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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 April 27, 2001
Commission File Number 0-27414
REMEC, INC.
(Exact name of registrant as specified in its charter)
| CALIFORNIA (State or other jurisdiction of incorporation or organization) | 95-3814301 (I.R.S. Employer Identification Number) | |
9404 CHESAPEAKE DRIVE SAN DIEGO, CALIFORNIA | 92123 | |
| (Address of principal executive offices) | (Zip Code) |
(858) 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: April 27, 2001 | |
|---|---|---|
| Common shares, $.01 par value | 44,706,961 |
REMEC, Inc.
Form 10-Q
For The Quarterly Period Ended April 27, 2001
| | | Page No. | ||
|---|---|---|---|---|
| PART I FINANCIAL INFORMATION | ||||
Item 1. | Condensed Consolidated Financial Statements: | |||
| Condensed Consolidated Balance Sheets | 3 | |||
| Condensed Consolidated Statements of Operations | 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 | 10 | ||
PART II OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 13 | ||
| Item 3. | Qualitative and Quantitative Disclosures About Market Risk | 13 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 15 | ||
SIGNATURES | 16 | |||
2
REMEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | April 27, 2001 | January 31, 2001 | ||||
|---|---|---|---|---|---|---|
| | (unaudited) | | ||||
| ASSETS | ||||||
| Cash and cash equivalents | $ | 114,262,854 | $ | 138,525,797 | ||
| Accounts receivable, net | 38,182,100 | 49,678,497 | ||||
| Inventories, net | 59,311,635 | 58,866,266 | ||||
| Deferred income taxes | 15,656,451 | 15,617,191 | ||||
| Prepaid expenses and other current assets | 4,273,659 | 3,535,084 | ||||
| Total current assets | 231,686,699 | 266,222,835 | ||||
Property, plant and equipment, net | 92,444,706 | 82,840,959 | ||||
| Restricted cash | 17,049,299 | 17,049,299 | ||||
| Intangible and other assets, net | 35,388,082 | 24,112,100 | ||||
| $ | 376,568,786 | $ | 390,225,193 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||
| Accounts payable | $ | 14,630,456 | $ | 19,947,845 | ||
| Accrued expenses and other current liabilities | 17,879,369 | 20,869,836 | ||||
| Total current liabilities | 32,509,825 | 40,817,681 | ||||
| Deferred income taxes and other long-term liabilities | 7,556,417 | 7,920,610 | ||||
| Shareholders' equity | 336,502,544 | 341,486,902 | ||||
| $ | 376,568,786 | $ | 390,225,193 | |||
See accompanying notes.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| | Three months ended | |||||
|---|---|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | ||||
| Net sales | $ | 58,923,189 | $ | 56,603,091 | ||
| Cost of sales | 54,552,213 | 41,499,172 | ||||
| Gross profit | 4,370,976 | 15,103,919 | ||||
Operating expenses: | ||||||
| Selling, general and administrative | 11,999,544 | 10,053,050 | ||||
| Research and development | 6,203,290 | 3,960,971 | ||||
| Total operating expenses | 18,202,834 | 14,014,021 | ||||
| Income (loss) from operations | (13,831,858 | ) | 1,089,898 | |||
| Write down of investment | (9,400,329 | ) | — | |||
| Gain on sale of subsidiary | 7,613,943 | — | ||||
| Interest income and other, net | 1,726,151 | 1,577,295 | ||||
| Income (loss) before provision (credit) for income taxes | (13,892,093 | ) | 2,667,193 | |||
| Provision (credit) for income taxes | (4,723,000 | ) | 1,314,440 | |||
| Net income (loss) | $ | (9,169,093 | ) | $ | 1,352,753 | |
Earnings (loss) per share: | ||||||
| Basic | $ | (0.21 | ) | $ | 0.03 | |
| Diluted | $ | (0.21 | ) | $ | 0.03 | |
Shares used in computing earnings (loss) per share: | ||||||
| Basic | 44,681,000 | 40,686,000 | ||||
| Diluted | 44,681,000 | 43,156,000 | ||||
See accompanying notes.
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REMEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | Three months ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | ||||||
| OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (9,169,093 | ) | $ | 1,352,753 | |||
| Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: | ||||||||
| Depreciation and amortization | 4,793,428 | 3,515,707 | ||||||
| Write down of investment | 9,400,329 | — | ||||||
| Gain on sale of subsidiary | (7,613,943 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 11,019,360 | (5,254,203 | ) | |||||
| Inventories | (2,275,733 | ) | (3,931,092 | ) | ||||
| Prepaid expenses and other current assets | (721,835 | ) | (1,774,229 | ) | ||||
| Accounts payable | (5,861,389 | ) | 5,271,833 | |||||
| Accrued expenses, deferred income taxes and other long-term liabilities | (5,293,842 | ) | 2,592,637 | |||||
| Net cash (used) provided by operating activities | (5,722,718 | ) | 1,773,406 | |||||
INVESTING ACTIVITIES | ||||||||
| Additions to property, plant and equipment | (7,658,172 | ) | (5,487,740 | ) | ||||
| Payment for acquisitions, net of cash acquired | (24,363,479 | ) | — | |||||
| Proceeds from sale of subsidiary | 13,781,914 | — | ||||||
| Other assets | 1,854,897 | (184,315 | ) | |||||
| Net cash used by investing activities | (16,384,840 | ) | (5,672,055 | ) | ||||
FINANCING ACTIVITIES | ||||||||
| Repayments on credit facilities and long-term debt | (2,199,633 | ) | (5,276,741 | ) | ||||
| Proceeds from sale of common stock | 110,970 | 133,419,402 | ||||||
| Net cash (used) provided by financing activities | (2,088,663 | ) | 128,142,661 | |||||
| Effect of exchange rate changes on cash | (66,722 | ) | (110,142 | ) | ||||
| Increase (decrease) in cash and cash equivalents | (24,262,943 | ) | 124,133,870 | |||||
| Cash and cash equivalents at beginning of period | 138,525,797 | 34,835,897 | ||||||
| Cash and cash equivalents at end of period | $ | 114,262,854 | $ | 158,969,767 | ||||
See accompanying notes
5
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, the 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, 2001, included in REMEC'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 REMEC as of April 27, 2001, and the results of its operations for the three month periods ended April 27, 2001, and April 28, 2000. The results of operations for the interim period ended April 27, 2001, are not necessarily indicative of the results which may be reported for any other interim period or for the entire fiscal year.
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, 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. REMEC undertakes no obligation to publicly release the result of any revisions to these forward-looking statements, other than as required by applicable law, that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
2. Earnings Per Share
REMEC calculates earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share is computed using the weighted average shares outstanding for each period presented. Diluted earnings per share is computed using the weighted average shares outstanding plus potentially dilutive common shares using the treasury stock method at the average market price during the reporting period. The calculation of net income per share reflects the historical information for REMEC and its acquired subsidiaries and the conversion of the common shares of those companies acquired in pooling of interests transactions into REMEC shares as stipulated in the respective acquisition agreements. The following table reconciles the shares used in computing basic and diluted earnings per share for the periods indicated:
| | Three Months Ended | |||
|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | ||
| Weighted average common shares outstanding used in basic earnings per share | 44,681,000 | 40,686,000 | ||
| Effect of dilutive stock options | — | 2,470,000 | ||
| Shares used in diluted earnings per share calculation | 44,681,000 | 43,156,000 | ||
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Dilutive securities may include options, warrants, and preferred stock as if converted and restricted stock subject to vesting. Potentially dilutive securities (which include options) totaling 581,000 shares for the three months ended April 27, 2001, were excluded from the calculation of diluted earnings per share because of their anti-dilutive effect.
3. Inventories
Inventories consist of the following:
| | April 27, 2001 | January 31, 2001 | ||||
|---|---|---|---|---|---|---|
| Raw materials | $ | 39,079,951 | $ | 35,227,299 | ||
| Work in progress | 20,231,684 | 23,638,967 | ||||
| $ | 59,311,635 | $ | 58,866,266 | |||
Inventories related to contracts with prime contractors to the U.S. Government included capitalized general and administrative expenses of $1,333,000 and $1,897,000 at April 27, 2001, and January 31, 2001, respectively. REMEC had a reserve for obsolete and unusable inventory of $14,428,000 and $9,963,000 as of April 27, 2001, and January 31, 2001, respectively.
4. Comprehensive Income
REMEC has adopted SFAS No. 130, "Reporting Comprehensive Income" which 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 (loss) 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 (loss).
The components of comprehensive income (loss), net of tax, are as follows:
| | Three Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | ||||||
| Net income (loss) | $ | (9,169,000 | ) | $ | 1,353,000 | |||
| Change in net unrealized loss on investment | 3,665,000 | — | ||||||
| Foreign currency translation adjustment | 409,000 | (381,000 | ) | |||||
| Comprehensive income (loss) | $ | (5,095,000 | ) | $ | 972,000 | |||
5. Transactions
On February 26, 2001, REMEC sold substantially all of the operating assets and operations of its wholly owned subsidiary Humphrey, Inc. in exchange for cash consideration of $13.8 million.
On March 7, 2001, REMEC acquired substantially all of the assets and assumed all of the obligations of Pacific Microwave Corporation ("PMC"), a privately held microwave electronics manufacturing company located in the Philippines, in exchange for cash consideration of approximately $23.1 million. 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 approximately $17.6 million is being carried as an intangible asset, and will be amortized over 10 years. REMEC's consolidated financial statements include the results of PMC from March 2001 forward.
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6. Information by Segment
During fiscal 2001, the Company realigned its operating structure into four distinct reportable segments, Broadband Wireless, Mobile Wireless Infrastructure, Defense Products and Manufacturing. The Company's new reportable segments have been determined based on the nature of the products offered to customers or the nature of their function within the organization. The Company evaluates performance and allocates resources based on profit or loss from operations before interest, other income and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies included in REMEC's Annual Report on Form 10-K. Although the Company had previously operated in one reportable segment, prior period operating results have been presented on a similar segmented basis for comparison purposes. Additionally, commencing with February 1, 2001, the operating results of the filter products business line of our REMEC Wireless subsidiary have been incorporated in the Mobile Wireless Infrastructure Group.
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Segment Data
| | Three Months Ended | |||||||
|---|---|---|---|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | ||||||
| Net Sales: | ||||||||
| Broadband Wireless | $ | 19,603,482 | $ | 24,615,476 | ||||
| Mobile Wireless Infrastructure | 18,660,313 | 14,245,612 | ||||||
| Defense Products | 15,293,579 | 16,140,750 | ||||||
| Manufacturing | 16,539,345 | 9,609,338 | ||||||
| All other | 4,503,166 | 3,855,977 | ||||||
| Intersegment revenues | (15,676,696 | ) | (11,864,062 | ) | ||||
| Consolidated net sales | $ | 58,923,189 | $ | 56,603,091 | ||||
| Income (loss) from operations: | ||||||||
| Broadband Wireless | $ | (2,774,863 | ) | $ | 196,467 | |||
| Mobile Wireless Infrastructure | (9,430,109 | ) | (1,370,676 | ) | ||||
| Defense Products | 709,876 | 1,573,584 | ||||||
| Manufacturing | 338,955 | 1,077,717 | ||||||
| All other | (2,675,717 | ) | (387,194 | ) | ||||
| Consolidated income (loss) from operations | $ | (13,831,858 | ) | $ | 1,089,898 | |||
| Depreciation and amortization: | ||||||||
| Broadband Wireless | $ | 1,075,490 | $ | 1,031,649 | ||||
| Mobile Wireless Infrastructure | 692,042 | 477,100 | ||||||
| Defense Products | 730,633 | 695,870 | ||||||
| Manufacturing | 1,054,695 | 422,652 | ||||||
| All other | 1,240,568 | 888,436 | ||||||
| Consolidated depreciation and amortization | $ | 4,793,428 | $ | 3,515,707 | ||||
April 27, 2001 | January 31, 2001 | |||||||
| Identifiable assets: | ||||||||
| Broadband Wireless | $ | 65,568,338 | $ | 61,390,434 | ||||
| Mobile Wireless Infrastructure | 48,144,735 | 51,873,917 | ||||||
| Defense Products | 31,320,087 | 35,492,456 | ||||||
| Manufacturing | 67,645,028 | 37,238,175 | ||||||
| All other assets | 163,890,598 | 204,230,211 | ||||||
| Consolidated identifiable assets | $ | 376,568,786 | $ | 390,225,193 | ||||
7. Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS No. 137. "Accounting for Derivative Instruments and Hedging Activities— Deferral of Effective Date of FASB Statement No. 133". The statement defers for one year the effective date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". The FASB issued SFAS No. 133 in June 1998, which established accounting and reporting standards for derivative instruments on the Company's balance sheet at fair value. As of April 27, 2001, the Company did not hold any derivative instruments or conduct any hedging activities. The adoption of SFAS No.'s 137 and 133 did not have any significant impact on the financial position or results of operations of REMEC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our business is divided into four groups: Broadband Wireless, Mobile Wireless Infrastructure, Defense Products and Manufacturing.
The Broadband Wireless Group develops and manufactures microwave products for fixed access wireless communications infrastructure equipment integrated into wireless networks for high speed voice, video, data and internet services and includes our subsidiaries, REMEC Magnum, REMEC Wireless and REMEC CSH. The Mobile Wireless Infrastructure Group develops and manufactures integrated RF products that improve the performance and cost effectiveness of mobile wireless communications infrastructure equipment. The subsidiaries within this group include REMEC Airtech, REMEC WACOM and REMEC Q-bit. The Defense Products Group provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors in military and space applications. This group currently consists only of REMEC Microwave. The Manufacturing Group provides high volume production of microwave products, including test and critical hybrid circuits, primarily to the other product groups. Subsidiaries or divisions within this group include REMEC Veritek, REMEC Costa Rica, Pacific Microwave Corporation and the REMEC Metal Fabrication Center. Not included in the above groups are certain non-operating subsidiaries of REMEC and Nanowave, Inc., a majority owned subsidiary which designs and produces custom monolithic integrated circuits, critical modules and integrated subassemblies for fiber optic and broadband wireless communication systems. Additionally, commencing with February 1, 2001, the operating results of the filter products business line of our REMEC Wireless subsidiary have been incorporated in the Mobile Wireless Infrastructure Group.
Results of Operations as a Percentage of Net Sales
The following table sets forth, as a percentage of total net sales, certain consolidated statement of income data for the periods indicated.
| | Three months ended | ||||
|---|---|---|---|---|---|
| | April 27, 2001 | April 28, 2000 | |||
| Net sales | 100.0 | % | 100.0 | % | |
| Cost of sales | 92.6 | 73.3 | |||
| Gross profit | 7.4 | 26.7 | |||
| Operating expenses: | |||||
| Selling, general & administrative | 20.4 | 17.8 | |||
| Research and development | 10.5 | 7.0 | |||
| Total operating expenses | 30.9 | 24.8 | |||
| Income (loss) from operations | (23.5 | ) | 1.9 | ||
| Write down of investment | (15.9 | ) | — | ||
| Gain on sale of subsidiary | 12.9 | — | |||
| Interest income and other, net | 2.9 | 2.8 | |||
| Income (loss) before income taxes | (23.6 | ) | 4.7 | ||
| Provision (credit) for income taxes | (8.0 | ) | 2.3 | ||
| Net income (loss) | (15.6 | %) | 2.4 | % | |
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Results of Operations
Net Sales and Gross Profit. Despite the sale of Humphrey, Inc. in February 2001, net sales increased 4.1% from $56.6 million during the first quarter of fiscal 2001 to $58.9 million for the first quarter of fiscal 2002, which primarily reflected an increase in revenue growth from the remaining Defense Products Group and increased demand for the turnkey manufacturing services of REMEC's Manufacturing Group. Gross profit decreased 71.1% from $15.1 million for the three months ended April 28, 2000, to $4.4 million for the period ended April 27, 2001. Consolidated gross margin as a percentage of sales decreased from 26.7% to 7.4% for the same periods. The decline in both overall gross profits and gross margins in the current period reflects the combination of the negative impact on overhead absorption resulting from declining production volume at certain of our business segments and an increase in our reserves for potential inventory obsolescence of approximately $7.0 million. Results within each of our business segments were as follows (segment sales figures include intersegment revenues):
Broadband Wireless Group. Sales within the Broadband Wireless Group decreased 20.4% from $24.6 million during the first quarter of fiscal 2001 to $19.6 million during the first quarter of the current fiscal year. As mentioned previously, effective February 1, 2001, the operating results of the filter products business of REMEC Wireless have been incorporated into the results of the Mobile Wireless segment. Filter product sales amounted to approximately $4.7 million in the current fiscal year and the removal of Filter Product sales from group results account for the majority of the sales decrease for this segment. Broadband Wireless Group gross margin as a percentage of sales decreased from 24.9% in the first quarter of fiscal 2001 to 16.3% in the first quarter of fiscal 2002. As discussed above, the decline in gross margins reflects both the negative impact on overhead absorption associated with the decline in production volume and charges of approximately $1.5 million related to increasing our reserves for potential inventory obsolescence.
Mobile Wireless Infrastructure Group. Sales increased 31.0% from $14.2 million during the first quarter of fiscal 2001 to $18.7 million during the first quarter of the current fiscal year. Results for the current fiscal year include filter products sales of $4.7 million, as discussed above. Excluding these sales, the sales from this segment declined slightly primarily as a result of decreased sales of amplifier products for mobile wireless communications infrastructure equipment. Gross margins decreased from 13.5% during the period ended April 28, 2000 to a negative 22.1% for the period ended April 27, 2001, primarily as a result of charges totaling approximately $5.2 million related to increasing our reserves for potential inventory obsolescence.
Defense Products Group. Sales decreased 5.3% from $16.1 million during the first quarter of fiscal 2001 to $15.3 million for the first quarter of fiscal 2002, reflecting a decrease in the level of sales from our Humphrey, Inc. subsidiary included in the current period total. The Company completed the sale of Humphrey, Inc. during the first quarter of fiscal 2002. Defense Products gross margins as a percentage of sales decreased from 25.0% during the period ended April 28, 2000 to 22.0% for the period ended April 27, 2001, as a result in the change in the mix of products sold.
Manufacturing Group. Sales to external customers increased 72.1% from $9.6 million during the first quarter of fiscal 2001 to $16.5 million for the first quarter of fiscal 2002, primarily due to approximately $1.0 million of sales from Pacific Microwave Corporation and an increase in demand for consignment and turnkey manufacturing services from the remainder of the Manufacturing Group. Pacific Microwave Corporation was acquired during the first quarter of fiscal 2002 and as such, the prior year results do not include any sales from this unit. Gross margin as a percentage of sales increased from 16.3% during the period ended April 28, 2000 to 11.7% for the period ended April 27, 2001, as a result of the change in the mix of products sold by the Group. To address the decline in intersegment sales as a result of falling demand from the Mobile Wireless Infrastructure Group, and the Broadband Wireless Group, and the company has reduced the manufacturing labor costs at both its
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Costa Rica and Philippine facilities. We anticipate that such measures will result in more cost efficient operations in the future.
Other Sales. Other sales increased 16.8% from $3.9 million during the first quarter of fiscal 2001 to $4.5 million for the first quarter of fiscal 2002, primarily as a result of increased demand for microwave modules for the fiber optic market; however, our gross margins as a percentage of sales decreased from 42.2% to 10.3% for the same time period as a result of a change in the mix of products sold and the negative impact on overhead absorption as a result of a decline in sales volume from the previous quarter.
Selling, General and Administrative Expenses ("SG&A"). Selling, general and administrative expenses increased 19.4% from $10.1 million during the first quarter of fiscal 2001 to $12.0 million in the first quarter of fiscal 2002. The increase in SG&A is primarily attributable to a combination of factors: An increase in payroll and employment benefit related costs and the additional costs arising at Pacific Microwave Corporation. As a percentage of net sales, SG&A expenses increased from 17.8% in the period ended April 28, 2000 to 20.4% in the period ended April 28, 2001 due to the additional costs as described above.
Research and Development Expenses. Research and development expenses increased 56.6% from $4.0 million for the first quarter of fiscal 2001 to $6.2 million in the first quarter of fiscal 2002, and as a percentage of net sales, increased to 10.5% in fiscal 2002 from 7.0% in fiscal 2001. These expenditures are almost entirely attributable to our Broadband Wireless and Mobile Wireless Infrastructure Groups and reflect increased activity associated with new wireless communications product development.
Write down of Investment. During the first quarter of fiscal 2002, the Company recorded a $9.4 million charge to operations representing the write down of its investment in Allgon AB common stock which had been acquired in conjunction with the proposed merger with Allgon. The carrying value of these shares has been written down to its market value at the end of the first quarter. There were no similar costs in the comparable prior year period.
Gain on Sale of Subsidiary. REMEC's results of operations for the first quarter of fiscal 2002 include the gain from the sale of our Humphrey, Inc. subsidiary. There was no similar gain in the comparable prior year period.
Interest Income. Interest income and other, net increased from $1.6 million in the first quarter of fiscal 2001 to $1.7 million in the first quarter of fiscal 2002. The increase in interest income was due to an increase in the amount of cash available for investing as a result of the funds generated by REMEC's March 2000 public offering.
Provision (Benefit) for Income Taxes. Income tax expense decreased from $1.3 million in the first quarter of fiscal 2001 to a benefit for income taxes of $4.7 million during the first quarter of fiscal 2002. The decrease in income taxes reflects the recognition of the tax benefit associated with the Company's domestic net operating loss.
Liquidity and capital resources
At April 27, 2001, REMEC had $199.2 million of working capital, which included cash and cash equivalents totaling $114.3 million. REMEC also has a $12.0 million revolving working capital line of credit with a bank. The borrowing rate under this credit facility is based on a fixed spread over the London Interbank Offered Rate (LIBOR). This credit facility terminates on July 1, 2002. As of April 27, 2001, there were no borrowings outstanding under this credit facility.
During the three-month period ended April 27, 2001, operations used cash of approximately $5.7 million. The negative operating cash flow during the first quarter was principally the result of the
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Company's $9.2 million net loss during the quarter (net of $6.6 million of non-cash adjustments) and cash used to fund working capital requirements.
During the three months ended April 27, 2001, $16.4 million was used in investing activities consisting of $7.7 million in capital expenditures and a net cash outflow of approximately $10.6 million resulting from separate transactions involving the purchase of Pacific Microwave Corporation (a privately held microwave electronics manufacturing company located in the Philippines), and the net cash proceeds received from the sale of the operating assets and operations of the Company's Humphrey, Inc. subsidiary.
Financing activities used approximately $2.1 million during the three-month period ended April 27, 2001, principally as a result of the pay off of certain debt facilities assumed in the acquisition of Pacific Microwave Corporation.
Our future capital requirements will depend upon many factors, including the nature and timing of the growth in orders by OEM customers, the expansion of manufacturing to meet sales requirements, the progress of our research and development efforts, expansion of our marketing and sales efforts, and the status of competitive products. REMEC believes that available capital resources will be adequate to fund its operations for at least twelve months.
Class Action Lawsuit. On April 19, 1999, a class action lawsuit was filed against REMEC, some of its officers and directors and the investment banking firms that served as the representatives of the underwriters of our public offering completed in February 1998. The lawsuit was filed by the law firm Milberg Weiss Bershad Hynes and Lerach and others 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 us and the other defendants between December 1, 1997, and June 12, 1998. Specifically, the complaint alleges that REMEC made falsely positive statements which artificially inflated the price of REMEC stock prior to a secondary offering completed in February 1998, in which REMEC and some of its officers and directors sold stock, and that REMEC's stock price fell on a series of adverse disclosures in late May and early June 1998. The complaint in the lawsuit does not specify an amount of claimed damages. Since the lawsuit was filed, the underwriters have been dismissed without prejudice.
REMEC believes that the lawsuit is without merit and has been defending against it vigorously through a motion to dismiss and otherwise. In addition, REMEC believes the ultimate resolution will not have a material adverse impact on our business or financial condition. However, if the plaintiffs are successful in pursuing their claims against REMEC and its officers and directors, such a result could have a significant negative impact on REMEC's business and financial condition.
Other than the securities class action lawsuit described above, neither REMEC nor any of its subsidiaries is presently subject to any material litigation, nor to REMEC's knowledge, is such litigation threatened against REMEC or its subsidiaries, other than routine actions and administrative proceedings arising in the ordinary course of business, all of which collectively are not anticipated to have a material adverse effect on the business or financial condition of REMEC.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
Interest Rate Risk. REMEC is exposed to changes in interest rates to the extent of its borrowings under its revolving working capital line of credit. At April 27, 2001, REMEC had no borrowings under this credit facility and, therefore, no exposure to interest rate movement on its debt. REMEC will also be affected by changes in interest rates in its investments in certain held-to-maturity securities. Under
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current REMEC 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 cash equivalent securities would not materially affect the fair value of these securities at April 27, 2001.
Foreign Currency Exchange Rate. REMEC's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. To a certain extent, foreign currency exchange rate movements also affect REMEC's competitive position, as exchange rate changes may affect business practices and/or pricing strategies on non-U.S. based competitors. The primary foreign currency risk exposure is related to U.S. dollar to British pound and U.S. dollar and British pound to Euro conversions. Considering both the anticipated cash flows from firm sales commitments and anticipated sales for the next quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected second quarter fiscal 2002 earnings or cash flows. This analysis is dependent on actual export sales during the next quarter occurring within 90% of budgeted forecasts. The effect of the hypothetical change in exchange rates ignores the effect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects described above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. REMEC reviews its position each month for expected currency exchange rate movements.
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Item 6. Exhibits and Reports on Form 8-K
- (a)
- The following exhibits are filed herewith:
Exhibit 10.1—Change of Control Severance Agreement
- (b)
- There was one report on Form 8-K filed by the registrant during the quarter ended April 27, 2001, which disclosed the following:
- 1)
- On February 26, 2001, REMEC sold substantially all of the assets of its wholly owned subsidiary Humphrey, Inc. to Rosemont Aerospace, Inc., a wholly owned subsidiary of the B.F. Goodrich Company.
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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/ DAVID L. MORASH David L. Morash Chief Financial and Accounting Officer | |||
| Date: June 11, 2001 | ||||
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Index
REMEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
REMEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Item 3. Qualitative and Quantitative Disclosures About Market Risk