<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 29, 1999
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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:
Class Outstanding as of: OCTOBER 29, 1999
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Common shares,
$.01(cent)par value 25,285,619
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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 Statements of Cash Flows.........................5
Notes to Condensed Consolidated Financial Statements....................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................9
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................14
Item 3. Qualitiative and Quantitive Disclosures About Market Risk....................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 29, January 31,
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1999 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $54,868,513 $83,011,819
Accounts receivable, net 33,498,335 27,294,544
Inventories, net 42,595,717 38,311,527
Prepaid expenses and other current assets 7,009,371 8,021,745
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Total current assets 137,971,936 156,639,635
Property, plant and equipment, net 60,436,284 44,706,757
Intangible and other assets, net 26,719,364 17,224,432
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$225,127,584 $218,570,824
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LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $11,338,305 $8,155,490
Accrued expenses and other current liabilities 17,996,319 14,677,273
---------- ----------
Total current liabilities 29,334,624 22,832,763
Deferred income taxes and other long-term liabilities 9,249,360 4,131,534
Shareholders' equity 186,543,600 191,606,527
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$225,127,584 $218,570,824
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</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------------------------------------------
October 29, October 30, October 29 October 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $48,370,547 $41,685,743 $138,862,804 $136,688,630
Cost of sales 35,979,435 29,892,293 105,873,355 104,916,405
------------ ----------- ------------ ------------
Gross profit 12,391,112 11,793,450 32,989,449 31,772,225
Operating expenses:
Selling, general and administrative 9,739,124 8,825,309 29,253,437 28,819,430
Research and development 3,765,384 2,768,661 10,357,706 7,740,819
Transaction costs --- --- 3,130,000 ---
------------ ----------- ------------ ------------
Total operating expenses 13,504,508 11,593,970 42,741,143 36,560,249
------------ ----------- ------------ ------------
Income (loss) from operations (1,113,396) 199,480 (9,751,694) (4,788,024)
Interest income 640,957 755,374 1,890,654 2,189,061
------------ ----------- ------------ ------------
Income (loss) before income taxes (472,439) 954,854 (7,861,040) (2,598,963)
Provision (credit) for income taxes 647,047 554,232 (484,271) 1,246,815
------------ ----------- ------------ ------------
Net income (loss) ($1,119,486) $400,622 ($7,376,769) ($3,845,778)
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Earnings (loss) per share:
Basic ($0.04) $0.02 ($0.29) ($0.16)
------- ----- ------- -------
------- ----- ------- -------
Diluted ($0.04) $0.02 ($0.29) ($0.16)
------- ----- ------- -------
------- ----- ------- -------
Shares used in computing earnings (loss) per share:
Basic 25,213,000 24,926,000 25,093,000 24,742,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
Diluted 25,213,000 25,042,000 25,093,000 24,742,000
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
October 29, October 30,
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1999 1998
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<C> <C> <C>
OPERATING ACTIVITIES
Net loss ($7,376,769) ($3,845,778)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 9,872,075 7,660,765
Changes in operating assets and liabilities:
Accounts receivable (7,089,394) 4,382,549
Inventories (2,920,847) (3,443,833)
Prepaid expenses and other current assets 1,049,287 (1,685,791)
Accounts payable 2,968,874 (3,590,011)
Accrued expenses, deferred income taxes and
other long-term liabilities 4,016,637 413,059
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Net cash provided (used) by operating activities 519,863 (109,040)
INVESTING ACTIVITIES
Additions to property, plant and equipment (20,305,330) (14,604,528)
Payment for acquisitions, net of cash acquired (5,825,237) ---
Other assets (9,630,285) (1,186,996)
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Net cash used by investing activities (35,760,852) (15,791,524)
FINANCING ACTIVITIES
Borrowings under credit facilities and long-term debt 6,026,147 843,963
Repayments on credit facilities and long-term debt (1,342,974) (738,298)
Proceeds from issuance of common stock 2,670,206 52,057,979
Purchase and retirement of common stock --- (2,851,406)
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Net cash provided by financing activities 7,353,379 49,312,238
Effect of exchange rate changes on cash 7,492 153,431
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Increase (decrease) in cash and cash equivalents (27,880,118) 33,565,105
Cash and cash equivalents at beginning of period 83,011,819 47,966,101
Adjustment for net cash activity of pooled company (263,188) ---
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Cash and cash equivalents at end of period $54,868,513 $81,531,206
------------ -----------
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</TABLE>
SEE ACCOMPANYING NOTES
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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 or "REMEC") 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 REMEC 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, 1999 included in REMEC's Annual
Report on Form 10-K/A. 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 REMEC as of
October 29, 1999 and the results of its operations for the three and
nine month periods ended October 29, 1999 and October 30, 1998. The
results of operations for the interim period ended October 29, 1999 are
not necessarily indicative of the results which may be reported for any
other interim period or for the entire fiscal year.
On April 29, 1999, REMEC acquired Airtech plc in a transaction
accounted for as a pooling of interests. Accordingly, REMEC's
consolidated financial statements for all periods prior to this
acquisition have been restated to include Airtech's financial position,
results of operations and cash flows.
During 1998, REMEC adopted Statement of Financial Accounting Standard
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" and
Statement of Financial Accounting Standard No. 131 ("SFAS No. 131"),
"Segment Information". Both of these standards are effective for fiscal
years beginning after December 15, 1997. SFAS 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 a 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, are required to be reported, net of their related tax
effect, to arrive at comprehensive income. REMEC's comprehensive income
is not materially different than reported net income for the three and
nine month periods ended October 29, 1999 and October 30, 1998. SFAS
No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating
segments. Operating segments, as defined in SFAS No. 131, are
components of an enterprise for which separate financial information is
available and is evaluated regularly by management in deciding how to
allocate resources and in assessing performance. The financial
information is required to be reported on the basis that is used
internally for evaluating segment performance. REMEC operates in one
business and operating segment only, and therefore adoption of this
standard did not have a material impact on REMEC'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 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 and other
factors and considerations described in REMEC's Annual Report on Form
10-K/A, and the other documents REMEC 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, REMEC 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. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE.
Basic earnings per common share are determined based on the weighted
average number of shares outstanding during the period. Diluted
earnings per common share include the weighted average number of shares
outstanding and give effect to potentially dilutive common shares such
as options outstanding. Both the basic and diluted loss per common
share for the three and nine months ended October 29, 1999 and for the
nine months ended October 30,1998 are based on the weighted average
number of shares of common stock outstanding during the periods.
Potentially dilutive securities include options outstanding; however,
such securities have not been included in the calculation of the
diluted loss per share as their effect is antidilutive. Since such
securities are antidilutive, there is no difference between basic and
diluted loss per common share for those periods.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 29, 1999 January 31, 1999
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<S> <C> <C>
Raw materials $23,952,978 $21,995,702
Work in progress 18,906,350 16,410,256
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42,859,328 38,405,958
Less unliquidated progress payments (263,611) (94,431)
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$42,595,717 $38,311,527
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</TABLE>
Inventories related to contracts with prime contractors to the U.S.
Government included capitalized general and administrative expenses of
$2,097,000 and $2,076,000 at October 29, 1999 and January 31, 1999,
respectively.
4. ACQUISITIONS
AIRTECH PLC ("AIRTECH")
On April 29, 1999, REMEC acquired Airtech, a United Kingdom - based
manufacturer of coverage enhancement products for wireless mobile
communications networks, in exchange for approximately 1.7 million
shares of REMEC's common stock. Prior to the combination, Airtech's
fiscal year ended on December 31, 1998. In recording the business
combination, Airtech's financial statements for the three and nine
month periods ended October 29, 1999 were combined with REMEC's for the
same periods. Airtech's statements of operations and cash flows for the
three and nine months ended September 30, 1998 were combined with
REMEC's for the three and nine months ended October 30, 1998. Airtech's
balance sheet as of December 31, 1998 was combined with REMEC's as of
January 31, 1999.
Included in the consolidated statement of operations for the nine
months ended October 29, 1999 are costs of approximately $3.0 million
related to the acquisition of Airtech. These costs are comprised
primarily of professional fees and other transaction costs associated
with the merger.
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<PAGE>
Net sales and net income reported by REMEC and Airtech for the periods
prior to the acquisition are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------------- ---------------------------------------
October 29, 1999 October 30, 1998 October 29, 1999 October 30, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales:
REMEC $43,954,111 $35,165,597 $123,144,015 $120,551,662
Airtech 4,416,436 6,520,146 15,718,789 16,136,968
--------- --------- ---------- ----------
$48,370,547 $41,685,743 $138,862,804 $136,688,630
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
Net Income (Loss):
REMEC $1,251,801 $1,345,838 ($280,851) $8,278,828
Airtech (2,371,287) (945,216) (7,095,918) (12,124,606)
----------- --------- ----------- ------------
($1,119,486) $400,622 ($7,376,769) ($3,845,778)
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
WACOM PRODUCTS, INC. ("WACOM PRODUCTS").
In March 1999, REMEC formed a limited partnership, REMEC WACOM, L.P.
("REMEC WACOM"), for the purpose of acquiring WACOM Products, a
manufacturer of commercial radio frequency filters for specialized
communications applications. On March 29, 1999, REMEC WACOM acquired
the assets and assumed all of the obligations of WACOM Products, in
exchange for cash consideration of $6,850,000. 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 ("APB") No. 16. The estimated
excess of the purchase price over the net assets acquired of $1,867,000
is being carried as intangible assets, and will be amortized over 8
years. REMEC's consolidated financial statements include the results of
REMEC WACOM from March 29, 1999 forward.
Assuming that the acquisition of WACOM Products had occurred on
February 1, 1998, pro forma condensed consolidated results of
operations would be as follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
Nine months ended
-----------------
October 29, 1999 October 30, 1998
---------------- ----------------
<S> <C> <C>
Net sales $139,959 $140,261
Net loss (7,215) (2,946)
Loss per share:
Basic ($.29) ($.12)
Diluted ($.29) ($.12)
</TABLE>
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<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"), REMEC Magnum, Inc., ("Magnum"),
REMEC Veritek, Inc. ("Veritek"), REMEC CSH, Inc. ("REMEC CSH"), REMEC Q-bit,
Inc. ("Qbit"), REMEC Nanowave, Inc. ("Nanowave"), REMEC WACOM L.P. ("REMEC
WACOM"), REMEC Airtech Ltd., ("Airtech") and REMEC, Inc. S.A., ("REMEC Costa
Rica").
On April 29, 1999, REMEC acquired the outstanding shares of Airtech in
a transaction accounted for as a pooling of interests. Accordingly, all
accompanying historical financial statement information has been restated to
include Airtech's operations, assets and liabilities.
In March 1999, REMEC acquired WACOM Products in a transaction accounted
for as a purchase. The condensed consolidated statements of income and cash
flows for the nine month period ended October 29, 1999 include REMEC WACOM's
results of operations from March 29, 1999. REMEC's October 29, 1999 balance
sheet includes REMEC WACOM'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. The expansion of REMEC's commercial business also has resulted in
increased inventory obsolescence. Although REMEC has added additional inventory
management controls, the commercial business is subject to more frequent product
changes and therefore, inventory obsolescence may continue at current levels or
increase.
Currently, REMEC 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, REMEC records the entire
amount of the purchase order as backlog, even if the customer releases
quantities incrementally against the purchase order. An amount of REMEC'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 delays in shipments to any significant customer may have a material
adverse effect on REMEC's business, financial condition and results of
operations. For example, REMEC's results of operations during fiscal 1999 were
adversely affected by a significant decline in commercial revenues from their
prior levels. This decline in commercial revenues was primarily attributable to
requests by certain customers to delay deliveries of previously announced
requirements. REMEC believes that some of these delays were attributable to
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 that similar delays
will not recur in the future.
REMEC has also experienced continued pricing pressure on follow-on
orders for existing defense programs on which REMEC participates, and REMEC
anticipates that there will be fewer available defense programs to which it can
market its products in the future. Failure of REMEC 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 REMEC's
business, financial condition or results of operations.
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<PAGE>
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 29, October 30, October 29, October 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................... 100% 100% 100% 100%
Cost of sales............................... 74 72 76 77
-- -- -- --
Gross profit................................ 26 28 24 23
Operating expenses:
Selling, general & administrative........... 20 21 21 21
Research and development.................... 8 7 8 6
Transaction costs........................... -- -- 2 --
-- -- - --
Total operating expenses.................... 28 28 31 27
-- -- -- --
Income (loss) from operations............... (2) -- (7) (4)
Interest income ............................ 1 2 1 2
- - - -
Income (loss) before income taxes........... (1) 2 (6) (2)
Provision (credit) for income taxes......... 1 1 (1) 1
- - --- -
Net income (loss)........................... (2%) 1% (5%) (3%)
---- -- ---- ----
---- -- ---- ----
</TABLE>
NET SALES. Net sales were $48.4 million and $138.9 million for the
three and nine month periods ended October 29, 1999, representing increases of
$6.7 million (16%) and $2.2 million (2%), respectively, over the comparable
prior year periods. Results of operations for the three and nine month periods
ended October 29, 1999 include revenues of $1.1 million and $2.6 million,
respectively, generated by REMEC WACOM. As this subsidiary was acquired in March
1999, fiscal 1999 results include no revenues from REMEC WACOM. The remainder of
the sales fluctuations during these periods was primarily due to fluctuating
demand from REMEC's commercial customers.
GROSS PROFIT. Gross profit was $12.4 million and $33.0 million for the
three and nine month periods ended October 29, 1999, representing increases of
$.6 million (5%) and $1.2 million (4%), respectively, over the comparable prior
year periods. The increase in gross profit in absolute dollar terms is primarily
due to the increase in sales discussed above. Gross margins were 26% and 24% for
the three and nine month periods ended October 29, 1999, compared with 28% and
23%, respectively, for the comparable prior year periods. The decline in gross
margins during the three months ended October 29, 1999 as compared with the
comparable prior year period is primarily due to pricing pressure in certain
commercial segments in which the Company operates. Gross profits for the nine
months ended October 30, 1998 were adversely affected by costs associated with
Airtech's MHA warranty upgrade program. The improvement in gross margins in the
comparable current year period is primarily attributable to the absence of such
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG & A") were $9.7 million and $29.3 million for the
three and nine month periods ended October 29, 1999, representing increases of
$.9 million (10%) and $.4 million (2%), respectively, over the comparable prior
year periods. The increase in SG & A reflects the additional costs arising at
REMEC WACOM (which was acquired during the current fiscal year) as well as the
increase in personnel and other administrative costs resulting from Company's
growth.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $3.8 million and $10.4 million for the three and nine month periods ended
October 29, 1999, representing increases of $1.0 million (36%) and $2.6 million
(34%), respectively, over the comparable prior year periods. These expenditures
are almost entirely attributable to the Company's commercial wireless business
and reflect activity associated with new product development.
TRANSACTION COSTS. REMEC's results of operations for the nine months
ended October 29, 1999 include $3.1 million of transaction costs associated with
REMEC's acquisition of Airtech and the terminated acquisition of STM Wireless,
Inc. There were no similar costs in the comparable prior year period.
INTEREST INCOME. Interest income was $.6 million and $1.9 million for
the three and nine month periods
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<PAGE>
ended October 29, 1998 representing decreases of $.1 million (15%) and $.3
million (14%), respectively, over the comparable prior year periods. The
decrease in interest income was due to a decrease in the level of cash available
for investing.
PROVISION (CREDIT) FOR INCOME TAXES. REMEC reported a credit for income
taxes of $.5 million for the nine months ended October 29, 1999 as compared to
income tax expense of $1.2 million recognized during the comparable prior year
period. The credit reflects recognition of the tax benefit associated with
REMEC's domestic operating losses.
LIQUIDITY AND CAPITAL RESOURCES
At October 29, 1999, REMEC had $108.6 million of working capital, which
included cash and cash equivalents totaling $54.9 million. REMEC also has $13.0
million available under two credit facilities consisting of a $9.0 million
revolving working capital line of credit and a $4.0 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 29,
1999, there were no borrowings outstanding under these credit facilities.
During the nine month period ended October 29, 1999, net cash
provided by operations totaled $.5 million as a $10.0 million increase in
trade receivables and inventories was offset by a $7.0 million increase in
trade accounts payable and other accrued expenses. The increase in trade
receivables during this period was primarily due to the increase in sales and
an increase in the length of time that customers were taking to pay invoices.
The increase in inventories (and trade accounts payable) was due to the need
to support anticipated future sales growth. Other accrued expenses increased
as a result of the establishment of reserves for the anticipated costs of
certain litigation and product warranty costs.
Investing activities required $35.8 million during the nine months
ended October 29, 1999, primarily as a result of $20.3 million in capital
expenditures, $5.8 million (net of cash acquired) paid in connection with the
acquisition of WACOM Products and the assets of Smartwaves International, and a
$9.6 million increase in other assets (which was primarily comprised of a $4.6
million investment in a unconsolidated company and a $5.0 million loan to this
same company). 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 significant as a result of commercial wireless
telecommunications expansion requirements. Financing activities generated
approximately $7.4 million during the nine month period ended October 29, 1999,
principally as a result of the proceeds borrowed under a mortgage obligation at
the Company's Airtech subsidiary, net of repayments, and net proceeds of $2.7
million generated by the issuance of shares in connection with REMEC's Employee
Stock Purchase Plan and from exercises of stock options.
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 available installed computer systems and
software products are coded to accept only two digit entries to represent 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.
REMEC's Vice President of Information Technology is responsible for
coordinating REMEC'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 REMEC'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
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<PAGE>
reports to REMEC's President and Chief Operating Officer on these matters. In
addition, REMEC's Audit Committee and Board of Directors provide supervisorial
oversight of REMEC's efforts relating to year 2000 readiness.
MANUFACTURING. REMEC utilizes various tools and equipment in connection
with the manufacture of its products which may have embedded technology that is
date sensitive. REMEC is testing substantially all of its critical tools and
equipment currently being utilized by REMEC in the manufacture of its products,
and continues to monitor year 2000 readiness in this area. Based on its efforts
to date, REMEC believes that its critical tools and equipment will be year 2000
ready on or before December 31, 1999. As a result, REMEC 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 many 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
$2.0 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 five of the Company's subsidiaries. The
information systems in place at three of REMEC's remaining subsidiaries have
also been upgraded to year 2000 compliance at a cost of approximately $250,000.
REMEC recently completed the acquisition of Airtech plc and WACOM Products.
REMEC has conducted year 2000 surveys at these subsidiaries and has made the
necessary changes to ensure year 2000 compliance. All year 2000 compliance
activities will be completed prior to December 31, 1999.
FACILITIES. REMEC has tested 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. REMEC currently has manufacturing operations or management personnel
in thirteen leased or Company-owned facilities. Based on its efforts to date,
REMEC currently does not anticipate any interruption of its operations due to
the failure of its facilities and infrastructure systems to be year 2000 ready.
SUPPLIERS. REMEC implemented a system to monitor the year 2000
readiness of its suppliers. The system included awareness/notification letters,
warranties and a review of suppliers' web-site statements regarding year 2000
readiness. Based on information provided by its suppliers, REMEC does not
anticipate any significant interruption of its business due to the inability of
suppliers to be year 2000 compliant.
COSTS. REMEC estimates that the aggregate costs for its year 2000
readiness program incurred by REMEC to date and anticipated to be incurred by
REMEC through December 31, 1999 is approximately $400,000. Through November
1999, REMEC estimates that it has incurred approximately $350,000 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
REMEC'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 REMEC is a significant disruption in
the business operations of REMEC's customers due to year 2000 problems. REMEC
manufacturers 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 REMEC's
products which may have a material adverse effect on REMEC's business, financial
condition and results of operations.
- 12 -
<PAGE>
UNCERTAINTIES. The above-description of REMEC's year 2000 efforts
contains forward-looking statements, including: the expected state of readiness
of REMEC's manufacturing equipment, information systems and facilities; the
future impact on REMEC's business, financial condition and results of operation
due to its year 2000 readiness; the anticipated state of readiness of REMEC's
suppliers; the estimated costs associated with REMEC's year 2000 readiness
program; and REMEC's most reasonably likely worst case scenario. There are many
factors that could cause REMEC'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 REMEC's
year 2000 readiness include the availability and cost of personnel trained in
this area, the ability of REMEC 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 REMEC's control and no assurances can be given that
REMEC, 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
REMEC's business, financial condition or results of operations.
- 13 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
CLASS ACTION LAWSUIT. On April 19, 1999, a class action lawsuit was
filed against REMEC, certain of its officers and directors and the investment
bankers who served as co-lead underwriters in REMEC's February 1998 public
offering. The lawsuit was filed by the law firm Milberg Weiss Bershad Hynes and
Lerach and two of its co-counsel in the United States District Court for the
Southern District of California as counsel for Charles Vezzetti and all others
similarly situated. The lawsuit alleges violations of the Securities Exchange
Act of 1934 by REMEC and the other defendants between December 1, 1997 and June
12, 1998. The complaints in the lawsuit do not specify an amount of claimed
damages. REMEC believes that the lawsuit is without merit and intends to defend
against it vigorously. In addition, REMEC believes the ultimate resolution will
not have a material adverse effect on REMEC's financial condition, results of
operations or liquidity. However, there can be no assurance that an adverse
result would not have a material adverse effect on REMEC.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
REMEC is exposed to changes in interest rates to the extent of its
borrowings under its revolving working capital line of credit and revolving term
loan. At October 29, 1999, REMEC had no borrowings under these credit facilities
and, therefore, no exposure to interest rate movement on its debt. REMEC also
will be affected by changes in interest rates in its investments in certain
held-to-maturity securities. Under its current policies, REMEC does not use
interest rate derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point increase in interest rates in REMEC's
held-to-maturity securities would not materially effect the fair value of these
securities at October 29, 1999.
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 29, 1999.
- 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 13, 1999
- 15 -
<PAGE>
EXHIBIT INDEX
Exhibit
Number
27 Financial Data Schedule
- 16 -
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-29-1999
<CASH> 54,868,513
<SECURITIES> 0
<RECEIVABLES> 34,410,894
<ALLOWANCES> 912,559
<INVENTORY> 42,595,717
<CURRENT-ASSETS> 137,971,936
<PP&E> 110,732,292
<DEPRECIATION> (50,296,008)
<TOTAL-ASSETS> 225,127,584
<CURRENT-LIABILITIES> 29,334,624
<BONDS> 0
0
0
<COMMON> 252,855
<OTHER-SE> 186,290,745
<TOTAL-LIABILITY-AND-EQUITY> 225,127,584
<SALES> 138,862,804
<TOTAL-REVENUES> 138,862,804
<CGS> 105,873,355
<TOTAL-COSTS> 105,873,355
<OTHER-EXPENSES> 42,741,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,861,040)
<INCOME-TAX> (484,271)
<INCOME-CONTINUING> (7,376,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,376,769)
<EPS-BASIC> (.29)
<EPS-DILUTED> (.29)
</TABLE>
