Table of Contents
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 November 2, 2007
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 211 DEL MAR, CALIFORNIA | 92014 | |
| (Address of principal executive offices) | (Zip Code) | |
(858) 259-4302
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days: Yes x No ¨
Indicate by check mark 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 ¨ Non-Accelerated Filer x
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: December 7, 2007 | |
| Common Stock, $.01 par value | 30,031,000 |
Table of Contents
Form 10-Q
For The Quarterly Period Ended November 2, 2007
Index | Page No. | |||
PART I | FINANCIAL INFORMATION | |||
| Item 1. | 5 | |||
Condensed Consolidated Statements of Net Assets in Liquidation | 5 | |||
Condensed Consolidated Statements of Changes in Net Assets in Liquidation | 6 | |||
| 7 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
| Item 3. | 17 | |||
| Item 4. | 17 | |||
PART II | OTHER INFORMATION | |||
| Item 1. | 18 | |||
| Item 1A. | 19 | |||
| Item 5. | 22 | |||
| Item 6. | 22 | |||
| SIGNATURES | 23 | |||
CERTIFICATIONS
EXHIBITS
Exhibit 31.1
Exhibit 31.2
Exhibit 32
2
Table of Contents
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 Quarterly Report on Form 10-Q 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 the amount of future liquidating distributions, if any, and the timing thereof, to our shareholders. |
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. Readers are urged to carefully review and consider the various disclosures we make, which attempt to advise them of the factors that affect our business, including without limitation, the disclosures made under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Part II, Item 1A, “Risk Factors” included herein and throughout this Quarter Report on Form 10-Q for the period ended November 2, 2007. The important factors listed in these disclosures, which could cause our actual results to differ materially from the forward-looking statements contained herein, include but are not limited to, the following:
| • | our ability to accurately estimate the expenses associated with executing our plan of complete liquidation and dissolution; and |
| • | our ability to successfully resolve all our outstanding or future creditor claims and litigation. |
In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. We do not intend 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.
3
Table of Contents
PART I—FINANCIAL INFORMATION
The accompanying November 2, 2007 and November 3, 2006 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. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended January 31, 2007 included in our fiscal year end January 31, 2007 Annual Report on Form 10-K, previously filed with the Securities and Exchange Commission.
4
Table of Contents
| Item 1. | Financial Statements. |
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(in thousands)
November 2, 2007 (unaudited) | January 31, 2007 | |||||
ASSETS | ||||||
Cash and cash equivalents | $ | 53,254 | $ | 50,363 | ||
Restricted cash | 20,250 | 19,703 | ||||
Receivables and other current assets | 2,463 | 2,598 | ||||
Other long term assets | 415 | 2,576 | ||||
Total assets | 76,382 | 75,240 | ||||
LIABILITIES | ||||||
Estimated taxes payable | 6,500 | 6,700 | ||||
Estimated purchase price adjustments and indemnification costs | 5,000 | 6,200 | ||||
Estimated costs to be incurred during liquidation | 3,602 | 4,101 | ||||
Estimated litigation costs | 1,483 | 2,617 | ||||
Estimated lease settlement costs | 813 | 1,065 | ||||
Total liabilities | 17,398 | 20,683 | ||||
Net assets in liquidation | $ | 58,984 | $ | 54,557 | ||
See accompanying notes.
5
Table of Contents
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
November 2, 2007 | November 3, 2006 | November 2, 2007 | November 3, 2006 | |||||||||||||
Net assets in liquidation, beginning of period | $ | 58,096 | $ | 66,562 | $ | 54,557 | $ | 47,615 | ||||||||
Liquidation basis adjustments: | ||||||||||||||||
Estimated net costs during liquidation | 1,143 | 6,989 | 3,853 | 11,818 | ||||||||||||
Estimated litigation costs | (120 | ) | 242 | (201 | ) | 4,954 | ||||||||||
Adjust liabilities to estimated fair value | (209 | ) | 3,343 | 785 | 12,776 | |||||||||||
Estimated lease settlement costs | 74 | (183 | ) | (10 | ) | (210 | ) | |||||||||
Net increase in net assets in liquidation | 888 | 10,391 | 4,427 | 29,338 | ||||||||||||
Net assets in liquidation, end of period | $ | 58,984 | $ | 76,953 | $ | 58,984 | $ | 76,953 | ||||||||
See accompanying notes.
6
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The Company
On July 21, 2005, our Board of Directors approved the liquidation and dissolution of REMEC, Inc. (“REMEC” or the “Company”) 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 effective September 3, 2005, at our August 31, 2005 special shareholder meeting. The key features of the Plan of Dissolution include (1) filing a certificate of dissolution for REMEC, Inc. and the remaining REMEC businesses with their respective jurisdictions of formation or incorporation; (2) ceasing conducting normal business operations, except as may be required to wind up our business affairs; (3) attempting to convert all of our remaining assets into cash or cash equivalents in an orderly fashion; (4) paying or adequately providing for payment for all of our known obligations and liabilities; 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 subject to settlement of outstanding litigation and the payment of liabilities. During this period, we will not operate our business as a going concern. Our Plan of Dissolution gives us the power to sell any and all of our assets without further approval by our shareholders and provides that liquidating distributions be made to our shareholders as determined by our Board of Directors.
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, 2007, 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 November 2, 2007. 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.
Summary of Significant Accounting Policies
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 and settlement value of liabilities 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.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to prior period amounts in order to conform with the current period presentation.
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 periods. 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
7
Table of Contents
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 and taxes payable, estimated litigation costs, estimated purchase price adjustments and indemnification costs and estimated lease settlement costs have the greatest potential impact on our consolidated financial statements, so we consider estimates associated with these obligations to be critical to our financial statements. We discuss below the critical accounting estimates associated with these policies.
Estimated Costs to be Incurred During Liquidation and Taxes Payable
Under the liquidation basis of accounting, we accrue for the remaining costs to be incurred during liquidation, including severance for our remaining employees, board fees, insurance and claims expense and miscellaneous other costs, partially offset by estimated future interest earnings. As of November 2, 2007, such costs were estimated at $3.6 million and taxes payable were estimated at $6.5 million based on probable exposure. 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 and taxes payable, 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 approximately $1.5 million as of November 2, 2007, represent estimated future legal fees and costs to be incurred.
As of November 2, 2007, we are not aware of and we have not accrued for any other material outstanding litigation other than as described in Note 5, under “Claims and Litigation.”
The Company continues to vigorously defend against current claims and litigation. The cost to conduct litigation is affected by a number of factors, many of which cannot be predicted with certainty. Accordingly, our continued litigation activities and ultimate settlement may result in the Company incurring lesser or greater costs than our current accruals, affecting net assets in liquidation. This risk has been considered in our estimated range of additional future liquidating distributions. Accordingly, ultimate litigation costs and settlements may vary, perhaps significantly, from amounts presently estimated.
Estimated Purchase Price Adjustments and Indemnification Costs
Under the liquidation basis of accounting, we accrue for estimated purchase price adjustments and indemnification costs primarily associated with the sale of our Wireless Systems business in fiscal 2006 and other business units. As of November 2, 2007, such costs were estimated at approximately $5.0 million. During the fiscal year ended January 31, 2006, we provided certain indemnifications under the terms of our asset purchase agreements in regards to the divestment of our business units. These indemnity provisions were secured, in part, by escrow accounts (included in restricted cash) from the sale proceeds of such transactions. Other estimated indemnity costs included provisions for the settlement of related expenses associated with the divested business units including post closing adjustments. As of August 24, 2007, all post closing adjustments related to the sale of our business units have been settled.
Estimated Lease Settlement Costs
Under the liquidation basis of accounting, we accrue for estimated lease settlement costs. Estimated lease settlement costs, which amounted to approximately $0.8 million as of November 2, 2007, represent the estimated settlement value on our two remaining facilities, net of estimated sublease rental income totaling approximately $2.5 million. See Note 7, under “Subsequent Events – Leases.”
Income Taxes
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The Company is subject to the provisions of FIN 48 as of February 1, 2007,
8
Table of Contents
and has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, “Definition ofSettlementin FASB Interpretation No. 48.” (“FSP FIN 48-1”) This FSP amends FASB Interpretation No. 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The interpretation was effective upon initial adoption of FIN 48. As the Company had applied FIN 48 in a manner consistent with the provisions of FSP FIN 48-1 there was no impact of this new pronouncement on its consolidated financial statements.
The Company adopted the provisions of FIN 48 on February 1, 2007, and implemented the guidance of FSP FIN 48-1 with no impact on beginning retained earnings as the Company had applied FIN 48 in a manner consistent with the provisions of FSP FIN 48-1. As a result of adoption of FIN 48, the Company did not recognize an additional liability. As of the date of adoption, the Company’s recognized tax exposure totaled $5.9 million. As of February 1, 2007, all of the tax positions identified by the Company would result, if disallowed, in a change to its annual effective income tax rate and a charge to results of operations.
The Company has filed numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state jurisdictions. With few exceptions, the Company is no longer subject to U.S. Federal income tax examinations for years before 2003 and is no longer subject to state and local income tax examinations by tax authorities for years before 2002. The Company is currently not undergoing any income tax audits.
In conjunction with the adoption of FIN 48, the Company did not recognize any additional amount for the potential payment of interest and penalties at February 1, 2007. During the quarterly period ended November 2, 2007, the Company recognized approximately $0.3 million in potential interest and penalties associated with uncertain tax positions. As of November 2, 2007, the Company carries approximately $1.3 million in interest and penalties payable. To the extent interest and penalties are not ultimately assessed with respect to uncertain tax positions, amounts presently accrued will be reduced.
The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits and the expiration of statute of limitations prior to the end of the first quarter of fiscal 2009.
Segment Information and Concentration of Risk
In connection with the adoption of the Plan of Dissolution, effective September 3, 2005 and subsequent periods the Company did not generate revenues from sale of products and have ceased all sales and marketing efforts related to the sales of our products and have no supply of product available for sale, and, therefore, the Company no longer has customers or related concentration of risk. The remaining entity reports in one segment and accordingly does not report segment information.
2. Shareholders’ Equity
Effective February 1, 2006, the Company adopted the provision of SFAS No. 123(R),Share-Based Payments, using the modified prospective method. 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 APB No. 25,Accounting for Stock Issued to Employees , and related interpretations, and provided the required pro forma disclosures prescribed by SFAS No. 123.
Under the modified prospective method of adoption for SFAS No. 123(R), the compensation cost recognized by the Company beginning February 1, 2006 includes (a) compensation cost for all equity incentive awards granted prior to, but not yet vested as of February 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all equity incentive awards granted subsequent to February 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No.123(R). The Company’s financial results for the prior periods have not been restated.
9
Table of Contents
Activity and pricing information regarding all our options to purchase shares of common stock are summarized as follows. (In thousands, except per share data):
Number of Shares | Weighted average exercise price | Weighted average remaining (in years) | Aggregate intrinsic value | ||||||||
Outstanding at January 31, 2007 | 760 | $ | 2.59 | 2.0 | |||||||
Expired | (193 | ) | 2.72 | ||||||||
Outstanding at November 2, 2007 | 567 | $ | 2.55 | 1.9 | $ | 108 | |||||
Outstanding exercisable at November 2, 2007 | 567 | $ | 2.55 | 1.9 | $ | 108 | |||||
The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $1.68 per share as of November 2, 2007, which amount would have been received by the optionees had all options been exercised on that date.
During the nine months ended November 2, 2007, the Company awarded no stock options and thus, recorded no compensation expense related to stock options after the adoption of SFAS No. 123(R). In addition, there were no option awards modified, repurchased or cancelled during the nine months ended November 2, 2007.
During the nine months ended November 2, 2007, no stock options were exercised, and therefore, no cash was received from stock option exercises.
3. 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 and cash equivalents included investments held in a money market fund of $51.7 million at November 2, 2007 and $35.0 million at January 31, 2007, respectively. The Company evaluates the financial strength of institutions at which significant investments are made. As of November 2, 2007, all investments are held in a money market fund of a high credit financial institution and management believes is not exposed to any significant credit risks.
4. Restricted Cash
Restricted cash was approximately $20.3 million at November 2, 2007 and $19.7 million at January 31, 2007, respectively. Restricted cash at November 2, 2007 includes $16.4 million (including interest) held in escrow related to the sale of our Wireless Systems business sold to Powerwave Technologies, Inc. to satisfy REMEC’s potential indemnification obligations. The remaining balance of $3.9 million represents certificates of deposit placed to cover certain letters of credit for foreign value added tax “VAT”, workers’ compensation and leasehold security interest obligations, that are secured by cash. The terms of these letters of credit expires upon the extinguishment of the underlying obligation. At that time, the certificates of deposit will be liquidated.
5. Commitments and Contingencies
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 sublease and/or terminate the remaining facility leases not released with the sale transactions of our business units and anticipates all remaining leases will be settled through sublease and/or early lease termination settlements within 12 months. The minimum future lease payments under non-cancelable operating lease payments as of November 2, 2007 are approximately $3.3 million, which is expected to be reduced by sublease payments totaling approximately $2.5 million. See Note 7, under “Subsequent Events.”
10
Table of Contents
Indemnifications and Guarantees
We have 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. Other than the pending Securities Class Action litigation described below and in Part II of this filing, there are no pending legal proceedings that involve the indemnification of any of the Company’s officers or directors.
During the third quarter of fiscal 2006, the Company entered into certain indemnifications under the terms of its Asset Purchase Agreement with Powerwave Technologies, Inc. The Company is presently unable to reasonably estimate the maximum amount that could be payable under this arrangement due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved.
Performance Base Incentive Bonuses
In accordance with our Plan of Dissolution, Richard A. Sackett, our President, will be entitled to receive incentive bonuses at the discretion of the Board of Directors in consideration for his work in implementing the Plan of Dissolution, if specified performance goals are met in our liquidation and dissolution. Any such incentive bonuses paid to Mr. Sackett will be in addition to his regular salary and other retention bonuses. There was no incentive bonuses paid during the nine months ended November 2, 2007. The amounts associated with these obligations have been accrued as of November 2, 2007.
In accordance with our Plan of Dissolution, David F. Wilkinson, our Chief Financial Officer, will be entitled to receive incentive bonuses at the discretion of the Board of Directors in consideration for his work in implementing the Plan of Dissolution, if specified performance goals are met in our liquidation and dissolution. Any such incentive bonuses paid to Mr. Wilkinson will be in addition to his regular salary and other retention bonuses. There was no incentive bonuses paid during the nine months ended November 2, 2007. The amounts associated with these obligations have been accrued as of November 2, 2007.
Claims and Litigation
The Company’s commitments and contingencies include the following claims and litigation. The Company is vigorously defending and prosecuting these matters, the outcome of which is not presently determinable. The ultimate result may vary significantly from amounts presently accrued. Any unfavorable result could materially affect our financial position and net assets in liquidation.
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 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 in violation 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.
After several consolidated and amended complaints were filed, challenged by the Company and dismissed by the Court with leave to amend, the Court denied REMEC’s Motion to Dismiss the Fourth Amended Complaint on September 25, 2006. REMEC filed its Answer to the Fourth Amended Complaint on November 6, 2006, denying all liability and asserting certain affirmative defenses. Discovery has commenced and is ongoing. The Court granted Plaintiff’s motion for class certification on November 21, 2007. REMEC maintains directors’ and officers’ liability insurance, and has tendered the defense of this lawsuit to its insurance carrier. The insurance carrier has agreed to provide coverage and defense of this action, subject to customary reservation of rights.
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 (“Tyco”), 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”). REMEC denied liability and filed cross-complaints against Tyco and Thomas & Betts. Tyco and Thomas & Betts in turn filed cross-complaints against REMEC. Trial commenced on May 8, 2006.
11
Table of Contents
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. On June 15, 2006, REMEC, Tyco and Thomas & Betts dismissed their cross-complaints against each other without prejudice, and reserved their rights to reassert the cross-complaints if there was a retrial after appeal. On August 8, 2006, the Court entered judgment in the case in favor of Cardinal against Tyco and Thomas & Betts in a total amount exceeding $12.7 million, and in favor of REMEC against Cardinal on its nonsuit motion. The Court granted REMEC’s motion to recover its costs of suit of approximately $80,000.00. Cardinal filed a Notice of Appeal as to REMEC’ nonsuit on October 31, 2006, and as to the cost award on December 22, 2006. On February 6, 2007, REMEC filed a Motion to Dismiss Cardinal’s primary appeal as not having been filed in a timely manner. On April 30, 2007, the Court of Appeal granted REMEC’s Motion to Dismiss. On May 17, 2007 the Court of Appeal denied Cardinal’s Petition for Rehearing, and on May 29, 2007 denied Cardinal’s Motion to Vacate. On July 25, 2007, the California Supreme Court denied Cardinal’s Petition for Review of the decision by the Court of Appeal. Cardinal’s appeal from the cost award remains pending. See Note 7, under “Subsequent Events.”
Retiree Medical Claim Arbitration
On October 7, 2005, the Company informed certain retired former officers of the Company that pursuant to the adoption of the Plan of Dissolution by the Company’s shareholders, the Company’s health care benefits for all employees and retirees would cease as of December 31, 2005. On May 11, 2006, the Company received written notice from each of two retired former officers, asserting claims for lifetime medical benefits for these former officers, their spouses and minor children, from the Company. The total of both claims exceeds $11.0 million. The Company has denied these claims in total. On or about November 13, 2006, the Company and each of the former officers agreed to a private binding arbitration to resolve this dispute. A former spouse of one of the claimants has joined the arbitration in order to assert an individual claim for lifetime medical care, which the Company has denied. Due to the wildfires in San Diego County the week of October 22, 2007, the arbitration hearing that was set for October 22-25, 2007, has been postponed to April 21, 2008.
Powerwave Indemnity Claims
On May 17, 2006, in connection with the Asset Purchase Agreement dated March 13, 2005, and amended on July 11, 2005 by and between 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 a copy of a certificate, submitted by Powerwave to the Escrow Agent on May 12, 2006, certifying indemnification claims by Powerwave against REMEC potentially in excess of the escrow funds ($15.0 million), together with instructions not to release the escrow funds on the release date of June 2, 2006. On May 17, 2007 REMEC filed a Complaint for Declaratory Relief against Powerwave in Orange County Superior Court, seeking a judicial declaration that REMEC owes Powerwave nothing and ordering a disbursement of all escrow funds to REMEC. On or about June 20, 2007, Powerwave answered REMEC’s Complaint, and filed a Cross Complaint for Breach of Contract and Declaratory Relief, seeking damages in excess of $5.0 million. REMEC and Powerwave have jointly requested that the case be transferred to the Complex Civil Division of the Orange County Superior Court. This request will be heard by the Court on December 12, 2007. See Note 7, under “Subsequent Events.”
Other
Other than the claims and lawsuits described above, neither REMEC nor any of its subsidiaries is presently subject to any material claims or litigation, nor to REMEC’s knowledge, are such claims or 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. 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.
6. Taxes
Estimated taxes payable are $6.5 million as of November 2, 2007. Our estimates are based on our evaluation of our tax positions and exposure together with assumptions regarding our ability to settle outstanding obligations to creditors and favorably resolve outstanding litigation; claims and liabilities, including indemnification claims from Powerwave. See Note 5, under “Claims and Litigation.” 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.
12
Table of Contents
During fiscal year ended January 31, 2006, the Company divested all its remaining business units in a number of individual asset and stock transactions. The preliminary purchase price allocations attributable to each transaction are subject to change and may be adjusted based upon resolution of several matters including, but not limited to, determination of the post-closing adjustments and the consequent effect upon the final purchase price, determination of final liabilities relating to each transaction and the determination of the tax basis of divested assets and liabilities. As a result of the Company’s continued analysis of its tax contingencies it was determined that its estimated taxes payable for tax year 2005 were favorably reduced. The Company finalized its tax year 2005 returns during the third quarter of fiscal 2007, reducing the Company’s estimated taxes payable.
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.
7. Subsequent Events
(1) Claims and Litigation
Cardinal Litigation
On December 13, 2007, REMEC and Tyco Electronics Corporation entered into a Settlement Agreement and Mutual Release, pursuant to which both parties agreed to dismiss their respective cross-complaints against each other with prejudice, and to release each other from all claims related to the Cardinal Complaint. See Note 5, under “Commitments and Contingencies.”
Powerwave Indemnity Claims
On December 12, 2007, the Court designated the case as Complex and transferred the case to the Complex Division of the Orange County Superior Court for scheduling.
(2) Liquidating Distribution
On December 14, 2007, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of the close of business on December 14, 2007 pursuant to our Plan of Dissolution. As a result of this distribution, and based on our projections of operating expenses and liquidation costs remaining after completion of this distribution, we estimate that the remaining amount of additional future liquidating distributions will range from $0.15 to $1.20 per common share. The cautionary statements regarding estimates of future liquidating distributions set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Forward-Looking Statements portions of this report are incorporated herein by reference.
(3) Leases
Effective December 11, 2007 we entered into a sublease agreement with ZO Skin Health, Inc. for a base lease value of approximately $0.6 million for approximately 5,500 square feet of space at our former headquarters facility at 3790 Via de la Valle, Suite 311, Del Mar, California, expiring in September 2011. With this sublease, our former headquarters facility is fully subleased. REMEC now operates out of its lease of 884 square feet at 3790 Via de la Valle, Suite 211, Del Mar, California.
13
Table of Contents
| 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 November 2, 2007 and January 31, 2007, together with changes in net assets for the three and nine months ended November 2, 2007 and November 3, 2006, respectively.
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. These forward-looking statements include estimates of the net assets of the Company in liquidation, statements about the amount and timing of the payment of additional liquidating distributions and statements about the Company’s operating costs through final dissolution, including the additional wind up costs, which will vary with the length of time it operates. The forward-looking statements in this report are subject to a number of other significant risks and uncertainties, and there can be no assurance that the expectations reflected in those statements will be realized or achieved. Such risks and uncertainties include, without limitation, possible contingent liabilities and post-closing indemnification and other obligations arising from the sale of the Company’s remaining assets; the risk that federal, state or local taxing authorities will audit the tax returns filed by the Company resulting in additional taxes being assessed against the Company; the risk that income, sales, use and other tax returns filed by the Company prior to the divestiture of its business units might be audited by federal, state or local taxing authorities resulting in additional taxes being assessed against the Company; the risk that the Company may not be able to realize its current estimate of the net value of its assets; the risk that the Company may have underestimated the settlement expense of its obligations and liabilities, including without limitation, accrued compensation and tax liabilities; risks associated with the liquidation and dissolution of the Company, including without limitation, settlement of the Company’s litigation, liabilities and obligations, costs including professional fees, incurred in connection with carrying out the Plan of Dissolution, discharge of any outstanding creditor claims, and the winding up and dissolution of the Company. See Item 1A, “Risk Factors” for additional information regarding these risks and uncertainties. In light of these risks, uncertainties and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this report. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this report to reflect future events or circumstances.
Overview
During fiscal year 2005, we engaged the services of financial advisors to evaluate strategic alternatives to enhance shareholder value, which included exploring the disposition of some or all of our business units. It was determined that in the best interest of shareholder value that the Company divest all remaining product line business units. During fiscal 2006, with shareholder approval, the Company divested all its remaining business units and adopted the Plan of Dissolution, effective September 3, 2005. On May 20, 2005, the Company completed the sale of the Defense & Space group to Chelton Microwave. On July 1, 2005, the Company completed the sale of certain assets and liabilities constituting a substantial portion of the Electronic Manufacturing Services business to Veritek Manufacturing Services, LLC and Samjor Family Limited Partnership. On August 26, 2005, the Company completed the sale of the Outdoor Unit/Transceiver business to Wireless Holdings International, Inc. On September 2, 2005, the Company sold the Wireless Systems business to Powerwave Technologies, Inc. The Wireless Systems business was the last remaining REMEC Inc. product line business unit.
The Company is in the process of finalizing the disposition of its remaining business assets, and the Company will continue in existence until its final dissolution, which is subject to settlement of outstanding litigation and the payment of liabilities. During this period, we will not continue our business as a going concern.
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.
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 Statements of Cash Flows is eliminated.
14
Table of Contents
Liquidation Basis of Accounting and Plan of Dissolution
The accompanying condensed consolidated financial statements have been prepared on the liquidation basis of accounting. 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 may 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 November 2, 2007, and subsequent to our recently declared distribution (see Note 7), we estimate that the remaining amount of additional future liquidating distributions will range from $0.15 to $1.20 per common share. The actual amount available for distribution, if any, could be less than $0.15 if we discover additional liabilities or claims or incur unexpected or greater than expected expenses, or more than $1.20 if we are able to resolve our liabilities for less than our reserves. 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 subject to contingencies inherent in winding up our business, to make such distributions as promptly as practicable and periodically as we pay our remaining liabilities and obligations subject to law. See Note 7, under “Subsequent Events - Liquidating Distribution.”
Results of Operations
Changes in Net Assets in Liquidation
Three Months Ended November 2, 2007
Net assets in liquidation increased approximately $0.9 million, or $0.03 per share, to $59.0 million for the three months ended November 2, 2007.
Nine Months Ended November 2, 2007
Net assets in liquidation increased approximately $4.4 million, or $0.15 per share, to $59.0 million for the nine months ended November 2, 2007.
The primary reason for the increase in net assets in liquidation for the nine months ended November 2, 2007, is a result of the award of $3.0 million in the second quarter of fiscal 2008 to the Company in the closing balance sheet arbitration with Powerwave Technologies, Inc.
Other changes in net assets in liquidation for the nine months ended November 2, 2007, include an increase of approximately $1.0 million primarily related to interest income, offset by other liquidation costs, net. An increase of approximately $0.8 million from the reduction in reserves related to estimated purchase price adjustments in the closing balance sheet arbitration with Powerwave and other final post closing balance sheet adjustments from the sale of the Company’s business units in fiscal 2006.
15
Table of Contents
The Company decreased its reserve for income taxes, net, approximately $0.2 million which increased net assets in liquidation for the nine months ended November 2, 2007. Additional increases in net assets in liquidation include the change in the liability insurance related the directors and officers’ policy premium of approximately $0.4 million.
Increases in net assets are off-set by approximately $0.8 million, in the change of the reserve for notes receivables as a result of a settlement agreement on the collection of a note. Other changes that decreased net assets in liquidation include the change in reserve for litigation costs of approximately $0.2 million.
Liquidity and Capital Resources
As of November 2, 2007, net assets in liquidation totaled $59.0 million, including $53.3 million in cash and cash equivalents and $20.3 million of restricted cash. Restricted cash consists of approximately $16.4 million for escrow funds and interest held back in escrow pending the closing of the sale of Wireless Systems business indemnity claims, and $3.9 million of restricted cash held as security on letters of credit. Total assets consist of approximately $2.4 million of receivables and other current assets consisting primarily of notes receivables. Other long term assets of approximately $0.4 million consist of long term notes receivable. Total assets are offset by approximately $17.4 million of estimated total liabilities to be incurred during liquidation, consisting of $3.6 million of estimated operating costs (“Costs to be incurred during Liquidation”), $0.8 million of estimated lease settlement costs, $1.5 million of estimated litigation costs including defense and resolution, $5.0 million related to estimated purchase price adjustments and indemnification costs and $6.5 million in 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 our 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 November 2, 2007, our cash and cash equivalents were held primarily in money market funds and other bank accounts. 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 August 2, 2005, we filed additional proxy material with the SEC that provided shareholders with an estimate of the 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 ultimately expected to receive between $2.45 to $2.95 in total 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, an initial cash liquidating distribution was made to shareholders of record of REMEC stock on September 13, 2005 at a rate of $1.35 per share totaling $39.2 million.
On October 19, 2006, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of November 1, 2006 pursuant to our Plan of Dissolution. On November 8, 2006, a cash liquidating distribution was made to all shareholders of record as of November 1, 2006 at a rate of $0.75 per share, totaling $22.5 million.
On December 14, 2007, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of the close of business on December 14, 2007 pursuant to our Plan of Dissolution.
The sources for payment of these distributions are funds made available from the settlement of liabilities and the liquidation of assets.
16
Table of Contents
Subsequent cash distributions are pending, subject to review by REMEC’s Board of Directors 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 amount and timing of distributions uncertain and may result in the actual cash distribution being lower or higher than the expected range.
Off-Balance Sheet Arrangements
As of November 2, 2007, 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 November 2, 2007 are reported in the condensed consolidated statements 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 facility operating leases. The Company is working to sublease and/or terminate these remaining facility leases. As of November 2, 2007 the accrual for the estimated net lease settlements on the remaining facility obligations is approximately $0.8 million net of sublease payments totaling approximately $2.5 million. See Note 7, under “Subsequent Events – Leases.”
| Item 3. | Qualitative and Quantitative Disclosures About Market Risk. |
Investments
At November 2, 2007, our investment portfolio includes cash equivalent securities held in a money market account with a recorded value of approximately $51.7 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
In connection with the adoption of the Plan of Dissolution, we will not generate revenues from sales of our products in the future. We have ceased all sales and marketing efforts related to the sales of our products and have no supply of product available for sale, and, therefore, will not incur cost of revenues in the future. We no longer have any foreign operations or exposure to foreign currency exchange rate fluctuations other than translation adjustments on our foreign held cash accounts.
| Item 4. | Controls and Procedures. |
(1) Management’s Evaluation of Disclosure Controls
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 resulting from the sale of our business units during fiscal 2006 and 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.
(2) Changes in Internal Control over Financial Reporting
During the quarter ending November 2, 2007, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
17
Table of Contents
PART II—OTHER INFORMATION
| Item 1. | Legal Proceedings. |
Claims and Litigation
The Company’s commitments and contingencies include the following claims and litigation. The Company is vigorously defending and prosecuting these matters, the outcome of which is not presently determinable. The ultimate result may vary significantly from amounts presently accrued. Any unfavorable result could materially affect our financial position and net assets in liquidation.
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 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 in violation 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.
After several consolidated and amended complaints were filed, challenged by the Company and dismissed by the Court with leave to amend, the Court denied REMEC’s Motion to Dismiss the Fourth Amended Complaint on September 25, 2006. REMEC filed its Answer to the Fourth Amended Complaint on November 6, 2006, denying all liability and asserting certain affirmative defenses. Discovery has commenced and is ongoing. The Court granted Plaintiff’s motion for class certification on November 21, 2007. REMEC maintains directors’ and officers’ liability insurance, and has tendered the defense of this lawsuit to its insurance carrier. The insurance carrier has agreed to provide coverage and defense of this action, subject to customary reservation of rights.
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 (“Tyco”), 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”). REMEC denied liability and filed cross-complaints against Tyco and Thomas & Betts. Tyco and Thomas & Betts in turn filed cross-complaints against REMEC. 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. On June 15, 2006, REMEC, Tyco and Thomas & Betts dismissed their cross-complaints against each other without prejudice, and reserved their rights to reassert the cross-complaints if there was a retrial after appeal. On August 8, 2006, the Court entered judgment in the case in favor of Cardinal against Tyco and Thomas & Betts in a total amount exceeding $12.7 million, and in favor of REMEC against Cardinal on its nonsuit motion. The Court granted REMEC’s motion to recover its costs of suit of approximately $80,000.00. Cardinal filed a Notice of Appeal as to REMEC’ nonsuit on October 31, 2006, and as to the cost award on December 22, 2006. On February 6, 2007, REMEC filed a Motion to Dismiss Cardinal’s primary appeal as not having been filed in a timely manner. On April 30, 2007, the Court of Appeal granted REMEC’s Motion to Dismiss. On May 17, 2007 the Court of Appeal denied Cardinal’s Petition for Rehearing, and on May 29, 2007 denied Cardinal’s Motion to Vacate. On July 25, 2007, the California Supreme Court denied Cardinal’s Petition for Review of the decision by the Court of Appeal. Cardinal’s appeal from the cost award remains pending. See Note 7, under “Subsequent Events.”
Retiree Medical Claim Arbitration
On October 7, 2005, the Company informed certain retired former officers of the Company that pursuant to the adoption of the Plan of Dissolution by the Company’s shareholders, the Company’s health care benefits for all employees and retirees would cease as of December 31, 2005. On May 11, 2006, the Company received written notice from each of two retired former officers, asserting claims for lifetime medical benefits for these former officers, their spouses and minor children, from the Company. The total of both claims exceeds $11.0 million. The Company has denied these claims in total. On or about November 13, 2006, the Company and each of the former officers agreed to a private binding arbitration to resolve this dispute. A former spouse of one of the claimants has joined the arbitration in order to assert an individual claim for lifetime medical care, which the Company has denied. Due to the wildfires in San Diego County the week of October 22, 2007, the arbitration hearing that was set for October 22-25, 2007, has been postponed to April 21, 2008.
18
Table of Contents
Powerwave Indemnity Claims
On May 17, 2006, in connection with the Asset Purchase Agreement dated March 13, 2005, and amended on July 11, 2005 by and between 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 a copy of a certificate, submitted by Powerwave to the Escrow Agent on May 12, 2006, certifying indemnification claims by Powerwave against REMEC potentially in excess of the escrow funds ($15.0 million), together with instructions not to release the escrow funds on the release date of June 2, 2006. On May 17, 2007 REMEC filed a Complaint for Declaratory Relief against Powerwave in Orange County Superior Court, seeking a judicial declaration that REMEC owes Powerwave nothing and ordering a disbursement of all escrow funds to REMEC. On or about June 20, 2007, Powerwave answered REMEC’s Complaint, and filed a Cross Complaint for Breach of Contract and Declaratory Relief, seeking damages in excess of $5.0 million. REMEC and Powerwave have jointly requested that the case be transferred to the Complex Civil Division of the Orange County Superior Court. This request will be heard by the Court on December 12, 2007. See Note 7, under “Subsequent Events.”
Other
Other than the claims and lawsuits described above, neither REMEC nor any of its subsidiaries is presently subject to any material claims or litigation, nor to REMEC’s knowledge, are such claims or 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.
| Item 1A. | Risk Factors. |
Risks Associated with Our Liquidation and Dissolution
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 filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended January 31, 2007, actual results could differ materially from those projected in any forward-looking statements.
The risk factors described below do not contain any material changes from the Risk Factors described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended January 31, 2007.
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 capital remaining available 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, new claims filed by third parties, whether our insurance policies will provide coverage for defense costs and any damages payable under our outstanding and any future litigation matters and unexpected or greater than expected expenses. We cannot assure you that we will successfully defend against the outstanding litigation matters filed against us or any new claims filed against us. In addition, regardless of the merit or eventual outcome of our existing litigation matters or any new claims which may be filed against us, these existing or potential litigation matters may result in the expenditure of a significant amount of cash on legal fees, expenses or payment of settlements. 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 less than or more 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.
19
Table of Contents
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.
Effective at the close of business on October 12, 2005, we voluntarily de-listed our common stock and closed our transfer books. Our common stock was traded on the Nasdaq National Market (Nasdaq) 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 in a favorable manner.
If we do not settle all of our obligations to creditors and resolve all of our outstanding and any new litigation, we may be prevented from completing our Plan of Dissolution. Our obligations to creditors include, among other things, long-term contractual obligations, including certain product warranties to certain customers, 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 and the sale of our business units and assets. As part of the wind up 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 in a favorable manner could delay or even prevent us from completing the Plan of Dissolution. Any new claims filed by third parties could further delay us from completing the Plan of Dissolution. Amounts required to settle our obligations to creditors and to resolve our outstanding and any new litigation will reduce the amount of remaining capital available for future distribution to shareholders. The Company is vigorously defending against these matters and the outcome of which is not presently determinable. The ultimate settlement, if any, may vary significantly from amounts presently accrued. Any unfavorable settlement could materially affect our financial position and net assets in liquidation. The amounts of settlements or damage payments, if we do not successfully defend cases that are not settled, could reduce future distributions to the lower end, or below the lower end, of our current estimated distribution range.
Some of our former customers may file for breach of contract and breach of express and implied warranties with regard to products sold by the Company.
Our products consisted of and incorporate numerous component parts designed and manufactured by certain former 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. These claims may result in additional liability to the Company; to the extent such liability was not assumed by the purchasers of our former business units.
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 liability insurance, payroll and local taxes, legal, accounting and consulting fees and miscellaneous office expenses, will continue to be incurred as we wind up our operations and implement our Plan of Dissolution. Additionally, indemnification claims potentially 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. In addition, we cannot assure you that third parties will not assert additional claims or causes of action against us. 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 the amounts indicated in our current estimated distribution range 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 November 2, 2007, 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.
20
Table of Contents
Significant judgment is required in determining the Company’s provision for income taxes payable. 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.
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 future cash liquidating distributions to our shareholders, the Board of Directors intends, subject to contingencies inherent in winding up our business, to make such distributions as promptly as practicable as creditor and litigant claims are paid, or settled or resolved. 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, new claims made by third parties and the settlement or the final resolution of any outstanding or future 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 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, even though compliance with such reporting requirements is economically burdensome until the Company is fully dissolved.
Our Board of Directors may determine to 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 determine at any time that it is in the best interests of the Company and its shareholders to 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.
Items 2, 3, and 4 are not applicable and have been omitted.
21
Table of Contents
| Item 5. | Other Information |
(1) Claims and Litigation
Cardinal Litigation
On December 13, 2007, REMEC and Tyco Electronics Corporation entered into a Settlement Agreement and Mutual Release, pursuant to which both parties agreed to dismiss their respective cross-complaints against each other with prejudice, and to release each other from all claims related to the Cardinal Complaint. See Note 5, under “Commitments and Contingencies.”
Powerwave Indemnity Claims
On December 12, 2007, the Court designated the case as Complex and transferred the case to the Complex Division of the Orange County Superior Court for scheduling.
(2) Liquidating Distribution
On December 14, 2007, the Board of Directors approved a cash liquidating distribution of approximately $22.5 million, or $0.75 per share to shareholders of record as of the close of business in December 14, 2007 pursuant to our Plan of Dissolution. As a result of this distribution, and based on our projections of operating expenses and liquidation costs remaining after completion of this distribution, we estimate that the remaining amount of additional future liquidating distributions will range from $0.15 to $1.20 per common share. The cautionary statements regarding estimates of future liquidating distributions set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the Forward-Looking Statements portions of this report are incorporated herein by reference.
| Item 6. | Exhibits |
Exhibit Number | Description | |
| 31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
22
Table of Contents
Pursuant to the requirements of the Securities 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: December 14, 2007
23