41,937,101
Accounts receivable, net 22,758,458 25,494,474
Inventories, net 35,077,302 30,380,941
Prepaid expenses and other current assets 8,979,476 6,831,010
------------ ------------
Total current assets 147,517,716 104,643,526
Property, plant and equipment, net 40,622,330 31,988,934
Intangible and other assets, net 17,221,345 17,232,241
------------ ------------
$205,361,391 $153,864,701
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,008,749 $8,531,756
Accrued expenses 9,547,204 11,616,242
------------ ------------
Total current liabilities 14,555,953 20,147,998
Deferred income taxes and other long-term liabilities 4,825,507 5,222,169
Shareholders' equity 185,979,931 128,494,534
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$205,361,391 $153,864,701
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months ended
--------------------------------- ----------------------------------
October 30, October 31, October 30, October 31,
1998 1997 1998 1997
----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $35,165,597 $38,560,919 $120,551,662 $111,850,276
Cost of sales 25,226,316 26,788,816 85,972,678 77,861,350
----------- ----------- ------------ ------------
Gross profit 9,939,281 11,772,103 34,578,984 33,988,926
Operating expenses:
Selling, general and administrative 6,775,900 6,442,512 21,766,652 18,008,794
Research and development 2,061,994 1,217,040 5,553,352 3,862,233
----------- ----------- ------------ ------------
Total operating expenses 8,837,894 7,659,552 27,320,004 21,871,027
----------- ----------- ------------ ------------
Income from operations 1,101,387 4,112,551 7,258,980 12,117,899
Gain on sale of subsidiary ----- 2,833,240 ----- 2,833,240
Interest income 798,683 608,390 2,266,663 1,833,624
----------- ----------- ------------ ------------
Income before provision for income taxes 1,900,070 7,554,181 9,525,643 16,784,763
Provision for income taxes 554,232 2,621,027 1,246,819 5,993,812
----------- ----------- ------------ ------------
Net income $1,345,838 $4,933,154 $8,278,824 $10,790,951
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Earnings per share:
Basic $0.06 $0.24 $0.36 $0.52
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted $0.06 $0.23 $0.35 $0.50
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Shares used in computing earnings per share:
Basic 23,177,000 20,881,000 22,993,000 20,747,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Diluted 23,293,000 21,876,000 23,403,000 21,549,000
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common stock
-------------------------
Shares Amount Paid-in capital Retained earnings Total
------------ -------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1998 21,182,663 $211,828 $95,838,167 $32,444,539 $128,494,534
Issuance of common shares in stock offering 1,990,000 19,900 49,543,600 --- 49,563,500
Issuance of common shares upon exercise of
stock options 80,768 807 403,079 --- 403,886
Issuance of common shares under employee
stock purchase plan 193,749 1,937 1,732,406 --- 1,734,343
Issuance of common shares 39,627 396 355,854 --- 356,250
Purchase and retirement of common shares (366,500) (3,665) (2,847,741) --- (2,851,406)
Net income --- --- --- 8,278,824 8,278,824
------------ -------- ------------ ----------- ------------
Balance at October 30, 1998 23,120,307 $231,203 $145,025,365 $40,723,363 $185,979,931
------------ -------- ------------ ----------- ------------
------------ -------- ------------ ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
October 30, October 31,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $8,278,824 $10,790,951
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,826,722 3,916,830
Gain on sale of subsidiary --- (2,833,240)
Changes in operating assets and liabilities:
Accounts receivable 2,736,016 (4,260,780)
Inventories (4,696,361) (7,644,546)
Prepaid expenses and other current assets (2,148,466) 245,308
Accounts payable (3,523,007) 1,145,856
Accrued expenses, deferred income taxes and
other long-term liabilities (2,465,700) 37,894
------------ -----------
Net cash provided by operating activities 5,008,028 1,398,273
INVESTING ACTIVITIES
Additions to property, plant and equipment (14,262,226) (10,785,093)
Proceeds from sale of subsidiary --- 5,000,000
Payment for acquisitions, net of cash acquired --- (5,066,075)
Other assets (1,186,996) 539,001
------------ -----------
Net cash used by investing activities (15,449,222) (10,312,167)
FINANCING ACTIVITIES
Borrowings under credit facilities and long-term debt --- 11,628,387
Repayments on credit facilities and long-term debt --- (18,553,066)
Proceeds from sale of common shares 52,057,979 1,877,754
Purchase and retirement of common shares (2,851,406) ---
------------ -----------
Net cash provided (used) by financing activities 49,206,573 (5,046,925)
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Increase (decrease) in cash and cash equivalents 38,765,379 (13,960,819)
Cash and cash equivalents at beginning of period 41,937,101 63,172,362
Adjustment for net cash activity of pooled companies --- (326,504)
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Cash and cash equivalents at end of period $80,702,480 $48,885,039
------------ -----------
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</TABLE>
SEE ACCOMPANYING NOTES
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. QUARTERLY FINANCIAL STATEMENTS
The interim condensed consolidated financial statements included herein
have been prepared by REMEC, Inc. (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). Certain information and footnote disclosures,
normally included in annual financial statements, have been condensed
or omitted pursuant to such SEC rules and regulations; nevertheless,
management of the Company believes that the disclosures herein are
adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto for the year ended January 31, 1998 included in the Company's
Annual Report on Form 10-K. In the opinion of management, the condensed
consolidated financial statements included herein reflect all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the consolidated financial position of the Company as
of October 30, 1998 and the results of its operations for the three and
nine month periods ended October 30, 1998 and October 31, 1997. The
results of operations for the interim periods ended October 30, 1998
are not necessarily indicative of the results which may be reported for
any other interim period or for the entire fiscal year.
In June 1997, the Financial Accounting Standards Board issued FAS No.
130, "Reporting Comprehensive Income" and FAS No. 131, "Segment
Information". Both of these standards are effective for fiscal years
beginning after December 15, 1997. FAS No. 130 requires that all
components of comprehensive income, including net income, be reported
in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign
currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to
arrive at comprehensive income. Comprehensive income is not materially
different than reported net income for the three and nine month periods
ended October 30, 1998 and October 31, 1997. FAS No. 131 amends the
requirements for public enterprises to report financial and descriptive
information about its reportable operating segments. Operating
segments, as defined in FAS No. 131, are components of an enterprise
for which separate financial information is required to be reported on
the basis that is used internally for evaluating the segment
performance. The Company believes it operates in one business and
operating segment and that adoption of these standards will not have a
material impact on the Company's financial statements.
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 the
Company'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 and
other factors and considerations described in the Company's Annual
Report on Form 10-K, and the other documents the company files from
time to time with the SEC. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of
the date hereof. Other than as required by applicable law, the Company
undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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2. NET INCOME PER SHARE
The Company presents its earnings per share information in accordance
with FAS No. 128, "Earnings per Share". Statement 128 replaced the
previously reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share, which includes the dilutive effects of options, warrants and
convertible securities, is very similar to the previously reported
fully diluted earning per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to conform
to the Statement 128 requirements.
The following table reconciles the shares used in computing basic and
diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ---------------------------
October 30, October 31, October 30, October 31,
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding used in basic earnings per 23,177,000 20,881,000 22,993,000 20,747,000
share calculation
Effect of dilutive stock options 116,000 995,000 410,000 802,000
----------- ---------- ---------- ----------
Shares used in diluted earnings per share
calculation 23,293,000 21,876,000 23,403,000 21,549,000
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 30, January 31,
1998 1998
----------- -----------
<S> <C> <C>
Raw materials $21,382,292 $16,087,158
Work in progress 13,940,291 14,968,767
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35,322,583 31,055,925
Less unliquidated progress payments (245,281) (674,984)
----------- -----------
$35,077,302 $30,380,941
----------- -----------
----------- -----------
</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,168,000 and $2,076,000 at October 30, 1998 and January 31, 1998,
respectively.
4. EQUITY OFFERING
In March 1998, the Company sold in an underwritten public offering an
additional 1,990,000 shares of common stock. The net proceeds received
by the Company from this offering totaled approximately $49.6 million.
Certain shareholders of the Company also sold 1,000,000 shares as part
of this offering.
-8-
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REMEC commenced operations in 1983 and has become a leader in the
design and manufacture of microwave multifunction modules ("MFM's") for
microwave transmission systems used in defense applications and the
commercial wireless telecommunications industry. REMEC's consolidated results
of operations include the operations of REMEC Microwave, Inc. ("Microwave"),
REMEC Wireless, Inc. ("Wireless"), Humphrey, Inc. ("Humphrey"), Magnum
Microwave Corporation ("Magnum"), Radian Technology, Inc. ("Radian"),
Verified Technical Corporation ("Veritek"), C&S Hybrid, Inc. ("C&S"), Q-bit
Corporation ("Q-bit"), Nanowave Technologies, Inc. ("Nanowave") and REMEC
S.A.. ("REMEC Costa Rica"). The Company's consolidated results of operations
for the three and nine months ended October 31, 1997 include the operations
of RF Microsystems, Inc. ("RFM"). RFM, which was acquired by REMEC on April
30 ,1996, was sold on August 26, 1997.
During fiscal 1998, the Company acquired all of the outstanding
shares of Q-bit, Radian and C&S Hybrid in a series of transactions accounted
for as poolings of interests. Accordingly, the consolidated financial
statements for the three and nine months ended October 31, 1997 have been
restated to include Radian's, C&S Hybrid's and Q-bit's operations, assets and
liabilities.
In March 1997, the Company acquired Veritek in a transaction
accounted for as a purchase. The condensed consolidated statements of income
and cash flows for the three and nine months ended October 31, 1997 include
Veritek's results of operations from March 31, 1997. On October 29, 1997, the
Company acquired Nanowave in a transaction also accounted for as a purchase.
The Company's condensed consolidated statements of income and cash flows for
the three and nine months ended October 31, 1997 include the results of
Nanowave from October 29, 1997 forward. REMEC's January 31, 1998 balance
sheet includes Veritek's and Nanowave's assets and liabilities.
REMEC'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 REMEC funded research and development expenses related to defense
programs have been minimal. As REMEC's commercial business has expanded,
research and development expenses have generally increased in amount and as a
percentage of sales. REMEC expects this trend to continue, although research
and development expenses may fluctuate on a quarterly basis both in amount
and as a percentage of sales.
Currently, the Company derives significant revenues from a limited
group of customers and expects that it will continue to do so in the
immediate future. In certain circumstances, customers place purchase orders
but release quantities incrementally against those purchase orders, subject
to an agreed period of performance. At the time a purchase order is placed,
the Company records the entire amount of the purchase order as backlog, even
if the customer releases quantities incrementally against the purchase order.
A substantial amount of the Company's backlog with these customers can be
canceled at any time generally without substantial penalties. As a result,
any cancellation, reduction or delay in orders by or shipments to any
significant customer may have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
results of operations for the third quarter of fiscal 1999 were adversely
affected by the significant decline in commercial revenues as compared to the
first and second quarters of fiscal 1999. The decline in commercial revenues
was primarily attributable to requests by certain customers to delay
deliveries of previously announced requirements. Some of the customer delays
are attributable to the economic difficulties in the Asian markets or other
international markets in which REMEC's customers operate, and to the
increased competition among the participants in those markets. There can be
no assurance whether, or to what extent, these delays will result in future
cancellations or reductions in customer orders, or whether the delays may
reflect the transfer of revenues to future quarters. The Company has also
experienced continued pricing pressure on follow-on orders for existing
defense programs on which the Company participates, and the Company
anticipates that there will be fewer available defense programs to which it
can market
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its products in the future. 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, may have a material adverse effect on the Company's
business, financial condition or results of operations.
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 Nine Months Ended
----------------------------------------------------------
October 30, October 31, October 30, October 31,
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales.................................. 100% 100% 100% 100%
Cost of goods sold......................... 72 69 71 70
--- --- --- ---
Gross profit............................... 28 31 29 30
Operating expenses:
Selling, general & administrative.......... 19 17 18 16
Research and development................... 5 3 5 4
- - - -
Total operating expenses................... 24 20 23 20
--- --- --- ---
Income from operations..................... 4 11 6 10
Gain on sale of subsidiary................. --- 7 --- 3
Interest income ........................... 2 2 2 2
--- --- --- ---
Income before income taxes................. 6 20 8 15
Provision for income taxes................. 2 7 1 5
- - - -
Net income................................. 4% 13% 7% 10%
--- --- --- ---
--- --- --- ---
</TABLE>
NET SALES. Net sales were $35.2 million and $120.6 million for the
three and nine month periods ended October 30, 1998, representing a decrease
of $3.4 million or 9% and an increase of $8.7 million or 8%, respectively,
over the comparable prior year periods. Defense sales were $18.5 million and
$53.1 million for the three and nine month periods ended October 30, 1998,
representing an increase of $2.4 million or 15% and $.6 million or 1%,
respectively, over the comparable prior year periods. Commercial wireless
sales were $16.7 million and $67.5 million for the three and nine month
periods ended October 30, 1998, representing a decrease of $5.8 million or
26% and an increase of $8.1 million or 14%, respectively, over the comparable
prior year periods. The increase in defense sales is primarily attributable
to increased customer demand for the Company's products and to $1.0 million
of non-recurring revenue associated with the settlement of a termination
claim for a defense contract that was terminated in February, 1997. The
Company's fiscal 1998 results reflect approximately $3.8 million of defense
contract revenue arising at RFM; the fiscal 1999 results include no revenue
from RFM as this entity was sold in August 1997. The decrease in commercial
sales during the three months ended October 30, 1998 is primarily
attributable to a reduction in demand from the Company's customers as a
result of the economic difficulties in the Asian markets or the other
international markets in which those customers operate. Approximately $4.6
million of the increase in commercial sales during the nine months ended
October 30, 1998 is attributable to revenue generated by the Company's
Nanowave subsidiary (which was acquired in October 1997); the fiscal 1998
period includes no revenue for Nanowave. The remaining increase in commercial
sales during fiscal 1999 is attributable to increased customer for the
Company's products.
GROSS PROFIT. Gross profit was $9.9 million and $34.6 million for
the three and nine month periods ended October 30, 1998, representing a
decrease of $1.8 million or 16% and an increase of $.6 million or 2%,
respectively, over the comparable prior year periods. Gross margins for
defense were 34% and 31% for the three and nine month periods ended October
30, 1998, compared with 25% and 30%, respectively, for the comparable prior
year periods. Commercial gross margins were 23% and 27% for the three and
nine month periods ended October 30, 1998 compared with 34% and 31%
respectively, for the comparable prior year periods. The increase in defense
gross margins is primarily attributable to improved overhead absorption as a
result of the increased production volume and approximately $570,000 of gross
margin associated with the termination settlement discussed above. The
fluctuations in the Company's commercial gross margins are primarily
attributable to changes in the Company's sales mix and to the impact on gross
margin associated with decreased production volume.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") were $6.8 million and $21.8 million for
the three and nine month periods ended October 30, 1998, representing
increases of $.3 million or 5% and $3.8 million or 21%, respectively, over
the comparable prior year periods. These expenses as a percentage of sales
increased to 19% and 18% for the three and nine month periods ended October
30, 1998 from 17% and 16% for the comparable prior year periods. The
increased expenses are primarily attributable to costs of approximately $2.6
million arising at subsidiaries acquired during fiscal 1998 whose operations
were not fully included in operating results for the three and nine months
ended October 31, 1997, approximately $600,000 of accounting and legal
expenses associated with an income tax credit study completed during the
second quarter of fiscal 1999, and increased personnel, legal and other
administrative costs resulting from the Company's growth.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $2.1 million and $5.6 million for the three and nine month periods ended
October 30, 1998, representing increases of $.8 million or 69% and $1.7
million or 44%, respectively, over the comparable prior year periods. The
expenditures are almost entirely attributable to the Company's commercial
wireless business. Research and development expenditures fluctuate on a
quarterly basis both in amount and as a percentage of sales.
GAIN ON SALE OF SUBSIDIARY. The Company's results of operations for
the three and nine month periods ended October 31, 1997 included the gain
from the sale of the Company's RFM subsidiary. There was no similar gain in
the current fiscal year.
INTEREST INCOME. Interest income was $799,000 and $2,267,000 for the
three and nine month periods ended October 30, 1998, representing increases
of $190,000 and $433,000 over the comparable prior year periods. The increase
in interest income during the current year reflects the increased level of
cash on hand as a result of the funds generated from REMEC's follow-on public
offering which was completed in March 1998.
PROVISION FOR INCOME TAXES. REMEC's effective income tax rate
declined from 36% during the nine month period ended October 31, 1997 to 13%
during the nine month period ended October 30, 1998. The decrease in the
effective income tax rate reflects the tax benefit of $1,992,000 related to
the recognition of research and experimentation tax credits pertaining to
previously filed tax returns. The reduction in the effective tax rate during
fiscal 1999 also reflects the benefit of tax credits for certain capital
expenditures. The Company expects its future effective tax rate to be
approximately 34%.
LIQUIDITY AND CAPITAL RESOURCES
At October 30, 1998, REMEC had $133.0 million of working capital
which included cash and cash equivalents totaling $80.7 million. REMEC also
has $17.0 million in available credit facilities consisting of a $9.0 million
revolving working capital line of credit and a $8.0 million revolving term
loan. The borrowing rate under both credit facilities is based on a fixed
spread over the London Interbank Offered Rate (LIBOR). The revolving working
capital line of credit terminates July 3, 2000. The revolving period under
the term loan expires July 1, 2000, at which time any loan amount outstanding
converts to a term loan to be fully amortized and paid in full by January 2,
2004. As of October 30, 1998, there were no borrowings outstanding under
REMEC's credit facilities.
During the nine month period ended October 30, 1998, net cash
provided by operations totaled $5.0 million as the cash flow from earnings
and non-cash expenses (primarily depreciation and amortization) more than
offset the increase in inventories and the repayment of trade accounts
payables and other accrued expenses. Inventories increased during this period
due to requests by certain customers to delay delivery of previously
announced requirements. Investing activities utilized $15.4 million during
the nine months ended October 30, 1998, primarily as a result of $14.3
million in capital expenditures. The bulk of the capital expenditures were
associated with the expansion of REMEC's commercial wireless
telecommunications business. The above expenditures were financed primarily
by cash on hand. REMEC's future capital expenditures may continue to be
substantially higher than historical levels as a result of commercial
wireless telecommunications expansion requirements. Financing activities
generated approximately
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<PAGE>
$49.2 million during the nine month period ended October 30, 1998,
principally as a result of the net proceeds of $49.6 million from the
follow-on offering and the proceeds of $2.1 million generated by the issuance
of shares in connection with the Company's Employee Stock Purchase Plan and
from exercises of stock options, net of $2.9 million utilized for the
repurchase and retirement of Company common stock.
REMEC's future capital requirements will depend upon many factors,
including the nature and timing of orders by OEM customers, the progress of
REMEC's research and development efforts, expansion of REMEC's marketing and
sales efforts, and the status of competitive products.
YEAR 2000 READINESS DISCLOSURE
GENERAL. Many currently installed computer systems, software
products and equipment are coded to accept only two digit entries to
recognize years. These date-sensitive systems, products and equipment may not
be able to accurately recognize the year 2000. As a result, these systems,
products and equipment may need to be upgraded or replaced in order to become
year 2000 ready.
The Company's Vice President of Information Technology is
responsible for coordinating the Company's efforts relating to year 2000
readiness. These efforts include the following phases: (i) identification of
potential year 2000 problems; (ii) assessment of the potential impact on and
risks to the Company's business; (iii) determination of specific solutions;
(iv) implementation of solutions; and (v) evaluation of all of the foregoing.
The Vice President of Information Technology reports to the Company's
President and Chief Operating Officer on these matters. In addition, the
Company's Audit Committee and Board of Directors provides supervisorial
oversight of the Company's efforts relating to year 2000 readiness.
MANUFACTURING. The Company utilizes various tools and equipment in
connection with the manufacture of its products which may have embedded
technology that is date sensitive. The Company is testing substantially all
of its critical tools and equipment currently being utilized by the Company
in the manufacture of its products, and continues to monitor year 2000
readiness in this area. Based on its efforts to date, the Company believes
that its critical tools and equipment will be year 2000 ready on or before
December 31, 1999. As a result, the Company currently does not anticipate
significant interruption of its manufacturing capabilities due to the failure
of its tools and equipment to be year 2000 ready.
INFORMATION SYSTEMS. The Company has various internal financial
information and reporting systems, human resources and payroll applications,
procurement requirements, customer billing applications, manufacturing
monitoring systems, communications systems, desktop computers and computer
networks. The Company is testing all of these internal systems and applications
and upgrading or replacing software and hardware where needed. Based on its
efforts to date, the Company currently does not anticipate significant
interruption of its operations due to the failure of its information systems to
be year 2000 ready.
In addition to testing existing information systems for year 2000
compliance, the Company is phasing in the installation of a new management
information system which will be used by the Company and all of its operating
subsidiaries in connection with internal financial information and reporting,
production planning and manufacturing monitoring and procurement requirements.
The purchase and installation of this system is estimated to cost approximately
$3.0 million and will be paid for by the Company out of existing funds when
installed at the various Company facilities. Although this system is not being
purchased exclusively to address year 2000 compliance issues, this management
information system is certified by the manufacturer to be year 2000 compliant.
This system has been implemented in one of the Company's subsidiaries, is in the
process of being implemented in another subsidiary and is estimated to be
completely installed and operational in all the Company's facilities over the
next two years.
FACILITIES. The Company is also testing all of its facilities and
infrastructure systems, including the heating/ventilation/air conditioning
(HVAC) systems, security systems and health, safety and environment systems
at each of its facilities. The Company currently has manufacturing operations
or management personnel in thirteen leased or Company-owned facilities. Based
on its efforts to date, the Company currently does not anticipate
-12-
<PAGE>
significant interruption of its operations due to the failure of its facilities
and infrastructure systems to be year 2000 ready.
SUPPLIERS. The Company is implementing a system to monitor the year
2000 readiness of its suppliers. The system will include
awareness/notification letters, warranties and a review of suppliers'
web-site statements regarding year 2000 readiness. If a supplier is
identified as having a high risk of year 2000 non-readiness, the Company will
develop alternative sourcing plans to minimize the year 2000 risks.
COSTS. The Company estimates that the aggregate costs for its year
2000 readiness program incurred by the Company to date and anticipated to be
incurred by the Company through December 31, 1999 is approximately $350,000.
Approximately $125,000 of the aggregate estimated costs relate to internal
resources incurred or anticipated to be incurred in connection with the
Company's readiness program. Through October 30, 1998, the Company estimates
that it has incurred approximately $50,000 on internal and external costs
relating to its year 2000 readiness program. No information technology or
other capital expenditure projects have been delayed due to the Company's
year 2000 efforts and the costs relating thereto.
WORST CASE SCENARIO: CONTINGENCY PLAN. The most reasonably likely
worst case year 2000 scenario which may affect the Company is a significant
disruption in the business operations of the Company's customers due to year
2000 problems. The Company manufactures components and systems for commercial
customers and various government agencies. To the extent that the customers'
business is disrupted by year 2000 problems, these customers may be unable to
purchase or pay for the Company's products. In that event the Company's
business, financial condition and results of operation will be adversely
effected.
The Company is in the process of analyzing all of its customers to
determine their risk of year 2000 non-readiness. Upon completion of this
analysis, the Company intends to develop a contingency plan to address this
and other year 2000 scenarios that may adversely effect the Company's
business, financial condition and results of operation. It is anticipated
that the Company's year 2000 contingency plan will be completed in October
1999.
UNCERTAINTIES. The above-description of the Company's year 2000
efforts contains forward-looking statements, including: the expected state of
readiness of the Company's manufacturing equipment, information systems and
facilities; the future impact on the Company's business, financial condition
and results of operation due to its year 2000 readiness; the anticipated
state of readiness of the Company's suppliers; the estimated costs associated
with the Company's year 2000 readiness program; and the Company's most
reasonably likely worst case scenario. There are many factors that could
cause the Company's actual results to differ materially from those year 2000
related forward-looking statements.
Some of the factors that could effect the anticipated impact of the
Company's year 2000 readiness include the availability and cost of personnel
trained in this area, the ability of Company personnel, vendors, customers
and suppliers to locate and correct all relevant computer codes; the
reliability of statements of third parties (customers, suppliers and vendors)
regarding their own year 2000 readiness; and similar uncertainties. In
addition, the anticipated costs of any year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events. Many of these factors and assumptions are
beyond the Company's control and no assurances can be given that the Company,
its suppliers and customers will be able to resolve all of their year 2000
readiness problems in a timely manner to avoid a material adverse effect on
the Company's business, financial condition or results of operations.
-13-
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September 1998, the Company issued 39,627 shares of common stock
that were not registered under the Securities Act of 1933. The proceeds from
this offering totaled $356,250. The shares were issued in connection with a
leasing transaction related to one of the Company's facilities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
- Exhibit 27 - Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter ended
October 30, 1998.
-14-
<PAGE>
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/ Michael D. McDonald
----------------------------------------
Michael D. McDonald
Chief Financial Officer and Secretary
Date: December 14, 1998
-15-
<PAGE>
EXHIBIT INDEX
Exhibit
Number
27 Financial Data Schedule
-16-
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-30-1998
<CASH> 80,702,480
<SECURITIES> 0
<RECEIVABLES> 23,413,444
<ALLOWANCES> 654,986
<INVENTORY> 35,077,302
<CURRENT-ASSETS> 147,517,716
<PP&E> 78,450,034
<DEPRECIATION> 37,827,704
<TOTAL-ASSETS> 205,361,391
<CURRENT-LIABILITIES> 14,555,953
<BONDS> 0
0
0
<COMMON> 231,203
<OTHER-SE> 185,748,728
<TOTAL-LIABILITY-AND-EQUITY> 205,361,391
<SALES> 120,551,662
<TOTAL-REVENUES> 120,551,662
<CGS> 85,972,678
<TOTAL-COSTS> 85,972,678
<OTHER-EXPENSES> 27,320,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,525,643
<INCOME-TAX> 1,246,819
<INCOME-CONTINUING> 8,278,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,278,824
<EPS-PRIMARY> .36
<EPS-DILUTED> .35
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