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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-16541
REMEC, INC.
(Exact name of Registrant as specified in its charter)
| California | 95-3814301 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3790 Via De La Valle, Suite 311 Del Mar, California | 92014 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (858) 842-3000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value Per Share
(Title of Class)
Indicate by check mark 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 twelve (12) months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days: Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. x
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨
The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on July 31, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $290,848,362 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.
The number of outstanding shares of REMEC common stock as of May 20, 2005 was 62,792,414.
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EXPLANATORY NOTE
This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to the Annual Report on Form 10-K of REMEC, Inc. (the “Company” or “REMEC”) for the fiscal year ended January 31, 2005 filed with the Securities and Exchange Commission on April 18, 2005 (the “Original Form 10-K”) in order to submit our management report on internal control over financial reporting and the related attestation report of our independent registered public accounting firm on management’s assessment and the effectiveness of internal control over financial reporting and to amend Part III of the Original Form 10-K. This Amendment also corrects some narratives and two footnotes to the financial statements.There is no restatement to our previously reported financial statements. Revised Consents of Independent Registered Public Accounting Firms have also been included as a result of this amendment. Except as expressly provided herein, this report speaks only as of the date of the Original Form 10-K and does not reflect any events occurring after January 31, 2005.
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REMEC, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 31, 2005
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| Page | ||||
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 35 | ||
| Interest Rate Risk | 35 | |||
| Foreign Currency Exchange Rate | 35 | |||
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 36 | ||
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 36 | ||
ITEM 9A. | CONTROL AND PROCEDURES | 37 | ||
| Report of Independent Registered Public Accounting Firm | 38 | |||
ITEM 9B. | OTHER INFORMATION | 40 | ||
| PART III | ||||
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF REMEC | 41 | ||
ITEM 11. | EXECUTIVE COMPENSATION | 45 | ||
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS | 58 | ||
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 60 | ||
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES | 60 | ||
| PART IV | ||||
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 63 | ||
SIGNATURES | ||||
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Some of the statements made by us in this Annual Report on Form 10-K are forward-looking in nature, including but not limited to, statements relating to our future revenue, product development, demand, acceptance and market share, gross margins, levels of research and development, our management’s plans and objectives for our current and future operations, and other statements that are not historical facts. Forward-looking statements include, but are not limited to, statements that are not historical facts, and statements including forms of the words “intend,” “believe,” “will,” “may,” “could,” “expect,” “anticipate,” “plan,” “possible,” and similar terms. Actual results could differ materially due to a variety of factors, including the risks described in this Annual Report and the other documents we file from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
REMEC, Inc. (“REMEC” or the “Company” or “our” or “we”) was incorporated in California in January 1983. Our principal executive offices are located at 3790 Via de la Valle, Del Mar, California 92014, and the telephone number for that location is (858) 842-3000. Our Internet address is www.remec.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports and other Securities and Exchange Commission, or “SEC,” filings are available free of charge through our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Upon written request, we will provide, without charge, a copy of this annual report on Form 10-K, including the consolidated financial statements, financial statement schedules and any exhibits for our most recent fiscal year. All requests should be sent to: REMEC, Inc., 3790 Via de la Valle, Del Mar, California 92014, Attn: Investor Relations. In addition, the public may read and copy materials filed by REMEC with the SEC at the SEC’s public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Our common stock trades on the Nasdaq National Market under the symbol “REMC.”
REMEC designs and manufactures high frequency subsystems used in the transmission of voice, video and data traffic over wireless communications networks in the defense and commercial sectors. Our products are designed to improve the capacity, efficiency, quality and reliability of wireless communications infrastructure equipment. We also develop and manufacture sophisticated wireless communications equipment used in the defense industry, including communications equipment integrated into electronic systems for tactical aircraft, ships, ground systems, satellites, missile systems and smart weapons. We manufacture products that operate at the full range of frequencies currently used in wireless communications transmission, including radio frequencies, or “RF,” microwave frequencies and millimeter wave frequencies. By offering products that cover the entire frequency spectrum for wireless communications, we are able to address opportunities in the worldwide commercial mobile wireless communications and defense markets.
During the fiscal year 2005, the Company engaged the services of financial advisors to evaluate strategic alternatives to enhance shareholder value, which included exploring the disposition of some or all of our business units. Actions to date are detailed in the Significant Business Developments in Fiscal Year 2005 section below.
SIGNIFICANT BUSINESS DEVELOPMENTS IN FISCAL YEAR 2005
In March 2004, the Company announced that it intended to divest certain “non-core” assets that accounted for a modest percentage of our revenues, but with unacceptable levels of operational losses.
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In April 2004, we sold certain assets and transferred certain liabilities related to our Antenna and Artificial Intelligence (AI) business to the owner of Optimal RF, a California start-up company.
In May 2004, we sold certain assets and transferred certain liabilities related to our Fixed Wireless Access (FWA) business to Axxcelera Broadband Wireless, Inc., a wholly owned subsidiary of Moseley Associates, Inc.
The sale of these assets and elimination of the FWA, Antenna and AI activities and liabilities reduced revenues by less than 1% in the aggregate.
In August 2004, we sold our majority interest in REMEC Nanowave Technologies Inc., a subsidiary located in Toronto, Canada, to Euromill Equihold Inc., an Ontario, Canada corporation for $3.0 million cash and a note for $2.5 million.
In September 2004, we issued a press release announcing that we had retained Needham & Company, Inc. as financial advisors to explore strategic alternatives, including the sale of the Company’s various business units.
In October 2004, we sold certain assets and transferred certain liabilities related to our Components business unit to Spectrum Control, Inc. for $8 million cash, subject to certain post-closing adjustments.
In December 2004, we sold the China Network Optimization business for $3.7 million, the return of certain securities, and the assumption of certain liabilities.
In December 2004, we entered into an agreement to sell our Defense & Space group to Chelton Microwave for $260 million cash. The Merger Agreement provides that Chelton Microwave will pay us $260 million in cash, subject to certain post-closing adjustments and the assumption of certain liabilities. In conjunction with the sale, the Company will propose a Certificate of Amendment to our existing Restated Articles of Incorporation (the“Certificate of Amendment”). The Certificate of Amendment will cause our common stock to be reclassified (the“Reclassification”) so that we can distribute a substantial portion of the proceeds from the sale of Defense & Space to our shareholders. In the Reclassification, each outstanding share of common stock will be converted into a fractional share of common stock (the“New Common Stock”) and one (1) share of redeemable common stock (the “Redemption Stock”). We intend to complete the Reclassification by filing the Certificate of Amendment with the Secretary of State of the State of California immediately prior to the effective time of the Merger.
We plan to distribute a substantial portion of the aggregate merger consideration to our shareholders by redeeming the Redemption Stock immediately after the effective time of the Merger (the“Redemption”). The exact amount of merger consideration distributed to our shareholders in the Redemption will be determined by our Board of Directors prior to the effective time of the Merger (the“Aggregate Redemption Amount”). Our Board currently expects the Aggregate Redemption Amount will be no less than $150 million and no more than $200 million. Assuming the sale of REMEC Defense & Space and the Certificate of Amendment are approved and the Merger is completed, each shareholder of REMEC will be entitled to receive an amount in cash per share of Redemption Stock equal to the Aggregate Redemption Amount divided by the number of shares of Redemption Stock issued and outstanding immediately prior to the effective time of the Merger.
In March 2005, we entered into a definitive agreement to sell selected assets and transfer certain liabilities of REMEC’s Wireless Systems business to Powerwave Technologies, Inc. for 10 million shares of Powerwave’s common stock and $40 million in cash and notes. Based on Powerwave’s closing price on Friday, March 11, 2005, the transaction value is approximately $120 million. The transaction includes our RF conditioning products, filters, tower-mounted amplifiers and RF power amplifiers. The transaction also includes our manufacturing facilities in Costa Rica, China and the Philippines, as well as certain employee related costs, facility lease obligations and assets and liabilities related to the product lines being acquired. We will retain certain assets of the Wireless Systems business that include the ODU/Transceiver product line and the
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manufacturing services business. For the twelve months ended January 31, 2005, these retained businesses generated approximately $20 million and $55 million of revenues, respectively.
The proposed sale of the Wireless Systems business assets and the previously announced sale of the Defense & Space business are results of the Company’s ongoing review of strategic alternatives to increase shareholder value. The completion of these transactions will result in REMEC divesting the majority of its operating assets and liabilities. The Wireless Systems sale, like the sale of Defense & Space, requires shareholder approval that has not been obtained as of the filing of this Form 10-K.
Consolidation Among Wireless Infrastructure OEMs and Service Providers Increases Competition. A limited number of large original equipment manufacturers (“OEMs”) account for a majority of purchases of filter, antenna line, and amplifier products and subsystems in the wireless equipment market. This requires manufacturers of filter products, antenna line products and amplifier products and subsystems, such as us, to increase efforts to establish and maintain relationships with these important customers. In addition, consolidation among wireless service providers has increased competition for their business and required the OEM’s selling to these service providers to reduce sales prices, pursue manufacturing cost reductions and commit resources to developing new products which has a like impact on us and our competitors.
The Wireless Industry Is Extremely Competitive and Requires a Significant Investment in Up-front Engineering Development. The competitive nature of the wireless industry results from the large number of suppliers at every level, from service providers to OEMs/subsystems and component suppliers. This results in an industry over-capacity condition. In addition, a significant up-front engineering investment is required in order to remain technically and cost competitive.
Demand for Mobile Wireless Services Necessitates Expansion of Wireless Infrastructure. Wireless network service providers to date have focused primarily on satisfying the increasing demand for wireless telephony through the transmission of voice and low speed data signals over cellular systems and digital personal communication systems (“PCS”). The demand created by increased minutes of usage and data transmission requires substantial additional capital investment in wireless communications infrastructure equipment.
Advances in Mobile Wireless Communications Network Technology Will Require Additional Wireless Infrastructure Equipment. The capacity and quality of domestic and international mobile wireless communications networks have evolved with advances in technology. In response to capacity and an increase in the level of service demands, service providers are expanding their current infrastructure and are implementing new wireless technologies, including third generation (“3G”) networks.
Demand for High Speed Internet Access and Other Data Services Increases the Need for Broadband Access. Consumers around the world are using the Internet for an ever-increasing range of purposes, including email, high quality audio, streaming video and other multimedia services. Businesses are also using the Internet to enhance their reach to both residential and business consumers with applications such as electronic commerce, global marketing, customer support, web hosting, order fulfillment and supply management. The Internet also permits access to corporate data networks, including intranets and extranets, facilitating communication among corporate sites or with telecommuters or traveling employees. This increased usage requires an expanded capacity for the quick and reliable transmission of voice, video and data, which can be accomplished through broadband access.
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Wireless Infrastructure OEMs Rely on Subsystem Providers. In order to meet the demand for mobile wireless and fixed wireless access broadband services, service providers normally utilize systems integrators or OEMs to build out infrastructure quickly, efficiently and in accordance with exacting performance specifications. In turn, many OEMs are looking to outsource the design and manufacture of highly integrated reliable subsystems in a cost-effective manner. This permits OEMs to accelerate their time to market and allows them to leverage their core competencies of full system design and integration. By outsourcing subsystems, OEMs promote competition among developers and manufacturers, which leads to technological innovations in wireless infrastructure equipment. Concurrently, OEMs are seeking to select a core group of subsystem and component providers in order to reduce the supply and management risks associated with the currently fragmented supplier base.
We market our products to OEMs of wireless communications networks and network service providers, as well as to prime contractors in the defense industry. We provide customers complete product life-cycle management for design, prototyping and mass production of reliable microwave and RF hardware.
Our core competencies include the following:
Integration Expertise. We design high performance subsystems over a broad range of RF, microwave and millimeter frequencies, which require sophisticated component integration. By integrating a number of required microwave functions into a single package, we are able to reduce the bill of materials, improve product performance, reduce cost and enhance yields and improve product reliability.
Concurrent Engineering. We streamline and optimize the product development cycle by employing “concurrent engineering,” which includes continuous joint participation with our customers from conceptualization, participation by our suppliers in the design process, and consideration of manufacturing constraints and limitations while developing a product design.
Design for Test and Design for Manufacturability Feedback. Our ability to plan both our internal manufacturing services and design capability reduces product time to market and unit costs. We retain control of each step of the design and manufacturing process while minimizing the use of outside sources and subcontractors for key manufacturing processes and services. This capability also improves quality control, reliability and our ability to implement volume production.
Broad Frequency Range. Our technologies support the range of frequencies utilized for mobile wireless and broadband wireless applications. Our microwave technology expertise covers the frequency spectrum used for existing wireless communications. Many of our subsystem competitors only address select frequency bands in the subsystems they design, which makes them vulnerable to technological advances in products that use frequency bands they do not address. By having the ability to design and manufacture products across the breadth of the wireless communications market, we can better address our customers’ needs and capitalize on our overall design and manufacturing capabilities.
Financial information regarding our business segments may be found in Note 11 to the Consolidated Financial Statements, which is incorporated herein by reference, and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K.
Wireless Systems Segment
The Wireless Systems segment addresses the mobile wireless infrastructure market. The mobile wireless market includes the cellular infrastructure market that supports Code Division Multiple Access (“CDMA”), Time
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Division Multiple Access (“TDMA”), Global Standard for Mobile (“GSM”), Enhanced Data Rates for GSM Evolution (“EDGE”), Universal Mobile Telecommunications System (“UMTS”) and 3G networks. Wireless network service providers to date have focused primarily on satisfying the increasing demand for wireless telephony through the transmission of voice and low speed data signals over cellular systems and digital PCS. In addition, the capacity and quality of domestic and international mobile wireless communications networks have evolved with advances in technology. In response to capacity and increased level of service demands, service providers are expanding their current infrastructure and are implementing new wireless technologies.
Defense & Space Segment
The Defense and Space segment addresses a broad spectrum of RF and microwave products for systems integrated by prime contractors in military and space applications. These products range from critical components and integrated modules to advanced integrated microwave assemblies for radar, missiles, electronic warfare and communication/navigation systems.
Wireless Systems Segment Products
We provide our products to worldwide OEMs and service providers. These products include tower mounted amplifiers and boosters, power amplifiers, medium power and low noise amplifiers, integrated filtering and combining systems, filters, oscillators, mixers, transceivers and radio outdoor units.
We provide a wide range of RF products and system solutions for use in cellular, TDMA, GSM, CDMA, PCS, PCN, EDGE and UMTS infrastructure networks. Our product lines include filter products, antenna line products and amplifier products and subsystems. Our products are designed to improve the capacity, coverage, efficiency, quality and reliability of today’s mobile infrastructure equipment networks.
| • | Filter Products. These products include bandpass filters, delay filters, duplexers, power dividers, combiners and integrated duplexer/amplifier/combiner subsystems. These products are typically custom OEM solutions for specific base transceiver station manufacturers. |
| • | Antenna Line Products. The following products are offered for use in both end user networks and custom OEM solutions to provide coverage enhancement and extension: interference rejection filters; band specific (Rx/Tx) duplexers; multi-band duplexers; triplexers and combiners for co-siting applications; tower mounted amplifiers and tower mounted boosters; and remote RF heads. All of these products are qualified to IP-68 environmental requirements. Our innovative approach has led to the industry leading Antenna Line Protocol (ALPTM) for integration, monitoring and control of antenna line systems, including electronically tiltable antennas. Tower-mounted and remote RF head products eliminate the cable loss between the base transceiver station (“BTS”) radio and the antenna by filtering and amplifying the transmit/receive signals directly at the antenna. These RF heads may extend coverage by up to 30% to 40%. As fully integrated RF “front ends,” these products provide the circuitry of the radio that enables signals to be transmitted and received at RF frequencies and that can be used as the front end of low power transceiver units. |
| • | Amplifier Product and Subsystems. These products include low noise amplifiers (“LNAs”), driver amplifiers, single carrier power amplifiers (“SCPAs”), multi-carrier power amplifiers (“MCPAs”), up/down converters, transceivers, and complete integrated RF subsystems. The primary applications of the products are custom OEM solutions for specific base transceiver station manufacturers, but also include a line of “standard” SCPA and MCPA high-power booster amplifier subsystems that “boost” the transmit signal of standard base stations to higher power levels and are offered in the end user market. These products are used in coverage applications to extend the range of the base transceiver stations to cover a wide area or in capacity enhancement applications to boost the signal level of multiple carriers on a single antenna after they have been combined onto a single transmission line. |
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Booster amplifier subsystems are offered as an integrated solution with our tower mounted amplifier products to provide a balanced link where the transmit power and receive sensitivity of the base transceiver stations are matched and optimized to a specific coverage area. |
Defense & Space Products
We provide RF and microwave products for electronic warfare, radar and communications/navigation systems for the defense market. We design, build and integrate these products and their microwave functionality into integrated subsystems for defense programs that we believe have a high probability of follow-on production. Our products are integrated into various defense tactical aircraft, satellites, missile systems and smart weapons that comprise the majority of high priority platforms of our customers. These RF and microwave systems, subsystems and integrated components are comprised of specialized combinations of components that perform a variety of microwave functions that include filters, couplers, power divider switches, amplifiers, voltage controlled oscillators, mixers and multipliers. Defense industry programs for which we provide subsystems and integrated components include the following:
| • | F-16 Tactical Fighter for the U.S. Air Force and International Markets |
| • | F/A-18 Tactical Fighter for the U.S. Navy |
| • | F/A-22 Tactical Fighter for the U.S. Air Force |
| • | F-35 Joint Strike Fighter for the U.S. Air Force, Navy and Marines |
| • | Integrated Defensive Electronic Countermeasure System (IDECM) for the U.S. Navy |
| • | Advanced Medium Range Air-to-Air Missile (AMRAAM) program for the U.S. Air Force |
| • | Longbow Missile and RADAR programs for the U.S. Army |
| • | Standard Missile for the U.S. Navy and International Markets |
| • | Tube Launched, Optically Tracked, Wire Guided (TOW) Missile for the U.S. Army |
| • | New Evolved Sea Sparrow (ESSM) Missile for the U.S. Navy and International Markets |
| • | Advanced Anti-Radiation Guided Missile (AARGM) for the U.S. Navy |
We also provide reliable designs and hardware solutions for U.S. space applications. Our products are integrated into many global positioning, military and communications satellites.
In addition, our Monolithic Microwave Integrated Circuits (MMIC) supports U.S. government research labs and other customers with state-of-the-art design services for next generation system capabilities such as “system on a chip” solutions for high-volume T/R modules.
Wireless Systems
The Wireless Systems segment has the ability to manufacture microwave products in high-volume, including test and critical hybrid circuits. Our manufacturing is organized into three main activities: volume manufacturing, new product introduction and manufacturing support. Volume manufacturing includes those sites that specialize in building our custom designs and those that have expertise in building to customer designs. Our volume manufacturing capabilities are located in several locations:
| • | Heredia, Costa Rica |
| • | Laguna, Philippines |
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| • | Shanghai, China |
| • | Escondido, California |
As part of our corporate strategy to globally manufacture in cost competitive locations that meet our customer’s needs, we commit significant resources to the development of and standardization to best-in-class processes and procedures. These manufacturing standards are developed in close coordination with our plants and our design groups. This allows our engineers to develop highly integrated products using a variety of packaging technologies and our manufacturing facilities to build those products using the most efficient and effective techniques. Additionally, we pursue the automation of key assembly and test processes in order to build on our competitive advantages.
All of our Wireless Systems segment factories and design centers have been certified to ISO-9001 or ISO-9002, as appropriate.
Defense & Space
The Defense & Space segment conducts its manufacturing activities at two major sites in North America. The primary manufacturing facility is located in San Diego, California. This facility includes design engineering, program management, manufacturing engineering, quality, supply chain management and other support functions for the U.S. based portion of this business.
REMEC Mexico, SA de CV, located in Tijuana, Mexico, serves as a low-cost manufacturing facility that augments the high production activities of our San Diego site. The close proximity to our San Diego location enables a full range of timely technical support for our high-volume manufacturing activities. Both locations have ISO 9001:2000 certifications. The San Diego location also maintains a MIL-PRF-38534 certification status for manufacturing microwave hybrid assemblies. In addition, the Defense Supply Center Columbus (DSCC) recently certified our environmental lab in San Diego for the Commercial Lab Suitability on MIL-STD-833 test methods. On-site manufacturing capabilities include:
| • | Precision machining, substrate fabrication and electro-plating |
| • | Hermetic sealing including laser welding |
| • | Components fabrication |
| • | Automated/semi-automated, and manual solder assembly |
| • | Automated/semi-automated, and manual microelectronics hybrid assembly |
| • | Automated/semi-automated, and manual test capabilities |
| • | Environmental test laboratory |
| • | Failure analysis evaluation laboratory |
We maintain research and development facilities in Richardson, Texas and Forsyth, Missouri. The research and development team enables REMEC to provide vertically integrated solutions from custom circuit design through component development. Services include standard and custom MMIC and transistor design, “fabless” microwave and millimeterwave packaging solutions, and direct circuit/radio frequency (DC/RF) on wafer testing.
Our products are manufactured from both standard components and parts that are built to specifications by other manufacturers. Our most significant raw materials are aluminum, ceramics and liquid nitrogen. While there have been some shortages in components and other materials, we have generally been able to obtain materials
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and components from a variety of sources to meet our needs. We develop and maintain alternative sources for essential materials and components. For most of our purchased parts, we do not have a concentration of sources of supply materials, labor or services that, if suddenly eliminated, would severely impact our operations.
REMEC derives a significant portion of our revenues from a limited group of customers. For the fiscal year ended January 31, 2005, our top ten customers comprised approximately 66% of revenues, compared to 69% in 2004 and 69% in 2003. For fiscal year 2005, three customers individually accounted for 10% or more of total fiscal revenues. Siemens accounted for 15%, Nokia Telecommunications Company 10%, and Northrop Grumman Corporation 10% of total fiscal revenues. We anticipate that we will continue to derive a significant portion of our revenues from sales to a relatively small group of customers. Our revenues would be significantly reduced if any of these customers cancel, reduce or delay orders or product shipments on account of their manufacturing or supply difficulties, financial difficulties or reduction in demand for their systems and products or otherwise.
We sell our commercial wireless communications products primarily to OEMs, which in turn integrate our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we also sell certain niche products directly to network service providers.
We sell RF and microwave equipment to major U.S. defense prime contractors for integration into larger systems, primarily radar electronic warfare, communications and navigation. Our customers for defense products include BAE Systems PLC, ITT Industries, Northrop Grumman Corporation, Raytheon Company, Lockheed Martin Corporation and L-3 Communications.
REMEC uses a team-based sales approach to facilitate close management of relationships at multiple levels of a customer’s organization, including management, engineering and purchasing personnel. Our integrated sales approach involves a team consisting of a senior executive, a business development specialist, members of our engineering department and local sales representation. Our executive officers are also involved in our relationships with our major customers. To identify sales opportunities, we primarily utilize a direct sales force supplemented by a group of manufacturer sales representatives.
We have direct sales offices in Europe and Asia and our international presence is increasing. Sales to customers residing outside of the U.S. represented 51%, 48% and 37% of net sales in fiscal years ended January 31, 2005, 2004 and 2003, respectively. Our international sales figures do not include products sold to foreign end users by our domestic customers.
A summary of our domestic and international net revenue and net property, plant and equipment is set forth in Note 11 to the Consolidated Financial Statements appearing elsewhere in this Form 10-K, which is incorporated herein by reference.
Our backlog, calculated as the aggregate of the sales price of orders received from customers less revenue recognized, was approximately $157.8 million on January 31, 2005 and $185.3 million on January 31, 2004. Approximately $29.1 million of the January 31, 2005 backlog and $44.8 million of the January 31, 2004 backlog was for the Wireless Systems segment.
Product orders in our backlog are frequently subject to changes in delivery schedules or to cancellation at the option of the purchaser without significant penalty. While we regularly review our backlog of orders to
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ensure that it adequately reflects product orders expected to be shipped within a one-year period, we cannot offer any assurance that such orders will actually be shipped or that such orders will not be cancelled in the future. We make regular adjustments to our backlog as customer delivery schedules change and in response to changes in our production schedule. Accordingly, backlog as of any particular date should not be considered a reliable indicator of sales for any future period and our revenues in any given period may depend substantially on orders booked in that period.
The markets for our products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and the market prices and margins of our products decline as competitors begin making similar products. We face competition from component/subsystem manufacturers, but we believe that our primary competition is from the captive manufacturing operations of large wireless communications OEMs, including nearly all of the major telecommunications equipment providers, and defense prime contractors. We believe that our future success depends largely upon the extent to which these OEMs and defense prime contractors elect to purchase subsystems and integrated components from outside sources such as us. OEMs and defense prime contractors could develop greater internal capabilities and manufacture these products exclusively in-house, rather than outsourcing them, which would have a negative impact on our sales.
Our core competencies, including our emphasis on concurrent engineering, rely heavily on our research and development capabilities. These capabilities, including our breadth of engineering skills, have allowed us to develop products that operate across the range of frequencies used in commercial wireless communications. Research and development expenses for the fiscal years ended January 31, 2005, 2004 and 2003 were $40.6 million, $47.4 million and $29.4 million, respectively.
Our research and development efforts in the defense industry are conducted in direct response to the unique requirements of a customer’s order and, accordingly, are included in cost of sales and the related funding in net sales. We believe that to remain a technology leader in the future we will need to invest significant financial resources in research and development. The results of the research and development programs continue to enhance and add value to our already impressive integration capability.
REMEC currently has more than 57 patents and approximately 6 patents pending. These patents include technologies for improving performance and reducing the cost of power amplifiers, multimode intelligent components, filters and transceivers. We believe these patents provide a competitive advantage and are important to our success as a supplier of RF and microwave equipment supplier. Our intellectual property also includes a variety of trade secrets and technology licenses.
In order to protect our intellectual property rights, we rely on a documented intellectual property protection process that includes patents, trade secrets, copyrights and trademarks and employee and third party nondisclosure agreements. We also limit access to and distribution of proprietary information. The steps that we have taken to protect our intellectual property rights may not be adequate to prevent misappropriation of our technology or to preclude competitors from independently developing similar technology.
Our products are incorporated into commercial wireless communications systems that are subject to regulation domestically by the FCC and internationally by other government agencies. Although the equipment
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operators and not us are usually responsible for compliance with these regulations, regulatory changes, including changes in the allocation of available frequency spectrum, could negatively affect our business by restricting development efforts by our customers, making current products obsolete or increasing the opportunity for additional competition. In addition, the increasing demand for wireless telecommunications has exerted pressure on regulatory bodies worldwide to adopt new standards for these products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused and may in the future cause the cancellation, postponement or rescheduling of the installation of communications systems by our customers.
We are also subject to a variety of local, state, federal and foreign governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture our products. The failure to comply with current or future regulations could result in the imposition of substantial fines on us, suspension of production, alteration of our manufacturing processes or cessation of operations.
Because of our participation in the defense industry, we are subject to audit from time to time of our compliance with government regulations by various agencies, including the Defense Contract Audit Agency, the Defense Security Service, the Office of Federal Contract Compliance Programs and the Defense Supply Center Columbus. These and other governmental agencies may also, from time to time, conduct inquiries or investigations that may cover a broad range of our business activity. Responding to any governmental audits, inquiries or investigations may involve significant expense and divert management attention. Also, an adverse finding in any such audit, inquiry or investigation could involve penalties.
We believe that we operate our business in material compliance with applicable government regulations.
As of January 31, 2005, we had a total of 5,070 employees, including 3,661 in manufacturing and operations (mostly at low-cost, offshore facilities), 643 in research, development and engineering, 225 in quality assurance, 62 in sales and marketing, and 479 in administration and material procurement. We believe our future performance will depend in large part on our ability to attract and retain highly skilled employees.
RISKS RELATING TO OUR BUSINESS
Failure to complete the Defense & Space sale could cause REMEC’s stock price to decline.
If the shareholders do not approve the proposed sale of the Defense & Space business segment, there will be a negative impact on the Company’s earnings for the fiscal year 2006. If the Defense & Space sale is not completed, REMEC’s stock price may decline due to any or all of the following potential consequences:
| • | REMEC may not be able to sell the Defense & Space business segment for value equaling or exceeding those currently estimated by REMEC; |
| • | REMEC’s costs related to the Defense & Space sale, such as legal, accounting and financial advisor fees, must be paid even if the sale is not completed; and |
| • | There is an $8 million termination fee that must be paid to Chelton if the Company terminates the agreement and certain events occur. |
| • | REMEC’s relationship with its customers and suppliers may suffer. |
In addition, if the sale is not completed, REMEC’s stock price may decline to the extent that the current market price of REMEC common stock reflects a market assumption that the Defense & Space sale will be completed.
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Failure to complete the Wireless Systems sale could cause REMEC’s stock price to decline.
If the shareholders do not approve the proposed sale of the Wireless Systems asset sale to Powerwave Technologies, Inc, there will be a negative impact on the Company’s earnings for the fiscal year 2006. If the Wireless Systems sale is not completed, REMEC’s stock price may decline due to any or all of the following potential consequences:
| • | REMEC may not be able to dispose of Wireless Systems assets for value equaling or exceeding those currently estimated by REMEC; |
| • | REMEC’s costs related to the Wireless Systems asset sale, such as legal, accounting and financial advisor fees, must be paid even if the sale is not completed; |
| • | There is a $5.65 million termination fee payable by REMEC to Powerwave if the asset purchase agreement is terminated and certain other conditions exist; and |
| • | REMEC’s relationship with its customers and suppliers may suffer. |
In addition, if the sale is not completed, REMEC’s stock price may decline to the extent that the current market price of REMEC common stock reflects a market assumption that the Wireless Systems asset sale will be completed.
We may not be able to borrow funds under our credit facility if we are not able to meet the conditions to borrowing in the facility.
This facility contains various conditions, covenants and representations with which we must be in compliance in order to borrow funds. We utilized this facility as security for certain financial transactions entered into by us and only briefly used it for borrowing purposes during the fiscal year 2005. All of this facility is used to guarantee certain business arrangements including letters of credit and our factoring facility. As of January 31, 2005, we were in compliance with the financial covenants contained in this credit facility. In addition, we may need additional capital to support our operations, which may be unavailable or costly.
As of January 31, 2005, our capital resources consisted of approximately $36.8 million in cash, cash equivalents and short-term investments. We anticipate that our existing capital resources will permit us to meet our capital and operational requirements through at least January 31, 2006. We base this expectation on our current operating plan, which may change as a result of many factors, including the following:
| • | Greater than expected product development or manufacturing costs; |
| • | Changes in the focus and direction of our research and development programs that could result in costly additional research and delay the sale of our products; |
| • | Failure to attain our target revenue levels, achieve our working capital requirements or derive anticipated cost savings/larger than expected operating losses. |
While management believes that we have adequate capital resources, there can be no assurance that this is the case. For example, if the shareholders do not approve the sale of our Defense & Space business unit or our operational performance varies substantially from our operating plan, our existing capital resources may not be sufficient to fund our operations. To the extent that our capital resources (including our credit facility mentioned above) are insufficient to meet our future capital requirements, we may have to curtail operations significantly.
Current economic conditions are uncertain.
Current conditions in the domestic and global economies are extremely uncertain. As a result, it is difficult to estimate the level of growth, if any, for the economy as a whole, and even more difficult to estimate growth, if any, in the specific markets in which we participate. Because our budgeting and forecasting are dependent upon
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estimates regarding the markets we serve, the prevailing economic uncertainty renders estimates of future income and expenditures even more difficult than usual to make. The future direction of the overall domestic and global economies will have a significant impact on our overall performance.
The terrorist attacks in 2001, current conflicts in the Middle East and the potential for future terrorist attacks and conflicts have created many economic and political uncertainties that have severely impacted the global economy. We experienced a decline in demand for our products after the terrorist attacks in 2001. The long-term effects of these economic and political uncertainties on our business and the global economy remain unknown.
Operating in the commercial wireless communications industry carries certain risks.
Our success in the commercial wireless market depends in large part on investments by our customers in expensive wireless infrastructure equipment. Because the commercial wireless market in the U.S. and Europe has only recently begun to deploy 3G, it is difficult to predict the rate at which this market will grow, if at all. Our customers may reduce their capital expenditures in response to current or anticipated reductions in consumer demand for their products and services. If the current economic uncertainty continues, demand for our commercial wireless products may be sharply reduced or may fail to develop, which would adversely affect our revenues. In addition, the need to invest in the engineering, research and development and marketing required to penetrate markets and maintain service and support capabilities limits our ability to reduce expenses during downturns.
The failure of our customers to sell wireless communications network solutions that include our subsystems and integrated components would harm our sales.
In general, our integrated components and subsystems must be custom designed for use in our customers’ products. As a result, we sell our products to a relatively small group of customers, and our products must be specifically engineered for each customer. While we select our customers based on our assessment of their ability to succeed in the marketplace, we cannot be sure of their success. If our customers are not successful, the length of time required to re-engineer our product for another customer may delay our sales or prohibit us from getting our products to the marketplace in a timely manner or at all. In addition, many of our customers can internally design and/or manufacture their own RF and microwave subsystems and systems. If, for any reason, our customers decide to produce their RF and microwave subsystems and systems internally, increase the percentage of their internal production, require us to participate in joint venture manufacturing with them or compete directly against us, our revenues would decrease which would adversely impact our results of operations.
Our production schedules and manufacturing processes may cause fluctuations in quarterly results.
Our quarterly results have varied significantly in the past and are likely to continue to vary significantly. These fluctuations are due to a number of factors, including the following: timing, cancellation or rescheduling of customer estimates for product; customer orders and shipments; pricing and mix of products sold; introduction of new products; our ability to obtain components and subassemblies from contract manufacturers and suppliers; and variations in manufacturing efficiencies. Any one of these factors could substantially affect our results of operations for any particular fiscal quarter.
Our continued efforts to service the defense market may limit our growth in revenues.
We make a substantial portion of our sales to the U.S. defense market. As a result, lower defense spending by the U.S. government could materially reduce our revenues. Lower defense spending by the U.S. government on REMEC programs might occur because of defense budget cuts, general budget cuts or other causes.
If we don’t complete the sale of the Defense & Space group, we expect to continue to derive a substantial portion of our revenues from defense programs and to develop microwave products for defense applications. If a
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significant defense program or contract ends, and we fail to replace sales from that program or contract, our revenues will decline. In addition, large portions of our expenses are fixed and difficult to reduce, thus magnifying the negative effect of any shortfall in revenue.
Our defense development contracts could cause our quarterly results to fluctuate.
We have entered into more defense industry development contracts as a source of defense revenues. Development contracts are contracts for the development of products, rather than the production of existing products and they tend to be fixed price contracts that generally result in lower gross profit margins than production contracts. As a result, our increased reliance on development contracts has led to the potential for increased quarterly fluctuations in sales and gross profit margins. Accordingly, our comparative performance from one fiscal quarter to the next is not necessarily an accurate indicator of our future performance.
Our exclusive arrangements with some customers may limit our pursuit of market opportunities and may result in a loss of revenues.
We have granted some of our customers’ exclusivity on specific products, which means that we are permitted to sell those specially, engineered products only to them. We expect that in some cases our existing customers and new customers may require us to give them exclusivity on new products that we make for them. By entering into exclusive arrangements, we may forego opportunities to supply these products to other companies. In addition, if we enter into exclusive relationships with customers who prove to be unsuccessful, our revenues will be negatively affected. We may not be able to establish business relationships with, or negotiate acceptable arrangements with, significant customers in the future. Also, our current or future arrangements with significant customers may not continue or be successful.
Our dependence on a few sole suppliers may decrease our timeliness of product delivery to customers.
In some cases, we rely on sole suppliers or a limited group of suppliers to provide us with services and materials necessary for the manufacture of our products. If we are not able to obtain sufficient allocations of these components, our production and shipment of product will be delayed, we may lose customers and our profitability may be affected.
Other risks relating to our reliance on sole suppliers include reduced control over productions costs, delivery schedules, reliability and quality of materials. Any inability to obtain timely deliveries of acceptable quality materials, or any other circumstances that would require us to seek alternative suppliers, could adversely affect our ability to deliver products to our customers. While it is unlikely that costs from our major suppliers will increase as costs are strictly managed through long-term contracts, if they did, we may suffer losses if we are unable to recover such cost increases under fixed price production commitments to our customers.
Fixed-price contracts may increase risks of cost overruns and product non-performance.
Our customers establish demanding specifications for product performance, reliability and cost. Most of our customer contracts are firm fixed price contracts. Firm fixed price contracts provide for a predetermined fixed price for the products we make, regardless of the costs we incur. We have made pricing commitments to customers based upon our expectation that we will achieve more cost effective product designs and automate more of our manufacturing operations.
Manufacture of our products is an extremely complex process. We face risks of cost overruns or order cancellations if we fail to achieve forecasted product design and manufacturing efficiencies or if products cost more to produce than expected. The expense of producing products can rise due to increased cost of materials, components or labor, or other factors. We may have cost overruns or problems with the performance or reliability of our products in the future.
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Our success in pursuing sales in international markets may be limited by risks related to international trade and marketing.
For the fiscal year ended January 31, 2005, approximately 51% of our revenue was derived from sales to customers residing outside the U.S. In addition, some of our U.S.-based customers who integrate our subsystems into their products may sell into these international markets. Adverse international economic conditions or developments, including economic instability in Asia, have in the past and could in the future negatively affect our direct sales and sales by our customers into these regions which would impact our revenues.
In addition to the uncertainty as to our ability to maintain and expand our international presence, there are certain risks inherent in foreign operations, including: delays resulting from export restrictions on certain products and technologies; fluctuations in foreign currencies and the U.S. dollar; foreign currency transaction exposure resulting from having costs and revenues in different currencies; loss of revenue, property and equipment from expropriation, nationalization, war, insurrection, terrorism and other political risks; transmission of contagious diseases; overlap of different tax structures; seasonal reductions in business activity; and risks of increases in taxes and other government fees. In addition, foreign laws treat the protection of proprietary rights differently from laws in the United States and may not protect our proprietary rights to the same extent as U.S. laws.
Increasing our international market presence may be difficult and costly.
We may seek to expand our presence in international wireless communications and related markets by entering into partnerships or alliances with OEMs and service providers in those countries and acquiring complementary international business. The success of our ability to increase our international market presence is dependent on a number of factors, including the success of our domestic operations, level of funding, stability of our stock price, ability to produce competitive international products, attraction and retention of key employees at our international locations and our execution of strategic objectives.
Competition among technology companies for experienced engineers and other personnel may affect our ability to sustain our growth expectations.
We depend on attracting and retaining competent personnel in all areas of our business, including management, engineering, manufacturing, quality assurance, finance, marketing and support. In particular, our development efforts depend on hiring and retaining qualified engineers. We believe that engineers, including highly skilled microwave engineers, with the skills necessary to develop products for wireless communications are in high demand. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. If we are unable to hire a sufficient number of engineering personnel, we may be unable to support the growth of our business, and as a result, our sales may suffer.
We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position.
Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. Despite our efforts to protect our proprietary technologies and processes, it is possible that certain of our competitors or other parties may obtain, use or disclose our technologies and processes. We have been issued a number of patents and other patent applications are currently pending. We cannot assure that any additional patents will be issued. Even if a new patent is issued, the claims allowed may not be sufficiently broad to protect our technology. In addition, any of our existing or future patents may be challenged, invalidated or circumvented. Moreover, any rights granted under these patents may not provide us with meaningful protection. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents.
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Our stock price may fluctuate significantly.
The market price of our common stock, like the stock prices of many companies in the telecommunications industry, is subject to wide fluctuations in response to a variety of factors, including: announcements of potential divestitures, actual or anticipated operating results; announcements of technological innovations; announcements of new products or new contracts by us, our competitors or customers; government regulatory action; developments with respect to wireless telecommunications; and general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations. These fluctuations have particularly affected the market prices for the stocks of technology companies and have often been unrelated to the operating performance of particular companies. The market price of our common stock has been highly volatile and may continue to be highly volatile.
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Our principal executive offices are located at 3790 Via de la Valle, Del Mar, California 92014. As of January 31, 2005, we owned or leased a total of approximately 1,083,900 square feet of space worldwide. We believe our existing properties are in good condition and suitable for the conduct of our business.
Our principal leased facilities have lease terms expiring between 2005 and 2017. Additional information regarding our obligations under property leases may be found in Note 7 to the Consolidated Financial Statements, which is incorporated herein by reference.
At the end of fiscal 2005, we were productively utilizing the space in our facilities, while attempting to dispose of space determined to be in excess.
Wireless Systems Segment Properties
The Wireless Systems segment owns or leases approximately 872,000 square feet located primarily in Poway, California; Milpitas, California; Escondido, California; Irvine, California; Aylesbury, United Kingdom; Shanghai, China; Heredia, Costa Rica; Oulu, Finland; Laguna, Philippines; and Seoul, South Korea.
Defense & Space Segment Properties
The Defense & Space segment leases approximately 212,000 square feet primarily located in San Diego, California; Tijuana, Mexico; Richardson, Texas; and Forsyth, Missouri.
Significant Geographic Operations
Americas | Europe | Asia | ||
| San Diego, California | Aylesbury, United Kingdom | Shanghai, China | ||
| Poway, California | Oulu, Finland | Laguna, Philippines | ||
| Escondido, California | Seoul, South Korea | |||
| Irvine, California | ||||
| Milpitas, California | ||||
| Tijuana, Mexico | ||||
| Heredia, Costa Rica |
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On September 29, 2004, three class action lawsuits were filed against the Company and current and former officers in the United States District Court for the Southern District of California alleging violations of federal securities laws between September 8, 2003 and September 8, 2004 (the “Class Period”). On January 18, 2005, the law firm of Milberg Weiss Bershad & Schulman LLP (“Milberg Weiss”) was appointed Lead Counsel and its client was appointed Lead Plaintiff.
On March 10, 2005, Milberg Weiss filed a Consolidated and Amended Complaint (the “Complaint”) naming the Company, a former officer and a current officer as defendants (“Defendants”). The Consolidated and Amended Complaint asserts, among other things, that during the Class Period, the Defendants made false and misleading statements and failed to disclose material information regarding the Company’s operations and future prospects. The Complaint seeks unspecified damages and legal expenses.
On November 16, 2004, a civil complaint was filed in San Diego Superior Court by Cardinal Health 301, Inc. (formerly known as Pyxis Corporation) (“Cardinal”) against Tyco Electronics Corporation, Thomas & Betts Corporation and the Company alleging breach of contract and breach of express and implied warranties with regard to certain products sold by the Company’s electronic manufacturing services business unit to Pyxis that incorporated allegedly defective components from Tyco and Thomas & Betts (the “Cardinal Complaint”).
On March 18, 2005, the court granted the Company’s demurrer to the Cardinal Complaint, allowing Cardinal an opportunity to amend its complaint, which it has done. Cardinal’s amended complaint includes the previous claims plus adds a claim for breach of the covenant of good faith and fair dealing. Cardinal’s amended complaint seeks seven million dollars in damages plus legal expenses. The Company’s response to the amended Cardinal Complaint, denying Cardinal’s claims and asserting a number of defenses, was filed on April 7, 2005.
Other than the two lawsuits 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 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matter was submitted to a vote of security holders during the fourth quarter ended January 31, 2005.
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| ITEM 5. | MARKET FOR REMEC’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock has been traded on the Nasdaq National Market since February 1, 1996 under the symbol “REMC.” On April 8, 2005, the number of shareholders of record of REMEC common stock was 991 and the closing sale price of REMEC common stock was $5.44 per share. The following table sets forth the range of high and low closing sale prices of our common stock as reported on the Nasdaq National Market for the quarterly periods indicated.
| High | Low | |||||
Fiscal 2004 | ||||||
First Quarter | $ | 5.16 | $ | 4.10 | ||
Second Quarter | 9.61 | 5.00 | ||||
Third Quarter | 11.80 | 7.80 | ||||
Fourth Quarter | 12.86 | 7.68 | ||||
Fiscal 2005 | ||||||
First Quarter | $ | 10.38 | $ | 6.07 | ||
Second Quarter | 6.92 | 4.37 | ||||
Third Quarter | 5.51 | 4.17 | ||||
Fourth Quarter | 7.44 | 5.45 | ||||
Fiscal 2006 | ||||||
First Quarter (through April 8, 2005) | $ | 7.02 | $ | 5.27 | ||
The Company will receive $260 million in cash, subject to certain post-closing adjustments, as a result of the sale of our Defense & Space subsidiary to Chelton Microwave. We plan to distribute a substantial portion of the net merger consideration to our shareholders by redeeming “Redemption Stock” immediately after the effective time of the Merger. We plan a reclassification of our common stock (the“Reclassification”) by authorizing a Certificate of Amendment to our Restated Articles of Incorporation. In the Reclassification, each share of our existing common stock will be converted into a fractional share of new common stock and one (1) share of redeemable common stock, or Redemption Stock. The Reclassification will enable us to distribute a substantial portion of the merger consideration we receive to our shareholders through the redemption of the Redemption Stock. The exact amount of merger consideration distributed to our shareholders will be determined by our Board of Directors prior to the effective time of the Merger (the“Aggregate Redemption Amount”). The Aggregate Redemption Amount of the distribution will be no less than $150 million and no more than $200 million. Assuming the sale of Defense & Space is completed, each shareholder of REMEC will be entitled to receive an amount in cash per share of Redemption Stock equal to the Aggregate Redemption Amount divided by the number of shares of Redemption Stock issued and outstanding immediately prior to the effective time of the Merger.
If the sale of the Wireless Systems business to Powerwave is approved by the shareholders, there will be a further distribution to shareholders following its approval. If it is not approved, other than the aforementioned special redemption of the proceeds from the Defense & Space sale, the Company intends to retain all future earnings, if any, for use in the operation and development of our Wireless Systems business and, therefore, do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. The credit agreement we entered into in February 2004 precludes the payment of cash dividends, although we have received oral assurances from the lender under that agreement that the Defense & Space redemption process discussed
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above will not give rise to an Event of Default under that agreement. We are in the process of obtaining that lender’s formal consent to the Defense & Space sale under the existing credit agreement.
RECENT SALES OF UNREGISTERED SECURITIES
We made no unregistered sales of our securities during the year ended January 31, 2005.
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| ITEM 6. | SELECTED FINANCIAL DATA |
The selected consolidated financial data set forth below is derived from our audited consolidated financial statements and may not be indicative of future operating results. The following selected financial data should be read in conjunction with the Consolidated Financial Statements for REMEC and notes thereto and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.
| Fiscal Year Ended January 31, | ||||||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Statement of Operations Data:(1) (2) | ||||||||||||||||||||
Net sales | $ | 423,911 | $ | 351,872 | $ | 226,678 | $ | 173,768 | $ | 186,992 | ||||||||||
Cost of sales | 358,501 | 292,354 | 194,826 | 153,834 | 138,401 | |||||||||||||||
Gross profit | 65,410 | 59,518 | 31,852 | 19,934 | 48,591 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling, general and administrative | 53,491 | 51,672 | 35,418 | 39,074 | 31,726 | |||||||||||||||
Research and development | 40,578 | 47,430 | 29,417 | 15,843 | 12,934 | |||||||||||||||
In-process research and development | — | — | — | 8,002 | — | |||||||||||||||
Merger and acquisition costs | — | — | — | — | 2,750 | |||||||||||||||
Impairment of goodwill | 62,400 | — | — | 17,695 | — | |||||||||||||||
Impairment of other long-lived assets | — | 1,038 | 658 | — | 2,311 | |||||||||||||||
Restructuring (reversals) charges | (888 | ) | 3,388 | 924 | 17,257 | — | ||||||||||||||
Total operating expenses | 155,581 | 103,528 | 66,417 | 97,871 | 49,721 | |||||||||||||||
Loss from continuing operations | (90,171 | ) | (44,010 | ) | (34,565 | ) | (77,937 | ) | (1,130 | ) | ||||||||||
Gain on sale of investment | — | 4,582 | — | — | 1,707 | |||||||||||||||
Gain on sale of facility | — | 945 | 1,183 | — | — | |||||||||||||||
Interest income and other, net | (93 | ) | 442 | 2,321 | 5,085 | 9,528 | ||||||||||||||
Write-down of investment | — | — | (1,801 | ) | (9,400 | ) | — | |||||||||||||
Gain on sale of subsidiary | — | — | — | 7,614 | — | |||||||||||||||
(Loss) income from continuing operations before income taxes and minority interest | (90,264 | ) | (38,041 | ) | (32,862 | ) | (74,638 | ) | 10,105 | |||||||||||
Provision (credit) for income taxes | (62 | ) | 103 | 19,563 | (13,955 | ) | 1,087 | |||||||||||||
(Loss) income from continuing operations before minority interest | (90,202 | ) | (38,144 | ) | (52,425 | ) | (60,683 | ) | 9,018 | |||||||||||
Minority interest | — | — | — | (972 | ) | 77 | ||||||||||||||
Net (loss) income from continuing operations | (90,202 | ) | (38,144 | ) | (52,425 | ) | (59,711 | ) | 8,941 | |||||||||||
(Loss) income from discontinued operations including gain (loss) on disposal, net of tax | (579 | ) | (11,264 | ) | (11,369 | ) | (10,152 | ) | 1,937 | |||||||||||
Net (loss) income | $ | (90,781 | ) | $ | (49,408 | ) | $ | (63,794 | ) | $ | (69,863 | ) | $ | 10,878 | ||||||
Earnings (loss) per share: | ||||||||||||||||||||
Basic | ||||||||||||||||||||
Net (loss) income from continuing operations | $ | (1.45 | ) | $ | (0.65 | ) | $ | (1.12 | ) | $ | (1.33 | ) | $ | 0.20 | ||||||
Net (loss) income from discontinued operations | (0.01 | ) | (0.19 | ) | (0.24 | ) | (0.23 | ) | 0.04 | |||||||||||
| $ | (1.46 | ) | $ | (0.84 | ) | $ | (1.36 | ) | $ | (1.56 | ) | $ | 0.24 | |||||||
Diluted | ||||||||||||||||||||
Net (loss) income from continuing operations | $ | (1.45 | ) | $ | (0.65 | ) | $ | (1.12 | ) | $ | (1.33 | ) | $ | 0.20 | ||||||
Net (loss) income from discontinued operations | (0.01 | ) | (0.19 | ) | (0.24 | ) | (0.23 | ) | 0.04 | |||||||||||
| $ | (1.46 | ) | $ | (0.84 | ) | $ | (1.36 | ) | $ | (1.56 | ) | $ | 0.24 | |||||||
Shares used in per share calculations: | ||||||||||||||||||||
Basic | 62,069 | 59,132 | 46,784 | 44,904 | 45,436 | |||||||||||||||
Diluted | 62,069 | 59,132 | 46,784 | 44,904 | 45,482 | |||||||||||||||
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| At January 31, | |||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||
| (In thousands) | |||||||||||||||
Balance Sheet Data:(1) (2) | |||||||||||||||
Cash, cash equivalents and short term-investments | $ | 36,773 | $ | 54,924 | $ | 76,845 | $ | 48,690 | $ | 131,149 | |||||
Working capital | 79,000 | 110,215 | 125,373 | 140,579 | 241,457 | ||||||||||
Total assets | 274,923 | 363,207 | 336,911 | 319,370 | 374,689 | ||||||||||
Long-term debt | — | 1,160 | 700 | 900 | — | ||||||||||
Total shareholders’ equity | 164,505 | 253,274 | 262,698 | 281,782 | 341,486 | ||||||||||
| (1) | REMEC has made numerous acquisitions, the most significant of which are Paradigm Wireless Systems, Inc. and Himark Telecom Group Limited in fiscal 2004, Spectrian Corporation in fiscal 2003 and ADC Mersum OY and Pacific Microwave Corporation in fiscal 2002, all of which were accounted for as purchases. The operating results of the acquired entities are included with REMEC from the date of acquisition. |
| (2) | REMEC has made several divestments during fiscal 2005 including the Components product line, the China Network Optimization product line, and Nanowave. These financial results for all time periods have been reclassified as discontinued operations on the income statement and assets held for sale on the balance sheet. |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
REMEC designs and manufactures microwave and millimeter wave subsystems used in the transmission of voice, video and data traffic over wireless communications networks and provides advanced integrated microwave subsystem solutions for defense and space electronics applications. We manufacture our products at our own plants in Heredia, Costa Rica; Laguna, Philippines; Shanghai, China and Kearny Mesa and Escondido, California.
We sell our commercial wireless systems products primarily to OEMs, which in turn integrate our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we also sell certain niche products directly to network service providers. We also sell our RF and microwave equipment to major U.S. defense prime contractors for integration into larger systems, primarily radar electronic warfare, communications and navigation.
Our net revenue consists principally of product revenue generated by sales of our microwave and RF products. Such sales represented the majority of our total net revenue in fiscal years 2005, 2004 and 2003, respectively.
The demand for our products has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:
| • | the economic and market conditions in the wireless communications markets; |
| • | the timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manage inventory; |
| • | our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner; |
| • | the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products; and |
| • | the rate at which our present and future customers and end-users adopt our products and technologies in our target markets. |
For these and other reasons, our net revenue in fiscal year 2005 and prior periods may not necessarily be indicative of future net revenue. From time to time, our key customers place large orders causing our quarterly net revenue to fluctuate significantly. We expect these fluctuations to continue.
Challenges include improving product margins, managing working capital and returning to profitability. The Company is taking steps we believe are necessary to cut product and infrastructure costs while increasing our base of revenue. Risks include our customers failing to sell wireless communications network solutions that include our subsystems and integrated components, which would harm our sales and production schedules, and manufacturing processes and may cause fluctuations in our quarterly results.
SIGNIFICANT RECENT DEVELOPMENTS
During the fiscal year 2005, the Company engaged Needham & Company, Inc. as financial advisors to evaluate alternative strategies to increase shareholder value, including the disposal of all or a portion of our business units.
In December 2004, we entered into the Merger Agreement to sell our Defense & Space group to Chelton Microwave for $260 million cash, subject to certain post-closing adjustments and the assumption of certain
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liabilities. We plan to distribute a substantial portion of the aggregate merger consideration to our shareholders by redeeming the Redemption Stock immediately after the effective time of the Merger (the“Redemption”). The exact amount of merger consideration distributed to our shareholders in the Redemption will be determined by our Board of Directors prior to the effective time of the Merger (the“Aggregate Redemption Amount”). The Aggregate Redemption Amount of the distribution will be no less than $150,000,000 and no more than $200,000,000, unless we experience unexpected adverse changes in our financial condition prior to the effective time of the Merger that cause our total or current liabilities to significantly increase or our total or current assets to significantly decrease, or some combination thereof.
In March 2005, we entered into a definitive agreement to sell selected assets and transfer certain liabilities of REMEC’s Wireless Systems business to Powerwave Technologies, Inc. for 10 million shares of Powerwave’s common stock and $40 million in cash. Based on Powerwave’s closing price on Friday, March 11, 2005, the transaction value is approximately $120 million. The transaction includes our RF conditioning products, filters, tower-mounted amplifiers and RF power amplifiers. The transaction also includes our manufacturing facilities in Costa Rica, China and the Philippines, as well as certain employee related costs, facility lease obligations and assets and liabilities related to the product lines being acquired. We will retain certain assets of the Wireless Systems business that include the ODU/Transceiver product line and the manufacturing services business. For the twelve months ended January 31, 2005, these retained businesses generated approximately $20 million and $55 million of revenues, respectively.
The proposed sale of the Wireless Systems business assets and the previously announced sale of the Defense & Space business are results of the Company’s ongoing review of strategic alternatives to increase shareholder value. The completion of these transactions will result in REMEC divesting the majority of its operating assets and liabilities. The Wireless Systems sale, like the sale of Defense & Space, requires shareholder approval that has not been obtained as of the filing date of this Form 10-K.
Consequently, if the sale transactions are approved and consummated, the Company’s financial and operational viability would become increasingly uncertain. As a result, in connection with seeking shareholder approval of the aforementioned transactions, the Board of Directors intends to ask Company shareholders to approve and adopt a plan of liquidation, which would be intended to allow for the orderly disposition of the Company’s remaining assets and businesses.
The management’s discussion and analysis centers on the continuing operations. The Components and China Network Optimization product lines, and Nanowave, all of which were divested during fiscal year 2005, are reported as discontinued operations, and “held for sale” assets on all prior period balance sheets.
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The following table sets forth, as a percentage of total net sales, the consolidated statement of operations data for the periods indicated:
| Years Ended January 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of sales | 84.6 | 83.1 | 85.9 | ||||||
Gross profit | 15.4 | 16.9 | 14.1 | ||||||
Operating expenses: | |||||||||
Selling, general and administrative | 12.6 | 14.7 | 15.6 | ||||||
Research and development | 9.6 | 13.5 | 13.0 | ||||||
Impairment of goodwill | 14.7 | — | — | ||||||
Impairment of other long lived assets | — | 0.2 | 0.3 | ||||||
Restructuring charge | (0.2 | ) | 1.0 | 0.4 | |||||
Total operating expenses | 36.7 | 29.4 | 29.3 | ||||||
Loss from operations | (21.3 | ) | (12.5 | ) | (15.2 | ) | |||
Gain on sale of investment | — | 1.3 | — | ||||||
Gain on sale of facility | — | 0.3 | 0.5 | ||||||
Interest income and other, net | — | 0.1 | 1.0 | ||||||
Write-down of investment | — | — | (0.8 | ) | |||||
Loss from continuing operations before income taxes | (21.3 | ) | (10.8 | ) | (14.5 | ) | |||
Provision (credit) for income taxes from continuing operations | — | — | 8.6 | ||||||
Net loss from continuing operations | (21.3 | ) | (10.8 | ) | (23.1 | ) | |||
Loss from discontinued operations including gain (loss) on disposal, net of tax | (0.1 | ) | (3.2 | ) | (5.0 | ) | |||
Net loss | (21.4 | )% | (14.0 | )% | (28.1 | )% | |||
FISCAL YEAR ENDED JANUARY 31, 2005 VS. FISCAL YEAR ENDED JANUARY 31, 2004
Net Sales and Gross Profit. Net sales for fiscal 2005 increased 20.5% from $351.9 million during fiscal 2004 to $423.9 million during fiscal 2005 due to increases in both our Wireless Systems and Defense & Space products. Gross profit increased 9.9% from $59.5 million in fiscal 2004 to $65.4 million in fiscal 2005.
Segment Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 11 of the Consolidated Financial Statements. Results within each of our business segments were as follows:
Wireless Systems. Net sales increased by $56.7 million, or 21.2%, to $324.4 million in fiscal 2005. The increase was primarily attributable to increasing our market share with major OEM customers for our amplifier products, our acquisition of Paradigm, strong customer demand for our tower-mounted amplifiers, and the ramp-up of our outdoor radio unit product line. Gross profit as a percentage of net sales decreased from 12.3% in fiscal 2004 to 11.6% in fiscal 2005. The decrease in the gross profit percent to sales was a result of increased pricing pressures across all product lines and our inability to reduce our manufacturing costs faster than the price decreases. In fiscal 2005, the Wireless Systems segment’s gross profit was impacted by approximately $3.6 million of charges for excess inventory versus $11.2 million charged in fiscal 2004. Also in fiscal 2004, the segment’s gross profit was negatively impacted by $3.3 million of reserves primarily related to two customer programs entered into in the latter half of fiscal 2004. Additionally, the results for fiscal 2005 include sales totaling $5.2 million of zero cost basis inventory
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obtained in our acquisition of Spectrian versus $6.8 million of sales in fiscal 2004. Operating expenses (including the impairment of goodwill and restructuring charges) increased by $53.1 million, or 58.3%, from $91.0 million in fiscal 2004 to $144.1 million in fiscal 2005. Excluding the impairment of goodwill, operating expenses declined as a percentage of net sales from 34.0% in fiscal 2004 to 25.2% in fiscal 2005. The charge for the impairment of goodwill was $62.4 million booked in the second quarter of fiscal 2005. The $9.3 million of operating expense decreases was due to plant consolidations, overall reduced spending, and the non-recurrence of provisions taken in 2004. The operating loss of the Wireless Systems segment increased from $58.1 million in fiscal 2004 to $106.5 million in fiscal 2005 due to the impact of the impairment of goodwill and lower gross profits previously discussed.
Defense & Space. Net sales increased by $15.3 million, or 18.1%, from $84.3 million in fiscal 2004 to $99.6 million in fiscal 2005, while gross profit as a percentage of sales decreased from 31.6% in fiscal 2004 to 27.9% in fiscal 2005. The increase in net sales was primarily due to increased delivery rates on production programs and increased sales from new development programs based on customer contract requirements. The decrease in gross profit as a percentage of net sales is a result of increased direct materials in the production programs and increased direct labor in our development programs. The manufacturing overhead amount, as a percentage of sales, remained relatively the same in both fiscal years. The segment’s operating income increased from $14.1 million in fiscal 2004 to $16.3 million in fiscal 2005, primarily attributable to the increase in net sales with lower operating expenses as a percentage of sales in fiscal 2005.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased by 3.5% from $51.7 million in fiscal 2004 to $53.5 million in fiscal 2005. As a percentage of net sales, SG&A decreased from 14.7% in fiscal 2004 to 12.6% in fiscal 2005. The decrease as a percentage of sales was primarily the result of cost reductions due to plant consolidations, improved efficiencies, and overall reduced spending.
Research and Development Expenses. Research and development expenses decreased from $47.4 million in fiscal 2004 to $40.6 million in fiscal 2005. Like in SG&A, the decreases were primarily the result of cost reductions due to improved efficiencies, and overall reduced spending. As a percentage of net sales, research and development expenses decreased from 13.5% in fiscal 2004 to 9.6% in fiscal 2005 as a result of the increase in sales and the lower spending.
Impairment of goodwill. During fiscal 2005, the Company determined there were indicators of impairment for the Wireless Systems reporting segment. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. Based on this assessment, the Company recorded a charge of $62.4 million to write down to zero the value of goodwill associated with the Wireless Systems reporting segment during the second quarter of this fiscal year. The Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill during the third fiscal quarter. Based on this assessment, there was no adjustment required to the loss previously recorded in the second fiscal quarter.
Impairment of other Long-Lived Assets. In the fourth quarter of fiscal 2004, the Company recorded an impairment charge of $1.0 million to write down the carrying value of two properties located in Finland to their estimated fair market value.
Restructuring Charge. During fiscal year 2005, the Company recognized a credit in the amount of $0.9 million related to the reversal of loss reserves intended for the sale of two buildings in Finland, one during the
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first quarter and another during the second quarter. During the fourth quarter of fiscal 2004, we announced our plan to restructure certain of our operations to improve our overall financial performance. Our restructuring plan included a reduction of our workforce, the transfer of production from our Finland manufacturing site to other manufacturing facilities and the disposition of unused equipment. As a result, we recorded a restructuring charge in fiscal 2004 totaling $3.4 million. This charge included severance costs of $2.1 million related to the reduction of our work force and an anticipated loss of $0.6 million from the write-off of other non-performing Wireless Systems segment assets. During fiscal 2004, we also reassessed our fiscal 2002 restructuring accrual, related to lease costs at abandoned facilities, and recorded an additional restructuring charge of approximately $0.7 million. (See Note 9 of the Consolidated Financial Statements.)
Gain on Sale of Investment. Fiscal 2004 results included a fourth quarter gain of $4.6 million associated with the sale of certain securities received during fiscal 2003 in a customer contract termination settlement.
Gain on Sale of Facility. Fiscal 2004 results include a $0.9 million gain associated with the sale of a facility located in the United Kingdom.
Interest Income and Other, Net. Interest income and other, net, decreased from $0.4 million of income in fiscal 2004 to $0.1 million of expense in fiscal 2005. Interest income was $0.7 million in fiscal 2004 due to interest on our investments, but was $0.7 million of expense in fiscal 2005 due to the combination of a reduction in the average amount of funds available for investment and factoring arrangements. Realized and unrealized foreign exchange was a gain of $0.7 million in fiscal 2004 and a loss of $0.3 million in fiscal 2005. Other expense was $1.0 million in fiscal 2004 and income of $0.9 million in fiscal 2005.
Provision (Credit) for Income Taxes. Income tax decreased from a provision for income taxes of $0.1 million in fiscal 2004 to a credit for income taxes of $0.1 million in fiscal 2005. No tax benefit has been recorded during fiscal 2004 or 2005 outside of amortization of acquisition related tax accruals and the recognition of anticipated tax refunds in certain of the foreign tax jurisdictions in which we operate.
For the fiscal years ended January 31, 2005 and 2004, we were in a net operating loss position for current tax provision purposes in all jurisdictions in which we operated. Significant items affecting the calculation of the effective tax rate include establishment of valuation reserves, the large permanent differences arising partly from non-deductible goodwill and merger costs, and the effect of these permanent differences on state income taxes. In addition, we recognized foreign taxes at rates that are generally lower than the U.S. statutory rate.
FISCAL YEAR ENDED JANUARY 31, 2004 VS. FISCAL YEAR ENDED JANUARY 31, 2003
Net Sales and Gross Profit. Net sales for fiscal 2004 increased 55.2% from $226.7 million during fiscal 2003 to $351.9 million during fiscal 2004 primarily as a result of increased sales of our Wireless Systems products as discussed further below. Gross profit increased 86.9% from $31.9 million in fiscal 2003 to $59.5 million in fiscal 2004. Gross profit as a percentage of net sales increased from 14.1% during fiscal 2003 to 16.9% during fiscal 2004. Fiscal 2004 results include charges of approximately $11.2 million to establish additional reserves for excess inventory and $3.8 million primarily to establish reserves for losses on two commercial programs entered into in the latter half of fiscal 2004.
Segment Information. The following segment information should be read in conjunction with the financial results of each reporting segment as detailed in Note 11 of the Consolidated Financial Statements. Results within each of our business segments were as follows:
Wireless Systems. Net sales increased by $112.0 million, or 72.0%, to $267.6 million in fiscal 2004. The increase was primarily attributable to increasing our market share within the mobile wireless
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communications infrastructure equipment market place as well as the impact of sales from acquired operations. In addition, the Wireless Systems segment experienced continued strong demand for manufacturing services. These increases were adversely impacted by the decline in industry demand for point-to-point radios and transceivers. Gross profit as a percentage of net sales increased from 8.8% in fiscal 2003 to 12.3% in fiscal 2004. In fiscal 2004, the Wireless Systems segment’s gross profit was negatively impacted by approximately $11.2 million of reserves for excess inventory as well as $3.3 million of reserves primarily related to two customer programs entered into in the latter half of fiscal 2004. In fiscal 2003 there were charges of $3.8 million for excess inventory reserves and $.4 million of program loss reserves. Additionally, the results for fiscal 2004 include sales totaling $6.8 million of zero cost basis inventory obtained in our acquisition of Spectrian, as well as the sale of $1.8 million of fully reserved inventory from a discontinued product line. Although operating expenses increased by $35.7 million, or 64.7%, from $55.3 million in fiscal 2003 to $91.0 million in fiscal 2004, they declined as a percentage of net sales from 35.5% in fiscal 2003 to 34.0% in fiscal 2004. The increase in total operating costs was primarily attributable to increased selling and marketing and research and development expenses associated with the activities absorbed from the acquisition of Spectrian. The operating loss of the Wireless Systems segment increased from $41.6 million in fiscal 2003 to $58.1 million in fiscal 2004.
Defense & Space. Net sales increased by $13.2 million, or 18.5%, from $71.1 million in fiscal 2003 to $84.3 million in fiscal 2004, while gross profit as a percentage of sales increased from 25.6% in fiscal 2003 to 31.6% in fiscal 2004. The increase in net sales was primarily due to increased delivery rates on production programs and increased sales from new development programs based on customer contract requirements. The increase in gross profit as a percentage of net sales was a result of decreased direct labor, direct materials, and overhead costs as a percentage of sales. The lower cost of goods sold primarily reflected continued productivity and manufacturing efficiency improvements at both our Mexico and San Diego facilities on production programs and improved overhead absorption resulting from the increase in production volumes. The segment’s operating income increased from $7.1 million in fiscal 2003 to $14.1 million in fiscal 2004, primarily as a result of the increase in gross profit as a percentage of sales.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, or SG&A, increased 45.9% from $35.4 million in fiscal 2003 to $51.7 million in fiscal 2004, and as a percentage of net sales, decreased from 15.6% in fiscal 2003 to 14.7% in fiscal 2004. The increase in SG&A was primarily a result of costs associated with the expansion of our sales organization in conjunction with the acquisition of the operations of Spectrian in December 2003 as well as costs associated with the operations of Paradigm, acquired during fiscal 2004. The Company also recorded a $2.4 million charge in the fourth quarter of fiscal 2004 associated with an executive transition agreement.
Research and Development Expenses. Research and development expenses increased from $29.4 million in fiscal 2003 to $47.4 million in fiscal 2004, primarily due to the expansion of our research and development activities as a result of acquired operations and an increase in activity associated with new wireless communications product development initiatives required to meet current and future market and customer requirements. As a percentage of net sales, research and development expenses increased from 13.0% in fiscal 2003 to 13.5% in fiscal 2004.
Impairment of other Long-Lived Assets. In the fourth quarter of fiscal 2004, the Company record an impairment charge of $1.0 million to write down the carrying value of two properties located in Finland to their estimated fair market value. During fiscal year 2003, the Company recorded asset impairment charges of $0.7 million to write-down the leasehold improvements at abandoned facilities.
Restructuring Charges. During the fourth quarter of fiscal 2004, we announced our plan to restructure certain of our operations to improve our overall financial performance. Our restructuring plan included a reduction of our workforce, the transfer of production from our Finland manufacturing site to other of our manufacturing facilities and the disposition of unused equipment. As a result, we recorded a restructuring charge
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in fiscal 2004 totaling $3.4 million. This charge includes severance costs of $2.1 million related to the reduction of our work force and an anticipated loss of $0.6 million from the write-off of other non-performing Wireless Systems segment assets. During fiscal 2004, we also reassessed our fiscal 2002 restructuring accrual, related to lease costs at abandoned facilities, and recorded an additional restructuring charge of approximately $0.7 million. During the fourth quarter of fiscal 2003, we reassessed our restructuring accrual in as much as it related to lease costs at abandoned facilities and recorded an additional restructuring charge of approximately $0.9 million associated with these leases. (See Note 9 of the Consolidated Financial Statements.)
Gain on Sale of Investment. Fiscal 2004 results include a fourth quarter gain of $4.6 million associated with the sale of certain securities received during fiscal 2003 in a customer contract termination settlement.
Gain on Sale of Facility. Fiscal 2004 results include a $0.9 million gain associated with the sale of a facility located in the United Kingdom. Fiscal 2003 results include a $1.2 million gain associated with the sale of a vacant facility located in San Diego, California.
Interest Income and Other, Net. Interest income and other, net, decreased from $2.3 million of income in fiscal 2003 to $0.4 million of income in fiscal 2004. Interest income was $2.1 million in fiscal 2003 due to interest on our investments versus $0.7 million of income in fiscal 2004. Realized and unrealized foreign exchange was a gain of $1.7 million in fiscal 2003 and a gain of $0.7 million in fiscal 2004. Other expense was $1.5 million in fiscal 2003 and expense of $1.0 million in fiscal 2004.
Write-down of Investment. Net loss for fiscal 2003 includes a $1.8 million charge representing the write-down of our investment in Allgon AB common stock, which had been acquired in conjunction with our proposed merger with Allgon in fiscal 2001. The carrying value of these shares was written down to the market value at the end of fiscal 2003.
Provision (Credit) for Income Taxes. Income tax expense decreased from a provision for income taxes of $19.6 million in fiscal 2003 to a provision for income taxes of $0.1 million in fiscal 2004. During fiscal 2003, we discontinued our prior practice of recording a tax benefit for our domestic operating losses and took the additional step of establishing a valuation allowance against all previously recorded deferred tax assets. No tax benefit has been recorded during fiscal 2004 outside of amortization of acquisition related tax accruals and the recognition of anticipated tax refunds in certain of the foreign tax jurisdictions in which we operate.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2005, we had $79.0 million of working capital, which included cash, cash equivalents and short-term investments totaling $36.8 million. We also have a $30.0 million revolving working capital line of credit with a bank, which expires in July 2005. The borrowing rate under this credit facility is based on prime + 1%, with prime being defined as “the bank’s most recently announced per annum ‘prime rate’.” Through January 31, 2005, we had no borrowings under this credit facility; however, approximately $8.4 million has been used under letter of credit arrangements, $1.8 million for banking cash management products, $2.6 million has been utilized in connection with foreign currency forward contracts and $17.2 million remains available to increase our factoring line. The credit facility is secured by the Company’s domestic trade receivables and inventory. As of January 31, 2005, we were in compliance with the financial covenants contained in this credit facility. This facility is also subject to a “Material Adverse Change” clause whereby the bank can subjectively determine that the Company is in default under the credit agreement. The Material Adverse Change is defined as “if there (i) occurs a material adverse change in the business operations, or condition (financial or otherwise) of the Borrower; or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) is a material impairment of the value or priority of Bank’s security interests in the Collateral.” We are not aware of any Material Adverse Change to date.
The Company has entered into a factoring arrangement whereby certain of its receivables are sold on a pre-approved, nonrecourse basis except in the event of dispute or claim as to price, terms, quality, material
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workmanship, quantity or delivery of merchandise. Pursuant to the terms of the arrangement, receivables are sold, net of factoring fees and commissions and net of any credits or discounts available to the Company’s customers. The Company had $8.1 million of advances from the factor outstanding at January 31, 2005 and none at January 31, 2004. In compliance with SFAS No 140 and the terms of the arrangement, proceeds are collected from the financial institution and the receivables are removed from the balance sheet.
During the year ended January 31, 2005, net cash used by continuing operations totaled $13.9 million. The negative operating cash flow during this period was principally the result of cash used to fund our operating losses, working capital requirements including the $7.5 million increase in accounts and other receivable and a decrease of $5.4 million in accounts payable. The increase in accounts and other receivables was primarily related to an increase in VAT (Value Added Tax) receivables and the decrease in accounts payable was related to our inventory reduction program.
During the year ended January 31, 2005, we consumed $17.5 million of cash from investing activities. Cash outflows from investing activities were primarily for capital expenditures partially offset by cash inflows from the sale of $5.8 million in investment maturities and $5.1 million from the sale of fixed assets no longer being utilized. Financing activities during the year ended January 31, 2005, consisted of proceeds of $3.6 million from the issuance of common stock under our Employee Stock Purchase Plan and from stock option exercises.
Our future capital requirements will depend upon many factors, including the proposed sale of the Defense & Space group, the proposed sale of the Wireless Systems assets (both of which are subject to shareholder approval), the nature and timing of orders by OEM customers, the progress of our research and development efforts, expansion of our marketing and sales efforts, and the status of competitive products. Our principal source of liquidity consists of our existing cash balances and our bank line of credit. If shareholders do not approve the sale of the Defense & Space group, it is possible that the Company may require additional sources of financing in order to capitalize on business opportunities that management believes currently exist. These additional sources of financing may include bank borrowings or public or private offerings of equity or debt securities. No assurance can be given that such additional sources of financing will be available on acceptable terms, if at all.
Off-Balance Sheet Arrangements
As of January 31, 2005 and 2004, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Obligations and Commitments
The following table summarizes our contractual payment obligations and commitments as of January 31, 2005:
| Payment Obligations by Fiscal Year (in 000’s) | |||||||||||||||||||||
| Total | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | |||||||||||||||
Operating leases | $ | 83,813 | $ | 9,966 | $ | 9,850 | $ | 8,900 | $ | 8,173 | $ | 7,941 | $ | 38,983 | |||||||
Purchase obligations | 14,635 | 14,566 | 38 | 31 | — | — | — | ||||||||||||||
| $ | 98,448 | $ | 24,532 | $ | 9,888 | $ | 8,931 | $ | 8,173 | $ | 7,941 | $ | 38,983 | ||||||||
We lease certain office and production facilities under non-cancelable agreements classified as operating leases. In accordance with accounting principles generally accepted in the United States, obligations under these long-term leases are not recorded on the balance sheet as liabilities until payment is due.
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We incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. Our purchase obligations are comprised of active and passive components as well as custom machined parts and castings, manufacturing and test equipment, computer hardware and information system infrastructure and other purchase commitments made in the ordinary course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions which allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us.
CRITICAL ACCOUNTING POLICIES ANDESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, impairment of long-lived assets, intangible assets, restructuring costs and income taxes. We base our estimates on historical experience and current developments and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially may result in materially different results under different assumptions or conditions. We consider the following accounting policies to be those that are both most important to the portrayal of our financial results and that require the most subjective judgment. See Note 1, of the notes to the Consolidated Financial Statements, for a summary of our significant accounting policies.
Revenue Recognition. We derive the majority of our revenue from product sales and we recognize revenue from these sales upon transfer of title to the product, which generally occurs upon shipment to the customer. In a growing number of instances, our customers are requiring us to transfer product through an intermediary warehouse. We generally ship to our customers “Free on Board” shipping point except in the circumstances described above. The Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) No. 101, as superceded by SAB No. 104,Revenue Recognition, provides guidance on the application of accounting principles generally accepted in the United States to selected revenue recognition issues. Revenues associated with the performance of non-recurring engineering and development contracts are recognized when earned under the terms of the related contract; and revenues for cost-reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bears to estimated costs. We believe that our revenue recognition policy is consistent with this guidance and in accordance with accounting principles generally accepted in the United States. If our shipping policies were to change, including the point of title transfer, materially different reported results would be likely. For example, if more customers required transfers through an intermediary warehouse, this would cause an increase to our inventory levels and delay revenue recognition.
Prospective losses on contracts, which are accrued for, are based upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms. For example, a delay in realizing cost reductions for a specific product would have a negative impact on our net income for the period.
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Allowance for Doubtful Accounts. Allowances for doubtful accounts are based on estimates of losses related to customer’s receivable balances. In establishing the appropriate provisions for customer receivables balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based upon individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivables balances. Generally, these individual credit assessments occur at regular reviews during the life of the exposure and consider (a) a customer’s ability to meet and sustain their financial commitments; (b) a customer’s current and projected financial condition; (c) the positive or negative effects of the current or projected industry outlook; and (d) the economy in general. Once the Company considers all of these factors, a determination is made as to the probability of default. An appropriate provision is made, which takes into account the severity of the likely loss on the outstanding receivable balance based on the Company’s experience in collecting these amounts. In addition to these individual assessments, in general, the Company provides a 5% reserve against all outstanding customer balances that are greater than 60 days past due. The Company’s level of reserves fluctuates depending upon all of the factors mentioned above. Credit losses have historically been within our expectations and the allowances established. At January 31, 2005, accounts receivable totaled $60.5 million, net of reserves for bad debt of $1.2 million.
Inventory Adjustments. Inventories are stated at the lower of weighted average cost or market. We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. As a general rule, stock levels in excess of one year’s expectation of usage or sales are fully reserved. The likelihood of any material inventory write-down is dependent on customer demand, competitive conditions or new product introductions by us, or our customers, that vary from our current expectations. The allowance is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of our cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis, in compliance with SAB Topic 5.BB. If future demand were significantly less favorable than projected by management, increases to the reserve would be required. In general, with the exception of our large excess and obsolescence charges during the fourth quarter of fiscal 2004, our losses from inventory obsolescence have been within our expectations and the reserves established. At January 31, 2005, inventories totaled $70.5 million, net of reserves for excess and obsolete inventory of $15.1 million and contract losses of $5.7 million.
Valuation of Goodwill, Intangible and Other Long-Lived Assets. We are required to assess goodwill impairment in fiscal 2005 using the methodology prescribed by Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
The majority of our acquisitions that resulted in goodwill being recorded fall within our Wireless Systems segment. The majority of goodwill and other long-lived assets within the Wireless Systems segment are attributable to the ADC Mersum OY, Himark and Paradigm acquisitions. Nanowave Technologies, Inc., which was merged into the Defense & Space segment in connection with the reorganization/reevaluation of the reporting units in 2003, is the only purchased business of this segment. Management determined in accordance with SFAS No. 142 that our segments meet the criteria for aggregation and therefore performed its analysis at the reporting segment level.
During the fiscal quarter ending July 30, 2004, the Company determined there were indicators of impairment for the Wireless Systems reporting segment as a result of changes in management’s assumptions with
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respect to revenue growth and gross margins. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. The assumptions used in this impairment test included sales growth rates ranging from 4%-8%, gross profit margins ranging from 14%-24%, and a discount rate of 18.6%. The estimates used reflected the Company’s inability to gain market segment share or attain the level of profitability previously anticipated. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. The Company had to issue financial statements before completing the second step of the impairment test that allows management to measure the actual amount of the impairment loss. Using the guidance included in SFAS No. 5,Accounting for Contingencies the Company determined that an impairment loss was probable and that this impairment loss could be reasonably estimated. The Company’s management made its best estimate of the goodwill impairment loss for the Wireless Systems reporting segment to be $62.4 million, the total amount of goodwill for that segment. In accordance with SFAS No. 142, the Company recorded an estimated charge to write down the value of its goodwill in the fiscal quarter ended July 30, 2004. During the Company’s fiscal quarter ending October 29, 2004, the Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill. Based on this assessment, there was no adjustment required to the loss recorded in the second fiscal quarter.
The primary factors that contributed to the impairment assessment of the Wireless Systems reporting segment in the second quarter of fiscal 2005 were continued projected losses resulting from industry overcapacity resulting in lower profit margins, and manufacturing cost reductions lagging market price decreases.
A goodwill impairment test was performed for the Defense & Space reporting segment as of January 31, 2005. Our impairment review process was based on a discounted future cash flow approach that uses our estimates of revenue for the reporting units, driven by assumed market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates. These estimates were consistent with the plans and estimates that we use to manage the underlying businesses. In performing the fiscal 2005 annual test for the Defense & Space segment, we assumed sales growth rates ranging from 10%-15%; gross profit margins ranging from 25%-27%; an income tax rate of 36% and a discount rate of 20%. In performing the fiscal 2005 annual test for the Defense & Space reporting segment, our assumptions were sales growth rates ranging from 10%-15%; gross profit margins ranging from 26%-28% (excluding depreciation); an income tax rate of 36% and a discount rate of 20%. We did not recognize any goodwill impairment as a result of performing this annual test.
A variance in the discount rate or gross margin assumptions could have a significant impact on the amount of identified goodwill impairment. A small change in the percentage assumptions for these factors could result in an indication of possible impairment that would lead us to further quantify the impairment and potentially record a charge to write-down these assets.
At January 31, 2005, intangible assets other than goodwill were evaluated for impairment using undiscounted cash flows expected to result from the use of the assets as required by SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. No impairment loss was recognized during fiscal 2005 related to these assets.
Accrued Restructuring Costs. To the extent that exact amounts are not determinable, we have estimated amounts for the direct costs and liabilities related to our restructuring efforts in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,andthe Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
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in a Restructuring). During fiscal 2005, the company recognized a credit in the amount of $0.9 million related to the reversal of reserves intended for the sale of two buildings in Finland, one during the first quarter and another during the second quarter of fiscal 2005. At the end of fiscal year 2005, there were no restructuring reserves remaining on the balance sheet. During fiscal 2004, we recorded a charge for restructuring costs of $2.7 million related to the restructuring plan announced in the fourth quarter of fiscal 2004. During fiscal 2004, we also reassessed the accrual related to our restructuring plan announced in fiscal 2002, in as much as it relates to costs of exiting certain lease obligations, and determined that the accrual was understated and recorded an additional $0.7 million charge.
Accrued Warranty Costs. Estimated future warranty obligations related to certain products are charged to operations in the period in which the related revenue is recognized. We establish a reserve for warranty obligations based on historical warranty experience. In general, our warranty costs have been within our expectations and the reserves established.
Valuation of Deferred Income Taxes. The Company records an estimated valuation allowance on its significant deferred tax assets when, based on the weight of available evidence (including the scheduled reversal of deferred tax liabilities, projected future taxable income or loss, and tax-planning strategies), it is more likely than not that some or all of the tax benefit will not be realized.
Income Tax Contingencies. Significant judgment is required in determining the Company’s worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany arrangements to share revenue and costs. In such arrangements there are uncertainties about the amount and manner of such sharing, which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although the Company believes that the approach to determining the amount of such arrangements is reasonable, no assurance can be given that the final exposure of these matters will not be materially different than that which is reflected in the Company’s historical income tax provisions and accruals.
In evaluating the exposure associated with various tax filing positions, the Company often accrues charges for probable exposures. At January 31, 2005, the Company believes it has appropriately accrued for probable exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of these accruals, the Company’s effective tax rate in a given financial statement period could be materially affected.
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123-R, which replaces SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value-based model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the fair-value method. Due to a recent SEC announcement delaying the effective date, the Company will be required to apply SFAS No. 123-R as of February 1, 2006. Thus, the Company’s consolidated financial statements will reflect an expense for (a) all share-based compensation arrangements granted beginning February 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b) the portion of previous share-based awards for which the requisite service has not been rendered as of that date, based on the grant-date estimated fair value of those awards.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured using the estimated fair value of the assets exchanged. SFAS 153 eliminates the narrow exception for nonmonetary exchanges of similar productive
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assets, and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has “commercial substance” if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. Management does not believe that this pronouncement will have a significant effect on its future financial statements.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs—an amendment of ARB No. 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. In Chapter 4 of ARB No. 43, paragraph 5 previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be so abnormal as to require treatment as current period charges…” SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005. Management does not believe this pronouncement will have a significant impact on its future financial statements.
In December 2003, the FASB issued a revision of SFAS No. 132,Employers’ Disclosures about Pensions and Other Postretirement Benefits. This pronouncement (“SFAS No. 132-R”) expands employers’ disclosures about pension plans and other post-retirement benefits, but does not change the measurement or recognition of such plans required by SFAS No. 87, No. 88. or No. 106. SFAS No. 132-R retains the existing disclosure requirements of SFAS No. 132, and requires certain additional disclosures about defined benefit post-retirement plans. The defined benefit pension plan of the Company’s United Kingdom subsidiary is the Company’s only defined benefit post-retirement plan. Except as described in the following sentence, SFAS No. 132-R is effective for foreign pension plans for fiscal years ending after June 15, 2004; after the effective date, restatement for some of the new disclosures is required for earlier annual periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such as the components of net periodic benefit cost, and certain key assumptions) are effective for foreign pension plans for quarters beginning after December 15, 2003; other interim-period disclosures will not be required for the Company until the first quarter of 2005. The interim-period disclosure requirements, which became effective on January 1, 2004 and December 31, 2004, were adopted by the Company on those dates. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defers indefinitely (a) the measurement and classification guidance of SFAS No. 150 for all mandatory redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150’s measurement guidance for other types of mandatory redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149,Amendments of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This pronouncement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s consolidated financial statements.
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In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or “VIEs”), and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are not small business issuers are as follows: (a) For interests in special-purpose entities: the first period ended after December 15, 2003; and (b) For all other types of VIEs: the first period ended after March 15, 2004. Management has determined that the Company has a VIE and as a result, an entity was consolidated in January 2005, which impacted its consolidated financial statements for fiscal year 2005 as discussed in Note 1 to our financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (the “SEC”), did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In July 2004, we increased our credit facility from $25.0 million to $30.0 million all of which is secured. To the extent of our borrowings under this facility, we will be exposed to changes in interest rates. Through, January 31, 2005 we have had no borrowings under this credit facility and, therefore, no related exposure to interest rate movement.
At January 31, 2005, our short-term investment portfolio includes fixed-income securities with a recorded value of approximately $4.5 million. These securities are subject to interest rate risk and might decline in value if interest rates increase. Due to their short-term nature, however, we believe that a hypothetical 100 basis point increase in interest rates would not materially affect the fair value of the securities in our investment portfolio.
FOREIGN CURRENCY EXCHANGE RATE
We have operations in Europe, Asia-Pacific and the Americas. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. Many of our reporting entities conduct a portion of their business in currencies other than the entity’s functional currency. These transactions give rise to receivables and payables that are denominated in currencies other than the entity’s functional currency. The value of these receivables and payables is subject to changes in exchange rates because they may become worth more or less than they were worth at the time we entered into the transaction due to changes in exchange rates. Both realized and unrealized gains or losses in the value of these receivables and payables are included in the determination of net income. Realized foreign currency transaction (losses) gains totaled $(0.1) million and $1.0 million during fiscal 2005 and 2004 while unrealized foreign currency losses totaled $(0.2) million and $(0.3) million during fiscal 2005 and 2004, and are included in other income and expense in the Condensed Consolidated Statements of Operations.
We transact sales denominated in Euros with two of our largest customers and entered into hedging contracts to offset the potential exposure related to foreign currency fluctuations. During the fiscal year 2004, we entered into forward contracts which did not qualify for special hedge accounting, therefore the forward contracts were marked to market and related gains and losses were recorded in income. The net realized loss related to these contracts was $0.3 million in fiscal 2004, which is included in other income, net. All of these contracts were settled as of January 31, 2004.
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To address increasing revenue growth denominated in foreign currencies and the related currency risks, in the fourth quarter of fiscal year 2004, the Company established a formal documented program to utilize foreign currency contracts to both mitigate the impact of currency fluctuations on existing foreign currency asset and liability balances as well as to reduce the risk to earnings and cash flows associated with selected anticipated foreign currency transactions anticipated within 12 months. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities all derivatives are recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify, that are not designated for special accounting treatment, or that are not effective as hedges, are recognized currently in earnings.
In fiscal year 2004, the Company began designating and documenting foreign exchange forward contracts related to forecasted sales as SFAS No. 133 cash flow hedges. The Company calculates hedge effectiveness, excluding time value, at least quarterly. The change in the fair value of the derivative on a spot to spot basis is compared to the spot to spot change in the anticipated transaction, with the effective portion recorded in other comprehensive income until it is reclassified to revenue together with the anticipated transaction upon revenue recognition. In fiscal 2005 the Company recorded a gain of $0.3 million in other income associated with forecasted transactions that were no longer expected to occur as originally documented, and a charge $0.9 million in other income associated with time value that has been excluded from effectiveness testing. In the event it becomes probable that additional hedged anticipated transactions will not occur, the gains or losses on the related cash flow hedges will immediately be reclassified from other comprehensive income to other income. At January 31, 2005, all outstanding cash flow hedging derivatives had a maturity of less than 6 months.
The Company manages the foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts with maturities of less than 12 months. These contracts are not designated under SFAS No. 133 for special accounting treatment and changes in their fair value are recognized currently in other income and substantially offset the remeasurement gains and losses associated with the foreign currency denominated assets and liabilities.
Outstanding net foreign exchange forward contracts at January 31, 2005 total $28.2 million (21.6 million Euro) with a weighted average exchange rate of 1.3059.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included as a separate section following Item 15 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On September 24, 2004, Ernst & Young LLP (“E&Y”) informed REMEC, Inc.that it was resigning as the Company’s independent registered public accounting firm effective no later than the completion of its review of the Company’s interim financial information for the three and nine months ending October 29, 2004.
The reports of E&Y on the Company’s financial statements for the fiscal years 2003 and 2004 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. E&Y’s reports on the Company’s fiscal 2004 and 2003 consolidated financial statements contained an explanatory paragraph indicating that the Company changed its method of accounting for goodwill and other intangible assets effective February 1, 2002.
The resignation of E&Y did not require a recommendation or the approval of the Audit Committee of the Company’s Board of Directors (the “Audit Committee”).
During the Company’s most recent two fiscal years and from January 31, 2004 through September 24, 2004, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement
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disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused it to make reference to the subject matter of the disagreements in connection with its report.
During the Company’s most recent two fiscal years and from January 31, 2004 through September 24, 2004, there were no “reportable events” as such term is described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934, as amended, except for those internal control issues that E&Y considered to be reportable conditions under auditing standards generally accepted in the United States and which were disclosed to the Audit Committee following the audits of the Company’s consolidated financial statements for the years ended January 31, 2003 and January 31, 2004 (See Item 9A- Controls and Procedures).
The Company is currently conducting a detailed assessment of its internal controls as required by the Sarbanes-Oxley Act of 2002 and has established a series of remediation teams to investigate potential control deficiencies, and, where appropriate, to remediate them.
The Company engaged Squar Milner Reehl Williamson LLP (“Squar Milner”) as the Company’s independent registered public accounting firm effective December 6, 2004. The engagement was authorized and approved by the Audit Committee of the Company’s Board of Directors.
During the Company’s most recent two fiscal years and from January 31, 2004 through December 6, 2004, the Company did not consult with Squar Milner regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K under the Securities Exchange Act of 1934, as amended, and the related instructions to Item 304 of Regulation S-K) or a “reportable event” (as such term is described in Item 304(a)(1)(v) of Regulation S-K), or (iii) any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in reports it files or submits under the Securities Exchange Act, and to record, process, summarize and disclose this information within the time periods specified in SEC rules and forms.
As of the quarter ended January 31, 2005, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was done under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.
Disclosure controls and procedures are defined in SEC rules as controls and other procedures designed to ensure that information required to be disclosed in Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. However, we note that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Based on the evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that the design of our disclosure controls and procedures is effective in ensuring that information required to be disclosed in the reports we file under the Securities Exchange Act is recorded, processed, summarized and reported within time periods specified in SEC rules and forms.
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(b) INTERNAL CONTROL OVER FINANCIAL REPORTING
Pursuant to Securities and Exchange Commission Release No. 34-50754, this Form 10-K/A amends our previous annual report to include the following management’s annual report on internal control over financial reporting required by Item 308(a) of Regulation S-K and the related attestation report of our independent auditors required by Item 308(b) of Regulation S-K.
(1) Management’s Annual Report on Internal Control over Financial Reporting
We prepared and are responsible for the consolidated financial statements that appear in our Annual Report. These consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP), and therefore, include amounts based on informed judgments and estimates. We also accept responsibility for the preparation of other financial information that is included in this document.
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial and accounting officer, the Company conducted an evaluation and assessment of the effectiveness of its internal control over financial reporting as of January 31, 2005, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Based on the Company’s evaluation under the framework inInternal Control—Integrated Framework,the Company’s management concluded that its internal control over financial reporting was effective as of January 31, 2005.
The Company’s independent auditors, Squar, Milner, Reehl & Williamson, LLP that audited the consolidated financial statements included in this Annual Report on Form 10-K/A have issued their attestation report on management’s assessment of our internal controls over financial reporting as set forth below.
(2) Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
REMEC, Inc.
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that REMEC, Inc. maintained effective internal control over financial reporting as of January 31, 2005, based on criteria established inInternal Control—Integrated
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Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of REMEC, Inc. is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 31, 2005, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2005, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of REMEC, Inc. as of January 31, 2005, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended and our report dated April 11, 2005 expressed an unqualified opinion thereon.
/s/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
Newport Beach, California
May 27, 2005
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(3) Deficiencies Identified by Management and Our Auditors
Whereas our evaluation and assessment of our internal controls over financial reporting revealed deficiencies, management concluded that such deficiencies were in all cases, mitigated by strong “compensating controls” and therefore did not rise above the level of significant deficiencies, individually or in combination. Further, such deficiencies were largely the result of “less than perfect” documentation, and arose partly as a result of employee turnover experienced by the Company during fiscal year 2005, among other factors.
A compensating control is a control that operates at a level of precision that would result in the prevention or detection of a misstatement that was more than inconsequential or material, as applicable, to annual or interim financial statements. The level of precision should be established considering the possibility of further undetected misstatements.
We have discussed these matters with our Audit Committee and board of directors and our independent auditors. We will continue to remediate the deficiencies so identified as part of management’s evaluation and assessment program.
(c) CHANGES IN INTERNAL CONTROLS.
During the period covered by this report, the Company has continued its efforts to improve its internal controls over financial reporting in connection with its assessment of such internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Except as described above, there was no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REMEC
The following table sets forth certain information concerning the executive officers and directors of REMEC as of May 23, 2005:
Name | Age | Position | ||
Thomas H. Waechter | 52 | President & Chief Executive Officer | ||
Winston E. Hickman | 62 | Executive Vice President and Chief Financial Officer | ||
Jon E. Opalski | 42 | Executive Vice President and Chief Technology Officer | ||
William Sweeney | 43 | Executive Vice President, Global Sales and Marketing | ||
Farid Firouzbakht | 41 | Senior Vice President, Base Station Systems | ||
Donald J. Wilkins | 57 | Senior Vice President, General Counsel & Secretary | ||
Martin Cooper(2)(4) | 76 | Director | ||
Thomas A. Corcoran(2)(4) | 60 | Director | ||
Mark D. Dankberg(1)(3)(4) | 49 | Director | ||
William H. Gibbs(1)(3) | 61 | Director | ||
Andre R. Horn | 76 | Chairman of the Board | ||
Harold E. Hughes, Jr.(1) | 59 | Director | ||
Jeffrey M. Nash(2)(3)(4) | 57 | Director | ||
Robert W. Shaner | 56 | Director |
| (1) | Member of the Audit Committee |
| (2) | Member of the Compensation Committee |
| (3) | Member of the Nominating and Governance Committee |
| (4) | Member of the Strategy Committee |
There is no family relationship between any of the directors or executive officers of REMEC.
THOMAS H. WAECHTER has served as President and Chief Executive Officer of REMEC since September 2004. He served as President and Chief Operating Officer from December 2002 until September 2004. Prior to joining REMEC, Mr. Waechter served as the President and Chief Executive Officer and a director of Spectrian Corporation from March 2000 to December 2002. From January 2000 until he joined Spectrian Corporation, Mr. Waechter was employed by Asyst Technologies, Inc., in various management positions, most recently as its Vice President of Global Operations. From September 1986 until January 2000, Mr. Waechter was employed by Schlumberger Ltd., a global technology services company, in various management positions, most recently as its Vice President of Global Operations. Mr. Waechter holds a B.B.A. in Business Administration from the College of William and Mary.
WINSTON E. HICKMAN has served as Executive Vice President, Chief Financial Officer of REMEC since November 2003. Prior to joining REMEC, Mr. Hickman was Chief Financial Officer at Paradigm Wireless Systems, Inc. Prior to joining Paradigm, Mr. Hickman served as Senior Vice President and Chief Financial Officer for Pacific Scientific. He has also held Vice President of Finance positions at Allied Signal and Rockwell International, both large public companies. Mr. Hickman received his undergraduate degree from California State University, Long Beach and a Master’s Degree in Business Administration from the University of Southern California.
JON E. OPALSKI has served in a variety of positions with REMEC since 1984. He currently serves as Executive Vice President and Chief Technology Officer. Prior to that Mr. Opalski served as Executive Vice
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President, Commercial Operations, President, Mobile Wireless Group and Senior Vice President, General Manager Integrated RF Solutions Group and Managing Director, REMEC Airtech and Senior Vice President, Marketing and Strategic Planning and President, General Manager, REMEC Wireless. He holds a B.S.E.E. from Massachusetts Institute of Technology.
WILLIAM SWEENEY joined REMEC in February 2002 and serves as Executive Vice President, Global Sales and Marketing. Before joining REMEC, he held various sales management roles at Cisco Systems, Inc. and was Vice President of Sales for a broadband wireless company. Mr. Sweeney earned a Bachelors Degree in Economics from San Diego State University.
FARID FIROUZBAKHT has served in a variety of positions with REMEC since November 2000. He currently serves as Senior Vice President of the Base Station Systems Division. Prior to that Mr. Firouzbakht was the President and General Manager of Mobile Wireless Europe. Prior to joining us, he worked for Lucent Technologies in Europe, and started his career at AT&T Bell Laboratories in 1988. Mr. Firouzbakht earned his Bachelors and Masters Degree in Electrical Engineering from the University of Wisconsin-Madison.
DONALD J. WILKINS has been the senior corporate counsel for REMEC since March 1997. From October 1989 until joining REMEC, Mr. Wilkins was General Counsel for Teledyne Ryan Aeronautical. Mr. Wilkins served in the U.S. Air Force from September 1969 until to his retirement in October 1989. Mr. Wilkins received a B.A. from the University of Notre Dame, a J.D. from the Catholic University of America, and an LL.M. in Government Procurement Law from The George Washington University.
MARTIN COOPER has been a director of REMEC since December 2002. Mr. Cooper is a founder of ArrayComm, Inc., a wireless technology manufacturer, and has served as Chairman since April 1992. He has served as President of Dyna, LLC, a consulting company, since 1986 and is presently its President. From 1985 to December 1992, he served as President of Cellular Pay Phone Incorporated, a cellular pay telephone company. From 1982 to 1986, he was a co-founder, Chairman and Chief Executive Officer of Cellular Business Systems, Inc., a management information company. From 1954 to 1983, Mr. Cooper served in a variety of positions including Corporate Vice President, Division Manager and Corporate Director of Research and Development of Motorola, Inc. He is a Fellow of the IEEE and of the Radio Club of America and a recipient of the IEEE Centennial medal. He serves on the Advisory Board of the International National Electronics Consortium and on the Board of Trustees of the Illinois Institute of Technology. Mr. Cooper holds B.S. and M.S. degrees in Electrical Engineering from the Illinois Institute of Technology.
THOMAS A. CORCORAN has been a director of REMEC since May 1996. From January 2001, he served as President of Corcoran Enterprises, LLC a management consulting firm. Mr. Corcoran is also a senior advisor to the Carlyle Group, a Washington D.C. based private equity group. Until December 2000, Mr. Corcoran was the Chairman, President and Chief Executive Officer of Allegheny Teledyne Incorporated. Prior to that, Mr. Corcoran was the President and Chief Operating Officer of the Space and Strategic Missiles sector of Lockheed Martin Corporation from October 1998 to September 1999. From March 1995 to September 1998, he was the President and Chief Operating Officer of the Electronics sector of Lockheed Martin. From 1993 to 1995 Mr. Corcoran was President of the Electronics Group of Martin Marietta Corporation, and from 1967 to 1993 he held various management positions, including Vice President and General Manager, with the Aerospace segment of General Electric Company. Mr. Corcoran is a director of L-3 Communications Holdings, Inc. and UIC Corporation. In recognition of Corcoran Enterprises’ strong relationship with The Carlyle Group, Mr. Corcoran is a director of Gemini Air Cargo, Inc. where he was CEO from early 2001 until March 2004. Mr. Corcoran is a member of the Board of Trustees of Stevens Institute of Technology.
MARK D. DANKBERG has been a director of REMEC since September 1999. Mr. Dankberg was a founder of ViaSat, Inc. and has served as Chairman of the Board and Chief Executive Officer of ViaSat since its inception in May 1986. Mr. Dankberg also serves as a director of TrellisWare Technologies, Inc., a privately-held subsidiary of ViaSat that develops advanced signal processing technologies for communication applications,
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and a manager of U.S. Monolithics, a privately-held subsidiary of ViaSat that develops millimeter-wave components and integrated millimeter-wave equipment. Prior to founding ViaSat, he was Assistant Vice President of M/A-COM Linkabit, a manufacturer of satellite telecommunications equipment, from 1979 to 1986 and Communications Engineer for Rockwell International from 1977 to 1979. Mr. Dankberg holds B.S.E.E. and M.E.E. degrees from Rice University.
WILLIAM H. GIBBS has been a director of REMEC since May 1996. From January 1998 to present he has served as President of Parafix Management, a company specializing in corporate turnaround and restructuring. Mr. Gibbs was the President and Chief Executive Officer of DH Technology, Inc. from November 1985 to January 1998 and was Chairman of the Board of DH Technology, Inc. from March 1987 through October 1997. From August 1983 to November 1985, he held various positions, including those of President and Chief Operating Officer, with Computer and Communications Technology, a supplier of rigid disc magnetic recording heads to the peripheral equipment segment of the computer industry. Mr. Gibbs is currently a director of Fargo Electronic, Inc. Mr. Gibbs holds a B.S.E.E. degree from the University of Arkansas.
ANDRE R. HORN has been a director of REMEC since 1988 and has served as REMEC’s Chairman of the Board since February 2005. Mr. Horn is the retired Chairman of the Board of Joy Manufacturing Company. From 1985 to 1991, Mr. Horn served as the Chairman of the Board of Needham & Company, Inc. He currently holds the honorary position of Chairman Emeritus of Needham & Company, Inc. Mr. Horn holds a B.S. degree in Mathematics from the University of Paris and is a graduate of the Ecole des Hautes Etudes Commerciales (Paris).
HAROLD E. HUGHES, JR. has been a director of REMEC since September 2003. Mr. Hughes has served as Chief Executive Officer of Rambus, a provider of interface solutions for chip and systems manufacturer, since January 2005. He is the former Chairman and CEO of Pandesic LLC, an e-commerce software supplier owned jointly by Intel Corporation and SAP. Prior to that, he spent 23 years with Intel where he held key positions in finance and operations management, including Treasurer, Chief Financial Officer and Vice President of Planning and Logistics. Mr. Hughes also founded and served as the Vice President of Intel Capital, Intel’s venture investment operation. From 1969 to 1974, Mr. Hughes served as an officer in the United States Army. He holds an M.B.A. degree from the University of Michigan and a B.A. degree from the University of Wisconsin.
JEFFREY M. NASH, Ph.D. has been a director of REMEC since September 1988. Since September 2003, Dr. Nash has served as Chairman and President of Inclined Plane, Inc. From June 1994 until September 2003, he was President of Digital Perceptions, Inc. From August 1995 to December 1997, he was the President of TransTech Information Management Systems, Inc. From 1989 to 1994, he was the President of Visqus Corporation as well as Conner Technology, Inc., both subsidiaries of Conner Peripherals, Inc. Dr. Nash is currently a director of ViaSat, Inc., a manufacturer of satellite communication equipment, and Pepperball Technologies, Inc., neither of which is an affiliate of REMEC. Dr. Nash holds B.S. and M.S. degrees in Engineering from UCLA, and a Ph.D. in Large Scale Systems Engineering/Operations Research, also from UCLA.
ROBERT W. SHANER has been a director of REMEC since December 2002. From January 2001 to February 2003, Mr. Shaner served as the President of Wireless Operations for Cingular Wireless LLC, a joint venture between the wireless divisions of SBC Communications Inc. and BellSouth Corporation. From November 1999 to January 2001, Mr. Shaner served as President SBC Wireless, a provider of wireless communication services to consumers and businesses. Mr. Shaner served as the President and Chief Executive Officer of Pacific Bell Wireless from August 1998 to November 1999. Prior to assuming that position, Mr. Shaner served as President of SBCI Europe and Middle East for SBC International, Inc. from March 1997 to July 1998. From 1995 to February 1997, Mr. Shaner held the position of President and Chief Executive Officer for SBC International Wireless. From 1991 to 1995, Mr. Shaner served as Executive Vice President for Southwestern Bell Mobile Systems. Prior to 1991, Mr. Shaner held various other management positions at Southwestern Bell Telephone/Telecom and Cellular One. Mr. Shaner also serves as a Curator and Chairman of the Board of Central Methodist University. He is also a director of Interdigital Communications Corporation and
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Mobility Electronics Corporation. Mr. Shaner is a principal and managing director of Performance Management Associates, LLC. Mr. Shaner holds a B.A. degree in Chemistry from Central Methodist College.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial and accounting officer and controller. This code of ethics is posted on our Website located at www.remec.com. The code of ethics may be found as follows: from our main Web page, first click on “Investors” at the top of the page and then on “Corporate Governance”. Then click on “Code of Business Conduct”. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller by posting such information on our Website, at the address and location specified above.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires REMEC’s directors and executive officers, and persons who own more than 10% of a registered class of REMEC’s equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the SEC. Such officers, directors and 10% shareholders are also required by SEC rules to furnish REMEC with copies of all Section 16(a) forms that they file. To REMEC’s knowledge, based solely upon review of the copies of such reports and certain representations furnished to it, REMEC’s executive officers and directors complied with all applicable Section 16(a) filing requirements during the fiscal year ended January 31, 2005.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total compensation received by the Chief Executive Officer, the four other most highly paid executive officers of REMEC and the individuals who served as Chief Executive Officer for at least portion of fiscal year 2005 (the “Named Executive Officers”). None of the Named Executive Officers received any bonuses or compensation for the fiscal years other than as set forth in the table or received any restricted stock awards, stock appreciation rights or long-term incentive plan payouts.
Summary Compensation Table
| Fiscal Year | Annual Compensation | Long-Term Compensation | ||||||||||||||||
| Awards | ||||||||||||||||||
Name and Principal Position | Salary ($)(1) | Bonus ($) | Restricted ($) | Securities Underlying Options (#) | All Other ($) | |||||||||||||
Thomas H. Waechter | 2005 2004 2003 | $ | 410,001 375,960 28,846 | $ | — — 1,000,000 | $ | 478,300 — — | (2) | 100,000 — 100,000 | $ | 11,059 47,557 1,500 | (3) (4) (5) | ||||||
Winston E. Hickman | 2005 2004 2003 | | 281,924 43,269 — | | 209,000 — — | | 466,500 — — | (6) | — 100,000 — | | 12,280 1,731 — | (7) (8) | ||||||
Jack A. Giles | 2005 2004 2003 | | 326,113 325,792 316,008 | | 114,281 90,850 — | | 141,075 — — | (9) | — — 100,000 | | 12,879 13,075 13,075 | (10) (11) (12) | ||||||
Jon E. Opalski | 2005 2004 2003 | | 250,903 248,363 240,467 | | — — — | | 73,850 — — | (13) | — — 150,000 | | 10,650 11,190 10,650 | (14) (15) (16) | ||||||
William F. Sweeney | 2005 2004 2003 | | 283,462 253,162 188,454 | | — — — | | 32,475 — — | (17) | — 25,000 130,000 | | 9,590 12,116 6,577 | (18) (19) (20) | ||||||
Ronald E. Ragland | 2005 2004 2003 | | 157,441 454,658 439,995 | | — — — | | — — — | | — — 200,000 | | 443,311 18,750 17,847 | (21) (22) (23) | ||||||
Robert W. Shaner | 2005 2004 2003 | | 321,538 — — | | — — — | | — — — | | 9,000 — 25,000 | | — — — | | ||||||
| (1) | Includes amounts deferred at the option of the officer pursuant to REMEC’s deferred compensation plan for employee directors. |
| (2) | Mr. Waechter received 85,000 Restricted Stock Units (of which 75,000 units were in exchange for underwater stock options) during the year ended January 31, 2005, which have a total value of $603,500 at the end of the fiscal year. These units will vest as follows: 2,500 on 09/16/2005; 18,750 on 11/10/2005; 2,500 on 09/16/2006; 18,750 on 11/10/2006; 2,500 on 09/16/2007; 18,750 on 11/10/2007; 2,500 on 09/16/2008; and 18,750 on 11/10/2008. |
| (3) | Consists of a $8,654 automobile allowance, $1,865 in life insurance premiums and a $540 contribution to the REMEC 401(k) plan. |
| (4) | Consists of a $9,000 automobile allowance, $1,865 in life insurance premiums, a $720 contribution to the REMEC 401(k) plan and $35,972 in relocation expenses. |
| (5) | Consists of a $1,500 automobile allowance. |
| (6) | Mr. Hickman received 75,000 Restricted Stock Units during the year ended January 31, 2005, which have a total value of $532,500 at the end of the fiscal year. These units will vest as follows: 37,500 on 05/17/2005; 18,750 on 02/01/2006; and 18,750 on 02/01/2007. |
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| (7) | Consists of a $9,000 automobile allowance and $3,280 in life insurance premiums. |
| (8) | Consists of a $1,731 automobile allowance. |
| (9) | Mr. Giles received 28,125 Restricted Stock Units (of which 13,125 units were in exchange for underwater stock options) during the year ended January 31, 2005, which have a total value of $199,688 at the end of the fiscal year. These units will vest as follows: 3,750 on 09/16/2005; 3,281 on 11/10/2005; 3,750 on 09/16/2006; 3,281 on 11/10/2006; 3,750 on 09/16/2007; 3,281 on 11/10/2007; 3,750 on 09/16/2008; and 3,282 on 11/10/2008. |
| (10) | Consists of a $8,654 automobile allowance, $3,505 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
| (11) | Consists of a $9,000 annual automobile allowance, $3,355 in life insurance premium, a $720 contribution to the REMEC 401(k) Plan. |
| (12) | Consists of a $9,000 automobile allowance, $3,355 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
| (13) | Mr. Opalski received 14,000 Restricted Stock Units (of which 9,000 units were in exchange for underwater stock options) during the year ended January 31, 2005, which have a total value of $99,400 at the end of the fiscal year. These units will vest as follows: 1,250 on 09/16/2005; 2,250 on 11/10/2005; 1,250 on 09/16/2006; 2,250 on 11/10/2006; 1,250 on 09/16/2007; 2,250 on 11/10/2007; 1,250 on 09/16/2008; and 2,250 on 11/10/2008. |
| (14) | Consists of a $9,000 automobile allowance, $930 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
| (15) | Consists of a $9,000 annual automobile allowance, $1,470 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
| (16) | Consists of a $9,000 automobile allowance, $930 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
| (17) | Mr. Sweeney received 7,500 Restricted Stock Units during the year ended January 31, 2005, which have a total value of $53,250 at the end of the fiscal year. These units will vest as follows: 1,875 on 09/16/2005; 1,875 on 09/16/2006; 1,875 on 09/16/2007; and 1,875 on 09/16/2008. |
| (18) | Consists of a $9,000 automobile allowance and $590 in life insurance premiums. |
| (19) | Consists of a $12,116 automobile allowance. |
| (20) | Consists of a $6,577 automobile allowance. |
| (21) | Consists of a $208 automobile allowance, $15,390 in life insurance premiums and a $427,713 severance payment. |
| (22) | Consists of a $9,000 automobile allowance, $9,030 in life insurance premiums, and a $720 contribution to the REMEC 401(k) plan. |
| (23) | Consists of a $9,000 automobile allowance, $8,127 in life insurance premiums and a $720 contribution to the REMEC 401(k) plan. |
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Option Grant Table. The following table sets forth certain information relating to options to purchase shares of REMEC common stock granted to the Named Executive Officers during the fiscal year ended January 31, 2005.
Option Grants in Fiscal 2005
Name | Number of Securities Underlying Options Granted (#) | Percent of Total Options Granted to Employees in Fiscal Year | Exercise or Base Price Per Share ($) (1) | Expiration Date | Potential Realizable Value at Assumed | ||||||||||||
| Annual Rates of Stock Price Appreciation for Option Term ($) (1) | |||||||||||||||||
| 5% | 10% | ||||||||||||||||
Thomas H. Waechter | 100,000 | (2) | 24.31 | % | $ | 8.00 | 9/1/2013 | $ | 441,063 | $ | 1,086,358 | ||||||
Winston E. Hickman | — | — | — | ||||||||||||||
Jack A. Giles | — | — | |||||||||||||||
Jon E. Opalski | — | — | |||||||||||||||
William F. Sweeney | — | — | |||||||||||||||
Ronald E. Ragland | — | — | |||||||||||||||
Robert W. Shaner | 9,000 | 2.19 | % | $ | 6.55 | 6/11/2013 | $ | 32,501 | $ | 80,051 | |||||||
| (1) | The 5% and 10% assumed rates of stock price appreciation used to calculate potential gains to optionees are provided pursuant to the rules of the Securities and Exchange Commission. |
| (2) | Exercisable upon completion of the first two consecutive fiscal quarters in which REMEC achieves positive net income from operations. |
Option Values at January 31, 2005
Name | Shares Acquired on Exercise (#) | Value Realized ($) | Number of Securities Underlying Unexercised Options at Fiscal Year-End (#) | Value of Unexercised In-The-Money Options at Fiscal Year-End ($) (1) | |||||||||||
| Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||
Thomas H. Waechter | — | $ | — | 107,498 | 237,502 | $ | 142,500 | $ | 746,000 | ||||||
Winston E. Hickman | — | — | 43,750 | 131,250 | — | — | |||||||||
Jack A. Giles | — | — | 167,501 | 108,125 | 71,253 | 342,188 | |||||||||
Jon E. Opalski | — | — | 210,751 | 97,000 | 173,949 | 241,900 | |||||||||
William F. Sweeney | — | — | 71,250 | 83,750 | 42,750 | 42,750 | |||||||||
Ronald E. Ragland | — | — | 960,000 | — | 570,000 | — | |||||||||
Robert W. Shaner | — | — | 35,792 | 18,208 | 43,702 | 32,499 | |||||||||
| (1) | Calculated on the basis of the closing price of REMEC common stock on the Nasdaq National Market on January 30, 2005 ($7.10 per share). |
2004 Option Exchange Program
In June 11, 2004, the Compensation Committee of the Board of Directors approved an offer by REMEC to certain eligible persons to exchange options to purchase shares of REMEC common stock with exercise prices greater than or equal to $15.00 per share that were outstanding under the REMEC 1995 Equity Incentive Plan (the “1995 Plan”), REMEC 2001 Equity Incentive Plan (the “2001 Plan”) and options that were assumed by REMEC pursuant to prior acquisitions for restricted stock units that represented the right to receive shares of REMEC Common Stock. The program provided one restricted stock unit for every four stock options exchanged. The restricted stock units were granted under the 1995 Plan and 2001 Plan. On November 10, 2004, 987,580 options were exchanged, and the Company awarded 246,861 shares of restricted stock units. The restricted stock units vest while the recipient remains an employee of the Company at the rate of 25% per year for four years.
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10-Year Option/ SAR Repricing Table
The following table provides information on all option repricings for the Executive Officers during the last ten fiscal years.
Name (a) | Date (b) | Number of Securities Underlying Options Repriced or Amended (#) (c) | Market Price of Stock at Time of Repricing or Amendment ($) (d) | Exercise ($) (e) | New Exercise Price (1) ($) (f) | �� | Length of Original Option Term Remaining at Date of Repricing or Amendment (g) | |||||
Thomas H. Waechter, | 11/10/2004 | 300,000 | $5.80 | 250,000 at $23.06; 50,000 at $16.00 | $0 | 5 years, 4 months; 6 years, 2 months | ||||||
Jack A. Giles, | 11/10/2004 | 52,500 | $5.80 | 52,500 at $25.42 | $0 | 4 years, 4 months | ||||||
Jon E. Opalski, | 11/10/2004 | 36,000 | $5.80 | 22,500 at $18.25; 13,500 at $25.42 | $0 | 2 years, 5 months; 4 years, 4 months | ||||||
Denny E. Morgan, | 11/10/2004 | 10,500 | $5.80 | $25.42 | $0 | 4 years, 4 months | ||||||
Farid Firouzbakht, | 11/10/2004 | 75,000 | $5.80 | $26.00 | $0 | 4 years, 10 months | ||||||
Donald J. Wilkins, | 11/10/2004 | 13,500 | $5.80 | 7,500 at $25.42; 6,000 at $20.06 | $0 | 4 years, 4 months; 4 years, 11 months | ||||||
| (1) | The restricted stock units do not have the exercise price and represent the right to receive shares of Common Stock of REMEC. |
Employment Contracts, Termination of Employment and Change-in-Control Arrangements
Employment Contracts. As of the end of REMEC’s 2005 fiscal year, Mr. Waechter and Mr. Hickman were the only Named Executive Officers who had employment agreements with REMEC.
Mr. Waechter. In connection with the acquisition of Spectrian in December 2002, Mr. Waechter, Spectrian’s President and Chief Executive Officer, entered into an employment agreement with REMEC (the “Employment Agreement”), to be effective upon the closing of the merger. Mr. Waechter became the President and Chief Operating Officer of REMEC upon the closing of the merger. Mr. Waechter agreed to waive his rights under his agreements with Spectrian upon the closing of the merger, and REMEC paid Mr. Waechter $1,000,000 in cash (subject to applicable tax withholding) upon the closing of the merger as consideration for the waiver of the approximately $1,600,000 in payments he would have been entitled to receive under his Spectrian change of control agreement.
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Under the Employment Agreement, Mr. Waechter is entitled to receive: an annual base salary of $375,000 (which was adjusted to $425,000 in September 2004 on his promotion to the Chief Executive Officer); an annual target bonus of 30% (which was adjusted to 50% on his promotion to the CEO) of his annual base salary provided Mr. Waechter achieves certain company-related objectives; reimbursement for expenses incurred in relocating to REMEC’s principal executive offices located in Del Mar, California (including a tax gross-up payment); reimbursement for the reasonable cost of a country club membership; a $9,000 annual car allowance; six weeks of vacation per year; and an option to purchase 100,000 shares of REMEC common stock with a four year vesting period; a $1 million life insurance policy; and other employee benefits available to senior executives of REMEC.
The Employment Agreement also provides that if in the first three years of Mr. Waechter’s employment with REMEC he is terminated without cause or resigns for good reason, then Mr. Waechter will be entitled to receive: payment of his base salary for three years after termination and three times his target bonus, as in effect at the time of such termination and calculated at the 100% achievement level; employee benefits for three years following termination; accelerated vesting of all of his outstanding options that were assumed by REMEC in connection with the merger to the extent that such options would vest in the three year period following Mr. Waechter’s termination date had he remained an employee of REMEC; and accelerated vesting of all of his outstanding options that were granted by REMEC after the closing of the merger to the extent that such options would vest in the year following Mr. Waechter’s termination date had he remained an employee of REMEC. The Employment Agreement defines “good reason” as the occurrence of any of the following unless expressly consented to by Mr. Waechter: a significant reduction of Mr. Waechter’s duties, position or responsibilities or his removal from such duties, position or responsibilities, unless he is provided with comparable duties, position and responsibilities; a substantial reduction, without good business reasons, in the facilities and perquisites available to Mr. Waechter; a reduction in Mr. Waechter’s base salary or target bonus; a material reduction in kind or level of Mr. Waechter’s benefits, with the result that Mr. Waechter’s overall benefits package is significantly reduced; the relocation of Mr. Waechter to a facility more than 35 miles away from REMEC’s Del Mar, California offices; any termination without cause or for which the grounds are not valid; or REMEC’s failure to cause the assumption of the Employment Agreement by a successor entity.
In the event Mr. Waechter is employed at REMEC on the date of a change of control of REMEC, Mr. Waechter will be entitled to receive: accelerated vesting of all of his outstanding options that were assumed by REMEC in connection with the merger to the extent that such options would vest in the three years following the date of the change of control of REMEC; and accelerated vesting of all of his options that were granted after the closing of the merger to the extent that such options would vest in the year following the date of the change of control of REMEC. In the event Mr. Waechter is terminated without cause or resigns for good reason within two years following a change of control of REMEC, then Mr. Waechter will also be entitled to receive: payment of his base salary for three years and three times his target bonus, as in effect at the time of such termination and calculated at the 100% achievement level; employee benefits for three years after his termination; and accelerated vesting of all his outstanding options. The Employment Agreement defines a “change of control” in the same manner as the Change of Control Agreements described below.
The Employment Agreement also provides for the imposition of a “best-of” provision with respect to Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), or any similar tax, if Mr. Waechter’s employment with REMEC is terminated without cause or for good reason within three years of the closing date of the merger or within two years after a change of control of REMEC. Upon the occurrence of either of these events, the benefits received by Mr. Waechter under the Employment Agreement will be paid at his election either in full or in such lesser amount such that the excise tax associated with Section 280G of the Internal Revenue Code will not apply with respect to the receipt of such benefits.
In order to receive severance payments and benefits during the three year severance period following his termination as described above, Mr. Waechter has agreed not to engage in any activity which is deemed to be in competition with REMEC’s business. Mr. Waechter has also agreed, for a 12-month period after the termination
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of his employment with REMEC for any reason, not to solicit, directly or indirectly, any employee to leave his or her employment with REMEC. Mr. Waechter also released REMEC from any and all claims or any liability for severance benefits or stock acceleration except as set forth in the Employment Agreement.
Mr. Hickman. We entered into an employment agreement with Mr. Hickman on December 10, 2004. Under his employment agreement, Mr. Hickman is entitled to receive: an annual base salary of $335,000; an annual target bonus of 40% of his annual base salary provided Mr. Hickman achieves certain company-related objectives, provided, however, that a guaranteed bonus for the fiscal year 2005 in the amount of $134,000 was paid to Mr. Hickman in December 2004; a $9,000 annual car allowance; six weeks of vacation per year; 75,000 shares of REMEC restricted stock units, 25% of which vest at the time of grant, with additional 25% vested on February 1, 2005, February 1, 2006 and February 1, 2007; retention payment in the amount of $50,000 payable on April 1, 2005 and $75,000 payable on September 1, 2005; reimbursement for housing expenses not to exceed $4,500; a $1 million life insurance policy; and other employee benefits available to senior executives of REMEC.
The employment agreement also provides that if Mr. Hickman is terminated without cause or resigns for good reason, then Mr. Hickman will be entitled to receive: payment of his base salary for 18 months after termination; employee benefits for 30 months following termination; accelerated vesting of his outstanding options or restricted stock grants that were granted to him within one year of the termination, except for the initial grant of restricted stock described above. The employment agreement defines “good reason” in the same manner as the Employment Agreement for Mr. Waechter.
In the event Mr. Hickman’s employment is terminated without cause or resigns for good reason within 6 month before or 12 months after a change of control of REMEC, Mr. Hickman will be entitled to receive: payment of his base salary for two years and two times his target bonus, as in effect at the time of such termination and calculated at the 100% achievement level; health and insurance benefits for Mr. Hickman, his spouse and dependents for 30 months after his termination; and accelerated vesting of all his outstanding options and restricted stock. In addition, we will continue to provide Mr. Hickman and his wife with medical, dental and vision insurance benefits upon the payment to us of the same monthly premiums for such insurance as are being paid from time to time by our corporate executives. The employment agreement defines a “change of control” in the same manner as the Change of Control Agreements described below.
In order to receive severance payments and benefits following his termination as described above, Mr. Hickman will have to release REMEC from any and all claims or any liability except as set forth in his employment agreement.
Change of Control Agreements.
Each of Messrs. Ragland, Opalski and Giles (collectively, the “Executive Officers”) entered into a Change in Control Agreement with REMEC dated October 21, 2002 (each an “Agreement”). Under each Agreement, certain benefits will be paid to each Executive Officer if REMEC incurs a change of control. In the absence of a change in control of REMEC, the Agreements do not provide any additional severance benefits to any Executive Officer (other than payment for unpaid base salary, unused vacation time and certain business expenses accrued before termination).
A “change of control” is defined in the Agreements as the occurrence of any one of the following events: (i) the completion of a merger or consolidation of REMEC with any other corporation or entity, other than a merger or consolidation that would result in the voting securities of REMEC outstanding immediately prior thereto continuing to represent more than 50% of the total voting power represented by the voting securities of REMEC or such surviving entity outstanding immediately after such merger or consolidation; (ii) any approval by the shareholders of REMEC of a plan of complete liquidation of REMEC or an agreement for the sale or disposition by REMEC of all or substantially all of the assets of REMEC; (iii) any person becoming the beneficial owner of securities of REMEC representing 50% or more of the total voting power represented by REMEC’s then
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outstanding voting securities; or (iv) change in the composition of the Board, as a result of which less than a majority of the directors are incumbent directors.
If REMEC incurs a change of control, all unvested options granted to the Executive Officers prior to the change of control that are scheduled to vest within one (1) year from the date of the change of control will immediately vest and become fully exercisable. In addition, if REMEC incurs a change of control and an Executive Officer’s employment is terminated without cause or constructively terminated within two years after the change of control, or if an Executive Officer’s employment terminates within two years after the change of control as a result of the failure of any REMEC successor to assume REMEC’s obligations under his Agreement, then such Executive Officer will be entitled to receive the following severance benefits: (i) eighteen months of his annualized base salary as in effect immediately before the change of control, payable in equal monthly installments in accordance with REMEC’s normal payroll practices; (ii) one and one half (1.5) times the average of any annual bonuses received from REMEC during the two years immediately prior to the change of control, payable in equal monthly installments in accordance with REMEC’s normal payroll practices; (iii) during the payment period of the severance benefits described in (i) and (ii) above, REMEC will continue to make available REMEC’s medical, dental, disability, life insurance and other similar plans in which the Executive Officer or his spouse or dependents participated on the date of termination; (iv) for an additional 18 months after termination of the payment period described in (iii) above, REMEC will continue to make available benefits that would be available under the Consolidated Omnibus Budget Reconciliation Act; and (v) all outstanding options granted to the Executive Officer before the change of control will immediately vest and become fully exercisable, except the Agreement entered into by Mr. Opalski require approval of the Board before this option acceleration will occur. These severance benefits described above may be subject to the Section 280G of the Code. In the event that these payments would otherwise be subject to the excise tax, the severance benefits will be reduced to the level at which no tax would be imposed.
The Agreements also impose certain non-solicitation obligations upon each of the Executive Officers for a period of 18 months following the termination of such Executive Officer’s employment for any reason, whether or not such termination is in connection with a change of control. Each Agreement will terminate upon the date that all obligations of REMEC and the applicable Executive Officer have been satisfied.
On November 9, 2004, we amended Mr. Opalski’s Agreement to clarify that a “change of control” is deemed to occur in the event we sell or otherwise dispose of all or substantially all of the assets of REMEC Defense & Space or the REMEC Wireless Systems business.
On November 9, 2004, we entered into a new agreement that amended and replaced the Agreement we had previously entered into with Mr. Giles. Under the terms of this new agreement, we clarified that a “change of control” is deemed to occur in the event we sell or otherwise dispose of all or substantially all of the assets of REMEC Defense & Space. This new agreement also removed the requirement that Mr. Giles be terminated following a change of control in order to qualify for his change of control benefits. As a result, Mr. Giles will be eligible to receive the change of control benefits set forth in his agreement upon the change of control regardless of his subsequent (actual or constructive) termination. Mr. Giles change of control has been triggered by a sale of Defense & Space to Chelton Microwave which was consummated on May 20, 2005.
Mr. Giles’ change of control agreement provides that upon a change of control, all unvested options, restricted stock units and other forms of equity compensation granted to Mr. Giles by us prior to the change of control will immediately vest and become fully exercisable. Mr. Giles is also entitled to receive, upon a change of control, payments amounting in the aggregate to (i) eighteen months of his base salary as in effect immediately prior to the change of control and (ii) one and one-half times the average of any annual bonuses received by Mr. Giles from us during the two years prior to the change of control. Mr. Giles’ base salary is currently set at approximately $354,800, and his bonuses in calendar years 2004 and 2005 averaged approximately $141,040. Based upon those amounts, the aggregate dollar amounts payable to Mr. Giles under his change of control agreement is approximately $743,760.
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In addition, during the period in which we make these payments to Mr. Giles, we will continue to make available to Mr. Giles and his wife and dependents all medical, dental or other health plans, any disability or life insurance plans and other similar insurance plans in which they participated immediately prior to the change of control. Upon the termination of the change of control benefits described above, or at the time Mr. Giles’ employment terminates for any other reason, we will continue to provide Mr. Giles and his wife with medical, dental and vision insurance benefits upon the payment to us of the same monthly premiums for such insurance as are being paid from time to time by our corporate executives. Chelton Microwave has agreed to assume our obligations under Mr. Giles’ change of control agreement to provide Mr. Giles and his wife with continued medical, dental and vision insurance benefits.
Transition Agreement
Mr. Ragland’s Agreement terminated upon Mr. Ragland’s resignation with REMEC effective February 9, 2004. Mr. Ragland entered into an Executive Transition Agreement with REMEC dated February 9, 2004 (the “Transition Agreement”). Pursuant to the Transition Agreement, Mr. Ragland resigned as a director and officer of REMEC. In consideration for the covenants in the Transition Agreement, REMEC agreed to pay Mr. Ragland $933,200, which is equivalent to two years of Mr. Ragland’s salary, in 24 equal monthly installments, plus $18,000, which is equivalent to two years of his annual automobile allowance. REMEC also agreed to accelerate the vesting of options to purchase 380,000 shares of REMEC common stock and to continue health insurance coverage for Mr. Ragland, Mrs. Linda Ragland and their dependent children. Pursuant to the Transition Agreement, Mr. Ragland agreed not to solicit any REMEC employees for a period of 12 months following Mr. Ragland’s termination date.
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COMPENSATION AND HUMAN RESOURCES COMMITTEE
REPORT AND RELATED INFORMATION
Compensation and Human Resources Committee Report
The Compensation and Human Resources Committee of the Board (the “Compensation Committee”) has furnished the following report:
The Compensation Committee is comprised of three independent directors and is responsible to assist the Board in discharging its responsibilities with respect to compensation of REMEC’s executive officers. The Compensation Committee, after reviewing all relevant and appropriate information related to business objectives and organizational performance, exercises independent responsibility to determine the most effective total compensation strategy for REMEC’s senior executive officers. The Compensation Committee, with assistance of independent executive compensation consultants, performs an annual review of marketplace competitiveness with telecommunications, defense and electronics manufacturing companies in comparable stages of development and with other comparable technology companies in the geographical regions where REMEC is located. For external marketplace comparison purposes, a group of companies operating in our industry is used for determining competitive compensation levels. The compensation strategy necessarily serves the business needs of REMEC and is consistent with the Board’s goal to build shareholder value, serve shareholders’ interests, and to attract, retain, and motivate the diverse talent required to do so. The Compensation Committee seeks to accomplish this goal by developing and administering REMEC’s executive compensation plans, programs and policies, by monitoring corporate performance and its bearing on the compensation of executive officers, and by making appropriate recommendations concerning matters of executive and director compensation.
Compensation Philosophy. REMEC operates in extremely competitive and rapidly changing industries, and its success depends upon its ability to attract and retain qualified executives through competitive compensation packages. The Compensation Committee’s general compensation philosophy is to provide executive officers with compensation based upon their personal performance, the financial performance of REMEC and their contribution to REMEC’s financial performance. The major goals of REMEC’s compensation program are to align compensation with the attainment of key business objectives and to enable REMEC to attract, retain and reward capable executives who can contribute to the continued success of REMEC. Within this overall philosophy, three key goals form the basis of compensation decisions for all employees of REMEC:
| 1. | To attract and retain the most highly qualified management and employee team critical to our long term success; |
| 2. | To pay competitively compared to similar technology and defense electronics companies and to provide appropriate reward opportunities for achieving high levels of performance compared to similar organizations in the marketplace; and |
| 3. | To motivate executives and employees to achieve REMEC’s annual and long-term business goals and encourage behavior toward the fulfillment of those objectives. |
As a result of this philosophy, in addition to standard benefits, REMEC’s executive compensation program is comprised of three elements: (i) base salary which reflects individual performance and expertise, (ii) variable bonus awards payable in cash and tied to the achievement of certain performance goals that the Board of Directors establishes from time to time for the Company, and (iii) long term stock-based incentive awards (stock option, restricted stock units and a stock purchase plan) which are designed to strengthen the mutuality of interests between the executive officers and our stockholders.
The summary below describes in more detail the factors which the Board of Directors considers in establishing each of the three primary components of the compensation package provided to the executive officers.
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Base Salary. The Compensation Committee recognizes the importance of maintaining compensation practices and levels of compensation competitive with telecommunications, defense and electronics manufacturing companies in comparable stages of development and with other comparable technology companies in the geographical regions where REMEC is located. For external marketplace comparison purposes, a group of companies operating in our industry is used for determining competitive compensation levels.
Base salary represents the fixed component of the executive compensation program. Determination of base salary levels is established on an annual review by independent executive compensation consultants of marketplace competitiveness with similar technology and defense electronics companies, and on individual performance. Periodic increases in base salary relate to individual contributions evaluated against established objectives, relative marketplace competitiveness levels, length of service and movements in the industry’s annual competitive pay practices.
During fiscal 2005, the Compensation Committee reviewed and made adjustments to the base salary amount for the President and Chief Executive Officer, and the Executive Vice Presidents of REMEC.
Cash-Based Incentive Compensation. REMEC’s bonus program is an integral part of its compensation program and is designed to reward executives for long-term strategic management and for success in achieving designated individual goals and our success in achieving specific financial performance goals, such as revenue growth and earnings. Each year a portion of REMEC’s pre-tax profits comprise the bonus “pool”. The Compensation Committee reviews and determines the bonus amounts for the President and Chief Executive Officer, and the Executive Vice Presidents of REMEC, based on both the attainment by those officers of specific business plan targets, and on overall financial performance. Maximum targeted cash bonuses for participating executive officers range from 30% to 50% of their base salaries, and lesser amount for other participating managers. Only Mr. Hickman and Mr. Giles received bonuses in fiscal 2005. Mr. Hickman received bonuses totaling $209,000, and Mr. Giles received a bonus of $141,281. (For his performance in fiscal year 2005, Mr. Giles also was awarded a bonus of $167,008 which was paid in the second quarter of fiscal 2006. Similarly, for his performance in fiscal year 2005, Mr. Waechter was awarded a bonus of $70,833 which was paid in the first quarter of fiscal 2006.)
Long-Term Incentive Compensation. We have utilized our stock option plans to provide executives and other key employees with incentives to maximize long-term stockholder values. Awards under these plans by the Board of Directors take the form of stock options or restricted stock unit grants designed to give the recipient a significant equity stake and thereby closely align his or her interests with those of our stockholders. Factors considered in making such awards include the individual’s position, his or her performance and responsibilities, and internal comparability considerations. The Board of Directors is not required to adhere strictly to these factors and may vary the size of the option grant or restricted stock unit grant made to each executive officer as it determines the circumstances warrant. Each option grant allows the executive officer to acquire shares of common stock at a fixed price per share (the fair market value on the date of grant) over a specified period of time (up to 10 years). The options typically vest in periodic installments over a four-year period, contingent upon the executive officer’s continued employment with us. Accordingly, the option will provide a return to the executive officer only if he or she remains in our service, and then only if the market price of the common stock appreciates over the option term. Similarly, in the case of restricted stock unit grants, unless the Board determines otherwise, the unvested stock reverts to REMEC on the executive officer’s termination of employment.
In accordance with this policy, during fiscal 2005, the existing equity-based compensation of the Named Executive Officers was reviewed and the Compensation Committee made new grants of stock options under REMEC’s equity incentive plans. In the aggregate, these options provided our executive officers with rights to purchase 109,000 shares of our common stock at prices ranging from $6.55 to $8.00 per share, and 209,625 shares of restricted stock units.
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In addition to participating in REMEC’s equity incentive plans, REMEC’s executive officers may also participate in the Employee Stock Purchase Plan on the same basis as other employees who meet eligibility criteria. This plan is qualified under Section 423 of the Internal Revenue Code, and it allows participants to purchase, through payroll deductions, shares of our common stock at a price equal to 85% of its fair market value on the enrollment date or the purchase date, whichever is lower.
Repricing of Options. During November 2004, we commenced a voluntary stock option exchange program for certain of our outstanding options. This program was offered to all option holders, including executive officers, whose options had exercise prices greater than or equal to $15.00 per share. As a result of the prolonged downturn in the defense and electronics manufacturing industry and the impact this has had on the market price of our common stock, the exercise price of these options was significantly above market price and no longer offered the incentive that had originally been intended. Thus, participants were offered the opportunity to exchange such old options for the right to receive restricted stock units. We believe that this exchange program is consistent with our goals of using long-term incentives as a means of promoting REMEC’s long-term financial objectives.
Compensation for the Chief Executive Officer. During the fiscal year ended January 31, 2005, Thomas Waechter was paid a base salary of $410,001 and did not receive a bonus (for his performance in fiscal 2005, he was awarded a bonus of $70,833 which was paid in the first quarter of fiscal 2006). During the fiscal year ended January 31, 2005, Mr. Waechter was granted 100,000 performance-based stock options exercisable at $8.00 per share upon completion of the first two consecutive fiscal quarters in which the Company achieves positive net income from operations and a grant of 85,000 shares of restricted Common Stock, of which 75,000 shares were in exchange for his underwater stock options. The Compensation Committee reviewed and analyzed the total compensation packages offered to chief executive officers by high technology and defense electronics companies of similar size. The comparative information was obtained from a number of sources, including surveys prepared by national consulting companies, publicly available information and extrapolations therefrom where appropriate. In addition, the Compensation Committee considered data and surveys from various industry groups. The Compensation Committee exercised its discretion and judgment to determine the appropriate compensation after weighing a number of factors, including competitive forces in the industry, individual motivation, REMEC’s financial and overall performance and Mr. Waechter’s leadership role in achieving REMEC’s long-term strategic goals established by the Board.
Policy Regarding Internal Revenue Code Section 162(m). Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation paid to the chief executive officer or any of the other four most highly compensated officers to the extent that the compensation exceeds $1 million in any one year. “Performance-based” compensation is excluded from this $1 million limitation. REMEC’s Equity Incentive Plan (approved by REMEC shareholders in 1996) and 2001 Equity Incentive Plan have been designed so that grants under those plans may qualify for the exclusion for performance-based compensation. REMEC’s policy is to attempt to qualify its compensation for tax deductions whenever possible and consistent with the long-term goals of REMEC. None of REMEC’s executive officers subject to Section 162(m) received non-performance based compensation from REMEC for the 2005 fiscal year that exceeded the $1 million limit. The Compensation Committee may pay officers amounts exceeding the 162(m) limit in the future where warranted to promote REMEC’s corporate goals.
Summary. The Compensation Committee believes that the compensation of REMEC executives is appropriate and competitive with the compensation provided by other technology and defense electronics companies with which REMEC competes for executives and employees. The Compensation Committee believes its compensation strategy, principles and practices result in a compensation program tied to shareholder returns and linked to the achievement of annual and longer-term financial and operational objectives of REMEC.
Compensation Committee Members:
Jeffrey M. Nash, Ph.D., Chairman
Martin Cooper
Thomas A. Corcoran
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Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee during REMEC’s 2005 fiscal year were Mr. Corcoran, Mr. Shaner and Dr. Nash; Mr. Shaner resigned from the Compensation Committee on February 9, 2004. No member of the Compensation Committee was at any time during REMEC’s 2005 fiscal year or at any other prior time an officer or employee of REMEC. Mr. Shaner was hired as REMEC’s Interim Chief Executive officer after his resignation from the Compensation Committee. No member of the Compensation Committee had any relationship during the 2005 fiscal year requiring disclosure by REMEC under Item 404 of Regulation S-K.
During the fiscal year ended January 31, 2005, no executive officer of REMEC served on the board of directors or compensation committee of another company that had an executive officer serving on REMEC’s Board or Compensation Committee.
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PERFORMANCE GRAPH
The graph set forth below compares the split adjusted cumulative total shareholder return on REMEC common stock with the cumulative total return on the Nasdaq Stock Market (U.S.) Index and the Nasdaq Electronic Components Index over a five-year period, beginning January 31, 2000 and ending January 31, 2005. The total shareholder return assumes (i) the investment of $100 at the beginning of the period in REMEC common stock, the Nasdaq Stock Market (U.S.) Index and the Nasdaq Electronic Components Index and (ii) the reinvestment of all dividends.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDERS MATTERS
The following sets forth certain information regarding beneficial ownership of REMEC common stock as of April 1, 2005 (i) by each person who is known by REMEC to own beneficially more than 5% of REMEC common stock, (ii) by each of REMEC’s directors, (iii) by the Named Executive Officers and (iv) by all directors and executive officers as a group.
Beneficial Owner | Number of Shares Beneficially Owned (1) | Percentage of Shares Beneficially Owned (1) (2) | |||
Kennedy Capital Management, Inc.(3) | 6,315,986 | 10.17 | % | ||
SACC Partners LP and Affiliates(4) | 5,904,333 | 9.51 | % | ||
Royce & Associates, L.L.C.(5) | 4,405,700 | 7.10 | % | ||
Kopp Investment Advisors, LLC and Affiliates(6) | 3,978,697 | 6.41 | % | ||
The TCW Group, Inc.(7) | 3,551,025 | 5.72 | % | ||
Ronald E. Ragland(8) | 2,229,005 | 3.59 | % | ||
Thomas H. Waechter | 118,371 | * | |||
Winston E. Hickman(9) | 64,563 | * | |||
Jack A. Giles(10) | 432,849 | * | |||
Jon E. Opalski(11) | 325,953 | * | |||
William F. Sweeney | 101,418 | * | |||
Martin Cooper(12) | 48,795 | * | |||
Thomas A. Corcoran(13) | 55,849 | * | |||
Mark D. Dankberg(14) | 57,908 | * | |||
William H. Gibbs(15) | 51,617 | * | |||
Andre R. Horn(16) | 66,158 | * | |||
Harold Hughes(17) | 10,045 | * | |||
Jeffrey M. Nash(18) | 83,474 | * | |||
Robert W. Shaner(19) | 37,545 | * | |||
All directors and executive officers as a group (14 persons)(20) | 3,861,623 | 6.22 | % |
| * | Less than 1% of the outstanding shares of Common Stock. |
| (1) | This table is based upon information supplied by directors, officers and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws, where applicable, each of the shareholders identified in this table has sole voting and investment power with respect to the shares owned. Percentage of ownership is based on 62,081,541 shares of Common Stock outstanding as of April 1, 2005. |
| (2) | Shares issuable upon exercise of outstanding options are considered outstanding for purposes of calculating the percentage of ownership of REMEC Common Stock of the person holding such options, but are not considered outstanding for computing the percentage of ownership of any other person. |
| (3) | Reflects beneficial ownership as reported on Schedule 13G dated December 31, 2004 with the SEC by Kennedy Capital Management, Inc. (“Kennedy”). Kennedy is a registered investment advisor. Kennedy is the beneficial owner of 6,315,986 shares of REMEC common stock, has sole voting power of 5,723,111 shares of REMEC common stock and sole dispositive power of 6,315,986 shares of REMEC common stock. The address of Kennedy is 10829 Olive Boulevard, St. Louis, Missouri 63141. |
| (4) | Reflects beneficial ownership as reported on Schedule 13D dated April 15, 2005 with the SEC by SACC Partners LP; Riley Investment Management LLC; B. Riley & Co. Inc.; B. Riley & Co. Retirement Trust; Bryant R. Riley; and Carleen Riley (“SACC & Affiliates”). SACC & Affiliates is the beneficial owner of 5,904,333 shares of REMEC common stock, has sole voting and dispositive power of 5,804,333 shares of |
| REMEC common stock, and shared voting and dispositive power of 100,000 shares of REMEC common stock The address of SACC & Affiliates is 11100 Santa Monica Boulevard, Suite 800, Los Angeles, California 90025. |
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| (5) | Reflects beneficial ownership as reported on Schedule 13G dated December 31, 2004 with the SEC by Royce & Associates, LLC (“Royce”). Royce is a registered investment advisor pursuant to the Investment Advisors Act of 1940. Royce is the beneficial owner of 4,405,700 shares of REMEC common stock and has sole voting and dispositive power of 4,405,700 shares of REMEC common stock. The address of Royce is 1414 Avenue of the Americas, New York, New York 10019. |
| (6) | Reflects beneficial ownership as reported on Schedule 13G dated December 31, 2004 with the SEC by Kopp Investment Advisors, LLC (“KIA”). Represents shares beneficially owned by (i) KIA, a registered investment advisor, (ii) Kopp Holding Company (“Holding”), (iii) Kopp Holding Company, LLC (“LLC”) and (iv) LeRoy C. Kopp individually and through his ownership of a controlling interest in KIA and his control over Holding. KIA is the beneficial owner of 3,978,697 shares of REMEC common stock, has sole voting power over 3,294,472 shares of REMEC common stock, sole dispositive power over 1,000,000 shares of REMEC common stock and shared dispositive power over 2,923,697 shares of REMEC common stock. Holding is the beneficial owner of 3,978,697 shares of REMEC common stock. LLC is the beneficial owner of 3,978,697 shares of REMEC common stock. Mr. Kopp has beneficial ownership of 4,413,697 shares of REMEC common stock and sole voting and dispositive power over 490,000 shares of REMEC common stock. The address of KIA, Holding, LLC and Mr. Kopp is 7701 France Avenue South, Suite 500, Edina, Minnesota 55435. |
| (7) | Reflects beneficial ownership as reported on Schedule 13G dated December 31, 2004 with the SEC by The TCW Group, Inc., on behalf of the TCW Business Unit (“TCW Group”). TCW Group is the beneficial owner of 3,551,025 shares of REMEC common stock, has shared voting power of 3,221,775 shares of REMEC common stock and shared dispositive power of 3,551,025 shares of REMEC common stock. The address of TCW Group is 865 South Figueroa Street, Los Angeles, California 90017. |
| (8) | Includes 54,200 shares held by Mr. Ragland’s minor children, 105,000 shares held by Mr. Ragland in an IRA and 9,000 shares held by Mr. Ragland’s spouse in an IRA. Mr. Ragland’s employment relationship with REMEC terminated on February 10, 2004. The beneficial ownership detail for Mr. Ragland accurately reflects activity through August 10, 2004. |
| (9) | 2,063 shares held by Mr. Hickman in a trust account. |
| (10) | Includes 17,438 shares held by Mr. Giles’ spouse. |
| (11) | Includes 3,766 shares held by Mr. Opalski’s spouse. |
| (12) | Includes 444 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (13) | Includes 1,036 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (14) | Includes 1,036 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (15) | Includes 1,036 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (16) | Includes 1,036 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (17) | Includes 444 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 2005. |
| (18) | Includes 1,036 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (19) | Includes 444 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
| (20) | Includes 6,512 shares issuable upon exercise of outstanding options that are exercisable within 60 days of April 1, 2005. |
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Equity Compensation Plan Information
The following table provides information as of January 31, 2005 with respect to the shares of REMEC common stock that may be issued under REMEC’s existing equity compensation plans. In addition, the table does not include information with respect to shares of REMEC common stock subject to outstanding options granted under equity compensation plans assumed by REMEC in connection with its acquisitions of the companies which originally granted those options. However, Footnote (1) to the table sets forth the total number of shares of REMEC common stock issuable upon the exercise of those assumed options as of January 31, 2005, and the weighted average exercise price of those options. Except for the adjustments described in Footnote (1) with respect to the outstanding assumed options, no additional options may be granted under the assumed plans.
Plan Category | (A) Number of securities to be issued upon exercise of outstanding options, RSUs, warrants, and rights (#) | (B) Weighted-average exercise price of outstanding options, RSUs, warrants, and rights ($) | (C) Number of securities | ||||
Equity Compensation Plans approved by security holders: | |||||||
1995 Equity Incentive Plan | 3,493,931 | $ | 9.10 | 1,731,768 | |||
2001 Equity Incentive Plan | 2,571,277 | $ | 5.41 | 336,202 | |||
1996 Nonemployee Directors Stock Option Plan | 381,375 | $ | 9.69 | 0 | |||
Employee Stock Purchase Plan | 0 | N/A | 1,607,761 | ||||
Equity Compensation Plans not approved by security holders | 0 | N/A | 0 | ||||
Total (1) | 6,446,583 | $ | 7.66 | 3,675,731 | |||
| (1) | The table does not include information with respect to equity compensation plans assumed by REMEC in connection with its acquisitions of the companies which originally established those plans. As of January 31, 2005, a total of 519,357 shares of REMEC common stock were issuable upon exercise of outstanding options under the assumed plans. The weighted average exercise price of the outstanding options to acquire shares of REMEC common stock under the assumed plans is $13.91 per share. No additional options may be granted under the assumed plans. |
| ITEM | 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
As of January 31, 2005, REMEC had a backlog of approximately $120,000 from ViaSat, Inc. (“ViaSat”). Shipments to ViaSat of approximately $2,100,000 represents less than 1% of REMEC’s gross revenues for the fiscal year 2005. The products, which are printed circuit board sub-assemblies used in satellite communication systems, are sold to ViaSat at market prices negotiated in an arm-length transaction. Mr. Dankberg, a director of REMEC, is Chairman of the Board, Chief Executive Officer and a shareholder of ViaSat. Pursuant to the current rules promulgated by the NASD, Mr. Dankberg’s relationship with ViaSat does not preempt the Board’s determination that Mr. Dankberg is an independent director.
| ITEM | 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Committee Report
The Audit Committee of the Board is comprised of the three directors named below and has previously adopted a written charter, which was included as Appendix A to our 2004 proxy statement. The Audit Committee reviews and reassesses the adequacy of its written charter on an annual basis. The Board has determined that all members of the Audit Committee are independent directors under the current Nasdaq listing standards and SEC rules regarding audit committee membership.
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The Audit Committee monitors and reviews REMEC’s financial reporting processes and procedures on behalf of the Board. Management has the primary responsibility for the financial statements and the reporting processes, including the system of internal controls. REMEC’s independent auditor is responsible for auditing the financial statements.
The Audit Committee has met and held discussions with management and the independent auditor, Squar, Milner, Reehl & Williamson LLP, regarding the fair and complete presentation of REMEC’s results. The Audit Committee has discussed significant accounting policies applied by REMEC in its financial statements, as well as alternative treatments. Management represented to the Audit Committee that REMEC’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and the Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent auditor. The Audit Committee discussed with the independent auditor their judgments as to the quality of REMEC’s accounting principles, not just the acceptability of REMEC’s accounting principles, and other such matters required to be discussed by the Statement on Auditing Standards No. 61, as amended (Communication With Audit Committees).
In addition, the Audit Committee has received the written disclosures and the letter from the independent auditor required by the Independence Standards Board Standard No. 1, as amended (Independence Discussions With Audit Committees) and has discussed with the independent auditor the auditor’s independence from REMEC and its management. The Audit Committee also has considered whether the independent auditor’s provision of non-audit services to REMEC is compatible with the auditor’s independence. The Audit Committee has concluded that the independent auditor is independent from REMEC and its management.
The Audit Committee discussed with REMEC’s internal and independent auditors the overall scope and plans for their respective audits. The Audit Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, the evaluations of REMEC’s internal controls and the overall quality of REMEC’s financial reporting.
In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board, and the Board has approved, that the audited financial statements be included in REMEC’s Annual Report on Form 10-K for the fiscal year ended January 31, 2005.
The Audit Committee:
Harold E. Hughes, Jr., Chairman
Mark D. Dankberg
William H. Gibbs
Independent Auditor
The Audit Committee has selected Squar, Milner, Reehl & Williamson LLP as REMEC’s independent auditor for the fiscal year ending January 31, 2005. Ernst & Young LLP had been engaged as REMEC’s auditors for the fiscal year ending January 31, 2004. Representatives of Squar, Milner, Reehl & Williamson LLP are expected to be present at the Annual Meeting and will have an opportunity to make a statement if they desire to do so. The representatives of Squar, Milner, Reehl & Williamson LLP also will be available to respond to appropriate questions raised during the meeting.
Audit Fees. Ernst & Young LLP’s fees for audit services for the fiscal year ended January 31, 2004 were $780,000 and Squar, Milner, Reehl & Williamson LLP’s fees for audit services for the fiscal year ended January 31, 2005 were $450,000. Audit services include the annual audit and review of REMEC’s interim financial statements, statutory audits at foreign locations, consents and assistance with the review of documents filed with the SEC.
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Audit-Related Fees. Ernst & Young LLP’s fees for audit-related services for the fiscal year ended January 31, 2004 were $41,000 and Squar, Milner, Reehl & Williamson LLP’s fees for audit-related services for the fiscal year ended January 31, 2005 were $75,000. Audit-related services were primarily for work on due diligence, benefit plan audits and the audit of a REMEC subsidiary.
Tax Fees. Ernst & Young LLP’s fees for tax services for the fiscal year ended January 31, 2004 were $128,000 and no fees were billed by Squar, Milner, Reehl & Williamson LLP’s fees for tax services for the fiscal year ended January 31, 2005. Tax services included tax consultation, expatriate tax matters and tax preparation.
All Other Fees. There were no other fees billed by Ernst & Young LLP or Squar, Milner, Reehl & Williamson LLP for services rendered during the fiscal years ended January 31, 2005 and January 31, 2004, other than the services described above under the caption “Audit Fees”, “Audit-Related Fees” and “Tax Fees”.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor. The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent auditor. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service of category of services and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditor and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval, and the fees for the services performed to date. None of the fees paid to the independent auditor under the categories Audit-Related Fees, Tax Fees and All Other Fees described above were approved by the Audit Committee after services were rendered pursuant to the de minimus exception established by the SEC.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at January 31, 2005 and 2004
Consolidated Statements of Operations for the years ended January 31, 2005, 2004 and 2003
Consolidated Statements of Shareholders’ Equity as of January 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended January 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules or because the information required is included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits
| Exhibit No. | Description | |
| 2.1(1) | Asset Purchase Agreement between REMEC, Inc. and Spectrum Control, Inc. dated October 15, 2004 | |
| 2.1(11) | Asset Purchase Agreement dated May 31, 2003 between REMEC China Holdings SRL, REMEC Himark Telecom Co., Limited, Himark Telecom Group Limited, and other parties thereto | |
| 3.1(2) | Restated Articles of Incorporation | |
| 3.2(2) | Certificate of Determination, Preferences and Rights of Series RP Preferred Stock of REMEC | |
| 3.3(2) | By-Laws, as amended | |
| 4.1(3) | Rights Agreement, dated as of June 15, 2001, between REMEC and Mellon Investor Services LLC, as Rights Agent, which includes: as Exhibit A thereto, the Form of Certificate of Determination, Preferences and Rights of Series RP Stock of REMEC; Exhibit B thereto, the Form of Right Certificate; and, as Exhibit C thereto, the Summary of Rights to Purchase Series RP Preferred Shares. | |
| 10.1(4)* | Equity Incentive Plan | |
| 10.2(4) | Form of Indemnification Agreements between REMEC and its officers and directors | |
| 10.3(5)* | Employee Stock Purchase Plan | |
| 10.4(9)* | 1996 Nonemployee Directors Stock Option Plan | |
| 10.5(4)* | Change of Control Agreement dated November 9, 2004 between REMEC and Jack A. Giles | |
| 10.6(6)* | Executive Transition Agreement dated June 23, 2004 between REMEC and Clark Hickock | |
| 10.7(7)* | Form of Employment Agreement dated December 10, 2004, between Winston E. Hickman and REMEC | |
| 10.8(8)* | Form of Change of Control Agreement | |
| 10.9(8)* | Employment and Retention Agreement dated May 19, 2002, between REMEC and Thomas Waechter | |
| 10.10(9)* | Executive Transition Agreement effective June 14, 2002, between REMEC and Errol Ekaireb |
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| Exhibit No. | Description | |
| 10.11(10)* | 2001 Equity Incentive Plan | |
| 10.12(12)* | Executive Transition Agreement effective February 9, 2004 between REMEC and Ronald E. Ragland | |
| 21.1(13) | Subsidiaries of REMEC | |
| 23.1(13) | Consent of Squar, Milner, Reehl & Williamson LLP, Independent Registered Public Accounting Firm | |
| 23.2(13) | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
| 24.1 | Power of Attorney (included in the Annual Report on Form 10-K) | |
| 31.1(13) | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2(13) | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1(13) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Previously filed with the Securities and Exchange Commission on October 18, 2004, as an exhibit to REMEC’s Current Report on Form 8-K and incorporated by reference into this Annual Report on Form 10-K. |
| (2) | Previously filed with the Securities and Exchange Commission on April 30, 2002, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2003 and incorporated by reference into this Annual Report on Form 10-K. |
| (3) | Previously filed with the Securities and Exchange Commission on June 15, 2001, as an exhibit to REMEC’s Registration Statement on Form 8-A (No. 001-16541) and incorporated by reference into this Annual Report on Form 10-K. |
| (4) | Previously filed with the Securities and Exchange Commission on December 8, 2004, as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (5) | Previously filed with the Securities and Exchange Commission on August 27, 2003 as an exhibit to REMEC’s Registration Statement on Form S-8 (No. 333-108279) and incorporated by reference into this Annual Report on Form 10-K. |
| (6) | Previously filed with the Securities and Exchange Commission on September 9, 2004 as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (7) | Previously filed with the Securities and Exchange Commission on December 15, 2004, as an exhibit to REMEC’s Current Report on Form 8-K and incorporated by reference into this Annual Report on Form 10-K. |
| (8) | Previously filed with the Securities and Exchange Commission on April 30, 2003, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (9) | Previously filed with the Securities and Exchange Commission on September 16, 2002, as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2002 and incorporated by reference into this Annual Report on Form 10-K. |
| (10) | Previously filed with the Securities and Exchange Commission on August 8, 2001 as an exhibit to REMEC’s Registration Statement on Form S-8 (No. 333-67102) and incorporated by reference into this Annual Report on Form 10-K. |
| (11) | Previously filed with the Securities and Exchange Commission on July 2, 2003, as an exhibit to REMEC’s Registration Statement on Form S-3 (No. 333-106767) and incorporated by reference into this Annual Report on Form 10-K. |
| (12) | Previously filed with the Securities and Exchange Commission on April 15, 2004, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2005 and incorporated by reference into this Annual Report on Form 10-K. |
| (13) | Filed with this Amendment 1 to the Annual Report on Form 10-K. |
| * | Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. |
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INDEX TO FINANCIAL STATEMENTS
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheet of REMEC, Inc. (the “Company”), as of January 31, 2005 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year then ended. Our audit also included the fiscal 2005 financial information present in the financial statement schedule listed in Item 15(a). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of REMEC, Inc. as of January 31, 2005, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the aforementioned financial statement schedule, when considered in relation to the basic financial statements taken as whole, presents fairly in all material respects the fiscal 2005 information set forth therein.
As discussed in Note 1, during fiscal year 2005, management engaged financial advisors to evaluate alternative strategies to enhance shareholder value, including the disposition of some or all of its business units. As more fully described in Note 4, on December 20, 2004 and March 14, 2005, the Company entered into definitive agreements to sell two of its core businesses representing a majority of the Company’s assets and liabilities. These proposed transactions are subject to shareholder approval in fiscal year 2006. If the sale transactions are approved and consummated, the Company’s financial and operational viability would become increasingly uncertain. As a result, in connection with seeking shareholder approval of the aforementioned transactions, the Board of Directors intends to ask Company shareholders to approve and adopt a plan of liquidation, which would be intended to allow for the orderly disposition of the Company’s remaining assets and liabilities and would require the Company to adopt the liquidation basis of accounting. The accompanying financial statements do not reflect any adjustments related to the possible future effects of these matters.
/s/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
Newport Beach, California
April 11, 2005
F-2
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
REMEC, Inc.
We have audited the accompanying consolidated balance sheet of REMEC, Inc. as of January 31, 2004 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the two years in the period ended January 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of REMEC, Inc. at January 31, 2004 and the consolidated results of its operations and its cash flows for each of the two years in the period ended January 31, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG, LLP
San Diego, California
March 19, 2004
F-3
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CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| January 31, | ||||||||
| 2005 | 2004 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 32,242 | $ | 44,628 | ||||
Short-term investments, available-for-sale | 4,531 | 10,296 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,224 and $2,137 at January 31, 2005 and 2004, respectively | 60,501 | 59,062 | ||||||
Notes and other receivables | 13,858 | 7,525 | ||||||
Inventories, net | 70,450 | 75,037 | ||||||
Net assets held for sale | — | 16,162 | ||||||
Prepaid expenses and other current assets | 5,224 | 3,439 | ||||||
Total current assets | 186,806 | 216,149 | ||||||
Property, plant and equipment, net | 71,967 | 75,381 | ||||||
Restricted cash | 9,426 | 569 | ||||||
Goodwill, net | 3,018 | 65,275 | ||||||
Intangibles, net | 2,572 | 3,257 | ||||||
Other assets | 1,134 | 2,576 | ||||||
Total assets | $ | 274,923 | $ | 363,207 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 53,252 | $ | 58,662 | ||||
Accrued salaries, benefits and related taxes | 10,259 | 11,277 | ||||||
Accrued expenses and other current liabilities | 44,295 | 35,995 | ||||||
Total current liabilities | 107,806 | 105,934 | ||||||
Deferred income taxes and other long-term liabilities | 2,612 | 3,999 | ||||||
Commitments and contingencies (Note 7) | ||||||||
Shareholders’ equity: | ||||||||
Preferred shares—$.01 par value, 5,000,000 shares authorized; none issued & outstanding | — | — | ||||||
Common shares—$.01 par value, 140,000,000 shares authorized; issued & outstanding shares—62,458,000 and 61,732,000 at January 31, 2005 and 2004, respectively | 624 | 616 | ||||||
Paid-in capital | 405,203 | 401,615 | ||||||
Accumulated other comprehensive income | 4,205 | 5,789 | ||||||
Accumulated deficit | (245,527 | ) | (154,746 | ) | ||||
Total shareholders’ equity | 164,505 | 253,274 | ||||||
Total liabilities and shareholders’ equity | $ | 274,923 | $ | 363,207 | ||||
See accompanying notes.
F-4
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net sales | $ | 423,911 | $ | 351,872 | $ | 226,678 | ||||||
Cost of sales | 358,501 | 292,354 | 194,826 | |||||||||
Gross profit | 65,410 | 59,518 | 31,852 | |||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | 53,491 | 51,672 | 35,418 | |||||||||
Research and development | 40,578 | 47,430 | 29,417 | |||||||||
Impairment goodwill | 62,400 | — | — | |||||||||
Impairment of long-lived assets | — | 1,038 | 658 | |||||||||
Restructuring charges (reversals) | (888 | ) | 3,388 | 924 | ||||||||
Total operating expenses | 155,581 | 103,528 | 66,417 | |||||||||
Loss from continuing operations | (90,171 | ) | (44,010 | ) | (34,565 | ) | ||||||
Gain on sale of investment | — | 4,582 | — | |||||||||
Gain on sale of facility | — | 945 | 1,183 | |||||||||
Interest income and other, net | (93 | ) | 442 | 2,321 | ||||||||
Write-down of investment | — | — | (1,801 | ) | ||||||||
Loss from continuing operations before income taxes | (90,264 | ) | (38,041 | ) | (32,862 | ) | ||||||
Provision (credit) for income taxes | (62 | ) | 103 | 19,563 | ||||||||
Net loss from continuing operations | (90,202 | ) | (38,144 | ) | (52,425 | ) | ||||||
Net loss from discontinued operations including loss on disposal | (556 | ) | (11,641 | ) | (12,367 | ) | ||||||
Income tax provision (credit) from discontinued operations | 23 | (377 | ) | (998 | ) | |||||||
Net loss from discontinued operations, net of taxes | (579 | ) | (11,264 | ) | (11,369 | ) | ||||||
Net loss | $ | (90,781 | ) | $ | (49,408 | ) | $ | (63,794 | ) | |||
Net loss per common share: | ||||||||||||
Net loss from continuing operations | $ | (1.45 | ) | $ | (0.65 | ) | $ | (1.12 | ) | |||
Net loss from discontinued operations | (0.01 | ) | (0.19 | ) | (0.24 | ) | ||||||
Basic and Diluted | $ | (1.46 | ) | $ | (0.84 | ) | $ | (1.36 | ) | |||
Shares used in computing loss per common share: | ||||||||||||
Basic and Diluted | 62,069 | 59,132 | 46,784 | |||||||||
See accompanying notes.
F-5
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Common Shares | Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated (Deficit) | Total | ||||||||||||||||
| Shares | Amount | |||||||||||||||||||
Balance at January 31, 2002 | 45,212 | $ | 452 | $ | 321,673 | $ | 1,201 | $ | (41,544 | ) | $ | 281,782 | ||||||||
Issuance of common shares | 626 | 7 | 2,361 | — | — | 2,368 | ||||||||||||||
Common shares issued and the value of the stock options assumed in conjunction with acquisition | 11,524 | 115 | 40,957 | — | — | 41,072 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net loss | — | — | — | — | (63,794 | ) | (63,794 | ) | ||||||||||||
Net change in foreign exchange translation adjustment | — | — | — | 3,661 | — | 3,661 | ||||||||||||||
Reversal of unrealized loss on investment | — | — | — | (2,391 | ) | — | (2,391 | ) | ||||||||||||
Total comprehensive loss | — | — | — | 1,270 | (63,794 | ) | (62,524 | ) | ||||||||||||
Balance at January 31, 2003 | 57,362 | 574 | 364,991 | 2,471 | (105,338 | ) | 262,698 | |||||||||||||
Issuance of common shares | 1,086 | 10 | 6,454 | 6,464 | ||||||||||||||||
Common shares issued and the value of the stock options assumed in conjunction with acquisition | 3,284 | 32 | 30,037 | — | — | 30,069 | ||||||||||||||
Deferred compensation write-off discontinued operations | — | — | 133 | — | — | 133 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net loss | — | — | — | — | (49,408 | ) | (49,408 | ) | ||||||||||||
Net change in foreign exchange translation adjustment | — | — | — | 2,008 | — | 2,008 | ||||||||||||||
Net unrealized gain on foreign currency forward contracts | — | — | — | 1,310 | — | 1,310 | ||||||||||||||
Total comprehensive loss | — | — | — | 3,318 | (49,408 | ) | (46,090 | ) | ||||||||||||
Balance at January 31, 2004 | 61,732 | 616 | 401,615 | 5,789 | (154,746 | ) | 253,274 | |||||||||||||
Issuance of common shares | 726 | 8 | 3,272 | — | — | 3,280 | ||||||||||||||
Compensation expense—RSU’s | — | — | 316 | — | — | 316 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net loss | — | — | — | — | (90,781 | ) | (90,781 | ) | ||||||||||||
Net change in foreign exchange translation adjustment | — | — | — | (179 | ) | — | (179 | ) | ||||||||||||
Net unrealized loss on foreign currency forward contracts | — | — | — | (1,430 | ) | — | (1,430 | ) | ||||||||||||
Unrealized gain on investments | — | — | — | 25 | — | 25 | ||||||||||||||
Total comprehensive loss | — | — | — | (1,584 | ) | (90,781 | ) | (92,365 | ) | |||||||||||
Balance at January 31, 2005 | 62,458 | $ | 624 | $ | 405,203 | $ | 4,205 | $ | (245,527 | ) | $ | 164,505 | ||||||||
See accompanying notes.
F-6
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| Operating Activities: | ||||||||||||
Net loss from continuing operations | $ | (90,202 | ) | $ | (38,144 | ) | $ | (52,425 | ) | |||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and amortization | 19,700 | 18,511 | 15,593 | |||||||||
Impairment of goodwill | 62,400 | — | — | |||||||||
Impairment of long-lived assets | — | 1,038 | 658 | |||||||||
Restructuring costs (reversals) | (888 | ) | 3,388 | 924 | ||||||||
Gain on sale of facility | — | (945 | ) | (1,183 | ) | |||||||
Decrease in deferred tax assets | — | — | 33,948 | |||||||||
Write-down of investment | — | — | 1,801 | |||||||||
Unrealized gain on foreign currency forward contracts | (1,430 | ) | (1,426 | ) | — | |||||||
Gain on sale of investments | — | (4,582 | ) | — | ||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable and other receivables | (7,523 | ) | (14,156 | ) | (10,894 | ) | ||||||
Inventories | 4,587 | (27,021 | ) | (246 | ) | |||||||
Prepaid expenses and other current assets | (1,785 | ) | 1,577 | (1,278 | ) | |||||||
Accounts payable | (5,409 | ) | 23,874 | 16,967 | ||||||||
Short term notes payable | 4,453 | (220 | ) | — | ||||||||
Accrued expenses, income taxes payable, and other long-term liabilities | 2,194 | 1,378 | (13,015 | ) | ||||||||
Net cash used in continuing operating activities | (13,903 | ) | (36,728 | ) | (9,150 | ) | ||||||
| Investing Activities: | ||||||||||||
Additions to property, plant and equipment | (20,860 | ) | (19,879 | ) | (20,325 | ) | ||||||
Proceeds from sale of property and equipment | 5,145 | 6,190 | 5,800 | |||||||||
Payment for acquisitions, net of cash acquired | — | — | 32,328 | |||||||||
Proceeds from sale of investments | — | 7,720 | — | |||||||||
Other assets | 1,299 | (9,700 | ) | 4,375 | ||||||||
Release of restricted cash | (8,857 | ) | 16,480 | — | ||||||||
Short-term investment purchases | (22,918 | ) | (39,274 | ) | — | |||||||
Short-term investment sales | 28,688 | 9,071 | — | |||||||||
Short-term investment maturities | — | 32,356 | — | |||||||||
Net cash provided by (used in) investing activities | (17,503 | ) | 2,964 | 22,178 | ||||||||
| Financing Activities: | ||||||||||||
Repayments of credit facilities and long-term debt | — | — | (200 | ) | ||||||||
Proceeds from issuance of common shares, net | 3,596 | 6,464 | 2,369 | |||||||||
Net cash provided by financing activities | 3,596 | 6,464 | 2,169 | |||||||||
(Decrease) increase in cash from continuing operations | (27,810 | ) | (27,300 | ) | 15,197 | |||||||
Net cash provided by (used in) discontinued operations | 15,582 | 1,827 | (2,719 | ) | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (158 | ) | 5,705 | 3,228 | ||||||||
(Decrease) increase in cash and cash equivalents | (12,386 | ) | (19,768 | ) | 15,706 | |||||||
Cash and cash equivalents at beginning of year | 44,628 | 64,396 | 48,690 | |||||||||
Cash and cash equivalents at end of year | $ | 32,242 | $ | 44,628 | $ | 64,396 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for: | ||||||||||||
Interest | $ | 953 | $ | — | $ | — | ||||||
Income taxes, net | $ | (726 | ) | $ | — | $ | — | |||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
Common shares issued in acquisitions | $ | — | $ | 29,236 | $ | 41,071 | ||||||
See accompanying notes.
F-7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REMEC AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Business and Basis of Presentation
REMEC, Inc. (“REMEC” or the “Company”) was incorporated in the State of California in January 1983. REMEC is a designer and manufacturer of high frequency subsystems used in the transmission of voice, video and data traffic over commercial wireless communications networks in the defense and commercial sectors. REMEC’s products are designed to improve the capacity, efficiency, quality and reliability of commercial wireless communications infrastructure equipment and operate at the full range of frequencies currently used in wireless communications transmissions including at radio (“RF”), microwave and millimeter wave frequencies. REMEC also develops and manufactures wireless communications equipment used in the defense industry, including communications equipment integrated into tactical aircraft, satellites, missile systems and smart weapons.
The accompanying financial statements have been prepared using the going concern basis of accounting. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of conducting business. During the fiscal year 2005, the Company engaged financial advisors to evaluate alternative strategies to increase shareholder value, including the disposal of all or a portion of our business units. Further, as more fully described in Note 4, in December 2004, we entered into an agreement to sell our Defense & Space group to Chelton Microwave for $260 million cash, subject to certain post-closing adjustments and the assumption of certain liabilities. The proposed transaction requires shareholder approval (which has not been obtained as of the filing of this Form 10-K). In March 2005, we entered into a definitive agreement to sell selected assets and liabilities of our Wireless Systems business to Powerwave Technologies, Inc. for 10 million shares of Powerwave’s common stock and $40 million in cash. Based on Powerwave’s closing price on Friday, March 11, 2005, the transaction value is approximately $120 million. The proposed transaction requires shareholder approval (which has not been obtained as of the filing of this Form 10-K). Although we will retain certain assets of our Wireless systems business (namely, the ODU/Transceiver product line and the manufacturing services business), the completion of these transactions, if approved by our shareholders, will result in REMEC divesting the majority of its operating assets and liabilities.
Consequently, if the sale transactions are approved and consummated, the Company’s financial and operational viability would become increasingly uncertain. As a result, in connection with seeking shareholder approval of the aforementioned transactions, the Board of Directors intends to ask the Company shareholders to approve and adopt a plan of liquidation, which would be intended to allow for the orderly disposition of the Company’s remaining assets and businesses.
If shareholders do not approve the proposed sale of the Defense & Space group and/or the Wireless Systems business assets, it is possible that the Company may require additional sources of financing in order to maintain its current operations. These additional sources of financing may include bank borrowings or public or private offerings of equity or debt securities. Whereas management believes it will have access to these financing sources, no assurance can be given that such additional sources of financing will be available on acceptable terms, if at all.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned and one variable interest entity in which the Company is considered the primary beneficiary (see “Consolidation of Variable Interest Entities” section below). All significant inter-company accounts and transactions have been eliminated in consolidation.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,Consolidation of Variable Interest Entities, as amended (“Interpretation No. 46”), which addresses the consolidation of variable interest entities (“VIEs”). Under Interpretation No. 46, arrangements that are not controlled through voting or similar rights are accounted for as VIEs. An enterprise is required to consolidate a VIE if it is the primary beneficiary of the VIE. Interpretation No. 46 applies immediately to arrangements created after January 31, 2003 and, with respect to arrangements created before February 1, 2003, the interpretation was applied to the Company as of February 1, 2004. The adoption of Interpretation No. 46 has not materially affected the Company’s consolidated net income. Prior period information has not been restated to conform to the presentation in the current period.
Under Interpretation No. 46, a VIE is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity through voting or similar rights, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity is deemed to be a VIE, pursuant to Interpretation No. 46, an enterprise that absorbs a majority of the expected losses or residual returns of the VIE is considered the primary beneficiary and must consolidate the VIE.
Based on the provisions of Interpretation No. 46, the Company has concluded that an entity in the Philippines is a VIE in which the Company is the primary beneficiary, as the Company provides the financial support necessary for the entity to carry its normal operations. The entity is engaged in the ownership of land. Accordingly, the financial statements of the VIE have been consolidated with the Company as of January 31, 2005 as follows:
| $ 000’s | ||||
Total Assets | $ | 1,024 | ||
Total Liabilities | (967 | ) | ||
Equity | (57 | ) | ||
The Company’s maximum exposure to loss related to this entity was approximately $1.0 million at January 31, 2005.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. Cash equivalents are comprised of money market funds, U.S. government and other corporate debt securities. Cash and cash equivalents included investments in debt securities of $9.0 million at January 31, 2004 and there were none at January 31, 2005. The Company evaluates the financial strength of institutions at which significant investments are made and believes the related credit risk is limited to an acceptable level.
Statement of Financial Accounting Standard (“SFAS”) No. 115,Accounting for Certain Investments in Debt and Equity Securities requires companies to record certain debt and equity security investments at market value. Investments with maturities greater than three months are classified as short-term investments. All of the Company’s short-term investments are classified as available-for-sale and are reported at fair value with any unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) within shareholders’ equity. The Company manages its cash equivalents and short-term investments as a single portfolio of highly marketable securities, all of which are intended to be available for the
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s current operations. The carrying amounts of these securities approximate fair value due to the short maturities of these instruments.
Derivative Financial Instruments
The Company recognizes all derivatives, consisting of foreign currency forward contracts, as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value, in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities. Gains and losses resulting from changes in the fair values of those derivative instruments are recorded to earnings or other comprehensive income depending on the use of the derivative instrument and whether it qualifies for hedge accounting. For those instruments qualifying for hedge accounting, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are effective. Should it be determined that a derivative is not effective as a hedge, the Company would discontinue the hedge accounting prospectively.
Concentration of Credit Risk
Accounts receivable are principally from domestic and international customers in the telecommunications industry and prime contractors of U.S. government contracts. Credit is extended based on an evaluation of the customer’s financial condition and generally collateral is not required. The Company performs periodic credit evaluations of its customers and maintains reserves for potential credit losses.
During fiscal 2005, two customers in the Wireless Systems segment and one customer in the Defense & Space segment accounted for a total of 35% of the Company’s net sales. One customer in the Company’s Wireless Systems segment and one customer in the Defense & Space segment accounted for a total of 28% of the Company’s net sales during fiscal 2004. One customer accounted for more than 10% of the Company’s net sales during fiscal 2003.
Financial Instruments
Financial instruments that subject the Company to credit risk also consist of cash balances maintained in the United States in excess of federal depository insurance limits. The accounts maintained by the Company at U.S. financial institutions are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. The uninsured balance was $33.2 million and $34.4 million at January 31, 2005 and 2004, respectively. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risks on cash.
Factoring Arrangement
In fiscal year 2004, the Company entered into a factoring arrangement whereby certain of its receivables were sold on a pre-approved, nonrecourse basis except in the event of dispute or claim as to price, terms, quality, material workmanship, quantity or delivery of merchandise. Pursuant to the terms of the arrangement, receivables are sold, net of factoring fees and commissions and net of any credits or discounts available to the Company’s customers. Approximately 29% and 20% of accounts receivable were factored at January 31, 2005 and January 31, 2004, respectively. The Company had $8.1 million of advances from the factor outstanding at January 31, 2005 and none at January 31, 2004. In compliance with SFAS No. 140 and the terms of the arrangement, proceeds are collected from the financial institution and the receivables are removed from the balance sheet.
In fiscal year 2005, the factoring arrangement limit was increased from $15 million to $25 million, with all other terms and conditions remaining the same. Late in fiscal year 2005, a foreign subsidiary of the Company
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
entered into a 6 million Euro factoring arrangement whereby certain of its receivables are sold on a pre-approved, non-recourse basis except in the event of dispute or claim as to price, terms, quality, material, workmanship, quantity or delivery of merchandise. Pursuant to the terms of the arrangement, receivables are sold, net of factoring fees and commissions and net of any credits or discounts available to the Company’s customers. There were no factorings under this facility as of January 31, 2005.
Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of losses related to customer’s receivable balances, excluding amounts that are factored. In establishing the appropriate provisions for customer receivables balances, the Company makes assumptions with respect to their future collectibility. The Company’s assumptions are based upon individual assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivables balances. An appropriate provision is made, which takes into account the severity of the likely loss on the outstanding receivable balance based on the Company’s experience in collecting these amounts. In addition to these individual assessments, in general, the Company provides a 5% reserve against all outstanding customer balances that are greater than 60 days past due. At January 31, 2005 and 2004, accounts receivable totaled $60.5 and $59.1 million respectively, net of reserves for bad debt of $1.2 and $2.1 million, respectively.
Inventories
Inventories are stated at the lower of weighted average cost or market. The Company provides allowances based on excess and obsolete inventories determined primarily by future demand sales forecasts. The allowance is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of our cost of sales. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis, in compliance with SAB Topic 5.BB.
Long-Lived Assets
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to five years for network equipment, PCs and software, five to eight years for machinery and equipment and up to 30 years for facilities and facility related assets. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the lease period.
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142,Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite useful lives are not amortized, but are reviewed annually for impairment or more frequently if impairment indicators arise. Separable intangible assets that have finite lives are amortized over their useful lives. Goodwill at January 31, 2003, was evaluated for impairment in accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of. The Company adopted SFAS No. 142 on February 1, 2002 and has performed its impairment test on an on-going basis, but at least annually.
Intangible assets (other than goodwill) in the accompanying balance sheets are primarily comprised of trademarks and acquired technology recorded in connection with the Company’s acquisitions. Intangible assets with finite lives (other than goodwill) are evaluated for impairment quarterly using undiscounted cash flows expected to result from the use of the assets as required by SFAS No. 144,Accounting for the Impairment or
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Disposal of Long-Lived Assets. These intangibles are amortized using the straight-line method over the estimated useful lives of the relevant intangible ranging from three to seven years. (See Note 5.)
Restricted Cash
Restricted cash totaled $9.4 million at January 31, 2005, $8.1 million of which relates to timing differences in our receivable factoring arrangement. The remaining $0.7 million was cash received by us that is due to Spectrum Controls, Inc., the buyer of our Components product line. At January 31, 2004, $0.6 million, was money in escrow as security for a letter of credit.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under SFAS No. 107,Disclosures about Fair Value of Financial Instruments, are determined at the balance sheet dates based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. For certain of the Company’s financial instruments, including cash, accounts and notes receivable, accounts payable, and letters of credit, the carrying amounts approximate fair value due to their maturities.
Warranty Obligations
The Company provides for the estimated costs of product warranties in the period sales are recognized. The Company’s warranty obligation is affected by historical product shipment levels, product performance and material and labor costs incurred in correcting product performance problems. Should product performance, material usage or labor repair costs differ from the Company’s estimates, revisions to the estimated warranty liability would be required.
Income Taxes
Income tax expense is based on reported income before income taxes. In accordance with SFAS No. 109,Accounting for Income Taxes, deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws. The Company records an estimated valuation allowance on its significant deferred tax assets when, based on the weight of available evidence (including the scheduled reversal of deferred tax liabilities, projected future taxable income or loss, and tax-planning strategies), it is more likely than not that some or all of the tax benefit will not be realized.
Income Tax Contingencies
Significant judgment is required in determining the Company’s worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany arrangements to share revenue and costs. In such arrangements there are uncertainties about the amount and manner of such sharing, which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although the Company believes that the approach to determining the amount of such arrangements is reasonable, no assurance can be given that the final exposure of these matters will not be materially different than that which is reflected in the Company’s historical income tax provisions and accruals.
In evaluating the exposure associated with various tax filing positions, the Company accrues charges for probable exposures. At January 31, 2005, the Company believes it has appropriately accrued for probable
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of these accruals, the Company’s effective tax rate in a given financial statement period could be materially affected.
Foreign Currency Translation
The Company translates the financial statements of its Finnish, U.K., and South Korean subsidiaries in accordance with SFAS No. 52,Foreign Currency Translation. The functional currency for all other foreign subsidiaries is the U.S. dollar or in currencies tied to the U.S. dollar. Foreign currency balance sheet accounts are translated into U.S. dollars at a rate of exchange in effect at fiscal year end. Income and expenses are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to a separate component of comprehensive income (loss) within shareholders’ equity. Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income. Realized and unrealized foreign currency transaction (losses) gains totaled $(0.3) million, $0.7 million, and $(0.5) million during fiscal years 2005, 2004 and 2003 respectively.
Revenue Recognition
The Company recognizes revenue pursuant to Staff Accounting Bulletin (“SAB”) No. 104,Revenue Recognition in Financial Statements. Accordingly, revenue is recognized when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured.
In accordance with SAB No. 104, revenues from product sales are recognized upon shipment of product and transfer of title to customers; revenues associated with the performance of non-recurring engineering and development contracts are recognized when earned under the terms of the related contract; and revenues for cost-reimbursement contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to estimated costs. Most of the Company’s non-recurring engineering projects are within the Company’s Defense & Space segment. The general terms of these agreements contain milestone provisions and/or the delivery of a prototype product. The Company is entitled to bill the customer for the specified amount and recognize revenue upon the completion of the related milestone (to customer satisfaction or by fulfillment of specifications) or delivery and the transfer of title of the prototype.
Prospective losses on contracts, which are accrued for, are based upon the anticipated excess of inventoriable manufacturing costs over the selling price of the remaining units to be delivered. Actual losses could differ from those estimated due to changes in the ultimate manufacturing costs and contract terms.
Shipping Costs
The Company follows EITF 00-10,Accounting for Shipping and Handling Fees and Costs. Shipping costs related to shipments between production facilities and shipments from production facilities to distribution facilities are reflected in costs of sales.
Research and Development
Research and development costs are primarily related to development initiatives at the Company’s Wireless Systems segment associated with new wireless product development and are expensed in the period incurred.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Exit and Disposal Activities
The Company accounts for expenses related to non-discretionary restructuring activities (including workforce reductions) in accordance with SFAS No. 146,Accounting for Costs Associated with Exit and Disposal Activities. GAAP prohibits the recognition of an exit-activity liability until (a) certain criteria (which demonstrate that it is reasonably probable that a present obligation to others has been incurred) are met, and (b) the fair value of such liability can be reasonably estimated. The Company applies the transition rules of SFAS No. 146 to account for exit activities that meet the criteria of EITF Issue No. 94-3.
Discontinued Operations
In accordance with SFAS No. 144, the Company accounts for the results of operations of a component of an entity that has been disposed or that meets all of the “held for sale” criteria, as discontinued operations, if the component’s operations and cash flows have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction and the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction. The “held for sale” classification requires having the appropriate approvals by our management, Board of Directors and shareholders, as applicable, and meeting other criteria. When all of these criteria are met, the component is then classified as “held for sale” and its operations reported as discontinued operations.
At January 31, 2005, the Components product line, the China Network Optimization product line, and Nanowave have been reclassified as discontinued operations and prior period assets are reported as “held for sale.”
At January 31, 2005, the Company’s Defense and Space group and its Wireless Systems assets do not meet all of the “held for sale” criteria and are therefore not classified as discontinued operations. The disposal of these two components is contingent upon obtaining approval of the Company’s shareholders in the near term.
At January 31, 2005, the Company’s ODU/Transceiver and Manufacturing Services assets do not meet all of the “held for sale” criteria and are therefore not classified as discontinued operations. Although management has been authorized to seek buyers, the businesses are available for immediate sale, and they are being marketed, the sale is not probable and may not be completed within one year.
Computation of Net Loss Per Share
The Company calculates loss per share in accordance with SFAS No. 128,Earnings per Share. Basic net loss per share is computed using the weighted average shares outstanding for each period presented. Diluted loss 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. As the Company has incurred net losses for each of the three years ending 2005, 2004, and 2003, there is no difference between basic and diluted net loss per share.
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 1,023,000, 650,000 and 143,000 for the years ended January 31, 2005, 2004 and 2003, respectively, were excluded from the calculation of diluted loss per share because of their anti-dilutive effect.
Stock Options
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure, which (i) amends SFAS No. 123,Accounting for Stock-Based Compensation to add two new
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
transitional approaches when changing from the Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees intrinsic value method of accounting for stock-based employee compensation to the SFAS No. 123 fair value method and (ii) amends APB Opinion No. 28,Interim Financial Reporting to call for disclosure of SFAS No. 123 pro forma information on a quarterly basis. The Company has elected to adopt the disclosure only provisions of SFAS No. 148 and will continue to follow APB Opinion No. 25 and related interpretations in accounting for the stock options granted to its employees and directors. Accordingly, employee and director compensation expense is recognized only for those options whose price is less than fair market value at the measurement date.
Pro forma information regarding net loss and loss per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options and employee stock purchase plan shares under the fair value method of that statement. The pro forma effects of stock-based compensation on net income (loss) and net earnings (loss) per common share have been estimated at the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions for the twelve months ended January 31, 2005, 2004, and 2003, respectively: risk-free interest rates of 3.6%, 6.0%, and 6.0%; dividend yields of 0%; expected volatility of 82.1%, 83.8%, and 85.0%, a weighted-average expected life of the option of 5, 6.3, and 7 years respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options and rights under the employee stock purchase plan have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair market value of its employee stock options or the rights granted under the employee stock purchase plan.
The following is a summary of the pro forma effects on reported net loss and loss per share for the years indicated as if the Company had elected to recognize compensation expense based on the fair value of the options at their grant date as prescribed by SFAS No. 123. For purposes of the pro forma disclosures, the estimated fair value of the options and the shares granted under the employee stock purchase plan is amortized to expense over their respective vesting or option periods.
The Company’s pro forma information follows (in 000’s, except per share data):
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Reported net (loss) | $ | (90,781 | ) | $ | (49,408 | ) | $ | (63,794 | ) | |||
Pro forma | ||||||||||||
Add: Stock-based employee compensation expense included in net loss, net of tax effects | 315 | — | — | |||||||||
Deduct: Total stock-based employee compensation determined under fair value based method, net of related tax effects | (6,208 | ) | (7,093 | ) | (8,528 | ) | ||||||
Pro forma net (loss) | $ | (96,674 | ) | $ | (56,501 | ) | $ | (72,322 | ) | |||
Loss per share: | ||||||||||||
Basic—as reported | $ | (1.46 | ) | $ | (0.84 | ) | $ | (1.36 | ) | |||
Basic—pro forma | $ | (1.56 | ) | $ | (0.96 | ) | $ | (1.55 | ) | |||
Diluted—as reported | $ | (1.46 | ) | $ | (0.84 | ) | $ | (1.36 | ) | |||
Diluted—pro forma | $ | (1.56 | ) | $ | (0.96 | ) | $ | (1.55 | ) | |||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions about the future that affect the amounts reported in the consolidated financial statements. These estimates include assessing the collectibility of accounts receivable, the realization of deferred tax assets, the usage and recoverability of inventories and long-lived assets (including goodwill) and the incurrence of losses on long-term contracts and warranty costs. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and significant price erosion generally occurs over the life of a product. As a result of such factors, actual results could differ from the estimates used by management.
Comprehensive Income (Loss)
The Company has adopted SFAS No. 130,Reporting Comprehensive Income, which requires that all components of comprehensive income (loss), including net income (loss), be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) 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 (loss), including foreign currency translation adjustments, unrealized gains and losses on investments, and the net unrealized gain (loss) on foreign currency forward contracts, shall be reported, net of their related tax effect, to arrive at comprehensive income (loss).
Recently Issued Accounting Standards
In December 2004, the FASB issued SFAS No. 123-R, which replaces SFAS No. 123,Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. As originally issued, SFAS No. 123 established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that pronouncement permitted entities to continue applying the intrinsic-value-based model of APB Opinion 25, provided that the financial statements disclosed the pro forma net income or loss based on the fair-value method. Due to a recent SEC announcement delaying the effective date, the Company will be required to apply SFAS No. 123-R as of February 1, 2006. Thus, the Company’s consolidated financial statements will reflect an expense for (a) all share-based compensation arrangements granted beginning February 1, 2006 and for any such arrangements that are modified, cancelled, or repurchased after that date, and (b) the portion of previous share-based awards for which the requisite service has not been rendered as of that date, based on the grant-date estimated fair value of those awards.
In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets, an amendment of APB Opinion 29, Accounting for Nonmonetary Transactions. The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured using the estimated fair value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets, and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has “commercial substance” if the future cash flows of the entity are expected to change significantly as a result of the transaction. This pronouncement is effective for nonmonetary exchanges in fiscal periods beginning after June 15, 2005. Management does not believe that this pronouncement will have a significant effect on its future financial statements.
In November 2004, the FASB issued SFAS No. 151,Inventory Costs—an amendment of ARB No. 43, Chapter 4, which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. In Chapter 4 of ARB No. 43, paragraph 5 previously stated that “…under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
be so abnormal as to require treatment as current period charges…” SFAS No. 151 requires that such items be recognized as current-period charges, regardless of whether they meet the criterion of so abnormal (an undefined term). This pronouncement also requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred in years beginning after June 15, 2005. Management does not believe this pronouncement will have a significant impact on its future financial statements.
In December 2003, the FASB issued a revision of SFAS No. 132,Employers’ Disclosures about Pensions and Other Postretirement Benefits. This pronouncement (“SFAS No. 132-R”) expands employers’ disclosures about pension plans and other post-retirement benefits, but does not change the measurement or recognition of such plans required by SFAS No. 87, No. 88. or No. 106. SFAS No. 132-R retains the existing disclosure requirements of SFAS No. 132, and requires certain additional disclosures about defined benefit post-retirement plans. The defined benefit pension plan of the Company’s United Kingdom subsidiary is the Company’s only defined benefit post-retirement plan. Except as described in the following sentence, SFAS No. 132-R is effective for foreign pension plans for fiscal years ending after June 15, 2004; after the effective date, restatement for some of the new disclosures is required for earlier annual periods. Some of the interim-period disclosures mandated by SFAS No. 132-R (such as the components of net periodic benefit cost, and certain key assumptions) are effective for foreign pension plans for quarters beginning after December 15, 2003; other interim-period disclosures will not be required for the Company until the first quarter of 2005. The Company adopted the interim-period disclosure requirements, which became effective on January 1, 2004 and December 31, 2004, on those dates. The adoption of this pronouncement did not have a significant impact on the Company’s results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity, and is effective for public companies as follows: (i) in November 2003, the FASB issued FASB Staff Position (“FSP”) FAS 150-03 (“FSP 150-3”), which defers indefinitely (a) the measurement and classification guidance of SFAS No. 150 for all mandatory redeemable non-controlling interests in (and issued by) limited-life consolidated subsidiaries, and (b) SFAS No. 150’s measurement guidance for other types of mandatory redeemable non-controlling interests, provided they were created before November 5, 2003; (ii) for financial instruments entered into or modified after May 31, 2003 that are outside the scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the aforementioned effective dates. The adoption of this pronouncement did not have a material impact on the Company’s results of operations or financial condition.
In April 2003, the FASB issued SFAS No. 149,Amendments of Statement 133 on Derivative Instruments and Hedging Activities, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. This pronouncement is effective for contracts entered into or modified after June 30, 2003 (with certain exceptions), and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. The primary objectives of FIN No. 46 are to provide guidance on the identification of entities for which control is achieved through means other than voting rights (variable interest entities, or “VIEs”), and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity for which either: (a) the equity investors do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity’s activities
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
without receiving additional subordinated financial support from other parties. In addition, FIN No. 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. As amended in December 2003, the effective dates of FIN No. 46 for public entities that are not small business issuers are as follows: (a) For interests in special-purpose entities: the first period ended after December 15, 2003; and (b) For all other types of VIEs: the first period ended after March 15, 2004. Management has determined that the Company has a VIE and as a result, an entity was consolidated in January 2005, which impacted its consolidated financial statements for fiscal year 2005 as previously discussed.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission (the “SEC”), did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
2. DISCONTINUED OPERATIONS
During fiscal year 2005, the management of REMEC engaged the services of financial advisors to facilitate the sale or divestiture of certain of its non-core business operations. The following transactions were completed during fiscal year 2005.
Nanowave Technologies Inc.
In August 2004, we sold our majority interest in REMEC Nanowave Technologies Inc., a subsidiary located in Toronto, Canada, to Euromill Equihold Inc., an Ontario, Canada corporation for $3.0 million cash and a note with a principal balance of $2.5 million. Repayment of the note, which bears interest at 6% per annum compounded annually and matures August 18, 2008 is uncertain due to Nanowave’s negative cash flows. Accordingly, the note has been fully reserved for. Nanowave was not a strategic fit for our Defense & Space business segment.
| $ in 000’s | ||||
Cash proceeds from sale | $ | 3,000 | ||
Transaction expenses: | ||||
Transfer taxes | 111 | |||
Transaction costs | 100 | |||
Total expenses | 211 | |||
Net Proceeds | 2,789 | |||
Net assets sold | 2,979 | |||
Loss on sale | $ | (190 | ) | |
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Components product line
In October 2004, we sold our Components product line to Spectrum Control, Inc. for $8.0 million cash. In addition, there is an earnout based on a percentage of net revenue in excess of certain targets for the fourth calendar quarter of 2004 (cash received and included below) and the first calendar quarter of 2005. The Components product line was not a core business of our Wireless Systems business segment.
| $ in 000’s | |||
Cash proceeds from sale | $ | 8,000 | |
Q4 2004 Earnout | 308 | ||
Transaction expenses: | |||
Transfer taxes | 13 | ||
Retention bonuses | 289 | ||
Legal and investment banker fees | 750 | ||
Total expenses | 1,052 | ||
Net Proceeds | 7,256 | ||
Net assets sold | 5,615 | ||
Gain on sale | $ | 1,641 | |
China Network Optimization product line
In December 2004, we sold the China Network Optimization product line for $3.7 million cash ($1.0 million was received at closing and $2.7 million is in escrow for no longer than 6 months as of the closing date), the return of certain securities, and the assumption of certain liabilities. The Company’s accelerated penetration of the China network optimization market never materialized. The high upfront investment in working capital made us re-prioritize where we strategically invested in growth. It was determined that it was more strategic for the Wireless Systems business segment to sell the components and sub-systems into the marketplace rather than this service and installation business.
| $ in 000’s | |||
Cash proceeds from sale | $ | 3,725 | |
Transaction expenses: | |||
Other termination costs | 94 | ||
Transaction costs | 100 | ||
Total expenses | 194 | ||
Net Proceeds | 3,531 | ||
Net assets sold | 894 | ||
Gain on sale | $ | 2,637 | |
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The results of operations of the product lines divested during fiscal year 2005 are as follow:
| Operating Results Data | Nanowave | Components | China | Total | ||||||||||||
| Year Ended January 31, 2005 | (in thousands) | |||||||||||||||
Revenues | $ | 3,924 | $ | 10,208 | $ | 3,195 | $ | 17,327 | ||||||||
Costs and expenses | (3,706 | ) | (11,305 | ) | (6,802 | ) | (21,813 | ) | ||||||||
Loss on long-lived assets | — | — | — | — | ||||||||||||
Other income and expense | — | — | (6 | ) | (6 | ) | ||||||||||
Interest and debt expense | (150 | ) | — | (2 | ) | (152 | ) | |||||||||
Income (loss) before income taxes | 68 | (1,097 | ) | (3,615 | ) | (4,644 | ) | |||||||||
Income taxes | (23 | ) | — | — | (23 | ) | ||||||||||
Income (loss) from discontinued operations, net of income taxes | $ | 45 | $ | (1,097 | ) | $ | (3,615 | ) | $ | (4,667 | ) | |||||
Gain/(loss) on disposal of discontinued operations, net of income taxes | (190 | ) | 1,641 | 2,637 | 4,088 | |||||||||||
Income (loss) from discontinued operations, net of income taxes | $ | (145 | ) | $ | 544 | $ | (978 | ) | $ | (579 | ) | |||||
The results of operations of the product lines divested during fiscal year 2004 are as follow:
| Operating Results Data | Nanowave | Components | China | Total | ||||||||||||
| Year Ended January 31, 2004 | (in thousands) | |||||||||||||||
Revenues | $ | 6,806 | $ | 18,132 | $ | 7,725 | $ | 32,663 | ||||||||
Costs and expenses | (9,898 | ) | (23,687 | ) | (7,680 | ) | (41,265 | ) | ||||||||
Loss on long-lived assets | (2,767 | ) | — | — | (2,767 | ) | ||||||||||
Other income and expense | — | — | 12 | 12 | ||||||||||||
Interest and debt expense | (284 | ) | — | — | (284 | ) | ||||||||||
Income (loss) before income taxes | (6,143 | ) | (5,555 | ) | 57 | (11,641 | ) | |||||||||
Income taxes | 377 | — | — | 377 | ||||||||||||
Income (loss) from discontinued operations, net of income taxes | $ | (5,766 | ) | $ | (5,555 | ) | $ | 57 | $ | (11,264 | ) | |||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The results of operations of product lines divested during fiscal year 2003 are as follow:
| Operating Results Data | Nanowave | Components | China | Total | |||||||||||
| Year Ended January 31, 2003 | (in thousands) | ||||||||||||||
Revenues | $ | 7,447 | $ | 12,463 | $ | — | $ | 19,910 | |||||||
Costs and expenses | (15,559 | ) | (13,273 | ) | — | (28,832 | ) | ||||||||
Loss on long-lived assets | (1,722 | ) | — | — | (1,722 | ) | |||||||||
Restructuring expense | (924 | ) | — | — | (924 | ) | |||||||||
Other income and expense | (79 | ) | (28 | ) | — | (107 | ) | ||||||||
Interest and debt expense | (692 | ) | — | — | (692 | ) | |||||||||
Loss before income taxes | (11,529 | ) | (838 | ) | — | (12,367 | ) | ||||||||
Income taxes | 998 | — | — | 998 | |||||||||||
Loss from discontinued operations, net of income taxes | $ | (10,531 | ) | $ | (838 | ) | $ | — | $ | (11,369 | ) | ||||
3. PRIOR ACQUISITIONS
Paradigm Wireless Systems, Inc. (“Paradigm”)
In November 2003, the Company acquired all of the assets and assumed all of the obligations of Paradigm, a private domestic merchant supplier of RF power amplifiers to the telecommunications infrastructure industry, in a stock-for-stock merger. The addition of Paradigm expanded the Company’s amplifier product portfolio. The factors contributing to the purchase price that resulted in $17.3 million of goodwill was the acquired OEM customer base in the growing market of China, significant penetration in the South Korean market, and a large U.S. OEM amplifier account. Paradigm stockholders received 1,892,107 shares of REMEC common stock. The board of directors of both companies unanimously approved the acquisition, which was valued at $22.1 million (based upon the average closing price of the Company’s stock for the period of two days before, the day of, and two days after the date the terms of the purchase agreement were agreed to, or $11.49 per share). The Company accounted for this transaction as a purchase in accordance with FAS No. 141,Business Combinations. The results of Paradigm are included in the Company’s Wireless Systems segment and have been included in the Company’s consolidated financial statements from the date of acquisition forward.
The following is a schedule detailing the $22.1 million purchase price paid for Paradigm:
| Shares | per share | $ in 000’s | ||||||
Common stock | 1,892,107 | $ | 11.49 | $ | 21,736 | |||
Cash paid for fractional shares | 1 | |||||||
Redeemable preferred stock | 90 | |||||||
Legal expenses | 197 | |||||||
Accounting and other transaction fees | 53 | |||||||
Total paid consideration | $ | 22,077 | ||||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Based on management’s review of the analysis of the tangible and intangible assets and liabilities of Paradigm, the purchase price was allocated as follows (in 000’s):
At November 10, 2003 | ||||
Accounts receivable and other receivables | $ | 3,611 | ||
Inventories | 3,345 | |||
Other current assets | 217 | |||
Property, plant, and equipment | 1,701 | |||
Other long-term assets, including other intangibles of $126 | 174 | |||
Goodwill | 17,293 | |||
Total assets acquired | 26,341 | |||
Current liabilities | (4,264 | ) | ||
Net assets acquired | $ | 22,077 | ||
The $17.3 million of goodwill was assigned to the Wireless Systems segment, none of which was expected to be deductible for tax purposes. The $126,000 of other intangibles was primarily related to customer base and backlog and will be amortized over its useful life.
Himark Telecom Group Limited (“Himark”)
In May 2003, the Company acquired the business of the Himark group, a group of companies in the private sales distribution and value-added telecommunications sector which are headquartered in Beijing, People’s Republic of China. The Company paid consideration of approximately $12.1 million, including 1,391,650 shares of REMEC common stock with a value of $7.0 million (based on the average closing price of the Company’s stock for the period of two days before and two days after the date the terms of the purchase agreement were agreed to, or $5.03 per share), as well as cash, a note payable and Class A Preferred Stock of REMEC International, Inc. The Class A Preferred Stock of REMEC International, Inc. was convertible in certain circumstances into securities granting a 10% ownership interest of REMEC’s combined Chinese operations. Prior to the acquisition, the Himark group jointly provided sales and distribution services for REMEC since its entry into the China telecom market. Management believed that the addition of Himark would accelerate the Company’s penetration of the China market and broaden its product offering by selling network optimization services. These were the primary factors contributing to the $9.9 million recognition of goodwill. The Company accounted for this transaction as a purchase in accordance with SFAS No. 141. The results of Himark were included in the Company’s Wireless Systems segment and were included in the Company’s condensed consolidated financial statements from the date of acquisition forward. The China Network Optimization piece of this business was disposed in December 2004 and reported as Discontinued Operations (see Note 2).
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a schedule detailing the $12.1 million purchase price paid for Himark:
| Shares | per share | $ in 000’s | ||||||
Common Stock | 1,391,650 | $ | 5.03 | $ | 7,000 | |||
Cash | 1,500 | |||||||
Note payable assumed net of assets purchased | 1,314 | |||||||
Inter-Company receivable forgiveness | 1,851 | |||||||
Legal expenses | 417 | |||||||
Total paid consideration | $ | 12,082 | ||||||
The Company determined that the Class A Preferred shares of REMEC International had only nominal value, and for accounting purposes ascribed no value to them as part of accounting for this acquisition.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Based on management’s review of the analysis of the tangible and intangible assets and liabilities of Himark, the purchase price has been allocated as follows (in 000’s):
At June 1, 2003 | ||||
Accounts receivable | $ | 1,554 | ||
Inventories | 800 | |||
Other current assets | 135 | |||
Property, plant, and equipment | 148 | |||
Goodwill | 9,868 | |||
Total assets acquired | 12,505 | |||
Current liabilities | (423 | ) | ||
Net assets acquired | $ | 12,082 | ||
Spectrian Corporation (“Spectrian”)
On December 20, 2002, the Company acquired all of the assets and assumed all of the obligations of Spectrian for the purchase price of $44.8 million. The purchase price was comprised of $38.5 million, which represented the value of the 11,524,000 shares of the Company’s common stock issued to the former Spectrian stockholders (based upon the average closing price of the Company’s stock for the period of two days before and two days after the date the terms of the revised purchase agreement were agreed to, or $3.34 per share), the fair value of Spectrian options assumed of $2.6 million (2,445,065 options assumed at a weighted average exercise price of $16.91) and acquisition related costs of $3.7 million. Spectrian was a leading designer and manufacturer of single carrier and multi-carrier high-power RF amplifiers for the worldwide wireless communications industry, utilized in both wireless data and voice applications. The acquisition was accounted for as a purchase, and accordingly, the total purchase price was allocated to the acquired assets and liabilities assumed at their estimated fair values in accordance with the provisions of SFAS No. 141. The Company’s consolidated financial statements include the results of Spectrian (which are included in the Company’s Wireless Systems segment) from the date of acquisition forward.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Based on management’s review of the analysis of the tangible and intangible assets and liabilities of Spectrian, the purchase price has been allocated as follows (in 000’s):
At December 20, 2002 | ||||
Cash and cash equivalents | $ | 32,328 | ||
Short-term investments | 12,449 | |||
Accounts receivable and other receivables | 10,680 | |||
Inventories | 10,553 | |||
Other current assets | 1,075 | |||
Property, plant, and equipment | 4,806 | |||
Other long-term assets | 476 | |||
Total assets acquired | 72,367 | |||
Account payable | (5,761 | ) | ||
Accrued salaries, benefits, and related taxes | (4,072 | ) | ||
Accrued warranty | (6,200 | ) | ||
Accrued adverse purchase commitments | (5,135 | ) | ||
Accrued restructuring | (1,613 | ) | ||
Accrued expenses and other liabilities | (4,832 | ) | ||
Current liabilities | (27,613 | ) | ||
Net assets acquired | $ | 44,754 | ||
The estimated fair values of identifiable tangible assets and liabilities acquired from Spectrian exceeded the amount paid, resulting in negative goodwill of $4.3 million. In accordance with SFAS No. 141, the negative goodwill was allocated to the non-current assets of Spectrian. Subsequently, management determined that it had under estimated the cost of exiting certain lease obligations associated with the former Spectrian operations. As such, the Company increased its accrual for lease obligations by $4.9 million during the fourth quarter of fiscal 2004, reinstated the aforementioned non-current assets, and recorded $0.6 million of goodwill associated with this transaction.
Pro Forma Information
The following unaudited pro forma summary presents the consolidated results of operations of the Company assuming that the acquisitions of Paradigm and Spectrian, had occurred on February 1, 2002 and that the Himark acquisition and subsequent divestiture of the related China Network Optimization product line are included in the loss from discontinued operations.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The pro forma condensed consolidated results of operations would be as follows (in 000’s, except per share data):
| Years ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
| (unaudited) | ||||||||||||
Pro forma net loss from continuing operations | $ | (90,202 | ) | $ | (50,841 | ) | $ | (99,994 | ) | |||
Pro forma net loss from discontinued operations | (579 | ) | (11,264 | ) | (11,369 | ) | ||||||
Pro forma net loss (1) (2) | $ | (90,781 | ) | $ | (62,105 | ) | $ | (111,363 | ) | |||
Basic and diluted | $ | (1.46 | ) | $ | (1.02 | ) | $ | (1.85 | ) | |||
| (1) | Fiscal 2005 results include a $62.4 million charge to write-off impaired goodwill related to Wireless Systems. |
| (2) | Fiscal 2003 results include a $24.5 million charge to write-down the carrying value of deferred tax assets. |
This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations of the Company or of the results that would have actually occurred had the transactions taken place on February 1, 2002.
4. PROPOSED TRANSACTIONS SUBJECT TO SHAREHOLDER APPROVAL
Defense & Space
In December 2004, we entered into an agreement to sell our Defense & Space group to Chelton Microwave for $260 million cash, subject to certain post-closing adjustments and the assumption of certain liabilities. The Merger Agreement provides that Chelton Microwave will pay us $260 million in cash, subject to certain post-closing adjustments. In conjunction with the sale, the Company will propose a Certificate of Amendment to our existing Restated Articles of Incorporation (the“Certificate of Amendment”). The Certificate of Amendment will cause our common stock to be reclassified (the“Reclassification”) so that we can distribute a substantial portion of the proceeds from the sale of Defense & Space to our shareholders. In the Reclassification, each outstanding share of common stock will be converted into a fractional share of common stock (the“New Common Stock”) and one (1) share of redeemable common stock (the “Redemption Stock”). We intend to complete the Reclassification by filing the Certificate of Amendment with the Secretary of State of the State of California immediately prior to the effective time of the Merger.
We plan to distribute a substantial portion of the aggregate merger consideration to our shareholders by redeeming the Redemption Stock immediately after the effective time of the Merger (the“Redemption”). The exact amount of merger consideration distributed to our shareholders in the Redemption will be determined by our Board of Directors prior to the effective time of the Merger (the“Aggregate Redemption Amount”). The Aggregate Redemption Amount will be not less than $150 million and no more than $200 million. Assuming the sale of REMEC Defense & Space and the Certificate of Amendment are approved and the Merger is completed, each shareholder of REMEC will be entitled to receive an amount in cash per share of Redemption Stock equal to the Aggregate Redemption Amount divided by the number of shares of Redemption Stock issued and outstanding immediately prior to the effective time of the Merger.
The sale requires shareholder approval that has not been obtained as of the filing of this Form 10-K.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tables below reflect an unaudited pro forma condensed consolidated balance sheet at January 31, 2005 and consolidated results of the Company for the year ended January 31, 2005 considering the effects of the proposed sale of REMEC Defense & Space which is subject to shareholder approval:
| Sale of Defense & Space (a) | |||||||||||||
| Company Historical | Historical Assets and Liabilities to be Sold | Other Pro Forma Adjustments | Company Pro Forma | ||||||||||
| (unaudited, in thousands) | |||||||||||||
2005 Condensed Pro Forma Balance Sheet | |||||||||||||
Current assets | $ | 186,806 | $ | (23,648 | ) | $ | 112,360 | $ | 275,518 | ||||
Long term assets | 88,117 | (17,668 | ) | — | 70,449 | ||||||||
Total assets | $ | 274,923 | $ | (41,316 | ) | $ | 112,360 | $ | 345,967 | ||||
Current Liabilities | 107,806 | (15,811 | ) | 27,762 | 119,757 | ||||||||
Long term liabilities | 2,612 | (879 | ) | — | 1,733 | ||||||||
Shareholders’ equity | 164,505 | (24,626 | ) | 84,598 | 224,477 | ||||||||
Total liabilities and shareholders’ equity | $ | 274,923 | $ | (41,316 | ) | $ | 112,360 | $ | 345,967 | ||||
| Company Historical | Sale of Defense & Space (b) | Company Pro Forma | ||||||||||
| (unaudited, in thousands) | ||||||||||||
2005 Condensed Pro Forma Results of Operations | ||||||||||||
Revenues | $ | 423,911 | $ | (99,553 | ) | $ | 324,358 | |||||
Cost of sales | 358,501 | (71,746 | ) | 286,755 | ||||||||
Gross margin | 65,410 | (27,807 | ) | 37,603 | ||||||||
Operating expenses | 155,581 | (11,501 | ) | 144,080 | ||||||||
Loss from continuing operations | (90,171 | ) | (16,306 | ) | (106,477 | ) | ||||||
Other income and expense | (93 | ) | (146 | ) | (239 | ) | ||||||
Provision for income taxes | (62 | ) | — | (62 | ) | |||||||
Loss from continuing operations | (90,202 | ) | (16,452 | ) | (106,654 | ) | ||||||
Loss from discontinued operations, net | (579 | ) | 145 | (434 | ) | |||||||
Net loss(d) | $ | (90,781 | ) | $ | (16,307 | ) | $ | (107,088 | ) | |||
Basic and diluted net loss per common share: | ||||||||||||
Loss from continuing operations | $ | (1.45 | ) | $ | (3.07 | ) | ||||||
Loss from discontinued operations | (0.01 | ) | (0.01 | ) | ||||||||
| $ | (1.46 | ) | $ | (3.06 | ) | |||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 62,069 | (27,318 | )(c) | 34,751 | ||||||||
Diluted | 62,069 | (27,318 | )(c) | 34,751 | ||||||||
| (a) | Reflects the removal from our balance sheet of the assets purchased and the liabilities assumed by Chelton Microwave under the terms of the Merger Agreement, the cash received as a result of the sale of REMEC Defense & Space (adjusted for the payment of $4.7 million in transaction expenses), the accrual of $27.8 |
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million in additional transaction expenses and liabilities arising as a result of the sale of REMEC Defense & Space primarily income taxes and employee costs including compensation expense associated with equity instruments which vested as a result of the Merger, and the effect of a $150 million cash distribution in the Redemption, as if these events occurred on January 31, 2005. Our Board of Directors may decide on increasing the amounts of the distribution pursuant to the Redemption to $200 million. In such case, pro forma cash and shareholders equity will decrease by an additional $50 million. |
| (b) | These adjustments reflect the elimination of the revenue and direct costs of REMEC Defense & Space as if the proposed sale of REMEC Defense & Space had occurred at the beginning of the period presented. |
| (c) | This adjustment represents the effect on weighted average common shares outstanding as a result of the (i) Reclassification, (ii) the exercise of fully vested options, (iii) all of the RSU’s outstanding as of January 12, 2005 and (iv) the Dividend Access shares expected to be exchanged for shares of common stock prior to the Merger as if these transactions had occurred as of the beginning of the period presented. Pursuant to the Reclassification, each outstanding share of common stock immediately prior to the effective time of the Merger will be converted into a fractional share of New Common Stock and one share of Redemption Stock. Diluted weighted common shares outstanding do not include the effect of outstanding unvested stock options, which would be anti-dilutive. |
| (d) | Upon consummation of the proposed merger sale of REMEC Defense & Space, the Company anticipates recognizing a gain of approximately $204 million. |
Wireless Systems
In March 2005, we entered into a definitive agreement with Powerwave Technologies, Inc. to sell selected assets and liabilities of our Wireless Systems business to Powerwave for 10 million shares of Powerwave’s common stock and $40 million in cash. Based on Powerwave’s closing price on Friday, March 11, 2005, the transaction value is approximately $120 million. The transaction includes our RF conditioning products, filters, tower-mounted amplifiers and RF power amplifiers. The transaction also includes our manufacturing facilities in Costa Rica, China and the Philippines, as well as certain employee related costs, facility lease obligations and assets and liabilities related to the product lines being acquired. We will retain certain assets of the Wireless Systems business that include the ODU/Transceiver product line and the manufacturing services business.
The sale of the Wireless Systems business assets and the previously announced sale of the Defense & Space business are results of the Company’s ongoing review of strategic alternatives to increase shareholder value. The completion of these transactions will result in REMEC divesting the majority of its operating assets and liabilities. This sale, like the sale of Defense & Space, requires shareholder approval that has not been obtained as of the filing of this Form 10-K.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The tables below reflect an unaudited pro forma condensed consolidated balance sheet at January 31, 2005 and consolidated results of the Company for the year ended January 31, 2005 considering the effects of the proposed sale of Wireless Systems which is subject to shareholder approval:
| Sale of Wireless Assets (a) | |||||||||||||
| Company Historical | Historical Assets and Liabilities | Other Pro Forma Adjustments | Company Pro Forma | ||||||||||
| (unaudited, in thousands) | |||||||||||||
2005 Condensed Pro Forma Balance Sheet | |||||||||||||
Current assets | $ | 186,806 | $ | (85,180 | ) | $ | 45,600 | $ | 147,226 | ||||
Long term assets | 88,117 | (49,969 | ) | 80,000 | 118,148 | ||||||||
Total assets | $ | 274,923 | $ | (135,149 | ) | $ | 125,600 | $ | 265,374 | ||||
Current Liabilities | 107,806 | (68,114 | ) | 11,904 | 51,596 | ||||||||
Long term liabilities | 2,612 | (750 | ) | — | 1,862 | ||||||||
Shareholders’ equity | 164,505 | (66,285 | ) | 113,696 | 211,916 | ||||||||
Total liabilities and shareholders’ equity | $ | 274,923 | $ | (135,149 | ) | $ | 125,600 | $ | 265,374 | ||||
| Company Historical | Sale of Wireless Assets (b) | Company Pro Forma | ||||||||||
| (unaudited, in thousands) | ||||||||||||
2005 Condensed Pro Forma Result of Operations | ||||||||||||
Revenues | $ | 423,911 | $ | (251,743 | ) | $ | 172,168 | |||||
Cost of sales | 358,501 | (226,881 | ) | 131,620 | ||||||||
Gross margin | 65,410 | (24,862 | ) | 40,548 | ||||||||
Operating expenses | 155,581 | (64,913 | ) | 90,668 | ||||||||
Loss from continuing operations | (90,171 | ) | 40,051 | (50,120 | ) | |||||||
Other income and expense | (93 | ) | (1 | ) | (94 | ) | ||||||
Provision for income taxes | (62 | ) | — | (62 | ) | |||||||
Loss from continuing operations | (90,202 | ) | 40,050 | (50,152 | ) | |||||||
Loss from discontinued operations, net | (579 | ) | — | (579 | ) | |||||||
Net loss (c) | $ | (90,781 | ) | $ | 40,050 | $ | (50,731 | ) | ||||
Basic & diluted net loss per common share: | ||||||||||||
Loss from continuing operations | $ | (1.45 | ) | $ | (0.81 | |||||||
Loss from discontinued operations | (0.01 | ) | (0.01 | ) | ||||||||
| $ | (1.46 | ) | $ | (0.82 | ) | |||||||
Weighted average common shares outstanding: | ||||||||||||
Basic | 62,069 | 62,069 | ||||||||||
Diluted | 62,069 | 62,069 | ||||||||||
| (a) | Reflects, the removal from our balance sheet of the assets purchased and the liabilities assumed by Powerwave Technologies, Inc. under the terms of the Asset Purchase Agreement, the cash received as a result of the sale of REMEC Wireless (adjusted by the payment of $2.9 million in certain transaction expenses), the accrual of $11.9 million of additional transaction and other liabilities arising as a |
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
result of the sale (primarily for D&O insurance trailer and employee costs including compensation expense associated with equity instruments which vested as a result of a change of control, retention bonuses and severance payments), as if these events occurred on January 31, 2005. We have not assumed any additional tax liability from the Wireless transaction. The amount of gain we will recognize will depend on the final structure of the Wireless transaction. Since we expect that all of our net operating and capital losses, including losses we are carrying over from prior years, as well as available state and federal income tax credits, will be absorbed to offset taxes that would otherwise be due as a result of our sale of REMEC Defense & Space, such amounts would not be available to offset gains from the Wireless transaction. As a result, any gains from the Wireless transaction would be fully subject to federal and state income taxes. We are currently in discussions with Powerwave to restructure the Wireless transaction in a tax efficient manner. Since the amount of federal and state corporate income tax liability we will incur as a result of our proposed Wireless transaction will depend on the results of these discussions, we cannot calculate the exact tax liability as of this date. If we are unsuccessful in restructuring the Wireless transaction in an efficient manner, our tax liability associated with the transaction could increase by up to approximately $25 million. |
| (b) | These adjustments reflect the elimination of the revenue and direct costs associated with the net assets of the Wireless Systems business included in the proposed sale to Powerwave as if the transaction had occurred at the beginning of the period presented. |
| (c) | Upon consummation of the proposed sale of Wireless transaction, the Company anticipates recognizing a gain of approximately $40 million. |
The pro forma data above is presented for informational purposes only and does not purport to be indicative of the results of future operations of the Company or of the results that would have actually occurred had the transactions taken place on the dates assumed.
5. FINANCIAL STATEMENT DETAILS
Short-Term Investments
SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, requires companies to record certain debt and equity security investments at market value. Investments with maturities greater than three months are classified as short-term investments. All of the Company’s short-term investments are classified as available-for-sale and are reported at fair value with any material unrealized gains and losses, net of tax, recorded as a separate component of accumulated other comprehensive income (loss) within shareholders’ equity. The Company manages its cash equivalents and short-term investments as a single portfolio of highly marketable securities, all of which are intended to be available for the Company’s current operations. As of January 31, 2005 and January 31, 2004, the Company had short-term investments of $4.5 million and $10.3 million, respectively. Unrealized gains on short-term investments as of January 31, 2005 are included in other comprehensive income. Gross realized and unrealized gains and losses on sales of short-term investments were not significant in either 2005 or 2004. As of January 31, 2005, all short-term investments in debt securities mature in one year or less.
Short-term investments, by security type, consist of the following (in 000’s):
Recorded Value January 31, | ||||||
| 2005 | 2004 | |||||
Commercial Paper | $ | 1,943 | $ | 4,240 | ||
U.S. Government Agencies | 2,588 | 6,056 | ||||
| $ | 4,531 | $ | 10,296 | |||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative Financial Instruments
SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 also requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met and that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company had not engaged in hedging or derivative transactions until January 2004. The Company uses derivatives to manage foreign currency risk and not for trading purposes.
Foreign Currency Cash Flow Hedges
We transact sales denominated in Euros with two of our largest customers and entered into hedging contracts to offset the potential exposure related to foreign currency fluctuations. During the fiscal year 2004, we entered into forward contracts which did not qualify for special hedge accounting, therefore the forward contracts were marked to market and related gains and losses were recorded in income. The net realized loss related to these contracts were $0.3 million in fiscal 2004, which is included in other income, net. All of these contracts were settled as of January 31, 2004.
To address increasing revenue growth denominated in foreign currencies and the related currency risks, in the fourth quarter of fiscal year 2004, the Company established a formal documented program to utilize foreign currency contracts to both mitigate the impact of currency fluctuations on existing foreign currency asset and liability balances as well as to reduce the risk to earnings and cash flows associated with selected anticipated foreign currency transactions anticipated within 12 months. In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, all derivatives are recorded on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify, that are not designated for special accounting treatment, or that are not effective as hedges, are recognized currently in earnings.
Cash Flow Hedging. In fiscal year 2004, the Company began designating and documenting foreign exchange forward contracts related to forecasted sales as SFAS No. 133 cash flow hedges. The Company calculates hedge effectiveness, excluding time value, at least quarterly. The change in the fair value of the derivative on a spot to spot basis is compared to the spot to spot change in the anticipated transaction, with the effective portion recorded in other comprehensive income until it is reclassified to revenue together with the anticipated transaction upon revenue recognition. In fiscal 2005 the Company recorded a gain of $0.3 million in other income associated with forecasted transactions that were no longer expected to occur as originally documented, and a charge $0.9 million in other income associated with time value that has been excluded from effectiveness testing. In the event it becomes probable that additional hedged anticipated transactions will not occur, the gains or losses on the related cash flow hedges will immediately be reclassified from OCI (other comprehensive income) to other income. At January 31, 2005, all outstanding cash flow hedging derivatives had a maturity of less than 6 months.
The following table summarizes impact of cash flow hedges on OCI (pre-tax) in fiscal 2005:
| Pre-Tax OCI | ||||
| (in thousands) | ||||
Ending balance gain at January 31, 2004 | $ | 1,307 | ||
Net change on cash flow hedges | (1,258 | ) | ||
Reclassifications to revenue | 154 | |||
Reclassifications to other income | (307 | ) | ||
Ending balance loss at January 31, 2005 | $ | (104 | ) | |
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company anticipates reclassifying the entire OCI balance to revenue within the next 6 months upon recognition of the anticipated sales.
Balance Sheet Hedging. The Company manages the foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts with maturities of less than 12 months. These contracts are not designated under SFAS No. 133 for special accounting treatment and changes in their fair value are recognized currently in other income and substantially offset the remeasurement gains and losses associated with the foreign currency denominated assets and liabilities.
Outstanding net foreign exchange forward contracts at January 31, 2005 are presented in the table below. Weighted average forward rates are quoted using market convention.
| Net Notional Amount ($000) | Weighted Average Rate | ||||
Cash Flow Hedges: | |||||
Euro purchases | $ | 28,159 | 1.3059 | ||
Inventories
Net inventories consist of the following (in 000’s):
| January 31, 2005 | January 31, 2004 | |||||||||||||||||||
| Gross | Reserves | Net | Gross | Reserves | Net | |||||||||||||||
Raw materials | $ | 56,153 | $ | (13,716 | ) | $ | 42,437 | $ | 65,781 | $ | (18,533 | ) | $ | 47,248 | ||||||
Work in progress | 14,176 | — | 14,176 | 17,703 | — | 17,703 | ||||||||||||||
Finished goods | 20,930 | (7,093 | ) | 13,837 | 17,185 | (7,099 | ) | 10,086 | ||||||||||||
| $ | 91,259 | $ | (20,809 | ) | $ | 70,450 | $ | 100,669 | $ | (25,632 | ) | $ | 75,037 | |||||||
The Company had a reserve for excess and obsolete inventory of $15.1 and $19.2 million as of January 31, 2005 and 2004, respectively. The Company also had additional reserves for anticipated contract losses of $5.7 million and $6.4 million as of January 31, 2005 and 2004, respectively.
Property, Plant and Equipment
Net property, plant and equipment consists of the following (in 000’s):
| January 31, | ||||||||
| 2005 | 2004 | |||||||
Machinery and equipment | $ | 125,115 | $ | 116,259 | ||||
Land, building and improvements | 12,917 | 16,840 | ||||||
Network equipment, PCs, software and other | 17,798 | 16,601 | ||||||
Leasehold improvements | 10,918 | 10,798 | ||||||
| 166,748 | 160,498 | |||||||
Less accumulated depreciation and amortization | (94,781 | ) | (85,117 | ) | ||||
| $ | 71,967 | $ | 75,381 | |||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Depreciation expense for the years ended January 31, 2005, 2004 and 2003, was $19.0 million, $17.4 million and $15.3 million respectively.
Assets subject to capital leases were $4.2 million at January 31, 2005. We had no capital leases prior to fiscal year 2005.
Goodwill, Intangible and Other Assets
In June 2001, the FASB issued SFAS No. 141 and SFAS No. 142. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations closed after June 30, 2001 and also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and, instead, requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized. The Company has implemented SFAS No. 141 and SFAS No. 142 and began applying the new rules on accounting for goodwill and other intangible assets effective February 1, 2002.
The following table summarizes the activity related to net goodwill (in 000’s):
| Year ended January 31, | ||||||||
| 2005 | 2004 | |||||||
Balance at beginning of period | $ | 65,275 | $ | 36,679 | ||||
Additions related to acquisitions | __ | 27,161 | ||||||
Revaluation of acquisition goodwill | 143 | 1,672 | ||||||
Discontinued op write-off | — | (237 | ) | |||||
Write-off of impaired goodwill | (62,400 | ) | — | |||||
Balance at end of period | $ | 3,018 | $ | 65,275 | ||||
By Segment: | ||||||||
Wireless Systems | $ | — | $ | 62,257 | ||||
Defense & Space | 3,018 | 3,018 | ||||||
| $ | 3,018 | $ | 65,275 | |||||
We are required to assess goodwill impairment in fiscal 2005 using the methodology prescribed by Statement of Financial Accounting Standards (SFAS) No. 142Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units and determining the fair value of each reporting unit. Significant judgments required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for each reporting unit.
The majority of our acquisitions that resulted in goodwill being recorded fall within our Wireless Systems segment. The majority of goodwill and other long-lived assets within the Wireless Systems segment were attributable to the ADC Mersum OY, Himark and Paradigm acquisitions. Nanowave Technologies, Inc., which
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
was merged into the Defense & Space segment in connection with the reorganization/reevaluation of the reporting units in 2003, is the only purchased business of this segment. Management determined in accordance with SFAS No. 142 that our segments meet the criteria for aggregation and therefore performed its analysis at the reporting segment level.
During the fiscal quarter ending July 30, 2004, the Company determined there were indicators of impairment for the Wireless Systems reporting segment as a result of changes in management’s assumptions with respect to revenue growth and gross margins. The Company tested the goodwill of the reporting segment for impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. The performance of the test required a two-step process. The first step of the test involved comparing the fair value of the affected reporting unit with the reporting segment’s aggregate carrying value, including goodwill. The Company estimated the fair value of the Wireless Systems reporting segment as of July 2004 using the income approach methodology of valuation. The assumptions used in this impairment test included sales growth rates ranging from 4%-8%, gross profit margins ranging from 14%-24%, and a discount rate of 18.6%. The estimates used reflected the Company’s inability to gain market segment share or attain the level of profitability previously anticipated. As a result of this comparison, the Company determined that the carrying value of the Wireless Systems business unit exceeded its implied fair value as of July 2004. The Company had to issue financial statements before completing the second step of the impairment test that allows management to measure the actual amount of the impairment loss. Using the guidance included in SFAS No. 5, Accounting for Contingencies the Company determined that an impairment loss was probable and that this impairment loss could be reasonably estimated. The Company’s management made its best estimate of the goodwill impairment loss for the Wireless Systems reporting segment to be $62.4 million, the total amount of goodwill for that segment. In accordance with SFAS No. 142, the Company recorded an estimated charge to write down the value of its goodwill in the fiscal quarter ended July 30, 2004. During the Company’s fiscal quarter ending October 29, 2004, the Company completed the second step of the goodwill impairment test, which required the Company to compare the implied fair value of the reporting segment goodwill with the carrying amount of that goodwill. Based on this assessment, there was no adjustment required to the loss recorded in the second fiscal quarter.
The primary factors that contributed to the impairment assessment of the Wireless Systems reporting segment in the second quarter of fiscal 2005 were continued projected losses resulting from industry overcapacity resulting in lower profit margins, and manufacturing cost reductions lagging market price decreases.
A goodwill impairment test was performed for the Defense & Space reporting segment as of January 31, 2005. Our impairment review process is based on a discounted future cash flow approach that uses our estimates of revenue for the reporting units, driven by assumed market growth rates and assumed market segment share, and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimates that we use to manage the underlying businesses. In performing the fiscal 2005 annual test for the Defense & Space reporting segment, our assumptions were sales growth rates ranging from 10%-15%; gross profit margins ranging from 26%-28% (excluding depreciation); an income tax rate of 36% and a discount rate of 20%. We did not recognize any goodwill impairment as a result of performing this annual test.
A variance in the discount rate or gross margin assumptions could have a significant impact on the amount of identified goodwill impairment. A small change in the percentage assumptions for these factors could result in an indication of possible impairment that would lead us to further quantify the impairment and potentially record a charge to write-down these assets.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Other Intangible Assets
Acquired intangible assets subject to amortization at January 31, 2005 were as follows (in 000’s):
| Gross Carrying Value | Accumulated Amortization | Net Carrying Value | ||||||||
Core technology | $ | 4,800 | $ | (2,228 | ) | $ | 2,572 | |||
Patents and trademark | 111 | (111 | ) | — | ||||||
| $ | 4,911 | $ | (2,339 | ) | $ | 2,572 | ||||
Amortization expense related to other intangible assets totaled $0.7 million, $0.7 million, and $0.7 million for fiscal years 2005, 2004 and 2003, respectively. The estimated future annual amortization expense for amortized intangible assets owned as of January 31, 2005 is as follows (in 000’s):
| Amortization Expense | |||
Fiscal 2006 | $ | 686 | |
Fiscal 2007 | 686 | ||
Fiscal 2008 | 686 | ||
Fiscal 2009 | 514 | ||
Total amortization expense | $ | 2,572 | |
At January 31, 2005, intangible assets other than goodwill were evaluated for impairment using undiscounted cash flows expected to result from the use of the assets as required by SFAS No. 144Accounting for the Impairment or Disposal of Long-Lived Assets. No impairment loss was recognized during fiscal 2005 related to these assets.
Other Investments
During fiscal 2001, the Company invested $13.6 million in the common stock of Allgon AB as part of a planned acquisition. The carrying value of this investment was adjusted to its fair market value of $9.9 million at January 31, 2001 in accordance with SFAS No. 115 and the unrealized loss of $3.7 million was included in accumulated comprehensive income in the consolidated statements of shareholders’ equity in fiscal 2001. In the first quarter of fiscal 2002, the Company recognized a $9.4 million charge in the consolidated statement of operations to write-down this investment to its then current fair market value based on the quoted market price. The subsequent $2.4 million increase in the value of this investment during fiscal 2002 was included in other comprehensive income. During fiscal 2003, the Company reflected the reversal of this unrealized gain in other comprehensive income and also recognized a $1.8 million charge in the consolidated statement of operations to write-down this investment to its current fair market value based on the quoted market price. During the fourth quarter of fiscal 2004, the Company sold those securities for $2.4 million.
During fiscal 2003, the Company received a common stock warrant from a customer in a contract settlement agreement. During the fourth quarter of fiscal 2004, the Company exercised the warrant and sold the underlying securities for $5.3 million. The resulting gain of $4.5 million is reflected in other income in the Consolidated Statement of Operations.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in 000’s):
| January 31, | ||||||
| 2005 | 2004 | |||||
Accrued warranty | $ | 8,847 | $ | 8,867 | ||
Accrued lease obligations | 6,449 | 6,292 | ||||
Accrued taxes | 5,488 | 2,627 | ||||
Accrued capital leases-short term | 3,963 | — | ||||
Accrued insurance | 3,603 | 2,891 | ||||
Accrued audit and legal fees | 1,757 | 450 | ||||
Accrued bonuses | 1,300 | 1,075 | ||||
Accrued restructuring | — | 2,638 | ||||
Accrued operating expenses and other current liabilities | 12,888 | 11,155 | ||||
| $ | 44,295 | $ | 35,995 | |||
Capital Leases
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum less payments as of January 31, 2005 (in 000’s):
| Capital Leases | ||||
Fiscal 2006 | $ | 3,018 | ||
Fiscal 2007 | 754 | |||
Fiscal 2008 | 199 | |||
Fiscal 2009 | — | |||
Fiscal 2010 | — | |||
Thereafter | — | |||
Total minimum capital lease payments | 3,971 | |||
Less: Amount representing interest | (8 | ) | ||
Present value of net minimum lease payments | $ | 3,963 | ||
Comprehensive Income
The components of accumulated other comprehensive income are as follow (in 000’s):
| January 31, | ||||||||
| 2005 | 2004 | |||||||
Cumulative translation adjustment | $ | 4,309 | $ | 4,479 | ||||
Accumulated unrealized gain on foreign currency forward contracts | 1,426 | 1,426 | ||||||
Accumulated unrealized loss on foreign currency forward contracts | (1,530 | ) | (116 | ) | ||||
Total accumulated other comprehensive income | $ | 4,205 | $ | 5,789 | ||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. SHAREHOLDERS’ EQUITY
Stock Option Plans
The Company’s 1995 and 2001 Equity Incentive Plans provide for the grant of incentive stock options, non-qualified stock options, restricted stock awards, stock purchase rights or performance shares to employees of the Company. The Plans’ original terms contain acceleration provisions in the event of a change in control or a sale of substantially all assets of the Company. The Company’s shareholders have approved the issuance of a total of 13,411,000 shares of common stock under the two plans. The exercise price of the incentive stock options must at least equal the fair market value of the common stock on the date of grant, and the exercise price of non-qualified options may be no less than 85% of the fair market value of the common stock on the date of grant. Options granted under the plans generally vest over four years and generally expire nine years from the date of grant.
The Company tendered an offer to REMEC employees to exchange certain outstanding options to purchase shares of REMEC’s common stock with exercise prices of $15.00 per share or greater for Restricted Stock Units that will represent the right to receive shares of common stock of REMEC. The exchange ratio was 4 options for 1 restricted stock unit. Each restricted stock unit will vest 25% per year for four years from the date of grant and if employment is terminated prior to the vesting date of the restricted stock units, all or a portion of the unvested restricted stock units may be forfeited. As of August 30, 2004, options to purchase 8,141,992 shares of REMEC Common Stock were issued and outstanding, of which options to purchase approximately 1,262,531 shares of REMEC Common Stock, constituting approximately 15.5%, were held by eligible persons and were eligible for exchange in the Offer to Exchange. Approximately 990,325 options were exchanged for a total of 247,581 restricted stock units as of the expiration date of the offer, November 7, 2004.
During fiscal 2005, the Company issued 147,250 shares of restricted stock to a number of salaried exempt employees. Each restricted stock unit will vest 25% per year for four years from the date of grant and if employment is terminated prior to the vesting date of the restricted stock units, all or a portion of the unvested restricted stock units may be forfeited. In addition, during fiscal 2005 the Company issued 168,000 shares of restricted stock to officers of the Company. Some of these restricted stock units may vest in less than four years or become fully vested on change of control of the Company.
The Company recognized compensation cost based on the fair value of the restricted stock units (equal to the quoted market price of the Company’s common stock on the exchange date) and amortized such expense over the respective vesting periods. Compensation expense recognized in fiscal year 2005 totaled $0.3 million.
The Company also maintains the 1996 Non-employee Directors Stock Option Plan under which 450,000 common shares have been reserved for non-qualified stock option grants to non-employee directors of REMEC. Under the Plan, option grants are automatically made on an annual basis at the fair market value of the stock on the date of grant. Options granted under the Plan generally vest over three years and generally expire nine years from the date of grant.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the Company’s stock option activity and related information is as follows:
| Years Ended January 31, | ||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||
| Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||||||
Outstanding—beginning of year | 9,206,000 | $ | 10.82 | 10,686,000 | $ | 11.14 | 5,801,000 | $ | 12.30 | |||||||||
Granted | 1,029,000 | 7.45 | 653,000 | 8.60 | 5,794,000 | 4.11 | ||||||||||||
Exercised | (190,000 | ) | 5.07 | (549,000 | ) | 7.53 | (15,000 | ) | 5.64 | |||||||||
Exchanged | (990,000 | ) | 22.93 | — | — | — | — | |||||||||||
Forfeited/Cancelled | (2,088,000 | ) | 10.82 | (1,584,000 | ) | 14.72 | (894,000 | ) | 14.72 | |||||||||
Outstanding—end of year | 6,967,000 | $ | 8.14 | 9,206,000 | $ | 10.82 | 10,686,000 | $ | 11.14 | |||||||||
The following table summarizes by price range the number, weighted average exercise price and weighted average life (in years) of options outstanding and the number and weighted average exercise price of exercisable options as of January 31, 2005:
| Total Outstanding | Total Exercisable | |||||||||||
Weighted Average | Number of Shares | Weighted Average Exercise Price | ||||||||||
Price Range | Number of Shares | Exercise Price | Life | |||||||||
$0.00–$ 5.00 | 1,896,000 | $ | 2.99 | 7.1 | 740,000 | $ | 4.13 | |||||
$5.01–$10.00 | 3,747,000 | 8.19 | 4.49 | 2,666,000 | 8.30 | |||||||
$10.01–$15.00 | 941,000 | 11.91 | 5.9 | 665,000 | 12.05 | |||||||
$15.01–$20.00 | 95,000 | 16.56 | 3.84 | 94,000 | 16.56 | |||||||
$20.01–$25.00 | 10,000 | 21.89 | 4.6 | 10,000 | 21.89 | |||||||
$25.01–$30.00 | 260,000 | 25.48 | 1.8 | 260,000 | 25.48 | |||||||
$30.01–$35.00 | 1,000 | 32.25 | 0.0 | 1,000 | 32.25 | |||||||
$35.01–$40.00 | 8,000 | 36.23 | 1.1 | 8,000 | 36.23 | |||||||
$40.01–$45.00 | 4,000 | 43.31 | 2.5 | 4,000 | 43.31 | |||||||
$45.01–$100.00 | 5,000 | 52.00 | 2.6 | 5,000 | 52.00 | |||||||
Total Plan | 6,967,000 | $ | 8.14 | 5.2 | 4,453,000 | $ | 9.51 | |||||
At January 31, 2005, options to purchase 2,068,000 shares of the Company’s common stock were available for future grant.
Stock Purchase Plan
The Company’s Employee Stock Purchase Plan provides for the issuance of shares of the Company’s common stock to eligible employees. During fiscal 2004, REMEC’s shareholders approved an increase in the number of shares available for issuance under the Employee Stock Purchase Plan to a total of 5,450,000 shares of common stock. The price of the common shares purchased under the Employee Stock Purchase Plan will be equal to 85% of the fair market value of the common shares on the first or last day of the offering period, whichever is lower. As of January 31, 2005, a total of 1,608,000 shares of the Company’s common stock were available for issuance under the Employee Stock Purchase Plan.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred Savings Plan
The Company has a Deferred Savings Plan for its employees, which allows participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions up to $180 per quarter, per employee. Employees vest immediately in their contributions and Company contributions vest over a two-year period. Company contributions to this plan totaled approximately $1.1 million, $0.9 million and $0.8 million for the years ended January 31, 2005, 2004 and 2003, respectively. The Company’s foreign subsidiaries maintain separate defined contribution retirement savings plans for substantially all of their employees. Participants may contribute a portion of their annual salaries subject to statutory annual limitations. The Company matches a percentage of the employee’s contribution as specified in the plan agreements. Contributions to these plans totaled $0.4 million, $0.1 million and $0.4 million for the years ended January 31, 2005, 2004 and 2003, respectively.
Post-Retirement Benefit Plans
The Company has a post-retirement benefit plan, which provides health care benefits to certain executives following employment. The Company accounts for these benefits under FAS 106,Employer’s Accounting for Post-retirement Benefits Other than Pensions, which requires the Company’s obligation for post-retirement benefits to be provided to or for an employee be fully accrued by the date that employee attains full eligibility for all of the benefits expected to be received by that employee. The amount accrued each year is based upon actuarial valuations with a discount rate of 6.25% for fiscal 2005 and a remaining amortization period of 10.55 years. As of January 31, 2005, the Company has accrued $0.4 million of the total projected benefit of $1.2 million.
7. COMMITMENTS AND CONTINGENCIES
Bank Revolving Line of Credit Facility
On July 6, 2004, the Company extended the term of its existing revolving working capital line of credit with its senior lender to July 5, 2005 and increased the maximum amount of the credit facility to $30 million. The borrowing rate under this credit facility is based on prime plus 1% with prime being defined as the bank’s most recently announced per annum “prime rate.” As of January 31, 2005 the Company has not had any borrowings under this credit facility; however $8.4 million has been used under letter of credit arrangements, $1.8 million for banking cash management products, $2.6 million has been utilized in connection with foreign currency forward contracts and $17.2 million remains available to increase its factoring line. The credit facility is secured by the Company’s domestic trade receivables and inventory. As of January 31, 2005 the Company was in compliance with the financial covenants contained in this credit facility. The facility is also subject to a “Material Adverse Change” clause whereby the bank can subjectively determine that the Company is in default under the credit agreement. The Material Adverse Change is defined as “if there (i) occurs a material adverse change in the business operations, or condition (financial or otherwise) of the Borrower; or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) is a material impairment of the value or priority of Bank’s security interests in the Collateral.” As of January 31, 2005, Management is not aware of any Material Adverse Change.
Factoring Arrangement
In fiscal year 2004, the Company entered into a factoring arrangement whereby certain of its receivables were sold on a pre-approved, nonrecourse basis except in the event of dispute or claim as to price, terms, quality, material workmanship, quantity or delivery of merchandise. Pursuant to the terms of the arrangement, receivables are sold, net of factoring fees and commissions and net of any credits or discounts available to the
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s customers. Approximately 29% and 20% of accounts receivable were factored at January 31, 2005 and January 31, 2004, respectively. The Company had $8.1 million of advances from the factor outstanding at January 31, 2005 and none at January 31, 2004. In compliance with SFAS No. 140 and the terms of the arrangement, proceeds are collected from the financial institution and the receivables are removed from the balance sheet.
In fiscal year 2005, the factoring arrangement limit was increased from $15 million to $25 million, with all other terms and conditions remaining the same. Late in fiscal year 2005, a foreign subsidiary of the Company entered into a 6 million Euro factoring arrangement whereby certain of its receivables are sold on a pre-approved, non-recourse basis except in the event of dispute or claim as to price, terms, quality, material, workmanship, quantity or delivery of merchandise. Pursuant to the terms of the arrangement, receivables are sold, net of factoring fees and commissions and net of any credits or discounts available to the Company’s customers. There were no factorings under this facility as of January 31, 2005.
Leases
The Company leases certain offices and production facilities under non-cancelable agreements classified as operating leases. Certain of these lease agreements include renewal options. At January 31, 2005, future minimum payments under these operating leases were as follows (in 000’s):
| Operating Leases | |||
Fiscal 2006 | $ | 9,966 | |
Fiscal 2007 | 9,850 | ||
Fiscal 2008 | 8,900 | ||
Fiscal 2009 | 8,173 | ||
Fiscal 2010 | 7,941 | ||
Thereafter | 38,983 | ||
Total minimum lease payments | $ | 83,813 | |
Rent expense totaled $7.3 million, $8.0 million and $4.6 million during fiscal 2005, 2004 and 2003, respectively. Minimum rental payments to be received by the Company under sub-lease rental arrangements are as follows: $1.5 million (2006), $1.5 million (2007), $1.5 million (2008) and $1.5 million (2009).
Sale-Leaseback Transaction
In January 2002, the Company completed a sale-leaseback transaction of its Escondido, California facility resulting in a $0.6 million gain on the transaction. Effective upon the closing of the sale, the Company leased the building back from the buyer. The Company deferred the $0.6 million gain and is amortizing it over the term of the lease. The new lease term provided for a 5-year lease with monthly lease payments totaling approximately $15,000. Under the terms of the lease beginning March 2002, each March thereafter the monthly rent is increased by 3%.
In April 2003, the Company completed a sale-leaseback transaction of its Kearny Mesa (San Diego), California business campus, resulting in a $0.9 million gain on the transaction. Effective upon the closing of the sale, the Company leased the entire campus back from the buyer. The Company deferred the $0.9 million gain and is amortizing it over the terms of the leases. The new lease terms provide for a 14-year lease on each of the four buildings with monthly lease payments totaling approximately $165,000. Under the terms of the leases, beginning August 2003 and each August thereafter, the monthly rent is adjusted based upon a CPI index factor.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In place of a security deposit on the properties, the Company provided letters of credit aggregating $3.3 million. The initial term of the letters of credit was two years with automatic annual renewals thereafter. The amount of the letters of credit may be reduced upon achievement of certain financial performance criteria. The letters of credit are backed by the Company’s revolving working capital line of credit
Warranty
Warranty reserves are established for costs that are expected to be incurred after the sale and delivery of a product or service for deficiencies under specific product or service warranty provisions. The warranty reserves are determined as a percentage of revenues based on the actual trend of historical charges incurred over various periods, excluding any significant or infrequent issues that are specifically identified and reserved.
The following table summarizes the activity related to warranty reserves (000’s):
Years Ended January 31 | ||||||||
| 2005 | 2004 | |||||||
Balance at beginning of year | $ | 8,867 | $ | 8,743 | ||||
Additions to reserve | 3,120 | 2,218 | ||||||
Usage and release of warranty reserves | (3,140 | ) | (2,094 | ) | ||||
Balance at end of year | $ | 8,847 | $ | 8,867 | ||||
Indemnifications and Guarantees
Effective January 1, 2003, the recognition provisions of FASB Interpretation No. 45 (FIN 45),Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Others, were adopted, which expands previously issued accounting guidance for certain guarantees. Indemnifications issued or modified during the year ended January 31, 2005 did not have a material effect on the consolidated financial statements. A description of the Company’s indemnifications and guarantees as of January 31, 2005 is provided below. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made under these agreements have not had a material effect on the Company’s business, financial condition or results of operations other than certain guaranteed payments made in connection with the customer financing arrangements discussed below.
The Company often designs, develops and manufactures standard “off-the-shelf” products and may provide the customer with an indemnification against any liability arising from third-party claims of patent, copyright or trademark infringement based upon the design or manufacturing of such products. The Company cannot determine the maximum amount of losses that it could incur under this type of indemnification because it often may not have enough information about the nature and scope of an infringement claim until it has been submitted to the Company and, to date, no claims have been made.
The Company indemnifies its directors and certain of its current and former officers against third party claims against them in their capacity as directors or officers. Certain of the costs incurred for providing such indemnification may be recovered under various insurance policies.
The Company has guaranteed the performance of two of its wholly-owned subsidiaries under a bank agreement to purchase accounts receivable from the subsidiary. This guarantee provides that if the customer does not pay the accounts receivable due to the subsidiary’s failure to perform the underlying contract, the Company
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
guarantees that its subsidiary will repay the funds received from the bank. There have been no uncollected accounts receivable to date and none are anticipated. The total amount of the potential obligation at January 31, 2005 is $24.6 million. Management believes that the likelihood of a payment associated with this guarantee is remote as the failure of the customer to make their required payments to the Company would be a breach of the underlying contract and would subject them to a claim for damages from the Company.
Litigation
The Company’s commitment and contingencies include claims and litigation in the normal course of business. In the opinion of management, based in part on outside counsel, these matters are not expected to have a material adverse effect on the Company’s results of operations and financial position.
On September 29, 2004, three class action lawsuits were filed against the Company and current and former officers in the United States District Court for the Southern District of California alleging violations of federal securities laws between September 8, 2003 and September 8, 2004 (the “Class Period”). On January 18, 2005, the law firm of Milberg Weiss Bershad & Schulman LLP (“Milberg Weiss”) was appointed Lead Counsel and its client was appointed Lead Plaintiff.
On March 10, 2005, Milberg Weiss filed a Consolidated and Amended Complaint (the “Complaint”) naming the Company, a former officer and a current officer as defendants (“Defendants”). The Consolidated and Amended Complaint asserts, among other things, that during the Class Period, the Defendants made false and misleading statements and failed to disclose material information regarding the Company’s operations and future prospects. The Complaint seeks unspecified damages and legal expenses.
On November 16, 2004, a civil complaint was filed in San Diego Superior Court by Cardinal Health 301, Inc. (formerly known as Pyxis Corporation) (“Cardinal”) against Tyco Electronics Corporation, Thomas & Betts Corporation and the Company alleging breach of contract and breach of express and implied warranties with regard to certain products sold by the Company’s electronic manufacturing services business unit to Pyxis that incorporated allegedly defective components from Tyco and Thomas & Betts (the “Cardinal Complaint”).
On March 18, 2005, the court granted the Company’s demurrer to the Cardinal Complaint, allowing Cardinal an opportunity to amend its complaint, which it has done. Cardinal’s amended complaint includes the previous claims plus adds a claim for breach of the covenant of good faith and fair dealing. Cardinal’s amended complaint seeks seven million dollars in damages plus legal expenses. The Company’s response to the amended Cardinal Complaint, denying Cardinal’s claims and asserting a number of defenses, was filed on April 7, 2005.
Letters of Credit
The Company has $8.4 million in outstanding letters of credit issued by financial institutions. The instruments mature through October 2005.
Environmental Matters
We follow the policy of monitoring our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to our properties that would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. IMPAIRMENT OF OTHER LONG-LIVED ASSETS IN PRIOR YEARS
In connection with its Fiscal 2004 restructuring plan, the Company undertook the sale of two of its facilities in Finland. Based on independent estimates of the current market value of these facilities at that time, the Company’s Wireless Systems segment recorded a charge of $1.0 million during the fourth quarter of fiscal 2004 to write down the carrying value of the facilities to their estimated fair market values. During fiscal 2003, the Company recorded an additional $0.7 million to write-down the leasehold improvements at abandoned facilities.
Write-Down of assets | ||||
Year Ended January 31, 2002: | ||||
Impairment charge | $ | 658 | ||
Direct reduction of assets | (658 | ) | ||
Balance at January 31, 2003 | $ | — | ||
Additional impairment charge | (1,038 | ) | ||
Direct reduction of assets | 1,038 | |||
Balance at January 31, 2004 | $ | — | ||
9. RESTRUCTURING CHARGE
2004 Restructuring
During the fourth quarter of fiscal 2004, the Company announced that as a result of continued operating losses, it was discontinuing production in Finland, eliminating a significant number of positions in its Finnish and U.S. workforce and disposing of other non-strategic assets and operations. As a result, the Company recorded a restructuring charge of $2.7 million during the fourth quarter related to its fiscal 2004 restructuring plan. The restructuring charge included $2.1 million in employee severance and related costs for approximately 200 employees, all of who were identified as of January 31, 2004. The majority of these employees worked in the Company’s Wireless Systems segment and all have left the Company by the end of fiscal 2005. The restructuring charge also reflects anticipated losses of $0.6 million on the disposal of excess property and equipment in the Company’s Wireless Systems segment. The disposition of these items occurred during fiscal 2005.
The following table summarizes the activity related to the accrued restructuring reserve which has been included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets related to the fiscal 2004 restructuring (in 000’s):
Severance Costs for Involuntary Employee Terminations | Write- Obsolete | Total | ||||||||||
Year Ended January 31, 2003: | ||||||||||||
Restructuring charge | $ | 2,135 | $ | 585 | $ | 2,720 | ||||||
Activity: | ||||||||||||
Cash | — | (585 | ) | (585 | ) | |||||||
Balance at January 31, 2004 | 2,135 | — | 2,135 | |||||||||
Activity: | ||||||||||||
Cash | (2,135 | ) | 888 | (1,247 | ) | |||||||
Reversal restructuring charge | — | (888 | ) | (888 | ) | |||||||
Balance at January 31, 2005 | $ | — | $ | — | $ | — | ||||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2002 Restructuring
Prior to fiscal 2002, the Company aggressively expanded its product offerings and manufacturing capacity through a series of acquisitions and internal growth to address expanding market opportunities. As a result of the sharp decrease in demand from the telecommunications industry during fiscal 2002, the Company faced the need to reduce its cost structure. The Company initiated its restructuring efforts in fiscal 2002 with the goal of improving overall operating performance. The Company’s restructuring plan primarily focused on its Wireless Systems segment and consisted of workforce reductions, the consolidation and exiting of excess facilities, the disposal of non-strategic business units and the impairment of excess property and equipment.
In the fourth quarter of fiscal 2002, a restructuring related charge of approximately $17.3 million was recognized as operating expenses related to the Company’s fiscal 2002 restructuring plan. The restructuring charge included components related to the reduction of the Company’s workforce, consolidation of excess facilities and property and equipment impairment.
| • | The reduction of workforce included the elimination of approximately 1,200 positions within the Company’s Wireless Systems segment, which resulted in a severance charge of approximately $2.1 million being recognized during fiscal 2002. Announcement of all such workforce reductions was made during the fourth quarter of fiscal 2002 and the reductions were completed by the end of the second quarter of fiscal 2003. |
| • | The Company also recorded facility related impairment charges of approximately $11.0 million associated with the closure of facilities in California and exited Company-owned facilities in Texas and the United Kingdom within the Company’s Wireless Systems segment. Consolidating locations and exiting facilities resulted in charges relating to write-offs of leasehold improvements at abandoned facilities of $3.1 million, an estimated loss on the sale of the Company’s building in the U.K. of $3.4 million, an estimated loss of $1.4 million on disposal of redundant equipment associated with the Company’s Texas operations, an estimated loss of $0.3 million on the sale of the Company’s building in Texas, recognition of lease obligations at abandoned California facilities over the planned exit period of $2.6 million and other costs of $0.3 million related to legal, real estate fees and commissions associated with the Texas and United Kingdom facilities held for sale. The impairment charge related to the disposal of the redundant equipment was taken in accordance with SFAS No. 121 and was based on management’s estimate that the related equipment would not generate any future cash flows. |
| • | The Company recorded a charge of $4.1 million related to the elimination of certain excess manufacturing equipment related to older process technologies and the closure of its machine shop facilities and included RF manufacturing and machine shop equipment classified as held for disposal in accordance with SFAS 121. The carrying amount of these assets at January 31, 2005 was approximately $0.5 million, which represented the estimated fair market value of similar equipment. The Company also recorded a charge of $0.8 million related to the abandonment of certain obsolete software licenses. |
During fiscal 2003 and 2004, the Company reassessed its fiscal 2002 restructuring accrual, in as much as it relates to costs of exiting certain lease obligations, and determined that the accrual was understated and recorded an additional $0.9 million charge in 2003 and $0.7 million in 2004. The facilities leases on these properties, which began expiring in October 2003, continue in some cases through February 2010. The Company will continue to reassess the related accrual through the end of the lease annually, or until the property is subleased, whichever occurs first, and record additional charges as considered necessary or reverse accruals not needed.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the activity related to the accrued restructuring reserve which has been included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets related to the fiscal 2002 restructuring (in 000’s):
Severance Costs for Involuntary Employee Terminations | Costs to Certain Lease Obligations | Other Costs Related to Consolidation of Facilities | Write-Down of Redundant/ Obsolete Assets | Total | ||||||||||||||||
Year Ended January 31, 2002: | ||||||||||||||||||||
Restructuring charge | $ | 2,146 | $ | 2,622 | $ | 8,351 | $ | 4,138 | $ | 17,257 | ||||||||||
Activity: | ||||||||||||||||||||
Cash | (1,439 | ) | (414 | ) | — | — | (1,853 | ) | ||||||||||||
Direct reduction of assets | — | — | (8,101 | ) | (4,138 | ) | (12,239 | ) | ||||||||||||
Balance at January 31, 2002 | 707 | 2,208 | 250 | — | 3,165 | |||||||||||||||
Activity: | ||||||||||||||||||||
Additional restructuring charge | — | 924 | — | — | 924 | |||||||||||||||
Cash | (707 | ) | (1,592 | ) | (250 | ) | — | (2,549 | ) | |||||||||||
Balance at January 31, 2003 | — | 1,540 | — | — | 1,540 | |||||||||||||||
Activity: | ||||||||||||||||||||
Additional restructuring charge | — | 668 | — | — | 668 | |||||||||||||||
Cash | — | (1,705 | ) | — | — | (1,705 | ) | |||||||||||||
Balance at January 31, 2004 | — | 503 | — | — | 503 | |||||||||||||||
Activity: | ||||||||||||||||||||
Cash | — | (503 | ) | — | — | (503 | ) | |||||||||||||
Balance at January 31, 2005 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
10. INCOME TAXES
For financial reporting purposes, income (loss) before taxes for the years ended January 31, 2005, 2004 and 2003 includes the following components (in 000’s):
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Loss from continuing operations before income taxes: | ||||||||||||
United States | $ | (48,197 | ) | $ | (36,705 | ) | $ | (30,471 | ) | |||
Foreign | (42,067 | ) | (1,336 | ) | (2,391 | ) | ||||||
| $ | (90,264 | ) | $ | (38,041 | ) | $ | (32,862 | ) | ||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The income tax provision (benefit) from continuing operations for the years ended January 31, 2005, 2004 and 2003 consists of the following (in 000’s):
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | 26 | 8 | 51 | |||||||||
Foreign | 198 | 310 | 375 | |||||||||
Deferred: | ||||||||||||
Federal | — | — | 11,841 | |||||||||
State | — | — | 7,467 | |||||||||
Foreign | (286 | ) | (215 | ) | (171 | ) | ||||||
| $ | (62 | ) | $ | 103 | $ | 19,563 | ||||||
The provision (credit) for income taxes from continuing operations is different from that which would be obtained by applying the statutory Federal income tax rate (35%) to loss before provision (credit) for income taxes. The items causing difference for the years ended January 31, 2005, 2004 and 2003 are as follows (in 000’s, except percentage data):
| Years Ended January 31, | |||||||||||||||||||||
| 2005 | 2004 | 2003 | |||||||||||||||||||
| Amount | % | Amount | % | Amount | % | ||||||||||||||||
Tax at statutory federal rate | $ | (31,592 | ) | 35 | % | $ | (13,314 | ) | 35 | % | $ | (11,502 | ) | 35 | % | ||||||
State income tax net of federal benefit | (1,610 | ) | 2 | (1,631 | ) | 4 | 470 | 1 | |||||||||||||
Tax credits | 75 | — | 2,198 | (6 | ) | (3,254 | ) | 10 | |||||||||||||
Change in valuation allowance | 6,781 | (8 | ) | 16,301 | (43 | ) | 35,318 | (107 | ) | ||||||||||||
Foreign rate difference | 14,928 | (17 | ) | (212 | ) | 1 | 134 | — | |||||||||||||
Permanent differences and other | 11,356 | (13 | ) | (3,239 | ) | 9 | 3,037 | 2 | |||||||||||||
| $ | (62 | ) | — | % | $ | 103 | 0 | % | $ | 19,563 | (60 | )% | |||||||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the net deferred tax asset (liability) as of January 31, 2005, 2004 and 2003 are as follows (in 000’s):
| January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Deferred tax liabilities: | ||||||||||||
Tax over book depreciation | $ | 3,595 | $ | 4,097 | $ | 4,269 | ||||||
Other | 643 | 814 | 1,029 | |||||||||
Total deferred tax liabilities | 4,238 | 4,911 | 5,298 | |||||||||
Deferred tax assets: | ||||||||||||
Net operating loss | 100,459 | 89,085 | 53,271 | |||||||||
Credits | 15,192 | 15,268 | 17,465 | |||||||||
Accrued expenses | 3,995 | 12,660 | 12,818 | |||||||||
Inventory and other reserves | 8,692 | 7,313 | 23,828 | |||||||||
Capital loss | 6,769 | 4,600 | — | |||||||||
Inventory costs capitalized | 1,322 | 1,109 | 1,959 | |||||||||
Write-down of Allgon AB investment | — | — | 4,564 | |||||||||
Other | 2 | 2 | 3 | |||||||||
Total deferred tax assets | $ | 136,431 | $ | 130,037 | $ | 113,908 | ||||||
Valuation allowance | (132,721 | ) | (125,940 | ) | (109,639 | ) | ||||||
| 3,710 | 4,097 | 4,269 | ||||||||||
Net deferred tax assets (liabilities) | $ | (528 | ) | $ | (814 | ) | $ | (1,029 | ) | |||
A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, a valuation allowance has been recognized to offset deferred tax assets because management cannot conclude that it is more likely than not that the deferred tax assets will be realized in the foreseeable future. At January 31, 2005, approximately $0.6 million of the valuation allowance for deferred tax assets related to stock option deductions which, when recognized, will be allocated directly to additional paid-in capital.
In Costa Rica, a subsidiary company has been granted tax-free status under that country’s Free Trade Zone Incentive System of 1990. As a result of the tax-free status, such subsidiary company is exempt from all taxes on profits or taxable income for an eight-year period through October 2006, and 50% from all taxes on profits or taxable income for an additional two-year period through October 2008.
In the Philippines, a subsidiary company has been granted tax-free status under the country’s Special Economic Zone Act. As a result of the tax-free status, such subsidiary company was exempt from all taxes on profits or taxable income for a six-year period through October 2004.
In China, a subsidiary company has been granted tax-free status under that country’s Foreign Investment and Foreign Enterprise Act. As a result of the tax-free status, such subsidiary company is exempt from all taxes on profits or taxable income for a five-year period through January 2008.
The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted because the Company considers these earnings to be permanently reinvested. As of January 31, 2005 and 2004, the undistributed earnings of these foreign subsidiaries are approximately $9.6 million and $9.9 million, respectively.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA provides several incentives for U.S. multinational corporations and U.S. manufacturers. Subject to certain limitations, the incentives include an 85% dividend received deduction for certain dividends from controlled foreign corporations that repatriate accumulated income abroad, and a deduction for domestic qualified production activities taxable income. The U.S. Treasury Department is expected to issue additional guidance with regards to these provisions. We are in the process of analyzing whether to take advantage of this opportunity or the potential impact on our income tax provision, if any.
At January 31, 2005 and 2004, the Company had federal net operating loss carry-forwards of approximately $224.5 million and $201.9 million, respectively, which will begin expiring in 2014, unless previously utilized. At January 31, 2005 and 2004, the Company had state net operating loss carry-forwards of approximately $96.1 million and $78.8 million, which will begin expiring in 2006, unless previously utilized. At January 31, 2005, the Company had approximately $11.0 million of foreign net operating losses in the United Kingdom, which are available indefinitely. At January 31, 2005, the Company had federal capital loss carry-forwards of $16.6 million, which will begin expiring in 2008, unless previously utilized. At January 31, 2005, the Company had consolidated federal and state research and development credits of approximately $8.6 million and $7.5 million respectively, which will begin to expire in 2005, unless previously utilized. The Company also had state manufacturing investment credits of approximately $1.7 million, which will begin to expire in 2007, unless previously utilized.
There are limitations on the utilization of the net operating loss carry-forwards. As a result, the net operating losses are not all available to offset current taxable income, including taxable gains that may be recognized on the sale of certain business segments. A portion of the Company’s federal net operating loss carry-forwards relate to acquired companies that are subject to annual usage limitations under Section 382 of the Internal Revenue Code. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company’s net operating loss carry-forwards may be limited in the event of a cumulative change in ownership of more than 50% within a three-year period.
As of January 31, 2005, the Company has not filed all of its required federal and state tax returns for fiscal 2005 and 2004. The absence of such filings exposes the Company to penalties and fees. In the opinion of management, such amounts are not material to the consolidated financial statements taken as whole.
11. INFORMATION BY SEGMENT AND GEOGRAPHIC REGION
During the third quarter of fiscal 2003, in order to more effectively manage its operating structure, the Company reorganized its business into two reportable segments, Commercial and Defense & Space. During the second quarter of fiscal 2005, the Company reorganized and renamed the Commercial segment, the Wireless Systems segment.
The Wireless Systems segment develops and manufacturers RF power amplifiers, filters, tower-mounted amplifiers, outdoor radio units, and manufacturing services used in the transmission of voice, video and data traffic over mobile wireless communication networks. These product lines have similar characteristics regarding (a) competitive pricing pressures, (b) life-cycle cost fluctuations, (c) number of competitors, (d) product differentiation, and (e) size of market opportunity.
The Defense & Space segment provides a broad spectrum of RF, microwave and guidance products for systems integrated by prime contractors in military and space applications.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Segment Data
| Years Ended January 31, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net Sales: | ||||||||||||
Wireless Systems | $ | 324,358 | $ | 267,611 | $ | 148,345 | ||||||
Defense & Space | 99,553 | 84,261 | 78,333 | |||||||||
Consolidated net sales | $ | 423,911 | $ | 351,872 | $ | 226,678 | ||||||
Net loss from continuing operations: | ||||||||||||
Wireless Systems | $ | (106,654 | ) | $ | (52,323 | ) | $ | (58,680 | ) | |||
Defense & Space | 16,452 | 14,179 | 6,255 | |||||||||
Consolidated income (loss) from continuing operations | $ | (90,202 | ) | $ | (38,144 | ) | $ | (52,425 | ) | |||
Net loss from discontinued operations: | ||||||||||||
Wireless Systems | $ | (434 | ) | $ | (5,498 | ) | $ | (839 | ) | |||
Defense & Space | (145 | ) | (5,766 | ) | (10,530 | ) | ||||||
Consolidated income (loss) from discontinued operations | $ | (579 | ) | $ | (11,264 | ) | $ | (11,369 | ) | |||
Net income (loss): | ||||||||||||
Wireless Systems | $ | (107,088 | ) | $ | (57,821 | ) | $ | (59,519 | ) | |||
Defense & Space | 16,307 | 8,413 | (4,275 | ) | ||||||||
Consolidated income (loss) | $ | (90,781 | ) | $ | (49,408 | ) | $ | (63,794 | ) | |||
Depreciation and amortization: | ||||||||||||
Wireless Systems | $ | 15,218 | $ | 14,605 | $ | 12,193 | ||||||
Defense & Space | 4,482 | 3,906 | 3,400 | |||||||||
Consolidated depreciation and amortization | $ | 19,700 | $ | 18,511 | $ | 15,593 | ||||||
Identifiable assets: | ||||||||||||
Wireless Systems | $ | 233,607 | $ | 322,913 | $ | 296,728 | ||||||
Defense & Space | 41,316 | 40,294 | 40,183 | |||||||||
Consolidated identifiable assets | $ | 274,923 | $ | 363,207 | $ | 336,911 | ||||||
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Geographic Area Data (in 000’s)
| Years Ended January 31, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Sales to external customers: | |||||||||
United States | $ | 209,411 | $ | 184,854 | $ | 142,667 | |||
Canada | 82 | 2,903 | 3,520 | ||||||
Europe | 144,436 | 113,998 | 67,767 | ||||||
Asia | 63,089 | 45,557 | 12,289 | ||||||
All other geographic regions | 6,893 | 4,560 | 435 | ||||||
Total sales to external customers | $ | 423,911 | $ | 351,872 | $ | 226,678 | |||
Tangible assets by area: | |||||||||
United States | $ | 33,075 | $ | 41,129 | $ | 48,116 | |||
Europe | 1,432 | 7,827 | 12,241 | ||||||
Costa Rica | 15,842 | 9,625 | 9,648 | ||||||
Asia | 21,618 | 18,507 | 11,501 | ||||||
All other geographic regions | — | — | — | ||||||
Total tangible assets | $ | 71,967 | $ | 77,088 | $ | 81,506 | |||
Sales are attributed to countries based on “ship-to” location of customers.
12. RELATED PARTIES
The Company generated sales of $2.1 million in fiscal year 2005 and they were insignificant in fiscal years 2004 and 2003, on product sold to an entity partially owned by a director.
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REMEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for fiscal 2005 and 2004 are as follows (in 000’s, except per share data):
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
Fiscal 2005 | ||||||||||||||||
Net sales | $ | 108,001 | $ | 108,521 | $ | 103,687 | $ | 103,702 | ||||||||
Gross profit | 17,750 | 10,789 | 18,984 | 17,887 | ||||||||||||
Loss from continuing operations (2) | (6,828 | ) | (73,461 | ) | (3,496 | ) | (6,418 | ) | ||||||||
Loss from discontinued operations, net of taxes | (271 | ) | (3,012 | ) | 12 | 2,692 | ||||||||||
Net loss | $ | (7,099 | ) | $ | (76,472 | ) | $ | (3,484 | ) | $ | (3,726 | ) | ||||
Per share data: | ||||||||||||||||
Loss from continuing operations | $ | (0.11 | ) | $ | (1.19 | ) | $ | (0.06 | ) | $ | (0.10 | ) | ||||
Net loss from discontinued operations | — | (0.05 | ) | — | 0.04 | |||||||||||
Net loss per common share—basic and diluted(1) | $ | 0.11 | $ | (1.23 | ) | $ | (0.06 | ) | $ | (0.06 | ) | |||||
Fiscal 2004 | ||||||||||||||||
Net sales | $ | 73,598 | $ | 78,530 | $ | 96,320 | $ | 103,424 | ||||||||
Gross profit | 16,516 | 19,452 | 21,508 | 2,042 | ||||||||||||
Loss from continuing operations (3) (4) | (6,079 | ) | (2,405 | ) | (3,041 | ) | (26,619 | ) | ||||||||
Loss from discontinued operations, net of taxes | (1,032 | ) | (1,153 | ) | (1,043 | ) | (8,036 | ) | ||||||||
Net loss | $ | (7,111 | ) | $ | (3,558 | ) | $ | (4,084 | ) | $ | (34,655 | ) | ||||
Per share data: | ||||||||||||||||
Loss from continuing operations | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.45 | ) | ||||
Loss from discontinued operations | (0.02 | ) | (0.02 | ) | (0.02 | ) | (0.12 | ) | ||||||||
Net loss per common share—basic and diluted(1) | $ | (0.13 | ) | $ | (0.06 | ) | $ | (0.07 | ) | $ | (0.57 | ) | ||||
| (1) | Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly net earnings per share will not necessarily equal the total for the year. |
| (2) | Fourth quarter fiscal 2005 operating results include an adjustment to correct losses on foreign currency contracts totaling $1.0 million. |
| (3) | Second quarter fiscal 2004 operating results include a restructuring charge of $0.4 million and abandoned facilities costs charged to R&D of $0.4 million. |
| (4) | Fourth quarter fiscal 2004 operating results include a restructuring charge of $4.9 million and an asset impairment charge of $1.9 million. |
F-50
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, REMEC, Inc., has duly caused this Amendment No. 1 to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on May 31, 2005.
REMEC, INC. | ||
By: | /s/ THOMAS H. WAECHTER | |
| Thomas H. Waechter | ||
| President and Chief Executive Officer | ||
Signature | Capacity | Date | ||
/s/ THOMAS H. WAECHTER Thomas H. Waechter | President and Chief Executive Officer (Principal Executive Officer) | May 31, 2005 | ||
/s/ WINSTON E. HICKMAN Winston E. Hickman | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | May 31, 2005 | ||
* Andre R. Horn | Chairman of the Board | May 31, 2005 | ||
* Thomas A. Corcoran | Director | May 31, 2005 | ||
* Martin Cooper | Director | May 31, 2005 | ||
* Mark D. Dankberg | Director | May 31, 2005 | ||
* William H. Gibbs | Director | May 31, 2005 | ||
* Harold E. Hughes, Jr. | Director | May 31, 2005 | ||
* Robert W. Shaner | Director | May 31, 2005 | ||
*By: | /s/ WINSTON E. HICKMAN | |
Winston E. Hickman Attorney-in-Fact | ||
Table of Contents
REMEC, INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(in 000’s)
Allowance for Doubtful Accounts | Balance at Beginning of | Additions | Deductions | Other | Balance at End of Period | ||||||||||||
Year ended January 31, 2003 | $ | 1,597 | $ | 6 | $ | (101 | ) | $ | — | $ | 1,502 | ||||||
Year ended January 31, 2004 | 1,502 | 379 | (149 | ) | 405 | (1) | 2,137 | ||||||||||
Year ended January 31, 2005 | 2,137 | 499 | (1,412 | ) | — | 1,224 | |||||||||||
Contract Loss Reserve | Balance at Beginning of | Additions | Deductions | Other | Balance at End of Period | ||||||||||||
Year ended January 31, 2003 | $ | 2,571 | $ | 1,106 | $ | (936 | ) | — | $ | 2,741 | |||||||
Year ended January 31, 2004 | 2,741 | 3,787 | (80 | ) | — | 6,448 | |||||||||||
Year ended January 31, 2005 | 6,448 | 50 | (807 | ) | — | 5,691 | |||||||||||
Reserve for Obsolete and Unusable Inventory | Balance at Beginning of | Additions | Deductions | Other | Balance at End of Period | ||||||||||||
Year ended January 31, 2003 | $ | 20,171 | $ | 3,761 | $ | (8,759 | ) | $ | — | $ | 15,173 | ||||||
Year ended January 31, 2004 | 15,173 | 11,240 | (9,556 | ) | 2,327 | (1) | 19,184 | ||||||||||
Year ended January 31, 2005 | 19,184 | 3,599 | (7,665 | ) | — | 15,118 | |||||||||||
| (1) | Reflects doubtful accounts and inventory reserves carried over from the acquisition of Paradigm. |
S-1
Table of Contents
EXHIBITS
| Exhibit No. | Description | |
| 2.1(1) | Asset Purchase Agreement between REMEC, Inc. and Spectrum Control, Inc. dated October 15, 2004 | |
| 2.1(11) | Asset Purchase Agreement dated May 31, 2003 between REMEC China Holdings SRL, REMEC Himark Telecom Co., Limited, Himark Telecom Group Limited, and other parties thereto | |
| 3.1(2) | Restated Articles of Incorporation | |
| 3.2(2) | Certificate of Determination, Preferences and Rights of Series RP Preferred Stock of REMEC | |
| 3.3(2) | By-Laws, as amended | |
| 4.1(3) | Rights Agreement, dated as of June 15, 2001, between REMEC and Mellon Investor Services LLC, as Rights Agent, which includes: as Exhibit A thereto, the Form of Certificate of Determination, Preferences and Rights of Series RP Stock of REMEC; Exhibit B thereto, the Form of Right Certificate; and, as Exhibit C thereto, the Summary of Rights to Purchase Series RP Preferred Shares. | |
| 10.1(4)* | Equity Incentive Plan | |
| 10.2(4) | Form of Indemnification Agreements between REMEC and its officers and directors | |
| 10.3(5)* | Employee Stock Purchase Plan | |
| 10.4(9)* | 1996 Nonemployee Directors Stock Option Plan | |
| 10.5(4)* | Change of Control Agreement dated November 9, 2004 between REMEC and Jack A. Giles | |
| 10.6(6)* | Executive Transition Agreement dated June 23, 2004 between REMEC and Clark Hickock | |
| 10.7(7)* | Form of Employment Agreement dated December 10, 2004, between Winston E. Hickman and REMEC | |
| 10.8(8)* | Form of Change of Control Agreement | |
| 10.9(8)* | Employment and Retention Agreement dated May 19, 2002, between REMEC and Thomas Waechter | |
| 10.10(9)* | Executive Transition Agreement effective June 14, 2002, between REMEC and Errol Ekaireb | |
| 10.11(10)* | 2001 Equity Incentive Plan | |
| 10.12(12)* | Executive Transition Agreement effective February 9, 2004 between REMEC and Ronald E. Ragland | |
| 21.1(13) | Subsidiaries of REMEC | |
| 23.1(13) | Consent of Squar, Milner, Reehl & Williamson LLP, Independent Registered Public Accounting Firm | |
| 23.2(13) | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | |
| 24.1 | Power of Attorney (included in the Annual Report on Form 10-K) | |
| 31.1(13) | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2(13) | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1(13) | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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| (1) | Previously filed with the Securities and Exchange Commission on October 18, 2004, as an exhibit to REMEC’s Current Report on Form 8-K and incorporated by reference into this Annual Report on Form 10-K. |
| (2) | Previously filed with the Securities and Exchange Commission on April 30, 2002, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2003 and incorporated by reference into this Annual Report on Form 10-K. |
| (3) | Previously filed with the Securities and Exchange Commission on June 15, 2001, as an exhibit to REMEC’s Registration Statement on Form 8-A (No. 001-16541) and incorporated by reference into this Annual Report on Form 10-K. |
| (4) | Previously filed with the Securities and Exchange Commission on December 8, 2004, as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended October 29, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (5) | Previously filed with the Securities and Exchange Commission on August 27, 2003 as an exhibit to REMEC’s Registration Statement on Form S-8 (No. 333-108279) and incorporated by reference into this Annual Report on Form 10-K. |
| (6) | Previously filed with the Securities and Exchange Commission on September 9, 2004 as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (7) | Previously filed with the Securities and Exchange Commission on December 15, 2004, as an exhibit to REMEC’s Current Report on Form 8-K and incorporated by reference into this Annual Report on Form 10-K. |
| (8) | Previously filed with the Securities and Exchange Commission on April 30, 2003, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2004 and incorporated by reference into this Annual Report on Form 10-K. |
| (9) | Previously filed with the Securities and Exchange Commission on September 16, 2002, as an exhibit to REMEC’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2002 and incorporated by reference into this Annual Report on Form 10-K. |
| (10) | Previously filed with the Securities and Exchange Commission on August 8, 2001 as an exhibit to REMEC’s Registration Statement on Form S-8 (No. 333-67102) and incorporated by reference into this Annual Report on Form 10-K. |
| (11) | Previously filed with the Securities and Exchange Commission on July 2, 2003, as an exhibit to REMEC’s Registration Statement on Form S-3 (No. 333-106767) and incorporated by reference into this Annual Report on Form 10-K. |
| (12) | Previously filed with the Securities and Exchange Commission on April 15, 2004, as an exhibit to REMEC’s Annual Report on Form 10-K for the year ended January 31, 2005 and incorporated by reference into this Annual Report on Form 10-K. |
| (13) | Filed with this Amendment 1 to the Annual Report on Form 10-K. |
| * | Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. |