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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 5, 2006
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 1-16541
REMEC, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA | 95-3814301 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
3790 VIA DE LA VALLE, SUITE 311 DEL MAR, CALIFORNIA | 92014 | |
(Address of principal executive offices) | (Zip Code) |
(858) 259-4302
(Registrant’s telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 month (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer ¨ | Accelerated Filer x | Non-Accelerated Filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES ¨ NO x
Indicate number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class | Outstanding as of: June 2, 2006 | |
Common Stock, $.01 par value | 29,048,881 |
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REMEC, Inc.
Form 10-Q
For The Quarterly Period Ended May 5, 2006
Index | Page No. | |||
PART I | FINANCIAL INFORMATION | |||
Item 1. | 3 | |||
Condensed Consolidated Statements of Net Assets in Liquidation | 3 | |||
Condensed Consolidated Statement of Changes in Net Assets in Liquidation | 4 | |||
Condensed Consolidated Statement of Operations (Going Concern Basis) | 5 | |||
Condensed Consolidated Statement of Cash Flows (Going Concern Basis) | 6 | |||
7 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3. | 17 | |||
Item 4. | 18 | |||
PART II | OTHER INFORMATION | |||
Item 1. | 19 | |||
Item 1A. | 20 | |||
Item 4. | 22 | |||
Item 6. | 22 | |||
23 |
CERTIFICATIONS
EXHIBITS
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
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As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company” and “REMEC” refer to REMEC, Inc., a California corporation and its wholly-owned subsidiaries.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our current expectations, assumptions, estimates and projections about REMEC and include, but are not limited to, the following:
• | any statements regarding the execution, timing and expenses associated with the complete dissolution of REMEC; |
• | any statements regarding the disposition of our existing assets; |
• | any statements regarding the resolution of outstanding creditor claims and the ongoing litigation against us; |
• | any statements regarding liquidating distributions, if and when, to our Shareholders. |
Readers are urged to carefully review and consider the various disclosures we make which attempt to advise them of the factors which affect our business, including without limitation, the disclosures made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under the caption “Business-Risk Factors” included herein. These important factors, which could cause actual results to differ materially from the forward-looking statements contained herein, include the following without limitation:
• | our ability to accurately estimate the expenses associated with executing our plan of complete liquidation and dissolution; |
• | our ability to successfully resolve all our outstanding creditor claims and ongoing litigation. |
Forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described elsewhere in this report. For a detailed discussion of these risks and uncertainties, see the “Risks Related to Our Business” section in this Form 10-Q. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, except as otherwise required pursuant to our on-going reporting obligations under the Securities Exchange Act of 1934, as amended.
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PART I—FINANCIAL INFORMATION
The accompanying May 5, 2006 and April 29, 2005 interim financial statements of REMEC, Inc. required to be filed with this Form 10-Q Quarterly Report were prepared by management without audit and commence on the following page, together with the related notes. In our opinion, these interim financial statements present fairly the financial condition including net assets in liquidation, changes in net assets in liquidation, results of operations and cash flows of our company, but should be read in conjunction with the consolidated financial statements for the year ended January 31, 2006 included in our fiscal year end January 31, 2006 Annual Report on Form 10-K, previously filed with the Securities and Exchange Commission, or the SEC.
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PART I—FINANCIAL INFORMATION
Item 1. | Financial Statements. |
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(in thousands)
May 5, 2006 (unaudited) | January 31, 2006 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 79,205 | $ | 87,603 | ||
Restricted cash | 20,772 | 20,629 | ||||
Receivables and other current assets | 6,058 | 6,150 | ||||
Other long term assets | 1,989 | 1,595 | ||||
Total assets | 108,024 | 115,977 | ||||
LIABILITIES | ||||||
Estimated costs to be incurred during liquidation | 5,702 | 11,497 | ||||
Estimated litigation costs | 15,894 | 16,702 | ||||
Estimated indemnification costs | 16,176 | 6,261 | ||||
Income taxes payable | 28,124 | 28,700 | ||||
Lease settlement costs | 1,330 | 5,202 | ||||
Total liabilities | 67,226 | 68,362 | ||||
Net assets in liquidation | $ | 40,798 | $ | 47,615 | ||
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(in thousands)
(unaudited)
Three months ended May 5, 2006 | ||||
Net assets in liquidation at January 31, 2006 | $ | 47,615 | ||
Changes in net assets in liquidation: | ||||
Payments of litigation costs | 1,131 | |||
Payments of lease settlement costs | 3,688 | |||
Payments of indemnification costs | 209 | |||
Payments of liquidation costs | 6,382 | |||
Payments of income taxes | 576 | |||
11,986 | ||||
Changes in fair value of assets and liabilities: | ||||
Change in estimated litigation costs | (323 | ) | ||
Change in estimated lease settlement costs | 184 | |||
Change in estimated indemnification costs | (10,077 | ) | ||
Change in estimated assets and liabilities during liquidation | (8,587 | ) | ||
Net decrease in fair value of assets and liabilities | (18,803 | ) | ||
Changes in net assets in liquidation | (6,817 | ) | ||
Net assets in liquidation at May 5, 2006 | $ | 40,798 | ||
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (GOING CONCERN BASIS)
(In thousands, except per share data)
(unaudited)
Three months ended April 29, 2005 | ||||
Net sales | $ | — | ||
Cost of sales | — | |||
Gross profit | — | |||
Operating expenses | — | |||
Income (loss) from continuing operations | $ | — | ||
Loss from discontinued operations including gain/(loss) on disposal, net of tax | (3,266 | ) | ||
Net loss | $ | (3,266 | ) | |
Basic and diluted net loss per common share: | ||||
Income (loss) from continuing operations | $ | — | ||
Loss from discontinued operations | (0.12 | ) | ||
$ | (0.12 | ) | ||
Shares used in computing net loss per common share: (*) | ||||
Basic and diluted | 27,892 | |||
(*) | Reflects the effect of exchange of 1 to 0.446 share declared May 20, 2005 |
See accompanying notes.
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (GOING CONCERN BASIS)
(in thousands)
(unaudited)
Three months ended April 29, 2005 | ||||
OPERATING ACTIVITIES | ||||
Net loss | $ | (3,266 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 4,665 | |||
Unrealized gain on foreign currency forward contract | 214 | |||
Changes in operating assets and liabilities: | ||||
Accounts and other receivables | (7,855 | ) | ||
Inventories | 5,452 | |||
Other current assets | 389 | |||
Accounts payable | (4,672 | ) | ||
Accrued expenses, deferred income taxes and other long-term liabilities | (1,198 | ) | ||
Net cash used in operating activities | (6,271 | ) | ||
INVESTING ACTIVITIES | ||||
Additions to property, plant and equipment | (1,999 | ) | ||
Change in restricted cash | 9,426 | |||
Short-term investments, sales | 2,849 | |||
Short-term investments, purchases | (865 | ) | ||
Other assets | 6 | |||
Net cash provided by investing activities | 9,417 | |||
FINANCING ACTIVITIES | ||||
Payments on short-term notes payable | (982 | ) | ||
Proceeds from sale of common stock | 871 | |||
Net cash used in financing activities | (111 | ) | ||
Effect of exchange rate changes on cash | 4 | |||
Increase in cash and cash equivalents | 3,039 | |||
Cash and cash equivalents at beginning of period | 32,242 | |||
Cash and cash equivalents at end of period | $ | 35,281 | ||
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The Company and Recent Developments
On July 21, 2005, our Board of Directors approved the liquidation and dissolution of REMEC, Inc. (the “Company” or “REMEC”) pursuant to a Plan of Complete Liquidation and Dissolution (the “Plan of Dissolution”), intended to allow for the orderly disposition of the Company’s remaining assets and liabilities. The holders of a majority of our outstanding shares approved the Plan of Dissolution at our August 31, 2005 special shareholder meeting, effective on September 3, 2005. The Company completed the sale of its Wireless Systems business to Powerwave Technologies, Inc. (“Powerwave”) on September 2, 2005, which was the last operating business unit of the Company as described below. The key features of the Plan of Dissolution include (1) ceasing conducting normal business operations, except as may be required to wind up our business affairs; (2) attempting to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (3) paying or adequately providing for payment for all of our known obligations and liabilities; (4) filing a certificate of dissolution for REMEC, Inc. and the remaining REMEC businesses with their respective jurisdictions of formation or incorporation; and (5) distributing pro rata, in one or more liquidating distributions, all of our remaining assets to our shareholders as of the applicable record date.
REMEC will continue in existence until its final dissolution, which is currently expected to occur, subject to settlement of outstanding litigation and the payment of liabilities, during fiscal year 2007.
In connection with the adoption of the Plan of Dissolution and the anticipated liquidation of the Company, we adopted the liquidation basis of accounting effective September 3, 2005, whereby assets are valued at their estimated net realizable cash values and liabilities are stated at their estimated settlement amounts.
On August 2, 2005, we filed additional proxy material with the SEC that provided shareholders with an estimate of cash and the number of shares of Powerwave common stock that would be distributed to REMEC shareholders following the sale of REMEC’s Wireless Systems business to Powerwave. That filing indicated shareholders were expected to receive between $2.45 to $2.95 in cash distributions and 0.333 shares of Powerwave stock for every share of REMEC stock held at the time the transaction closed. In September 2005, 10 million shares of Powerwave stock (received from the sale of our Wireless Systems business) were issued to our shareholders of record on September 13, 2005 of REMEC stock at a ratio of 0.3443 shares of Powerwave stock for every share of REMEC stock held. On October 4, 2005, a cash distribution was made to all shareholders of record on September 13, 2005 at a rate of $1.35 per share.
On October 10, 2005, we provided a delisting notice to the Nasdaq National Market (Nasdaq) and voluntarily requested that the Company common stock be de-listed from the Nasdaq as of October 13, 2005, the last trading day being October 12, 2005. Since we were de-listed from Nasdaq and closed our stock records on October 13, 2005, our shares have continued to trade on the National Association of Securities Dealers (NASD) Over-the-Counter Bulletin Board (OTCBB) exchange. From time to time, trading volume in our shares has been relatively high, and our shares have traded at prices in excess of the highest price we have estimated for potential liquidation distributions. Traders in our shares are cautioned that our shares are highly speculative, and we cannot predict with any accuracy when, or if, additional liquidation distributions will be made.
Based on our projections of operating expenses and liquidation costs as of May 5, 2006, we estimate that the remaining amount of additional future liquidating distributions will range between $1.10 and $1.80 per common share. The actual amount available for distribution, if any, could be substantially less if we discover additional liabilities or claims or incur unexpected or greater than expected expenses related to existing claims and liabilities, or more if we are able to favorably resolve creditor claims, litigation and other liabilities and obligations. Uncertainties as to the precise net value of our non-cash assets, and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value that may ultimately be distributed to shareholders. Claims, liabilities and future expenses for operations, although currently declining in the aggregate, will continue to be incurred with execution of the Plan of Dissolution. These costs will reduce the amount of net assets available for ultimate distribution to shareholders. Although we do not believe that a precise estimate of those expenses can currently be made, we believe that available cash and amounts received from liquidation of non-cash assets will be adequate to provide for our obligations, liabilities, operating costs and claims, and to make cash distributions to shareholders. If available cash and amounts received from liquidation of non-cash assets are not adequate to provide for our obligations, liabilities, operating costs and claims, estimated future distributions of cash to our shareholders may not be possible.
Although our Board of Directors has not established a firm timetable for the liquidating distributions, the Board of Directors intends to, subject to contingencies inherent in winding up our business, make such distributions as promptly as practicable and periodically as we convert our remaining assets to cash and pay our remaining liabilities and obligations subject to law.
Our Plan of Dissolution gives us the power to retain a third party liquidator or trust without further approval by our shareholders at the discretion of our Board of Directors. We may determine that the continued liquidation of REMEC may be more efficiently handled by retaining a third party liquidator or trust to manage the liquidation process. In particular, we may determine to do so at such time as our outstanding litigation and other significant creditor claims have been resolved. We cannot predict when or if these matters will be resolved, or when or if we will engage a third party liquidator or trust.
2. Summary of Significant Accounting Policies
Interim Financial Data
The interim condensed consolidated financial statements included herein have been prepared by REMEC without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended January 31, 2006, included in REMEC’s Annual Report on Form 10-K. In the opinion of management, the condensed consolidated financial statements included herein reflect all adjustments, consisting of normal recurring adjustments and other adjustments related to our liquidation, necessary to present fairly the consolidated financial position of REMEC as of May 5, 2006. The condensed consolidated financial statements for the three months ended April 29, 2005 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. The results of operations for the interim periods are not indicative of the results, which may be reported for any other interim periods or for the entire fiscal year.
During fiscal year 2005, the Company engaged financial advisors to evaluate alternative strategies to provide the best value to shareholders, including the disposal of all or a portion of our business units. Further, as detailed in REMEC’s Annual Report on Form 10-K for the year ending January 31, 2006. On May 18, 2005 we entered into an agreement to sell our Defense & Space group to Chelton Microwave for $256 million cash, after certain post-closing adjustments and the assumption
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of certain liabilities by Chelton Microwave. Our shareholders approved the transaction on May 18, 2005 and the sale closed on May 20, 2005. Defense & Space is reported as a discontinued operation in our historical financial statements. Our Electronic Manufacturing Services (“EMS”) business was sold and closed on July 1, 2005, and is reported as a discontinued operation in our historical financial statements. Our ODU product line was sold and closed on August 26, 2005, and is reported as a discontinued operation in our historical financial statements. Our Wireless Systems business was sold and closed on September 2, 2005, and is reported as a discontinued operation in our historical financial statements. As a result of the shareholders’ approval of the liquidation plan and the imminent nature of the liquidation, the Company adopted the liquidation basis of accounting effective September 3, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.
Reclassifications
Certain reclassifications have been made to prior year amounts in order to conform to the discontinued operations presentation. As of May 5, 2006 all REMEC operating business units have been sold and are reported as discontinued operations for all periods presented.
Basis of Presentation
The consolidated financial statements for the period three months ended April 29, 2005 were prepared on the going concern basis of accounting, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. As a result of the shareholders’ approval of the Plan of Dissolution and the imminent nature of liquidation, the Company adopted the liquidation basis of accounting for all periods subsequent to September 2, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable values of assets are reasonably determinable. Under this basis of accounting, assets are valued at their estimated net realizable values and liabilities are stated at their estimated settlement amounts.
Use of Estimates and Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. The liquidation basis of accounting requires us to make assumptions, judgments and estimates that can have a significant impact on our reported net assets in liquidation. We base our assumptions, judgments and estimates on the most recent information available and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for the Estimated Costs to be Incurred During Liquidation, Estimated Litigation Costs and Estimated Lease Settlement Costs have the greatest potential impact on our consolidated financial statements, so we consider these estimates to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies.
Estimated Costs to be Incurred During Liquidation
Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including compensation and severance for the remaining employees, board fees, fees of professional service providers, insurance and claims expense and miscellaneous other costs, partially offset by estimated future interest earnings. As of May 5, 2006, such costs were estimated at $5.7 million and taxes payable were estimated at $28.1 million. Our estimates are based on assumptions regarding costs to be incurred in executing the Plan of Dissolution, as described above. If there are delays in executing the Plan of Dissolution, actual costs incurred during liquidation may increase, reducing net assets available in liquidation. Our reported results may be subject to final examination by taxing authorities. Because many transactions are subject to varying interpretations of the applicable federal, state or foreign tax laws, our reported tax liabilities and taxes may be subject to change at a later date upon final determination by taxing authorities. The impact of this final determination on our estimated tax obligations could increase or decrease amounts of cash available for distribution to our shareholders, perhaps significantly.
Estimated Litigation Costs
Under the liquidation basis of accounting, we accrue for estimated litigation costs. Estimated litigation costs, which amounted to $15.9 million as of May 5, 2006, represent both estimated future legal fees to be incurred and amounts that may be paid in settlement or by way of final judgment. Included in this amount is approximately $0.67 million self insured retention with one of our primary insurance carriers. Our continued litigation activities may result in a lesser or greater amount than our current estimate, affecting net assets in liquidation. We are not aware of, and have not accrued for, any other outstanding litigation other than what is described in under our legal proceedings as of May 5, 2006.
Estimated Lease Settlement Costs
Under the liquidation basis of accounting, we accrue for estimated lease settlement costs. Estimated lease settlement costs, which amounted to $1.3 million as of May 5, 2006, represent the settlement value on our remaining two facilities. The settlement of lease costs includes approximately $0.2 million in lease terminations fees including estimated commissions and other miscellaneous settlement costs.
3. Net Income (Loss) Per Share
Prior to the adoption of our Plan of Dissolution, we reported net income (loss) per share in accordance with SFAS No. 128, Earnings per Share. Basic net income (loss) per share was computed using the weighted average shares outstanding for each period presented. Diluted income (loss) per share was 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 all reporting periods presented, there is no difference between basis and diluted net loss per share.
Dilutive securities include options, warrants, and restricted stock units as if converted and restricted stock subject to vesting. Potentially dilutive securities (which include options) totaling 128,000 shares for the three months ended April 29, 2005, were excluded from the calculation of loss per share because of their anti-dilutive effect.
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Subsequent to April 29, 2005, the Company completed the reclassification of its common stock to allow for the distribution of proceeds from the proposed merger sale of REMEC Defense & Space Group. Pursuant to the reclassification, which was approved by the shareholders on May 18, 2005, effective May 20, 2005, each share of its existing common stock was converted into a fractional share of common stock, which entitled the shareholder to voting rights and participation in earnings of the Company, and one share of redemption stock, which was automatically redeemed by the Company. As a result of the reclassification and redemption, each holder of one share of REMEC’s existing common stock at the close of trading on the Nasdaq National Market on May 20, 2005 was entitled to receive 0.446 of a new share of common stock (plus $2.80 per share in cash for the redemption share). The reclassification and redemption resulted in a substantial decrease in the number of outstanding shares and thus is reflected retroactively in our per share calculations for all periods presented.
The net loss per share calculation presented above for the prior year is based on the weighted average shares outstanding adjusted as if the reclassification completed on May 20, 2005 had occurred at the beginning of the fiscal year and all common shares outstanding were exchanged at a ratio of 1 to 0.446:
Three months ended April 29, 2005 | ||
Weighted Average | ||
Number of Common Shares Outstanding | 62,537,506 | |
Multiply by 0.446 Conversion factor | 0.446 | |
New Number of Common Shares Outstanding | 27,891,728 | |
4. Shareholders’ Equity
Stock-Based Compensation
Prior to the adoption of our Plan of Dissolution, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation,and SFAS No. 148,Accounting for Stock-Based Compensation Transition and Disclosure,we had elected to follow Accounting Principles Board Opinion, or APB, No. 25,Accounting for Stock Issued to Employees,and related interpretations in accounting for our employee stock options and warrants. Under APB No. 25, compensation expense was recorded when the exercise price of employee stock options was less than the fair value of the underlying stock on the date of grant. We had implemented the disclosure-only provisions of SFAS No. 123 and SFAS No. 148. Accordingly, employee and director compensation expense for the three months ended April 29, 2005 was recognized only for those options whose price was 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. 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.
The following is a summary of the pro forma effects on reported net loss and loss per share for the period 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.
Pro forma information is as follows (in 000’s, except per share data):
Three months ended April 29, 2005 | ||||
Net loss applicable to common shareholders, as reported | $ | (3,266 | ) | |
Deduct: Stock-based employee compensation expense determined under fair value based method, for all awards, net of related tax effects | (334 | ) | ||
Pro forma net loss | $ | (3,600 | ) | |
Net loss per share: | ||||
As reported – Basic and diluted | $ | (0.12 | ) | |
Pro forma – Basic and diluted | $ | (0.13 | ) |
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The fair value of options granted under employee stock option plans and employee stock purchase plan for the three months ended April 29, 2005 were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
Three months ended April 29, 2005 | |||
Dividend yield | None | ||
Risk-free interest rate | 4 | % | |
Expected volatility | 81.4 | % | |
Expected life | 4-5 years |
Effective February 1, 2006, the Company adopted the provision of SFAS No. 123(R)”Share-Based Payments.” SFAS No. 123(R) requires employee stock options and rights to purchase shares under stock participation plans to be accounted for under the fair value method and requires the use of an option pricing model for estimating fair value. Accordingly, share-based compensation is measured at the grant date, based on the fair value of the award. The Company previously accounted for awards granted under its equity incentive plans under the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123.
There have been no options granted subsequent to September 2, 2005. Accordingly, the adoption of SFAS No.123(R) did not have a material effect on the Company’s financial statements.
Stock Options Exercised
During the first quarter of fiscal year 2006, the Company issued a total of 65,885 shares of common stock (147,725 old shares adjusted by the reclassification and redemption factor of 0.446) upon exercise of stock options by employees. Total proceeds received were $0.4 million.
5. 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 held in a money market fund of $71.5 million as of May 5, 2006 and $73.4 million in investments held in a money market fund at January 31, 2006. 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 were classified as available-for-sale and were 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 Company’s current operations. The carrying amounts of these securities approximate fair value due to the short maturities of these instruments. As a result of the Company’s Plan of Dissolution, the Company is no longer purchasing new investments. All short-term investments have matured as of May 5, 2006.
6. Restricted Cash
Restricted cash as of May 5, 2006 was $20.8 million. Restricted cash balance includes $1.0 million held in escrow related to the sale of our ODU business and $15.3 million (including interest) held in escrow related to the sale of our Wireless Systems business sold to Powerwave Technologies, Inc. Both escrow accounts are to be held for a minimum period of nine months after the relevant closing date to satisfy REMEC’s potential indemnification obligations. The remaining balance of $4.5 million represents a certificate of deposit placed to cover certain letters of credit and banking products previously secured by our receivables and inventory.
7. Commitments and Contingencies
Bank Revolving Line of Credit Facility and Letter of Credit Facility
On July 29, 2005, the Company extended the term of its existing $30 million revolving working capital line of credit with its senior lender to May 5, 2006. In connection with the discontinuation of operations, the Company has cancelled this facility effective November 30, 2005. The borrowing rate under this credit facility was based on prime plus 1% with prime being defined as the banks most recently announced per annum “prime rate.” As of May 5, 2006, there was no borrowing outstanding under this credit facility and, therefore, no related exposure to interest movement.
In connection with the adoption of our Plan of Dissolution, certain letters of credit that were previously secured by our domestic trade receivables and inventory are now secured by cash of $4.5 million of which has been used under letter of credit arrangements and banking cash management products.
Operating Leases
Certain office and production facilities held by the Company and classified as operating leases were acquired by the buyers of our business units, releasing REMEC from future lease liability. The Company is working to terminate the remaining two facility leases not released with the sale transactions of our business units. Lease termination penalties may be assessed for early lease settlement based on original agreements.
During the quarter ended May 5, 2005, the Company paid lease and sublease termination fees of $2.6 million and $0.7 million, respectively, and related broker fees of $0.1 million, pursuant to termination agreements entered into in February 2006 on one of its facilities. These amounts had been previously accrued at January 31, 2006.
Capital Leases
In connection with the discontinuation of operations, leases for machinery and equipment under non-cancelable agreements classified as capital leases were acquired by the buyers of our business units releasing REMEC from the lease liability. As of May 5, 2006, there are no capital lease obligations.
Warranty
Prior to the adoption of our Plan of Dissolution, warranty reserves were established for costs that were 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 were 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. At April 29, 2005 the Company had a warranty reserve of $9.2 million.
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We released the warranty reserve for our divested product lines upon the sale of our remaining businesses. Further, warranty reserves are no longer required and have been eliminated as the Company will not generate revenue in the future from the sale of products and services.
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 as of May 5, 2006 did not have a material effect on the consolidated financial statements. A description of the Company’s indemnifications and guarantees as of May 5, 2006 is provided below.
In prior years, we entered into separate indemnification agreements with our officers and with each of our directors. These agreements require us, among other things, to indemnify such officer and director against expenses (including attorneys’ fees), judgments, fines and settlements paid by such individual in connection with any action, suit or proceeding arising out of such individual’s status or service as our director or officer (provided that the individual acted in good faith and in a manner the individual reasonably believed to be in the best interests of the Company) and to advance expenses incurred by such individual in connection with any proceeding against such individual with respect to which such individual may be entitled to indemnification by us.
During the third quarter of fiscal 2006, the Company entered into certain indemnifications under the terms of its Asset Purchase Agreements with Wireless U.S., LLC and Powerwave Technologies, Inc.
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.
Litigation
The Company’s commitments and contingencies include the following claims and litigation.
Securities Class Action
On September 29, 2004, three class action lawsuits were filed against the Company and certain former officers (the “Defendants”) 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”). The Complaint asserted, 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 financial condition and performance, operations, earnings and business prospects. The Complaint sought unspecified damages and legal expenses. On April 19, 2005, REMEC filed a Motion to Dismiss the Complaint, which was granted on August 17, 2005, with leave to amend. Plaintiffs filed a Consolidated Second Amended Complaint on or about September 16, 2005. On October 28, 2005, REMEC filed a Motion to Dismiss the Consolidated Second Amended Complaint, which was granted by the Court on February 14, 2006, with leave to amend. On March 23, 2006, Plaintiffs filed a Third Amended Complaint. On April 18, 2006 the Court granted the Plaintiffs leave to further amend the Third Amended Complaint, and relieved the Defendants of the responsibility to respond to the Third Amended Complaint. On May 4, 2006, Plaintiffs filed a Fourth Amended Complaint. The Fourth Amended Complaint seeks unspecified legal expenses and damages. REMEC filed a Motion to Dismiss the Fourth Amended Complaint on June 2, 2006, which motion is scheduled to be heard by the Court on July 14, 2006. REMEC believes that the lawsuit is without merit and intends to vigorously defend it.
Cardinal Litigation
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 Cardinal that incorporated allegedly defective components from Tyco and Thomas & Betts (the “Cardinal Complaint”).
On March 29, 2005, after the Cardinal Complaint was successfully challenged by REMEC, Cardinal filed an amended complaint seeking $7.0 million in damages plus legal expenses. On April 7, 2005, the Company filed its answer to the amended Cardinal Complaint, denying Cardinal’s claims and asserting a number of defenses. Cardinal has increased its damages claim in the litigation to $16.5 million. Trial commenced on May 8, 2006. On June 8, 2006, the Court granted REMEC’s motion for nonsuit, made at the close of Cardinal’s case in chief, as to all causes of action.
Wage and Hour Class Action
On November 28, 2005, Peter Zanni, a former employee of the Company, filed a class action lawsuit against the Company, alleging that the Company mischaracterized employees engaged in certain purchasing functions as exempt and failed to provide meal and rest periods as required by California law. The complaint seeks an unspecified amount of damages. The Company filed its answer to the Complaint on December 29, 2005, denying the allegations in the Complaint. Discovery has commenced and is continuing. The Company believes the lawsuit is without merit and intends to vigorously defend this matter.
3G Infrastructure Services Arbitration
On January 31, 2006, 3G Infrastructure Services, AB (“3GIS”) filed a Request for Arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce, naming REMEC UK Ltd as the Respondent. The Request for Arbitration claims that REMEC UK Ltd is liable for alleged defects in Tower Mounted Amplifiers (“TMAs”) sold to 3GIS pursuant to a Product Purchase Agreement entered into in February 2002. 3GIS is claiming that REMEC UK Ltd is liable for the cost of replacing all TMAs sold, which amount exceeds 85,000,000 SEK (Swedish Kroner), or approximately $11.0 million. On February 17, 2006, REMEC UK Ltd filed its response, denying all liability, and intends to vigorously defend the arbitration. The Company and 3GIS are currently engaged in settlement discussions.
Telenor Sverige AB Claim
On February 7, 2006, Vodafone Sverige AB (“Vodafone”) notified the Company through its counsel that it intended to file a Request for Arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce, naming REMEC Europe Ltd as the Respondent. The draft Request for Arbitration claims that REMEC Europe Ltd is liable for alleged defects in Tower Mounted Amplifiers (“TMAs”) sold to Vodafone pursuant to a Framework Agreement for the Supply of UMTS TMA
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entered into in July 2002. In January 2006, Vodafone Sverige was acquired by Telenor ASA, and the name of Vodafone Sverige AB was changed to Telenor Sverige AB (“Telenor”) on April 20, 2006. Vodafone is claiming that REMEC Europe Ltd is liable for the cost of replacing all TMAs sold, which amount exceeds 60,000,000 SEK (Swedish Kroner), or approximately $8.0 million. By letter dated March 30, 2006, Vodafone further stated that it intended to assert a claim for the contractual liability directly against REMEC, Inc. The Company has denied any and all liability, and intends to vigorously defend any asserted claims. The Company and Telenor are currently engaged in settlement discussions.
Retiree Medical Claims
On May 11, 2006 the Company received written notice from each of two retired former officers of the Company that a claim may be asserted for breach of certain agreements with these retired officers, based on an interpretation that these former officers are entitled to lifetime medical benefits from the Company. The total of both claims exceeds $11,000,000. The Company intends to vigorously defend any such claims that may be asserted.
Powerwave Indemnification Claims
On May 17, 2006, in connection with the Asset Purchase Agreement dated March 13, 2005, and amended on July 11, 2005 by and among Powerwave Technologies, Inc. (“Powerwave”) and REMEC, Inc. (“REMEC”) and the related Escrow Agreement dated as of September 2, 2005 by and among Powerwave, REMEC and Greater Bay Trust Company (the “Escrow Agent”), REMEC received from Powerwave a copy of a certificate, submitted to the Escrow Agent on May 12, 2006, certifying indemnification claims potentially in excess of $15,000,000 by Powerwave against REMEC, together with instructions not to release the escrow funds ($15,000,000) on the release date of June 2, 2006. REMEC intends to investigate the nature, basis and amount of the claims made by Powerwave and will respond appropriately in the event it determines that such claims are invalid or were not properly made. We have accrued approximately $16 million related to the settlement and defense of the foregoing matters. Actual settlement amounts may vary significantly from amounts presently estimated.
Other than the claims and 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 financial condition of REMEC.
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.
8. Comprehensive Income (Loss)
Prior to the adoption of our Plan of Dissolution, we reported comprehensive income in accordance with SFAS No. 130,Reporting Comprehensive Income.This statement defines comprehensive income as the changes in equity of an enterprise except those resulting from shareholders’ transactions. Accordingly, 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 and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income (loss).
The components of comprehensive income (loss), net of tax, were as follows (in 000’s):
Three months ended April 29, 2005 | ||||
Net loss | $ | (3,266 | ) | |
Change in net unrealized gain on investment | 17 | |||
Change in cumulative foreign currency translation adjustment | 4 | |||
Change in unrealized gain on FX hedge | 214 | |||
Comprehensive loss | $ | (3,031 | ) | |
9. Taxes
Estimated taxes payable are $28.1 million, as of May 5, 2006. Our estimates are based on assumptions regarding our ability to settle outstanding obligations to creditors, and favorably resolve outstanding litigation; claims and liabilities, including claims from Powerwave (see Note 7- Commitments and Contingencies). If there are delays, or we are not successful, in achieving these objectives, actual costs incurred during liquidation including litigation costs may increase, affecting our ultimate tax liability and reducing net assets available in liquidation.
Our reported results may be subject to final examination by taxing authorities. Because many transactions are subject to varying interpretations of the applicable federal, state or foreign tax laws, our reported tax liabilities and taxes may be subject to change at a later date upon final determination by the taxing authorities. The impact of this final determination on our estimated tax obligations could increase or decrease amounts of cash available for distribution to our shareholders, perhaps significantly.
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10. Subsequent Events
ODU Escrow
On May 26, 2006, in connection with the Asset Purchase Agreement dated July 26, 2005, by and among Wireless Holdings, Inc., formerly known as Wireless Holdings International, Inc. (“Wireless”) and REMEC, Inc. (“REMEC”) and the related Escrow Agreement dated as of August 26, 2005 by and among Wireless, REMEC and Silicon Valley Bank (the “Escrow Agent”), REMEC received from Wireless a letter, addressed to REMEC and to the Escrow Agent, asserting indemnification claims of approximately $100,000 by Wireless against REMEC, together with instructions not to release escrow funds on the release date of May 26, 2006. On May 31, 2006, the Company and Wireless Holdings International, Inc. agreed that $960,000 of the $1,000,000 held in escrow, would be released to REMEC, and that the remainder ($40,000 plus accrued interest) would remain in escrow pending resolution of the indemnification claims. On June 1, 2006, REMEC received the $960,000. REMEC intends to investigate the nature, basis and amount of the claims made by Wireless and will respond appropriately in the event it determines that such claims are invalid or were not properly made.
Cardinal Litigation
On June 8, 2006, the Court granted REMEC’s motion for nonsuit, made at the close of Cardinal’s case in chief, as to all causes of action.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with our financial statements and notes appearing elsewhere in this Form 10-Q. Such financial statements and information have been prepared to reflect our net assets in liquidation as of May 5, 2006 and January 31, 2006 (liquidation basis), together with the changes in net assets for the three months ended May 5, 2006 (liquidation basis), and the results of operations and cash flows the three months ended April 29, 2005 (going concern basis).
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, of the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. We intend these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on our assumptions and describe future plans, strategies and expectations for ourselves, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” or similar expressions as well as any statements referring to our Plan of Dissolution. Our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects on a consolidated basis include, without limitation, the following: our ability to successfully resolve all our outstanding creditor claims and ongoing litigation, accounting principles generally accepted in the United States of America, or GAAP, and policies and guidelines applicable to REMEC, predictions of the amount of liquidating distributions to be received by shareholders; statements regarding the timing of asset dispositions and the sales price we will receive for assets, the effect of the liquidation, the availability of settling property lease agreements, the absence of future material litigation and the implementation and completion of our plan of liquidation. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Overview
In March 2005, we entered into a definitive agreement to sell selected assets and liabilities of our Wireless Systems business, including certain RF conditioning products, filters, tower-mounted amplifiers and RF power amplifiers, as well as its manufacturing facilities in Costa Rica, China and the Philippines, to Powerwave Technologies, Inc. (“Powerwave”) for 10 million shares of Powerwave common stock and $40 million in cash (less a $15.0 million escrow holdback), subject to certain post-closing adjustments (the “Wireless Transaction”). The transaction was subject to approval by REMEC and Powerwave shareholders, which was obtained on August 31, 2005.
On May 20, 2005, we completed the sale of the Defense & Space group to Chelton Microwave for $256 million cash after certain post-closing adjustments and the assumption of certain liabilities. The transaction required shareholder approval, which was obtained May 18, 2005 and the sale closed on May 20, 2005. In conjunction with the sale, the Company amended its existing Articles of Incorporation to reclassify our common stock so that a substantial portion of the proceeds from the sale of Defense & Space were distributed to our shareholders. Each outstanding share of common stock was converted into a fractional share of common stock and one (1) share of redeemable common. In May 2005, the Company completed the reclassification of its common stock to allow for the distribution of proceeds from the proposed merger sale of the Defense & Space group. Effective May 20, 2005, each share of the Company’s existing common stock was converted into a fractional share of common stock, which entitled the shareholder to voting rights and participation in earnings of the Company, and one share of redemption stock, which was automatically redeemed by the Company. As a result of the reclassification and redemption, each holder of one share of the Company’s existing common stock at the close of trading on the Nasdaq National Market on May 20, 2005 was entitled to receive 0.446 of a new share of common stock plus $2.80 per share in cash for the redemption share.
On July 1, 2005, we completed the sale of certain assets and liabilities constituting a substantial portion of the Electronic Manufacturing Services business (“EMS” Transaction) to Veritek Manufacturing Services, LLC and Samjor Family Limited Partnership for approximately $19 million in cash, subject to certain post closing adjustments.
On August 2, 2005, we filed additional proxy material with the SEC that provided shareholders with an estimate of cash and the number of shares of Powerwave common stock that would be distributed to REMEC shareholders following the sale of REMEC’s Wireless Systems business to Powerwave. That filing indicated shareholders were expected to receive between $2.45 to $2.95 in cash distributions and 0.333 shares of Powerwave stock for every share of REMEC stock held at the time the transaction closed. In September 2005, 10 million shares of Powerwave stock were issued to the shareholders’ of record on September 13, 2005 of REMEC stock at a ratio of 0.3443 shares of Powerwave stock for every share of REMEC stock held. On October 4, 2005, a cash distribution was made to shareholders of record of REMEC stock on September 13, 2005 at a rate of $1.35 per share. Subsequent cash distributions are pending REMEC’s Board of Directors review of the Company’s remaining obligations. However, the significant number of liabilities and obligations that REMEC must satisfy along with the uncertainty surrounding these obligations makes the actual timing of distributions uncertain and may result in the actual cash distribution being lower or higher than the expected range.
On August 26, 2005, we completed the sale of the Outdoor Unit/Transceiver (“ODU”) business to Wireless Holdings International, Inc. (“Wireless Holdings”), for approximately $15 million in cash (less $1.0 million escrow holdback), and the assumption by Wireless Holdings of certain liabilities. The sale was made pursuant to an Asset Purchase Agreement dated July 26, 2005.
On August 31, 2005, the shareholders also approved the Plan of Dissolution, intended to allow for the orderly disposition of the Company’s remaining assets and businesses effective September 3, 2005. As a result, the Company has changed its basis of accounting for the periods subsequent to September 2, 2005 from the going concern basis to the liquidation basis. The key features of the Plan of Dissolution include (1ceasing conducting normal business operations, except as may be required to wind up our business affairs; (2) attempting to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (3) paying or attempting to adequately provide payment for all of our known obligations and liabilities; (4) ) filing a certificate of dissolution for REMEC, Inc. and the remaining REMEC businesses with their respective States of Incorporation; and (5) distributing pro rata, in one or more liquidating distributions all of our remaining assets to our shareholders as of the applicable record date.
On September 2, 2005, we sold the Wireless Systems business assets and liabilities to Powerwave, in a transaction valued at $147 million and received all consideration including the 10 million shares of Powerwave common stock. The sale of the Wireless Systems business assets resulted in the Company divesting the majority of its remaining operating assets and liabilities.
On September 3, 2005, we adopted the liquidation basis of accounting pursuant to the Plan of Dissolution approved by our shareholders on August 31, 2005.
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At the close of business on October 12, 2005, our common stock was de-listed from the Nasdaq National Market. Since we were de-listed from the Nasdaq National Market on October 12, 2005, our shares have continued to trade in the Over the Counter Market’s “Bulletin Board”. Traders in our shares are cautioned that our shares are highly speculative, and we cannot predict with any accuracy when, or if, additional liquidation distributions will be made.
We are in the process of finalizing the disposition of our remaining business assets and will continue in existence until its final dissolution, which is currently expected to occur, subject to settlement of outstanding litigation and the payment of liabilities, during fiscal year 2007. During this period, we will not continue our business as a going concern.
Under the Plan of Dissolution, we will liquidate our assets and make liquidating distributions to shareholders. We have not established a firm timetable for liquidating distributions to shareholders, but we intend, subject to contingencies inherent in winding up our business, to make such liquidating distributions as promptly as practicable and periodically as we convert our remaining assets to cash.
Prior to the decision to dissolve REMEC we designed and manufactured microwave and millimeter wave subsystems used in the transmission of voice, video and data traffic over wireless communications networks. We sold our wireless systems products primarily to OEMs, which in turn integrated our products into wireless infrastructure equipment solutions sold to network service providers. In addition, we also sold certain niche products directly to network service providers. We manufactured our products at our own plants in Heredia, Costa Rica; Laguna, Philippines, and Shanghai, China.
Since the Company is in liquidation without continuing operations, the need to present future quarterly Statements of Operations and Comprehensive Income Statements as well as a Statement of Cash Flows is eliminated.
Liquidation Basis of Accounting
The accompanying interim financial statements have been prepared by us in accordance with GAAP and under the liquidation basis of accounting effective September 3, 2005, in conjunction with the rules and regulations of the SEC. Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying unaudited financial statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position including net assets in liquidation, changes in net assets in liquidation, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of the results to be expected for the full year; such results may be less favorable. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our 2006 Annual Report on Form 10-K, as filed with the SEC.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted. Uncertainties as to the precise net value of our non-cash assets and the ultimate amount of our liabilities make it impracticable to predict the aggregate net value that may ultimately be distributable to shareholders. Claims, liabilities and future expenses for operations, although currently declining in the aggregate, will continue to be incurred with execution of the plan. These costs will reduce the amount of net assets available for ultimate distribution to shareholders. Although we do not believe that a precise estimate of those expenses can currently be made, we believe that available cash and amounts received from sales of non-cash assets will be adequate to provide for our obligations, liabilities, operating costs and claims, and to make cash distributions to shareholders. If available cash and amounts received from sales of non-cash assets are not adequate to provide for our obligations, liabilities, operating costs and claims, estimated future distributions of cash to our shareholders will be reduced.
The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts necessarily requires many estimates and assumptions. In addition, there are substantial risks and uncertainties associated with carrying out the liquidation of the Company’s existing operations. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and costs associated with carrying out the dissolution and liquidation plan based on the assumptions set forth below. The actual values and costs are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded. Accordingly, it is not possible to predict the aggregate amount that will ultimately be distributable to shareholders and no assurance can be given that the amount to be received in liquidation will equal or exceed the net assets in liquidation per share in the accompanying Statement of Net assets in Liquidation or the price or prices at which the Common Stock has generally traded or is expected to trade in the future. The cautionary statements regarding estimates of net assets in liquidation set forth in the Forward-Looking Statements portion of this report are incorporated herein by reference.
Based on our projections of operating expenses and liquidation costs as of May 5, 2006, we estimate that the remaining amount of additional future liquidating distributions will range between $1.10 and $1.80 per common share. The actual amount available for distribution, if any, could be substantially less if we discover additional liabilities or claims or incur unexpected or greater than expected expenses related to existing claims and liabilities, or more if we are able to favorably resolve creditor claims, litigation and other liabilities and obligations. We are subject to litigation, the outcome of which is not presently known and which may increase our expenses and reduce cash available for distribution to shareholders. In addition, we may be subject to final examination by taxing authorities; thus amounts presently estimated for taxes may vary from ultimate amounts, which may cause our final distributions to change perhaps significantly. Although our Board of Directors has not established a firm timetable for the liquidating distributions, the Board of Directors intends to, subject to contingencies inherent in winding up our business, make such distributions as promptly as practicable and periodically as we convert our remaining assets to cash and pay our remaining liabilities and obligations subject to law.
Our Plan of Dissolution gives us the power to retain a third party liquidator or trust without further approval by our shareholders at the discretion of our Board of Directors. We may determine that the continued liquidation of REMEC may be more efficiently handled by retaining a third party liquidator or trust to manage the liquidation process. In particular, we may determine to do so at such time as our outstanding litigation and other significant creditor claims have been resolved. We cannot predict when or if these matters will be resolved, or when or if we will engage a third party liquidator or trust.
Results of Operations
Changes in Net Assets in Liquidation
Three Months Ended May 5, 2006
Net assets in liquidation decreased $6.8 million for the three months ended May 5, 2006. The reason for the decrease was primarily related to a reserve adjustment of $10 million made in connection with indemnification claims asserted by Powerwave related to the Asset Purchase Agreement dated March 13, 2005, and amended on July 11, 2005 and the related Escrow Agreement dated as of September 2, 2005 by and among Powerwave, REMEC and Greater Bay Trust Company (the “Escrow Agent”). REMEC received from Powerwave a copy of a certificate, submitted to the Escrow Agent on May 12,
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2006, certifying indemnification claims potentially in excess of $15 million by Powerwave against REMEC, together with instructions not to release the funds held in escrow on the release date of June 2, 2006. Increases to net assets in liquidation include changes in our estimated litigation costs of approximately $0.8 million associated with defense and potential settlement accrual valuations, $3.8 million related to VAT receivable claims processed in the first quarter of fiscal 2007, off-set by approximately $1.4 million in the increase of operating liquidation costs.
Liquidity and Capital Resources
As of May 5, 2006, net assets in liquidation totaled $40.8 million, consisting of $79.2 million in cash and cash equivalents and $20.8 million of restricted cash. Restricted cash consist of approximately $16.3 million and interest held back in escrow pending the closing of the sale of ODU and Wireless Systems, and $4.5 million of restricted cash held for security on letters of credit. Net assets consist of $6.1 million of receivables and other current assets, $2.0 million of other long-term assets offset by $67.2 million of estimated total liabilities to be incurred during liquidation, consisting of $5.7 million of estimated operating costs, $1.3 million of estimated lease settlement costs, $15.9 million of estimated litigation costs, $16.2 million related to escrow and asset purchase agreement adjustments and $28.1 million taxes payable. We expect to use our capital resources to execute and complete our Plan of Dissolution, settle existing claims against the Company, including existing litigation and other current liabilities and accrued expenses, and to make liquidating distributions to shareholders. Capital resources available for liquidating distributions to shareholders may vary if we incur greater than estimated operating expenses associated with executing the Plan of Dissolution, actual settlement costs for existing claims against the company vary from estimates, or if there are existing, but unknown claims made against us in the future. We intend to distribute net assets in liquidation to shareholders as liquidating distributions as promptly as practicable as we convert our remaining assets to cash. At May 5, 2006, our cash and cash equivalents were held primarily in money market funds. We expect to continue to hold our cash and cash equivalents primarily in money market funds while we execute the Plan of Dissolution.
Distributions
On May 20, 2005, the Company completed the reclassification of its common stock to allow for the distribution of proceeds from the proposed merger sale of REMEC Defense & Space group. Pursuant to the reclassification, which was approved by the shareholders on May 18, 2005, effective May 20, 2005, each share of its existing common stock was converted into a fractional share of common stock, which entitled the shareholder to voting rights and participation in earnings of the Company, and one share of redemption stock, which was automatically redeemed by the Company. As a result of the reclassification and redemption, each holder of one share of REMEC’s existing common stock at the close of trading on the Nasdaq National Market on May 20, 2005 was entitled to receive 0.446 of a new share of common stock plus $2.80 per share in cash for the redemption share. The reclassification and redemption resulted in a substantial decrease in the number of outstanding shares and thus is reflected retroactively in our per share calculations for all periods presented.
On August 2, 2005, we filed additional proxy material with the SEC that provided shareholders with an estimate of cash and the number of shares of Powerwave common stock that would be distributed to REMEC shareholders following the sale of REMEC’s Wireless Systems business to Powerwave. That filing indicated shareholders were expected to receive between $2.45 to $2.95 in cash distributions and 0.333 shares of Powerwave stock for every share of REMEC stock held at the time the transaction closed. In September 2005, 10 million shares of Powerwave stock were issued to the shareholders’ of record on September��13, 2005 of REMEC stock at a ratio of 0.3443 shares of Powerwave stock for every share of REMEC stock held. On October 4, 2005, a cash distribution was made to shareholders of record of REMEC stock on September 13, 2005 at a rate of $1.35 per share or $39.2 million.
Subsequent cash distributions are pending REMEC’s Board of Directors review of the Company’s remaining obligations. Based on our projections of operating expenses and liquidation costs as of May 5, 2006, we estimate that the amount of future liquidating distributions will range between $1.10 and $1.80 per common share. However, the significant number of liabilities and obligations that REMEC must satisfy along with the uncertainty surrounding these obligations makes the actual timing of distributions uncertain and may result in the actual cash distribution being lower or higher than the expected range. Although our Board of Directors has not established a firm timetable for the liquidating distributions, the Board of Directors intends to, subject to contingencies inherent in winding up our business, make such distributions as promptly as practicable and periodically as we convert our remaining assets to cash and pay our remaining liabilities and obligations subject to law.
On October 10, 2005, we provided a delisting notice to the Nasdaq National Market (Nasdaq) and voluntarily requested that the Company common stock be de-listed from the Nasdaq as of October 13, 2005, the last trading day being October 12, 2005. Since we were de-listed from Nasdaq and closed our stock records on October 13, 2005, our shares have continued to trade on the National Association of Securities Dealers (NASD) Over-the-Counter Bulletin Board (OTCBB) exchange. From time to time, trading volume in our shares has been relatively high, and our shares have traded at prices in excess of the highest price we have estimated for potential liquidation distributions. Traders in our shares are cautioned that our shares are highly speculative, and we cannot predict with any accuracy when, or if, additional liquidation distributions will be made.
We may at some point determine that the continued liquidation of REMEC may be more efficiently handled by retaining a third party liquidator or trust to manage the liquidation process. In particular, we may determine to do so at such time as our outstanding litigation and other significant creditor claims have been resolved. We cannot predict when or if these matters will be resolved, or when or if we will engage a third party liquidator or trust. We continue to actively manage our cash and cash equivalent portfolio and control operating expenses.
Off-Balance Sheet Arrangements
As of May 5, 2006, 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
Our contractual obligations and commitments as of May 5, 2006 are reported in the condensed consolidated statement of net assets in liquidation as accrued expenses and accounts payable or estimated costs to be incurred during liquidation. The remaining obligations and commitments of the Company include the facility operating leases. The Company is working to terminate the remaining facility leases. As of May 5, 2006 the accrual for the estimated net leases settlements on the remaining facility obligations is $1.3 million.
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Recently Issued Accounting Standards.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20 and FASB Statement No. 3. This pronouncement applies to all voluntary changes in accounting principle, and revises the requirements for accounting for and reporting a change in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle, unless it is impracticable to do so. This pronouncement also requires that a change in the method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 retains many provisions of APB Opinion 20 without change, including those related to reporting a change in accounting estimate, a change in the reporting entity, and correction of an error. The pronouncement also carries forward the provisions of SFAS No. 3 which govern reporting accounting changes in interim financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Statement does not change the transition provisions of any existing accounting pronouncements, including those that were in a transition phase as of the effective date of SFAS No. 154.
In June 2005, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 05-06,Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination (“EITF 05-06”). EITF 05-06 concludes that the amortization period for leasehold improvements acquired in a business combination and leasehold improvements that are in service significantly after and not contemplated at the beginning of the lease term should be amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of inception. Management believes the adoption of this pronouncement will not have a material effect on the Company’s consolidated financial statements. As of May 5, 2006, this pronouncement had no impact on the Company’s consolidated financial statements.
In February 2006, the FASB Staff Position (FSP) issued No. FAS 123(R)-4,Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event (FAS 123(R)-4) concludes that a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not become a liability until it becomes probable that the event will occur. An option or similar instrument that is classified as equity, but subsequently becomes a liability because the contingent cash settlement event is probable of occurring, shall be accounted for similar to modification from an equity to liability award. To the extent that the liability exceeds the amount previously recognized in equity, the excess is recognized as compensation cost. The total recognized compensation cost for an award with a contingent cash settlement feature shall at least equal the fair value of the award at the grant date. The FSP is applicable only for options or similar instruments issued as part of employee compensation arrangements. The guidance in this FSP shall be applied upon initial adoption of Statement 123(R). As of May 5, 2006, this pronouncement had no impact on the Company’s consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS No. 133 (“Accounting for Derivative Instruments and Hedging Activities”) and SFAS No. 140 (“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”). In this context, a hybrid financial instrument refers to certain derivatives embedded in other financial instruments. SFAS No. 155 permits fair value re-measurement of any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133. SFAS No. 155 also establishes a requirement to evaluate interests in securitized financial assets in order to identify interests that are either freestanding derivatives or “hybrids” which contain an embedded derivative requiring bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips are subject to SFAS No. 133, and provides that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS No. 155 amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative. When SFAS No. 155 is adopted, any difference between the total carrying amount of the components of a bifurcated hybrid financial instrument and the fair value of the combined “hybrid” must be recognized as a cumulative-effect adjustment of beginning deficit/retained earnings.
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted only as of the beginning of a fiscal year, provided that the entity has not yet issued any annual or interim financial statements for such year. Restatement of prior periods is prohibited.
Item 3. | Qualitative and Quantitative Disclosures About Market Risk. |
Interest Rate Risk
On November 30, 2005, the Company cancelled its $30 million line of credit. The borrowing rate under this credit facility was based on prime plus 1% with prime being defined as the banks most recently announced per annum “prime rate.” As of May 5, 2006 the Company has not had any borrowings under this credit facility and, therefore, no related exposure to interest rate movement. In connection with the adoption of our Plan of Dissolution, certain letters of credit that were previously secured by our domestic trade receivables and inventory are now secured by cash of $4.5 million of which has been used under letter of credit arrangements and banking cash management products and no related exposure to interest rate movement.
Investments
At May 5, 2006, our investment portfolio includes cash equivalent securities held in a money market with a recorded value of approximately $71.5 million. The Company considers all investments with original maturities of three months or less to be cash equivalents. These securities are subject to interest rate risk and might decline in value if interest rates increase. Due to their short-term nature interest rates would not materially affect their value.
Foreign Currency Exchange Rate Fluctuations
Prior to our Plan of Dissolution and the divestment of the Company’s business units we had operations in Europe, Asia-Pacific and the Americas. As a result, our financial position, results of operations and cash flows were affected by fluctuations in foreign currency exchange rates. Many of our reporting entities conducted a portion of their business in currencies other than the entity’s functional currency. These transactions gave rise to receivables and payables that were denominated in currencies other than the entity’s functional currency. The value of those receivables and payables were 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 and losses in
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the value of these receivables and payables are included in the determination of net income. In connection with the adoption of our Plan of Dissolution, there will be no future impact of unrealized gains and losses associated with foreign currency exchange rates as a result of the sale of our foreign entities.
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 connection with the adoption of our Plan of Dissolution, there will be no future revenue generated by sales.
Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Our significant personnel reductions during 2005 have affected the overall control environment. However, management does not believe that these personnel reductions have had a significant impact on the effectiveness of the operation of the Company’s disclosure controls and procedures.
Changes in Internal Controls Over Financial Reporting
There has been no change in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II—OTHER INFORMATION
Item 1. | Legal Proceedings. |
Litigation
The Company’s commitment and contingencies include claims and litigation in the normal course of business.
Securities Class Action
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 April 19, 2005, REMEC filed a Motion to Dismiss the Consolidated Amended Complaint, which was granted on August 17, 2005, with leave to amend. Plaintiffs filed a Consolidated Second Amended Complaint on or about September 16, 2005. On October 28, 2005, REMEC filed a Motion to Dismiss the Consolidated Second Amended Complaint, which was granted by the Court on February 14, 2006, with leave to amend. On March 23, 2006, Plaintiffs filed a Third Amended Complaint. On April 18, 2006 the Court granted the Plaintiffs leave to further amend the Third Amended Complaint, and relieved the Defendants of the responsibility to respond to the Third Amended Complaint. On May 4, 2006, Plaintiffs filed a Fourth Amended Complaint. The Fourth Amended Complaint seeks unspecified legal expenses and damages. REMEC filed a Motion to Dismiss the Fourth Amended Complaint on June 2, 2006, which motion is scheduled to be heard by the Court on July 14, 2006. REMEC believes that the lawsuit is without merit and intends to defend against it vigorously.
Cardinal Litigation
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 Cardinal 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 $7.0 million 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. Cardinal increased its damages claim in the litigation to $16.5 million. Trial commenced on May 8, 2006. On June 8, 2006, the Court granted REMEC’s motion for nonsuit, made at the close of Cardinal’s case in chief, as to all causes of action.
Wage and Hour Class Action
On November 28, 2005, Peter Zanni, a former employee of the Company, filed a class action lawsuit against the Company, alleging, that the Company mischaracterized employees engaged in certain purchasing functions as exempt and failed to provide meal and rest periods as required by California law. The Company filed its answer to the Complaint on December 29, 2005, denying the allegations in the Complaint. Discovery has commenced and is continuing. REMEC believes the lawsuit is without merit and intends to vigorously defend itself in this matter.
3G Infrastructure Services Arbitration
On January 31, 2006, 3G Infrastructure Services, AB (“3GIS”) filed a Request for Arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce, naming REMEC UK Ltd as the Respondent. The Request for Arbitration claims that REMEC UK Ltd is liable for alleged defects in Tower Mounted Amplifiers (“TMAs”) sold to 3GIS pursuant to a Product Purchase Agreement entered into in February 2002. 3GIS is claiming that REMEC UK Ltd is liable for the cost of replacing all TMAs sold, which amount exceeds 85,000,000 SEK (Swedish Kroner), or approximately $11.0 million. On February 17, 2006, REMEC UK Ltd filed its response, denying all liability, and intends to vigorously defend the arbitration. The Company and 3GIS are currently engaged in settlement discussions.
Telenor Sverige AB Claim
On February 7, 2006, Vodafone Sverige AB (“Vodafone”) notified the Company through its counsel that it intended to file a Request for Arbitration with the Arbitration Institute of the Stockholm Chamber of Commerce, naming REMEC Europe Ltd as the Respondent. The draft Request for Arbitration claims that REMEC Europe Ltd is liable for alleged defects in Tower Mounted Amplifiers (“TMAs”) sold to Vodafone pursuant to a Framework Agreement for the Supply of UMTS TMA entered into in July 2002. In January 2006, Vodafone Sverige was acquired by Telenor ASA, and the name of Vodafone Sverige AB was changed to Telenor Sverige AB (“Telenor”) on April 20, 2006. Vodafone is claiming that REMEC Europe Ltd is liable for the cost of replacing all TMAs sold, which amount exceeds 60,000,000 SEK (Swedish Kroner), or approximately $8.0 million. By letter dated March 30, 2006, Vodafone further stated that it intended to assert a claim for the contractual liability directly against REMEC, Inc. The Company has denied any and all liability, and intends to vigorously defend any asserted claims. The Company and Telenor are currently engaged in settlement discussions.
Retiree Medical Claims
On May 11, 2006 the Company received written notice from each of two retired former officers of the Company that a claim may be asserted for breach of certain agreements with these retired officers, based on an interpretation that these former officers are entitled to lifetime medical benefits from the Company. The total of both claims exceeds $11,000,000. The Company intends to vigorously defend any such claims that may be asserted.
Powerwave Indemnification Claims
On May 17, 2006, in connection with the Asset Purchase Agreement dated March 13, 2005, and amended on July 11, 2005 by and among Powerwave Technologies, Inc. (“Powerwave”) and REMEC, Inc. (“REMEC”) and the related Escrow Agreement dated as of September 2, 2005 by and among Powerwave,
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REMEC and Greater Bay Trust Company (the “Escrow Agent”), REMEC received from Powerwave a copy of a certificate, submitted to the Escrow Agent on May 12, 2006, certifying indemnification claims potentially in excess of $15,000,000 by Powerwave against REMEC, together with instructions not to release the escrow funds ($15,000,000) on the release date of June 2, 2006. REMEC intends to investigate the nature, basis and amount of the claims made by Powerwave and will respond appropriately in the event it determines that such claims are invalid or were not properly made. We have accrued approximately $16 million related to the settlement and defense of the foregoing matters. Actual settlement amounts may vary significantly from amounts presently estimated.
Other than the claims and 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 1A. | Risk Factors. |
In addition to other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating us and our liquidation and dissolution because such factors may have a significant impact on the execution of our Plan of Dissolution and the timing and amount of liquidating distributions, if any, to our shareholders. As a result of the risk factors set forth below and elsewhere in this Form 10-Q, and the risks discussed in our other Securities and Exchange Commission filings, actual results could differ materially from those projected in any forward-looking statements.
We cannot assure you of the exact amount or timing of any future distribution to our shareholders under the Plan of Dissolution.
The liquidation and dissolution process is subject to numerous uncertainties and may not result in any remaining capital for future distribution to our shareholders. The precise nature, amount and timing of any future distribution to our shareholders will depend on and could be delayed by, among other things, sales of our non-cash assets, claim settlements with creditors, resolution of outstanding litigation matters, and unexpected or greater than expected expenses. Furthermore, we cannot provide any assurances that we will actually make additional distributions. The estimates we have provided are based on currently available information, and actual payments, if any, could be substantially less than the range we have estimated. Any amounts to be distributed to our shareholders may be less than the price or prices at which our common stock has recently traded or may trade in the future.
Our common stock is continuing to trade even though we are in the process of liquidation and liquidating distributions, if any, may be below any trading price.
On October 13, 2005, we voluntarily de-listed our common stock and closed our transfer books. Our common stock was traded on the Nasdaq National Market under the symbol “REMC.” Since the de-listing, our common stock has been trading in the Over the Counter Market’s “Bulletin Board” under the symbol “REMC.OB”. It has been trading under “due-bill” contractual obligations between the seller and purchaser of the stock, who negotiate and rely on themselves with respect to the allocation of shareholder proceeds arising from ownership of the shares. No assignments or transfers of our common stock were recorded or will be recorded after October 12, 2005. Trading in our stock is highly speculative and the market for our stock is highly illiquid. The only value associated with our shares is the right to receive further distributions as part of the liquidation process. Because of the difficulty in estimating the amount and timing of the liquidating distributions, and due to the other risk factors discussed herein, our common stock may be subject to significant volatility and may trade above the amount of any liquidating distribution that is made.
We may not be able to settle all of our obligations to creditors and resolve all of our outstanding litigation.
If we do not settle all of our obligations to creditors and resolve all of our outstanding litigation, we may be prevented from completing our Plan of Dissolution. Our obligations to creditors include, among other things, long-term contractual obligations to certain customers, including certain product warranties, and contractual obligations to certain of our vendors. The Company’s commitments and contingencies include claims and litigation arising out of our previous ordinary course of business. As part of the wind down process, we will attempt to settle our obligations with our creditors and resolve all of the outstanding litigation. Our inability to reach settlement with our creditors and resolve outstanding litigation could delay or even prevent us from completing the Plan of Dissolution. Amounts required settling our obligations to creditors and resolving any outstanding litigation will reduce the amount of remaining capital available for future distribution to shareholders.
Some of our customers have filed or may file for breach of contract and breach of express and implied warranties with regard to products sold by the Company.
Our products consist of and incorporate numerous component parts designed and manufactured by certain REMEC subsidiaries. We cannot assure you that these products and/or parts are free of defects or errors. Given the complex nature of our products and our dependence on a large number of highly intricate component parts, our products may contain defects or errors not detectable during our quality assurance and testing procedures. Any such defects or errors could result in legal claims against us.
We will continue to incur claims, liabilities and expenses that will reduce the amount available for distribution out of the liquidation to shareholders.
Claims, liabilities and expenses from operations, such as operating costs, directors’ and officers’ insurance, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses, will continue to be incurred as we wind down. Additionally, indemnification claims in excess of $15 million have been made against funds held in escrow pending the closing of the sale of our business units. These expenses and claims may reduce the amount of assets available for future distribution out of the liquidation to shareholders. If available cash and amounts received on the sale of non-cash assets are not adequate to provide for our obligations, liabilities, expenses and claims, we may not be able to distribute meaningful cash out of the liquidation, or any cash at all, to our shareholders.
We may be subject to final examinations by taxing authorities across various jurisdictions which may impact the amount of taxes that we pay and the ultimate distributions to our shareholders
In evaluating the exposure associated with various tax filing positions, the Company accrues charges for probable exposures. At May 5, 2006, 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.
Significant judgment is required in determining the Company’s provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain.
Our reported results may be subject to final examination by taxing authorities. Because many transactions are subject to varying interpretations of the applicable federal, state or foreign tax laws, our reported tax liabilities and taxes may be subject to change at a later date upon final determination by the taxing authorities. The impact of this final determination on our estimated tax obligations could increase or decrease amounts of cash available for distribution to our shareholders, perhaps significantly.
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Distribution of cash out of the liquidation, if any, to our shareholders could be delayed.
Although our Board of Directors has not established a firm timetable for distributions to our shareholders out of the liquidation, the Board of Directors intends, subject to contingencies inherent in winding down our business, to make such distributions as promptly as practicable as creditor and litigant claims are paid or settled. However, we are currently unable to predict the precise timing of any such distributions. The timing of such distributions will depend on and could be delayed by, among other things, the timing of sales of our non-cash assets, claim settlements with creditors and the settlement of any outstanding litigation matters. Additionally, a creditor could seek an injunction against the making of such distributions to our shareholders on the grounds that the amount to be distributed was needed to provide for the payment of our liabilities and expenses. Any action of this type could delay or substantially diminish the amount available for such distribution to our shareholders.
If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each shareholder could be held liable for payment to our creditors of his or her pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such shareholder.
In the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each shareholder could be held liable for payment to our creditors of such shareholder’s pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such shareholder.
Although the liability of any shareholder is limited to the amounts previously received by such shareholder from us (and from any liquidating trust or trusts) in the dissolution, this means that a shareholder could be required to return all distributions previously made to such shareholder and receive nothing from us under the Plan of Dissolution. Moreover, in the event a shareholder has paid taxes on amounts previously received, a repayment of all or a portion of such amount could result in a shareholder incurring a net tax cost if the shareholder’s repayment of an amount previously distributed does not cause a commensurate reduction in taxes payable. While we will endeavor to make adequate reserves for all known and contingent liabilities, there is no guarantee that the reserves established by us will be adequate to cover all such expenses and liabilities.
We will continue to incur the expenses of complying with public company reporting requirements.
We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act,” even though compliance with such reporting requirements is economically burdensome until the Company is fully dissolved.
Our Board of Directors may at any time turn management of the liquidation of REMEC, Inc. over to a third party, and some or all of our directors may resign from our board at that time.
Our Board of Directors may at any time turn the management of the Company over to a third party to complete the liquidation of our remaining assets and distribute the available proceeds to our shareholders, and some or all of our directors may resign from our board at that time. If management is turned over to a third party and all of our directors resign from our board, the third party would have sole control over the liquidation process, including the sale or distribution of any remaining assets.
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Items 2, 3 and 5 are not applicable and have been omitted.
Item 4. | Submission of Matters to a Vote of Security Holders |
No matter was submitted to a vote of security holders during the first quarter ended May 5, 2006.
Item 6. | Exhibits |
Exhibit Number | Description | |
31.1 | Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | 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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Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REMEC, Inc. | ||
By: | /s/ Richard A. Sackett | |
Richard A. Sackett | ||
President | ||
/s/ David F. Wilkinson | ||
David F. Wilkinson | ||
Chief Financial and Accounting Officer |
Date: June 14, 2006
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